Tryg
Annual Report 2005

Plain-text annual report

annual report 2005 08.01.05 / the storM in January in denMark 14.09.05 / Mudslide in bergen in norway 14.11.05 / large Fire on aMager in denMark Contents ManageMent’s report Moving closer to our customers 2005 in review Financial highlights and key ratios of TrygVesta TrygVesta and the world around us Strategy and goals Financial performance TrygVesta’s financial performance in 2005 Private & Commercial Denmark Private & Commercial Norway Corporate Finnish general insurance Investment activities Capitalisation 2005 our customers our processes our employees and values our investors Financial calendar TrygVesta shares Focus areas and financial forecast for 2006 Corporate governance risk management aCCounts Statement by the Supervisory Board and the Executive Management Internal auditors’ report Auditors’ report Accounting policies Income statement and balance sheet for TrygVesta Income statement and balance sheet for TrygVesta A/S (Parent company) Group overview Financial highlights and key ratios by geography Organisation Members of the Supervisory Board Members of the Group Executive Management Glossary of technical terms Cases The storm in January in Denmark Mudslide in Bergen in Norway Large fire on Amager in Denmark 11 11 12 14 16 17 19 20 24 26 28 30 32 35 36 38 39 40 40 41 42 46 49 55 56 57 58 59 75 115 123 124 125 126 128 129 131 132 136 140 Moving Closer to our CustoMers In our 2004 annual report we made a commitment to use some of the benefits we had reaped on Nordic synergies through tight cost management and improvements in all business areas to strengthen our sales power and service vis-à-vis our customers. A wide range of initiatives has helped us fulfil our commitment. In Norway, for example, we introduced major changes to our private customer price and benefit programme by “refocusing on the customer”. We have abolished the practice which in many cases enabled new customers to buy insurance at a lower price than our loyal and faithful customers could. We have also created a more logical and transparent price structure, and our Norwegian customers have so far welcomed this concept. We also further developed the Tryg Bygning and Tryg Reparation concepts in Denmark, providing new and enhanced deliveries in the claims situation. We are changing from covering only the financial consequences of a loss into a player that takes responsibility for solving our customers’ problems once a loss has occurred. Vis-à-vis our private and commercial customers, proximity means that we listen to our customers. We completed a systematic follow-up on our concept customers in Denmark in 2005, enhancing customer loyalty in the process, and we are introducing the same procedure vis-à-vis our Norwegian customers. In the service provided to our large corporate customers, general risk consultancy and engineering reviews of risks are becoming increasingly important to our operations. We therefore used 2005 to create new, tailored solutions to our biggest customers. These initiatives, and many others, ran concurrently with TrygVesta’s IPO. This naturally imposed a big extra workload on large parts of our organisation, but it will allow us to maintain and further develop the process of professionalising our business which has already come a long way. Being a Nordic player, we have the privilege of an extensive partnership with Nordea, under which Nordea sells our general insurance policies, while we sell Nordea’s life and pension products. This partnership enables both companies to offer customers a complete, simple solution to their financial requirements. The Nordic cooperation is becoming increasingly important in everyday work at TrygVesta. We are strongly positioned in Norway and Denmark, our Finnish business continues to develop at a sound pace, and we have carefully prepared our imminent entry into the Swedish market, which will reuse the Finnish business model and IT solutions. One of the biggest advantages of the Nordic collaboration is that it allows us to learn from each other and leverage synergies when developing our business. Thus, 2005 was a year of progress and change. It was also a year in which our new level of earnings was confirmed. We intend to work towards continuing and strengthening the Group’s positive performance in the years ahead. I hope you will enjoy reading our annual report. Stine Bosse Group CEO TrygVesta Annual Report 2005 / Page 11 of 144 Management's report 2005 in review • Pre-tax profit up by DKK 861m to DKK 2,913m pre-tax proFit • The technical result improved by DKK 353m and investment income was DKK 510m higher • Combined ratio of 89.0 • Premium growth in 2005 of 2.9% • The Group’s investments yielded a return of DKK 1,681m • Partnership agreement with Nordea extended until 2010 • The Vesta Trygghetsavtale programme was success- fully launched in Norway • New motor tariff introduced in Denmark • Excellent rating in customer survey for handling claims after the fireworks explosion at Seest, Denmark, in 2004 • A focused effort, new systems and Nordic efficiency ensured fast claims handling after the storm in Den- mark in January • Quick assistance after two occurrences of heavy rain and cloudbursts in Bergen, Norway, minimises the consequences to human and property (cid:40)(cid:33)(cid:37)(cid:37)(cid:37) (cid:39)(cid:33)(cid:42)(cid:37)(cid:37) (cid:39)(cid:33)(cid:37)(cid:37)(cid:37) (cid:38)(cid:33)(cid:42)(cid:37)(cid:37) (cid:38)(cid:33)(cid:37)(cid:37)(cid:37) (cid:42)(cid:37)(cid:37) (cid:37) (cid:34)(cid:42)(cid:37)(cid:37) (cid:34)(cid:38)(cid:33)(cid:37)(cid:37)(cid:37) • Customer surveys indicate increasing satisfaction and CoMbined ratio loyalty. In Norway, we advanced one step to rank se- cond among large companies on customer satisfaction (cid:38)(cid:38)(cid:37) • The Tryg Bygning arrangement in Denmark extended to include carpenters in addition to plumbers, which strengthens our ability to provide total solutions to our customers • TrygVesta listed on the Copenhagen Stock Exchange. The price at 31 December 2005 was 39% above the offer price • Proposed dividend payout ratio of 68% of the profit for the year, equal to DKK 21 per share Q4 • Pre-tax profit of DKK 678m • Combined ratio of 91.7 • New motor tariff introduced in Denmark • Enhanced performance in customer surveys in all three markets • Higher-than-expected return on investment activities TrygVesta Annual Report 2005 / Page 12 of 144 DKKm (cid:39)(cid:33)(cid:46)(cid:38)(cid:40) (cid:38)(cid:33)(cid:46)(cid:41)(cid:44) (cid:39)(cid:33)(cid:37)(cid:42)(cid:39) (cid:38)(cid:33)(cid:37)(cid:41)(cid:42) (cid:38)(cid:37)(cid:46) (cid:34)(cid:44)(cid:44)(cid:41) (cid:39)(cid:37)(cid:37)(cid:38) (cid:39)(cid:37)(cid:37)(cid:39) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:41)(cid:21) (cid:62)(cid:59)(cid:71)(cid:72) (cid:39)(cid:37)(cid:37)(cid:42) (cid:62)(cid:99)(cid:107)(cid:90)(cid:104)(cid:105)(cid:98)(cid:90)(cid:99)(cid:105)(cid:21)(cid:94)(cid:99)(cid:88)(cid:100)(cid:98)(cid:90) (cid:73)(cid:90)(cid:88)(cid:93)(cid:99)(cid:94)(cid:88)(cid:86)(cid:97)(cid:21)(cid:103)(cid:90)(cid:104)(cid:106)(cid:97)(cid:105) (cid:68)(cid:105)(cid:93)(cid:90)(cid:103) (cid:38)(cid:37)(cid:44)(cid:35)(cid:39) (cid:38)(cid:37)(cid:37)(cid:35)(cid:44) (cid:46)(cid:40)(cid:35)(cid:45) (cid:46)(cid:38)(cid:35)(cid:38) (cid:45)(cid:46)(cid:35)(cid:37) (cid:38)(cid:37)(cid:42) (cid:38)(cid:37)(cid:41)(cid:35)(cid:41) (cid:38)(cid:37)(cid:37) (cid:46)(cid:42) (cid:46)(cid:37) (cid:45)(cid:42) (cid:39)(cid:37)(cid:37)(cid:38) (cid:39)(cid:37)(cid:37)(cid:39) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:41)(cid:21) (cid:62)(cid:59)(cid:71)(cid:72) (cid:39)(cid:37)(cid:37)(cid:42) teChniCal result by business areas DKKm earnings per share Continuing business DKK (cid:39)(cid:33)(cid:37)(cid:42)(cid:40) (cid:38)(cid:33)(cid:44)(cid:37)(cid:37) (cid:38)(cid:33)(cid:41)(cid:42)(cid:43) (cid:39)(cid:33)(cid:37)(cid:37)(cid:37) (cid:38)(cid:33)(cid:42)(cid:37)(cid:37) (cid:38)(cid:33)(cid:37)(cid:37)(cid:37) (cid:42)(cid:37)(cid:37) (cid:37) (cid:34)(cid:42)(cid:37)(cid:37) (cid:34)(cid:38)(cid:33)(cid:37)(cid:37)(cid:37) (cid:40)(cid:44)(cid:43) (cid:38)(cid:37)(cid:42) (cid:34)(cid:42)(cid:42)(cid:45) (cid:40)(cid:37) (cid:39)(cid:37) (cid:38)(cid:37) (cid:37) (cid:34)(cid:38)(cid:37) (cid:34)(cid:39)(cid:37) (cid:34)(cid:40)(cid:37) (cid:40)(cid:38) (cid:39)(cid:39) (cid:39)(cid:39) (cid:38)(cid:41) (cid:38) (cid:34)(cid:39)(cid:44) (cid:39)(cid:37)(cid:37)(cid:38) (cid:39)(cid:37)(cid:37)(cid:39) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:41) (cid:69)(cid:103)(cid:94)(cid:107)(cid:86)(cid:105)(cid:90)(cid:21)(cid:27)(cid:21)(cid:56)(cid:100)(cid:98)(cid:98)(cid:90)(cid:103)(cid:88)(cid:94)(cid:86)(cid:97)(cid:21)(cid:57)(cid:90)(cid:99)(cid:98)(cid:86)(cid:103)(cid:96) (cid:39)(cid:37)(cid:37)(cid:41)(cid:21) (cid:62)(cid:59)(cid:71)(cid:72) (cid:56)(cid:100)(cid:103)(cid:101)(cid:100)(cid:103)(cid:86)(cid:105)(cid:90) (cid:39)(cid:37)(cid:37)(cid:42) (cid:39)(cid:37)(cid:37)(cid:38) (cid:39)(cid:37)(cid:37)(cid:39) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:41)(cid:21) (cid:62)(cid:59)(cid:71)(cid:72) (cid:39)(cid:37)(cid:37)(cid:42) (cid:69)(cid:103)(cid:94)(cid:107)(cid:86)(cid:105)(cid:90)(cid:21)(cid:27)(cid:21)(cid:56)(cid:100)(cid:98)(cid:98)(cid:90)(cid:103)(cid:88)(cid:94)(cid:86)(cid:97)(cid:21)(cid:67)(cid:100)(cid:103)(cid:108)(cid:86)(cid:110) (cid:59)(cid:94)(cid:99)(cid:97)(cid:86)(cid:99)(cid:89) (cid:68)(cid:105)(cid:93)(cid:90)(cid:103) return on eQuity aFter tax and disContinued business % shareholders' eQuity DKKm (cid:38)(cid:42) (cid:38) (cid:34)(cid:41)(cid:44) (cid:40)(cid:37) (cid:39)(cid:37) (cid:38)(cid:37) (cid:37) (cid:34)(cid:38)(cid:37) (cid:34)(cid:39)(cid:37) (cid:34)(cid:40)(cid:37) (cid:34)(cid:41)(cid:37) (cid:34)(cid:42)(cid:37) (cid:34)(cid:43)(cid:37) (cid:39)(cid:42) (cid:39)(cid:40) (cid:39)(cid:45) (cid:38)(cid:37)(cid:33)(cid:37)(cid:37)(cid:37) (cid:45)(cid:33)(cid:39)(cid:38)(cid:42) (cid:43)(cid:33)(cid:45)(cid:37)(cid:39) (cid:43)(cid:33)(cid:38)(cid:38)(cid:44) (cid:42)(cid:33)(cid:40)(cid:43)(cid:37) (cid:41)(cid:33)(cid:42)(cid:43)(cid:41) (cid:41)(cid:33)(cid:39)(cid:43)(cid:45) (cid:45)(cid:33)(cid:37)(cid:37)(cid:37) (cid:43)(cid:33)(cid:37)(cid:37)(cid:37) (cid:41)(cid:33)(cid:37)(cid:37)(cid:37) (cid:39)(cid:33)(cid:37)(cid:37)(cid:37) (cid:37) (cid:39)(cid:37)(cid:37)(cid:38) (cid:39)(cid:37)(cid:37)(cid:39) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:41)(cid:21) (cid:62)(cid:59)(cid:71)(cid:72) (cid:39)(cid:37)(cid:37)(cid:42) (cid:39)(cid:37)(cid:37)(cid:38) (cid:39)(cid:37)(cid:37)(cid:39) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:41)(cid:21) (cid:62)(cid:59)(cid:71)(cid:72) (cid:39)(cid:37)(cid:37)(cid:42)(cid:31)(cid:30) *) Shareholders' equity is exclusive of dividend, which is deducted on payment in 2006 Figures for 2001 and 2002 are pro forma figures as if the Nordea AB activities were owned as of the beginning of each period. Figures for 2001 through 2004 are made up in accordance with the Danish Financial Supervisory Authority's accounting rules in force at the time. Figures for 2004 and 2005 are made up in accordance with IFRS. TrygVesta Annual Report 2005 / Page 13 of 144 Management's report FinanCial highlights and key ratios oF trygvesta Mio, dkk Gross premiums earned Gross claims incurred Gross expenses profit/loss on gross business iFrs danish gaap Q4 2005 Q4 2004 2005 2004 2004 2003 2002 2001 3,961 -2,771 -665 525 3,820 -2,867 -644 309 15,705 -11,304 -2,662 1,739 15,266 -10,572 -2,611 2,083 16,308 -11,020 -3,462 1,826 16,702 -11,940 -3,745 1,017 15,792 -12,334 -3,732 -274 12,620 -9,782 -3,063 -225 profit/loss on ceded business -196 -101 -9 -718 -814 -1,135 -871 -329 Technical interest, net of reinsurance Change in equalisation provisions technical result Profit/loss on investments after transfer to insurance activities Other income Other expenses profit/loss for the period before tax Extraordinary items and minority interests Tax profit/loss for the period, continuing business Profit/loss on discontinued and divested business after tax profit/loss for the period 92 0 421 272 47 -62 678 0 -185 493 3 496 76 0 284 273 38 -46 549 0 -149 400 -31 369 323 0 2,053 888 126 -154 2,913 0 -788 2,125 -28 2,097 335 0 1,700 378 121 -147 2,052 0 -556 1,496 -75 1,421 537 -93 1,456 517 121 -147 1,947 0 -485 1,462 -55 1,407 595 -101 376 685 115 -131 1,045 1 -87 959 -217 742 832 -245 -558 -170 127 -173 -774 -1,256 213 -1,817 -274 -2,091 715 -56 105 4 121 -121 109 7 -43 73 -22 51 Run-off gains/losses, net of reinsurance 181 -161 3 -516 -458 -283 balance sheet Total provisions for insurance contracts Total reinsurers' share of provisions for insurance contracts Total shareholders' equity Total assets key ratios Claims ratio Business ceded as a percentage of gross premiums Claims ratio, net of ceded business Expense ratio Combined ratio 26,757 2,630 8,215 40,811 25,212 3,292 6,802 37,824 26,599 3,132 6,117 33,553 25,955 3,480 5,360 31,337 26,238 4,632 4,268 29,833 22,740 5,067 4,564 24,032 70.0 4.9 74.9 16.8 91.7 75.1 2.6 77.7 16.9 94.6 72.0 0.1 72.1 16.9 89.0 69.3 4.7 74.0 17.1 91.1 67.6 5.0 72.6 21.2 93.8 71.5 6.8 78.3 22.4 100.7 78.1 5.5 83.6 23.6 107.2 77.5 2.6 80.1 24.3 104.4 Operating ratio 89.6 92.7 87.2 89.1 90.8 97.2 101.9 98.8 Relative run-off gains/losses 0.9 -1.0 - - - other data 1) Return on equity before tax and discontinued and divested business Return on equity after tax and discontinued and divested business Earnings per share (continuing business) Net asset value per share Dividend per share Average number of shares (1,000) Number of shares, year end (1,000) Share price Quoted price/net asset value Price Earnings number of full-time employees, end of period: Continuing business Discontinued and divested business TrygVesta Annual Report 2005 / Page 14 of 144 - 3 39 33 34 22 -46 28 31 121 21 68,000 68,000 319.2 2.6 10.2 23 22 100 10 68,000 68,000 - - - 25 22 90 10 68,000 68,000 - - - 15 14 79 1 68,000 68,000 - - - -47 -27 63 0 68,000 68,000 - - - 1 1 67 0 68,000 68,000 - - - 3,694 24 3,728 34 3,728 34 3,750 670 3,739 672 3,744 572 1) Share data is based on 68,000,000 shares as though such number of shares was outstanding during the periods presented. The 68,000,000 shares reflect the number of outstanding shares after giving effect to the four-to- one share split set forth in the company's amended articles of association approved by the company's shareholders on 21 September 2005. accounting policies From 1 January 2005, the accounting policies of TrygVesta follow the IFRS standards. The comparative figures for 2004 have been restated to IFRS, but in addition to IFRS restatements, the figures for 2004 are net of divested business, which is henceforth included in “Profit/loss on discontinued and divested business”. TrygVesta Annual Report 2005 / Page 15 of 144 Management's report trygvesta and the world around us TrygVesta maintains and develops its position as a key Unfortunately, terrorism is continuing to gain topicality. player in the Nordic insurance market, being the second In addition to causing immediate damage to humans largest general insurer in the Nordic region and the and property, major terrorist acts may have a signifi- largest and third largest general insurer in the Danish cant effect on the insurance industry. At TrygVesta, and Norwegian markets, respectively. Most players con- we acknowledge each company’s duty to buy reinsur- tinue to enjoy good profitability in the Nordic market, ance in order to maximise our robustness against such and there are no signs of a return to the unsatisfactory events. This does not, however, change the fact that performance we used to see due to a unilateral focus it ought to be possible for companies in the Nordic on market share. countries to safeguard their capital, even where no re- insurance is available. Otherwise, policyholders may be The insurance industry has a historically cyclical nature, left to pay the price as insurers exclude cover of such but at TrygVesta we believe that prospects of sustained claims in their policies. low interest rates and more unpredictable investment returns will keep the industry focused on earnings Recent years have seen many devastating hurricanes, ahead of investment returns. Underwriting discipline floodings and similar events. If the greater frequency is also here to stay, backed by a hardening reinsurance of such events is related to sustained climatic changes market and a growing number of weather-related claims. and not merely coincidences, it will greatly affect insur- The debate about future welfare in all Nordic countries global scale, and disasters far away from the Nordic demonstrates the need that will arise in the years ahead region may affect pricing and will certainly do so. for private insurance schemes covering health and sick- TrygVesta’s scenario projections incorporate such ness, unemployment and other social events. However, factors. ance pricing. Reinsurance helps to equalise risk on a it is also evident that ordinary citizens do not want private schemes to replace public arrangements on a full scale. Instead, private insurance will be a supplement to the public, tax-funded offer. At TrygVesta, we believe this is a growing business area, driven by a desire for more and more individualised cover. We intend to play an active role in developing this business area. Nordic businesses are increasing their focus on risk management and risk hedging. Good corporate gover- nance today requires boards of directors to focus on risk and risk hedging, which naturally implies a requirement for insurers to play a pro-active role in businesses’ risk management. TrygVesta has developed tools that en- able us to play this role in a strong partnership with our customers. TrygVesta Annual Report 2005 / Page 16 of 144 strategy and goals vision Norway added new elements which will be introduced in Denmark over time. Based partly on the Norwegian experience, we have developed a new motor tariff in We want to be perceived as the leading Denmark, making the price of motor insurance more peace of mind supplier of the Nordic transparent by including mileage in the price calcula- region on the markets and within the tion, and protecting customers against price increases business areas chosen by us. if they report a claim. growing the private and commercial portfolios Targeted and efficient sales efforts in the Danish pri- Defined in 2003, TrygVesta’s overall strategy remains vate and commercial markets have been rewarded, gen- unchanged. Accordingly, we continue to focus on gen- erating premium growth of 5.6%. In the Norwegian mar- eral insurance as such, on the Nordic region as our geo- ket, the new concept which abolished the introductory graphic business area and on our existing customers discounts that were more favourable to new customers as the basis for profitable growth of our core business. than to our loyal customers, improved customer reten- The results of the turnaround we initiated in 2003 have tion. Finland continued to see strong growth with 75,000 materialised faster than expected, and our perform- new policies sold in 2005 and gross earned premiums ance in 2005 confirms the new level of earnings. up 44%. Growth was generated through our partnership On the threshold of 2005, we announced that TrygVesta’s market, and through new sales channels of our own. with Nordea, which sold 67,000 policies in the Finnish special focus areas for 2005 would be: adjusting resources and achieving group synergies Focusing on direct nordic insurance Concurrently with investing in IT development, continu- With all non-Nordic business finally divested or dis- ing to upgrade our employees and preparing to estab- continued, we have focused our efforts on the Nordic lish operations in the Swedish market, we succeeded market. Based on providing products that offer peace in retaining our fixed gross expenses at an unchanged of mind, we consolidated our market position in the level. This was attributable to continued tight cost Nordic region and recorded progress in all of the three management and the reaping of some already identi- markets: Denmark, Norway and Finland. Not least our fied Nordic synergies. Finnish business developed in a close partnership with Nordea. We are now importing this model to Sweden. optimising the corporate portfolio Following the targeted restructuring of our corporate retaining our commitment to existing customers portfolio in 2003 and 2004, this part of our business In Norway, we introduced the Vesta Trygghetsavtale, a records excellent profitability. Careful selection of large concept designed to create customer loyalty by safe- risks and continued focus on a balanced product mix guarding all aspects of the everyday lives of individual enabled us to retain market share in the final quarters customers and their families, and guaranteeing that of 2005, without jeopardising profitability. the cover that has been taken out covers the fami- ly’s requirements. Many of the ideas of this concept Common identity and shared values were developed in the Danish market, but the work in We linked the Group’s logos and typography more TrygVesta Annual Report 2005 / Page 17 of 144 Management's report closely together in 2005 in order to allow customers value-oriented themes relevant to the individual em- and the market to gradually get used to our new com- ployee. Our value coaches play a pro-active role, and mon Nordic identity. Furthermore, all TrygVesta examples and experience are available to all employees managers participated in communicating our values on the “value net”, offering inspiration on how to use during 2005 by rolling out “theme packages” with the values in their daily encounters with customers. turning words into results We use the balanced scorecard to implement our strategy and retain our strategic focus areas. This annual report is therefore structured around the four perspectives of the balanced scorecard – financial perspective, customer perspective, processes perspective and employee perspective. selected balanced scorecard-benchmarks for trygvesta iFrs 2005 iFrs 2004 2003 2002 2001 Financial perspective Return of equity after tax (%) Combined ratio Expense ratio, gross Customer perspective, private customers (index) Relention rates Customer loyalty Other customers with concept agreements processes perspective (index) Portfolio (nominal prices) per full-time employee Customier satisfaction in claims handling employee perspective (index) Employee satisfaction 27.9 89.0 16.9 23.1 91.1 17.1 15.4 100.7 22.4 -47.4 107.2 23.6 1.2 104.4 24.3 101.2*) 109.2 108.2 100.9 109.4 106.1 100.0 105.9 102.5 101.6 101.5 98.5 133 105 129 104 124 102 116 100 100 100 100 100 100 105**) 105 102 101 100 Customer, processes and employee perspective benchmarks are based on data for the Danish and Norwegian activities *) Index for retention rates 2005 adjusted for effect of short cancellation notice on the Danish business **) Employee satisfaction survey to be carried out in 2006 TrygVesta Annual Report 2005 / Page 18 of 144 FinanCial perForManCe TrygVesta is committed to generating strong financial risk that likely capital fluctuations may affect our ability results based on a stable and highly predictable per- to run the business and meet our obligations to our cus- formance over time. tomers. On the other hand, we do not intend to accumu- late capital in excess of what is required to continue to TrygVesta's provisioning policy takes into account the run our business and implement our corporate strategy. probability that social inflation, changes in legal practice and similar factors occur from time to time. Accordingly, TrygVesta A/S and our subsidiaries are regulated by local we are more likely to record run-off gains in a normal supervisory authorities, which also monitor the compa- year. nies’ solvency. In practice, the regulatory capital require- ment is below the current target for an A- rating. We We intend to continue to apply new technology and closely monitor developments in the European Union’s modern work organisation principles to eliminate re- efforts to promote new uniform capital requirements, dundant administrative routines, aiming to reduce our the so-called Solvency II project, and play an active role expense ratio over time. in the work in both national and international fora. Our target is to achieve a claims ratio at the low end of the market through high underwriting quality, current efforts to secure a high-quality portfolio and focus on claims expenses, including claims handling expenses. We pursue an active capital strategy and keep a close balance between capital management and risk manage- ment by using the same in-house ALM models in our long-term capital planning. We seek to optimise our capitalisation on an ongoing basis while duly safeguard- ing our stakeholders’ interests and leaving the Group sufficient scope in which to develop and grow. Our financial strength is rated by Standard & Poor's and Moody’s each year, and the aim is to meet the rat- ing agency requirements to maintain certain levels of capital. We seek to maintain minimum ratings of A- and A3, respectively. Given the current structure of our busi- ness and investment profile, the targeted rating levels correspond to maintaining capital at 52-56% of net premiums. This target enables us to meet the rating requirements of corporate customers and brokers and eliminates the TrygVesta Annual Report 2005 / Page 19 of 144 Management's report trygvesta’s FinanCial perForManCe in 2005 TrygVesta improved its financial results markedly in 2005, tive period was adversely affected by the fire at a reporting a profit on ordinary activities of DKK 2,913m fireworks factory in Seest, Denmark, and the tsunami before tax and a return on equity of 28% after tax. in Asia. The fourth quarter expense ratio was below the level for the full year 2005. The pre-tax performance was an increase of DKK 861m over 2004, primarily comprising a DKK 353m improve- The return on investment activities before other finan- ment of the technical result and a substantial improve- cial income and expenses and transfer to insurance ment of DKK 510m of the return on investment activities. activities totalled DKK 399m. This was an excellent per- Earnings from Norwegian and Danish general insurance year and the investment result was some DKK 300m remained well balanced in 2005 and our three principal better than projected in the announcement of financial business areas all made positive contributions to the results for the nine months ended 30 September 2005, financial results. which was based on our knowledge of equity market formance compared with the first three quarters of the trends at 31 October 2005. Compared with the guidance provided in the announce- ment of financial results for the nine months ended positive trend in earned premiums 30 September 2005, the profit on ordinary activities Gross earned premiums rose by 2.9% relative to 2004, before tax was DKK 513m better than our projection composed of satisfactory growth of 5.6% in Private & of DKK 2,400m, in particular, because equity markets Commercial Denmark and, as expected, lower premium performed better than expected. The combined ratio growth of 4.5% in Private & Commercial Norway follow- of 89 for 2005 is in line with the favourable scenario. ing a review of our price structure in the private market The combined ratio improved over the year because in Norway. Corporate recorded a fall of 2.8%. In Fin- claims frequencies were lower and because the effect land, sales through Nordea’s branches saw sustained of claims procurement initiatives materialised sooner growth with gross premiums up 44% over 2004. than anticipated. Run-off gains also pushed up the forecast profit. TrygVesta’s provisioning policy assumes very satisfactory claims level sustained that run-off gains are more likely than run-off losses in The gross claims ratio increased to 72.0 in 2005 from a normal year. Q4 69.3 in 2004, primarily due to claims after the storm in Denmark in January. Gross claims related to the storm amounted to DKK 830m in 2005, of which the share TrygVesta posted profit before tax of DKK 678m in payable by TrygVesta was DKK 100m, while the re- the fourth quarter. Gross earned premiums were 3.7% mainder was recovered through reinsurance. TrygVesta higher than in 2004, 0.8 percentage points more than also paid DKK 64m in reinstatement fees in respect of the year-to-date increase. The gross claims ratio was the storm, which had a gross impact of 5.7 percentage 2.0 percentage points over the year-to-date level, and points on TrygVesta’s combined ratio. Thanks to our was still better than expected even with the reporting effective reinsurance cover for this event, the total net period being autumn and winter months. expense for storm and weather-related claims was in line with expectations for a normal year, and the net The gross claims ratio was 5.1 percentage points lower effect was 1 percentage point. than in the fourth quarter of 2004, but the compara- TrygVesta Annual Report 2005 / Page 20 of 144 CoMbined ratio ForeCasts 2005 teChniCial result by Countries (cid:46)(cid:45) (cid:46)(cid:43) (cid:46)(cid:41) (cid:46)(cid:39) (cid:46)(cid:37) (cid:45)(cid:45) (cid:45)(cid:43) (cid:39)(cid:33)(cid:37)(cid:37)(cid:37) (cid:38)(cid:33)(cid:42)(cid:37)(cid:37) (cid:38)(cid:33)(cid:37)(cid:37)(cid:37) (cid:42)(cid:37)(cid:37) (cid:37) (cid:34)(cid:42)(cid:37)(cid:37) (cid:34)(cid:38)(cid:33)(cid:37)(cid:37)(cid:37) (cid:40)(cid:44)(cid:43) (cid:38)(cid:37)(cid:42) (cid:34)(cid:42)(cid:42)(cid:45) DKKm (cid:39)(cid:33)(cid:37)(cid:42)(cid:40) (cid:38)(cid:33)(cid:44)(cid:37)(cid:37) (cid:38)(cid:33)(cid:41)(cid:42)(cid:43) (cid:39)(cid:37)(cid:37)(cid:41) (cid:70)(cid:38)(cid:21)(cid:39)(cid:37)(cid:37)(cid:42) (cid:70)(cid:39)(cid:21)(cid:39)(cid:37)(cid:37)(cid:42) (cid:70)(cid:40)(cid:21)(cid:39)(cid:37)(cid:37)(cid:42) (cid:39)(cid:37)(cid:37)(cid:42) (cid:39)(cid:37)(cid:37)(cid:38) (cid:39)(cid:37)(cid:37)(cid:39) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:41)(cid:21) (cid:62)(cid:59)(cid:71)(cid:72) (cid:39)(cid:37)(cid:37)(cid:42) (cid:67)(cid:90)(cid:92)(cid:86)(cid:105)(cid:94)(cid:107)(cid:90) (cid:59)(cid:100)(cid:103)(cid:90)(cid:88)(cid:86)(cid:104)(cid:105) (cid:69)(cid:100)(cid:104)(cid:94)(cid:105)(cid:94)(cid:107)(cid:90) (cid:54)(cid:88)(cid:105)(cid:106)(cid:86)(cid:97) (cid:57)(cid:64) (cid:67)(cid:68) (cid:59)(cid:62) (cid:68)(cid:105)(cid:93)(cid:90)(cid:103) The projections from 2004 have been restated to IFRS and differ from the 2004 annual report. gross earned preMiuMs by business areas 2005 CoMbined ratio (cid:38)(cid:38)(cid:37) (cid:38)(cid:37)(cid:44)(cid:35)(cid:39) (cid:38)(cid:37)(cid:42) (cid:38)(cid:37)(cid:41)(cid:35)(cid:41) (cid:38)(cid:37)(cid:37)(cid:35)(cid:44) (cid:38)(cid:37)(cid:37) (cid:46)(cid:42) (cid:46)(cid:37) (cid:45)(cid:42) (cid:46)(cid:40)(cid:35)(cid:45) (cid:46)(cid:38)(cid:35)(cid:38) (cid:45)(cid:46)(cid:35)(cid:37) (cid:39)(cid:37)(cid:37)(cid:38) (cid:39)(cid:37)(cid:37)(cid:39) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:41)(cid:21) (cid:62)(cid:59)(cid:71)(cid:72) (cid:39)(cid:37)(cid:37)(cid:42) (cid:21)(cid:40)(cid:37)(cid:26)(cid:21) (cid:56)(cid:100)(cid:103)(cid:101)(cid:100)(cid:103)(cid:86)(cid:105)(cid:90) (cid:21) (cid:38)(cid:26)(cid:21) (cid:59)(cid:94)(cid:99)(cid:97)(cid:86)(cid:99)(cid:89) (cid:21)(cid:41)(cid:37)(cid:26)(cid:21) (cid:69)(cid:103)(cid:94)(cid:107)(cid:86)(cid:105)(cid:90)(cid:21)(cid:27) (cid:21) (cid:21) (cid:21) (cid:56)(cid:100)(cid:98)(cid:98)(cid:90)(cid:103)(cid:88)(cid:94)(cid:86)(cid:97) (cid:21) (cid:57)(cid:90)(cid:99)(cid:98)(cid:86)(cid:103)(cid:96) (cid:21)(cid:39)(cid:46)(cid:26)(cid:21) (cid:69)(cid:103)(cid:94)(cid:107)(cid:86)(cid:105)(cid:90)(cid:21)(cid:27) (cid:21) (cid:21) (cid:21) (cid:56)(cid:100)(cid:98)(cid:98)(cid:90)(cid:103)(cid:88)(cid:94)(cid:86)(cid:97) (cid:21) (cid:67)(cid:100)(cid:103)(cid:108)(cid:86)(cid:110) TrygVesta Annual Report 2005 / Page 21 of 144 Management's report dkkm Storm and weather gross Storm and weather net Large losses, gross Run-off result, gross iFrs 2005 -911 -177 -416 263 iFrs 2004 -111 -111 -461 -17 normal year -210 -184 -402 0 The number of large claims corresponded to a normal Gross expenses were unchanged from 2004 when year and was slightly below 2004, while claims, net of expressed net of currency movements despite 2.5% reinsurance, were slightly higher because most of the salary indexation, strategic investments in IT, growth large claims were below DKK 50m and therefore not in new markets and an increase in customer-oriented covered by our reinsurers. activities. We had run-off gains of DKK 263m in 2005 against run- The expense ratio for 2005 includes 0,3 percentage off losses of DKK 17m in 2004 which had a favourable points with respect to employee bonus and issue of impact on profits relative to a normal year. The run-off employee shares. results for 2005 include increased provisions for claims handling costs. investment activities Claims frequencies for, in particular, buildings in Den- cial income and expenses and transfer to insurance mark and Norway and motor in Norway were lower business totalled DKK 1,681m, which was DKK 478m than in a normal year. The average claim developed more than in 2004. The return on investment activities before other finan- favourably due to TrygVesta’s arrangements with re- pairers and builders. The improvement was made up of a substantial increase in the return on shares, while the return on There were no judgments or change in the practice bonds fell slightly due to the rise in bond yields during relating to personal accident insurance that could cause the year. us to make extraordinary provisions. expense ratio improved due to efficiency activities, which was satisfactory considering the enhancements and synergies Group’s investment policy. We benefited both from the The gross expense ratio was 16.9% in 2005, which was short-term bond portfolio and from the equity portfo- 0.2 percentage points lower than in 2004. In 2005, we lio, which is heavily weighted in Denmark, Norway and continued our targeted efforts to reduce costs, both the rest of Europe, all markets that provided handsome The performance equals a 5.5% return on investment short term and longer term, by leveraging synergies in returns. the Nordic collaboration and through continued meas- ures to make business processes more efficient. TrygVesta Annual Report 2005 / Page 22 of 144 aCCuMulated return ratio 2005 % balanCe sheet DKKm (cid:39)(cid:42) (cid:39)(cid:37) (cid:38)(cid:42) (cid:38)(cid:37) (cid:42) (cid:37) (cid:42)(cid:37)(cid:33)(cid:37)(cid:37)(cid:37) (cid:41)(cid:37)(cid:33)(cid:37)(cid:37)(cid:37) (cid:40)(cid:44)(cid:33)(cid:45)(cid:39)(cid:41) (cid:41)(cid:37)(cid:33)(cid:45)(cid:38)(cid:38) (cid:40)(cid:37)(cid:33)(cid:37)(cid:37)(cid:37) (cid:39)(cid:37)(cid:33)(cid:37)(cid:37)(cid:37) (cid:38)(cid:37)(cid:33)(cid:166)(cid:37)(cid:37)(cid:37) (cid:37) (cid:39)(cid:42)(cid:33)(cid:39)(cid:38)(cid:39) (cid:39)(cid:43)(cid:33)(cid:44)(cid:42)(cid:44) (cid:63)(cid:86)(cid:99) (cid:59)(cid:90)(cid:87) (cid:66)(cid:86)(cid:103) (cid:54)(cid:101)(cid:103) (cid:66)(cid:86)(cid:110) (cid:63)(cid:106)(cid:99) (cid:63)(cid:106)(cid:97) (cid:54)(cid:106)(cid:92) (cid:72)(cid:90)(cid:101) (cid:68)(cid:88)(cid:105) (cid:67)(cid:100)(cid:107) (cid:57)(cid:90)(cid:88) (cid:54)(cid:104)(cid:104)(cid:90)(cid:105)(cid:104) (cid:69)(cid:103)(cid:100)(cid:107)(cid:94)(cid:104)(cid:94)(cid:100)(cid:99)(cid:104) (cid:55)(cid:100)(cid:99)(cid:89)(cid:104) (cid:69)(cid:103)(cid:100)(cid:101)(cid:90)(cid:103)(cid:105)(cid:110) (cid:72)(cid:93)(cid:86)(cid:103)(cid:90)(cid:104) (cid:73)(cid:100)(cid:105)(cid:86)(cid:97) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:42) (cid:43)(cid:33)(cid:45)(cid:37)(cid:39) (cid:45)(cid:33)(cid:39)(cid:38)(cid:42) (cid:72)(cid:93)(cid:86)(cid:103)(cid:90)(cid:93)(cid:100)(cid:97)(cid:89)(cid:90)(cid:103)(cid:104)(cid:188) (cid:90)(cid:102)(cid:106)(cid:94)(cid:105)(cid:110) tax The pension obligation towards Norwegian TrygVesta Tax on the profit for the year amounted to DKK 788m employees totalled DKK 635m after set-off of the against DKK 556m in 2004. The effective tax rate scheme assets. The full amount has been recognised in of 27% was unchanged from 2004. The tax expense the balance sheet. included a current tax charge of DKK 628m and a DKK 160m increase in TrygVesta’s deferred tax. TrygVesta generated a cash inflow from operating discontinued business activities in 2005 of DKK 4,298m compared with DKK 5,176m in 2004. An amount of DKK 1.2bn regarding TrygVesta reported a loss on discontinued business of sales of property is included in 2004. Investments DKK 28m. The improvement of DKK 47m over 2004 re- increased by DKK 4,051m in 2005, and there was a cash lates mainly to Chevanstell Ltd. We had a stable claims outflow from financing activities of DKK 197m. experience and small commutation gains in 2005. The main reason for reporting a loss was that we strength- shareholders’ equity ened the provision for administrative expenses in con- Shareholders’ equity increased by DKK 1,413m to stand nection with running off the portfolio as this process at DKK 8,215m at 31 December 2005. The increase has been delayed relative to what we anticipated. At 31 was made up of the profit for the year less dividends December 2005, the provision set aside to administer paid, and including adjustments for actuarial gains and the run-off portfolio totalled DKK 96m. losses on the pension provision under IAS 19 and other balance sheet and cash flow TrygVesta’s total assets increased from DKK 37,824m These figures exclude the proposed DKK 1,428m distri- in 2004 to DKK 40,811m in 2005. Liabilities comprised bution of dividends for 2005. minor adjustments. mainly shareholders’ equity of DKK 8,215m and total provisions for insurance contracts, of DKK 26,757m. Total provisions for insurance contracts were DKK 1,545m higher than in 2004, and TrygVesta’s claims provision ratio was 126% in 2005 against 122% in 2004. We have restructured our reinsurance programme in recent years, reducing the reinsurers’ share of the pro- visions for insurance contracts from DKK 3.3bn in 2004 to DKK 2.5bn in 2005. Receivables were reduced by DKK 518m in 2005, mainly due to lower reinsurance receivables. TrygVesta Annual Report 2005 / Page 23 of 144 Management's report private & CoMMerCial denMark dkkm 2005 2004 2005 2004 2004 2003 2002 2001 iFrs Q4 Q4 danish gaap Gross premiums earned Gross claims incurred Gross expenses profit/loss on gross business 1,570 1,501 -1,120 -1,282 -277 173 -235 -16 6,276 -4,987 -1,113 176 5,942 -4,376 -1,057 509 5,977 -4,257 -1,235 485 5,660 -4,194 -1,287 179 5,191 -4,070 -1,194 4,666 -3,843 -1,183 -73 -360 profit/loss on ceded business -34 -26 467 -101 -99 -167 -180 -10 Technical interest, net of reinsurance Change in equalisation provisions technical result key ratios Claims ratio 52 0 191 71.3 Business ceded as a percentage of gross premiums 2.2 Claims ratio. net of ceded business Expense ratio Combined ratio Operating ratio 44 0 2 85.4 1.7 87.1 15.7 102.8 113 0 756 79.5 -7.4 72.1 17.7 89.8 116 0 524 73.7 1.7 75.4 17.8 93.2 