Tryg
Annual Report 2012

Plain-text annual report

Annual report 2012 Contents 1 Income overview 16 Tryg’s results 2 Introduction by the Chairman 20 Private 3 Introduction by the Group CEO 24 Commercial 4 Highlights of the year 27 Corporate 29 Sweden 46 Corporate governance 54 Supervisory Board 57 Group Executive Management 58 Corporate Social Responsibility 8 Strategy and Key Performance Indicators 32 Investment activities 65 Financial statements 10 Customers 12 Insurance market 35 Financial targets and outlook 38 Capital and risk management 151 Group chart 41 Tryg share and dividend policy 152 Products 148 Glossary Tryg is the second-largest insurance company in the Nordic region. We are the largest player in Denmark and the third-largest in Norway. In Sweden, we are the fifth-largest insurance company. We offer a broad range of insurance products to both private individuals and businesses. Our 4,000 employees provide peace of mind for almost 3 million customers. 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Editors Investor Relations | Publication 7 February 2013 | Design e-types | Layout amo design | Print Centertryk A/S | Paper Munken Polar Income overview DKKm Q4 2011 Q4 2012 2011 2012 Gross premium income Technical result Investment return after insurance technical interest Profit/loss before tax Profit/loss on continuing business Profit/loss Run-off gains/losses, net of reinsurance Key figures Total equity Return on equity after tax (%) Number of shares, year-end (1,000) Earnings per share of 25 DKK Net asset value per share (DKK) Dividend per share (DKK) Price/Earnings Premium growth in local currencies Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio Combined ratio exclusive of run-off Run-off, net of reinsurance (%) Large claims, net of reinsurance (%) Weather claims, net of reinsurance (%) Combined ratio by business area Private Commercial Corporate Sweden a) Proposed dividend. 4,950 310 144 467 338 344 331 -0.5 78.5 -0.9 77.6 16.9 94.5 101.2 -6.7 6.2 4.5 92.6 85.7 98.5 113.5 5,076 648 5 638 394 404 237 -0.5 70.2 0.9 71.1 16.3 87.4 92.1 -4.7 4.3 2.2 86.8 82.6 90.7 87.5 19,948 1,572 61 1,603 1,148 1,140 944 9,007 13.1 60,373 18.9 149.2 6.52 16.8 3.6 79.1 -2.5 76.6 16.6 93.2 97.9 -4.7 2.7 3.6 92.7 92.1 91.2 102.9 20,314 2,492 585 3,017 2,180 2,208 1,015 10,979 22.1 60,695 36.5 180.9 26.0a) 11.8 0.1 72.2 -0.4 71.8 16.4 88.2 93.2 -5.0 2.3 1.8 87.7 83.7 87.7 95.3 The results of Tryg’s Finnish branch are included under discontinuing business as the business is no longer part of the continuing business. The comparative figures have been restated accordingly. The profit/loss on discontinued and divested business appears from the financial statements. Income overview | Annual report 2012 | Tryg A/S | 1 Chairman of the Supervisory Board: A satisfactory year approximately DKK 800m in the form of taxes and other duties, while much of the dividend is distributed via TryghedsGruppen, Tryg’s principal shareholder, for charitable purposes and activities aimed at creating peace of mind. Optimisation of the capital structure is an important focus area, which is why it has been decided to arrange a new subordinate loan of DKK 800m, to repay the existing loan of EUR 65m and to initiate the extra- ordinary buyback of treasury shares totalling DKK 800m. The purpose is a capital reduction, and a corresponding reduction in equity. 2012 was a satisfactory year with good results. Important strategic In 2012, the Supervisory Board focused, in particular, on risks, and Tryg initiatives were implemented in the course of the year, including established a process which ensures that all significant risks are reported a new dividend policy, renewal of the partnership agreement with and factored in when determining the Individual Solvency Requirement. Nordea and the divestment of the Finnish business activities. Profit for the year Divestment of Finnish activities and new agreement with Nordea In early 2012, Tryg announced that the Group’s Finnish business was undergoing a strategic audit, as the business had not attained the size At the beginning of 2012, the Supervisory Board and the Executive and business volume required to operate profitably after 10 years on Management set a return on equity target of 20%. With Morten Hübbe the market. In November 2012, Tryg sold its Finnish business to If. at the helm, we made a significant change of direction towards a stronger focus on profitability, increased price differentiation and a clear division At the same time, Tryg’s strategic partnership with Nordea in Denmark of responsibility for results. The Supervisory Board is pleased to note and Norway was strengthened following the renewal of its agreement that in 2012 Tryg achieved a return on equity of 22.1% and satisfactory with Nordea to better accommodate Tryg’s focus on profitability. In growth in profit, borne by a strong profit for the insurance business and Sweden and Finland, the agreement has been terminated by mutual an unusually high investment return. The good results were created agreement. As regards pensions, Tryg will continue to sell Nordea’s concurrently with the satisfactory implementation of a number of pension products in Denmark and Norway. strategic measures. Further improvements in results are needed, but the activities launched are beginning to bear fruit. New Chairman Dividend and capital After 16 years on the Supervisory Board and seven years as Chairman of Tryg, it is with sadness but also considerable pride that I will be handing In 2012, a focus area for the Supervisory Board was creating a basis for over to my successor in April, in the definite knowledge that a stable stable results and stable dividends for shareholders, while at the same foundation has been created for the future Tryg. My years as Chairman time maintaining a solid capital base which is deemed key to customer have been marked by many exciting challenges, the listing of Tryg in confidence. According to the new dividend policy, adopted by the 2005 as one of the greatest. Moreover, the change of direction achieved Super visory Board and announced in December 2012, the aim is to in recent years has been tremendously positive for Tryg’s customers, distribute 60-90% of the profit after tax, while at the same time aspiring employees and shareholders. The many new initiatives have been neces- for a steady increase in dividend in nominal terms. It is important that sary and ensure that Tryg can maintain its strong market position. I would the new dividend policy is competitive and on a par with the policies like to express my sincere thanks to Tryg’s shareholders, management of Tryg’s competitors in the Nordic region. For 2012, the Supervisory and employees and wish you all a promising future. Board proposes a dividend of DKK 26 per share or the distribution of total dividend of DKK 1,594m, corresponding to 72% of the profit for the year. In 2012, there was a lot of focus on the tax payments of Danish Mikael Olufsen companies and their corporate social responsibility. Tryg contributes Chairman 2 | Tryg A/S | Annual report 2012 | Introduction by the Chairman Group CEO: Tryg’s success depends on people claims, we want to intensify our claims prevention efforts and improve the procurement of claims services. In 2011, Commercial was established as a separate business area with a view to directing particular focus on profitability. Profitability is improved through risk-based pricing, optimised sales channels and improved processes. In Sweden, we are continuing our work to strike a better balance between growth and profitability by optimising sales and streamlining business processes. Our success depends on people Despite the enduringly uncertain macroeconomic situation in Europe, Based on the commitment and dedicated efforts of our employees, the considerable changes intro duced internally in Tryg contributed to Tryg creates good results. Consequently, we must focus on creating the return of markedly improved results for 2012 with a profit before the best possible conditions for our employees to develop their tax of DKK 3,017m. Strategy and results competences and potential and for ensuring a high level of employee satisfaction. I am proud that – despite the many changes which have been introduced in recent times – Tryg still ranks above average in the employee satisfaction survey conducted by the financial sector. Creating peace of mind and value must be at the core of everything In 2012, we combined our staff functions Communication, HR, we do, and Tryg aims to do just that. This means that we must be the Marketing and Legal to create a new area – People & Reputation – best in the industry when it comes to insurance, people and earnings. which is represented on the Group Executive Management. The new All three elements are fundamental to creating peace of mind and value area will ensure a strong focus on employee activities by the Group for our customers, employees and shareholders. In 2012, we further Executive Management and strengthen the services provided by the specified our financial targets, which must, among other things, be staff functions, ensuring that Tryg can be best at insurance, people achieved through increased price differentiation, increased segmen- and earnings. tation, claims prevention and improved procurement of claims services. The phase which Tryg is now entering will focus on improvements In 2012, CSR activities continued to focus on reducing the risk of through hard internal work. climate-related claims and reducing the company’s CO2 emissions. As a large company, we are aware of our corporate social responsibilities, The results for 2012 very clearly show that Tryg is on the right track. and CSR plays a natural role in our daily activities. The profit before tax was up at DKK 3,017m in 2012 from DKK 1,603m in 2011, while the combined ratio totalled 88.2 against 93.2 in 2011. The progress realised in 2012 can largely be ascribed to the initiatives The improved results were strongly aided by a small number of weather introduced in recent years. The result is a stronger Tryg resting on solid claims and an unusually high investment return. Also, we achieved foundations from which we can generate further growth, and create the targets for 2012 set out in our cost-cutting programme, which peace of mind and value for customers, employees and shareholders must reduce costs and claims costs by DKK 1bn in the period leading in the coming years. up to 2015. Ambitious financial targets In 2012, Tryg specified its financial targets with a combined ratio of 90 or less from Q3 2013 and an expense ratio of under 15 in 2015, while the target of a 20% return on equity was maintained. The targets must be achieved by strengthening our competitiveness Morten Hübbe and striking a better balance between price and risk. With regard to Group CEO Introduction by the Group CEO | Annual report 2012 | Tryg A/S | 3 Highlights of the year Tryg closed NASDAQ stock exchange The Tryg share did well on the Danish stock exchange in 2011, and in February 2012, Group CEO Morten Hübbe was invited to close trading at the NASDAQ stock exchange in New York. Prestigious workplace Tryg was the highest-ranked financial business on the list of the most pres- tigious Danish workplaces in a YouGov survey conducted for the newspaper Ugebrevet A4. Improved Customer Service results In Norway, Tryg improved results markedly in 2012 compared with last year’s customer service survey and still ranks as one of the best companies. January February March April May June July August September October November December Roadside assistance in Commercial and Corporate From mid-April, Commercial and Cor- porate customers were offered peace of mind for drivers of vans up to 3,500 kg on the roads. Commercial and Corporate customers using Tryg Roadside Assis- tance will, among other things, be given assistance on the spot, assistance in case of a breakdown and free recovery. Like Private customers, these customers may now also choose Extended Tryg Roadside Assistance, which includes a number of additional services such as wheel change. Strongest insurance brand in Denmark Tryg is the strongest insurance brand in Denmark according to the 2012 brand index for the financial sector prepared for FinansWatch. The survey looks into brand perception based on the following parameters: quality, impression, value for money, willingness to recommend the brand to others, reputation and customer satisfaction. Tryg was also the second- strongest financial brand, surpassed only by ATP. Tryg insured Danish Olympic delegation Tryg insured the Danish delegation at the London Olympics. About 300 people, including athletes, coaches, TEAM Danmark employees and invited guests, were covered by Tryg’s travel insurance. S&P confirms ‘A-’ rating Standard & Poor’s confirmed Tryg’s and Tryg Garanti’s ‘A-’ rating in their annual assessment of both companies. 