164 54 604 71.2 1.7 72.9 20.7 93.6 147 -39 120 74.1 3.0 77.1 22.7 99.8 219 19 -15 78.4 3.5 81.9 23.0 233 14 -123 82.4 0.2 82.6 25.4 104.9 108.0 73.5 17.6 91.1 88.2 99.9 88.2 91.4 91.0 97.3 100.6 102.8 This business area generated a very satisfactory The renewal rate was 85.0 in 2005, up from 84.4 in technical result thanks to a good claims performance, 2004. Renewal rates improved, in particular, among despite the storm in January, and a favourable premium commercial customers, while renewal rates in the pri- performance. vate lines remained at a satisfactory level. retention of existing customers The Danish operations began using the Norwegian call Private & Commercial Denmark reported 5.6% growth centre technology at the end of 2005, resulting in a in gross earned premiums relative to 2004. Allowing more systematic distribution of work between our cus- for some 2.4% indexation and 1.2% other price in- tomer service staff and our own sales agents, thereby creases, volume growth was thus 2.0%, and TrygVesta enhancing quality, productivity and quick service to our is winning market shares. The increase was prima- customers. rily attributable to customer loyalty and thus higher renewal rates within most segments, and to the effect Combined ratio improvement of 3.4 percentage of the refocused sales organisation, which resulted in points more customer contacts for all employees. The significant enhancement of the technical result is reflected in the combined ratio, which improved 3.4 percentage points relative to 2004. The storm in Janu- TrygVesta Annual Report 2005 / Page 24 of 144 developMent in ClaiMs FreQuenCy denMark (cid:38)(cid:38)(cid:37) (cid:38)(cid:37)(cid:42) (cid:38)(cid:37)(cid:37) (cid:46)(cid:42) (cid:46)(cid:37) (cid:45)(cid:42) (cid:45)(cid:37) (cid:39)(cid:37)(cid:37)(cid:39) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:42) (cid:55)(cid:106)(cid:94)(cid:97)(cid:89)(cid:94)(cid:99)(cid:92) (cid:66)(cid:100)(cid:105)(cid:100)(cid:103) iFrs 2005 -739 -115 -23 -2 iFrs 2004 -74 -74 -10 -138 dkkm Storm and weather, gross Storm and weather, net Large losses, gross Run-off result, gross ary had an impact on the gross combined ratio of 12.2 to the snowfall between Christmas and New Year 2005, percentage points and an impact of 2.2 percentage but it remained satisfactory. points on the combined ratio, net of reinsurance. Claims ratio impacted by the storm mated in early 2005, resulting in substantial admin- The gross claims ratio was 5.8 percentage points istrative savings. At the same time, the process was higher than in 2004. Disregarding the storm in January, prepared for further automation. These savings are re- the gross claims ratio was 68.2, equivalent to a fall of flected in the claims ratio as future savings will also be. Most of our motor claims handling was further auto- 5.5 percentage points relative to last year. All primary products are generally performing well with the excep- expense ratio tion of personal accident insurance, which continued to Private & Commercial Denmark reported a gross ex- record an unsatisfactory claims experience. pense ratio for 2005 that was slightly below the level Due to our reinsurance agreements, the storm in ing power. Our continuing efforts to combine sales of- January had a limited impact on the performance, net fices into large powerful units had a favourable impact. of last year, reflecting our investment in increased sell- of reinsurance, and the overall figure for storm and weather-related claims was only slightly higher than in a normal year. Large claims and run-off results were in line with ex- pectations for a normal year. Tryg Reparation for cars, which was introduced in 2003, and Tryg Bygning from 2004 also had a positive effect on claims expenses. The new approach to claims hand- ling resulted in a decrease in the average claim. The claims frequency for building insurance continued to fall throughout 2005. In motor insurance, the fre- quency rose marginally from 2004 to 2005, mainly due TrygVesta Annual Report 2005 / Page 25 of 144 Management's report private & CoMMerCial norway dkkm 2005 2004 2005 2004 2004 2003 2002 2001 iFrs Q4 Q4 danish gaap DKK/NOK, rate, quarterly, annual average 94.61 90.71 92.85 88.79 88.79 93.68 98.46 92.16 Gross premiums earned Gross claims incurred Gross expenses profit/loss on gross business profit/loss on ceded business Technical interest, net of reinsurance Change in equalisation provisions key ratios Claims ratio 65.4 Business ceded as a percentage of gross premiums 1.0 Claims ratio, net of ceded business Expense ratio Combined ratio Operating ratio 1,184 1,149 4,632 4,435 -697 -263 189 -2,844 -2,696 -945 843 -922 817 4,421 -2,615 -1,106 700 4,553 -3,275 -1,123 155 4,211 -3,032 -1,136 43 3,103 -2,465 -810 -172 -62 -73 -86 -93 -228 240 -6 28 0 93 0 87 0 60.7 0.5 61.2 22.9 84.1 61.4 1.3 62.7 20.4 83.1 60.8 1.6 62.4 20.8 83.2 140 -92 662 59.1 1.9 61.0 25.0 86.0 204 -57 209 71.9 2.0 73.9 24.7 98.6 263 -140 -62 72.0 5.4 77.4 27.0 104.4 197 -55 210 79.4 -7.7 71.7 26.1 97.8 -774 -233 177 -12 25 0 66.4 19.7 86.1 84.3 82.1 81.5 81.6 83.5 94.4 98.3 92.0 technical result 190 211 874 831 The favourable performance in 2005 was attributable sales through Nordea were 60% higher than in 2004. to enhanced risk selection, a very low claims frequency The development in earned premiums was attribut- for building and motor insurance in Norway and im- able to our continued focus on profitable business. We proved claims procurement. expect that the revised price structure and the launch of a new customer concept will strengthen our position stable premium performance among private customers in Norway further. The per- Private & Commercial Norway increased gross earned formance reflects a year with an unsatisfactory balance premiums by 4.5% relative to 2004. In local currency, between customer inflow and customer outflow during gross premiums were up 1% over 2004. Allowing for the first six months, and an improvement during the last some 1.1% indexation and other price increases of six months following initiatives relating to the new cus- 0.6%, volume growth was thus a negative 0.8%, The tomer concept and the strengthened sales organisation. renewal rate was 83.7%, up from 83.0%. The improve- ment took place gradually over the year, reflecting the Stronger focus on additional sales to existing customers launch of our Vesta Trygghetsavtale customer con- helped strengthen the trend in the latter half of 2005. cept. Furthermore, developing from a low starting level, TrygVesta Annual Report 2005 / Page 26 of 144 developMent in ClaiMs FreQuenCy norway (cid:38)(cid:39)(cid:37) (cid:38)(cid:37)(cid:37) (cid:45)(cid:37) (cid:43)(cid:37) (cid:39)(cid:37)(cid:37)(cid:38) (cid:39)(cid:37)(cid:37)(cid:39) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:42) (cid:55)(cid:106)(cid:94)(cid:97)(cid:89)(cid:94)(cid:99)(cid:92) (cid:66)(cid:100)(cid:105)(cid:100)(cid:103) iFrs 2005 -35 -32 -37 164 iFrs 2004 -15 -15 -24 91 dkkm Storm and weather, gross Storm and weather, net Large losses, gross Run-off result, gross Combined ratio at a low level Claims incurred in workers’ compensation, in particular, The positive technical performance was reflected in the improved significantly in 2005 relative to 2004. This combined ratio, which at 83.1 was 0.1 percentage point should be seen in the context of the premium increases lower than in 2004 and lower than in a normal year. introduced in the personal accident lines. Claims ratio at a satisfactory level Costs of stronger sales effort The gross claims ratio was 0.6 percentage point up on Private & Commercial Norway reduced its gross ex- 2004, but it remains at a very low level. We attribute pense ratio to 20.4% in 2005. We have invested in more this to the effect of prior-year initiatives and enhanced selling power throughout the year while reducing costs risk selection based on the revised price structure that by implementing planned sales offices closures and helps us retain existing profitable customers. In addi- efficiency-enhancements of workflows and processes tion, as the claims frequency was lower due to favour- as part of our strategy to combine sales in larger sales able weather conditions, we recorded an extraordinarily offices with a powerful selling environment. favourable claims performance for, in particular, building and motor insurance. Large claims, comprising three property claims, were at a slightly higher level than in a normal year but were more than offset by run-off gains of DKK 164m. Building insurance saw an extremely favourable claims frequency in 2004 and 2005 due to the very mild winters. Motor insurance also saw a lower frequency, which we expect to sustain going forward. We recorded a significantly lower claims frequency among new customers due to a much better risk selec- tion, and this supported the favourable claims perform- ance. TrygVesta Annual Report 2005 / Page 27 of 144 Management's report Corporate dkkm 2005 2004 2005 2004 2004 2003 2002 2001 iFrs Q4 Q4 danish gaap DKK/NOK, rate, quarterly, annual average 94.61 90.71 92.85 88.79 88.79 93.68 98.46 92.16 Gross premiums earned Gross claims incurred Gross expenses profit/loss on gross business 1,171 1,151 4,666 4,801 4,786 5,190 5,120 3,832 -847 -137 187 -872 -127 152 -3,361 -3,431 -3,417 -3,555 -4,368 -2,810 -534 771 -561 809 -689 680 -873 762 -846 -94 -681 341 profit/loss on ceded business -150 -75 -421 -549 -570 -801 -363 -495 Technical interest. net of reinsurance Change in equalisation provisions technical result key ratios Claims ratio 14 0 51 72.3 Business ceded as a percentage of gross premiums 12.8 Claims ratio, net of ceded business Expense ratio Combined ratio Operating ratio 85.1 11.7 96.8 4 0 81 75.8 6.5 82.3 11.0 93.3 114 0 464 72.0 9.0 81.0 11.4 92.4 130 0 390 71.5 11.4 82.9 11.7 94.6 190 -54 246 71.4 11.9 83.3 14.4 97.7 209 -15 155 68.5 15.4 83.9 16.8 314 -119 -262 85.3 7.1 92.4 16.5 251 -31 66 73.3 12.9 86.2 17.8 100.7 108.9 104.0 95.7 93.0 90.3 92.1 94.0 96.9 102.6 97.6 Corporate, our Nordic business area, continued the profitable business, which implies that we have opted positive trend from 2004, improving profitability in the to stay away from certain customer groups in the personal accident lines in general and in Norway, in past few years or required that they provide improved particular. safeguarding measures and hold higher deductibles. Towards the end of the year, we saw a strong increase earned premiums in sales and satisfactory renewal rates. Corporate recorded a 2.8% fall in gross earned premiums from 2004 to 2005. Combined ratio improvement of 2.2 percentage points Gross earned premiums in Denmark were 3.8% lower, The favourable technical performance was reflected in of which the transfer of the aviation portfolio to the combined ratio of 92.4, which was an improvement an independent company and the full effect of the of 2.2 points relative to 2004. introduction of net pricing to customers served by brokers accounted for almost 2%. In Norway, the Claims ratio impacted by January storm reduction was 6.2% in local currency. The premium The gross claims ratio was 0.5 percentage points higher performance was linked to our continued focus on than in 2004 and affected by the storm in Denmark in TrygVesta Annual Report 2005 / Page 28 of 144 dkkm Storm and weather, gross Storm and weather, net Large losses, gross Run-off result, gross iFrs 2005 -136 -29 -356 100 iFrs 2004 -23 -23 -427 24 January. Its effect on gross claims was DKK 120m. Our being lower in 2005 than in 2004 due to such measures retention was DKK 15m and we paid reinstatement pre- as changed principles for settlement with brokers, our miums of DKK 9m. The gross claims ratio was 69.5 net continued efforts throughout 2005 to make selling of the January storm. The favourable performance of, more efficient and the general cost constraint. in particular, the Norwegian part of the portfolio was mainly driven by our initiatives in the personal accident business. We continuously focus on working systematically with risk selection and sound underwriting. We measure the quality of our portfolio relative to customers who choose other insurers to ensure we select risk and set prices correctly. The number of large claims within our retention limit of DKK 50m brought our claims expenses for large losses, net of reinsurance, slightly higher than in a normal year. The conventional corporate insurance lines, property, liability, motor and transport insurance saw a satis- factory claims performance which was better than in a normal year, while the claims performance in the marine businesses was still not satisfactory. sustained low cost level Corporate reduced its gross expense ratio by 0.3 percentage point relative to 2004 despite lower gross earned premiums. The favourable expense ratio per- formance was primarily attributable to absolute costs TrygVesta Annual Report 2005 / Page 29 of 144 Management's report Finnish general insuranCe dkkm 2005 2004 2005 2004 2004 2003 2002 2001 iFrs Q4 Q4 danish gaap DKK/EUR, rate, quarterly, annual average 745.95 743.43 745.07 743.99 743.99 742.92 743.08 745.74 Gross premiums earned Gross claims incurred Gross expenses profit/loss on gross business profit/loss on ceded business Technical interest, net of reinsurance Change in equalisation provisions 39 -32 -18 -11 -1 1 0 28 -20 -19 -11 1 0 0 140 -113 -70 -43 -1 3 0 97 -73 -71 -47 0 2 0 97 -66 -78 -47 0 2 0 61 -47 -63 -49 0 1 0 21 -18 -66 -63 -4 1 0 2 -1 -29 -28 -1 0 0 technical result -11 -10 -41 -45 -45 -48 -66 -29 key ratios Claims ratio 82.1 Business ceded as a percentage of gross premiums 2.6 Claims ratio, net of ceded business Expense ratio Combined ratio Operating ratio 71.4 -3.6 67.8 67.9 80.9 0.2 81.1 50.2 75.3 0.2 75.5 73.0 68.5 0.2 68.7 79.8 84.7 46.2 130.9 135.7 131.3 148.5 148.5 77.5 1.0 78.5 102.8 181.3 84.8 18.7 103.5 91.1 0.0 91.1 316.3 1,795.1 419.8 1,886.2 127.5 135.7 128.0 145.3 145.5 177.4 400.0 1,550.0 sustained strong growth and performance During their short life-span, the Finnish operations improvement have succeeded in growing the business volume in line Nordea Vahinkovakuutus, TrygVesta’s Finnish business, with our ambitious plans. Nordea’s around 3 million pri- generated 44% growth in gross earned premiums in vate customers in Finland offer a large sales potential. 2005. The improvement was primarily achieved because we strengthened the partnership with Nordea, which Claims ratio at a satisfactory level sells insurance through its branches, and launched our The gross claims ratio was 5.6 percentage points own new channels. higher than in 2004 mainly due to the payment into the Finnish motor third party liability insurance pool, which We extended the partnership in 2005 to include Nordea covers death and disability. Finans in connection with sales of motor insurance policies. significant improvement of expense ratio The gross expense ratio for Finland decreased 22.8 We sold a satisfactory volume of new policies in 2005. percentage points relative to 2004. The very favourable With almost 75,000 polices sold, sales were up by 15% performance was mainly due to absolute costs being on 2004. TrygVesta Annual Report 2005 / Page 30 of 144 aCCuMulated weekly sales Number of policies Finland gross preMiuMs earned DKKm (cid:45)(cid:37)(cid:33)(cid:37)(cid:37)(cid:37) (cid:44)(cid:37)(cid:33)(cid:37)(cid:37)(cid:37) (cid:43)(cid:37)(cid:33)(cid:37)(cid:37)(cid:37) (cid:42)(cid:37)(cid:33)(cid:37)(cid:37)(cid:37) (cid:41)(cid:37)(cid:33)(cid:37)(cid:37)(cid:37) (cid:40)(cid:37)(cid:33)(cid:37)(cid:37)(cid:37) (cid:39)(cid:37)(cid:33)(cid:37)(cid:37)(cid:37) (cid:38)(cid:37)(cid:33)(cid:37)(cid:37)(cid:37) (cid:37) (cid:38)(cid:42)(cid:37) (cid:38)(cid:39)(cid:37) (cid:46)(cid:37) (cid:43)(cid:37) (cid:40)(cid:37) (cid:37) (cid:38) (cid:41) (cid:44) (cid:38)(cid:37) (cid:38)(cid:40) (cid:38)(cid:43) (cid:38)(cid:46) (cid:39)(cid:39) (cid:39)(cid:42) (cid:39)(cid:45) (cid:40)(cid:38) (cid:40)(cid:41) (cid:40)(cid:44) (cid:41)(cid:37) (cid:41)(cid:40) (cid:41)(cid:43) (cid:41)(cid:46) (cid:42)(cid:39) (cid:39)(cid:37)(cid:37)(cid:38) (cid:39)(cid:37)(cid:37)(cid:39) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:41)(cid:21) (cid:62)(cid:59)(cid:71)(cid:72) (cid:39)(cid:37)(cid:37)(cid:42) (cid:39)(cid:37)(cid:37)(cid:42) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:39) (cid:76)(cid:90)(cid:90)(cid:96)(cid:104) almost unchanged from 2004 while earned premiums increased strongly. Higher payroll costs, office operation expenses and commissions in line with increased sales were offset by lower IT related depreciation charges. TrygVesta Annual Report 2005 / Page 31 of 144 Management's report investMent aCtivities dkkm Tryg Vesta TrygVesta A/S Total Other financial income and expenses *) total investments activities Transferred to technical interest Return on investment activities Discontinued business profit/loss assets end of 2005 1,064 615 2 2004 2005 2004 803 396 4 19,426 16,251 14,950 12,563 34 109 1,681 1,203 34,410 28,923 -86 -187 1,595 1,016 -707 888 -6 -638 378 -7 578 745 *) The item comprises gains and losses as a result of a changed discount rate, interest on operating assets, bank debt and reinsurance deposits, exchange rate adjustment of insurance items and costs of investment activities. TrygVesta’s return on investment activities before 2005, lifting the proportion of equities from just under transfer to insurance activities and before other finan- 11% to almost 14%. We only added DKK 55m to our cial income and expenses was DKK 1,681m in 2005, or portfolio of real property, reducing the proportion it 5.5%, which was better than the 2004 return of DKK constitutes of the overall investment portfolio. 1,203m or 4.6%. The improvement was due to a larger investment portfolio and, in particular, higher equity asset allocation returns, while the higher interest rates triggered a fall Our net investments amounted to about DKK 4.3bn in in the bond return. 2005, of which DKK 3.6bn was invested in bonds and the balance in equities and real property. Other financial income and expenses improved from a net expense of DKK 187m to a net expense of DKK bonds 86m among other things because higher interest rates Our overall bond portfolio including cash yielded a changed the discounting effect from minus DKK 109m return of 2.7% or DKK 687m in 2005. Short-term bond to a gain of DKK 43m. Technical interest transferred to yields rose 0.3-0.8 percentage points during 2005, insurance activities was DKK 69m higher, increasing the which had an adverse impact on value adjustments and total return on investment activities by DKK 510m. thus on the return. asset allocation DKK 26.0bn or 94% of our bond portfolio consisted of Throughout 2005, we maintained a high proportion of Danish mortgage bonds, placements in the Norwegian highly liquid bonds in our portfolio for security and rat- money market or Western European or US government ing considerations. Net investments and rising equity bonds. prices increased our equity portfolio by DKK 1,622m in TrygVesta Annual Report 2005 / Page 32 of 144 investment assets 31-12-05 bonds return net in return invest- dkkm Tryg Vesta TrygVesta A/S Total Other financial income and expenses total Discontinued business Asset allocation in % Return in DKKm Return in % shares etc. property total dkkm in % ments 3,239 1,531 13 14,839 12,712 21 1,348 19,426 1,064 707 14,950 0 34 615 2 6.2 4.5 2,663 1,699 -75 4,783 27,572 2,055 34,410 1,681 5.5 4,287 -86 1,595 16 2,6 -85 0 13.9 819 22.3 578 80.1 687 2.7 0 6.0 175 9.4 578 100.0 1,681 5.5 return on asset Classes % bond portFolio by geography 31-12-05 (cid:39)(cid:42) (cid:39)(cid:37) (cid:38)(cid:42) (cid:38)(cid:37) (cid:42) (cid:37) (cid:39)(cid:39)(cid:35)(cid:40) (cid:38)(cid:43)(cid:35)(cid:38) (cid:46)(cid:35)(cid:41) (cid:44)(cid:35)(cid:45) (cid:42)(cid:35)(cid:42) (cid:41)(cid:35)(cid:43) (cid:39)(cid:35)(cid:44) (cid:40)(cid:35)(cid:38) (cid:55)(cid:100)(cid:99)(cid:89)(cid:104)(cid:21)(cid:90)(cid:105)(cid:88)(cid:35) (cid:72)(cid:93)(cid:86)(cid:103)(cid:90)(cid:104) (cid:69)(cid:103)(cid:100)(cid:101)(cid:90)(cid:103)(cid:105)(cid:110) (cid:73)(cid:100)(cid:105)(cid:86)(cid:97) (cid:39)(cid:37)(cid:37)(cid:42) (cid:39)(cid:37)(cid:37)(cid:41) (cid:21)(cid:38)(cid:41)(cid:35)(cid:39)(cid:26)(cid:21) (cid:68)(cid:105)(cid:93)(cid:90)(cid:103) (cid:21)(cid:42)(cid:38)(cid:35)(cid:44)(cid:26)(cid:21) (cid:57)(cid:86)(cid:99)(cid:94)(cid:104)(cid:93) (cid:21) (cid:21) (cid:87)(cid:100)(cid:99)(cid:89)(cid:104) (cid:21)(cid:40)(cid:41)(cid:35)(cid:38)(cid:26)(cid:21) (cid:67)(cid:100)(cid:103)(cid:108)(cid:90)(cid:92)(cid:94)(cid:86)(cid:99)(cid:21) (cid:21) (cid:21) (cid:21) (cid:87)(cid:100)(cid:99)(cid:89)(cid:104)(cid:21)(cid:86)(cid:99)(cid:89)(cid:21) (cid:21) (cid:98)(cid:100)(cid:99)(cid:90)(cid:110)(cid:21)(cid:98)(cid:86)(cid:103)(cid:96)(cid:90)(cid:105) TrygVesta Annual Report 2005 / Page 33 of 144 Management's report rating alloCation aF bond portFolio 31-12-05 listed shares by geography (cid:21) (cid:37)(cid:35)(cid:41)(cid:26)(cid:21) (cid:55)(cid:55)(cid:55)(cid:36)(cid:55)(cid:86)(cid:86) (cid:21)(cid:38)(cid:46)(cid:35)(cid:42)(cid:26)(cid:21) (cid:67)(cid:71) (cid:21)(cid:37)(cid:35)(cid:37)(cid:38)(cid:26)(cid:21) (cid:49)(cid:55)(cid:55)(cid:36)(cid:55)(cid:86) (cid:21)(cid:43)(cid:44)(cid:35)(cid:42)(cid:26)(cid:21) (cid:54)(cid:54)(cid:54)(cid:36)(cid:54)(cid:86)(cid:86) (cid:21)(cid:38)(cid:38)(cid:35)(cid:44)(cid:26)(cid:21) (cid:54)(cid:54)(cid:36)(cid:54)(cid:86) (cid:21) (cid:37)(cid:35)(cid:46)(cid:26)(cid:21) (cid:54)(cid:36)(cid:54) (cid:21)(cid:39)(cid:44)(cid:35)(cid:46)(cid:26)(cid:21) (cid:74)(cid:72)(cid:54) (cid:21) (cid:41)(cid:35)(cid:43)(cid:26)(cid:21) (cid:68)(cid:105)(cid:93)(cid:90)(cid:103) (cid:21)(cid:38)(cid:37)(cid:35)(cid:42)(cid:26)(cid:21) (cid:57)(cid:90)(cid:99)(cid:98)(cid:86)(cid:103)(cid:96) (cid:21) (cid:43)(cid:35)(cid:39)(cid:26)(cid:21) (cid:67)(cid:100)(cid:103)(cid:108)(cid:86)(cid:110) (cid:21)(cid:40)(cid:39)(cid:35)(cid:42)(cid:26)(cid:21) (cid:71)(cid:90)(cid:104)(cid:105)(cid:21)(cid:100)(cid:91) (cid:21) (cid:21) (cid:58)(cid:106)(cid:103)(cid:100)(cid:101)(cid:86) (cid:21)(cid:38)(cid:45)(cid:35)(cid:40)(cid:26)(cid:21) (cid:74)(cid:64) The pie chart presents the composition of the bond Our portfolio of listed shares is highly diversified. Our portfolio by rating category. As shown, 79% of the port- largest position accounted for only 2.8% of total listed folio is rated AAA/Aaa or AA/Aa. The unrated 20% of the shares and 0.4% of total investment assets. Further- portfolio comprises mainly short-term Norwegian money more, the proportion of domestic listed shares (Den- market certificates issued by banks. mark and Norway) is very low, amounting to some 17% of the listed shares portfolio at 31 December 2005, The option adjusted duration including cash of the and our international share investments are placed in Group’s total bond portfolio was 1.6 years at 31 De- portfolios that are highly diversified with regard to geo- cember 2005 compared to 1.3 years at 31 December graphical and industry distribution and with a low track- 2004. The short, but slightly higher duration was pri- ing error, meaning that we expect the portfolio return marily due to a higher duration on the Danish portfolio to be very close to the benchmark return. In both Den- and an increased portfolio of foreign bonds in Vesta. mark and Norway, the five largest companies account The bond portfolio had less interest rate sensitivity for more than 55% of the index, while the five largest than the provisions. shares components of our total equity portfolio account for 9.6%. We intend to maintain a diversified international equity portfolio in order to minimise risk relating to any The total return on investments for the financial year single market or any single company. was DKK 819m, equivalent to 22.3%. The strong return was driven by sound returns in the large international real property equity markets, exceptionally large returns in the The investment return on real property was DKK 175m, Danish and Norwegian equity markets, and a reduced equivalent to a total return of 9.4%. The Group sold proportion of US shares in the portfolio from 1 Janu- investment properties worth DKK 19m in 2005. The ary 2005. The return on Danish shares was 50.0%, occupancy rate was 94.4% at 31 December 2005 com- while Norwegian shares generated a return of 45.1% pared to 95.6% at 31 December 2004. compared with 46.5% for the Danish OMXCB index and 40.5% for the Norwegian OSEBX index. The return on The portfolio is well-diversified and consists of quality other international shares was 17.4% compared with property, typically in prime locations in major cities in 24.9% and 5.1% for MSCI Europe and MSCI USA, respec- Denmark and Norway. The portfolio mainly comprises tively. We hedged currency risks relating to interna- office premises, but also includes a small proportion of tional bonds during the year. Unlisted shares accounted other commercial property and residential property. for DKK 225m at 31 December 2005. TrygVesta Annual Report 2005 / Page 34 of 144 Capitalisation 2005 trygvesta had the following ratings at 31 december 2005 standard & poor's Moody’s Tryg Forsikring Vesta Forsikring Dansk Kaution Target (minimum) In 2005 Moody's upgraded its outlook for Tryg Forsikring and Vesta Forsikring from stable to positive. Changes in our capitalisation Shareholders’ equity Subordinate loan capital Dividend for the year Capital net premiums Capital/premiums A-/stable A-/stable A-/stable A- A3/positive A3/positive - A3 2005 8,215 1,098 -1,428 7,885 2004 6,802 700 650 6,852 14,900 13,782 52.9% 49.7% The ratio of capital to premiums was 52.9% in 2005, up from 49.7% in 2004. Given the anticipated dividend mark smba was repaid in connection with the bond distribution for 2005, this is well within our targeted issue, as were the subordinated intercompany loans. range. The new loan increased the ratio of subordinate loan capital to the capital from 9.3% in 2004 to 11.8% in We made two important changes to our capitalisation 2005, or 13.9% after payment of dividend. in 2005: The higher volume of loan finance raised our annual 1. Tryg Forsikring A/S issued a listed bond loan in interest expense on subordinate loans to DKK 50.6m December 2005 from DKK 43.75m. Our earnings in 2005 covered the 2. TrygVesta extended its credit facility on 5 July 2005 total interest expense 43 times. In order to make our capitalisation more transparent, we Capital resources show a simplified capital model on TrygVesta Investor On 5 July 2005, TrygVesta replaced the existing short- Relations homepage. term debt of DKK 600m by a five-year DKK 2,000m revolving credit facility. At 31 December 2005, we had subordinate loan capital utilised DKK 715m of this facility. In December 2005, Tryg Forsikring A/S issued a subor- dinated bond loan listed on the London Stock Exchange Including subordinate loan capital and the amount in a nominal amount of EUR 150m. This loan is included drawn under the credit facility, debt finance accounted in the calculation of the Group’s capital base. for 18.1% of our capital base, rising to 27.4% on full The 20-year loan is subject to a prepayment option utilisation of the credit facility. after ten years. It was subscribed at 1.10% above The credit facility provides flexibility in planning the the swap rate, which was 3.53% when the price was Group’s capitalisation, but we do not anticipate increas- determined. The coupon is 4.50% p.a. for the first ten ing the utilisation rate of the facility significantly in the years and will then become variable. The bonds, heavily short term. oversubscribed, had been taken up in advance by a group of Danish and international professional inves- tors and were rated BBB by Standard & Poors and BAA 2 by Moody’s. The previous subordinate loan granted by Tryg i Dan- TrygVesta Annual Report 2005 / Page 35 of 144 Management's report our CustoMers Insurance customers in the Nordic region are becom- This special survey showed that TrygVesta’s staff hand- ing increasingly focused on quality and reliability in the led the huge task very satisfactorily. It also showed provision of services. that almost nine out of ten customers would recom- mend TrygVesta to their family and friends based on At TrygVesta, we fundamentally believe that our cus- this performance. This is a very strong signal of loyalty tomers’ requirements are best covered when we provide and satisfaction. solutions rather than mere financial compensation in case they report a claim. Other customer surveys in the year also produced many positive responses. As a consequense we work with concepts where we pro-actively provide peace of mind to customers, private In Norway, TrygVesta advanced to rank second among as well as corporate. Examples include when custom- the three companies we usually consider our peers in ers needs a garage to repair damage to their car, when the Norwegian market, and which hold an aggregate their house or flat has been damaged by water or 82% market share. We believe that our new customer otherwise, when customers need help to return to the concept Vesta Trygghetsavtale, which involves that labour market after an accident, or when large or small we take responsibility for meeting customers’ overall businesses need help to maintain or restore production insurance requirements, contributed strongly to the after a large claim. improvement. TrygVesta aims to enhance customer loyalty on an TrygVesta ranks first among the big players in Den- ongoing basis. We can achieve this only by constantly mark, and we recorded progress in both customer spotlighting customer satisfaction. As part of our active loyalty and satisfaction. Continuous claims handling customer policy, we contact all private customers every improvements and our focus on the ongoing contact to year when we send out policy renewals and policy over- our customers also when they do not have a claim or views. We also send all our concept customers at least need to renew their policies helped us retain the very one positive message each year. high rating. We carry out regular customer surveys in all markets. TrygVesta in Finland has some of the most loyal and We also carry out surveys if many customers have satisfied customers, and we rank first or second in all required TrygVesta’s expertise due to particular events. categories. We made such a survey after the hurricane in 1999 in Customer expectations to TrygVesta in Finland are the Denmark, and the results of the survey caused us to highest in the market at 76.3%. Number two on the implement major changes to our IT systems and busi- list was at 73.6%. We succeeded in meeting the very ness procedures. We were therefore able to handle high customer expectations as reflected, among other the severe storm in Denmark in 2005 quickly and things, by customers rating TrygVesta best on price- efficiently. Likewise, we performed a survey among af- quality relationship. We are rated 76.5% against 73.3% fected customers after all the work involved in handling for our closest competitor. the consequences of the fireworks explosion at Seest, Denmark in 2004. TrygVesta Annual Report 2005 / Page 36 of 144 CustuMer rating denMark 2005 satisFaCtion and loyalty - private CustoMers 1) CustoMer rating, norway 2005 satisFaCtion and loyalty - private CustoMers 1) (cid:110) (cid:105) (cid:97) (cid:86) (cid:110) (cid:100) (cid:65) (cid:45)(cid:38) (cid:44)(cid:46) (cid:44)(cid:44) (cid:44)(cid:42) (cid:44)(cid:40) (cid:44)(cid:38) (cid:43)(cid:46) (cid:43)(cid:44) (cid:43)(cid:42) (cid:43)(cid:40) (cid:73)(cid:103)(cid:110)(cid:92)(cid:75)(cid:90)(cid:104)(cid:105)(cid:86) (cid:110) (cid:105) (cid:97) (cid:86) (cid:110) (cid:100) (cid:65) (cid:44)(cid:45) (cid:44)(cid:43) (cid:44)(cid:41) (cid:44)(cid:39) (cid:44)(cid:37) (cid:43)(cid:45) (cid:43)(cid:43) (cid:43)(cid:41) (cid:43)(cid:39) (cid:73)(cid:103)(cid:110)(cid:92)(cid:75)(cid:90)(cid:104)(cid:105)(cid:86) (cid:43)(cid:40) (cid:43)(cid:42) (cid:43)(cid:44) (cid:43)(cid:46) (cid:44)(cid:38) (cid:44)(cid:40) (cid:44)(cid:42) (cid:44)(cid:44) (cid:44)(cid:46) (cid:45)(cid:38) (cid:43)(cid:39) (cid:43)(cid:41) (cid:43)(cid:43) (cid:43)(cid:45) (cid:44)(cid:37) (cid:44)(cid:39) (cid:44)(cid:41) (cid:44)(cid:43) (cid:44)(cid:45) (cid:72)(cid:86)(cid:105)(cid:94)(cid:104)(cid:91)(cid:86)(cid:88)(cid:105)(cid:94)(cid:100)(cid:99) (cid:72)(cid:86)(cid:105)(cid:94)(cid:104)(cid:91)(cid:86)(cid:88)(cid:105)(cid:94)(cid:100)(cid:99) (cid:73)(cid:103)(cid:110)(cid:92)(cid:75)(cid:90)(cid:104)(cid:105)(cid:86) (cid:62)(cid:99)(cid:89)(cid:106)(cid:104)(cid:105)(cid:103)(cid:110) (cid:56)(cid:100)(cid:98)(cid:101)(cid:90)(cid:105)(cid:94)(cid:105)(cid:100)(cid:103)(cid:21)(cid:38) (cid:73)(cid:103)(cid:110)(cid:92)(cid:75)(cid:90)(cid:104)(cid:105)(cid:86) (cid:62)(cid:99)(cid:89)(cid:106)(cid:104)(cid:105)(cid:103)(cid:110) (cid:56)(cid:100)(cid:98)(cid:101)(cid:90)(cid:105)(cid:94)(cid:105)(cid:100)(cid:103)(cid:21)(cid:39) (cid:56)(cid:100)(cid:98)(cid:101)(cid:90)(cid:105)(cid:94)(cid:105)(cid:100)(cid:103)(cid:21)(cid:40) (cid:56)(cid:100)(cid:98)(cid:101)(cid:90)(cid:105)(cid:94)(cid:105)(cid:100)(cid:103)(cid:21)(cid:41) (cid:56)(cid:100)(cid:98)(cid:101)(cid:90)(cid:105)(cid:94)(cid:105)(cid:100)(cid:103)(cid:21)(cid:38) (cid:56)(cid:100)(cid:98)(cid:101)(cid:90)(cid:105)(cid:94)(cid:105)(cid:100)(cid:103)(cid:21)(cid:39) CustoMer rating, Finland 2005 satisFaCtion and loyalty - private CustoMers 1) CustoMer rating, nordiC Countries 2005 satisFaCtion and loyalty - private CustoMers 1) 2) (cid:110) (cid:105) (cid:97) (cid:86) (cid:110) (cid:100) (cid:65) (cid:45)(cid:39) (cid:45)(cid:37) (cid:44)(cid:45) (cid:44)(cid:43) (cid:44)(cid:41) (cid:44)(cid:39) (cid:44)(cid:37) (cid:43)(cid:45) (cid:73)(cid:103)(cid:110)(cid:92)(cid:75)(cid:90)(cid:104)(cid:105)(cid:86) (cid:110) (cid:105) (cid:97) (cid:86) (cid:110) (cid:100) (cid:65) (cid:44)(cid:43) (cid:44)(cid:41) (cid:44)(cid:39) (cid:44)(cid:37) (cid:43)(cid:45) (cid:43)(cid:43) (cid:43)(cid:41) (cid:73)(cid:103)(cid:110)(cid:92)(cid:75)(cid:90)(cid:104)(cid:105)(cid:86) (cid:43)(cid:41) (cid:43)(cid:43) (cid:43)(cid:45) (cid:44)(cid:37) (cid:44)(cid:39) (cid:44)(cid:41) (cid:44)(cid:43) (cid:44)(cid:45) (cid:43)(cid:41) (cid:43)(cid:43) (cid:43)(cid:45) (cid:44)(cid:37) (cid:44)(cid:39) (cid:44)(cid:41) (cid:44)(cid:43) (cid:72)(cid:86)(cid:105)(cid:94)(cid:104)(cid:91)(cid:86)(cid:88)(cid:105)(cid:94)(cid:100)(cid:99) (cid:72)(cid:86)(cid:105)(cid:94)(cid:104)(cid:91)(cid:86)(cid:88)(cid:105)(cid:94)(cid:100)(cid:99) (cid:73)(cid:103)(cid:110)(cid:92)(cid:75)(cid:90)(cid:104)(cid:105)(cid:86) (cid:62)(cid:99)(cid:89)(cid:106)(cid:104)(cid:105)(cid:103)(cid:110) (cid:73)(cid:103)(cid:110)(cid:92)(cid:75)(cid:90)(cid:104)(cid:105)(cid:86) (cid:62)(cid:99)(cid:89)(cid:106)(cid:104)(cid:105)(cid:103)(cid:110) (cid:56)(cid:100)(cid:98)(cid:101)(cid:90)(cid:105)(cid:94)(cid:105)(cid:100)(cid:103)(cid:21)(cid:38) (cid:56)(cid:100)(cid:98)(cid:101)(cid:90)(cid:105)(cid:94)(cid:105)(cid:100)(cid:103)(cid:21)(cid:39) (cid:56)(cid:100)(cid:98)(cid:101)(cid:90)(cid:105)(cid:94)(cid:105)(cid:100)(cid:103)(cid:21)(cid:40) (cid:56)(cid:100)(cid:98)(cid:101)(cid:90)(cid:105)(cid:94)(cid:105)(cid:100)(cid:103)(cid:21)(cid:38) (cid:56)(cid:100)(cid:98)(cid:101)(cid:90)(cid:105)(cid:94)(cid:105)(cid:100)(cid:103)(cid:21)(cid:39) 1) Satisfaction and loyalty is measured on a scale from 0-100 2) The benchmarks in the Nordic comparison are simple averages of Line of business = average for all companies surveyed Source: EPSI Rating (EPSI is an independent non-profit organisation for measuring customer satisfaction in the Nordic countries) official EPSI country results for companies with a presence in more than one Nordic market This is a performance achieved by a new small, but In 2005, our websites in Denmark and Norway (tryg. highly dedicated organisation. dk and vesta.no) had 2.1m visitors who viewed 13.4m pages. Our Danish website had 1.5m visitors account- Only three companies have a presence in more than ing for 10.4m page views, and our Norwegian website one market in the Nordic region. Our advance in Nor- had 560,000 visitors and 3m page views. way, our top ranking in Denmark and the efforts in Finland place TrygVesta as the undisputed Number One The corresponding figures for 2004 were 1.5m visitors in the Nordic market. viewing a total of 9.8m pages. In our letter to Danish concept customers this year we In Finland, Nordea’s TrygVesta pages had 132,127 hits offered customers a say in the further development of in 2005 against 71,823 hits in 2004. our concepts by assessing the individual concept ele- ments. We were very pleased to see that 19.3% of our Danish concept customers responded. Customers and companies make increasing use of the Internet to communicate with each other, and we measure these trends in all markets. TrygVesta Annual Report 2005 / Page 37 of 144 Management's report our proCesses We are committed to enhancing processes on an on- visitors viewed 646,222 pages on vesta.no and 296,240 going basis. We do this by systematically sharing know- visitors to tryg.dk viewed 1,756,000 pages. An increas- ledge and implementing new technology. The develop- ing number of visitors sign up to receive communica- ment of our overall processes and support processes tions online. builds on self-service and straight-through processing. We set up customer teams comprising representatives Our strategy of leveraging shared Nordic synergies has from the sales, underwriting, engineering and claims proved viable and efficient. By continuing to integrate departments when quoting for new policies or renew- IT systems across national borders we become more ef- als and servicing existing corporate customer policies. ficient and better able to cooperate across the organi- This procedure allows Corporate to get a good idea of sation. It also provides economies of scale and compe- the customer’s risk profile and other relevant matters, tence building in our IT development. while also giving the customer a better understanding of TrygVesta’s assessments and price. Our general efforts to reduce expense levels in staff functions and enhance processes in the individual The Danish part of our business implemented the Nor- business areas were key to improving the Group’s per- wegian call centre system in 2005, which enabled us to formance both in 2004 and in 2005, and we intend to offer faster service to customers and to improve our continue these efforts in 2006. quality assurance follow-up. We introduced a new process for handling motor claims TrygVesta’s partnership with Nordea to sell general in Denmark in 2005 based on straight through process- insurance products through the bank’s branches ing and claims handling automation. As a result, most contributed to our strong market position. A total of loss adjustments can be handled in a single routine. 117,627 policies were sold through Nordea’s branches in Denmark, Norway and Finland in 2005. In 2005, we extended our cooperation with suppliers in claims situations with respect to Tryg Reparation for We implemented a new, shared Nordic financial man- cars and Tryg Bygning, under which we cooperate with agement system, SAP, in TrygVesta on 1 January 2005 plumbers and carpenters to have damage reported which enables us to have shared Nordic processes. This by our customers repaired fast, professionally and improves the monthly reporting and allows for better correctly. Such arrangements will be extended on an current cost management. We intend to use SAP in the ongoing basis, helping us improve claims handling in future to support further Nordic integration. relation to custo-mers and reducing claims expenses for TrygVesta. Also in Norway this cooperation has been Beginning in 2006, our franchisees in the Norwegian further deve-loped both regarding the building and the market will have new technical potential for selling motor insu-rance area. products to small and medium-sized businesses. We expect these initiatives to strengthen sales in this area Vesta.no was completely revamped in 2005 reusing significantly. Tryg.dk technology and the website ideas were devel- oped further in both countries. Both websites had a record number of hits in December 2005 when 123,710 TrygVesta Annual Report 2005 / Page 38 of 144 our eMployees and values It is up to our employees to handle the day-to-day pro- We intend to continue this work in 2006 to make sure vision of products and services that offer peace of mind that our corporate values are communicated through- to our customers. We therefore depend on our ability out the organisation. As a result of the intensive work to continue to attract and retain the best employees with the theme packages we have deferred our 2005 by being an attractive workplace offering employees employee survey to 2006. freedom to act, thrive and develop. It is important to us that all our employees see their growth in 2005, and our performance triggered a bonus own efforts relative to an overall target, and we use an of DKK 4,000 to each employee. In addition, the Super- employee bonus programme as a natural tool in this visory Board has decided to distribute employee shares Employee bonus benchmarks were combined ratio and connection. worth DKK 6,000 to all employees to further strengthen links between the employees and the company. For tax We want our everyday work in TrygVesta to reflect the reasons, our Norwegian and Finnish staff may receive corporate values we have worked with over the past the corresponding amount in cash. two years. The substantial profit increase we have seen in the We provide peace of mind because: entire TrygVesta Group over the past few years is very • We show people respect, openness and trust much attributable to the dedicated efforts of manag- • We show initiative, share knowledge and take ers at many levels in our organisation. The results of responsibility the work to enhance our management development • We provide solutions characterised by quality and programmes in 2005 will be implemented in 2006. The simplicity Supervisory Board has launched an option scheme for • We create sustainable results management and senior management employees as In 2005, we arranged for managers and employees to described in the section Corporate governance. meet to make a joint effort to ensure that our corporate values are understood, followed and embedded in our We live in a world with an accelerating pace of change an extension of the existing incentive scheme, which is everyday work. and under growing pressure to perform, the effect of which lowers our basic stress thresholds. At TrygVesta, We began by having all managers with employees a steadily developing business characterised by growth reporting to them attend courses on understanding the and ambitious employees, we are aware that stress may values as a tool in everyday work, using both in-house become a factor in the workplace, adversely affecting and external instructors to ensure that TrygVesta man- employee well-being, job satisfaction and the quality agers have a uniform understanding of the work with of the products and services we provide. We intend to our corporate values. focus on workplace stress in 2006. We used theme packages covering individual aspects of the values to involve our employees in the work, for instance by asking them to find good examples of how the values are applied in their everyday work. TrygVesta Annual Report 2005 / Page 39 of 144 Management's report our investors Openness, transparency and a fundamental under- information sources standing of investor information requirements are key The primary sources of information to investors and to creating and maintaining good relations to investors. analysts are our half-year and quarterly interim reports Our Investor Relations policy is designed to ensure that and stock exchange announcements. Following all the valuation of our shares is based on open and direct releases of interim reports, management is available communications with all stakeholders. to analysts, major institutional investors and private investors by way of roadshows, webcasts, telephone We maintain a high level of information to analysts and conferences and investor meetings to provide as broad investors by a presence as possible. All stock market information is • Being proactive in our dealings with investors and issued in a Danish and an English version. analysts All investors may ask questions and submit proposals at • Being available for questions and our general meetings. • Engaging in a close dialogue on potentials and challenges Our Investor Relations department is available for queries on an ongoing basis although we refrain from We make information that may influence the pricing commenting on the Group’s general financial position of our shares available to all stakeholders through during a period of three weeks prior to announcement the Copenhagen Stock Exchange with a view to global of our interim results. distribution. dividend TrygVesta primarily wishes to attract investors who The proposed dividend for the year is DKK 21 per share, take a long-term view as well as investors with a me- totalling DKK 1,428m, and equalling a payout ratio of dium-term investment horizon. 68% of the profit for the year after tax. The dividend Assuming sufficient distributable reserves are avail- tive to the price at 31 December 2005 of DKK 319.2 corresponds to an annual dividend yield of 6.6% rela- able at the relevant time, we intend to target a pay-out per share. ratio of not less than 50%. FinanCial Calendar 30 March Annual General Meeting 2006 10 May Financial results for the three months ending 31 March 2006 16 August Financial results for the six months ending 30 June 2006 8 November Financial results for the nine months ending 30 September 2006 TrygVesta Annual Report 2005 / Page 40 of 144 trygvesta shares TrygVesta was listed on the Copenhagen Stock Ex- priCe developMent in 2005 aFter trygvesta's ipo change in the autumn of 2005. The first day of trading in the shares was 14 October 2005. On 19 December 2005, the TrygVesta share became a component of the OMXC20 index comprising the 20 most traded shares on the Copenhagen Stock Exchange. The share closed the year at DKK 319.2, equal to a market capitalisa- tion for the Group of DKK 21.7bn and marking a price increase of 39% since the listing where the share was quoted at a price of DKK 230. Turnover of TrygVesta shares totalled DKK 2.9bn on the first two days of trading with a subsequent average daily turnover of DKK 117m. This makes TrygVesta the second most traded financial share on the Copenhagen Stock Exchange. TrygVesta has one class of shares, and all shares rank pari passu. Tryg i Danmark smba holds 60% of the shares in TrygVesta and is the only shareholder with a holding of more than 5%. There was heavy demand for the offer shares. Danish retail investors oversubscribed their allotment four times, while institutional investors’ allotment was 16 times oversubscribed. The pie chart illustrates the share allocation. (cid:38)(cid:42)(cid:37) (cid:38)(cid:41)(cid:37) (cid:38)(cid:40)(cid:37) (cid:38)(cid:39)(cid:37) (cid:38)(cid:38)(cid:37) (cid:38)(cid:37)(cid:37) (cid:46)(cid:37) (cid:42) (cid:37) (cid:37) (cid:39) (cid:21) (cid:37) (cid:38) (cid:34) (cid:40) (cid:38) (cid:42) (cid:37) (cid:37) (cid:39) (cid:21) (cid:37) (cid:38) (cid:34) (cid:37) (cid:39) (cid:42) (cid:37) (cid:37) (cid:39) (cid:21) (cid:37) (cid:38) (cid:34) (cid:44) (cid:39) (cid:42) (cid:37) (cid:37) (cid:39) (cid:21) (cid:38) (cid:38) (cid:34) (cid:40) (cid:37) (cid:42) (cid:37) (cid:37) (cid:39) (cid:21) (cid:38) (cid:38) (cid:34) (cid:37) (cid:38) (cid:42) (cid:37) (cid:37) (cid:39) (cid:21) (cid:38) (cid:38) (cid:34) (cid:44) (cid:38) (cid:42) (cid:37) (cid:37) (cid:39) (cid:21) (cid:38) (cid:38) (cid:34) (cid:41) (cid:39) (cid:42) (cid:37) (cid:37) (cid:39) (cid:21) (cid:39) (cid:38) (cid:34) (cid:38) (cid:37) (cid:42) (cid:37) (cid:37) (cid:39) (cid:21) (cid:39) (cid:38) (cid:34) (cid:45) (cid:37) (cid:42) (cid:37) (cid:37) (cid:39) (cid:21) (cid:39) (cid:38) (cid:34) (cid:42) (cid:38) (cid:42) (cid:37) (cid:37) (cid:39) (cid:21) (cid:39) (cid:38) (cid:34) (cid:39) (cid:39) (cid:42) (cid:37) (cid:37) (cid:39) (cid:21) (cid:39) (cid:38) (cid:34) (cid:46) (cid:39) (cid:73)(cid:103)(cid:110)(cid:92)(cid:75)(cid:90)(cid:104)(cid:105)(cid:86)(cid:21)(cid:29)(cid:39)(cid:40)(cid:37)(cid:30) (cid:73)(cid:100)(cid:101)(cid:89)(cid:86)(cid:99)(cid:98)(cid:86)(cid:103)(cid:96) (cid:56)(cid:100)(cid:89)(cid:86)(cid:99) (cid:54)(cid:97)(cid:98)(cid:21)(cid:55)(cid:103)(cid:86)(cid:99)(cid:89) (cid:56)(cid:39)(cid:37) distribution oF shareholders on allotMent 13 oCtober 2005 (cid:21)(cid:39)(cid:37)(cid:26)(cid:21) (cid:71)(cid:90)(cid:105)(cid:86)(cid:94)(cid:97)(cid:21)(cid:29)(cid:57)(cid:64)(cid:30) (cid:21)(cid:38)(cid:37)(cid:26)(cid:21) (cid:73)(cid:93)(cid:90)(cid:21)(cid:67)(cid:100)(cid:103)(cid:89)(cid:94)(cid:88) (cid:21) (cid:103)(cid:90)(cid:92)(cid:94)(cid:100)(cid:99) (cid:21) (cid:21)(cid:41)(cid:37)(cid:26)(cid:21) (cid:62)(cid:99)(cid:105)(cid:90)(cid:103)(cid:99)(cid:86)(cid:105)(cid:94)(cid:100)(cid:99)(cid:86)(cid:97) (cid:21)(cid:40)(cid:37)(cid:26)(cid:21) (cid:57)(cid:64)(cid:21)(cid:90)(cid:109)(cid:88)(cid:97)(cid:35)(cid:21)(cid:71)(cid:90)(cid:105)(cid:86)(cid:94)(cid:97) TrygVesta Annual Report 2005 / Page 41 of 144 Management's report FoCus areas and FinanCial ForeCast For 2006 TrygVesta’s focus areas for 2006 will be Expectations regarding the gross earned premiums • To retain our focus on existing customers are based on the portfolio at 31 December 2005 and • To promote sales through Nordea in Denmark, assumptions with respect to sales and loss of policies Norway, Finland and Sweden and price adjustments of policies in force. Assumptions • To streamline our distribution platform in Norway for sales and loss of policies are based on historical • To achieve additional synergies by extending our levels, planned initiatives and the market situation. Nordic platform Assumptions for price adjustments are primarily based • To utilise our purchasing power better in claims on agreements relating to individual insurance policies. procurement The forecast is expressed in Danish kroner and assumes an exchange rate equivalent to the rate prevailing at 31 These focus areas will be supported by current and new December 2005. initiatives, and as in 2005, our efforts will be backed by applying balanced scorecards for all departments, Expectations regarding claims are generally based on as- evaluating their activities in terms of the four measur- sumptions for the various products in the individual busi- ing points. ness areas and companies. We base our expectations regarding claims ratios on historical performance in the The financial forecast for TrygVesta for 2006 is com- form of average claims ratios for the past five years, with posed of the main areas insurance activities, invest- recent years’ trends generally being weighted stronger ment activities and tax. The basis for determining the than those of prior years. Trends in claims frequencies assumptions for each of these areas will be discussed and, in particular, the average claims ratio for motor briefly below. and building, which was significantly lower in 2005 as compared with expectations for a normal year, are major assumptions for insurance activities factors that may affect the overall performance. The forecast for the technical result for 2006 is based on assumptions with respect to gross premiums writ- Assumptions for storm and large losses are gener- ten, gross claims incurred, gross expenses, result of ally based on historical experience for not less than business ceded and technical interest. ten years. In addition, we incorporate the effect of FinanCial ForeCasts TrygVesta is committed to providing the market with precise profit guidance. Within the Group, we therefore attach great importance to using our very extensive records of previous perform- ance which, together with TrygVesta’s size in our core markets, are very important when making performance forecasts. In addition, TrygVesta emphasises the importance of having a clear cor- relation between initiatives and the financial impact in all planning activities. TrygVesta Annual Report 2005 / Page 42 of 144 large losses exCeeding dkk 10M DKKm (cid:45)(cid:37)(cid:37) (cid:44)(cid:37)(cid:37) (cid:43)(cid:37)(cid:37) (cid:42)(cid:37)(cid:37) (cid:41)(cid:37)(cid:37) (cid:40)(cid:37)(cid:37) (cid:39)(cid:37)(cid:37) (cid:38)(cid:37)(cid:37) (cid:37) (cid:44)(cid:40)(cid:46) (cid:41)(cid:43)(cid:38) (cid:41)(cid:38)(cid:43) (cid:39)(cid:44)(cid:45) (cid:39)(cid:40)(cid:43) (cid:39)(cid:37)(cid:37)(cid:38) (cid:39)(cid:37)(cid:37)(cid:39) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:42) (cid:67)(cid:100)(cid:103)(cid:98)(cid:86)(cid:97)(cid:21)(cid:97)(cid:90)(cid:107)(cid:90)(cid:97)(cid:21)(cid:39)(cid:37)(cid:37)(cid:42) profitability initiatives and the effect of any legislative run-oFF gains and losses, gross DKKm measures in the anticipated claims level. The forecast generally assumes no run-off gains or losses in 2006 on the provisions for claims established in the 2005 financial statements. This should be seen in the context of gross run-off gains totalling DKK 263m in 2005. The forecast for gross expenses reflects the projected number of employees during 2006 and the related costs. The projected number of employees incorporates the effect of measures launched to improve efficiency. The forecast further includes other costs such as IT op- erating expenses and headquarter expenses, which are predominantly based on agreements that are known to us. The result of business ceded is based on contracts made with reinsurers to cover claims and events such as storm and large losses. The expected result of busi- ness ceded is calculated on the basis of such contracts and TrygVesta’s historical data. Technical interest is based on interest rate assumptions at 31 December 2005. assumptions for investment activities Return on investment activities for 2006 is based on the following assumptions with respect to investment assets: Bonds are expected to account for around 81% of total investment assets and to yield a return of 2.6%. Shares are expected to account for around 13% of as- sets and to yield a return of 7.1%, while real property is expected to account for 6% and yield a return of 6.5%. This should be viewed against corresponding returns of 2.7%, 22.3% and 9.4% generated on bonds, shares and property, respectively, in 2005. (cid:38)(cid:33)(cid:37)(cid:37)(cid:37) (cid:46)(cid:37)(cid:37) (cid:45)(cid:37)(cid:37) (cid:44)(cid:37)(cid:37) (cid:43)(cid:37)(cid:37) (cid:42)(cid:37)(cid:37) (cid:41)(cid:37)(cid:37) (cid:40)(cid:37)(cid:37) (cid:39)(cid:37)(cid:37) (cid:38)(cid:37)(cid:37) (cid:37) (cid:41)(cid:37)(cid:37) (cid:40)(cid:37)(cid:37) (cid:39)(cid:37)(cid:37) (cid:38)(cid:37)(cid:37) (cid:37) (cid:34)(cid:38)(cid:37)(cid:37) (cid:34)(cid:39)(cid:37)(cid:37) (cid:34)(cid:40)(cid:37)(cid:37) (cid:34)(cid:41)(cid:37)(cid:37) (cid:34)(cid:42)(cid:37)(cid:37) (cid:34)(cid:43)(cid:37)(cid:37) (cid:34)(cid:44)(cid:37)(cid:37) (cid:39)(cid:43)(cid:40) (cid:34)(cid:39)(cid:43)(cid:39) (cid:34)(cid:41)(cid:38)(cid:37) (cid:34)(cid:42)(cid:45)(cid:45) (cid:34)(cid:38)(cid:44) (cid:39)(cid:37)(cid:37)(cid:38) (cid:39)(cid:37)(cid:37)(cid:39) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:42) storM and weather DKKm (cid:46)(cid:38)(cid:38) (cid:38)(cid:45)(cid:41) (cid:45)(cid:41) (cid:44)(cid:40) (cid:38)(cid:38)(cid:38) (cid:39)(cid:37)(cid:37)(cid:38) (cid:39)(cid:37)(cid:37)(cid:39) (cid:39)(cid:37)(cid:37)(cid:40) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:42) (cid:67)(cid:100)(cid:103)(cid:98)(cid:86)(cid:97)(cid:21)(cid:97)(cid:90)(cid:107)(cid:90)(cid:97)(cid:21)(cid:39)(cid:37)(cid:37)(cid:42) TrygVesta Annual Report 2005 / Page 43 of 144 Management's report dkkm Premium growth Technical result Investment result Profit before tax Profit after tax Combined ratio actual 2005 Forecast 2006 Favourable scenario negative scenario 2,8% 2,053 988 2,913 2,097 89.0 4% 1,800 400 2,200 1,650 91 2,100 1,500 1,875 1,425 89 93 divided per share dkkm 50 60 70 Favourable Forecast Negative 1,875 1,650 1,425 14 12 10 17 15 13 19 17 15 80 22 19 17 result after tax divided percentage assumptions for tax Premiums are expected to increase by some 4%, as- The tax rate is 28% in both Denmark and Norway. The suming competitive conditions remain stable. We aim to effective tax rate is primarily attributable to gains or retain our strategy of generating profitable growth. losses on shares which are tax-exempt or non-deduct- ible. We assume an effective tax rate of 25% for 2006 TrygVesta estimates that the combined ratio for 2006 based on the above assumptions for the return on will be at the level of 89-93 with an expectation of 91 shares. compared with the 89.0 achieved for 2005. outlook for 2006 TrygVesta expects to reduce its expense ratio relative We base our outlook for 2006 on the above description to the expense ratio of 16.9 achieved in 2005. These of main elements included in the financial results. expectations include the investment made in Sweden to TrygVesta expects to report strong financial results start up bancassurance and the continued expansion of also for 2006, with a projected low combined ratio the investment made in the Finnish market. Excluding and a return on equity of just over 25% before tax and the investment in Sweden, the expected expense ratio around 19% after tax based on the dividend policy for 2006 would be 0.2-0.3 percentage points lower. described in the annual report. The Group forecasts a profit on ordinary activities before tax of DKK 2,200m outlook for the medium term for the full year 2006 compared with the full-year profit Expectations for the combined ratio in the medium term for 2005 of DKK 2,913m. are at the level of 91-93, corresponding to a return on equity after tax of 18-20%. TrygVesta Annual Report 2005 / Page 44 of 144 CoMbined ratio ForeCasts 2006 % (cid:38)(cid:37)(cid:37) (cid:46)(cid:42) (cid:46)(cid:37) (cid:45)(cid:42) (cid:45)(cid:37) (cid:39)(cid:37)(cid:37)(cid:41) (cid:39)(cid:37)(cid:37)(cid:42) (cid:39)(cid:37)(cid:37)(cid:43) (cid:54)(cid:88)(cid:105)(cid:106)(cid:86)(cid:97) (cid:59)(cid:100)(cid:103)(cid:90)(cid:88)(cid:86)(cid:104)(cid:105) (cid:67)(cid:90)(cid:92)(cid:86)(cid:105)(cid:94)(cid:107)(cid:90)(cid:21)(cid:104)(cid:88)(cid:90)(cid:99)(cid:86)(cid:103)(cid:94)(cid:100) (cid:59)(cid:86)(cid:107)(cid:100)(cid:106)(cid:103)(cid:86)(cid:87)(cid:97)(cid:90)(cid:21)(cid:104)(cid:88)(cid:90)(cid:99)(cid:86)(cid:103)(cid:94)(cid:100) disClaiMer The information on TrygVesta contained in this annual report is based exclusively on the informa- tion available when the annual report was prepared. It should be emphasised that the forward- looking statements provided in this annual report are subject to uncertainty. Accordingly, there can be no assurance that the targets for the future will be achieved. A number of different factors may therefore cause the actual performance to deviate signifi- cantly from the forward-looking statements in this annual report, including economic develop- ments, changes in the competitive environment, developments in the financial markets, extraor- dinary events such as natural disasters or terrorist attacks, changes in legislation or case law and reinsurance. We recommend investors to carefully consider TrygVesta in the context of their own circumstances. TrygVesta Annual Report 2005 / Page 45 of 144 Management's report Corporate governanCe As early as in 2004, TrygVesta’s Supervisory Board on the company’s balanced scorecard. Please see the decided to generally comply with the recommendations section Strategy and goals. TrygVesta has a compe- published by the Copenhagen Stock Exchange Commit- tition compliance policy. See also the sections Our tee on Corporate Governance in December 2003. customers and Our employees and values. the Committee’s recommendations include the 3. openness and transparency following eight main areas TrygVesta A/S has adopted IFRS standards in its 1. The role of the shareholders and their interaction financial reporting beginning in the 2005 financial year. with the management of the company See also the section Our investors. 2. The role of the stakeholders and their importance to the company 4. the tasks and responsibilities of the 3. Openness and transparency supervisory board 4. The tasks and responsibilities of the Supervisory Board The Supervisory Board is responsible for the overall 5. The composition of the Supervisory Board management and financial and managerial control of 6. Remuneration to the members of the Supervisory TrygVesta A/S. To perform this task, the Supervisory Board and the Executive Management Board applies target and framework management 7. Risk management 8. Audit based, among other things, on regular and systematic discussions of the company’s strategy and policies for the relevant main areas with subsequent follow-up. The Supervisory Board of Tryg i Danmark smba, the company’s former owner, and the present Supervisory 5. the composition of the supervisory board Board of TrygVesta A/S have generally agreed with the The Supervisory Board will comprise 12 members after Committee’s corporate governance recommendations. the Annual General Meeting, including four represent- The Supervisory Board has the following comments on ommended by and among the members of the Super- atives elected by the shareholders, who shall be rec- each of the main areas: visory Board of Tryg i Danmark, four representatives elected by the shareholders, who shall be non-affili- 1. the role of the shareholders and their ated with Tryg i Danmark smba and the management interaction with the management of the of TrygVesta A/S, and four employee representatives, company who according to agreement between the Danish and Please see the description of the company’s Investor Norwegian employee associations will include two Relations policy in the section Our investors. representatives of the Danish employees and two repre- sentatives of the Norwegian employees. The chairman TrygVesta’s articles of association do not contain provi- of the Supervisory Board of Tryg i Danmark smba is sions on differentiated voting rights or other special rules. chairman of the Supervisory Board of TrygVesta A/S. The Supervisory Board carries out an annual self-as- 2. the role of the stakeholders and their sessment of the work of the Supervisory Board and the importance to the company Executive Management and an evaluation of the work Our stakeholders’ interests are strongly reflected in and the efficiency of the cooperation between the Su- TrygVesta’s corporate values, strategic basis and work pervisory Board and the Executive Management. TrygVesta Annual Report 2005 / Page 46 of 144 6. remuneration to the members of the Management and certain senior management em- supevisory board and the group executive ployees. In 2006, the grant comprises up to 179,500 Management stock options, including around 48,500 stock options The members of TrygVesta’s Supervisory Board receive to members of the Executive Management and around a fixed annual remuneration of DKK 200,000 with the 131,000 stock options to some 53 senior management deputy chairman and the chairman receiving 75% and employees. Options granted in 2006 entitle the 150% more, respectively, than the other members. holder to acquire shares at the average price of Members of the audit committee will receive a special TrygVesta shares (“all trades”) on the Copenhagen remuneration to be determined. Stock Exchange on 27 February 2006. The options will be granted on 28 February 2006. TrygVesta’s Group Executive Management comprises five members. The remuneration paid to the Executive Members of the Executive Management will be granted Management reflects a wish to secure a good and options as follows: stable performance for the company in the short term as well as in the longer term. The remuneration 20960 options to Christine Bosse includes a large element of performance-related bonus 7860 options to Morten Hübbe and incentives to focus on share price performance. 6550 options to Erik Gjellestad 6550 options to Peter Falkenham TrygVesta pays a contribution of 25% of the fixed sal- 6550 options to Stig Ellkier-Pedersen ary into a pension scheme. The bonus, which depends on the company’s financial results within the four Each option entitles the holder to acquire one share at perspectives of the balanced scorecard, is up to three the exercise price. Options cannot be exercised earlier months’ additional salary. In addition, the members of than three years after the date of grant and not later the Group Executive Management have company cars. than five years after the date of grant. Christine Bosse Morten Hübbe Peter Falkenham Erik Gjellestad Fixed salary DKK 4.5m The Supervisory Board of TrygVesta has furthermore Fixed salary DKK 2.7m resolved to offer up to 26,200 stock options to em- Fixed salary DKK 2.4m ployees to reward outstanding performance. The grant Fixed salary DKK 2.3m will be made during the year, and the stock options will Stig Ellkier-Pedersen Fixed salary DKK 2.3m be subject to terms identical to those described above. Members of the Group Executive Management are Based on the average price (all trades) on 15 February entitled to 12 months’ notice of termination and to 2006, the total option value for 2006 is approximately 12 months’ severance pay. However, the Group CEO is DKK 7.9m, with DKK 1.9m being attributable to mem- entitled to 12 months’ notice of termination and to 18 bers of the Executive Management, approximately DKK months’ severance pay plus pension contributions. 5m being attributable to senior management em- stock options ployees, and DKK 1m being attributable to employees for outstanding performance. The value has been cal- The Supervisory Board has resolved to offer an annual culated based on the Black & Scholes formula. grant of stock options to members of the Executive TrygVesta Annual Report 2005 / Page 47 of 144 Management's report After 2007, stock options will be granted in connection the chairman of the audit committee be elected among with announcement of the annual result. the non-affiliated members of the Supervisory Board of Tryg i Danmark smba. shares at a discount to the market price Beginning in 2007 after announcement of the 2006 annual results, members of the Executive Management and senior management employees will be offered to use part of any bonus payment up to three months’ salary to acquire shares at a discount to the market price. Shares at a discount to the market price will be offered at par value. 7. risk management We are an insurance group subject to public supervi- sion and continuous monitoring, and TrygVesta’s risk management is organised professionally and monitored in all relevant aspects by the Executive Management and the Supervisory Board. Risk related to investment, reinsurance, underwriting and acceptance policies, IT security, IT resources and our own insurance matters is managed through policies defined by the Executive Management and approved by the Supervisory Board. Risk is measured and managed centrally at Group level for all the Group’s companies. See also se the section Risk management. 8. audit TrygVesta A/S is subject to the rules of the Danish Financial Supervisory Authority governing financial business. We therefore also have an internal audit department. The Supervisory Board regularly receives and considers audit reports from our appointed audi- tors and internal auditors. The Supervisory Board of our former sole owner, Tryg i Danmark smba, intends to propose to the annual general meeting of TrygVesta A/S that an audit committee be established comprising members elected by and among our future Supervisory Board to be elected by the shareholders. The Supervi- sory Board of Tryg i Danmark smba recommends that TrygVesta Annual Report 2005 / Page 48 of 144 risk ManageMent Risk management is a fundamental part of TrygVesta’s Our risk management structure is based on a number business philosophy. When a customer takes out a of policies that are reviewed and approved annually by policy with us or investors buy our shares, it is because our Supervisory Board. they are confident that TrygVesta has risk manage- ment procedures in place that ensure we are able to Part of our financial risk relates to the relationship meet our obligations with respect to paying claims for between our liabilities, primarily insurance liabilities and insurance events and to creating value for our owners. the assets available to cover these liabilities. Man- Structured and competent risk management is funda- agement of interest rate risk and other risks impact- mental to this confidence. ing both assets and liabilities is also referred to as FinanCial risk insurance risk The risk relating to pricing insurance products and the run-off of technical provisions. Market risk The risk that volatility of financial markets impacts TrygVesta’s results. Credit risk The risk that a counterparty fails to live up to financial obligations towards TrygVesta. strategiC risk The risk that the conditions under which TrygVesta operates change. operational risk The risk of errors or failures in internal procedures, systems and processes, and other risks that are not covered by the financial and strategic risks. TrygVesta divides risk into the above general types for risk management purposes. TrygVesta Annual Report 2005 / Page 49 of 144 Management's report asset/liability management or ALM. We have for some reinsurance years worked on developing a financial ALM model to To the widest extent possible, TrygVesta’s reinsur- assess the impact of fluctuations in specific factors ance programme consists of joint reinsurance treaties and describe the consequences. The ALM model is an covering all of the subsidiaries of the Group, and the important tool in managing financial risk in TrygVesta. treaties are assessed and analysed on a Group-wide It ensures that key calculations are made on a consist- basis. TrygVesta’s structured approach to reinsurance is ent basis. We also use ALM in preparing for the new EU supported by the ALM model, which we use for assess- solvency requirements (Solvency 2) which are expected ing the impact of different reinsurance alternatives. to be implemented during the next five years. insurance risk The framework for TrygVesta’s use of reinsurance is de- fined in our reinsurance and credit management policy, Insurance risk is the risk relating to the insurance which is subject to annual reviews and approval by operations. It is the most important risk TrygVesta is the Supervisory Board. Our credit management policy exposed to. defines credit rating requirements that reinsurers must meet prior to entering into a reinsurance contract with Insurance risk is assessed in connection with underwrit- TrygVesta (see Credit risk on page 53). ing, generally using tariffs based on statistical risk type analyses. As part of the Nordic integration, TrygVesta Catastrophes and natural disasters has placed the responsibility for making tariff analysis TrygVesta’s main exposure to catastrophes is the risk with a pan-Nordic analysis function. This work focuses of natural disasters and, to a lesser extent, large fires on enabling the Group to assess risk on a consistent and terrorist-related events. and transparent basis by using uniform methods and tools in Denmark and Norway. In order to protect against natural disaster risks, TrygVesta maintains cover of up to DKK 4.5bn for 2006 When the period of cover of the policies has expired, (DKK 3.5bn in 2005) with retentions of DKK 100m in insurance risk relates to the provisions for claims made Denmark and NOK 100m (NOK 70m in 2005) in Norway. to cover future payments on claims already incurred. We determine the level of cover based on the risk ex- The size of the provisions is determined both through posure of our portfolio, using market-based simulation individual assessments of each claim and actuarial cal- models. These models suggest that a loss in excess culations. TrygVesta has a pan-Nordic actuarial function of DKK 4.5bn occurs less often than once every 250 to handle such actuarial calculations and ensure that all years. We determined to raise the level of reinsurance assessments comply with our provisioning policy and ap- protection as the simulation models indicated our pre- ply uniform principles. When possible, we also implement vious cover corresponded to a loss occurring less often the same models and methods for calculating provisions than once every 100 years. Our exposure to natural in Denmark and Norway. In order to ensure coordination disasters in Norway is furthermore limited through our between the actuarial function and the claims handling participation in the Norwegian Pool of Natural Perils. departments, TrygVesta has established a Claims Provi- sioning Committee, consisting of representatives from TrygVesta’s catastrophe reinsurance programme also both the claims handling and the actuarial function to covers other catastrophe events, including terrorist- allow early recognition of any change in circumstances. related events, up to DKK 1.75bn, with terrorist events TrygVesta Annual Report 2005 / Page 50 of 144 Catastrophe reinsuranCe In case of a disaster, such as a storm, our catastrophe reinsurance provides for TrygVesta to pay the first DKK 100m, and for our reinsurers in 2006 to cover amounts in excess thereof up to a maximum loss of DKK 4.5bn. It is common for reinsurance contracts to state that cover has to be reinstated after an event for which the cover has come into force. It is agreed beforehand whether the direct insurer (the ceding company) can renew the cover, the number of times the cover can be renewed, and the price. If the insurer reinstates the existing cover, the total cost of a storm is the sum of the retention and the reinstatement premium. Windstorm Erwin hit Den- mark and, to a lesser extent, Norway on 8 January 2005. As at 31 December 2005 we expected to receive a total of DKK 830m in claims relating to this storm. being covered for buildings, building contents and Market risk consequential loss for risks with a total insured value Market risk is the risk that volatility in the financial of up to DKK 370m. TrygVesta has bought catastrophe markets and/or macroeconomic factors will impact our reinsurance up to DKK 1.5bn for our personal accident results of operations and financial position. We divide and workers’ compensation policies with a retention of market risk into five subcategories: interest rate risk, eq- DKK 50m, covering the risk of several injuries from the uity risk, real property risk, currency risk and credit risk. same cause, including terror. other reinsurance Our main exposure to market risk relates to our invest- ments in financial asset. TrygVesta’s provisions for In addition to reinsuring catastrophe events, we also claims are, however, also exposed to interest rate risk buy protection for certain lines where experience has due to discounting. TrygVesta has adopted full dis- shown that claims vary considerably. counting of all material provisions for claims beginning in 2005. The reason for this decision was partly that Our corporate portfolio includes a number of very the Danish Financial Supervisory Authority requires large property risks in both Denmark and Norway. We general insurance companies as from 2005 to discount have bought reinsurance in the Danish and Norwegian provisions if such discounting is material, and partly markets for these policies with a retention on a single that the implementation of IFRS stage 2 is expected to claim of DKK/NOK 50m and with cover up to a maxi- make discounting of all provisions mandatory. mum of DKK/NOK 900m. For property risks exceeding the upper level, we buy facultative reinsurance. Other Our overall investment activities are managed by Group lines covered by reinsurance include liability and motor, Investments under the supervision of the Investment marine, fish farms and bond insurance. Committee, which is chaired by the Group CEO. The basic framework of TrygVesta’s investment risk management TrygVesta Annual Report 2005 / Page 51 of 144 Management's report is laid down in our investment policies, which are Based on the investment policies, we define the appro- approved each year by the Supervisory Board. When priate asset mix, including limits on types of assets and reviewing the investment policies, we use the ALM the geographic distribution and risk profile of bonds, model to simulate the risk and return characteristics of shares and real property for each of company of the alternative investment strategies. An investment policy TrygVesta Group. The asset mix and risk of our invest- may be revised during the period between the annual ments focus on security and liquidity. reviews when changed market conditions or other circumstances so require. interest rate risk The value of the discounted provisions for claims depends on their settlement profile, as is the case for bonds. Provisions that are paid out over a long period of time, such as personal injury claims, are more sensitive to interest rate changes than provisions that are paid out over shorter periods. Interest rate risk is often measured based on duration, being the sensitivity to a 1% parallel shift of the yield curve, that is, a 1% rise or fall in interest rates for all maturities. However, changes in interest rates are rarely in the form of parallel shifts, and the impact of changes may vary. This is indicated by duration. The figure to the left on the next page illustrates three different yield curves. The red curve is the yield curve used for discounting provisions for claims in Denmark. The blue curve indicates an upwards parallel shift of 1%. The yellow curve illustrates a situation where rates for durations in excess of three years rise 1% while short rates rise 0.5%. The green curve indicates a situation where rates for durations in excess of three years only rise 0.5%, while short rates rise 1%. The figure to the right on the next page illustrates the impact on TrygVesta’s fixed-rate securi- ties and discounted provisions for claims*) in the two scenarios. The pink line shows situations where the interest rate changes result in a net impact of DKK 0. All three scenarios are below the pink line, indicating that the impact on assets