4 | Tryg A/S | Annual report 2012 | Highlights of the year Capital Markets Day in London and specified targets On Tryg’s Capital Markets Day in London, which was attended by international investors, analysts and financial journalists, the management presented specified financial targets, with a combined ratio of 90 or below from Q3 2013 and an expense ratio below 15 in 2015 by cutting expenses and reducing claims costs by a total of DKK 1bn. Changes in Group Executive Management Kjerstin Fyllingen left her position as Group Executive Vice President for Commercial and as Country Manager Norway. Rikke Larsen was appointed Group Executive Vice President for People & Reputation, which covers, among other things, HR, legal and a number of other staff areas. Lifebuoy’s 60th anniversary The lifebuoy is a symbol of peace of mind in the Nordic countries, and in Norway 33,000 life- buoys are dispersed along the coastline. Its 60th anniversary was celebrated with events all over Norway, where lifebuoys were handed out to local communities, organisations and private individuals. Renewed agreement with Nordea Tryg’s strategic partnership with Nordea was strengthened with the renewal of our agreement for another five-year term for Denmark and Norway. The partner- ship agreement was amended to better accommodate Tryg’s profitability focus. As regards pensions, Tryg will continue to sell Nordea pension products in Denmark and Norway. There was consensus that the agreement would not be renewed in Sweden. January February March April May June July August September October November December Finnish business sold In 2012, the Group’s Finnish business was subjected to a strategic audit, as the business had not attained the expected size and business volume required to operate profitably after 10 years on the market. In November, Tryg sold the Finnish business to If for EUR 15m. New contents insurance A new contents insurance product, offering a tariff that better reflects the risk, was introduced in Denmark. The new contents insurance product has no maximum sum insured, since it is Tryg’s responsibility to ensure that the sum insured is correct. Thus, the customers are no longer requested to state the total value of their belongings. New dividend policy Tryg changed its dividend policy with the distribution of the profit for the year 2012. In future, the annual dividend will consist of a 60-90% cash payment of the profit after tax. Highlights of the year | Annual report 2012 | Tryg A/S | 5 Peace of mind after accidents In the 2012 skiing season, Tryg dispatched six air ambulances to pick up injured skiers. Every time we fill an air ambulance instead of sending injured skiers home by scheduled flights, we provide peace of mind and an enhanced sense of security for our customers. At the same time, we save money and improve our financial performance, thus serving the interests of our customers and our business. Carsten Kristoffersen was injured in a skiing accident in Canazei, Italy. He first contacted Tryg on Monday, was informed which plane would take him home on Tuesday, and was flown back to Denmark on Thursday. ‘I don’t think it could have been done any quicker,’ Carsten says, ‘but I wish I had known how my insurance policy worked before I went on holiday. It would have saved me a lot of worry and hassle if I had looked into how the social insurance card covers and where cover is provided under my own insurance.’ Strategy and Key Performance Indicators Creating peace of mind and value must be at the core of everything Commercial back on track we do, and Tryg aims to do just that. This means that we must be the Commercial was set up as an independent business area in Tryg in best in the industry when it comes to insurance, people and earnings. 2011, increasing focus on commercial customers as well as internal All three elements are fundamental to creating peace of mind and process optimisation. The purpose was to considerably improve the value for our customers, employees and shareholders. profitability of Commercial activities via targeted initiatives. Commer- It’s all about creating peace of mind We create peace of mind and value for customers, employees and shareholders. cial improved its profitability significantly in 2012. Focus areas in 2012 and in the years to come will be improved risk-based pricing, increased segmentation, cost cuts, optimisation of distribution channels and automated processes. Solid foundation in Sweden In Sweden, Tryg is focusing on striking a better balance between In order to provide peace of mind and create value for customers, growth and profitability. In order to achieve this, the coming years employees and shareholders, Tryg must be a financially well-run will see the implementation of three strategic phases: Establishing business. In 2012, a set of clearly defined financial targets were our position, producing results and creating profitable growth. Tryg announced to the market. The financial targets include a return on focuses on the optimisation of sales and claims, improved risk-based equity of 20% after tax, a combined ratio of 90 or less, to be achieved pricing and increasing business process efficiency. from Q3 2013, and an expense ratio of under 15 in 2015. To ensure continuous improvements in earnings, and to create the foundation Competitive level of expenses and claims costs for a strengthened market position and improved competitiveness, In the past five years, Tryg has had a stable expense ratio during a Tryg has defined a number of focus areas: period of high premium income growth. During the same period, • Increased price differentiation and ‘time to market’. In response, Tryg has established an ambitious target of reducing several of Tryg’s competitors have improved their expense ratios. • Commercial back on track. • Solid foundation in Sweden. expenses and claims costs in the period leading up to 2015. • Competitive level of expenses and claims costs. Simplification of products and systems • Simplification of products and systems. Tryg continuously works to simplify its products. Companies acquired by Tryg during the past decades are now an integrated part of the company, Increased price differentiation and ‘time to market’ and some products originating from these acquisitions constitute part Profitable insurance products depend on the right balance being struck of Tryg’s portfolio and are different from the products that Tryg currently between price and risk. Tryg’s tariffs and segmentation models are sells to its customers. As part of the simplification process, measures continuously being improved and updated. In 2012, Tryg focused in have been launched to reduce the number of products and systems. particular on risks and on our ability to respond quickly to changes in risk scenarios. This focus will be maintained in the coming years. This Key Performance Indicators (KPIs) resulted in the launch in 2012 of a new contents insurance product Tryg has determined a number of KPIs which are used to measure with several additional tariff criteria, thus offering prices which more and follow up on the objectives and targets laid down in the company accurately reflect the risks involved. In terms of price differentiation, strategy. Tryg has defined a number of ambitious financial targets to the aim is to match or exceed the level of our competitors by 2015 for be met by 2015, but to achieve this, KPIs have also been determined most of our products. The correlation between price and risk is also for customers and employees, as there is a clear link between cus- impacted by claims prevention. Claims prevention serves the dual tomer and employee satisfaction and the financial results. purpose of shielding customers from the inconvenience caused by damage or injury and at the same time reducing Tryg’s claims costs Financial KPIs by preventing damage or injury from happening as well as minimising Tryg’s targets include a 20% return on equity and a similar target the effects of such events. for the insurance business of a combined ratio of 90 or less, to be 8 | Tryg A/S | Annual report 2012 | Strategy and Key Performance Indicators It is our responsibility as a company to ensure that our employees possess or develop competences which make them attractive in the labour market in times of mounting job insecurity. In return, our employees must be ready to develop their competences in step with company needs. achieved from Q3 2013. A necessary precondition for achieving this provider. Tryg therefore wants to be better than its competitors degree of profitability is a strong focus on the profitability of opera- when it comes to customer satisfaction. tions. Cost-efficiency is crucial to the company’s long-term com- petitiveness, and Tryg wants to achieve an expense ratio below 15 in Focus must be on customer experience, and customers must be 2015 and a DKK 1bn reduction in expenses and claims costs in 2015. guaranteed a correct premium based on risk factors. Continued This entails cost cuts of DKK 400m across business areas and staff focus must be on claims handling, claims prevention and high functions. Tryg has launched a programme aimed at reducing claims product and service standards. Tryg meets customers on their terms costs by DKK 600m, primarily through the improved procurement by increasingly communicating digitally and by supplying services of claims services and improved processes. The financial KPIs, which are available to customers wherever they are. The KPIs, which return on equity, combined ratio and expense ratio are described are used to assess how satisfied customers are with Tryg, include under results on page 16. customer satisfaction and customer retention. Customer satisfaction and peace of mind Competent employees Tryg must provide peace of mind for customers from day one and in Competent and highly committed employees are a precondition for such a way that they continue to prefer Tryg as their peace-of-mind achieving Tryg’s objectives. Tryg wants to be among the companies Customer retention Index 120 110 100 90 80 2008 2009 2010 2011 2012 with the highest level of employee satisfaction in the financial sector in the Nordic region. An attractive workplace focusing on compe- tence development and skilled managers is the key to achieving this. We focus on developing our managers and employee competences in accordance with Tryg’s strategy. At a time when there is a keen focus on costs, we attach importance to not hampering investments in competence development, but to strengthening such investments. Employee satisfaction is measured both externally and internally based on regular surveys. In 2012, Tryg maintained a high level of employee satisfaction, and once again did better than the financial sector as a whole, which was very positive. The high level of employee satisfaction was maintained during a period marked by a number of restructurings which involved job cuts. Customer satisfaction Employee satisfaction Index 120 110 100 90 80 Index 120 110 100 90 80 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Strategy and Key Performance Indicators | Annual report 2012 | Tryg A/S | 9 Customers As a peace-of-mind provider, Tryg wants to supply comprehensive channels. Tryg makes it possible and easy for customers to take out solutions characterised by simplicity. Being available to customers as insurance online, report a claim electronically, request quotes and and when required is an important part of Tryg’s distribution strategy, as calculate prices. So far, experience from the Nordic region shows that is a desire for most of the distribution to take place via the company’s the Internet is a valuable tool for informing and advising customers own sales channels. Tryg’s business areas are divided into Private, and for servicing customers, for example in connection with a claim. Commercial, Corporate and Sweden. Sales are primarily effected through personal contact between the customer and the company, for example by phone. Sales to and the servicing of private customers in Denmark are handled via call centres and the Internet, via Tryg’s own agents, Products and differentiation group agreements, car dealers, estate agents and Nordea’s branches. With a view to improving profitability and increasing transparency for In Norway, sales and services are handled in the same way as in customers, focus is on the sharper pricing of risk based on the inclusion Denmark, but with the addition of franchisees who are independent of a number of relevant pricing parameters. Consequently, price diffe r - sellers of Tryg’s products. The Private customer segment is Tryg’s entiation is a continuous focus area for Tryg. In 2012, Tryg launched largest business area with revenue in 2012 of DKK 9,733m being a new contents insurance product with tariffs which more accurately generated in Denmark and Norway. reflect the risks involved. The result is improved competitiveness in relation to customers. The new contents insurance product has no The Commercial segment encompasses the sale of insurance maximum sum insured. The customer therefore no longer has to as- products to small and medium-sized businesses, which means sess the total value of household contents, which very few customers