is greater than the opposite impact on provisions for claims. The parallel shift scenario corresponds to a negative net impact on the result of DKK 109m, while the impact is smaller in the other scenarios. TrygVesta uses the ALM model on an ongoing basis to assess the impact which various changes in interest rates would have on profits. *) The calculation of the impact on TrygVesta’s liabilities excludes provisions for annuities in workers’ compensation, the provision for pension obligations and Finland. TrygVesta Annual Report 2005 / Page 52 of 144 yield Curve sCenarios iMpaCt on seCurity and ClaiMs provisions (cid:42)(cid:35)(cid:37) (cid:41)(cid:35)(cid:42) (cid:41)(cid:35)(cid:37) (cid:40)(cid:35)(cid:42) (cid:40)(cid:35)(cid:37) (cid:39)(cid:35)(cid:42) (cid:39)(cid:35)(cid:37) (cid:38)(cid:35)(cid:42) (cid:38)(cid:35)(cid:37) (cid:37)(cid:35)(cid:42) (cid:37)(cid:35)(cid:37) (cid:104) (cid:105) (cid:90) (cid:104) (cid:104) (cid:86) (cid:21) (cid:98) (cid:100) (cid:103) (cid:91) (cid:21) (cid:104) (cid:104) (cid:100) (cid:97) (cid:36) (cid:105) (cid:94) (cid:91) (cid:100) (cid:103) (cid:101) (cid:21) (cid:99) (cid:100) (cid:21) (cid:105) (cid:88) (cid:86) (cid:101) (cid:98) (cid:62) (cid:42)(cid:37) (cid:34)(cid:42)(cid:37) (cid:34)(cid:38)(cid:42)(cid:37) (cid:34)(cid:39)(cid:42)(cid:37) (cid:34)(cid:40)(cid:42)(cid:37) (cid:34)(cid:41)(cid:42)(cid:37) (cid:34)(cid:42)(cid:42)(cid:37) (cid:40)(cid:66) (cid:43)(cid:66) (cid:38)(cid:78) (cid:39)(cid:78) (cid:40)(cid:78) (cid:41)(cid:78) (cid:42)(cid:78) (cid:43)(cid:78) (cid:44)(cid:78) (cid:45)(cid:78) (cid:46)(cid:78) (cid:38)(cid:37)(cid:78) (cid:39)(cid:42)(cid:37) (cid:40)(cid:37)(cid:37) (cid:40)(cid:42)(cid:37) (cid:41)(cid:37)(cid:37) (cid:41)(cid:42)(cid:37) (cid:57)(cid:86)(cid:99)(cid:94)(cid:104)(cid:93)(cid:21)(cid:110)(cid:94)(cid:90)(cid:97)(cid:89)(cid:21)(cid:88)(cid:106)(cid:103)(cid:107)(cid:90) (cid:29)(cid:32)(cid:37)(cid:35)(cid:42)(cid:48)(cid:32)(cid:38)(cid:35)(cid:37)(cid:30) (cid:29)(cid:32)(cid:38)(cid:35)(cid:37)(cid:48)(cid:32)(cid:38)(cid:35)(cid:37)(cid:30) (cid:29)(cid:32)(cid:38)(cid:35)(cid:37)(cid:48)(cid:32)(cid:37)(cid:35)(cid:42)(cid:30) (cid:62)(cid:98)(cid:101)(cid:86)(cid:88)(cid:105)(cid:21)(cid:100)(cid:99)(cid:21)(cid:101)(cid:103)(cid:100)(cid:91)(cid:94)(cid:105)(cid:36)(cid:97)(cid:100)(cid:104)(cid:104)(cid:21)(cid:91)(cid:103)(cid:100)(cid:98)(cid:21)(cid:101)(cid:103)(cid:100)(cid:107)(cid:94)(cid:104)(cid:94)(cid:100)(cid:99)(cid:104) (cid:29)(cid:32)(cid:38)(cid:33)(cid:37)(cid:48)(cid:32)(cid:38)(cid:33)(cid:37)(cid:30) (cid:29)(cid:32)(cid:38)(cid:33)(cid:37)(cid:48)(cid:32)(cid:37)(cid:33)(cid:42)(cid:30) (cid:29)(cid:32)(cid:37)(cid:33)(cid:42)(cid:48)(cid:32)(cid:38)(cid:33)(cid:37)(cid:30) (cid:62)(cid:98)(cid:101)(cid:86)(cid:88)(cid:105)(cid:21)(cid:100)(cid:99)(cid:21)(cid:86)(cid:104)(cid:104)(cid:90)(cid:105)(cid:104)(cid:21)(cid:86)(cid:99)(cid:89)(cid:21)(cid:97)(cid:94)(cid:86)(cid:87)(cid:94)(cid:97)(cid:94)(cid:105)(cid:94)(cid:90)(cid:104)(cid:21)(cid:94)(cid:104)(cid:21)(cid:98)(cid:106)(cid:105)(cid:106)(cid:86)(cid:97)(cid:97)(cid:110)(cid:21)(cid:100)(cid:91)(cid:91)(cid:104)(cid:90)(cid:105)(cid:105)(cid:94)(cid:99)(cid:92) interest rate risk by changes in interest rates. However, such changes do Before 1 January 2005, only investment assets were not affect results as they are recognised in equity. affected by fluctuations in interest rates. The discount- ing of provisions for claims from 2005 has substantially other market risk reduced the impact of interest rate fluctuations on TrygVesta’s equity and real property portfolios are ex- financial performance. Fluctuations in interest rates posed to changes in equity markets and real property now have two opposite effects on TrygVesta’s financial markets, respectively. We manage such risk through results. A rising level of interest rates would have an investment limits for various asset classes. adverse profit impact as it causes a drop in the value of TrygVesta’s bond portfolio. At the same time, rising We generally manage currency risk by matching a li- interest rates would result in a correspondingly high ability in a given currency with an asset in the same discount rate, which would increase TrygVesta’s profit currency. We generally hedge exchange risk through as it would trigger a fall in provisions for claims. forward currency contracts. In certain circumstances, we also use interest rate and equity derivatives to Most of TrygVesta’s provisions for claims are dis- manage investment risk. counted using an interest rate curve based on market rates except for provisions for annuities in Danish We are exposed to credit risk in connection with our workers’ compensation insurance, which are discounted insurance business and in our investment business. using a fixed real rate of interest of 1% and therefore not directly affected by market fluctuations. We face credit risk in connection with reinsurance be- cause we remain liable to the claimant if a reinsurer is TrygVesta’s portfolio of fixed-interest securities unwilling or unable to fulfil its obligations, and we may stood at DKK 29.3bn at 31 December 2005, while the therefore incur a loss. Our credit management policy provisions for claims discounted using a market rate requires a credit rating for reinsurers of at least BBB amounted to DKK 19.6bn, net of reinsurance. The from Standard & Poor's as a condition for TrygVesta respective durations were 1.6 and 2.3 years. A parallel reinsuring business with such reinsurer. shift of interest rates of 1% would reduce the market value of our securities by DKK 485m, while the opposite The credit risk of our investments is connected to our impact on provisions would be DKK 376m, triggering a investment in bonds. We manage this risk by maintain- negative net impact of DKK 109m. Thus, an increase in ing a diversified bond portfolio generally with high interest rates would initially have a relatively modest credit ratings. effect on our results. Where a change in interest rates triggered a change in the discount rate applied to the provisions for annu- ities, the effect would be to lift profit by around DKK 200m if the rate went up to 2%. In addition to the provisions for claims, TrygVesta’s provision for pension obligations in Norway is affected TrygVesta Annual Report 2005 / Page 53 of 144 Management's report effect on equity of market changes at 31 december 2005 dkkm interest rate market — increase in interest rates of 100 basic points Impact on fixed interest securities 1) Higher discounting of provisions for claims 2) Impact on Norwegian pension obligation equity market Decrease of equity markets of 15% Impact arising from derivatives real property market Decrease of real property markets of 15% Currency market Decrease of exposed currencies versus Danish kroner of 15% Impact arising from derivatives -485 376 172 -717 0 -308 -990 917 1) The impact is calculated on the basis of the option adjusted duration without correction for convexity. 2) Excluding impact on provisions in Finland and provisions for annuities for workers’ compensation. The provisions for annuities are discounted using a fixed rate of 1%, which is only changed in case of anticipated long-term changes in interest rates. The provision would decrease by some DKK 200m if the discounting rate increased to 2%. operational risk up-to-date basis for our assessment of external condi- As operational risks are mainly internal, our management of tions, be it our competitors’ market initiatives, new these risks centres on establishing a satisfactory controlling legislation or other external factors that may impact environment in our operations. In practice, we organise this TrygVesta. work through a structure of policies, procedures and guide- lines that cover different aspects of our operations. strategic risk We have a strategic planning process to manage the Group’s strategic risk. The Supervisory Board defines the overall strategy in the middle of the year within the framework of our vision, and the Executive Manage- ment use this as the basis for further strategic work. We use the balanced scorecard as a tool in this work to ensure coherence in the strategy and the initiatives we implement. During the year, our strategy is managed in Executive Management meetings and meetings to follow up on the balanced scorecard performance by business areas and staff functions. We also continu- ously monitor the market to ensure that we have an TrygVesta Annual Report 2005 / Page 54 of 144 accountS 2005 Accounts Statement by the SuperviSory board and the executive management The Supervisory Board and the Executive Management In our opinion, the accounting policies applied are ap- have today considered and adopted the annual report propriate, and the annual report gives a true and fair for 2005 of TrygVesta A/S and the TrygVesta Group. view of the Group’s and the parent company’s assets, liabilities, and financial position at 31 December 2005 The consolidated financial statements have been and of the results of The Group’s and the parent com- prepared in accordance with the International Financial pany’s operations and the cash flow of the Group for Reporting Standards as adopted by the EU, and the the financial year ended 31 December 2005. financial statements of the parent company have been prepared in accordance with the Danish Financial Busi- We recommend that the annual report be adopted by ness Act. In addition, the annual report has been pre- the shareholders at the annual general meeting. sented in accordance with additional Danish disclosure requirements for the annual reports of listed financial enterprises. Ballerup, 28 February 2006 executive management Christine Bosse Morten Hübbe Erik Gjellestad SuperviSory board Mikael Olufsen Mogens Jacobsen Per Skov Chairman Deputy Chairman Deputy Chairman Jørn Wendel Andersen John Frederiksen Jørn Hesselholt Håkon J. Huseklepp Jens Lyngbo (Employee Representative) Peter Wagner Mollerup (Employee Representative) Birthe Petersen N.E. Schultz-Petersen (Employee Representative) TrygVesta Annual Report 2005 / Page 56 of 144 internal auditorS' report We have audited the annual report of TrygVesta A/S ber 2005 and of the results of its operations and for the financial year 2005. The consolidated financial cash flows for the financial year 2005 in accordance statements have been prepared in accordance with with International Financial Reporting Standards as International Financial Reporting Standards as adopted adopted by the EU and additional Danish disclosure by the EU, and the parent financial statements have requirements for the annual reports of listed financial been prepared in accordance with the Danish Finan- enterprises. cial Business Act. In addition, the annual report has been presented in accordance with additional Danish In addition, in our opinion, the annual report gives a disclosure requirements for the annual reports of listed true and fair view of the Parent’s financial position financial enterprises. at 31 December 2005 and of the results of its opera- tions for the financial year 2005 in accordance with the The annual report is the responsibility of the Company’s Danish Financial Business Act and additional Dan- Executive and Supervisory Boards. Our responsibility is ish disclosure requirements for the annual reports of to express an opinion on the annual report based on listed financial enterprises. our audit. emphasis of matter basis of opinion As described in Accounting policies on page 73, the We conducted our audit on the basis of the Danish annual report contains proforma financial figures for Financial Supervisory Authority’s executive order on the Group for the financial years 2001 and 2002. The auditing financial enterprises etc. and financial groups TrygVesta Group was established on 28 June 2002 by and in accordance with Danish and international audit- way of a non-cash contribution from the Nordea AB ing standards. Based on an evaluation of materiality Group’s general insurance activities in TrygVesta A/S. and risk, we examined the business procedures, the accounting policies applied and the estimates made Therefore, the pro forma financial figures represent and verified the basis for the amounts and other dis- accounting figures for a period during which the Group closures in the annual report. We believe that our audit did not exist as a legal entity. Reference is made to provides a reasonable basis for our opinion. Management’s description of the basis for determining Our audit did not result in any qualification. opinion these pro forma figures. We agree with Management’s comments on the pro forma figures, including the view that the figures make In our opinion, the annual report gives a true and fair the financial statements more informative with respect view of the Group’s financial position at 31 Decem- to the technical operations. Ballerup, 28 February 2006 Jens Galsgaard Chief Internal Auditor TrygVesta Annual Report 2005 / Page 57 of 144 Accounts auditorS' report to the shareholders of trygvesta a/S opinion We have audited the annual report of TrygVesta A/S In our opinion, the annual report gives a true and fair for the financial year 2005. The consolidated financial view of the Group’s financial position at 31 December statements have been prepared in accordance with 2005 and of the results of its operations and cash flows International Financial Reporting Standards as adopted for the financial year 2005 in accordance with Interna- by the EU, and the parent financial statements have tional Financial Reporting Standards as adopted by the been prepared in accordance with the Danish Finan- EU and additional Danish disclosure requirements for cial Business Act. In addition, the annual report has the annual reports of listed financial enterprises. been presented in accordance with additional Danish disclosure requirements for the annual reports of listed In addition, in our opinion, the annual report gives a financial enterprises. true and fair view of the Parent’s financial position at 31 December 2005 and of the results of its opera- The annual report is the responsibility of the Company's tions for the financial year 2005 in accordance with the Executive and Supervisory Boards. Our responsibility is Danish Financial Business Act and additional Danish to express an opinion on the annual report based on disclosure requirements for the annual reports of listed our audit. financial enterprises. basis of opinion emphasis of matter We conducted our audit in accordance with Danish and As described in Accounting policies on page 73, the International Standards on Auditing. Those Standards annual report contains pro forma figures for the Group require that we plan and perform the audit to obtain for the financial years 2001 and 2002. The TrygVesta reasonable assurance that the annual report is free of Group was established on 28 June 2002 by way of a material misstatement. An audit includes examining, non-cash contribution from the Nordea AB Group’s on a test basis, evidence supporting the amounts and general insurance activities in TrygVesta A/S. disclosures in the annual report. An audit also includes assessing the accounting policies applied and signifi- Therefore, the pro forma figures represent account- cant estimates made by the Executive and Supervisory ing figures for a period during which the Group did not Boards, as well as evaluating the overall annual report exist as a legal entity. Reference is made to Manage- presentation. We believe that our audit provides a rea- ment’s description of the basis for determining these sonable basis for our opinion. pro forma figures. Our audit did not result in any qualification. We agree with Management’s comments on the pro forma figures, including the view that the figures make the financial statements more informative with respect to the technical operations. Copenhagen, 28 February 2006 Deloitte Grant Thornton Statsautoriseret Revisionsaktieselskab Statsautoriseret Revisionsaktieselskab Lone Møller Olsen Thomas Elsborg Jensen Christian Fløistrup State Authorised State Authorised Public Accountant Public Accountant State Authorised Public Accountant TrygVesta Annual Report 2005 / Page 58 of 144 accounting policieS a) general information valuation is made at cost or fair value. Furthermore accounting policies applied for the consolidated the requirements regarding presentation and disclo- financial statements sure are less comprehensive than under IFRS. These consolidated financial statements are prepared in accordance with the International Financial Reporting The parent company’s investments in subsidiaries Standards (IFRS) issued and adopted by the EU as at and associates are recognised and measured under 31 December 2005. the equity method. The parent company’s share of the enterprises’ profits or losses after elimination of The principal accounting policies applied in the prepara- unrealised intra-group profits and losses is recog- tion of these consolidated financial statements are set nised in the income statement. In the balance sheet, out below in part D. investments are measured at the pro rata share of the enterprises’ equity. parent company The financial statements of the parent company are Subsidiaries and associates with a negative net asset presented in accordance with the executive order is- value are measured at zero value. Any receivables from sued by the Danish Financial Supervisory Authority on these enterprises are written down by the parent com- financial reports presented by insurance companies and pany’s share of such negative net asset value where profession-specific pension funds. The executive order the receivables are deemed irrecoverable. If the nega- has been prepared with a view to making the account- tive net asset value exceeds the amount receivable, ing rules as consistent with the international account- the remaining amount is recognised under provisions if ing standards as possible. The Copenhagen Stock the parent company has a legal or constructive obliga- Exchange has announced that, as a result of the above, tion to cover the liabilities of the relevant enterprise. listed financial enterprises are not required to comply with the existing Danish accounting standards issued Net revaluation of investments in subsidiaries and as- by the Institute of State-Authorised Public Accountants sociates is taken to reserve for net revaluation under in Denmark. Accordingly, the financial statements of equity if the carrying amount exceeds cost. the parent company have not been prepared in accord- ance with the Danish accounting standards • Unlike IAS 19, the Danish FSA’s executive order does not allow for actuarial gains and losses arising from The accounting policies applied for the parent company experience adjustments and changes in actuarial are in accordance with the executive order issued by the assumptions to be taken to equity. Actuarial gains Danish Financial Supervisory Authority on financial re- and losses will therefore be recognised in the parent ports presented by insurance companies and profession- company’s income statement. specific pension funds dated 13 December 2005 (the Danish FSA’s executive order), which is largely identical to • The Danish FSA’s executive order does not allow IFRS. The most significant deviations from the recogni- provisions for deferred tax of contingency reserves tion and measurement requirements of IFRS are: allocated from untaxed funds. Deferred tax and the opening equity of the parent company have been • Investments in subsidiaries and associates are valued adjusted accordingly. according to the equity method, whereas under IFRS TrygVesta Annual Report 2005 / Page 59 of 144 Accounts The executive order on application of international financial reporting standards for companies subject to the Danish Financial Business Act issued by the Danish Financial Supervisory Authority requires disclosure of differences between the format of the annual report under international financial reporting standards and the rules issued by the Danish Financial Supervisory Authority. The following is a reconciliation of differences in the profit for the year and shareholders' equity. dKKm profit reconciliation Profit for the year ended 31 December - IFRS Current-year effect of actuarial gains and losses on pension obligation after tax Change in deferred tax relating to contingency funds profit for the year ended 31 december - danish fSa executive order equity reconciliation Shareholders' equity at 31 December - IFRS Deferred tax provisions for contingency funds Change in deferred tax relating to contingency funds equity at 31 december - danish fSa executive order 2005 2004 2,097 1,421 -86 -2 -80 0 2,009 1,341 8,215 6,802 29 -2 29 0 8,242 6,831 b) changeS in accounting policieS IFRS 4 was implemented on 1 January 2004. As permit- As of 1 January 2005, the accounting policies were ted under IFRS 4.42, the presentation requirements have changed to comply with IFRS. All comparative figures not been implemented for comparative figures for 2004. for 2004 have been restated in compliance with IFRS 1. In accordance with IFRS 1, IAS 32 and IAS 39 were im- the financial statements on adoption of ifrS plemented on 1 January 2005 without the inclusion of The combined impact of the changed accounting poli- comparative figures for one year. The option selected cies from applying IFRS is a DKK 14m improvement in about not implementing IAS 32 and IAS 39 in 2004 the profit and a DKK 685m increase in shareholders’ effects of the changed accounting policies on has no effect on the recognition and measurement equity for 2004. of financial instruments in the income statement or balance sheet as Danish GAAP (the previous account- The effect of the changes below is described in note 27 ing policies) applied for investment assets and loans Significant changes from transition to IFRS. does not differ materially from the recognition and measurement requirements of IAS 39. In accordance recognition and measurement with the provisions on early implementation of IFRS 1, The principal changes in recognition and measurement the company does not comply with the requirements of on adoption of IFRS are presented below. The effect on IAS 32 and IAS 39 on the presentation of comparative equity of changes in accounting policy is specified in figures for 2004. the notes according to IFRS 1. TrygVesta Annual Report 2005 / Page 60 of 144 equalisation provisions claims handling costs IFRS prohibits recognition of equalisation provisions, Claims incurred include direct and indirect claims and the existing equalisation provisions have there- handling costs contrary to the previous practice, under fore been eliminated. Equalisation provisions have so which only the costs of claims assessors were included far represented amounts included to equalise future in this financial statement item. claims, net of reinsurance, in areas where experience has shown that claims vary. Earlier equalisation provi- Provisions for claims include a best estimate provision sions in TrygVesta comprised to cover direct and indirect claims handling costs in • The Norwegian Pool of Natural Perils in Norway Such costs were previously expensed as incurred. • Equalisation provisions in credit and guarantee insur- Provisions for claims handling costs are discounted if connection with run-off on the provisions for claims. ance calculated in accordance with rules laid down by such discounting is material. the Danish Financial Supervisory Authority’s provi- sions on equalisation provisions pension liability • Equalisation of storm and large losses, and In Norway, we operate a defined benefit plan, in which • The difference between provisions for annuities an old age and disability pension is set as a percentage relating to compulsory workers’ compensation in of an employee’s final salary. This pension plan creates Denmark made up at discount rates of 2.00% and a constructive obligation to our Norwegian employees 2.75%, respectively and current pensioners. Equalisation provisions relating to the Pool of Natural TrygVesta has applied IAS 19 retrospective from 1 Janu- Perils, credit and guarantee, and storm and large loss ary 2004 regarding the pension liability towards the equalisation have been transferred to the Group’s Norwegian employees. equity after deduction of deferred tax. The equalisa- tion provision relating to workers’ compensation has Actuarial gains and losses may be recognised in equity been transferred to provisions for claims according in full in the period in which they occur. Actuarial gains to the current best estimates of future cash flows of and losses are for example changes in the discount claims regarding workers’ compensations. rate, increases in salaries, mortality and differences between the actual and the expected return on plan discounting of provisions for claims assets. Provisions for claims are discounted if such discounting is material. TrygVesta already applied discounting of Under Danish GAAP (former accounting principles) the provisions relating to compulsory workers’ compensa- defined benefit pension plan in Norway was measured tion insurance, but has decided to discount all provi- at an estimated market value using Norwegian assump- sions for claims, if material. tions relating to long-term economic developments. Discounting is based on a yield curve applied to the ex- Under IFRS the pension plan is treated as a defined pected future payments from the provision. Discount- benefit plan and assets and liabilities are measured ing affects the motor liability, professional liability and based on an actuarial calculation of the value in use of personal accident classes, in particular. future benefits payable under the plan which has been TrygVesta Annual Report 2005 / Page 61 of 144 Accounts calculated in accordance with the economic market arising on revaluation of owner-occupied properties assumptions on the balance sheet date. The expected are credited to the properties’ revaluation reserve in future return on plan assets reflects the asset mix held equity. by Nordea Liv og Pension in Norway unlike previously when the assumptions were based on expected long- The company no longer charges an estimated rent term economic developments. of own properties to insurance operation expenses. employee benefits TrygVesta owns the headquarter property in Norway as well as a few headquarter properties in Denmark IFRS requires provisions to be established for short- relating to the decentralised organisation. term as well as long-term employee benefits. In addition to the pension liability referred to above, technical interest TrygVesta recognises anniversary awards and pension According to the Danish FSA’s executive order, techni- benefits. Such costs were previously expensed cal interest is presented as a calculated return on the as incurred. dividends year’s average insurance liability provisions, net of reinsurance. The interest rate applied is based on the duration of the provisions for claims. Previously, techni- Under IFRS, dividends will not be recognised as a liabil- cal interest was calculated applying an interest rate ity until approved by the company’s shareholders. equal to the pre-tax yield to maturity on all bonds with a term to maturity of less than three years. deferred tax In compliance with IAS 12, TrygVesta recognises de- Technical interest is reduced by the portion of the ferred tax on contingency fund provisions in Norway increase in net provisions that relates to unwinding of and Denmark. Previously, no deferred tax was provided discounting. in respect of such provisions. According to Danish tax regulation, a tax liability will only crystallise on contin- changes in foreign currency exchange rates and gency fund provisions if the net insurance provisions market value adjustments are reduced below the booked net insurance provisions Changes in foreign currency exchange rates and market at 31 December 1994. Provisions for deferred tax and value adjustments, including changes in the discount tax assets are recognised on an undiscounted basis. rate applied are presented as value adjustments. owner-occupied properties Previously changes in the discount rate applied were In prior years, owner-occupied properties were meas- included as movements in provisions for claims. ured at market value in accordance with the Danish FSA’s executive order. Previously, increases and decreases in derivative financial instruments market value were taken through the income statement. Investments are recognised and derecognised on a trade date basis – the date on which the Group com- In accordance with IFRS, owner-occupied properties are mits to purchase or sell the asset. Previously, invest- stated at their revalued amounts, being the fair value ments were recognised on the settlement date, and at the revaluation date, and are depreciated over their the fair value of the unsettled commitment was recog- estimated useful lives. Increases in the carrying amount nised in the balance sheet. TrygVesta Annual Report 2005 / Page 62 of 144 c) changeS in accounting eStimateS and requires management to exercise its judgment In 2005, we changed the accounting estimates for in the process of applying the company’s accounting discounting workers’ compensation in Norway. In 2004 policies. The areas involving a higher degree of judg- we used a fixed interest of 3% and in 2005 we used ment or complexity, or areas where assumptions and a yield curve. The change results in a decrease of the estimates are significant to the consolidated financial discounted gross provisions of DKK 153m and DKK statements, are disclosed in a separate section of 87m net of reinsurance. In the income statement DKK these financial statements. 87m net of reinsurance has been taken as an income in Value adjustment. All amounts in the notes are shown in millions of DKK, In our Danish business, we have changed the account- ing estimate for discounting regarding other provisions recognition and measurement for claims for workers’ compensation from an implicit Assets are recognised in the balance sheet when it discounting to the use of a yield curve. The change re- is probable that future economic benefits will flow to sults in an increase of the discounted gross provisions the Group and the value of the asset can be reliably unless otherwise stated. of DKK 36m. In the income statement this amount has measured. been expensed under Value adjustment. The two above-mentioned changes in accounting Group has a legal or constructive obligation as a result estimates are due to an alignment of discounting ap- of a prior event, and it is probable that future economic proaches for the Group. benefits will flow out of the Group, and the value of the Liabilities are recognised in the balance sheet when the In the Danish business the discounting rate on annui- ties (workers’ compensation) was reduced from 2% to On initial recognition, assets and liabilities are meas- 1% in 2005. The change is due to falling interest rates ured at cost. Measurement subsequent to initial recog- and results in an increase of the discounted gross nition is effected as described below for each financial liabilities can be measured reliably. provisions of DKK 165m. In the income statement this statement item. amount has been expensed under Value adjustment. d) baSiS of preSentation of presentation of the annual report and that confirm The annual report has been prepared under the histori- or invalidate affairs and conditions existing at the cal cost convention, as modified by the revaluation of balance sheet date are considered at recognition and Anticipated risks and losses that arise before the time owner-occupied properties, where increases are cred- measurement. ited to equity and revaluation of investment property, financial assets held for trading and financial assets Income is recognised in the income statement as and financial liabilities (including derivative instru- earned, whereas costs are recognised by the amounts ments) at fair value through the income statement. attributable to this financial year. Value adjustments The preparation of financial statements under IFRS income statement unless otherwise described below requires the use of certain critical accounting estimates of financial assets and liabilities are recorded in the TrygVesta Annual Report 2005 / Page 63 of 144 Accounts consolidation items are translated at the average exchange rates for The consolidated financial statements comprise the the period. Exchange differences arising on translation financial statements of TrygVesta A/S (the parent com- are classified as equity and transferred to the Group’s pany) and enterprises (subsidiaries) controlled by the translation reserve. parent company. Control is achieved where the parent company directly or indirectly holds more than 50% Translation differences are recognised as income or of the voting rights or is otherwise able to exercise or as expenses in the period in which the operation is actually exercises a controlling influence. disposed of. All other currrency translation of gains and losses are recognised in the income statement. The consolidated financial statements are prepared on the basis of the financial statements of the parent Under IFRS 1 TrygVesta has elected not to apply IFRS 3 company and its subsidiaries by adding items of a uni- retrospectively to past business combinations (business form nature. combinations that occurred before the date of transi- The financial statements of subsidiaries that present financial statements under other legislative rules are re- Segment reporting tion to IFRS). stated to the accounting policies applied by the Group. A business segment is a group of assets and opera- tions engaged in providing products or services that On consolidation, intragroup income and expenses, are subject to risks and returns that are different from shareholdings, intragroup accounts and dividends, and those of other business segments. gains and losses arising on transactions between the consolidated enterprises are eliminated. Main business segments in TrygVesta are the Personal & Commercial (Denmark) segment, the Personal & Newly acquired or divested subsidiaries are con- Commercial (Norway) segment, the Corporate segment solidated at the results for the period subsequent to and the General Insurance (Finland) segment. achieving or surrendering control, respectively. Profit and loss in divested subsidiaries and profit and business segments operating in a particular economic loss on discontinued activities are included under discon- environment. In TrygVesta, these areas are Denmark, tinued and divested business in the income statement. Norway and Finland. The secondary business segment is geographical, i.e. Unrealised gains on transactions between the Group currency translation and its subsidiaries and associates are eliminated to The results of foreign subsidiaries are based on transla- the extent of the Group’s interest in the companies. tion of the items in the income statement at average Unrealised losses are eliminated in the same way as exchange rates for the period. Income and expenses in unrealised gains unless impairment has occurred. domestic enterprises denominated in foreign currency are translated at the exchange rate ruling on the date On consolidation, the assets and liabilities of the of the transaction. Group’s foreign operations are translated at exchange rates of the balance sheet date. Income and expense TrygVesta Annual Report 2005 / Page 64 of 144 Assets and liabilities denominated in foreign currency Technical interest is reduced by the portion of the are translated at the exchange rates at the balance increase in net provisions that relates to unwinding. sheet date. income Statement premiums claims incurred Claims incurred represent claims paid during the year adjusted for changes in provisions for claims less the Earned premiums represent gross premiums earned reinsurers’ share. In addition, the item includes run-off during the year, net of outward reinsurance premiums results regarding previous years. The portion of the and adjusted for changes in the provision for unearned increase in provisions which can be ascribed to unwind- premiums, corresponding to an accrual of premiums ing is transferred to technical interest. to the risk period of the policies, and in the reinsurers´ share of the provision for unearned premiums. Claims are shown inclusive of direct and indirect claims handling costs, including costs of inspecting and Premiums are recognised as earned premiums accord- assessing claims, costs to combat and contain claims ing to the exposure of risk over the period of cover- incurred and other direct and indirect costs associated age, computed separately for each insurance contract with the handling of claims incurred. using the pro rata method, and adjusted if necessary to reflect any variation in the incidence of risk during the Changes in claims incurred due to changes in the yield period covered by the contract. curve and exchange rates are recognised as a value The portion of premiums received on contracts that adjustment. relate to unexpired risks at the balance sheet date is bonus and premium rebates reported under provisions for unearned premiums. Bonus and premium rebates represent anticipated and reimbursed premiums where the amount reimbursed The portion of premiums paid to reinsurers that relates depends on the claims record, and for which the criteria to unexpired risks at the balance sheet date is reported for payment have been defined prior to the financial as the reinsurers’ share of provisions for unearned year or when the business was written. premiums. insurance operating expenses, net technical interest Insurance operating expenses represent acquisition According to the Danish FSA’s executive order, techni- costs and administrative expenses less reinsurance cal interest is presented as a calculated return on the commissions received. Expenses relating to acquiring year’s average insurance liability provisions, net of and renewing the insurance portfolio are recognised reinsurance. The calculated interest return for grouped at the time of writing the business. Administrative classes of risks is calculated as the monthly average expenses are accrued to match the financial year. provision plus a co-weighted interest from the present yield curve for each individual group of risks. The investment activities interest is weighted according to the expected run-off Income from associates includes the Group’s share of pattern of the provisions. the associates’ net profit. TrygVesta Annual Report 2005 / Page 65 of 144 Accounts Income from investment properties before fair value in the income statement include the post-tax profit adjustment represents the profit from property opera- of TrygVesta’s business in run-off as well as divested tions less property management expenses. enterprises. Business in run-off comprises the results Interest, dividends, etc. represent interest earned, of the wholly-owned subsidiary Chevanstell Ltd. UK dividends received, etc. during the financial year. In and business in run-off in Tryg Forsikring A/S. Divested addition, the item includes gains and losses on