businesses with 0-4 employees (small) and up to 50 employees are able to do reliably. To obtain cover, customers only have to indicate (medium-sized). In Denmark, sales and services are handled by Tryg’s items worth more than DKK 50,000. Everything else is gene rally cov- own agents and sector agree ments. In Norway, the segment is serviced ered. This provides peace of mind, and in future the customer only has by franchisees and Tryg’s own agents. In Norway, group agreements to actively and specifically consider items of special value. have also been made with various associations. The Commercial customer segment generated revenue of DKK 3,687m in 2012. The many initiatives within pricing and product development and the streamlining of operations are helping Tryg to maintain its strong position Corporate customers are mainly large enterprises, and in Denmark in the Nordic market. People’s insurance needs change in the course and Norway Tryg sells insurance via its own sales team and through of their lives. Consequently, private customers are treated differently insurance brokers. For customers requiring an international insurance depending on which stage of life they are at. Life stages are characterised programme, Tryg’s partnership with the AXA Group enables the by differences in activity levels, form of cohabitation, working life, offering of complete insurance solutions. In addition, the Corporate financial position and required level of peace of mind. Focus on this business area handles all activities involving brokers. Consequently, means that Tryg can offer advice and solutions which are tailored to the medium-sized businesses using brokers are also included in the customers’ specific requirements, and to suit the different stages of life Corporate segment. Corporate is Tryg’s second-largest business area and situations. At the same time, the company’s targeted advice and and generated revenue of DKK 5,258m in 2012. individual service increase customer satisfaction and improve the scope In Sweden, insurance products for private customers are sold via policies with Tryg. Customers who bundle their insurance agreements of sales. Customers need to know that it pays to have all your insurance the Moderna brand, through own agents, customer centres and with Tryg enjoy special benefits. the Internet. An important distribution channel is also dealers who sell insurance products as part of their sales of consumer products. These include: These include both boat and motorcycle dealers and shops selling • Discounts when several policies are taken out with Tryg. electronics. In 2012, the business area posted revenue of DKK 1,654m. • Benefits such as Tryg Roadside Assistance, psychological crisis assistance and under-insurance guarantee. Important elements in Tryg’s distribution strategy are being available to customers and for primary distribution to take place via own sales • • Product benefits such as free travel insurance for companions. Discounts on various peace-of-mind products, including burglar alarms. 10 | Tryg A/S | Annual report 2012 | Customers Claims prevention pack consists, for example, of fire retardant and smoke alarms and can In recent years, Tryg has focused on claims prevention as a way of be purchased via the Tryg website. An offer has been sent out by email creating peace of mind for customers, to draw attention to risks to Danish customers, and this is yet another step aimed at minimising and to make customers address the risks and to mitigate damage claims. Moreover, Tryg runs the two sites tryghedsraadgiveren.dk and and injury. Tryg offers preventive solutions for customers based on trygghetsraadgiveren.no, where customers and others can find advice knowledge, data and expertise which are translated into preventive on how to protect their homes against burglary, water damage and solutions that focus on preventing undesired situations from arising. fire. The sites also provide guidance on travel insurance, family insu- In 2012, Tryg gave customers who had previously suffered water rance and checklists which can help prevent or limit damage or injury. damage in connection with cloudbursts the offer of a free inspec- tion of their homes with a view to preventing and mitigating future In cooperation with the Federation of Danish Motorists (FDM), Tryg claims. The inspections were carried out by experts who offered also offers technical driving courses; against a small fee, customers advice on specific, practical solutions. For agricultural businesses, are offered advice on driving economically and on how to improve Tryg has established initiatives whereby buildings are inspected and their driving technique. The initiative has been introduced to provide thermography is performed of electrical panels which are often the increased peace of mind for customers in icy or slippery road seat of fire in farm buildings. conditions. See an overview of Tryg’s insurance products on page 152 and at the customer sites tryg.dk, tryg.no and Tryg has also introduced a safety pack aimed at reducing fire damage modernaforsakringar.se. in the home, which often occurs in December and January. The safety Customers | Annual report 2012 | Tryg A/S | 11 Insurance market The Nordic insurance market is characterised by a number of large Finally, a reform of the law on early retirement and subsidised flexible companies being present in several of the Nordic countries. The employment schemes will tighten the rules and lead to higher workers’ four largest companies have a combined market share of 47% in the compensation payments. This is due to the fact that pay under Nordic market. In the individual countries, the four largest companies subsi dised flexible employment schemes is offset against workers’ have a combined market share of 60-77%. For the Nordic market as a compensation payments. Also, case handling is expected to become whole, total premium income amounts to approximately DKK 160bn. more protracted, resulting in more people being granted temporary 2012 was characterised by continued economic uncertainty. Despite also be affected by a gradual increase in payroll tax in the period up workers’ compensation payments. The insurance companies will a large number of initiatives on the part of the EU and the European until 2012. Central Bank aimed at ensuring economic stability in the EU, uncertainty is still hampering the budding signs of recovery seen in the healthier Norway and Sweden have not seen major changes in legislation in European markets. This translates into low growth rates which impact these areas, and the market was affected by no major structural the insurance companies’ premium income, especially within the changes in 2012. In Norway, the small insurance companies have won commercial and corporate segments. market shares from the larger firms, but are struggling to combine growth and profitability. Sweden has seen a number of mergers and The atmosphere of economic uncertainty is expected to continue acquisitions among the smaller market players, but this does not in 2013 and will thus dominate the markets for some time to come. change the general picture of a strongly consolidated market with In the insurance market, 2012 was a good year as most insurance a small number of large players. In Finland, market consolidation companies in the Nordic region saw a relatively low level of claims. became even more pronounced in 2012 following the merger of the This is true, in particular, as regards weather claims due to favourable second-largest company, Tapiola, with the fifth-largest player in the weather conditions throughout the year. Moreover, several companies market, making it the largest insurance company in Finland. Follow- are beginning to see the effects of the price adjustments introduced in ing the merger, the four largest insurance companies in Finland will recent years, and many companies are reporting general profitability account for almost 90% of premium income. improvements. In recent years, continued focus has been directed at the correlation between price and risk, and this focus on profitability is Tryg in the market expected to continue. This also applies to costs, as efficiency increases As the second-largest general insurance company in the Nordic and cost reductions have been on the agenda of many companies for region, Tryg is affected by developments in the Nordic insurance a long time. market, but at the same time it is helping to shape developments. Like many of the other Nordic companies, Tryg has introduced price At the beginning of 2012, the Danish government decided to abolish adjustments in recent years in order to counter a negative develop- the tax exemption for company-paid health insurance. This is expected ment in the price/risk correlation. But whereas many of these price to impact the insurance companies’ premium income from these adjustments have been introduced in response to specific market products, but derived negative effects on, especially, the private trends, Tryg will continue to work on developing products which bet- health care sector are also expected to follow in the wake of this step. ter take account of a large number of risk factors. A better balance Furthermore, legislative changes were also introduced in Denmark in must be struck between risk and premium, and Tryg’s products must 2012 which have an impact on workers’ compensation. The change in be more differentiated, while also improving the company’s competi- the statutory retirement age from 65 to 67 years meant that provisions tiveness in the Nordic market. for workers’ compensation insurance were increased in 2012. A bill on a new workers’ compensation tax was introduced, which would mean Steps aimed at process optimisation internally and in connection with that the insurance companies would have to increase their premiums the procurement of claims services are also central to improving Tryg’s for this product by 14%. However, the tax on workers’ compensation competitiveness. In the long term, an efficient and more cost-effective payments was changed so that, from 1 January 2013, it will be levied insurance business will make Tryg better geared to manoeuvring in via the Labour Market Occupational Diseases Fund and not via the more uncertain and changeable markets. In the long term, this will insurance companies. also contribute to the foundation for profitable growth. 12 | Tryg A/S | Annual report 2012 | Insurance market Market shares in Denmark Market shares in Norway 28.8 5.8 5.5 20.2 Per cent 17.5 9.7 12.5 Tryg Topdanmark Codan Alm. Brand Gjensidige If Others 22.4 15.6 Per cent 11.3 25.1 25.6 Tryg If Gjensidige Sparbank 1 Others Market shares in Sweden Market shares in Nordic region 3.9 15.6 1.3 15.3 Per cent 29.4 16.0 18.5 Moderna (Tryg) Länsforsäkringar If Codan Folksam Gjensidige Others 11.1 39.8 Per cent 17.8 9.0 5.0 8.7 8.6 Tryg If Codan Gjensidige Länsforsäkringar Topdanmark Others Source: Official market statistics from the various countries. In line with the strategic work aimed at improving Tryg’s profitability employees, who will now be part of a larger Finnish organisation. The and competitiveness, a decision was made in November 2012 to divestment also means that Tryg can now focus on running a profitable divest the company’s Finnish business activities to its competitor, insurance business in those markets where Tryg has a solid position If. In the strongly consolidated and also very competitive Finnish and a good foundation for developing its business in Denmark, market, Tryg has not been able to achieve the size necessary for pro f- Norway and Sweden. itable insurance operations. The transaction was therefore the right solution for all parties, but especially for customers and the Finnish Insurance market | Annual report 2012 | Tryg A/S | 13 Prevention in agriculture In March 2012, Tryg published a study which confirmed the importance of informing our customers of claims prevention. The study showed that there is a significant risk of fire at 10% of all agricultural establishments. For this reason, thermography of electrical panels is provided under Tryg policies to uncover any potentially serious defects that might cause severe and very costly damage. Every year, fires in electrical panels cause devastating fires at agricultural establishments. This results in declining revenues and a lot of extra work until normal operations can be resumed. With thermography, the systems are measured when active to identify the peak loads. Thermography shows differences in temperature and thus pinpoints major fire hazards. It typically costs DKK 2-3,000 to repair the defects identified by means of thermography. We also ask our agricultural customers to install firetrace in their harvesters. This technology can be used to prevent fire in, for example, the engine compartment of combine or forage harvesters. Installation and equipment cost DKK 10-15,000, and it is a requirement for new large harvesters and is recommended for existing harvesters. We are sure that this is a worthwhile investment for our customers, as it will enable them to repair their harvesters quickly and bring in the harvest. Tryg’s results Highlights • The profit after tax for the year was DKK 2,208m (DKK 1,140m ) with a high return on equity after tax of 22.1% (13.1%). • Technical result of DKK 2,492m (DKK 1,572m). the combined ratio by 1.2 per centage points. Thanks to the improved result and several initiatives in the pipeline, Tryg is well on its way to achieving its targets of a return on equity of 20% and a combined ratio of 90 or below from Q3 2013. The high investment return was influenced, in particular, by rising share prices, the credit crisis in southern Europe and a low interest rate • Combined ratio of 88.2 (93.2). level, which meant that the authorities carried out a technical adjust- • Claims ratio, net of ceded business, of 71.8 (76.6). • Lower level of large claims, net DKK 471m (DKK 546m), and weather claims, gross of DKK 356 (DKK 721m). • Expense ratio improved from 16.6 to 16.4. • High investment return, after transfer to insurance, of DKK 585m (DKK 61m). • Write-down of owner-occupied property of DKK 350m. • Proposed dividend of DKK 26 per share and proposed share buyback of DKK 800m. ment of the discount rate which is used when discounting claims provisions in the insurance business. These factors led to significant price increases for especially bonds in the Nordic markets, and a one-off gain of DKK 150m as a result of the change in the discounting curve. In addition, the investment return benefited from solid gains on high-yield and emerging market bonds as well as write-down of owner-occupied property. The primary purpose of the investment business is to support the insurance business and to have a low risk profile. In this respect, the investment return in 2012 was extra ordi n- arily high and must, given the low interest rate levels, be expected to be lower in the coming years. In 2012, the macroeconomic situation was generally characterised After a couple of challenging years in 2010 and 2011, when weather- by low growth in the Danish economy accompanied by reticence related claims in particular impacted results, 2012 was in many ways on the part of consumers, which impacted small and medium-sized a good year for Tryg. The most important profitability measures which businesses. Large corporate customers benefited from growth in the have been implemented in recent years had a positive impact on export markets, especially the German market. The Norwegian market results, while the main strategic challenges – the business in Finland was basically unaffected by the economic crisis in southern Europe, and renewing the Nordea partnership agreement – were resolved. which otherwise impacted the rest of Europe. Norway continued to It was also positive that all business areas contributed to the overall see solid growth in its gross domestic product, increasing pay levels profit, in particular Commercial and Sweden, which saw marked and employment rates, but still relatively low inflation. The Swedish improvements in results. At the same time, many initiatives saw good economy was, like the Danish economy, influenced by general reti- progress and will improve results in the coming years. These include, cence among consumers. for example, a DKK 1bn cost-savings programme, and price differenti- ation which, in 2012, was manifested through the launch of a new Premiums contents insurance product on the Danish market. Premium income totalled DKK 20,314m (DKK 19,948m), which in local currencies corresponds to basically unchanged premium income. Tryg’s profit after tax totalled DKK 2,208m (DKK 1,140m), which Premium income was impacted by Tryg’s focus on profitability which, corresponds to a return on equity of 22.1% (13.1%). The improvement among other things, was improved through price increases and prun- in profit stems from an increase in the technical result of DKK 920m ing unprofitable customers. Premium income for Private increased and a higher investment return of DKK 524m. The technical result by 1.5% (6.1%) and was influenced by the high renewal rate in both the was improved from DKK 1,572m to DKK 2,492m and is attributable Danish and Norwegian business. The lower growth is due to lower to profitability measures, a significantly lower level of weather claims sales, especially in Denmark. Moreover, the development in motor in- and the positive effect of a reinsurance agreement based on the surance premiums was affected by the fact that car sales in Denmark, frequency of weather claims. The combined ratio totalled 88.2 in particular, were comprised mainly of smaller vehicles with higher (93.2) despite a low interest rate level, which negatively impacted safety levels and thereby lower average premiums. Premiums in both 16 | Tryg A/S | Annual report 2012 | Tryg’s results the Commercial and Corporate segments fell by 2% when measured which was slightly higher than the savings target for 2012 of DKK in local currencies. This development was also influenced by the re- 100m. The greatest effect of the initiatives can be seen within motor action of customers to price increases, pruning and a weak economy, insurance. In the coming years, a bigger effect will be seen within the especially in the Danish market. building area. An important initiative has been the signing of an agree- ment on using Scalepoint, a purchasing system which is more flexible Tryg implemented significant price increases in 2010 to improve for customers while ensuring more accurate pricing of an item’s value. profitability, focusing in particular on the private sectors in Denmark. A significant effect will also be achieved through improved processes. The price increases were introduced as a result of an increasing num- ber of burglaries, increasing prices from tradesmen and a higher level Weather claims, gross, totalled DKK 323m (DKK 1,756m). This signifi- of weather claims. Subsequently, Tryg has introduced price increases cantly lower level can be attributed to the cloudburst in the Copenhagen in the Commercial area. In future, there will be less need for price area in July 2011 which triggered claims expenses of DKK 1.5bn. increases beyond normal adjustment for inflation. In addition, weather claims in 2012 were at a lower level than ex- Claims pected for an average year. In 2012, Tryg introduced a new contents insurance product, where the risk of weather claims is a significant The claims ratio, net of ceded business, which covers both claims element in the pricing. and net reinsurance ratio, was 71.8 (76.6). The improvement covers, in particular, the effect of the profitability measures, the low level At DKK 713m (DKK 858m), the level of large claims was slightly of weather claims and a satisfactory result from a lateral reinsur- lower than in 2011, but somewhat higher than the expected level of ance agreement. The level of large claims was lower than in 2011, DKK 550m for the year as a whole. whereas the lower interest rate level had a negative impact on the claims ratio, net of ceded business. In July 2011, Tryg bought a reinsurance programme which limits Tryg’s expenses in the case of a high frequency of weather claims On the Capital Markets Day in 2012, Tryg announced its target of events. While traditional reinsurance provides cover per event, this reducing claims costs by a total of DKK 700m (including DKK 100m cover takes effect if Tryg incurs more than DKK 400m in claims for transferred from expenses) up to 2015. These reductions will be weather damage originating from several events. As a result of the achieved, in particular, by exploiting Tryg’s size in connection with many storms and cloudbursts in H2 2011 and developments in H1 sourcing and through improved processes. In 2012, Tryg continually 2012, Tryg saw reinsurance cover of DKK 136m. The agreement was followed up on these initiatives, the total effect being DKK 120m, renewed from 1 July 2012 at a slightly higher price. Tryg does not Weather claims Large claims DKKm 2,000 1,600 1,200 800 400 0 Expected level, gross for 2012: DKK 600m 2008 2009 2010 2011 2012 DKKm 1,000 800 600 400 200 0 Expected level, gross for 2012: DKK 550m 2008 2009 2010 2011 2012 Storm and cloudburst, gross Storm and cloudburst, net Large claims, gross Large claims, net Tryg’s results | Annual report 2012 | Tryg A/S | 17 expect any proceeds from this agreement, as it is primarily intended Investment return to provide cover in the event of a high frequency of weather-related In 2012, Tryg’s total investment portfolio of DKK 45.5bn (DKK 41.3bn) events which do not follow the normal weather patterns. realised a high gross return of DKK 2,243m, corresponding to a return Expenses of 5.1% (4.8%) on the average invested capital during the period. Tryg’s investment portfolio is divided into a match portfolio and a The expense ratio was 16.4 (16.6) in 2012. The improvement must free portfolio. The match portfolio totalled DKK 34.9bn (DKK 32.6bn) be seen in the context of a target of an expense ratio below 15 in and was made up of bonds which match the insurance provisions so 2015, which must be achieved through initiatives that will reduce that fluctuations resulting from interest rate changes are offset to the the cost level by DKK 300m between now and 2015. greatest possible extent. The remaining part of the assets, the free portfolio, is a diversified portfolio of real estate, equities and bonds It is positive that the expense ratio in 2012 was reduced which reflect the company’s total equity. At 31 December 2012, the considerably despite a growth in premiums below the rate of value of the free portfolio totalled DKK 10.8bn. In general, the division inflation and despite non-recurring restructuring costs of of the investment portfolio entails a low financial risk and reflects approximately DKK 100m in connection with the restructurings Tryg’s focus on the insurance business. which have been implemented in Tryg. In 2012, the return on the match portfolio was, after transfer to The initiatives for reducing costs by DKK 300m by 2015 are divided insurance technical interest, DKK 109m (DKK 95m), and was into annual effects. For 2013, the goal is to implement initiatives impacted by changes in the Danish Supervisory Authority’s interest corresponding to DKK 125m. For 2012, the effect was DKK 55m, curve which had a positive effect on the return on the match portfolio. and covers in particular a reduction in the number of employees in staff functions. Tryg is simplifying its processes through having The return on the free investment portfolio was DKK 1,129m. a flatter organisation and assessing value creation in relation to (DKK 184m). The return was impacted by significant price increases customers. The process will continue in 2013 to ensure the goal for equities and bonds and by negative developments in the financial is achieved. markets, including the debt crisis in southern Europe. The equity portfolio, which is a globally diversified portfolio, generated a posi- The number of employees, exclusive of the Finnish business, was tive return of 13% (4.2%). Bond investments were impacted by the reduced from 4,076 to 3,912, which reflects the implemented development in interest rates in Europe and produced a return of streamlining measures. 4.5% and, for high-yield and emerging-market bonds in particular, there was a high return in 2012. The composition of the free portfolio In recent years, the cost level has been impacted by increases in was basically unchanged in 2012, and the portfolio is still made up of payroll taxes in Denmark, and it will increase further in 2013 from a diversified mix of real estate, equities and bonds. 10.5% to 10.9%. Also, from 2013, the payroll tax will gradually increase, so that by 2021 it will total 12.3%, corresponding to a Other financial income and expenses were negative by an amount increase of approximately DKK 30m. of DKK 551m, particularly in relation to the write-down of owner- Profit on discontinued business DKK 200m, respectively, were based on a re-evaluation of rent levels The profit on discontinued business was DKK 28m and primarily and a higher return requirement to ensure a higher degree of flexi bility concerns the Finnish business, which was sold in Q4 and therefore in connection with possible future restructurings. Including other finan - falls under discontinued business. The Finnish business was sold cial income and expenses as well as investment return from discon tin ued for EUR 15m. At the same time, intangible assets concerning a and divested activities, the investment return totalled DKK 585m. occupied property. In Q2 and Q4, write-down charges of DKK 150m and large IT project were impaired by approximately DKK 100m so that the total impact on the profit was slightly negative. In addition, Tax run-off on claims provisions from Marine Hull insurance, which Tryg Tax on profit for the year totalled DKK 837m, or 28%. In 2012, Tryg stopped writing in 2010, is included, with a slightly positive result. paid corporate income tax of DKK 425m and in addition various payroll 18 | Tryg A/S | Annual report 2012 | Tryg’s results taxes which totalled DKK 374m. Thus, the combined income tax and aim being a steadily increasing dividend. On the basis of this new paid payroll taxes for 2012 totalled approximately DKK 800m. In 2011, dividend policy, the Supervisory Board proposes that DKK 1,594m taxes and duties totalled approximately DKK 600m. be disbursed as a cash dividend. In addition, an extraordinary share buyback of DKK 800m is proposed. Capital position Tryg’s equity totalled DKK 10,979m (DKK 9,007m) at the end of Events after the statement of financial position date 2012. Tryg determines an individual solvency need according to the As previously mentioned, in connection with the repayment of the Danish Financial Supervisory Authority’s guidelines. This totalled subordinated loan with TryghedsGruppen, Tryg has decided to DKK 6,410m at the end of 2012, and should be seen in relation to arrange a loan of DKK 800m, which is irredeemable by the creditor. a capital base of DKK 8,832m after the proposed dividend. Relative Read more in the chapter Capital and risk management on page to this, Tryg thus has surplus cover of DKK 2,422m, or 38%. 