bonds subsidiaries comprise the activities in Poland, Estonia drawn for redemption. and Tryg Baltica International A/S. Impairment losses or gains on Chevanstell Ltd. are also included in the line Realised and unrealised investment gains and losses, discontinued and divested business. including gains and losses on derivative financial instru- ments, value adjustment of land and buildings, exchange balance Sheet rate adjustments and the effect in movements in the intangible assets – software yield curve used for discounting, are recognised as Acquired computer software licences are capitalised on value adjustments. the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised Investment management charges represent expenses on the basis of the expected useful life (four years). relating to the management of investments. other income and expenses of identifiable and unique software products, for which Other income and expenses includes income and ex- there is sufficient certainty that future earnings will penses which cannot be ascribed to TrygVesta’s insur- exceed costs for more than one year, are recognised ance portfolio or investment assets, including the sale as intangible assets. Direct costs include the software of products for Nordea Liv og Pension. development team’s employee costs and an appropriate Costs that are directly associated with the production portion of relevant overheads. All other costs associ- discontinued and divested business ated with developing or maintaining computer software Discontinued and divested activities are consolidated in are recognised as an expense as incurred. one line item in the income statement and supplemented with disclosure of the discontinued and divested activi- After completion of the development the asset is ties in a note to the financial statements. depreciated on a straight-line basis over the expected Recognition of the balance sheet items in respect of The basis of depreciation is reduced by any impairment useful life, however with a maximum period of 4 years. the discontinued activities remains unchanged in the writedowns. respective items whereas assets and liabilities from di- vested activities are consolidated in one line as “assets owner-occupied property and operating concerning divested business” and “liabilities concern- equipment ing divested business”, respectively. Owner-occupied properties are measured in the bal- ance sheet at their revalued amounts, being the fair The comparative figures, including financial highlights value at the date of revaluation, less any subsequent and key ratios, have been restated to reflect discon- accumulated depreciation and subsequent accumulated tinued business. Discontinued and divested activities impairment writedowns. Revaluations are performed TrygVesta Annual Report 2005 / Page 66 of 144 regularly to avoid the carrying amount differing materi- amount. These are included in the income statement. ally from the owner-occupied property’s fair value at When revalued assets are sold, the amounts included the balance sheet date. in the revaluation reserve are transferred to retained Increases in the revalued carrying amount of owner-oc- cupied properties are credited to the properties’ revalu- investment properties earnings. ation reserve in equity. Decreases that offset previous Properties held for renting yields that are not occupied increases of the same asset are charged against the by the Group are classified as investment properties. properties’ revaluation reserves directly in equity; all other decreases are charged to the income statement. Investment property is carried at fair value. Fair value is based on market prices, adjusted for any difference in Subsequent costs are included in the asset’s carrying the nature, location or condition of the specific asset. If amount or recognised as a separate asset, as appropri- this information is not available, the Group uses alter- ate, when it is probable that future economic benefits as- native valuation methods such as discounted cash flow sociated with the item will flow to the Group, and the cost projections and recent prices on less active markets. of the item can be reliably measured. Ordinary repair and maintenance costs are charged to the income statement Changes in fair value are recorded in the income state- during the financial period in which they are incurred. ment. Fixtures and operating equipment are measured at cost impairment of intangible assets, equipment, less accumulated depreciation and any accumulated im- owner-occupied properties and investment pairment losses. Cost encompasses the purchase price properties and costs directly attributable to the acquisition of the The carrying amount of intangible assets, operating relevant assets until the time when the asset is ready equipment, owner-occupied properties and investment to be brought into use. properties are tested at least once a year for impairment in the cash-generating unit to which the asset belongs, Depreciation on property, plant and equipment is and the asset is written down to the recoverable amount calculated using the straight-line method over their through the income statement if the carrying amount is estimated useful lives, as follows: higher. The recoverable amount is generally calculated as • Owner-occupied properties, 50 years the present value of the future cash flows expected to • Vehicles, 3-5 years be derived from the activity to which the asset belongs. • Furniture, fittings and equipment, 3-5 years Land is not depreciated. investments in subsidaries The parent company’s investments in subsidiaries are recognised and measured under the equity method. The assets’ residual values and useful lives are reviewed The parent company’s share of the enterprises’ profits at each balance sheet date and adjusted if appropriate. or losses after elimination of unrealised intra-group Gains and losses on disposals and retirements are ment. In the balance sheet, investments are measured determined by comparing proceeds with carrying at the pro rata share of the enterprises’ equity. profits and losses is recognised in the income state- TrygVesta Annual Report 2005 / Page 67 of 144 Accounts Subsidiaries with a negative net asset value are meas- financial assets at fair value through income ured at zero value. Any receivables from these enter- Financial assets measured at fair value with recognition prises are written down by the parent company’s share of value changes in the income statement comprise as- of such negative net asset value where the receivables sets that form part of a trading portfolio and financial are deemed irrecoverable. If the negative net asset assets which the company upon initial recognition re- value exceeds the amount receivable, the remaining solves to attribute to this category (fair value option). amount is recognised under provisions if the parent None of the Group's financial assets are included in the company has a legal or constructive obligation to cover latter category. the liabilities of the relevant enterprise. Net revaluation of investments in subsidiaries is taken for sale at inception if acquired principally for the purpose to reserve for net revaluation under equity if the carry- of selling in the short term, if it forms part of a portfolio A financial asset is classified as a financial asset available ing amount exceeds cost. of financial assets in which there is evidence of short- term profit-taking, or if so designated by management. investments in associates Derivatives are also classified as financial assets available Associates are enterprises over which the Group has for sale unless they are designated as hedges. significant influence but not control, generally accom- panying a shareholding of between 20% and 50% of Financial assets are derecognised when the rights to the voting rights. Investments in associates are meas- receive cash flows from the financial asset have expired, ured according to the equity method of accounting so or if they have been transferred, and the Group has also that the carrying amount of the investment represents transferred substantially all risks and rewards of owner- the Group’s proportionate share of the enterprises’ net ship. Financial assets are recognised and derecognised assets. on a trade date basis – the date on which the Group commits to purchase or sell the asset. Financial assets Income after taxes from investments in associates is are initially recognised at fair value. included as a separate line in the income statement. Associates with negative equity value are measured changes in the fair value of the financial assets at fair at zero value. If the Group has a legal or constructive value through income are included in the income state- obligation to cover the associate’s negative balance, ment in the period in which they arise. Realised and unrealised gains and losses arising from such obligation is recognised under liabilities. investments The fair values of quoted investments are based on stock exchange prices at the balance sheet date. For Investments include financial assets at fair value through securities that are not listed on a stock exchange, the income statement. The classification depends on or for which no stock exchange price is quoted that the purpose for which the investments were acquired. reflects the fair value of the instrument, the fair value Management determines the classification of its invest- is determined using valuation techniques. These include ments at initial recognition and re-evaluates this at every the use of similar recent arm’s length transactions, reporting date. reference to other instruments that are substantially the same and a discounted cash flow analysis. TrygVesta Annual Report 2005 / Page 68 of 144 derivative financial instruments and hedge Contracts that do not meet these classification require- accounting ments are classified as financial assets. The Group’s activities expose it primarily to the finan- cial risks of changes in foreign currency exchange rates The benefits to which the Group is entitled under its and interest rates. The Group uses derivative financial reinsurance contracts held are recognised as assets and instruments to hedge its risks associated with foreign reported as reinsurers’ share of provisions for insurance currency fluctuations relating to investments in foreign contracts. operations. Amounts recoverable from reinsurers are measured Derivatives are initially recognised at fair value on the consistently with the amounts associated with the date on which a derivative contract is entered into and reinsured insurance contracts and in accordance with are subsequently measured at their fair value. the terms of each reinsurance contract. Changes due to Recognition of the resulting gain or loss depends on whether the derivative is designated as a hedging Changes due to changes in the yield curve or foreign instrument and, if so, the nature of the item being currency exchange rates are recognised as value unwinding are recognised in technical interest. hedged. The Group designates certain derivatives as adjustments. hedges of investments in foreign operations. For all hedges, the derivative financial instruments are for impairment. If there is objective evidence that the included in other receivables or other debt. reinsurance asset is impaired, the Group reduces the The effective portion of changes in the fair value of able amount and recognises that impairment loss in the carrying amount of the reinsurance asset to its recover- The Group assesses continuously its reinsurance assets derivatives that are designated and qualify as net invest- income statement ment hedges are recognised directly in equity. Changes in the fair value relating to the ineffective portion are receivables recognised in the income statement. Exchange differ- Receivables are non-derivative financial assets with ences arising from changes in exchange rates regarding fixed or determinable payments that are not quoted in hedging of foreign subsidiaries are classified as equity an active market other than receivables that the Group and transferred to the Group’s translation reserve. Gains intends to sell in the short term. Receivables arising and losses accumulated in equity are included in the from insurance contracts are classified in this category income statement on disposal of the foreign operation. and are reviewed for impairment as part of the impair- ment review of receivables. reinsurers' share of provisions for insurance contracts On initial recognition, receivables are measured at Contracts entered into by the Group with reinsurers fair value, and they are subsequently measured at under which the Group is compensated for losses on amortised cost. Appropriate allowances for estimated one or more contracts issued by the Group and that irrecoverable amounts are recognised in the income meet the classification requirements for insurance con- statement when there is objective evidence that the tracts are classified as reinsurance contracts held. asset is impaired. The allowance recognised is measured TrygVesta Annual Report 2005 / Page 69 of 144 Accounts at the difference between the asset’s carrying amount risk period. However, as a minimum to the part of the and the present value of estimated future cash flows. premium calculated using the pro rata temporis princi- ple until the next payment date. Adjustments are made prepayments and accrued income to reflect any variations in the incidence of risk. This Prepayments and accrued income comprise cost paid applies to gross as well as ceded business. relating to the following financial year. Share capital Claims and claims handling costs are charged to income as incurred based on the estimated liability for compen- Shares are classified as equity when there is no obliga- sation owed to contract holders or third parties damaged tion to transfer cash or other assets. Incremental costs by the contract holders. They include direct and indi- directly attributable to the issue of equity instruments rect claims handling costs and arise from events that are shown in equity as a deduction from the proceeds, have occurred up to the balance sheet date even if they net of tax. dividend distribution have not yet been reported to the Group. Provisions for claims are estimated using the input of assessments for individual cases reported to the group and statistical Proposed dividend is recognised as a liability at the analyses for the claims incurred but not reported and the time of adoption by the shareholders at the annual expected ultimate cost of more complex claims that may general meeting (the date of declaration). Dividends be affected by external factors (such as court decisions). expected to be paid in respect of the year are stated The provisions include claims handling costs. as a separate line item under equity. Subordinate loan capital on a yield curve reflecting duration applied to the ex- Subordinate loan capital is recognised initially at fair pected future payments from the provision. Discounting value, net of transaction costs incurred. Subordinate affects the motor liability, professional liability, workers’ loan capital is subsequently stated at amortised cost; compensation and personal accident classes, in particular. Provisions for claims are discounted. Discounting is based any difference between the proceeds (net of transac- tion costs) and the redemption value is recognised in Provisions for annuities relate to compulsory workers’ the income statement over the period of the borrow- compensation insurance in Denmark, which is settled ings using the effective interest method. by payment of annuities. The provisions are calculated provision for insurance contracts discounting expected future payments. Provisions for Premiums are recognised in the income statement annuities in workers’ compensation are discounted using the fixed-rate method at the present value by (premium income) proportionally over the period of using a fixed-rate method. coverage and, where necessary, adjusted to reflect any variation in the incidence of risk. The portion of Provisions for bonus and premium rebates represent premium received on in-force contracts that relates to amounts expected to be paid to policyholders in view unexpired risks at the balance sheet date is reported as of the claims experience during the financial year. provisions for unearned premiums. Unearned premium provisions are generally calculated according to a best Provisions for claims are determined for each product estimate of expected payments throughout the agreed line based on actuarial methods. In cases where product TrygVesta Annual Report 2005 / Page 70 of 144 lines encompass more than one business unit, the on the current benefit, implying that the discounting claims reserves are distributed, as a main rule, based applied corresponds to a real interest rate of 1%. on reported number of claims in Denmark and indi- • Provisions in respect of Chevanstell are assessed by vidual claims in Norway. The models currently used are external actuaries, and TrygVesta allocates provisions Chain-Ladder, Bornhuetter-Ferguson, the Loss Ratio in accordance with these assessments. method, De Vylder’s credibility method and a proprietary collective reserve model for use in private business lines In some instances, the historic data used in the actu- in Denmark. Chain-Ladder techniques are used for busi- arial models is not necessarily predictive of the future ness lines with a stable run-off pattern. The Bornhuet- development of claims. Specifically, this is the case ter-Ferguson method, and sometimes the Loss Ratio with legislative changes where in each specific case method, are used for claims years in which the previous an estimate used for premium increases related to run-off provides insufficient information about the fu- the relevant risk increase is derived. For the legislative ture run-off performance. De Vylder’s credibility method changes mentioned below this estimate is used also in is used for areas that are somewhere in between the determining the level of claims – and hence reserves. Chain-Ladder and Bornhuetter-Ferguson/Loss Ratio Subsequently, this estimate is updated when new loss methods, and may also be used in situations that call for history materialises. the use of exposure targets, for example the number of insured, other than premium volume. Several assumptions and estimates underlying the calculation of the provisions for claims are mutually The proprietary collective model is based exclusively on dependent. Most importantly, this can be expected to actual payments and is therefore only used for provi- be the case for interest rate and inflation assumptions. sions for small claims, below DKK 200,000 for motor, or DKK 100,000 for other. The model is so dynamic that, For workers’ compensation, future claims are discounted to the greatest extent possible, it captures changes in at a real rate of interest and it can be assumed that the run-off pattern. It consists of two modules, with the correlation between interest rate and inflation at the first module estimating on a daily basis with due least in the near term does not give rise to significant consideration to days off and special high-frequency fluctuation in the real rate of interest. For workers’ days such as New Year’s Eve or days with slippery compensation, the adjustment percentage published roads. The model also takes the season into considera- in 2005 with a premium of 1% is used as the expected tion, both in terms of claims performance and in claims future inflation rate. handling intensity. In the second module, estimates are on a more aggregate level, and the calculations are For other lines of business, the inflation assumptions, based on a generalised hierarchic De Vylder model. because present only implicitly in the actuarial models, Special areas will cause a certain lag in predicting the level of future losses when a shift in inflation occurs. On the other • The provision for annuities in workmen’s. hand, the effect of discounting will show immediately compensation insurance is calculated on the basis as a consequence of inflation changes to the extent of a mortality corresponding to the G82 calculation that this change affects the interest rate. basis (government-estimated mortality table), with a net discount rate of 1%. The calculation is based Other correlations are not significant. TrygVesta Annual Report 2005 / Page 71 of 144 Accounts liability adequacy test The actuarial gains and losses arising from experience Tests are continuously performed to ensure the ad- adjustments and changes in actuarial estimates is equacy of the technical provisions. In performing these charged or credited to equity. tests, current best estimates (without margins for adverse deviation) of future cash flows of claims, gains other employee benefits and direct and indirect claims handling costs are used. Employees of the Group are entitled to a fixed pay- Any deficiency is charged to the income statement by ment, when they reach retirement and when they have raising the relevant provision. been employed with the group for 25 and for 40 years. employee benefits pension obligations The Group recognises this liability as soon as the em- ployment begins. The Group operates various pension schemes. The In special instances the employee can enter a contract schemes are funded through payments to insurance with the Group to receive compensation for loss in companies or trustee-administered funds. In Norway, pension benefits caused by the reduced working hours. the group operates a defined benefit plan. A defined The Group recognises this liability based on statistic benefit plan is a pension plan that defines an amount models. of pension benefit that an employee will receive on retirement, dependent on age, years of service and income tax and deferred tax compensation. In Denmark, the Group operates a The Group provides current tax expense according to defined contribution plan. A defined contribution plan the tax law of each jurisdiction in which it operates. is a pension plan under which the Group pays fixed Current tax liabilities and current tax receivables are contributions into a separate entity (a fund) and will recognised in the balance sheet as estimated tax on have no legal or constructive obligation to pay further the taxable income for the year, adjusted for adjust- contributions. ments on tax on prior years’ taxable income and for tax paid under the on–account tax scheme. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value Deferred tax is measured according to the balance of the defined benefit obligation at the balance sheet sheet liability method on all timing differences between date less the fair value of plan assets, together with the tax and accounting value of assets and liabilities. adjustments for unrecognised actuarial gains or losses Deferred income tax is measured using tax rules and and past service costs. The defined benefit obligation is tax rates that apply in the relevant countries by the bal- calculated annually by actuaries using the projected unit ance sheet date when the deferred tax asset is realised credit method. The present value of the defined benefit or the deferred income tax liability is settled. obligation is determined by discounting the estimated future cash outflows by a duration that matches the Deferred income tax assets, including the tax value of conditions of the underlying pension obligation. tax losses carried forward, are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. TrygVesta Annual Report 2005 / Page 72 of 144 Deferred income tax is provided on temporary differ- Cash flows from acquisition and divestment of enter- ences arising on investments in subsidiaries and associ- prises are shown separately under cash flows from in- ates, except where the Group controls the timing of the vesting activities. Cash flows from acquired enterprises reversal of the temporary difference, and it is probable are recognised in the cash flow statement from the that the temporary difference will not reverse in the time of their acquisition, and cash flows from divested foreseeable future. enterprises are recognised up to the time of sale. provisions Cash flows from operating activities are calculated Provisions are recognised when, as a consequence of whereby major classes of gross cash receipts and gross an event that has occurred before or on the balance cash payments are disclosed. sheet date, the Group has a legal or constructive obli- gation, and it is likely that an outflow of resources will Cash flows from investing activities comprise payments be required to settle the obligation. in connection with acquisition and divestment of enterprises and activities as well as purchase and sale Provisions are measured as the management’s best of intangible assets, property, plant and equipment as estimate of the amount with which the liability is well as fixed asset investments. expected to be settled. financial liabilities Cash flows from financing activities comprise changes in the size or composition of the Group’s share capital and Bond loans, debt to credit institutions, etc. are related costs as well as the raising of loans, instalments recognised at the raising of the loan as the proceeds on interest-bearing debt, and payment of dividends. received less transaction costs. In the subsequent periods, financial liabilities are measured at amortised Cash and cash equivalents comprise cash and demand cost, applying the “effective interest rate method”, to deposits. the effect that the difference between the proceeds and the nominal value is recognised in the income pro forma comparative figures statement under financial expenses over the term of The financial statements for 2002 and 2001 present the loan. pro forma comparative figures prior to the formation of TrygVesta A/S as at 28 January 2002 and the company’s Other liabilities are measured at net realisable value. subsequent acquisition of the general insurance activi- ties of Nordea AB as at 28 June 2002. cash flow statement The cash flow statement of the Group is presented Pro forma comparative figures have been included in using the direct method and shows cash flows from op- order to provide more information in the annual report erating, investing and financing activities as well as the with respect to the technical operations of the general Group’s cash and cash equivalents at the beginning and insurance companies forming part of TrygVest irrespec- the end of the financial year. No separate cash flow tive of the former ownership of these companies. statement has been prepared for the parent company because it is included in the consolidated cash flow statement. TrygVesta Annual Report 2005 / Page 73 of 144 Accounts The pro forma comparative figures are stated on the basis of a consolidation af the companies forming part of the Group as at 31 December 2003. The following should be taken into account when evalu- ating the pro forma comparative figures: Tryg Forsikring A/S and Vesta Forsikring AS are stated net of their life and pension insurance activities, which were operated by wholly-owned subsidiaries. Where the accounting policies have been changed during the period, the comparative figures of each company have to the extent possible been adjusted on consolidation to comply with the current accounting policies. Such adjustments only have a minor impact on the pro forma figures. TrygVesta Annual Report 2005 / Page 74 of 144 income Statement and balance Sheet for trygveSta income Statement dKKm Notes general insurance Gross premiums written Ceded insurance premiums Change in provisions for unearned premiums Change in the reinsurers' share of provisions for unearned premiums 1 earned premiums, net of reinsurance 2005 2004 15,444 -892 422 -74 14,900 15,022 -1,596 406 -50 13,782 2 technical interest, net of reinsurance 323 335 Claims paid Reinsurance recoveries Change in provisions for claims Change in the reinsurers' share of provisions for claims 3 claims incurred, net of reinsurance bonus and premium rebates Acquisition costs Administrative expenses Acquisition costs and administrative expenses Commission and profit commission from the reinsurers 4 total insurance operating expenses, net of reinsurance 5 technical result investment activities 14 Income from associates Income from investment properties Interest income and dividends, etc, Value adjustment Interest expenses 6 7 6 Investment management charges total return on investment activities 2 Interest on insurance provisions total return on investment activities after technical interest Other income Other expenses profit/loss before tax 8 Tax profit/loss on continuing business 9 Profit/loss on discontinued and divested business -10,256 1,373 -1,048 -487 -10,418 -161 -1,514 -1,148 -2,662 71 -2,591 2,053 2 101 1,035 588 -68 -63 1,595 -707 888 126 -154 2,913 -788 2,125 -28 -9,446 902 -1,126 -190 -9,860 -162 -1,441 -1,170 -2,611 216 -2,395 1,700 0 91 834 220 -74 -55 1,016 -638 378 121 -147 2,052 -556 1,496 -75 profit/loss for the year 2,097 1,421 TrygVesta Annual Report 2005 / Page 75 of 144 Accounts balance Sheet dKKm Notes assets 10 intangible assets 11 Operating equipment 12 Owner-occupied property total property, plant and equipment 2005 2004 135 109 329 438 112 173 273 446 13 investment property 1,726 1,727 14 Investments in associates total investments in associates Equity investments Unit trust units Bonds Deposits in credit institutions Cash in hand and at bank 15 total other financial investment assets 30 30 4,707 280 27,763 120 543 33,413 28 28 3,105 246 25,259 116 490 29,216 deposits with ceding undertakings, receivable 27 28 total investment assets 35,634 31,445 Reinsurers' share of provisions for unearned premiums Reinsurers' share of provisions for claims 16 total reinsurers' share of provisions for insurance contracts Receivables from policyholders Receivables from insurance brokers Total receivables in relation to direct insurance contracts Receivables from insurance enterprises Receivables from subsidiaries Other receivables total receivables Temporarily acquired assets Current tax assets Other total other assets Accrued interest and rent earned Prepaid acquisition costs Other prepayments and accrued income total prepayments and accrued income 146 2,484 2,630 819 85 904 722 44 145 212 3,080 3,292 817 119 936 960 0 437 1,815 2,333 9 106 8 123 423 1 50 474 0 192 9 201 383 0 58 441 total assets 40,811 37,824 TrygVesta Annual Report 2005 / Page 76 of 144 dKKm Notes liabilities Shareholders' equity 17 Subordinate loan capital Provisions for unearned premiums 18 Provisions for claims Provisions for bonuses and premium rebates Other insurance provisions total provisions for insurance contracts 19 Pensions and similar obligations 20 Deferred tax liability Other provisions total provisions Debt related to direct insurance Debt related to reinsurance 21 Debt to credit institutions Debt to subsidiaries Current tax liabilities 22 Other debt total debt accruals and deferred income total liabilities and equity 23 capital adequacy, etc. 24 earnings per share 25 contingent liabilities and collateral 26 related parties 27 Significant changes upon transition to ifrS 2005 2004 8,215 1,098 5,183 21,261 313 0 26,757 669 939 41 1,649 342 143 786 0 385 1,186 2,842 250 6,802 700 5,037 19,914 260 1 25,212 543 792 37 1,372 366 485 609 37 0 1,991 3,488 250 40,811 37,824 TrygVesta Annual Report 2005 / Page 77 of 144 Accounts Statement of changeS in equity dKKm revalua- reserve for equalisa- Share Share tion exchange tion other retained proposed capital premium reserves rate adj. reserve reserves earnings dividends total Shareholders' equity at 1 January 2004 Change in accounting policies adjusted equity at 1 January 2004 equity entries in 2004 Profit/loss for the year Retained share premium Revaluation of owner- occupied properties Exchange rate adjustment of foreign entities Hedge of foreign currency risk in foreign entities Actuarial gains and losses on pension obligation Tax on equity entries Total comprehensive income Dividend paid total equity entries in 2004 Shareholders' equity at 31 december 2004 Shareholders' equity at 1 January 2005 equity entries in 2005 Profit/loss for the year Change in equalisation provision Revaluation of owner- occupied properties Exchange rate adjustment of foreign entities Hedge of foreign currency risk in foreign entities Actuarial gains and losses on pension obligation Tax on equity entries Total comprehensive income Dividend paid total equity entries in 2005 1,700 2,968 189 599 692 -689 5,360 149 50 1,700 2,968 0 0 189 599 3 50 5,509 -2,968 137 634 2,968 650 1,421 0 68 -68 0 0 0 0 132 -119 33 46 -111 33 3,524 137 137 3,524 0 0 650 -50 600 68 -68 -111 33 1,343 -50 1,293 189 736 3,527 650 6,802 189 736 3,527 650 6,802 -126 64 605 126 1,428 2,097 7 132 -119 -118 64 2,063 -126 64 -118 33 646 1,428 46 -126 64 646 -650 778 -650 1,413 46 63 800 4,173 1,428 8,215 0 0 0 0 7 -2 5 5 5 0 -2,968 0 -2,968 1,700 1,700 0 0 0 0 0 0 0 Shareholders' equity at 31 december 2005 1,700 Vesta Forsikring AS has in its consolidated financial statements included provisions for contingency funds of NOK 2,251m under provisions for insurance contracts. In the consolidation, these provisions, due to their nature as additional provisions, are included in shareholders' equity (retained earnings), net of deferred tax. When assessing Vesta Forsikring AS’ option to pay dividend to the parent company Tryg Forsikring this amount should be considered. Tryg Forsikring’s option to pay dividend to TrygVesta is influenced by this amount and a contingency fund provision of DKK 670m, which is included in shareholders’ equity in Tryg Forsikring A/S. Dansk Kaution has a similar contingency amounting to DKK 139m, which is also included in the company’s shareholders’ equity. TrygVesta Annual Report 2005 / Page 78 of 144 caSh flow Statement dKKm Notes cash generated from operations Premiums Claims paid Ceded business Expenses Change in other payables and other amounts receivable cash flow from insurance operations Interest and dividends Taxes Other items total cash generated from operations investments Acquisition/sale of real property (net) Acquisition/sale of equity investments and unit trust units (net) Purchase/sale of bonds (net) Purchase/sale of secured loans and other loan (net) Purchase/sale of operating equipment (net) Acquisition of subsidiaries Purchase/sale og associated undertakings total investments 1 funding Subordinate loan capital Dividend paid Foreign currence hedging Change in debt to credit institutions total funding change in cash and cash equivalents, net Price adjustment of cash and cash equivalents, beginning of year Additions relating to sale of subsidiaries changes in cash and cash equivalents, gross Cash and cash equivalents, beginning of year cash and cash equivalents, year-end discontinued business Total cash generated from operations Total investments Total funding change in cash and cash equivalents, net Cash and cash equivalents, beginning of year cash and cash equivalents, year-end Cash and cash equivalents comprise cash balance and demand deposits Notes 1 acquisition/sale of subsidiaries Purchase TrygVesta IT A/S Sale Tryg Polska Minority interest Tryg Polska Nordicum Kindlustuse TBi 2005 2004 15,915 -10,017 451 -2,944 95 3,500 965 -139 -28 4,298 16 -709 -3,367 0 9 0 0 -4,051 395 -650 -119 177 -197 50 14 0 64 560 624 -146 145 -10 -11 -70 -81 - - - - 15,821 -9,336 -561 -2,267 1,428 5,085 728 -611 -26 5,176 69 -710 -5,010 70 -74 517 -14 -5,152 0 -50 0 54 4 28 -11 -5 12 548 560 -24 -186 130 -80 10 -70 -1 220 -6 0 -302 -517 TrygVesta Annual Report 2005 / Page 79 of 144 Accounts noteS dKKm 1 earned premiums, net of reinsurance Direct insurance Indirect insurance Unexpired risk provision Ceded direct insurance Ceded indirect insurance direct insurance, by location of risk Gross Denmark Other EU countries Other countries Ceded Denmark Other EU countries Other countries 2 technical interest Interest on insurance provisions Transferred from provisions for claims concerning discounting Technical interest concerning discontinued business In respect of provisions for unearned premiums, the return under the item technical interest is calculated as the provision from time to time plus an average interest rate that corresponds to the estimated settlement period of the provision. In respect of provisions for claims, the calculated return for grouped classes of risk is calculated as the monthly average provision plus a co-weighted interest rate from the current yield curve for each risk group. The interest rate is weighted according to the expected settlement pattern of the provisions. 