38 in the annual report. Tryg has arranged subordinate loans of DKK 1,597m. In 2009, in connection with the acquisition of Moderna, Tryg took out a sub ordinate loan of EUR 65m with TryghedsGruppen, which is Highlights for Q4 2012 expected to be repaid in Q1 2013. In this connection, it has been decided to make the most of the favourable capital markets and optimise the capital structure by arranging a subordinate loan of • Profit after tax of DKK 404m (DKK 344m). DKK 800m which is irredeemable by the creditor. The current capital requirement rules limit the amount of fixed-term subordin- ated loan capital which can be included in the capital base, which has meant that the existing subordinated loan from TryghedsGrup- pen of EUR 65m does not qualify for inclusion in Tryg’s capital base. The new subordinated loan will be for a perpetual term, and the full amount of DKK 800m can therefore be included in the capital base, • Technical result of DKK 648m (DKK 310m). • Combined ratio of 87.4 (94.5). • • The quarter was characterised by a lower level of weather claims than in Q4 2011. Large claims impacted the combined ratio by 4.3 percentage points (6.2). which thus increases by DKK 800m, all else being equal. Against • Expense ratio of 16.3 (16.9). this background, Tryg will acquire treasury shares worth DKK 800m as part of an extraordinary distribution, which all in all will result in an unchanged capital base, but with a lower proportion of equity, leading to a higher future return on equity for the benefit of Tryg’s • High bond yields and write-down of owner-occupied property. shareholders. Moreover, the new subordinated loan is expected Results for Q4 2012 to qualify for inclusion as Tier 2 capital under the new Solvency II The profit after tax totalled DKK 404m for Q4 2012 (DKK 344m). capital adequacy rules. The result was made up of a technical result of DKK 648m and an investment return of DKK 5m (DKK 144m) based on an exceptionally In connection with a change to the dividend policy, capital manage- high return on bonds and the write-down of owner-occupied property ment will be based on the calculation of Individual Solvency. This by DKK 200m. The technical result was impacted by weather claims decision has been made to strengthen the balance between Tryg’s below the expected level, a high level of large claims totalling DKK 317m risk profile and capital base, and does not change Tryg’s objective (DKK 398m) and a run-off level totalling DKK 237m (DKK 331m). As a of a Standard & Poor’s ‘A-’ rating or its focus on a strong capital result of the lower interest rate level, the effect of discounting on the structure. Dividend policy combined ratio was 0.8 percentage points less than in Q4 2011. Premiums in local currencies fell in Q4 by 0.5%, resulting from Tryg presented a new dividend policy in December 2012. The policy positive growth in the Private market and negative growth in the is based on the distribution of 60-90% of the profit for the year, the Commercial and Corporate markets. Tryg’s results | Annual report 2012 | Tryg A/S | 19 Private Highlights • Technical result improved by DKK 466m to DKK 1,233m (DKK 767m). • Combined ratio improved by 5.0 percentage points to 87.7 (92.7). Results Private was the business area where Tryg first implemented significant profitability measures. Thus, Private is the area which is farthest ahead in relation to the financial targets. To ensure continued satisfactory financial results, considerable focus is devoted to price differentiation, segmentation and optimising sales channels. Gross premiums increased by 1.5% (6.1%) following price increases. The technical result for 2012 was DKK 1,233m (DKK 767m), with a combined ratio of 87.7 (92.7). • • Still highest customer satisfaction among the largest companies in Denmark and Norway. • Launch of new contents insurance product. • Significant reduction in the expense ratio from 16.4 to 15.7. The improvement is due to both the effect of profitability measures and significantly better weather conditions in 2012. Due to previous price increases, the need for extraordinary increases, apart from general inflation adjustments, was less pronounced in 2012. In 2012, the Danish economy was impacted by the economic crisis, Private encompasses the sale of insurance products to private especially in southern Europe. This particularly affected consumer individuals in Denmark and Norway. Sales are effected via call spending and thereby the level of economic activity. For the insurance centres, the Internet, Tryg’s own agents, franchisees (Norway), market, this meant a low turnover of homes and increased sales of interest organisations, car dealers, estate agents and Nordea’s smaller cars. In Norway, private consumption was still at a high level, branches. The business area accounts for 48% of the Group’s with car sales slightly up on 2011. Inflation is low in both Denmark and total premium income. Norway, but due to increasing pay levels in Norway, Tryg is particularly Key figures – Private DKKm Gross premium income Gross claims Gross expenses Profit/loss on gross business Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result Run-off gains/losses, net of reinsurance Key ratios Premium growth in local currencies Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio Combined ratio exclusive of run-off Run-off, net of reinsurance (%) Large claims, net of reinsurance (%) Weather claims, net of reinsurance (%) 20 | Tryg A/S | Annual report 2012 | Private Q4 2011 Q4 2012 2,373 -1,803 -387 2,449 -1,717 -383 183 -6 15 192 43 2.1 76.0 0.3 76.3 16.3 92.6 94.4 -1.8 1.6 5.0 349 -27 4 326 40 0.6 70.1 1.1 71.2 15.6 86.8 88.4 -1.6 0.6 2.5 2011 9,425 -7,469 -1,542 414 273 80 767 185 6.1 79.2 -2.9 76.3 16.4 92.7 94.7 -2.0 0.4 4.2 2012 9,733 -7,084 -1,524 1,125 81 27 1,233 326 1.5 72.8 -0.8 72.0 15.7 87.7 91.0 -3.3 0.1 2.4 A new contents insurance product was an important milestone in 2012, and price differentiation will also be essential in future Group Executive Vice President, Private Lars Bonde aware of developments in the inflation rate in Norway and the possible Premiums need to adjust pricing. In 2012, Tryg’s customer retention rate All in all, gross premiums increased by 1.5% (6.1%) in local currencies. remained high, which is supported by customer surveys from EPSI The growth was made up of a slightly negative growth in Denmark of for 2012 which show that Tryg, in both Denmark and Norway, still has 0.3% and growth in Norway of 3.5%. the highest level of customer satisfaction among the larger insurance companies. The low growth in Denmark resulted from an enduringly high retention rate and a decline in sales relative to last year. In addition, the premium As mentioned, in Private there was considerable focus in 2012 on income is impacted by a higher level of premium discounts based price differentiation. In November 2012, Tryg launched a new con- on developments for a number of group agreements which reduced tents insurance product in the Danish market which better reflects growth in the Danish business by 0.5 percentage points. The retention variations in risk. The new product makes it easier for the customer rate was approximately 90, which was positive given the price in- to be adequately covered. With the new contents insurance, the creases intro duced in recent years. The lower sales can be attributed customer does not have to calculate the total sum insured, but simply to a declining average price for motor insurance, among other things list any assets in the home worth more than DKK 50,000. Initially, the because of high sales of cars with a higher level of safety and thereby insurance is being sold to new customers, but in 2013 existing cus- a lower insurance risk. The higher pricing of many insurance products tomers will also be covered by the new insurance. Within the Private and the economic situation in Denmark characterised by, among segment, Tryg will continue to work with price differentiation, and in other things, low consumer spending and a low turnover of owner- the coming years gradually implement several new products with a occupied homes, also contributed to the lower growth in the Private higher degree of price differentiation. customer segment. One of Private’s most important distribution channels is the bank The growth in Norway of 3.5% is explained by price increases, a insurance partnership with Nordea. In 2012, the agreement with Norwegian economy with solid growth and a retention rate which Nordea was renewed for Denmark and Norway for a term of five has improved by almost one percentage point. The growth is seen, years. The agreement has been changed in relation to previous years in particular, within house and motor insurance, and generally reflects and is now more in line with Tryg’s focus on profitability and portfolio the level of inflation in the Norwegian economy. The effect of price development. Among other things, the partnership agreement makes increases was evident in the average premium for Norwegian Private it possible in future for Tryg to sell new products to existing Nordea customers, which increased by 4.3% in 2012, while the correspond- customers through its own call centres. ing increase for Danish Private customers was 3.3%. Average premium – house Average premium – motor Index 140 130 120 110 100 90 2008 2009 2010 2011 2012 Index 140 130 120 110 100 90 2008 2009 2010 2011 2012 Denmark Norway Denmark Norway Private | Annual report 2012 | Tryg A/S | 21 Customer retention – Private % 94 92 90 88 86 84 82 the rate of inflation, the effect is also countered by claims prevention measures where Tryg, through using its purchasing power and improved processes, achieves benefits that reduce the claims costs. Expenses The expense ratio was 15.7 (16.4) in 2012, which was a significant reduction, and achieved through the continued optimisation of distribution costs, in particular. The number of employees was reduced from an average of 955 in 2011 to 918 in 2012, primarily through natural wastage. The Private area has centralised functions that were 2008 2009 2010 2011 2012 previously scattered, which has positively impacted the expense ratio. Denmark Norway Claims The gross claims ratio amounted to 72.8 (79.2), and the claims ratio, net of ceded business, which includes net reinsurance ratio, was 72.0 (76.3). The improved claims ratio, net of ceded business, is attributable to a significantly lower level of weather claims and the effect of profitability measures. Moreover, the claims ratio, net of ceded business, was also impacted by the lateral reinsurance In addition, Private is, like other business areas, affected by reductions in the various staff functions, which will also have a positive effect on costs in the coming years. Highlights for Q4 2012 • Technical result of DKK 326m (DKK 192m). • Combined ratio of 86.8 (92.6). • The quarter was characterised by a considerably lower level of weather claims than in Q4 2011. agreement, which had a positive effect of DKK 93m, reducing the • Expense ratio of 15.6 (16.3). claims ratio by 1.0 percentage point. Claims prevention activities were also a high-priority area for Tryg in 2012. Tryg implemented various measures, especially vis-à-vis house-owners in Denmark to Results for Q4 2012 reduce claims following storms and cloudbursts. In 2012, the offer of For Q4 2012, the technical result totalled DKK 326m (DKK 192m) a Tryg House Check was extended to customers who have previously and was impacted by the continual improvements resulting from made cloudburst claims. The offer involves inspecting the customer’s profitability measures and favourable weather conditions. The property to identify the risk of damage from cloudbursts, with the combined ratio showed a solid improvement and totalled 86.8 (92.6) option of a quote for repairs which may prevent claims. In addition, in Q4 2012. several activities aimed at preventing claims have been implemented, for example the use of ‘burn block’ to counter the risk of fire in Gross premiums increased by 0.6% in Q4 which, as expected, was Christmas decorations. slightly lower than for the year as a whole. The retention rate in Denmark was 90.2 (90.5), which was still high, while the retention In 2012, Tryg renewed its agreement with garages on car repairs, rate in Norway was 86.8 (86.1). and repair costs remain significantly lower than for the market as a whole. The gross claims ratio was 70.1 (76.0), and the claims ratio, net of ceded business, was 71.2% (76.3%). In the Norwegian part of Private, particular focus is on claims inflation as wage inflation is at a considerably higher level than in Denmark. The expense ratio was 15.6 (16.3). The considerable fall is due, in This, of course, impacts the claims, especially where labour is involved particular, to the reduced employee numbers and a streamlining of in repairing damage. In addition to the possibility of raising prices by the staff functions. 