3 claims incurred, net of reinsurance Claims incurred Run-off previous years, gross Reinsurance recoveries Run-off previous years, reinsurers' share 4 insurance operating expenses, net of reinsurance Commission regarding direct business Other acquisition costs Total acquisition costs Administrative expenses Insurance operating expenses, gross Commission, etc, from reinsurers TrygVesta Annual Report 2005 / Page 80 of 144 2005 2004 15,833 33 15,866 0 15,866 -974 8 14,900 8,816 177 6,840 15,833 -542 -11 -421 -974 707 -378 -6 323 -11,567 263 -11,304 968 -82 -10,418 -270 -1,244 -1,514 -1,148 -2,662 71 -2,591 15,409 45 15,454 -26 15,428 -1,651 5 13,782 8,539 150 6,720 15,409 -915 -16 -720 -1,651 638 -301 -2 335 -10,555 -17 -10,572 856 -144 -9,860 -276 -1,165 -1,441 -1,170 -2,611 216 -2,395 dKKm 2005 2004 insurance operating expenses, gross, classified by type Commission Staff expenses Other staff expenses Headquarter expenses Office expenses and fees Marketing Software expenses Operating and maintenance costs, IT Depreciation, amortisation and impairment writedowns Other expenses Insurance operating expenses and claims incurred include the following staff expenditure: Salaries and wages Commission Pensions Other social security costs Payroll tax, etc. Specification of remuneration, etc. Supervisory Board Executive Management Remuneration, etc. includes pension contributions Supervisory Board Executive Management -289 -1,862 -207 -174 -290 -95 -90 -188 -145 678 -298 -1,727 -167 -176 -279 -88 -98 -189 -186 597 -2,662 -2,611 -1,561 -26 -242 -132 -220 -2,181 -3 -12 -15 0 -1 -1 -1,494 -24 -338 -109 -175 -2,140 -3 -10 -13 0 -1 -1 Members of the Supervisory Board of TrygVesta A/S do not receive bonuses and are not participants in any severance plans. The Group Executive Management has a bonus scheme for up to 3 months’ salary. Other than that, there are no incentive plans for the Supervisory Board and Group Executive Management. At the annual general meeting, the Supervisory Board will show management's future share programme based on a share element for the Group Executive Management and key employees with a view to establishing incentives relevant to ensure competitive remuneration of the Group Executive Management and other key employees. Average number of full-time employees during the year 3,702 4,396 Administrative expenses include fee to the auditors appointed by the Annual General Meeting: Deloitte Grant Thornton Of which services other than audit Deloitte In addition, expenses have been incurred for the Group's Internal Audit Department. -10 -1 -11 -4 -4 -12 -1 -13 -7 -7 TrygVesta Annual Report 2005 / Page 81 of 144 Accounts dKKm 5 Segments primary segments 2005 2004 2005 2004 2005 2004 2005 2004 private & private & commercial commercial finnish general denmark norway corporate insurance Gross premiums earned Gross claims Gross expenses Profit/loss on business ceded Technical interest, net of reinsurance Technical result Total return on investment activities after technical interest Other income and expenses Profit before tax Tax Profit on continued business Profit/loss on discontinued and divested business profit for the year Reinsurers' share of provisions for unearned premiums Reinsurers' share of provisions for claims Other assets Total assets Provisions for unearned premiums Provisions for claims Provisions for bonuses and premium rebates Other insurance provisions Provisions Debt Accruals and deferred income Total liabilities 6,276 -4,987 -1,113 467 113 756 5,942 -4,376 -1,057 -101 116 524 4,632 4,435 4,666 4,801 -2,844 -2,696 -3,361 -3,431 -945 -922 -62 93 874 -73 87 831 -534 -421 114 464 -561 -549 130 390 140 -113 -70 -1 3 -41 97 -73 -71 0 2 -45 -11 124 -1 -66 1 320 44 648 156 169 1,260 1,562 2,361 6,988 191 2,253 6,308 168 1,755 3,334 0 1,700 3,070 0 1,030 9,338 122 1,058 8,609 92 0 0 37 88 0 0 0 26 53 0 * Other assets and liabilities are not directly attributable, and it is not possible to allocate these items so that they present a true and fair view. Accordingly, the amounts are recognised in a single line item Unallocated activities. danish finnish general insurance general insurance general insurance 2004 norwegian 2004 2004 2005 2005 2005 8,764 956 567 77 -70 1,530 8,525 722 376 76 -72 1,102 6,810 1,138 354 49 -47 1,494 6,653 1,023 33 45 -43 1,058 140 -41 -2 0 0 -43 97 -45 -2 0 0 -47 Secondary segments Gross premiums earned Technical result Return on investment activities Other income Other expenses Profit/loss for the period before tax TrygVesta Annual Report 2005 / Page 82 of 144 1 0 8 0 0 0 0 0 unallocated 2005 2004 2005 total 2004 -9 -9 15,705 15,266 4 0 5 0 0 -11,304 -10,572 -2,662 -2,611 -9 323 -718 335 2,053 1,700 888 -28 2,913 -788 2,125 -28 378 -26 2,052 -556 1,496 -75 2,097 1,421 0 780 0 146 212 936 2,484 3,080 1,513 1,874 21,261 19,914 0 0 1 38,181 34,532 40,811 37,824 5,183 5,037 313 0 1,649 2,842 250 260 1 1,372 3,488 250 1,649 2,842 250 1,372 3,488 250 6,254 6,985 31,498 30,322 other 2005 2004 2005 total 2004 -9 0 -31 0 -37 -68 -9 0 -29 0 -32 -61 15,705 15,266 2,053 1,700 888 126 -154 2,913 378 121 -147 2,052 dKKm 5 Segments primary segments 2005 2004 2005 2004 2005 2004 2005 2004 private & private & commercial commercial finnish general denmark norway corporate insurance unallocated 2005 2004 2005 total 2004 description of segments Private & Commercial Denmark provides general insurance products for private households and small and medium-sized enterprises in Denmark under the brand name “Tryg”. TrygVesta's products in Denmark are distributed principally through our proprietary distribu- tion networks consisting of five regional customer centers and 16 local service centers staffed by our own customer advisors and sales agents. We also distribute our products through other channels, Gross premiums earned Gross claims Gross expenses Profit/loss on business ceded Technical interest, net of reinsurance Technical result Total return on investment activities after technical interest Other income and expenses Profit before tax Tax Profit on continued business Profit/loss on discontinued and divested business profit for the year Reinsurers' share of provisions for unearned premiums Reinsurers' share of provisions for claims Other assets Total assets Provisions for unearned premiums Provisions for claims Provisions for bonuses and premium rebates Other insurance provisions Provisions Debt Accruals and deferred income Total liabilities 6,276 -4,987 -1,113 467 113 756 5,942 -4,376 -1,057 -101 116 524 4,632 4,435 4,666 4,801 -2,844 -2,696 -3,361 -3,431 -945 -922 -62 93 874 -73 87 831 -534 -421 114 464 -561 -549 130 390 140 -113 -70 -1 3 -41 97 -73 -71 0 2 -45 -11 124 -1 -66 1 320 44 648 156 169 1,260 1,562 2,361 6,988 191 2,253 6,308 168 1,755 3,334 0 1,700 3,070 0 1,030 9,338 122 1,058 8,609 92 0 0 37 88 0 0 0 26 53 0 * Other assets and liabilities are not directly attributable, and it is not possible to allocate these items so that they present a true and fair view. Accordingly, the amounts are recognised in a single line item Unallocated activities. Secondary segments Gross premiums earned Technical result Return on investment activities Other income Other expenses danish norwegian finnish general insurance general insurance general insurance 2005 2004 2005 2004 2005 2004 8,764 8,525 956 567 77 -70 722 376 76 -72 6,810 1,138 354 49 -47 6,653 1,023 33 45 -43 140 -41 -2 0 0 97 -45 -2 0 0 Profit/loss for the period before tax 1,530 1,102 1,494 1,058 -43 -47 -9 -9 15,705 15,266 including affinity groups and Nordea’s 344 bank branches. 1 0 8 0 0 4 0 5 0 0 -11,304 -10,572 -2,662 -2,611 -9 323 -718 335 2,053 1,700 888 -28 2,913 -788 2,125 -28 378 -26 2,052 -556 1,496 -75 Private & Commercial Norway provides general insurance products for private households and small and medium-sized enterprises in Norway under the brand names “Vesta” and “Enter”. TrygVesta's products in Norway are distributed through 85 franchisee offices who are licensed to use our brand and exclusively sell our products and Nordea products. We also sell through our own sales agents, three regional customer centers, 35 local service centers, car dealers and Nordea’s 125 bank branches. TrygVesta's Corporate business unit currently provides general insurance products for larger businesses under the brands “Tryg” in Denmark and “Vesta” in Norway, but commencing in late 2005 will 2,097 1,421 also be providing them under the combined name “TrygVesta”. We 0 780 0 146 212 936 2,484 3,080 38,181 34,532 40,811 37,824 0 0 5,183 5,037 1,513 1,874 21,261 19,914 0 0 1,649 2,842 250 0 1 1,372 3,488 250 313 0 1,649 2,842 250 260 1 1,372 3,488 250 6,254 6,985 31,498 30,322 2005 other 2004 2005 -9 0 -31 0 -37 -68 -9 0 -29 0 -32 -61 15,705 2,053 888 126 -154 2,913 total 2004 15,266 1,700 378 121 -147 2,052 service our corporate customers with our direct sales force, consist- ing of 35 account managers in Denmark and 30 account managers in Norway, as well as underwriting insurance arranged by brokers for commercial and corporate customers. The results of our guarantee and surety bond subsidiary, Dansk Kaution, are also included in our Corporate business unit. Dansk Kaution is the leading supplier of guarantee insurance and surety bonds in Denmark. TrygVesta's branch in Finland sells general insurance products to private household customers, mainly through Nordea's 376 Finnish bank branches under the “Nordea” brand name. The secondary, geographic segments exclusively relate to Denmark, Norway and Finland. TrygVesta Annual Report 2005 / Page 83 of 144 Accounts dKKm 5 technical result, net of reinsurance, by lines of business accident and health 1) 2004 2005 workers' motor compensation motor tpl comprehensive 2005 2004 2005 2004 2005 2004 gross premiums written 2,154 1,923 1,014 959 2,312 2,268 2,989 2,908 Gross premiums earned Gross claims Bonuses and premium rebates Gross operating expenses Profit/loss on ceded business Technical interest, net of reinsurance 2,197 1,989 1,034 980 2,396 2,316 3,084 2,981 -1,955 -1,856 -995 -1,308 -1,975 -1,983 -1,629 -1,619 -6 -349 -24 78 -7 -315 5 54 0 -135 -29 51 0 -67 50 96 -7 -362 -15 88 -11 -426 -22 45 -77 -422 23 35 -68 -473 -7 31 technical result -59 -130 -74 -249 125 -81 1.014 845 marine, aviation fire & contents fire & contents and cargo (private) (commercial) liability 2005 2004 2005 2004 2005 2004 2005 2004 gross premiums written 553 552 3,011 2,924 2,327 2,363 676 680 Gross premiums earned Gross claims Bonuses and premium rebates Gross operating expenses Profit/loss on ceded business Technical interest, net of reinsurance 561 -329 -8 -85 -70 1 572 -346 -11 -106 -56 7 3,072 2,921 2,399 2,483 -2,196 -1,833 -1,742 -1,214 -18 -681 196 38 -26 -413 -53 38 2 -453 91 26 3 -526 -414 25 699 -365 -47 -130 -123 19 714 -359 -41 -128 -82 2 technical result 70 60 411 634 323 357 53 106 credit & guarantee insurance other insurance norwegian group life 1) total one-year policies 2005 2004 2005 2004 2005 2004 2005 2004 gross premiums written 132 131 284 314 15.444 15.022 628 754 Gross premiums earned Gross claims Bonuses and premium rebates Gross operating expenses Profit/loss on ceded business Technical interest, net of reinsurance 133 -12 0 -32 -18 2 130 8 0 -37 -26 2 299 -107 0 -13 -47 -15 342 -62 -1 -120 -113 35 15,866 -11,304 -161 -2,662 -9 323 15,428 -10,572 -162 -2,611 -718 335 612 -464 0 -147 -7 0 728 -660 0 -160 -1 0 technical result 73 77 117 81 2.053 1.700 -5 -93 1) Personal accident and health insurance includes one-year group life policies of Vesta Forsikring AS, see above. TrygVesta Annual Report 2005 / Page 84 of 144 dKKm 2005 2004 6 interest and dividends, etc. Dividends Interest expenses Interest income 7 market value adjustment Investment property Equity investments Unit trust units Share derivatives Bonds Interest derivatives Other loans Other balance sheet items Discounting Market value gains Market value losses Market value adjustment, net 8 reconciliation of tax expense Tax on profit for the year Prior-year tax adjustments Utilised joint taxation loss in non-consolidated undertaking/non-capitalised loss Tax on non-taxable income and expenses Difference between Danish and foreign tax rate effective tax rate Tax on profit for the year Prior-year tax adjustments Utilised joint taxation loss in non-consolidated undertaking/non-capitalised loss Tax on non-taxable income and expenses Difference between Danish and foreign tax rate Tax relating to discontinued and divested business is included in the net profit of such activities. Tax amounts to an expense of DKK 0.6m. 9 profit/loss on discontinued and divested business Earned premiums, net of reinsurance Technical interest, net of reinsurance Claims incurred, net of reinsurance Insurance operating expenses, net of reinsurance Technical result Return on investment activities after technical interest Profit/loss before tax Tax 126 -68 909 967 43 682 34 -10 -204 -7 -7 14 43 588 1,356 -768 588 -816 45 -11 -6 - -788 % 28 -1 0 0 - 27 -27 28 23 -45 -21 -6 -27 -1 -28 85 -74 749 760 30 399 28 -28 -17 -61 0 -22 -109 220 958 -738 220 -616 -10 42 7 21 -556 % 30 0 -2 0 -1 27 925 72 -704 -367 -74 -7 -81 6 -75 TrygVesta Annual Report 2005 / Page 85 of 144 Accounts dKKm 9 the techinical result of discontinued and divested business is specified by lines of business as follows gross premiums written Gross premiums earned Gross claims Bonuses and premium rebates Gross operating expenses Profit/loss on ceded business Technical interest, net of reinsurance technical result gross premiums written Gross premiums earned Gross claims Bonuses and premium rebates Gross operating expenses Profit/loss on ceded business Technical interest, net of reinsurance technical result accident and health motor tpl comprehensive and cargo motor marine, aviation 2005 2004 2005 2004 2005 2004 2005 2004 -3 -3 -8 0 -1 4 0 -8 20 22 -11 0 -18 5 2 0 0 0 0 0 0 0 0 0 278 254 -209 0 -93 0 14 -34 0 0 0 0 0 0 0 0 134 130 -96 0 -46 1 6 -4 -4 0 0 -19 27 9 -13 10 -73 0 -34 131 12 -5 13 46 fire & contents fire & contents (private) (commercial) liability credit & guarantee insurance 2005 2004 2005 2004 2005 2004 2005 2004 0 0 0 0 0 0 0 0 5 4 -1 0 -1 0 0 2 0 0 0 0 0 0 0 0 21 20 -9 0 -9 -10 1 -7 0 0 0 0 0 0 0 0 27 22 -6 0 -10 -4 1 3 0 0 0 0 0 0 0 0 5 5 -6 0 -1 1 0 -1 other insurance 1) 2004 2005 2005 total 2004 gross premiums written -25 744 -32 1,221 Gross premiums earned Gross claims Bonuses and premium rebates Gross operating expenses Profit/loss on ceded business Technical interest, net of reinsurance -25 -25 0 -29 34 19 598 -675 0 -187 150 36 -32 -33 0 -49 65 28 1,065 -1,086 0 -399 274 72 technical result -26 -78 -21 -74 1) Indirect insurance are included in “Other insurance”. TrygVesta Annual Report 2005 / Page 86 of 144 dKKm 10 intangible assets cost Balance 1 January Exchange rate adjustment Transferred from operating equipment Additions during the year Disposals during the year Balance 31 December amortisation and writedowns Balance 1 January Exchange rate adjustment Amortisation transferred from operating equipment Amortisation for the year Reversed amortisation Balance 31 December carrying amount 31 december Amortisation is recognised in the income statement under insurance operating expenses. 11 operating equipment cost Balance 1 January Exchange rate adjustment Transferred to intangible assets Additions during the year Disposals during the year Balance 31 December depreciation and impairment writedowns Balance 1 January Exchange rate adjustment Depreciation transferred to intangible assets Depreciation for the year Reversed depreciation Balance 31 December carrying amount 31 december Depreciation is recognised in the income statement under insurance operating expenses. 2005 2004 159 4 14 65 -4 238 -47 -1 0 -58 3 -103 135 582 9 -14 62 -336 303 -409 -8 0 -69 292 -194 109 118 2 28 11 0 159 -19 0 -11 -17 0 -47 112 782 4 -28 62 -238 582 -489 -2 11 -146 217 -409 173 TrygVesta Annual Report 2005 / Page 87 of 144 Accounts dKKm 12 owner-occupied property cost Adjustment, beginning of year Exchange rate adjustment Additions during the year Disposals during the year Balance 31 December accumulated value adjustments Balance 1 January Value adjustment for the year at revalued amount Balance 31 December accumulated depreciation Balance 1 January Depreciation for the year Balance 31 December 2005 2004 273 50 11 16 -28 322 0 8 8 0 -1 -1 267 0 6 0 0 273 0 0 0 0 0 0 balance at revalued amount at 31 december 329 273 Depreciation is recognised in the income statement under insurance operating expenses. External experts were not involved in valuing owner-occupied property. The following return percentages were used for each property category. Office property Office property lowest average highest percentage percentage percentage 2005 7.4 2005 7.4 2005 7.4 lowest average highest percentage percentage percentage 2004 8.0 2004 8.0 2004 8.4 TrygVesta Annual Report 2005 / Page 88 of 144 dKKm 2005 2004 13 investment property Fair value at the end of the previous financial year Adjustment, beginning of year Exchange rate adjustment Additions during the year Disposals during the year Value adjustment for the year 1,727 -50 14 13 -8 30 1,750 0 8 38 -75 6 fair value at the balance sheet date 1,726 1,727 Total rental income for 2005 is DKK 140m. Total expenses for 2005 are DKK 38m. Of this amount, not-hired property is DKK 2m. The total expenses at the income leading investment property are DKK 36m. External experts were not involved in valuing investment property. The following return percentages were used for each property category. Business property Office property Residential property All properties Business property Office property Residential property All properties lowest average highest percentage percentage percentage 2005 2005 2005 7.50 6.06 5.50 5.97 7.76 7.34 6.16 7.27 8.00 8.25 6.50 8.29 lowest average highest percentage percentage percentage 2004 2004 2004 7.50 6.08 5.50 5.99 7.79 7.47 6.08 7.34 8.00 8.50 6.50 8.50 TrygVesta Annual Report 2005 / Page 89 of 144 Accounts dKKm 14 investments in associates cost Balance 1 January Additions during the year Balance 31 December revaluations at net asset value Balance 1 January Revaluations during the year Balance 31 December carrying amount, 31 december Shares in associates according to the latest financial statements: 2005 2004 14 0 14 14 2 16 30 0 14 14 0 14 14 28 name and registered office assets liabilities Shareholders' equity revenue profit/loss for the year ownership share in % Nordisk Flyforsikring A/S, Denmark The company was established at the end of 2004 Bilskadeinstituttet AS, Norway Edsvåg Fabrikker AS, Norway - 5 36 - 0 6 50 5 30 - 1 12 - 0 4 28 30 28 15 other financial investment assets Bonds Shares Properties The bond portfolio includes unit trusts in which the underlying assets are bonds. In addition, the amounts include liquid assets allocated to the portfolio manager, money market deposits and debt and receivables from unsettled investment transactions. bonds carrying amount Danish bonds Norwegian bonds and money market instruments Other bonds effective interest rate Danish bonds Norwegian bonds and money market instruments Other bonds listed shares United States United Kingdom Denmark Norway Rest of Europe Other TrygVesta Annual Report 2005 / Page 90 of 144 2005 2004 27,572 4,783 2,055 34,410 23,762 3,161 2,000 28,923 14,248 9,402 3,921 27,571 % 4.2 2.6 3.5 3.6 1,271 836 480 283 1,479 209 4,558 11,889 10,371 1,502 23,762 % 5.3 2.2 2.5 3.7 1,170 448 322 123 790 148 3,001 the company's ten largest investments in listed shares Issuer Royal Dutch Shell A & B (UK) Danske Bank (Denmark) General Electric Co. (USA) HBOS Plc. (UK) ING Group N.V (The Netherlands) Royal Bank of Scotland (UK) ABN Amro (The Netherlands) Lloyds TSB Group Plc. (UK) Novo Nordisk B (Denmark) Barclays Plc. (UK) The portfolio of unlisted shares totals dKKm bond portfolio by maturity Due in one year or less Due after one year through five years Due after five years through 10 years Due after 10 years through 20 years Due after more than 20 years % of listed % of total dKKm shares investments 126 90 81 80 79 74 71 71 69 65 2.8 2.0 1.8 1.8 1.7 1.6 1.6 1.6 1.5 1.4 225 2005 9,165 9,331 822 1,408 6,771 27,497 15,594 9,954 1,922 27 0 0.4 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 160 2004 11,008 8,036 355 1,110 4,332 24,841 17,003 6,380 1,424 34 0 27,497 24,841 The bond portfolio includes unit trusts in which the underlying assets are bonds. adjusted duration of bond portfolio Due in one year or less Due after one year through five years Due after five years through 10 years Due after 10 years through 20 years Due after more than 20 years The bond portfolio includes unit trusts in which the underlying assets are bonds. The option adjusted duration is used to measure duration. The option adjustment relates primarily to Danish mortgage bonds and reflects the expected duration-shortening effect of the borrower's option to cause the bond to be redeemed through the mortgage institution at any point in time. exposure to exchange rate risk insurance, etc. hedge exposure USD EUR GBP NOK CHF SEK JPY CAD Other properties bonds 0 0 0 707 0 0 0 0 0 931 2,426 844 9,272 0 0 0 75 0 Shares 1,272 1,363 819 357 116 71 148 35 23 -202 -926 -482 -5,903 1 -1 0 -98 0 -1,890 -2,865 -1,107 -4,170 -138 -69 -126 -33 -23 707 13,548 4,204 -7,611 -10,421 111 -2 74 263 -21 1 22 -21 0 515 TrygVesta Annual Report 2005 / Page 91 of 144 Accounts dKKm 2005 2004 15 derivative financial instruments market values Interest derivatives Exchange rate derivatives 6,104 10,473 2,583 6,950 Forward exchange transactions and currency swaps are used for forward currency hedging of holdings of shares, bonds, investments in subsidiaries and insurance balance sheet items. Interest derivatives in the form of forward transactions, repos, swaps and forward rate agreements are used to control cash flows and interest in connection with holdings of bonds. Share derivatives are sometimes used to adjust share exposure. hedge accounting The exchange rate adjustment for the period for foreign entities and the hedging of currency risk will be handled according to the rules of hedge accounting and will be an entry on shareholders' equity. The net asset value of investments in the subsidiaries Vesta Forsikring AS and Chevanstell Ltd. is estimated on a current basis and is hedged 90-100% by entering into short-term forward exchange transactions in NOK and GBP. gains and losses on foreign exchange hedges charged to equity gains losses 0 -119 -119 2005 -4 54 572 166 12 175 2,666 -36 2,630 Gains and losses on hedges charged to equity at 1 January 2005 Gains and losses on hedges charged to equity in the period Gains and losses on hedges charged to equity at 31 December 2005 0 0 0 Sensitivity information Interest rate increase of 0.7 pct. point Interest rate fall of 0.7 pct. point Equity price fall of 12% Fall in property prices of 8% Exchange rate risk (VaR 99,5) Loss on counterparties of 8% 16 reinsurers' share Reinsurers' share Writedown after impairment test 17 Subordinate loan capital In December 2005, Tryg Forsikring A/S raised a subordinate bond loan for EUR 150m at the price of 99.017. The loan bears interest at 4.5% p.a. until 2015, at which time it is repayable. After that time, it will bear interest at URIBOR plus 2.1% until it falls due in 2025. The loan is measured at amortised cost, and from the EUR 150m loan DKK 11m has been deducted in capital losses and DKK 10m in expenses when the loan was raised. The fair value of the loan at the balance sheet date was DKK 1,124m. The loan is an interest-only loan, and the lender has no option to call the loan or otherwise terminate the loan agreement with TrygVesta A/S. The loan is automatically accelerated upon the liquidation or bankruptcy of TrygVesta A/S. At 31 December 2004, TrygVesta A/S had a subordinate loan of DKK 700m, for which the lender is Tryg i Danmark smba. The loan was repaid in 2005. TrygVesta Annual Report 2005 / Page 92 of 144 net 0 -119 -119 2004 - - - - - - 3,324 -32 3,292 dKKm 2005 2004 2003 2002 2001 2000 Sum 18 provisions for claims gross Estimated accumulated claims Cumulative payments to date Discounting Reserves from 1999 and prior years Other reserves Gross provisions for claims, end of year ceded business Estimated accumulated claims Cumulative payments to date Discounting Reserves from 1999 and prior years Other reserves Provisions for claims, end of year net of reinsurance Estimated accumulated claims Cumulative payments to date Discounting Reserves from 1999 and prior years Other reserves Provisions for claims, net of reinsurance, end of the year 0 1 2 3 4 5 0 1 2 3 4 5 0 1 2 3 4 5 -11,732 -10,997 -11,004 -10,659 -10,764 -10,430 -11,230 -11,582 -11,584 -11,640 -11,732 5,325 403 -11,004 7,208 296 -10,430 7,832 206 -11,640 9,246 214 -9,164 -9,399 -9,594 -9,706 -9,637 -9,637 8,373 103 -8,534 -8,860 -9,068 -9,273 -9,361 -9,490 -9,490 8,297 104 944 860 873 937 898 894 2,034 2,141 2,024 2,017 1,445 1,458 1,465 1,480 1,454 944 -562 -19 873 -654 -37 894 -735 -21 2,017 -1,603 -44 1,454 -1,300 -21 1,434 1,549 1,513 1,539 1,572 1,567 1,567 -1,456 -14 -10,788 -10,137 -10,130 -9,722 -9,866 -9,536 -9,196 -9,441 -9,560 -9,622 -10,788 4,762 384 -10,130 6,553 260 -9,536 7,097 185 -9,622 7,643 170 -7,719 -7,941 -8,129 -8,226 -8,183 -8,183 7,072 81 -7,100 -7,311 -7,555 -7,735 -7,789 -7,923 -7,923 6,840 90 -63,933 46,280 1,326 -3,460 -1,473 -21,261 7,750 -6,311 -156 362 840 2,484 -56,183 39,969 1,169 -3,099 -634 -18,777 The table consists of figures for Tryg Forsikring A/S and Vesta Forsikring A/S. Other companies in the group are included in “Other”, which comprises provisions for claims for Dansk Kaution, travel and health, our Finnish business unit and Chevanstell Ltd. The provision for Chevanstell Ltd. includes an offset of the stop-loss treaty between Tryg Forsikring A/S and Chevanstell Ltd. In the table, amounts in Norwegian kroner are translated into Danish kroner using the exchange rate as of 31 December 2005 in order to avoid any impact from currency fluctuations. For the claims year 2000, a contribution to the revision of the estimates came from business written by Chevanstell Ltd., which at that time oper- ated under the name TBi UK in the London market. Although Chevanstell is not directly included in the triangulation, it has impacted the figures through the stop-loss treaty between Tryg Forsikring A/S and Chevanstell Ltd. that was put in place in 2000 to cover business written before 2000. The inclusion of the Zurich portfolio acquired in 2002 and, to a minor extent, the Allianz Norwegian portfolio acquired in 2001 affects the figures. As the liabilities of these portfolios appear in the triangulation, the ultimate liability for the preceding claims years is increased but, naturally, not as a result of a revision of already existing liabilities. The combined impact of the two acquisitions amounts to DKK 210m gross and DKK 200m net of reinsurance. TrygVesta Annual Report 2005 / Page 93 of 144 Accounts dKKm 18 provisions for claims gross Total, beginning of period Market value adjustment of provisions, beginning of period Paid in the financial year in respect of the current year Paid in the financial year in respect of prior years Change in claims in the financial year in respect of the current year Change in claims in the financial year in respect of prior years Discounting 3) Provisions for claims, end of year 1) Other 2) ceded business Reinsurer's shares of provisions for claims, beginning of period Market value adjustment of provisions, beginning of period Paid in the financial year in respect of the current year Paid in the financial year in respect of prior years Change in claims in the financial year in respect of the current year Change in claims in the financial year in respect of prior years Discounting 3) Provisions for claims, end of year 1) Other 2) net of reinsurance Provisions for claims, beginning of period Total, beginning of period Market value adjustment of provisions, beginning of period Paid in the financial year in respect of prior years Change in claims in the financial year in respect of the current year Change in claims in the financial year in respect of prior years Discounting 3) Provisions for claims, end of year 1) Other 2) TrygVesta Annual Report 2005 / Page 94 of 144 2005 2004 18,157 290 18,447 -5,325 -4,811 -10,136 11,329 -203 11,126 16,273 157 16,430 -4,902 -4,485 -9,387 10,563 80 10,643 351 471 19,788 1,473 21,261 2,096 67 2,163 -562 -805 -1,367 925 -66 859 -11 1,644 840 2,484 16,061 223 16,284 -4,763 -4,006 -8,769 10,404 -137 10,267 362 18,144 633 18,777 18,157 1,757 19,914 2,118 39 2,157 -302 -612 -914 877 -99 778 75 2,096 984 3,080 14,155 118 14,273 -4,600 -3,873 -8,473 9,686 179 9,865 396 16,061 773 16,834 dKKm Gross Falling due within one year Falling due after more than one year Ceded Falling due within one year Falling due after more than one year 1) The table consists of figures for Tryg Forsikring A/S and Vesta Forsikring AS. Other companies in the Group are included in “Other”. 2) Comprises provisions for claims for Dansk Kaution, travel and health, our Finnish business unit and Chevanstell Ltd. The provision for Chevanstell Ltd. includes an offset of the stop-loss treaty between Tryg Forsikring A/S and Chevanstell Ltd. 3) Discounting also includes exchange rate adjustments. 19 pensions and similar obligations Other benefits recognised obligation, end of year Defined benefit pension plans Specification of change in recognised pension obligations: Recognised pension obligation, beginning of year Exchange rate adjustment Present value of amounts accumulated during the year Capital costs of previously accumulated pensions Actuarial losses Paid during the period Change in recognised employers' nat. ins. contribution recognised pension obligation, end of year Change in carrying amount of plan assets: Carrying amount of plan assets, beginning of year Exchange rate adjustment Investments in 2004 Estimated return on pension funds Actuarial losses Paid during the period carrying amount of plan assets, end of year total pensions and similar obligations, end of year total recognised obligation, end of year Financed through operations Financed through fund accumulation The premium for the 2005 financial year is estimated at: Estimated distribution of plan assets: Shares Bonds Property Average return on plan assets 2005 2004 6,951 12,836 19,787 578 1,066 1,644 34 34 1,119 41 67 50 136 -49 -2 30 30 960 20 53 46 83 -43 0 1,362 1,119 606 21 68 45 18 -31 727 635 669 92 1,271 103 % 18 65 17 8.2 556 12 61 31 -27 -27 606 513 543 88 1,031 61 % 14 69 17 5.9 TrygVesta Annual Report 2005 / Page 95 of 144 Accounts dKKm 2005 2004 % 4.2 5.2 4.0 3.5 3.5 6.0 14.1 3 175 187 56 421 53 934 355 18 1,360 939 792 160 -13 939 72 50 % 4.8 5.6 4.0 3.5 3.5 6.0 14.1 11 216 239 0 466 53 1,130 75 0 1,258 792 559 251 -18 792 78 - Assumptions used: Discount rate Estimated return on pension funds Salary adjustment Pension adjustment G adjustment Turnover Employers' nat. ins. contribution 20 deferred tax tax asset Land and buildings Operating equipment Debt and provisions Bonds and loans secured by mortgages tax liability Land and buildings Contingency funds Bonds and loans secured by mortgages Intellectual property rights deferred tax, end of year reconciliation of deferred tax, beginning of year Deferred tax, beginning of year Change in deferred tax taken to the income statement Change in deferred tax taken to equity non-capitalised tax loss TrygVesta A/S Nordea Vahinkovakuutus (Finland) The loss in TrygVesta A/S cannot be utilised in the Danish joint taxation scheme. The loss can be carried forward indefinitely. The Danish joint taxation rules were changed in 2005, which means that the Finnish loss can no longer be deducted in the Danish taxable income. The loss under the Finnish rules can be carried forward for ten years. The losses are not recognised as tax assets until it has been substantiated that the company can generate sufficient future taxable income to utilise the tax loss, cf. IAS 12. The total current and deferred tax relating to items recognised in equity is recognised in the balance sheet in the amount of DKK 64m. The temporary difference between the accounting and tax values of investments in subsidiaries, etc. amounts to DKK 1.3bn. The tax rate in Denmark was lowered from 30% to 28%, which reduced the value of the tax asset by DKK 5m. TrygVesta Annual Report 2005 / Page 96 of 144 dKKm 21 debt to credit institutions Bank loans Bank overdrafts 2005 2004 710 76 786 600 9 609 In 2005, a consortium of banks granted Tryg Vesta A/S a loan facility for DKK 2,000m, of which DKK 715m had been utilised at 31 December 2005. In 2005, the loan carried interest at CIBOR plus a margin, totalling approximately 2.5% p.a. The unutilised part of the loan facility is measured at amortised cost, and an amount of DKK 5m was deducted from the loan proceeds upon signing the loan agreement. The costs are amortised until the loan facility expires in July 2010. The fair value of the loan is considered to be the utilised part of the facility of DKK 715m. At 31 December 2004, Tryg Vesta A/S had three floating-rate loans totalling DKK 600m, which were repaid in 2005. Debt falling due within one year Debt falling due after more than five years 22 other debt Unsettled transactions Interest derivatives Exchange rate derivatives Other debt 23 capital adequacy, etc. Shareholders' equity according to annual report Subordinate loan capital Proposed dividend Solvency requirements to subsidiary undertakings Capitalised tax assets capital base weighted assets Solvency 24 earnings per share Basic earnings per share is calculated by dividing the profit for the year and the profit/loss from discontinued and divested business by the total average number of shares. The company has not issued options, warrants, convertible debt instruments or the like. Therefore, there is no difference between basic EPS and diluted EPS. Profit/loss for the period from continuing business Average number of shares Basic earnings per share of DKK 25 Profit/loss for the period from discontinued and divested business Average number of shares Basic earnings per share of DKK 25 dividends per share Dividends per share is calculated as the total dividend proposed by the Supervisory Board after the balance sheet date divided by the total number of shares (68,000,000). The dividend is not paid until approved by the shareholders at the Annual General Meeting of the following year. Dividend per share of DKK 25 609 0 1,306 7 0 678 1,991 6,802 700 -650 -2,459 -3 4,390 5,616 78 76 0 349 4 109 1,073 1,186 8,215 349 -1,428 -2,512 0 4,624 6,404 72 2,125 68,000 31 -28 68,000 0 21 TrygVesta Annual Report 2005 / Page 97 of 144 Accounts dKKm 25 contingent liabilities and collateral payment due by period Operating leases Other contractual obligations <1 year 103 203 306 1-3 years 196 337 533 3-5 years 193 25 218 More than 5 years 1,439 0 1,439 Total 1,931 565 2,496 The amounts include the following: Tryg Forsikring A/S and Vesta Forsikring AS have signed an operating agreement with CSC for an amount of DKK 513m for a period of 4 years. Tryg Forsikring A/S has an annual obligation to Danica Pension with respect to the lease of the head office in Ballerup. The annual rent and taxes currently amount to DKK 79m. The remaining lease period is 20 years. Other relevant matters: Tryg Forsikring A/S has signed a portfolio management contract for DKK 134m. The contract expires in 2010. Tryg Ejendomme A/S is jointly and severally liable with the partly demerged com- pany Nordea Pension Danmark, ejendomsselskab IV A/S for the liabilities existing at the time of publication of the demerger in 2003, up to a maximum of the reversed value of DKK 382m. The Danish companies in TrygVesta are jointly taxed with Tryg i Danmark smba. Until 2004, the companies were jointly and severally liable for payment of imposed corporation tax. Most of the Danish companies in TrygVesta are commonly registered for VAT and payroll tax with Tryg i Danmark smba and are jointly and severally liable for payment of all such direct and indirect taxes. Tryg i Danmark smba left the joint taxation following the listing of Tryg Vesta A/S in 2005. Companies of TrygVesta are part of some disputes the outcome of which is not estimated to affect the financial position of the Group. Management believes that the outcome of these legal proceedings will not affect the Group's financial position beyond those receivables and obligations recognised in the balance sheet at 31 December 2005. TrygVesta Annual Report 2005 / Page 98 of 144 dKKm 26 related parties Supervisory board and executive management Premium income: • Parent company (Tryg i Danmark smba) • Key management • Other related parties Claims paid: • Key management • Other related parties An amount of DKK 0.1m has been provided for claims payments. Guarantee agreements with related parties: • Account • Exercised, end of year • Premium Outstanding guarantees cover the policyholders' financial obligations pursuant to the contract. Following an individual assessment, all guarantees are issued without additional security. The company has full recourse against the individual companies. No provisions have been made for non-performing guarantees and no expenses were incurred during the financial year. Guarantee agreements are made on market terms. Leases with related parties Transactions with related parties also comprise rental income as premises are being let to a member of management on market terms. parent company tryg i danmark smba Tryg i Danmark smba controls 60% of the shares in TrygVesta A/S. Intra-group trading involved the following: • Providing and receiving services • Intra-group account • Interest, subordinated loan Administration fee, etc. is fixed on a cost-recovery basis. Intra-group accounts are offset and carry interest on market terms. The TrygVesta companies have entered into reinsurance contracts on market terms. Transactions with subsidiaries have been eliminated in the consolidated financial statements in accordance with the accounting policies. 