22 | Tryg A/S | Annual report 2012 | Private Commercial Highlights • Technical result improved from DKK 310m to DKK 604m. business area. Creating results which are in line with Tryg’s overall objectives is particularly challenging for the Commercial business area. This focus is reflected in the measures which have been intro- duced, and which have resulted in clear improvements in the level of claims. Moreover, structural initiatives were implemented in 2012 • Combined ratio improved from 92.1 to 83.7. which will further improve cost levels in the coming years. • The gross premiums were reduced by 2.0% (0.2%) as a result of profitability measures and the economic situation for businesses in Denmark. Commercial posted a technical result for 2012 of DKK 604m (DKK 310m), with a combined ratio of 83.7 (92.1). The improved result is due to both the effect of profitability measures and significantly better weather conditions than in 2011. Moreover, medium-sized claims Commercial encompasses the sale of insurance products to small were considerably lower than in 2011, while run-off was unusually high. and medium-sized businesses in Denmark and Norway. Sales are effected by Tryg’s own sales force, franchisees (Norway), customer The results were positively impacted by price increases and segmen t - centres and group agreements. The business area accounts for 18% a tion and product development activities. In addition, the first of the Group’s total premium income. structural adjustments of the organisation were made to increase Results efficiency and cut costs. The Danish and Norwegian markets deve- loped differently. In Denmark, private consumption was marked by In 2011, the desire for special focus to be devoted to the business continued reticence, which both had an impact on the insurance segment led to the establishment of Commercial as an independent requirements of businesses and the continued high level of Key figures – Commercial DKKm Gross premium income Gross claims Gross expenses Profit/loss on gross business Profit/loss on ceded business Technical interest, net of reinsurance Technical result Run-off gains/losses, net of reinsurance Key ratios Premium growth in local currencies Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio Combined ratio exclusive of run-off Run-off, net of reinsurance (%) Large claims, net of reinsurance (%) Weather claims, net of reinsurance (%) 24 | Tryg A/S | Annual report 2012 | Commercial Q4 2011 Q4 2012 916 -588 -178 150 -19 2 133 93 -3.1 64.2 2.1 66.3 19.4 85.7 95.9 -10.2 4.4 5.0 906 -542 -181 183 -25 -2 156 29 -3.3 59.8 2.8 62.6 20.0 82.6 85.8 -3.2 5.0 4.0 2011 3,715 -2,801 -755 159 132 19 310 147 0.2 75.4 -3.6 71.8 20.3 92.1 96.1 -4.0 2.4 3.9 2012 3,687 -2,372 -748 567 32 5 604 212 -2.0 64.3 -0.9 63.4 20.3 83.7 89.4 -5.7 1.5 1.9 Structural changes must ensure continued improvements in the coming years Acting Group Executive Vice President, Nicklas Larsen Commercial bankruptcies. In Norway, sustained macro-economic growth contents insurance. The measures include price increases and supported growth for small and medium-sized businesses. changed terms, especially for valuables in basements. Commercial Premiums also focused on claims prevention, for example in the agricultural sector, with a view to reducing fire damage as a result of short- A combined fall in premium income of 2.0% (0.2%) was realised, circuiting. Product differentiation is also important within the when measured in local currencies. The fall was based on negative Commercial business area, and the first product area to see product growth in Denmark of 2.7% and in Norway of 0.4%. The negative differentiation in 2013 is workers’ compensation insurance, in the growth in Denmark resulted both from a fall in the retention rate form of a new tariff. and from lower sales. The retention rate was negatively affected by profitability measures, which in addition to price increases also Expenses comprised a demand for protective measures in basements, and by In 2012, the expense ratio was 20.3 (20.3), which is explained by a large number of business failures due to the economic situation. a reduction in nominal expenses of approximately 1%, achieved The fall in sales was attributable both to price increases and to the primarily through organisational adjustments. To improve cost levels, difficulties facing businesses. With a view to improving premium Tryg restructured the area significantly in Q4, mainly back-office income, Tryg decided to change its sales organisation towards the functions, which cut staff by approximately 30. As mentioned above, end of 2012, the aim being to ensure greater activity in the Danish with a view to increasing sales efficiency, Commercial set up a new market through the use of more cost-effective channels. sales channel at the end of 2012 which will focus on small busi- The zero growth in Norway can also be ascribed to price increases important focus area, calling for further automation and simplifica- nesses in the Commercial segment. Reducing costs will remain an and a competitive market, which led to a fall in renewals relative to tion of processes. last year. This development also calls for a stronger focus on sales. With a view to strengthening the focus on sales and the quality of its Another cost-cutting measure will be a transfer to digital commu- customer service, in 2012 Commercial introduced a specialisation nication. Therefore, in 2013, customers will be able to access their of the sales and service functions in its own sales channels. Similarly, insurance details and documents via the Internet before Tryg stops franchisees have been offered training in commercial insurance with sending physical documents and makes a complete transfer to the aim of boosting sales. digital communication. At the end of 2012, both the Danish and the Norwegian part of Commercial set up new sales channels focusing on new sales to small businesses in the Commercial segment. Customer retention – Commercial Claims The gross claims ratio amounted to 64.3 (75.4), and the claims ratio, net of ceded business, which includes net reinsurance ratio, was 63.4 (71.8). The improved claims ratio is attributable to a significantly lower level of both weather claims and large claims as well as the effect of profitability measures and a reinsurance agreement concerning the frequency of weather claims which had a positive impact of DKK 20m, corresponding to 0.5 percentage points in relation to the claims ratio, net of ceded business. % 94 92 90 88 86 84 82 As mentioned above, Tryg has introduced profitability measures in relation to Commercial customers, primarily within building and 2008 2009 2010 2011 2012 Denmark Norway Commercial | Annual report 2012 | Tryg A/S | 25 Highlights for Q4 2012 • Technical result of DKK 156m (DKK 133m). • Combined ratio of 82.6 (85.7). • The quarter was characterised by a lower level of weather claims than in Q4 2011. • Expense ratio of 20.0 (19.4). The combined ratio totalled 82.6 (85.7), which is very low and which reflects the measures introduced, but also the fact that in Q4 Commercial was affected by favourable weather conditions and an unusually low level of medium-sized claims. Gross premiums fell by 3.3% in Q4, which was in line with expect- ations and the developments which generally characterised the year. The retention rate for Denmark was 84.6 (85.5), a level which was still affected by the profitability measures introduced, while the retention rate in Norway was 87.4 (88.4). Results for Q4 2012 The gross claims ratio was 59.8 (64.2), and the claims ratio, A technical result of DKK 156m (DKK 133m) was posted, based on net of ceded business, was 62.6 (66.3). continuous improvements as a result of the measures introduced. In Q4 2012, weather claims were lower than for the prior-year period The expense ratio was 20.0 (19.4), which was lower than for the and also lower than for an average year. full year. 26 | Tryg A/S | Annual report 2012 | Commercial Corporate Focus on profitability – even if it leads to fluctuations in premium income Truls Holm Olsen Group Executive Vice President, Corporate Highlights • Technical result improved by DKK 141m to DKK 650m (DKK 509m). • Combined ratio improved by 3.5 percentage points to 87.7 (91.2). • Gross premiums reduced by 2.0% (0.8%) after intro duction of profitability measures, including the pruning of customers. These are often keen to compete on price, and Corporate’s focus on profitability means that premium income will fluctuate more than for Private and Commercial. For Corporate, it is therefore important to ensure profitable business, while at the same time being able to adjust cost levels to major fluctuations in premium income. The technical result for 2012 was DKK 650m (DKK 509m), with a combined ratio of 87.7 (91.2). The improved result is primarily attri b- utable to the effect of profitability measures, including pruning of unprofitable segments and considerably more favourable weather Corporate sells insurance products to corporate customers under the conditions than in 2011. The level of large claims declined compared ‘Tryg’ and ‘Tryg Garanti’ brands in Denmark and Norway and under the with last year, corresponding to a 0.3 percentage point reduction. ‘Moderna’ brand in Sweden. Sales are effected both via Tryg’s own sales However, the lower interest rate level reduced the combined ratio by force and via insurance brokers. Moreover, customers with international 2.4 percentage points relative to 2011. Run-off gains were high, pri- insurance needs are served by Corporate through its cooperation with mary due to the significant size of long-tailed workers’ compensation the AXA Group. Tryg Garanti is also included in Corporate results. The business, which – seen from a historical perspective – has had high business area accounts for 26% of the Group’s total premium income. run-off gains. Despite the high run-off gains, no changes have been made in the principles used for claims provisions. Profit/loss Corporate is focused on improving profitability and satisfactory generating Tryg has a solid market position in Denmark and Norway, while the results relative to the capital attributable to the area. The Corporate market Corporate business in Sweden is still in a start-up phase character- is the most competitive area, and new players enter the field regularly. ised by consciously limited growth, the focus being on the profit- Key figures – Corporate DKKm Gross premium income Gross claims Gross expenses Profit/loss on gross business Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result Run-off gains/losses, net of reinsurance Key ratios Premium growth in local currencies Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio Combined ratio, exclusive of run-off Run-off, net of reinsurance (%) Large claims, net of reinsurance (%) Weather claims, net of reinsurance (%) Q4 2011 Q4 2012 1,308 -1,177 -172 -41 60 10 29 189 -3.4 90.0 -4.6 85.4 13.1 98.5 112.9 -14.4 17.3 4.3 1,330 -1,035 -162 133 -9 -3 121 169 -1.4 77.8 0.7 78.5 12.2 90.7 103.4 -12.7 11.8 0.8 2011 5,259 -4,227 -671 361 107 41 509 630 0.8 80.4 -2.0 78.4 12.8 91.2 103.2 -12.0 7.9 3.2 2012 5,258 -3,929 -648 681 -37 6 650 506 -2.0 74.7 0.7 75.4 12.3 87.7 97.3 -9.6 7.6 0.6 Corporate | Annual report 2012 | Tryg A/S | 27 ability of selected segments. Tryg distinguishes itself, in particular, on weather claims which had a positive impact of DKK 23m, correspond- its significant knowledge of the segments and its high service levels. ing to 0.4 percentage points in relation to the claims ratio. Considering Tryg’s small market share in Sweden, it was therefore very positive that a survey among 143 insurance brokers ranked Tryg most The profitability measures in relation to Corporate customers have highly among the insurance companies in the Swedish market. included higher prices, changes to the insurance cover for weather In 2012, the market situation in the Corporate market was generally unsatisfactory profitability. In Norway, these included power stations, not impacted significantly by the economic situation in southern and in Denmark local authorities. claims and pruning of customers and segments characterised by Europe. Danish businesses benefited from the positive economic development in Germany, Denmark’s largest export market. However, Expenses towards the end of the year, the German economy fared less well, which The expense ratio was 12.3 (12.8 ) in 2012, which represented a satis- is expected to have a negative impact on Danish industry in 2013. factory reduction concurrently with a reduction in premium levels. The reduction is due to the tailoring of the business to a lower level of activity In Norway, macro-economic growth also benefited the industrial and general measures aimed at ensuring a reduction in cost levels. companies. On account of Tryg’s smaller market share and focused approach to new business, Tryg’s Swedish business is only affected by macro-economic developments to a smaller extent. Premiums All in all, gross premiums fell by 2.0% (0.8%) in local currencies. The negative growth was a combination of negative growth of 1.1% in the Danish Corporate segment, a negative growth in Norway of 5.2% and a positive growth in Sweden of 10%. The negative growth in both Denmark and Norway can be ascribed to price increases, pruning of Highlights for Q4 2012 • Technical result of DKK 121m (DKK 29m). • Combined ratio of 90.7 (98.5). • The quarter was characterised by a considerably lower level of both weather claims and large claims than in Q4 2011. customers and lower sales. As mentioned above, the Corporate market is • Expense ratio of 12.2 (13.1). characterised by changes in the competitive situation when new players try to gain market shares – a development which in 2011 was particularly pronounced in the Danish market, and which affected the Norwegian Results for Q4 2012 market in 2012. Tryg focuses on profitability, which during periods of The technical result totalled DKK 121m (DKK 29m) and reflected the fierce price competition will lead to fluctuations in premium income. continued improvement based on profitability measures, but was also at- tributable to a considerably lower level of weather claims and large claims. Corporate customer loyalty is determined by the distribution channels. For its direct sales, Tryg has, over the years, developed concepts for the The combined ratio was 90.7 (98.5), the considerable fall being various customer groups which entice customers to stay with Tryg. This attributable to developments in claims. is deemed to be an important explanation for the higher level of loyalty compared with customers served by brokers. Gross premiums fell by 1.4% in Q4, representing a slightly lower reduction than for the full year. Claims The gross claims ratio amounted to 74.7 (80.4), and the claims ratio, The claims ratio was 77.8 (90.0), and the claims ratio, net of ceded net of ceded business, which includes the profit/loss from reinsurance, business, was 78.5 (85.4), reflecting in particular a lower level of was 75.4 (78.4). The improved claims ratio is attributable to a signifi- weather claims and large claims. cantly lower level of both weather claims and large claims as well as the effect of profitability measures. Moreover, the claims ratio was The expense ratio was 12.2 (13.1), corresponding to the level affected by a reinsurance agreement concerning the frequency of for the full year. 28 | Tryg A/S | Annual report 2012 | Corporate Sweden Highlights • Technical result improved by DKK 116m to DKK 102m (DKK -14m). • • Combined ratio improved by 7.6 percentage points to 95.3 (102.9). Gross premiums were up 0.7% (9.2%) as a result of profitability measures and a conscious reduction in sales. Profitability measures have improved results and will continue to do so in the coming years Group Executive Vice President, Sweden Per Fornander business and the acquired Moderna. Moreover, important structural measures have been implemented in relation to distribution. With these initiatives, a solid foundation has been created for further developing the business and improving profitability. Profit/loss A profit of DKK 102m (DKK -14m) was posted. The positive develop ment is based on a continued high level of profitability within the niche areas, which comprise the insurance of leisure boats, motorcycles and product insurance in connection with elec- tronics purchases. Moreover, the profitability measures introduced in the business which was originally started up in Malmö based on Sweden comprises the sale of insurance products to private Nordea customers have contributed positively to the results. customers under the ‘Moderna’ brand. Sales are effected via Tryg’s own sales team, call centres and the Internet. The business area Profitability measures have also been introduced for the rest of the accounts for 8% of the Group’s total premium income. Private business area, and a conscious reduction has been made in the rest of the acquired Moderna’s non-niche Private portfolio. For the Sweden business area, which at the beginning of the year The market situation in Sweden is generally impacted by the global also included Finland, focus has been on improving profitability. economic situation which put a dampener on private consump- Important steps included divesting the Finnish business and im- tion. For Moderna, this has been particularly true of the market for proving pricing, while further integrating the original bank insurance leisure boats and motorcycles where sales have been low. Key figures – Sweden DKKm Gross premium income Gross claims Gross expenses Profit/loss on gross business Profit/loss on ceded business Technical interest, net of reinsurance Technical result Run-off gains/losses, net of reinsurance Key ratios Premium growth in local currencies Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio Combined ratio, exclusive of run-off Run-off, net of reinsurance (%) Weather claims, net of reinsurance (%) Q4 2011 Q4 2012 370 -326 -92 -48 -2 6 -44 6 4.7 88.1 0.5 88.6 24.9 113.5 115.1 -1.6 1.4 399 -268 -84 47 3 4 54 -1 0.9 67.2 -0.8 66.4 21.1 87.5 87.2 0.3 1.3 2011 1,586 -1,319 -303 -36 -9 31 -14 -18 9.2 83.2 0.6 83.8 19.1 102.9 101.8 0.0 1.3 2012 1,654 -1,267 -306 81 -3 24 102 -29 0.7 76.6 0.2 76.8 18.5 95.3 93.5 1.8 1.2 Sweden | Annual report 2012 | Tryg A/S | 29 Premiums Claims All in all, premium income was up 0.7% against growth of 9.2% in The gross claims ratio amounted to 76.6 (83.2), and the claims ratio, 2011. The low growth is due to Tryg’s focus on profitability, which net of ceded business, which includes the profit/loss from reinsurance, has resulted in considerable price increases within the Private seg- was 76.8 (83.8). The improved claims ratio, net of ceded business, can ment, which was originally established on the basis of bank distribu- be ascribed to price increases and reduced growth within un pro fitable tion. Price increases have been introduced for all main products. The customer groups. Moreover, considerably improved tariffs have motor insurance portfolio has been pruned as it comprised too many been developed within both motor and house insurance, ensuring expensive cars at too low a price, and new tariffs with a markedly signifi cantly better price differentiation. The claims ratio is positively better correlation between risk and price have been implemented. affected by major efficiency increases in claims handling. This is il- The number of partnership agreements has been reduced signifi- lustrated for example by the fact that approximately 50% of claims in cantly to ensure profitability and a volume which reflects the costs Stockholm were registered and processed on the same day. A conver- associated with administering the agreements. sion from two IT systems to one in 2013 will further increase claims The profitability measures have had the intended effect, which can, among other things, be seen from the official statistics for the Swedish Expenses handling efficiency. market. They show that Moderna’s market share for contents, house An improved expense ratio of 18.5 (19.1) was achieved in 2012, and motor insurance has been reduced in terms of the number of concurrently with considerably lower premium growth compared policies, whereas it is virtually unchanged within both boat insurance with prior years. To ensure further growth, Moderna implemented a and other motor insurance. Measured in terms of premium income, number of structural initiatives at the end of 2012 which will result market share is slightly up, which illustrates the improved profitability. in additional cost level improvements in the coming years. The initia- tives include a centralisation of functions within distribution, claims Nordea was an important distribution channel in particular in connec- handling and staff services. The most important step was gathering tion with the original establishment of the business in Sweden. In all customer service and telemarketing functions in Malmö and the 2012, Tryg and Nordea decided not to renew the distribution agree- closing-down of a similar function in Luleå in northern Sweden. ment. On the other hand, Moderna’s agreement with ICA Bank was The restructure results in approximately 50 jobs being cut, or ap- renewed and expanded. Moreover, Moderna will launch a number proximately 11%. Moreover, Moderna will, in 2013, convert to using of initiatives both to retain the profitable customers in the Nordea only one IT system, which will contribute to further cost reductions. portfolio, to develop direct sales and to enter into more partnership agreements. Average premium – house Average premium – motor Index 140 130 120 110 100 90 2008 2009 2010 2011 2012 Index 140 130 120 110 100 90 2008 2009 2010 2011 2012 30 | Tryg A/S | Annual report 2012 | Sweden Highlights for Q4 2012 The combined ratio was 87.5 (113.5), which highlights the marked improvements achieved by this business area. • Technical result of DKK 54m (DKK -44m). • Combined ratio of 87.5 (113.5). • Expense ratio of 21.1 (24.9). Gross premiums were up 0.9% in Q4, which was in line with expect- ations and the developments which generally characterised the year. The claims ratio was 67.2 (88.1), and the claims ratio, net of ceded business, was 66.4 (88.6). The lower level of claims is attributable to the positive development in claims costs recognised in the financial statements for Q2 and Q3, which improved the claims ratio in Q4. Results for Q4 2012 A technical result of DKK 54m (DKK -44m) was posted, based on The expense ratio was 21.1 (24.9). The slightly higher level is attri b - continuous improvements as a result of the profitability measures utable, in particular, to the accrual of Moderna’s premium income introduced and a lower level of weather claims. according to the risk, and to the fact that the premium income is therefore lower in Q4 than in the year as a whole. Sweden | Annual report 2012 | Tryg A/S | 31 Investment activities Highlights investment portfolio. Consequently, the investment portfolio is divided into two portfolios – a match portfolio and a free portfolio. • Gross return of DKK 2,243m (DKK 1,890m). Investment return in 2012 In 2012, the Group’s total investment portfolio of DKK 45.5bn • Return on match portfolio of DKK 109m (DKK 95m). (DKK 41.3bn) generated a gross return of DKK 2,243m (DKK 1,890m), • Very high return on free portfolio of DKK 1,129m (DKK 184m). • Write-down of owner-occupied property of DKK 350m. corresponding to a return of 5.1% (4.8%) on the average invested capital. The result was positively impacted by gains on equities and credit bonds like, for example, global high-yield bonds, government and corporate bonds from emerging markets and primarily financial senior credit bonds. Bonds generally benefited from strongly falling interest rates, especially in the first half year. The return on investment Tryg’s investment activities include investing in investment assets property also made a positive contribution, thanks to a slight upturn such as bonds, equities and property and managing Tryg’s liquidity. in the Norwegian property market. The investment activities are regulated by legislation and by the policies and guidelines adopted and issued by the Supervisory Board. The investment return after transfer of insurance technical interest and Investment portfolio value adjustment of discounting of provisions totalled DKK 1,238m in 2012. After adjustment of other financial income and expenses, the net Tryg’s primary focus is on operating a profitable insurance business, investment return totalled DKK 617m (DKK 54m), and after discon - and the investment activities must support this focus in the best ti nued and divested activities the result was DKK 585m (DKK 61m). possible way. The investment strategy is based on a relatively low investment risk, and most of the assets are secure investment assets, Match portfolio primarily bonds. The purpose of the investments is both to match The purpose of the match portfolio is to hedge fluctuations in the the insurance-related obligations in the best possible way, and to discounting of insurance provisions by means of interest rate swaps in obtain a satisfactory absolute return on the remaining part of the local currencies. By entering into Danish, Norwegian and Swedish Key figures for the year – Investments DKKm Bonds, cash deposits etc. Equities Real estate Total Value adjustments, changed discount rate Transferred to insurance technical interest Total investment return before other financial items Other financial income and expenses, investments a) Total investment return Other financial income and expenses, non-investment a) Investment return Of which investment return on discontinued and divested business Investment return on continuing business Return 2011 1,858 -87 119 1,890 -760 -851 279 -59 220 -166 54 -7 61 Total 1,770 269 204 2,243 -477 -528 1.238 -70 1,168 -551 617 32 585 Free 656 269 204 Investment assets 31.12.12 31.12.11 37,232 1,860 2,199 41,019 2,444 2,082 1,129 41,291 45,544 Return 2012 Match 1,114 1,114 -477 -528 109 1,129 a) The item comprises interest on operating assets, bank debt and reinsurance deposits, foreign currency translation adjustment of insurance items, costs of investment activities. 