2005 2004 0.1 0.6 2.1 0.0 0.3 850 648 1 0.1 0.7 2.4 0.3 0.4 1,150 921 2 4 44 -44 TrygVesta Annual Report 2005 / Page 99 of 144 Accounts 27 Significant changes upon transition to ifrS first-time adoption of ifrS TrygVesta adopts IFRS for the first time in the annual financial statements for the year ended 31 December 2005, which will include comparative financial statements for the year ended 31 December 2004. With regard to IFRS TrygVesta have developed accounting policies based on the standards and related interpretations that are effective on 31 December 2005. IFRS 1 also requires that those policies be applied to the opening IFRS balance sheets as of 1 January 2004 and the annual IFRS financial statements for the two years ended 31 December 2005 and 2004. ifrS 4 In March 2004 the International Accounting Standards Board (“IASB”) issued IFRS 4 – phase I “Insurance Contracts (“IFRS 4”), which is a temporary standard until phase II is completed. This standard applies to all insurance contracts that an entity issues and to reinsurance contracts that it holds. Under IFRS 4 – phase I, an insurer is temporarily exempt from some requirements of other IFRS rules, including the requirement to consider the IFRS framework in selecting accounting policies for insurance contracts. IFRS 4 does not apply to all other (non-insurance contract-related) assets and liabilities of an insurer. All non-insurance items are recognised in accordance with the applicable IFRS guidelines. Under IFRS 4 insurers may continue to use their local GAAP for their insurance contracts, subject to the following adjustments: • Prohibition of provisions for possible claims under contracts that are not in existence as of the reporting date, such as equalisation provisions for future claims • Gross presentation of insurance liabilities without offsetting them against related reinsurance assets • The requirement for a test for the adequacy of recognised insurance liabilities • The requirement for an impairment test for reinsurance assets • Prohibition to de-recognise insurance liabilities in its balance sheet until they are discharged, cancelled or expire In addition, an insurer is permitted to change its accounting policies for insurance contracts only if, as a result, that TrygVesta's financial statements present information that is more relevant and no less reliable, or more reliable and no less relevant. new danish fSa accounting rules The Danish FSA has issued new accounting rules that apply from 1 January 2005. These new Danish FSA rules attempt to convert the old Danish statutory rules to an accounting system for insurers that is more in line with the recognition and measurement regulations inher- ent in the IFRS Framework. The new rules are applicable to all insurance companies and include approximated fair value measurements for insurance contracts but do not include the recognition and measurement options available in IFRS. The new Danish FSA accounting rules regarding approximated fair value measurement are supported by changed regulations for insurance contracts, such as the requirement to discount reserves if discounting constitutes a material amount. When TrygVesta refers to Danish GAAP in the annual financial statements, TrygVesta is referring to the rules in effect at the time, and not the new Danish GAAP effective as of 1 January 2005. TrygVesta has adopted the new Danish FSA rules as local GAAP for the recognition and measurement of insurance contracts as required by IFRS 4 which had the following effects: • Eliminated equalisation provisions • Presented the insurance provisions as gross liabilities and the related reinsurers’share as assets In addition, TrygVesta has changed accounting policies to discount all provisions for claims and claims handling costs and the related reinsurers’ share of these liabilities to reflect the economic reality of the business and so provide more relevant information as permitted by IFRS 4. For all provisions except for annuity provisions in Denmark, TrygVesta also uses a yield curve rather than a fixed rate to reflect a more relevant market interest rate. consolidated financial information as of 31 december 2004 The IFRS consolidated financial information as of 31 December 2004 has been prepared in accordance with the recognition and measure- ment provisions of those standards and interpretations issued and effective, or issued and early adopted, as of 31 December 2005. The following discussion describes certain of TrygVestas income statement items and balance sheet line items under both Danish GAAP and IFRS. The following discussion will also describe the principle differences between Danish GAAP and IFRS, and provides a set of comparative IFRS data and information, including explanation of the main differences and reclassifications that arise. TrygVesta Annual Report 2005 / Page 100 of 144 impact on profit and Shareholders’ equity resulting from the ifrS implementation The implementation of IFRS has resulted in certain reclassifications as well as adjustments to amounts recognised under Danish GAAP. The table below presents the effect on profit for the year ended 31 December 2004 as a result of implementation of IFRS. In the section “TrygVesta 2004 comparative IFRS figures” TrygVesta have included a detailed discussion of the reclassifications and adjustments affecting the income statement and balance sheet. dKKm profit for the year ended 31 december – danish gaap A) Current-year effect of elimination of equalisation provisions B) Change in provision for defined benefit pension plan in Vesta C) Increase in claims handling costs D) Net effect of discounting E) Tax on IFRS changes, including contingency funds F) Other, net profit for the year ended 31 december – ifrS dKKm Shareholders’ equity 31 december – danish gaap A) Equalisation provisions B) Defined benefit pension plan in Vesta C) Claims handling costs D) Discounting E) Tax on IFRS changes, including contingency funds F) Other items, including employee benefits, etc G) Dividend Shareholders’ equity 31 december – ifrS dKKm Shareholders’ equity 1 January – ifrS Profit for the year ended 31 December 2004 in accordance with IFRS B) Actuarial gains and losses on pension obligation E) Tax on equity entries G) Dividend paid Shareholders’ equity 31 december – ifrS 2004 1,407 92 47 -52 9 -76 -6 1,421 2004 6,117 1,411 -347 -502 708 -1,043 -196 650 6,802 2004 5,509 1,421 -111 33 -50 6,802 A) Equalisation provisions represent amounts reserved to equalise fluctuations in future profits for areas which historically have been subject to substantial random fluctuations. For the majority of these provisions, their use to offset claims can only occur if the relevant losses exceed a predetermined size. In periods where such claims occur, the reserves are utilized as claims are made. Under Danish GAAP this provision was accounted for under change in the equalisation provisions. Under IFRS equalisation provisions are not permitted and are therefore adjusted to shareholders’ equity as of 1 January 2004. The amount reflected in the reconciliation of profit is the change in equalisation provisions from 1 January 2004 to 31 December 2004 under Danish GAAP. B) The measurement of TrygVestas defined benefit pension plan in Vesta under Danish GAAP was based on an actuarial calculation of the value of future benefits payable under the scheme using assumptions related to long-term economic developments. According to IFRS, the benefit plan liabilities are measured based on current discount rate assumptions relevant on the balance sheet date. According to IAS 19, TrygVesta has retrospectively from 1 January 2004 applied the new option to recognise the actuarial gains and losses in full in the period in which they occur in shareholders’ equity. Under Danish GAAP these were recognised in the income statement. C) Under Danish GAAP, claims handling costs were expensed as incurred and no provision for handling the claims related to the claims reserves were made. Under IFRS, the provision for claims include a provision to cover direct and indirect claims handling costs in connection with servicing claims outstanding at the balance sheet date. D) Under Danish GAAP, TrygVesta discounted provisions related to workers’ compensation. TrygVesta has chosen to also discount all other claims provisions as allowed under IFRS. As a result, initial changes in claims provisions, changes in discount rates or changes in duration of claims provisions could have positive or negative effects on earnings. TrygVesta Annual Report 2005 / Page 101 of 144 Accounts E) The change in tax is due to the adoption of IAS 12 “Income Taxes” (“IAS 12”) regarding the recognition of deferred tax provisions for contingency funds, the tax effect of all IFRS adjustments and the tax effect of including in shareholders’ equity actuarial gains and losses on the defined benefit pension plan. F) Under Danish GAAP, employee benefits and bonus and premium rebates to certain affinity groups are expensed as incurred. Under IFRS, these amounts are recognised as liabilities. G) Under Danish GAAP, proposed dividends were recognised as a liability. Under IFRS, dividends are not recognised as a liability until approved on the Annual Generel Meeting. Because TrygVesta under Danish GAAP measured all investment assets at fair value, no differences in 2004 profits or shareholders’ equity were recognised when implementing IFRS. trygvesta's 2004 comparative ifrS figures The following is a reconciliation of the significant differences on a line item basis in TrygVesta's consolidated financial statements between Danish GAAP and IFRS as of and for the year ended 31 December 2004. reconciliation of the transition from danish gaap to ifrS year ended 31 december 2004 dKKm Notes danish gaap 1) adjustments ifrS ifrS income statement Gross earned premiums Earned premiums, net of reinsurance Technical interest, net of reinsurance Claims incurred, net of reinsurance Change in other insurance provisions, net of reinsurance Bonus and premium rebates Total insurance operating expenses, net of reinsurance Change in the equalisation provisions technical result investment activities Income from investment assets 1 2 3 4 5 6 7 8 9 10 Unrealized gains or losses on investment assets Charges relating to investment assets Exchange rate adjustments return on investment activities before transfer to insurance activities technical interest transferred to insurance activities Other ordinary expenses profit before tax 11 Tax profit on continued business Loss on discontinued and divested business profit for the period 15,273 13,777 495 -9,645 -25 -151 -2,894 -92 1,465 1,046 235 -128 -7 1,146 -634 -26 1,951 -480 1,471 -64 1,407 -7 5 -160 -215 25 -11 499 92 235 -25 -108 - 3 -130 -4 - 101 -76 25 -11 14 15,266 13,782 335 -9,860 - -162 -2,395 0 1,700 1,021 127 -128 -4 1,016 -638 -26 2,052 -556 1,496 -75 1,421 Certain income statement activity under Danish GAAP is classified differently under IFRS. See “Presentational Differences” for a reconciliation of these income statement items. 1) Danish GAAP according to the issued financial statements of 2004 but adjusted for divested business in 2004 which in the income statement to the line “Loss on the discontinued and divested business”. Reclassification on the divested business 2004 in the table above is made for the purpose of comparability. TrygVesta Annual Report 2005 / Page 102 of 144 description of danish gaap and ifrS and reconciliation of differences between danish gaap and ifrS Notes 1 Gross earned premiums Under Danish GAAP, gross earned premiums included gross premiums written adjusted for provisions (earned premiums), reduced by bonus and premium rebates. The basis for the amount of gross premiums written recognised in any accounting period varies by the volume and type of contacts TrygVesta write. Earned premiums were recorded in accordance with the terms of the underlying policies and according to various estimates that TrygVesta were required to make. Gross earned premiums under Danish GAAP also includes self-insurance contracts covering assets of TrygVesta. Under IFRS, gross earned premiums are the same as under Danish GAAP except that: • premiums from self-insurance contracts are not recognised; • bonus and premium rebates to affinity groups are recognised as a provision and expensed based on the current years’ performance of the affinity group’s portfolio of insurance policies • changes in the provision for unexpired risk under IFRS is part of change in premium provision, whereas under Danish GAAP it was classified as “change in other insurance provisions, net of reinsurance” The total effect on gross earned premiums as a result of implementing IFRS amounts to a DKK 7m reduction, as follows: dKKm Insurance premium on self-insurance Bonus and premium rebates to affinity groups Reclassification of change in provision for unexpired risk *) -7 -11 11 -7 *) As a result of a provision for risk not yet run off in Vesta recorded as an equalisation reserve of DKK 36m, the net effect of DKK 11m is booked to premium. 2 Earned premiums, net of reinsurance Under Danish GAAP earned premiums, net of reinsurance was equal to gross premiums written less premiums paid to TrygVestas reinsurers for the reinsurance protection TrygVesta purchase plus the net change in provisions for unearned premiums. The basis for the amount of gross premiums written recognised in any accounting period varies by the volume and type of contacts that TrygVesta write. Earned premiums were recorded in accordance with the terms of the underlying policies and according to various estimates that TrygVesta were required to make. Earned premiums under Danish GAAP includes self-insurance contracts covering assets of TrygVesta and self-insurance for employee related matters. Gross premiums written during one reporting period do not necessarily represent the risks actually carried during that period. In a typical reporting period, TrygVesta earn a portion of the gross premiums written during that period together with premiums that were written during earlier periods. Likewise, some part of gross premiums written are not earned until future periods. Under Danish GAAP TrygVesta allocate premiums written but not yet earned to provision for unearned premiums, which represents a liability on balance sheet. The provision for unearned premiums comprises the proportion of gross premiums written that are estimated to be earned in a subsequent financial period, computed separately for each insurance contract using the pro rata method, and adjusted if necessary to reflect any variation in the incidence of risk during the period covered by the contact. As time passes, the unearned premium reserve in relation to a policy is gradually reduced and the corresponding amount released through the profit and loss account as premiums are earned. The change in the unearned premium reserve was disclosed on TrygVesta Danish GAAP income statement under “Change in the gross provisions for unearned premiums”. Under IFRS, earned premiums, net of reinsurance, are treated the same as under Danish GAAP, except that: • premiums from self-insurance contracts are not recognised • “changes in the provision for unexpired risk” under IFRS is part of “change in premium provision” whereas under Danish GAAP it was classified as “change in other insurance provisions, net of reinsurance” TrygVesta Annual Report 2005 / Page 103 of 144 Accounts The total effect on earned premiums as a result of implementing IFRS amounts to DKK 5m, as follows: dKKm Insurance premium on self-insurance Reclassification of change in provision for unexpired risk *) -7 11 5 *) As a result of a provision for risk not yet run off in Vesta recorded as equalisation reserve of DKK 36m, the net effect of DKK 11m is booked to premium. 3 Technical interest, net of reinsurance Under Danish GAAP, technical interest, net of reinsurance partially consisted of a calculated return on the average provisions on insurance contracts (the “Technical provisions”), partially offset by the accretion over the relevant period of discounted technical provisions for insurance contracts. Technical interest, net of reinsurance, was calculated by applying an interest rate equal to the pre-tax yield to maturity on bonds with a term to maturity of less than three years. The interest rate was determined by the Danish FSA. The amount resulting from this calculation was transferred from the aggregate return on investment activities to the technical result. Under IFRS, TrygVesta have the option to continue to use the interest rate determined by the Danish FSA or a yield curve. The yield curve provides interest rates matching the estimated cash flows of the provisions recorded. TrygVesta have elected to use an interest rate based on a yield curve. Technical interest, net of reinsurance, under IFRS is still calculated as the return on the relevant period’s average technical provisions, net of reinsurance, offset by the accretion over the period of discounted technical provisions, net of reinsurance. Under Danish GAAP, the Danish FSA allowed, but did not require, discounting of provision for claims with long duration (i.e. greater than four years). Under Danish GAAP, TrygVesta only discounted provisions related to workers’ compensation. IFRS provides an option to discount all insurance liabilities. The Danish FSA requires the discounting of all insurance liabilities if material. TrygVesta are now discounting all of provisions for claims. TrygVesta use a yield curve and select discount rates commensurate with the estimated cash flow of each of TrygVesta provisions to calculate discounted insurance liabilities. As a result of the application of a different interest rate, technical interest net of reinsurance increases by DKK 6m as a result of the implementation of IFRS. Since all technical provisions are discounted under IFRS, the effect of accretion of discounted technical provisions increases. This had an effect on technical interest, net of reinsurance of a reduction of DKK 166m. Hence, total technical interest, net of reinsurance is DKK 160m lower under IFRS. Discounting of claims provisions (Unwinding) The movement in provisions for claims related to the effect of discounting is recognised in three separate line items in the income statement. The change due to the accretion of the discount is recognised as a cost in technical interest. The movement due to change in yield curve is recognised as a cost in “unrealized gains or losses on investment assets” (value adjustments in the IFRS presentation). The third element results from the effects on results due to timing of income recognition as a result of discounting. As claims are recognised on a discounted basis in the financial statements, income is recognised earlier. This effect is reflected in “claims incurred, net of reinsurance”. Decomposition of the movement of the discounting on claims provisions within an accounting period The classification of the effects of discounting in the income statement as described above is prescribed under Danish FSA and allowed under IFRS. The purpose of the classification in the income statement of the three elements of discounting is to accom- plish offsetting of similar types of interest income and interest expense. The interest rate used to discount claims provisions is the same interest rate used to calculate technical interest. As such, the accretion of the discount is classified in technical interest to offset the interest income calculated. The interest on investment assets is premarily earned on fixed rate instruments. Therefore, as interest rates move, the marking to market of the fair value of investment assets creates gains and losses. The portion of the discount related to changes in yield curve moves with the gains and losses on investment assets. The timing effect discussed above is also related to technical interest and is therefore classified within technical result. TrygVesta Annual Report 2005 / Page 104 of 144 Effect of converting from Danish GAAP to IFRS The effect of discounting of provisions (unwinding) for insurance contracts can be disaggregated, as follows: dKKm Changes due to accretion of discounts on claim provisions Timing effect on results due to discounting Movement in yield curve recognised in investment activities 4 Claims incurred, net of reinsurance -166 283 -108 9 Under Danish GAAP, claims incurred, net of reinsurance represented claims paid during the year and adjusted for changes in provisions for unpaid claims and changes in case reserve provisions less the portion of the reinsurance claims paid that TrygVesta ceded to reinsurers. Under Danish GAAP, no provision for claims handling costs was made. Under IFRS, claims incurred, net of reinsurance are treated the same as under Danish GAAP except that claims handling costs are included in this item, and accruals for claims handling costs are also included. In addition to the reclassification of claims handling costs discussed in the preceding paragraph, claims incurred, net of reinsurance are also impacted by a change under IFRS of TrygVestas discounting of provisions for claims. As discussed above in Section 3 “Technical interest, net of reinsurance”, a difference as a result of the implementation of IFRS results from discounting of claims provisions in the form of the timing of recognition of income. As claims are recognised on a discounted basis in the financial statements, income is recognised earlier. In 2004 the total difference on claims incurred, net of reinsurance as a result of discounting amounted to DKK 283m. The total effect of implementing IFRS on the claims incurred, net of reinsurance amounts to DKK 215m. This includes the net effect of the reclassification of claims handling costs of DKK 440m to claims incurred, net of reinsurance from total insurance operating expenses, net of reinsurance (see below), as well as DKK 52m in accrued provisions, partially offset by the effect of discounting as described above, plus certain other less material changes. dKKm Discounting of claims provisions Reclassified claims handling costs Accrued provisions for claims handling costs Other 5 Change in other insurance provisions, net of reinsurance 283 -440 -52 -6 -215 Under Danish GAAP, changes in other insurance provisions, net of reinsurance represented changes in other insurance provisions for risk not yet run off, which represented the estimated amount of future expected expenses and claims in excess of provisions for unearned and future premiums in respect of potential claims within the cover period of the insurances. Under IFRS, the amounts included under “Change in other insurance provisions, net of reinsurance” reclassified under earned premiums, net of reinsurance. The effect of the IFRS implementation is a reclassification of DKK 25m from “Change in other insurance provision, net of reinsurance” to earned premiums, net of reinsurance. 6 Bonus and premium rebates Under Danish GAAP, bonus and premium rebates represented anticipated and reimbursed premiums mainly related to arrangements TrygVesta have with affinity groups where the amount reimbursed depends on the claims record, and for which the criteria for payment have been determined prior to the financial year or when the business was written. TrygVesta Annual Report 2005 / Page 105 of 144 Accounts Under IFRS, a provision has been made regarding a liability towards certain affinity groups, and changes to this liability are reflected in the bonus and premium rebates of DKK 11m. This difference is also reflected in the calculation of gross earned premiums. 7 Total insurance operating expenses, net of reinsurance Under Danish GAAP, insurance operating expenses, net of reinsurance represented acquisition costs and administrative expenses less reinsurance commissions received. Policy acquisition costs were expensed when incurred. Under Danish GAAP, direct and indirect claims handling costs are included within total insurance operating expenses, net. Under Danish GAAP, a calculated “internal rent” on owner-occupied properties was reclassified as total insurance operating expense, net of reinsurance. Under IFRS, insurance operating expenses, net of reinsurance are the same as under Danish GAAP except that direct and indirect claims handling costs are reclassified and moved to claims incurred, net of reinsurance. Under IFRS, principally as a result of the reclassification of claims handling costs, total insurance operating expenses, net of reinsurance are DKK 499m lower than under Danish GAAP, which mainly consists of a reclassification to claims regarding direct and indirect claims handling costs of DKK 440m. The total change of DKK 499m is disaggregated as follows: dKKm Derecognition of internal rent Change in provision for pension fund Reclassification of claim handling costs Other 25 47 440 -13 499 TrygVesta has applied IAS 19 retrospective from January 1, 2004 regarding the pension liability towards its Norwegian employees. IAS 19 was implemented, which permits the option of recognising actuarial gains and losses in full in equity rather than the income statement in the period in which they occur. Actuarial gains and losses may be triggered (for example, by changes in the discount rate, increases in salaries, mortality and differences between the actual return on plan assets and the expected return on plan assets). The change in accounting practice improves the result for 2004 by DKK 47m since these amounts are no longer reflected in the income statement. Under IFRS, internal rent is not recognised. Under IFRS as a result of the reversal of this reclassification, total insurance operating expenses, net of reinsurance were reduced by DKK 25m. 8 Change in the equalisation provisions Under Danish GAAP, equalisation provisions are used to equalise fluctuations in future profits for areas which historically have been subject to substantial random fluctuations. For the majority of these provisions, their use to offset claims can only occur if the relevant losses exceed a predetermined size. Examples of these claims include windstorms, natural perils, credit insurance and workers’ compensation. The size and the criteria for establishing equalisation provisions were either determined by legislation or determined by actuarial calculations. In periods where such claims occur, the provisions are utilized as claims are made. Under IFRS, equalisation provisions are not permitted. Because equalisation provisions are prohibited under IFRS, the difference recognised in the income statement for the year ended December 31, 2004 represents the write-off to shareholders’ equity of the amount recognised in the current year under Danish GAAP. 9 Income from investment assets Under Danish GAAP, income from investment assets consisted of interest, dividends, realized gains/losses relating to investment assets, together with rental income and property expenses. Under Danish GAAP, a calculated “internal rent” on owner-occupied properties reduced expenses and was reclassified to increase total insurance operating expenses, net of reinsurance. Under IFRS, income from investment assets are the same, except internal rent is not recognised. TrygVesta Annual Report 2005 / Page 106 of 144  The change in income from investment assets as a result of the implementation of IFRS represents the elimination of internal rent of DKK 25m reclassified to total insurance operating expenses, net of reinsurance under Danish GAAP. 10 Unrealized gains or losses on investment assets Under Danish GAAP, this item is primarily income related to investment assets which are fixed rate instruments. Therefore, as interest rates move, the marking to market of investment assets creates gains and losses. Under IFRS, unrealized gains and losses are calculated in the same way as under Danish GAAP, and includes the effect of discounting all claims reserves. Under IFRS TrygVesta have elected to use a yield curve which TrygVesta believe is a more precise method since it allows for greater matching of the rate used to the relevant period, except for annuity reserves for Danish workers’ compensation for which TrygVesta use a fixed rate of 1%. Unrealized gains and losses on investment assets decreased by DKK 108m due to the differences arising from discounting using a yield curve. See note 3 “Technical interest, net of reinsurance”. 11 Tax The transition from Danish GAAP to IFRS does not impact TrygVestas income taxes payable. However, due to changes in accounting policies deferred tax is impacted as follows: dKKm A) Equalisation provision including Norwegian Pool B) Contingency funds C) Claims handling costs D) Discounting of deferred tax -34 -31 17 -28 -76 A) Previously TrygVestas did not provide deferred tax for equalisation provisions under Danish GAAP. Under IFRS deferred tax has been provided for. The deferred tax expense of DKK 34m is the tax effect from the change in equalisation provisions in 2004. B) Previously TrygVesta did not provide deferred tax for contingency funds under Danish GAAP. Under IFRS deferred tax has been provided for. The deferred tax expense of DKK 31m is the tax effect from the change in contingency funds during 2004. C) Under Danish GAAP, claims handling costs were expensed when incurred. Under IFRS, estimated claims handling costs are accrued as part of the claims provision. For tax purposes these costs are expensed when incurred. Due to the change in claims handling cost accrued, deferred tax varies accordingly. Based on the 2004 change in accrued claims handling costs, deferred tax decreased by DKK 17m. D) Under Danish GAAP, deferred taxes were discounted, if material. Under IFRS, discounting of deferred taxes is not permitted. The 2004 change in discounting effect on deferred taxes under Danish GAAP amounting to DKK 28m has been reversed under IFRS. TrygVesta Annual Report 2005 / Page 107 of 144 Accounts reconciliation of the transition from danish gaap to ifrS as of december 31, 2004 dKKm Notes 12 13 14 15 16 17 18 balance sheet Intangible assets Investment assets Reinsurers’ share of technical provisions Amounts owing Other assets Prepayments and accrued income total assets liabilities Subordinate loan capital Technical provisions, net of reinsurance Provisions for other risks and charges Debt Accruals and deferred income total liabilities Shareholders’ equity total liabilities and shareholders’ equity 12 Investment assets danish gaap adjustments ifrS 112 29,473 0 2,604 923 441 33,553 700 23,467 169 2,850 250 27,436 6,117 33,553 0 1,309 3,292 -271 -59 0 4,271 0 1,745 1,203 638 0 3,586 685 4,271 ifrS 112 30,782 3,292 2,333 864 441 37,824 700 25,212 1,372 3,488 250 31,022 6,802 37,824 The largest component of investment assets is bonds. Under Danish GAAP, purchases and sales of investments were recognised on settlement date and purchases and sales not yet settled were off-balance sheet items until the settlement date. Under Danish GAAP, investments were measured at fair value as of the balance sheet date based on the average quoted market price on that date and any unrealized gains and losses recognised in unrealized gains and losses on investment assets. Under IFRS, purchases and sales of investments are recognised on the trade date and measured by the closing quoted market price on the balance sheet date. Due to the change in recognition from settlement date under Danish GAAP to trade date under IFRS TrygVesta recognised DKK 1,306m of additional investments on December 31, 2004. This was due to an increased volume of trading activity that occurs at the end of the year. The change from measuring investments by the average quoted market price to the closing quoted market price totals DKK 3m. 13 Reinsurers' share of technical provisions Under Danish GAAP, TrygVesta were allowed to net the reinsurers' share of technical provisions in technical provisions, net of reinsurance. Under IFRS, netting is not allowed. Therefore, the reinsures’ share of technical provisions of DKK 3,292m is reclassified from technical provisions, net of reinsurance to an asset on the balance sheet under “reinsurers' share of technical provisions”. 14 Amounts owing Under Danish GAAP, amounts owing included prepaid income tax. Under IFRS, prepaid income tax is included in other assets. As a result of the implementation of IFRS, the balance of prepaid tax of DKK 271m as of December 31, 2004 is reclassified from amounts owing to other assets. TrygVesta Annual Report 2005 / Page 108 of 144  15 Other assets Under Danish GAAP, other assets includes deferred tax assets. However, under Danish GAAP other assets did not include amounts relating to net prepaid income tax (prepaid income tax less income taxes payable). Under IFRS, other assets include net prepaid income tax. IFRS requires deferred tax assets and deferred tax liabilities to be pre- sented net in the balance sheet. Since the net position at December 31, 2004 is a net deferred tax liability, deferred tax assets are reclassified to provisions for other risks and charges. As a result of the implementation of IFRS, other assets have been reduced as of December 31, 2004 by DKK 59m related to the effects of the following reclassifications: dKKm Prepaid income taxes Income taxes payable Deferred taxes 16 Technical provisions, net of reinsurance 271 -79 -251 -59 The total effect of implementing IFRS on the technical provisions, net of reinsurance is an increase of DKK 1,745m, and is detailed as follows: dKKm Discounting of claims provisions Provision for claims handling costs Equalisation provisions, excluding workers’ compensation Provision for bonus and premium rebates Reclassification of the reinsurers’ share of insurance provisions Provision for self insurance -708 502 -1,411 108 3,292 -38 1,745 Under Danish GAAP technical provisions, net of reinsurance consisted of the following balances: • Provisions for unearned premiums, net of reinsurance • Provisions for claims, net of reinsurance • Provisions for workers’ compensation • Provisions for bonuses and premium rebates, net of reinsurance • Equalisation provisions • Other insurance provision, net of reinsurance Each of the provisions affected by the implementation of IFRS and the related effect are described below. Discounting of claims provisions Under Danish GAAP, discounting of provision for claims with long duration (i.e., greater than four years) was allowed but not required. Under Danish GAAP TrygVesta only discounted provisions for workers compensation. IFRS provides an option to discount all insurance liabilities. The Danish FSA requires the insurance liabilities to be discounted if the effect thereof is material. Under IFRS TrygVesta are now discounting all of their provisions for claims. A yield curve is used and select discount rates commensurate with the estimated cash flow of each of TrygVestas provisions to calculate TrygVestas discounted insurance liabilities. As a result of the transition to IFRS, the difference in technical provision, net of reinsurance due to discounting amounted to DKK 708m as of December 31, 2004. TrygVesta Annual Report 2005 / Page 109 of 144 Accounts Provision for claims handling costs Under Danish GAAP, provisions for claims, net of reinsurance represented amounts to cover claims incurred before the balance sheet date, whether reported or not, but did not include any provision for claims handling costs. Under IFRS, provisions for claims, net of reinsurance are treated the same as for Danish GAAP except that accrued claims handling costs are included in this item. Claims handling costs are discounted using the same methodology and yield curve as for claims provisions. The effect at December 31, 2004 of including discounted provisions for claims handling costs in provisions for claims, net of rein- surance as a result of the implementation of IFRS amounted to DKK 502m. Equalisation provisions Under Danish GAAP, equalisation provisions represented reserves recorded to equalise fluctuations in future profits for areas which historically have been subject to substantial random fluctuations. For the majority of these provisions, their use to offset claims can only occur if the relevant losses exceed a predetermined size. These provisions are actuarially determined. In periods where such losses occur, the provisions were utilized as claims were made. Equalisation provisions were presented net of reinsurance. The equalisation provisions comprise the following: • The Norwegian pool • Credit and guarantee provisions calculated according to rules issued by the Danish FSA • The difference between provisions for insurance contracts regarding workers' compensations under the Danish FSA made up at discount rates of respectively 2% and 2.75% • Storm and large losses TrygVesta collect premiums regarding the Norwegian Pool and pay out claims relating to natural disasters (under the definition of the Norwegian Pool). If the collected premiums exceed TrygVestas proportional share of the total claims, under Danish GAAP the difference was recorded under “Change in equalisation provisions”. The other equalisation provisions described above were also recorded under “Change in equalisation provisions”. Under IFRS, equalisation provisions are not permitted and thus have been adjusted to shareholders' equity. The provisions relating to the Norwegian Pool, credit and guarantee, and storm and large losses in the amount of DKK 1,411m have been adjusted to shareholders’ equity. Provision for bonus and premium rebates Under Danish GAAP, bonus and premium rebates represent anticipated and reimbursed premiums where the amount reimbursed depends on the claims record, and for which the criteria for payment have been determined prior to the financial year or when the business was written. Under IFRS, a provision has been made regarding a liability towards affinity groups and changes to this liability has been included in the bonus and premium rebates. This provision has been recorded at DKK 108m. Reclassification of reinsurers’ share of insurance provisions Under Danish GAAP TrygVesta were allowed to net the reinsurers' share of technical provisions in technical provisions, net of reinsurance. Under IFRS, netting is not allowed. Therefore, the reinsures’ share of technical provisions of DKK 3,292m is reclassified from technical provisions, net of reinsurance to an asset on the balance sheet under “Reinsurers' share of technical provisions”. Provision for self-insurance Under Danish GAAP, provisions for self-insurance represented TrygVesta estimated incurred liabilities for items TrygVesta self- insure. TrygVesta classified these item under technical provisions, net of reinsurance. Under IFRS, the accounting for self-insurance provisions is the same as Danish GAAP except that TrygVesta classify the liability within provisions for other risks and charges. As a result of the implementation of IFRS TrygVesta have reclassified self-insurance provisions of DKK 38m from technical provisions, net of reinsurance to provisions for other risks and charges. TrygVesta Annual Report 2005 / Page 110 of 144  17 Provisions for other risks and charges The total effect of implementing IFRS on the provisions for other risks and charges amounts to DKK 1,203m. The effect on the current year is disaggregated as follows: dKKm Deferred taxes Provision for self-insurance Provision for pension fund Provision for other benefits Deferred taxes 792 38 347 26 1,203 Under Danish GAAP, TrygVesta did not recognise deferred tax on contingency funds. Additionally, under DanishGAAP, deferred taxassets and liabilities are presented separately in the balance sheet. Under Danish GAAP de ferred taxes were discounted, if material. Under IFRS, TrygVesta recognise deferred taxes on contingency fund provisions in Norway and Denmark in our Consolidated Financial Statements. Under IFRS, deferred tax assets and liabilities are netted in the balance sheet. Also, discounting of deferred taxes is not permitted. As a result of the implementation of IFRS, TrygVesta recognised deferred taxes on contingency funds of DKK 574m. TrygVesta have also reclassified deferred tax assets of DKK 251m from other assets to provisions for other risks and changes. The implementation of IFRS effected the book basis of several items on balance sheet. Below is a summary of all changes in deferred taxes as a result of the implementation of IFRS. dKKm Reclassification of deferred tax asset Contingency funds Equalisation provisions Discounting Claims handling costs Defined benefit pension plan in Vesta Discounting of deferred tax; deferred tax on equities, real estate, etc. Other items, including employee benefits, etc. -251 574 403 205 -146 -97 154 -50 792 Provision for self-insurance Under Danish GAAP, provisions for self insurance represented estimated incurred liabilities for items that TrygVesta self-insure. TrygVesta classified this item under technical provisions, net of reinsurance. Under IFRS, the accounting for self-insurance provisions is the same as Danish GAAP except that TrygVesta classify the liability within provisions for other risks and charges. As a result of the implementation of IFRS TrygVesta have reclassified self-insurance provisions of DKK 38m from technical provisions, net of reinsurance to provisions for other risks and charges. Pension liability Under Danish GAAP, the defined benefit pension plan in Vesta was measured at an estimated market value using Norwegian assumptions relating to long-term economic developments. Under IFRS, the pension plan is treated as a defined benefit plan and the assets and liabilities are measured based on an actuarial calculation of the value in use of future benefits payable under the plan which has been made up in accordance with the economic market assumptions on the balance sheet date instead of assumptions relating to long-term economic developments. The effect of changes in assumptions under IFRS results in a DKK 347m increase in TrygVesta's pension liability. TrygVesta Annual Report 2005 / Page 111 of 144 Accounts 18 Debt The total effect of implementing IFRS on debt amounts to an increase of DKK 638m. The effect on the current year is disaggre- gated as follows: dKKm Unsettled bonds Dividend Reclassification of income taxes payable Increase in provision for holiday allowance Other 1,309 -650 -79 38 20 638 Unsettled bonds Under Danish GAAP, debt associated with the acquisition of bonds was recognised on settlement date and purchases and sales not yet settled were off-balance sheet items until the settlement date. Under Danish GAAP, investments were measured at fair value at the balance sheet date based on the average quoted market price on that date. Under IFRS, purchases and sales of bonds are recognised on the trade date and measured by the closing quoted market price on that balance sheet date. Due to the change in recognition from settlement date under Danish GAAP to trade date under IFRS, TrygVesta recognised DKK 1,309m of additional investments on December 31, 2004. This was due to increased volume of trading activity that occurs at the end of the year. Dividend for the year Under Danish GAAP, proposed dividends were recognised as a liability. Under IFRS, dividends are not recognised as a liability until approved by the Annual General Meeting. As a result of the implementation of IFRS, DKK 650m of proposed dividends have been reclassified from liabilities to shareholders’ equity at December 31, 2004. Reclassification of income taxes payable Under Danish GAAP, income taxes payable were recorded under debt. Under IFRS, income taxes payable are presented net with prepaid income taxes. As a result of the implementation of IFRS, DKK 79m of income taxes payable has been reclassified as of December 31, 2004 to other assets. Increase in provision for holiday allowance Under Danish GAAP, TrygVesta calculated the provision for holiday allowances based on those amounts for the current holiday season and an estimate for accruals for prior years. Under IFRS, provisions for holiday allowances includes a more accurate accrual of prior years’ amounts and additional amounts regarding senior employees. As a result of the implementation of IFRS, TrygVesta recognised additional provisions of DKK 38m for holiday allowances. TrygVesta Annual Report 2005 / Page 112 of 144  presentational differences As a result of the implementation of IFRS, certain accounts are recorded under different line items in the income statement. The most significant effect of these presentational dif- ferences occur within the income statement subtotals for “Return on investment activities before transfer to insurance activities” under Danish GAAP, which is referred to as “Total return on investment activities” under IFRS. The following provides a “mapping” of the presentational differences from Danish GAAP to IFRS. dKKm Notes danish gaap presentation reclassi- ifrS presentation amounts on an ifrS basis fication amounts on an ifrS basis Income from investment assets Income from investment property Interest and dividends etc. 1 2 3 Realized gains from investment assets 90 834 97 total income from investment assets 1,021 4 5 6 7 Unrealized gains or losses on investment assets 127 Charges relating to investment income Interest expenses Investment management charges total changes relating to investment income 8 Exchange rate adjustments return on investment activities -74 -54 -128 -4 -97 -127 220 4 Income from investment property Interest and dividends, etc. 90 834 924 220 Value adjustments -74 -54 -128 Interest expenses Investment manage ment charges total return on investment before transfer to insurance activities 1,016 1,016 activities 1 “Income from investment property” under Danish GAAP is included in “Income from investment assets”, whereas under IFRS it is shown separately. 2 “Interest and dividends etc.” under Danish GAAP is included in “Income from investment assets”, whereas under IFRS it is shown separately. 3 “Realized gains from investment assets” under Danish GAAP is included in “Income from investments assets”, whereas under IFRS it is included in “Value adjustments”. 4 “Unrealized gains and losses from investment assets” under Danish GAAP is shown 5 6 7 8 separately, whereas under IFRS it is included in “Value adjustments”. “Value adjustments” under IFRS; see notes 3, 4 and 8. “Interest expenses” under Danish GAAP is included in “Income from investment assets”, whereas under IFRS it is shown separately. “Investment management charges” under Danish GAAP is included in “Income from investment assets”, whereas under IFRS it is shown separately. “Exchange rate adjustments” under Danish GAAP is shown separately, whereas under IFRS it is included in “Value adjustments”. TrygVesta Annual Report 2005 / Page 113 of 144 Accounts TrygVesta Annual Report 2005 / Page 114 of 144 income Statement and balance Sheet for trygveSta a/S (parent company) income Statement dKKm Notes investment activities Income from subsidiaries Interest income, etc. 1 2 Exchange rate adjustments 2 Interest expenses Investment management charges total return on investment business 3 Other expenses profit before tax 4 Tax profit/loss on continuing business 5 Profit/loss on discontinued and divested business profit/loss for the year proposed distribution of the profit for the year: Dividend Transferred to Net revaluation reserve as per the equity method Transferred to Retained earnings 2005 2004 2,086 34 -1 -60 -3 1,480 37 -1 -62 -3 2,056 1,451 -37 -32 2,019 1,419 18 -3 2,037 1,416 -28 -75 2,009 1,341 1,428 1,409 -828 2,009 650 477 214 1,341 TrygVesta Annual Report 2005 / Page 115 of 144 Accounts balance Sheet balance dKKm Notes assets Investments in subsidiaries Investments in subsidiaries in respect of discontinued business 6 6 Loans to subsidiaries 7 Investments in associates total investments in subsidiaries and associates Bonds Cash in hand and at bank total other financial investment assets 2005 2004 8,804 121 0 14 8,939 22 8 30 7,359 105 600 14 8,078 77 1 78 total investment assets 8,969 8,156 Other receivables total receivables Current tax asset 9 Deferred tax asset total other assets Accrued interest and rent earned total prepayments and accrued income total assets liabilities and equity Shareholders' equity 8 Subordinate loan capital 10 Debt to credit institutions Debt to subsidiaries Other debt total debt 0 0 21 0 21 0 0 16 16 0 3 3 2 2 8,990 8,177 8,242 6,831 0 710 30 8 748 700 601 33 12 646 total liabilities and equity 8,990 8,177 11 12 13 capital adequacy, etc. contingent liabilities and collateral related parties TrygVesta Annual Report 2005 / Page 116 of 144 Statement of changeS in equity dKKm Share capital Share premium revaluation equity method retained earnings proposed dividends Shareholders' equity at 1 January 2004 Change in accounting policies adjusted equity at 1 January 2004 equity entries in 2004 Profit for the year Retained share premium Revaluation of owner- occupied properties Exchange rate adjustment of foreign entities Hedge of foreign currency risk in foreign entities Actuarial gains and losses on pension obligation Tax on equity entries Total comprehensive income Dividend paid total equity entries in 2004 Shareholders' equity at 31 december 2004 Shareholders' equity at 1 January 2005 equity entries in 2005 Profit/loss for the year Revaluation of owner- occupied properties Exchange rate adjustment of foreign entities Hedge of foreign currency risk in foreign entities Tax on equity entries Total comprehensive income Dividend paid total equity entries in 2005 Shareholders' equity at 31 december 2005 692 130 822 214 2,968 1,700 2,968 1,700 2,968 0 -2,968 477 68 -68 -2,968 477 3,182 -2,968 477 3,182 50 50 650 650 -50 600 total 5,360 180 5,540 1,341 0 68 -68 1,341 -50 1,291 0 0 0 0 0 477 4,004 650 6,831 477 4,004 650 6,831 1,409 -828 1,428 2,009 7 133 -119 31 1,461 -828 1,428 1,461 -828 -650 778 7 133 -119 31 2,061 -650 1,411 1,938 3,176 1,428 8,242 0 0 1,700 1,700 0 0 1,700 Vesta Forsikring AS has in its consolidated financial statements included provisions for contingency funds of NOK 2,251m under provisions for insurance contracts. In the consolidation, these provisions, due to their nature as additional provisions, are included in shareholders’ equity (retained earnings), net of deferred tax. When assessing Vesta Forsikring AS’ option to pay dividend to the parent company Tryg Forsikring this amount should be considered. Tryg Forsikring’s option to pay dividend to TrygVesta is influenced by this amount and a contingency fund provision of DKK 670m, which is included in shareholders’ equity in Tryg Forsikring A/S. Dansk Kaution has a similar contingency amounting to DKK 139m, which is also included in the company’s shareholders’ equity. TrygVesta Annual Report 2005 / Page 117 of 144 Accounts noteS dKKm 1 income from subsidiaries Tryg Forsikring A/S profit on continuing business Loss on discontinued business after tax 2 interest and dividends, etc. Interest expenses Interest income 3 other expenses Administrative expenses Remuneration of the Executive Management is paid by Tryg Forsikring A/S and Vesta Forsikring AS and is charged to TrygVesta A/S via the cost allocation. Specification of remuneration, etc. Supervisory Board Executive Management Remuneration, etc. includes pension contributions Supervisory Board Executive Management 2005 2004 2,086 2,086 -28 2,058 1,480 1,480 -75 1,405 -60 34 -26 -37 -37 -3 -12 -15 0 -1 -1 -62 37 -25 -32 -32 -3 -8 -11 0 -1 -1 Members of the Supervisory Board of TrygVesta A/S do not receive bonuses and are not participants in any severance plans. The Executive Management has a bonus scheme for up to 3 months’ salary. Other than that, there are no incentive plans for the Supervisory Board and Group Executive Management. At the Annual General Meeting, the Supervisory Board will show management's future share programme based on a share element for the Group Executive Management and key employees with a view to establishing incentives relevant to ensure competitive remuneration of the Group Executive Management and other key employees. Average number of full-time employees during the year 0 0 Administrative expenses include fee to the auditors appointed by the Annual General Meeting: Deloitte Grant Thornton Of which services other than audit Deloitte In addition, expenses have been incurred for the Group's Internal Audit Department. -0.9 -0.4 -1.3 0.0 0.0 -3.3 -0.2 -3.5 -2.7 -2.7 TrygVesta Annual Report 2005 / Page 118 of 144 dKKm 2005 2004 4 reconciliation of tax expense Tax on financial loss before profit/loss in subsidiaries and tax Tax offset in jointly taxed companies in 2004 Tax on non-taxable income and expenses effective tax rate Tax on financial loss before profit/loss Tax offset in jointly taxed companies in 2004 Tax on non-taxable income and expenses 5 profit/loss on discontinued and divested business Earned premiums, net of reinsurance Technical interest, net of reinsurance Claims incurred, net of reinsurance Insurance operating expenses, net of reinsurance Technical result Return on investment activities after technical interest Profit/loss before tax Tax 6 investments in subsidiaries cost Balance 1 January Adjustment, beginning of year Balance 31 December revaluations and impairment writedowns at net asset value Balance 1 January Revaluations during the year Dividend paid Balance 31 December 19 0 -1 18 % 28 - -2 26 -27 28 23 -45 -21 -6 -27 -1 -28 6,987 0 6,987 477 2,111 -650 1,938 18 -19 -2 -3 % 30 -31 -4 -5 925 72 -704 -367 -74 -7 -81 6 -75 6,809 178 6,987 -880 1,407 -50 477 carrying amount 31 december 8,925 7,464 name and registered office Tryg Forsikring A/S, Ballerup ownership Share- share profit/ holders' in % loss equity 100 2,058 8,925 TrygVesta Annual Report 2005 / Page 119 of 144 Accounts dKKm 2005 2004 7 investments in associates cost Balance 1 January Additions during the year Balance 31 December revaluations and impairment writedowns at net asset value: Balance 1 January Balance 31 December carrying amount 31 december Shares in associates according to the latest financial statements 14 0 14 0 0 14 0 14 14 0 0 14 name and registered office assets liabilities equity for the year for the year share in % Shareholders' revenue profit/loss ownership Nordisk Flyforsikring A/S, Denmark The company was established at the end of 2004 8 Subordinate loan capital - - 50 - - 28 At 31 December 2004, TrygVesta A/S had a subordinate loan of DKK 700m, for which the lender is Tryg i Danmark smba. The loan was repaid in 2005. 9 deferred tax tax asset Debt and provisions deferred tax, end of year reconciliation of deferred tax, beginning of year Deferred tax, beginning of year Change in deferred tax taken to the income statement non-capitalised tax loss TrygVesta A/S The loss in TrygVesta A/S can only be utilised in TrygVesta A/S. The loss can be carried forward indefinitely. The losses are not recognised as tax assets until it has been substantiated that the company can generate sufficient future taxable income to utilise the tax loss. 2005 2004 0 0 3 -3 0 72 3 3 6 -3 3 78 TrygVesta Annual Report 2005 / Page 120 of 144 dKKm 10 debt to credit institutions Bank loans 2005 2004 710 601 In 2005, a consortium of banks granted Tryg Vesta A/S a loan facility for DKK 2,000m, of which DKK 715m had been utilised at 31 December 2005. In 2005, the loan carried interest at CIBOR plus a margin, totalling approximately 2.5% p.a. The unutilised part of the loan facility is measured at amortised cost, and an amount of DKK 5m was deducted from the loan proceeds upon signing the loan agreement. The costs are amortised until the loan facility expires in July 2010. The fair value of the loan is considered to be the utilised part of the facility of DKK 715m. At 31 December 2004, Tryg Vesta A/S had three floating-rate loans totalling DKK 600m, which were repaid in 2005. 11 capital adequacy, etc. Shareholders' equity according to annual report Subordinate loan capital Proposed dividend Solvency requirements to subsidiary undertakings Deferred tax assets capital base weighted assets Solvency 8,242 349 -1,428 -2,512 0 4,651 6,431 72 6,831 700 -650 -2,459 -3 4,419 5,616 79 12 contingent liabilities and collateral The Danish companies in TrygVesta are jointly taxed with Tryg i Danmark smba. Until 2004, the companies were jointly and severally liable for payment of imposed corporation tax. From 2005, the companies are liable for the company's own share of the imposed corporation tax. Most of the Danish companies in TrygVesta are commonly registered for VAT and payroll tax with Tryg i Danmark smba and are jointly and severally liable for payment of all such direct and indirect taxes. Tryg i Danmark smba left the joint taxation following the listing of TrygVesta A/S in 2005. The company is part of some disputes the outcome of which is not estimated to affect the financial position of the company. Management believes that the outcome of these legal proceedings will not affect the company's financial position beyond those receivables and obliga- tions recognised in the balance sheet at 31 December 2005. TrygVesta Annual Report 2005 / Page 121 of 144 Accounts dKKm 13 related parties Supervisory board and executive management Premium income • Parent company (Tryg i Danmark smba) • Key management • Other related parties Claims paid • Key management • Other related parties An amount of DKK 0.1m has been provided for claims payments. Guarantee agreements with related parties • Account • Exercised, end of year • Premium Outstanding guarantees cover the policyholders' financial obligations pursuant to the contract. Following an individual assessment, all guarantees are issued without additional security. The company has full recourse against the individual companies. No provisions have been made for non-performing guarantees and no expenses were incurred during the financial year. Guarantee agreements are made on market terms. Leases with related parties Transactions with related parties also comprise rental income with premises being let to a member of management on market terms. parent company tryg i danmark smba Tryg i Danmark smba controls 60% of the shares in TrygVesta A/S. Intra-group trading involved the following: • Providing and receiving services • Intra-group account • Interest–subordinated loan Administration fee, etc. is fixed on a cost-recovery basis. Intra-group accounts are offset and carry interest on market terms. Subsidiaries and associates TrygVesta A/S owns all the shares of Tryg Forsikring A/S. Intra-group trading involved: • Buying and selling of other assets • Providing and receiving services • Intra-group account • Interest–subordinated loan Assets are transferred on market terms. Administration fee, etc. is settled on a cost-recovery basis. Intra-group accounts are offset and carry interest on market terms. TrygVesta Annual Report 2005 / Page 122 of 144 2005 2004 0.1 0.6 2.1 0.0 0.3 850 648 1 0.1 0.7 2.4 0.3 0.4 1,150 921 2 4 44 -44 37 -30 -30 32 group overview TrygVesta A/S has the following subsidiaries dKKm office country for 2005 share in % 31.12.2005 31.12.2005 registered profit/loss ownership capital equity Share Shareholders' Tryg Forsikring A/S Vesta Forsikring AS Enter Forsikring AS Slettebakksveien AS Respons Inkasso AS Thunes Vei 2 AS Dansk Kautionsforsikrings-Aktieselskab Ballerup ApS SMBK nr. 98 Chevanstell Ltd. ApS KBIL 9 nr. 2032 Tryg Ejendomme A/S TrygVesta IT A/S Ballerup London Ballerup Ballerup Ballerup Ballerup Denmark Bergen Bergen Bergen Bergen Bergen Norway Norway Norway Norway Norway Denmark Denmark England Denmark Denmark Denmark 2,058 1,067 87 0 1 4 72 0 -30 0 37 -2 100 100 100 100 100 100 100 100 100 100 100 100 1,100 807 47 7 0 49 45 0 642 0 1 2 8,925 4,333 158 28 0 52 656 0 121 0 451 49 TrygVesta Annual Report 2005 / Page 123 of 144 Accounts financial highlightS and Key ratioS by geography dKKm danish general insurance Gross earned premiums Technical result Profit on investment Other income Other expenses Profit/loss for the period before tax Key ratios Claims ratio Business ceded as a percentage of gross premiums Claims ratio, net of ceded business Expense ratio Combined ratio Operating ratio ifrS danish gaap q4 2005 q4 2004 2005 2004 2004 2003 2002 2001 2,177 2,097 8,764 8,525 8,570 8,242 7,411 6,467 224 201 12 -11 426 70.9 3.6 74.5 17.3 91.8 9 241 25 -23 252 84.8 2.0 86.8 14.9 101.7 956 567 77 -70 722 376 76 -72 790 450 76 -71 1,530 1,102 1,245 78.0 -3.9 74.1 16.6 90.7 73.6 3.5 77.1 16.3 93.4 71.6 3.5 75.1 19.0 94.1 443 393 71 -68 839 70.4 6.1 76.5 20.4 96.9 -61 -128 78 -74 -185 82.0 1.6 83.6 21.1 -49 49 92 -92 0 80.5 1.6 82.1 23.9 104.7 106.0 89.9 99.6 89.3 91.7 91.5 94.4 100.3 100.8 Number of full-time employees, at the end of the period 2,215 2,223 2,223 2,248 2,330 2,458 norwegian general insurance Gross earned premiums Technical result Profit on investment Other income Other expenses Profit/loss for the period before tax Key ratios Claims ratio Business ceded as a percentage of gross premiums Claims ratio, net of ceded business Expense ratio Combined ratio Operating ratio 1,748 1,704 208 76 35 -35 284 68.5 6.8 75.3 15.4 90.7 285 41 13 -13 326 62.9 3.8 66.7 18.4 85.1 6,810 1,138 354 49 -47 6,653 1,023 33 45 -43 1,494 1,058 64.0 5.2 69.2 16.7 85.9 63.5 6.4 69.9 17.3 87.2 6,614 7,161 722 94 45 -44 817 62.7 6.9 69.6 21.2 90.8 41 316 44 -42 359 72.9 7.8 80.7 22.4 7,111 -278 -55 49 -47 -331 75.8 9.2 85.0 22.6 5,134 202 -42 29 -29 160 76.1 3.1 79.2 22.0 103.1 107.6 101.2 88.4 83.6 83.7 85.0 87.6 98.4 101.0 94.9 Number of full-time employees, at the end of the period 1,431 1,454 1,454 1,460 1,374 1,272 finnish general insurance Gross earned premiums Technical result Profit on investment Loss for the period before tax Key ratios Claims ratio Business ceded as a percentage of gross premiums Claims ratio. net of ceded business Expense ratio Combined ratio Operating ratio 39 -11 -1 -12 82.1 2.6 84.7 46.2 28 -10 -1 -11 71.4 -3.6 67.8 67.9 140 -41 -2 -43 80.9 0.2 81.1 50.2 97 -45 -2 -47 75.3 0.2 75.5 73.0 97 -45 -2 -47 68.5 0.2 68.7 79.8 130.9 135.7 131.3 148.5 148.5 61 -48 -1 -49 77.5 1.0 78.5 102.8 181.3 21 -66 -1 -67 84.8 18.7 103.5 2 -29 0 -29 91.1 0.0 91.1 316.3 1,795.1 419.8 1,886.2 127.5 135.7 128.0 145.3 145.5 177.4 400.0 1,550.0 Number of full-time employees, at the end of the period 48 51 51 42 35 14 TrygVesta Annual Report 2005 / Page 124 of 144 organiSation TrygVesta A/S Private & Commercial Denmark Private & Commercial Norway Corporate Other Vahinkovakuutus Finnish generel insurance Swedish generel insurance Group CEO Christine Bosse Personal & Commercial (P&C) Denmark Stig Ellkier-Pedersen Personal & Commercial (P&C) Norway Erik Gjellestad Corporate Peter Falkenham Process Owners Customer Service & Sales Karsten Kristiansen Customer Service & Sales Jesper Joensen Customer Service & Sales Bente Arnesen Underwriting Adm. Kevin Carlson Underwriting Birgitte Kartman Underwriting Trond Tepstad Customer Service & Sales Truls Holm Olsen, Martin Hay Schmidt & Martin Nielsen Underwriting Kevin Carlson & Trond Thorsen Claims handling Lars Bonde Claims Lars Bonde Claims Anne Stine Mollestad Claims Alice Meulengracht Group Finance Morten Hübbe New Markets Investor Relations Ole Søeberg Group Control Peter Brondt Pedersen Group Management Secretariat Ane Jægersborg Group Accounting Fatiha Benali Group Legal Dept. Bjarne Lau Pedersen Group Risk Ole Hesselager Communications Troels Rasmussen Group Investment Torben Jørgensen Finland Flemming Steen Pedersen & Ville-Veikko Laukkanen Sweden Flemming Steen Pedersen & Peter Appelros Product Development Keld Holm Product Development Trond Tepstad Product Development Kevin Carlson & Trond Thorsen Enter Roger Slinning Dansk Kaution Mads Løgstrup Business Centre Health Care & Pension Vacant Bancassurance Flemming Steen Pedersen Marketing Torben Vejen HR Reidar Kleven Operation Martin Bøge Mikkelsen TrygVesta- Competence Centre Subsidiary /Branch TrygVesta Annual Report 2005 / Page 125 of 144 Accounts member of the SuperviSory board This overview shows the directorships held by the board member of members of TrygVesta A/S’ Supervisory Board. miKael olufSen, chairman, born 1943 Dagrofa A/S Denerco Oil A/S Denerco Petroleum A/S DSV, De Sammensluttede Vognmænd af 13.7.1976 A/S chairman of the Supervisory board of Kemp & Lauritzen A/S Tryg i Danmark smba Tryg Forsikring A/S Malaplast Co. Ltd. Bangkok member of the board of representatives of Tryg i Danmark smba The Danish Rheumatism Association JØrn wendel anderSen, vice chairman of the Supervisory board of born 1951 Trustees of the Egmont Foundation Egmont International Holding A/S chairman of the Supervisory board of Arla Foods AB Ejendomsselskabet Gothersgade 55 ApS Arla Foods Finance A/S Ejendomsselskabet Vognmagergade 11 ApS Arla Insurance Company (Guernsey) Ltd. board member of British Import Union Danmark-Amerika Fondet member of the presiding committee of Fidan A/S board member of Tryg i Danmark smba Tryg Forsikring A/S WWF in Denmark board member and ceo of member of the board of representatives of AF A/S Tryg i Danmark smba The Danish Rheumatism Association mogenS JacobSen, Arla Foods Holding A/S Arla Foods International A/S ceo of Arla Foods amba deputy chairman, born 1944 member of the board of representatives of chairman of the Supervisory board of Tryg i Danmark smba Rodskovgård ApS deputy chairman of the Supervisory board of John r. frederiKSen, Tryg i Danmark smba Tryg Forsikring A/S board member of born 1948 chairman of the Supervisory board of Hellebo Park A/S Nordea Pension Danmark, livsforsikringsselskab A/S Ejendomsselskabet Storken A/S board member and manager of Rodskov Svineproduktion ApS Ejendomsselskabet Uglen A/S Jacob Holm & Sønner A/S member of the board of representatives of Jacob Holm Industriinvest A/S Tryg i Danmark smba per SKov, deputy chairman, born 1941 chairman of the Supervisory board of Utility Development A/S Nordlux A/S Cobra Holding A/S RenHold A/S SBS Rådgivning A/S SBS Byfornyelse Smba Sjælsø Enterprise A/S Sjælsø Gruppen A/S board member of Tryg i Danmark smba Tryg Forsikring A/S deputy chairman of the Supervisory board of Danarota Technic A/S Tryg i Danmark smba Tryg Forsikring A/S Dønnerup A/S Fortunen A/S TrygVesta Annual Report 2005 / Page 126 of 144 Freja Ejendomme A/S (Statens Ejendomssalg A/S) Højgård Ejendomme A/S Oak Property Invest A/S Renholdningsselskabet af 1898 The Finance Sector Union of Norway Sogn og Fjordane Bustadbyggelag Råstof og Genanvendelse Selskabet af 1990 A/S JenS lyngbo, Renoflex-Gruppen A/S C.W. Obel Ejendomme A/S C.W. Obel Projekt A/S Ejendomsaktieselskabet Knud Højgaards Hus Jacob Holm & Sønner Holding A/S Ejendomsaktieselskabet Helleholm born 1943 board member of Tryg i Danmark smba Tryg Forsikring A/S Nordea Pension Danmark, livsforsikringsselskab A/S NMI, New Marketing International (Denmark) ApS Insight Foundation Property Trust Limited, (Guernsey) K/S Dania Trans Insight Foundation Property Limited, (Guernsey) ceo of Insight Foundation Property No. 2 Limited, (Guernsey) D.D.P. Fællesindkøbs-Forening Insight Foundation Holding Company Limited, (Guern- manager of sey) NMI, New Marketing International (Denmark) ApS SIPA (Scandinavian International Property Association) member of the board of representatives of BERCO Deutschland GmbH (Tyskland) Tryg i Danmark smba ceo of Fortunen A/S Oak Property Invest A/S manager of BERCO ApS peter wagner mollerup, employee repreSentative, born 1966 chairman of the Supervisory board of The Association of Danish Certificated Insurers member of the board of representatives of board member of Tryg i Danmark smba chairman of Tryg Forsikring A/S member of Ejendomsforeningen Danmark The Executive Committee of the Danish member of Financial Services Union The Advisory Board of Sparinvest Property Fund K/S manager of The Advisory Board of Ejendomsselskabet Norden 1 K/S W&P ApS JØrn heSSelholt, born 1944 birthe peterSen, chairman of the Supervisory board of employee repreSentative, born 1949 Hesselholt Fisk Eksport A/S board member of Tryg i Danmark smba Tryg Forsikring A/S ceo of Hesselholt Ejendommen ApS E. & J.H., Skagen ApS board member of Tryg Forsikring A/S member of The Executive Committee of the Organisation of Danish Insurance Employees nielS eriK SchultZ-peterSen, member of the board of representatives of born 1941 Tryg i Danmark smba hÅKon J. huSeKlepp, board member of Tryg i Danmark smba Tryg Forsikring A/S employee repreSentative, born 1955 member of the board of representatives of board member of Tryg Forsikring A/S Vesta Forsikring AS The Finance Sector Union of Vesta Tryg i Danmark smba TrygVesta Annual Report 2005 / Page 127 of 144 Accounts memberS of the executive management The Group Executive Management of TrygVesta com- member of the board of representatives of prises Ms Christine Bosse, CEO of Tryg and Group CEO Nordea Liv A/S of the TrygVesta Group, Mr Morten Hübbe, Group CFO, Mr Erik Gjellestad, CEO of Vesta, Mr Stig Ellkier-Pedersen Stig ellKier-pederSen, and Mr Peter Falkenham. chriStine boSSe, group ceo, born 1960 ceo of TrygVesta A/S Tryg Forsikring A/S member of the group executive management, born 1947 member of the executive management of Tryg Forsikring A/S board member of SOS International A/S Forsikringsakademiet A/S chairman of the Supervisory board of Fonden Forsikringsakademiet af 26/2 2003 Vesta Forsikring AS ApS KBIL 9 NR. 2032 Tryg Ejendomme A/S TrygVesta IT A/S board member of TDC A/S Grundfos Management A/S Poul Due Jensen’s Fond Forsikring og Pension member of The Danish Welfare Commission morten hÜbbe, group cfo, born 1972 member of the executive management of TrygVesta A/S Tryg Forsikring A/S FA, Finanssektorens Arbejdsgiverforening peter falKenham, member of the group executive management, born 1958 member of the executive management of Tryg Forsikring A/S chairman of the Supervisory board of Dansk Kautionsforsikrings-Aktieselskab board member of Tryg Ejendomme A/S ApS KBIL 9 NR. 2032 Nordisk Flyforsikring A/S Vesta Forsikring AS Solar Holding A/S Aktieselskabet Nordisk Solar Compagni Glunz & Jensen A/S deputy chairman of the Supervisory board of Danmarks Skibskredit A/S TrygVesta IT A/S board member of Dansk Kautionsforsikrings-Aktieselskab Tryg Ejendomme A/S Vesta Forsikring AS eriK gJelleStad, member of the group executive management, born 1953 ceo of Vesta Forsikring AS member of the executive management of TrygVesta A/S Tryg Forsikring A/S board member of Høyteknologisenteret AS Teknoholmen AS Finansnæringens Hovedorganisasjon TrygVesta Annual Report 2005 / Page 128 of 144 gloSSary of technical termS The financial highlights and key ratios of TrygVesta combined ratio have been prepared in accordance with the execu- is calculated as the sum of the gross claims ratio, the tive order issued by the Danish Financial Supervisory gross expense ratio and the result of business ceded as Authority on the presentation of financial reports by a percentage of gross earned premiums. insurance companies and profession-specific pen- sion funds and also comply with “Recommendations return on equity & Financial Ratios 2005” issued by the Danish Society is calculated as the profit for the year as a percentage of Financial Analysts except for per share data, which of the average shareholders’ equity. are based on 68,000,000 shares as if such number of shares was outstanding during the periods presented. The 68,000,000 shares reflect the number of shares after giving effect to the four-to-one share split ap- Profit for the year x 100 Average shareholders’ equity proved by the shareholders at the extraordinary gen- net asset value per share eral meeting held on 21 September 2005. The section is calculated as year-end shareholders’ equity divided ‘Accounting policies’ describes the income statement by the average number of shares. and balance sheet items in more detail. gross earned premiums is calculated as gross premiums written adjusted for Year-end equity Average number of shares change in gross provisions for unearned premiums, less dividends per share bonuses and premium rebates. is calculated as the total dividend proposed divided by gross claims ratio is calculated as the ratio of gross claims incurred to gross earned premiums. Gross claims incurred x 100 Gross earned premiums business ceded as a percentage of gross premiums is calculated as the ratio of the result of business ceded to gross earned premiums. Result of business ceded x 100 Gross earned premiums gross expense ratio the average number of shares. Proposed dividend Average number of shares price/net asset value is calculated as the quoted price of the share divided by the net asset value per share. Quoted price Net asset value per share danish gaap Danish GAAP means that the annual report has been prepared in accordance with the Danish Financial Serv- ices Act and the executive order issued by the Danish Financial Supervisory Authority on the presentation of is calculated as the ratio of gross insurance operating financial reports by insurance companies and profession- expenses to gross earned premiums. specific pension funds. Gross insurance operating expenses x 100 Gross earned premiums “The English text in this document is a translation of the Danish original. In the event of any inconsistencies the Danish version shall apply”. TrygVesta Annual Report 2005 / Page 129 of 144 caSeS 08.01.05 / the Storm in January cauSed Several damageS the Storm in January in denmarK 08.01.05 With just over one week into 2005, the forces of nature struck and Denmark was hit by a violent storm. Tryg’s claims centres received reports that roofs had been completely or partially blown off and trees had fallen onto houses. 08.01.05 Tens of thousands of unfortunate and worried customers called in to report claims. Tryg’s claims centres were prepared and had called in extra staff. 09.01.05 3,200 claims reported. Claims assessors already on site deemed that additional assistance was required. Claims handlers, customer advisers and sales agents stepped in to assist. 09.01.05 The first claims assessors arrived from Norway to assist in the hardest hit areas. 10.01.05 Tryg receives 110,000 calls. In December 2004, Tryg received a total of 120,000 calls. 31.01.05 Some three weeks after the storm, Tryg had received 44,924 claims involving a total cost of DKK 557m. 31.03.05 Tryg had now received 49,806 claims. 47% of them had been settled, the total cost being DKK 658.4m. 30.05.05 51,326 claims had been reported, and 62% of them had been settled. Costs now totalled DKK 708.6m. 30.09.05 The number of claims had reached 52,123, of which 75% had been settled. The total cost exceeded DKK 754.6m. 31.12.05 52,343 claims reported, of which 80% had been settled. The remaining 20% had not been settled mainly due to the heavy workload among builders or because they involved major damage that takes time to repair. Estimated total costs running at DKK 830m. TrygVesta Annual Report 2005 / Page 134 of 144 Claims assessor Tor Carlstedt from TrygVesta in Norway inspects the damage after the storm at a stud farm in Mid-Jutland. be prepared You cannot control the forces of nature. But you can be prepared. Tryg prepared by listening to the weather forecast. Extra staff had been called in already before the storm hit – and was badly needed. 30,000 claims were recorded within the first five days. Staff from many departments stepped in, using their weekends and days off to help our claims handlers. Tryg used the experience from the hurricane in 1999 to make contingency plans for the 2005 storm. help from norway Norwegian claims assessors were called in to assist their Danish colleagues. This meant quick help to many customers, and most claims were settled within a short period of time. In most cases, claims assessors were able to give the go-ahead to repair the damaged buildings on site. Setting up protection and minimiSing damage A total of 52,343 claims involving an aggregate expected cost of DKK 830m were reported, leaving many people without a roof over their heads or with a business operating on a reduced scale. Tryg therefore gives good advice on how to minimise damage and subsequently provides consulting on how to prevent any future storm claims. TrygVesta Annual Report 2005 / Page 135 of 144 14.09.05 / heavy rain cauSed flooding and mudSlide in bergen mudSlide in bergen in norway 14.09.05 Heavy rains in the western part of Norway resulted in new record precipitation of 159 millimetres in just 24 hours, triggering flooding and a mudslide that ravaged four houses. A shopping centre was also flooded. 14.09.05 Rescue personnel were on site within a few minutes. In spite of their efforts, three people were killed and five injured and taken to hospital. 50 persons had to be evacuated from their homes. 14.09.05 Early in the morning, Vesta held the first meeting with the affected families. Vesta’s rep- resentative gave customers the necessary information and provided practical assistance. Vesta received 100 claims reports during the day. 15.09.05 Claims assessors began their work. Geological investigations revealed a risk of further mudslides. 16.09.05 The mudslide was still blocking access to many houses. Five houses had been destroyed, and another 12 were in peril. 22.09.05 The possibility of tearing down houses in peril was considered. october 05 A decision was made to demolish 11 severely damaged and threatened houses in the area. Five of the families involved were Vesta customers, and agreements were made with respect to compensation. People living in another three houses above the affected area decided to move due to the risk of new mudslides. Vesta had insured two of the houses and compensated the occupants for their losses. 31.12.05 A total of 222 claims were reported to Vesta. 45% had been settled. Total costs are ex- pected to exceed NOK 40m when all claims have been finally settled. TrygVesta Annual Report 2005 / Page 138 of 144 159 millimeters of rain in only 24 hours affected the entire area. quicK reSponSeS Claims handlers and assessors were informed of special aspects of the event early in the first day. They could pass on the information to customers fast, including what customers could do them- selves to contain the loss, various insurance agreements, when claims assessors could inspect the damage, and how soon their claim could be finally made up. extenSive inveStigationS The geological investigations concluded that a number of buildings in the most severely affected area would either have to be demolished or undergo extensive and costly protective works. The local authority decided to demolish the houses. overview In a situation such as this where many people had lost their homes, it is vital that both claims as- sessors and claims handlers get a quick overview of the extent of the damage in order to handle claims fast and to give customers precise answers of what to expect, and how long it will take before their claim has been finally made up. We use the knowledge gathered to enhance our con- tingency plans for any future similar events. TrygVesta Annual Report 2005 / Page 139 of 144 14.11.05 / fire ravaged 69 flatS on the iSland of amager large fire on amager in denmarK 14.11.05 Late in the evening, 69 flats in a five-floor residential property on Amager were de- stroyed by a violent fire. The fire broke out in a flat on the fifth floor. Hardly anything could be saved, and the fire made 200 people homeless. 15.11.05 Claims assessors working with settlement of contents claims met with colleagues from our Corporate large claims settlement department at the scene of the fire early in the morning to make an initial assessment and interview the residents affected by the fire. Damage to the building estimated to total DKK 50m. The actual cost depends on the extent to which it would be possible to save floor partitions, wooden floors and walls on the fifth floor and elsewhere in the building. 16.11.05 Meeting with the people from the affected property at the local school. The meeting was attended by 125 people. Tryg’s claims handlers were present and answered many ques- tions, mainly on immediate temporary rehousing for exampel in hotels. 23.11.05 The Copenhagen Police had not yet completed their technical investigations on the cause of the fire. Work to clear the site continued. 29.11.05 Tryg arranged “permanent” rehousing for all residents of the building. Scaffolding had been put up, and temporary covers were mounted on the building. Plans for dehumidifi- cation were prepared, and all flats were emptied. 08.12.05 The police reported that the cause of the fire was unknown. The Danish Institute of Fire Technology ruled out electrical installations as the cause. Meetings with demolition firm, bricklayers and engineers. Demolition started. 30.12.05 The demolition works progressed as planned, and dehumidification was set up. All resi- dents rehoused in flats in Copenhagen. The work to restore the property is expected to take about 12 months. TrygVesta Annual Report 2005 / Page 142 of 144 Employees from Tryg were on site already during the fire-fightingoperations. pSychological criSiS therapy From one moment to the next, 200 became homeless and were left without their clothes or other belongings. The uncertainty was the worst part, and everybody was deeply affected by the tragic event. Tryg therefore offered psychological crisis therapy. Many of the residents accepted the of- fer to deal with their fears, feelings and thoughts. meeting with the reSidentS In a situation such as this, people feel lost and don’t really know what to do. It is therefore impor- tant for Tryg staff to be on site, already during fire fighting. They meet with the residents, who get a chance to vent frustration and get an answer to many of their questions. Tryg staff also at- tended a meeting with the residents to inform them of their possibility for getting compensation. rehouSing Not all people living in the property were Tryg customers. Several of them were not insured at all. However, rehousing was part of the property’s insurance, and all residents were rehoused within a few days. In addition, our claims handlers maintained ongoing contact with the customers. Even though all residents had been rehoused, it was important for them to follow the process continu- ously and to know when they could return to their real homes. TrygVesta Annual Report 2005 / Page 143 of 144 

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