32 | Tryg A/S | Annual report 2012 | Investment activities fixed-rate swaps, Tryg avoids fluctuations in the fair value of its The free portfolio yielded a gross return of DKK 1,129m (DKK 184m), long-term liabilities in the respective countries, and this eliminates corresponding to 11.4% (3.4%) of the average invested capital. The most of the interest rate risk of Tryg’s claims provisions. As fluctua- portfolio grew from approximately DKK 8.1bn at the end of 2011 to tions in swap rates are sometimes greater or smaller than the Danish DKK 10.8bn at the end of 2012. The increase is attributable to satisfac- Financial Supervisory Authority’s interest rates, a mismatch will arise tory insurance operations as well as an increase in value due to devel- in addition to a mismatch from the other risks which are not interest opments in the financial markets. The equity portfolio, which is globally rate risks and which cannot be hedged accurately. diversified, yielded a return of DKK 269m (DKK -87m), or 13.0%. This In practice, Tryg seeks to put together bond portfolios which are report for 2011. The property portfolio, which consists of Danish and most likely to achieve the discounting curve yield given by the Danish Norwegian properties, yielded a return of DKK 204m (DKK 119m), cor- significantly exceeded the outlook announced by Tryg in the annual Financial Supervisory Authority over time. These portfolios are provided responding to 9.7% (6.1%). as benchmarks for our managers who must ensure performance. Hedging of the interest rate risk and developments in the FSA rate and In 2012, the free bond portfolio yielded a total return of DKK 656m the swap rate has resulted in a mismatch of DKK 109m. The mismatch (DKK 152m), due to an overweight of bonds with credit exposure. is primarily attributable to the implementation of the Solvency II curve The bond portfolio was impacted in 2012 by decreasing interest rates, in June, on the initiative of the Danish Ministry of Business and Growth. narrowing credit spreads, low risk appetite and a demand for alterna- This meant an immediate write-down of Tryg’s discounted provisions by tive investments with high risk premiums. Moreover, the portfolio was DKK 150m. Without this write-down, Tryg would have had a negative supported by good absolute returns on both global high-yield bonds mismatch of approximately DKK 40m. and emerging-market bonds which are primarily issued in USD or EUR. Free portfolio Improved public finances in many high-interest countries, relative to the western economies, supported these asset classes. Moreover, The free investment portfolio consists of the other investment assets financial senior credit bonds contributed to a good return. Based on which reflect Tryg’s equity. The portfolio is invested broadly in bonds, the above-mentioned positive performance and a sensible portfolio equities and investment property to ensure diversification and the best allocation, Tryg’s bond portfolio made a substantial contribution to the possible return based on a limited risk. total investment return. Key figures for investments Q4 DKKm Bonds, cash deposits etc. Equities Real estate Total Value adjustments, changed discount rate Transferred to insurance technical interest Total investment return before other financial items Other financial income and expenses, investment a) Total investment return Other financial income and expenses, non-investment a) Investment return Of which investment return on discontinued and divested business Investment return on continuing business Investment assets 31.12.12 41,019 2,444 2,081 45,544 Return Q4 2011 Return Q4 2012 Total Match Free 235 235 -103 -105 27 146 67 43 256 256 432 103 25 560 -196 -176 188 -16 172 -29 143 -1 144 381 67 43 491 -103 -105 283 -20 263 -251 12 7 5 a) The item comprises interest on operating assets, bank debt and reinsurance deposits, foreign currency translation adjustment of insurance items, costs of investment activities. Investment activities | Annual report 2012 | Tryg A/S | 33 Other financial income and expenses Other financial income and expenses totalled DKK -621m (DKK -225m), due, among other things, to the write-down of Tryg’s owner-occupied properties by DKK 350m. The write-down resulted partly from the effect of a reassessment of the rent level in Q2 2012 Highlights for Q4 2012 • Return on match portfolio of DKK 27m (DKK -7m). by an amount of DKK 150m, and partly from a higher return • High return on free portfolio of DKK 256m (DKK 194m). requirement, the effect being DKK 200m. Other major elements included Tryg’s interest expenses in respect of subordinate loans and the costs of hedging Tryg’s equity in Norway and Sweden. The costs of hedging currency exposure totalled approximately DKK 110m • Write-down of owner-occupied property of DKK 200m. (DKK 87m) in 2012, primarily from the hedging of foreign branches Investment activities in Q4 2012 due to the higher interest rate level in Norwegian kroner. Interest on Investment activities before other financial income and expenses subordinate loans amounted to approximately DKK 79m in 2012. generated a profit of DKK 283m in Q4 2012 against DKK 188m for Total investment portfolio 10 Per cent 5 5 3 2 75 Mortgage bonds High-yield bonds Government bonds Real estate Equities Bank deposits the prior-year period. The match portfolio had a mismatch of DKK 27m (DKK -7m) and thus fulfilled the targets for this part of the portfolio. The free portfolio generated a profit of DKK 256m (DKK 194m) in Q4, with equities accounting for DKK 67m (DKK 103m). Bonds etc. in the free portfolio generated a profit of DKK 146m (DKK 66m) and were affected by a high direct interest rate on credit bonds and high-yield bonds. Moreover, the return was impacted by the above-mentioned write- down of owner-occupied property of DKK 200m due to a higher return requirement with the aim to ensure a higher degree of flex- ibility in connection with possible future restructurings. Match portfolio Free investment portfolio 3 9 Per cent 88 Mortgage bonds Government bonds Bank deposits 14 24 Per cent 20 30 10 2 Mortgage bonds High-yield bonds Government bonds Real estate Equities Bank deposits 34 | Tryg A/S | Annual report 2012 | Investment activities Financial targets and outlook Efficiency increases and simplification will be essential to reducing costs in the coming years. Tor Magne Lønnum Group CFO Tryg’s financial targets An extraordinarily high investment return was realised in 2012, and • Combined ratio of 90 or below from Q3 2013. a lower return is expected for the coming years as interest rates are • Expense ratio under 15 in 2015. • Return on equity of 20% after tax. low and are expected to remain so. As the investment risk is generally kept low, half of the investment portfolio is in bonds and will only make a modest contribution to the investment return as current In order to ensure the realisation of Tryg’s financial targets, Tryg is interest rate levels are used to calculate the expected bond yields. implementing an ambitious cost-cutting programme, the aim being For equities and real estate, the same expectations are applied as to reduce costs and claims by a total of DKK 1bn in the period up until for earlier years of 7% and 6%, respectively. 2015. Costs must be reduced by DKK 400m, including DKK 100m from claims handling costs to be realised via claims. Claims must Investment activities include other types of investment income and be reduced by DKK 600m. Claims-related cost reductions must be expenses, especially the costs of managing the investments, gains achieved through outsourcing and better procurement, for example and losses on foreign currency hedges and interest paid on loans. via the use of online auctions for repairs. Costs must be reduced, in particular, through job cuts in the staff functions, where the number of employees has increased by 25% in recent years. Claims expenses related to weather and large claims have been increasing in recent years. However, 2012 was an exception as both weather and large claims were lower than expected. In 2013, weather claims net of reinsurance are expected to total DKK 500m, and large claims DKK 450m. Price increases have lifted the top line in recent years. Given Tryg’s focus on profitability, it will be necessary to say goodbye to unprofit- able customers, and Tryg therefore expects only a modest increase in premium income in the coming years. Targets – expenses DKKm 300 250 200 150 100 50 0 300 55 125 125 50 Total savings and expenses 2012 2013 2014 2015 Target Achieved Savings programme up until 2015 Targets – claims DKKm 1,000 800 600 400 200 0 Total reduction in expenses DKK 400m Claims DKK 600m 300 100 600 Transfer to claims/ indirect claims Claims DKKm 800 700 600 500 400 300 200 100 0 700 100 120 250 250 100 Total savings and clims 2012 2012 2013 2014 2015 Target Achieved Financial targets and outlook | Annual report 2012 | Tryg A/S | 35 Tryg House Check In 2012, we gave many private customers in the Greater Copenhagen area who suffered water damage in connection with the cloudburst in 2011 the offer of a free inspection of their homes. With the Tryg House Check, customers are given advice and instructions on what they can do to prevent damage in future, and, if requested, a specific quote for the work required. Leif and Tove Rasmussen from Dyssegård accepted the offer of the Tryg House Check. The family was hit twice by cloudbursts in 2011 and had to undergo extensive renovation work, which was expensive for Tryg and difficult for Leif and Tove. An anti-flooding valve at the floor drain and a water tank connected to the gutter are some of the measures implemented by the family to prevent future damage. ‘We really want to avoid any more damage. We are the ones who suffer, and it is such a hassle sorting everything out, especially with water damage,’ Tove and Leif say. The specialist who performed the House Check inspection was satisfied with the family’s preventive measures. Capital and risk management Credit ratings As at 31 December 2012 Tryg Forsikring A/S Tryg Garantiforsikring A/S Standard & Poor’s ‘A-’/stable ‘A-’/stable Tryg’s capital base and financial strength are preconditions for the model, Tryg calculates the necessary capital each quarter based on Group being able to take over risks from customers. For this to be the future Solvency II standard model. Under the standard model, the possible, capital planning must be tailored to the Group’s risk and capital need is DKK 8,161m which – compared to the actual capital of growth profile. Tryg wants to have the necessary capital, while at DKK 10,400m, calculated according to the Solvency II rules – equates the same time being able to distribute stable dividend correspond- to a surplus cover of DKK 2,239m. The introduction of the Solvency II ing to 60-90% of the earnings for the year. Read more about rules will make stricter demands on the way in which insurance com- dividend policy in the chapter on the Tryg share and dividend panies work with and control risks, including the Supervisory Board’s policy on page 41. involvement in risk and capital management. Tryg has for a number of years been working to tailor the company to meeting these require- Risk-based capital management ments. This means that the Supervisory Board actively determines the Through capital and risk management, Tryg aims to secure financial company’s risk appetite and the risk management framework, while strength and flexibility. Capital management is based on Tryg’s regularly assessing the aggregate risk and the derived capital need. internal capital model, and the capital requirement is determined on Once a year, a so-called ORSA (Own Risk and Solvency Assessment) the basis of Tryg’s current risk profile with a 99.5% level of certainty. is carried out, which is a systematic and comprehensive assessment This corresponds to the chosen capital level being insufficient once in of the Group’s risk and solvency. ORSA also comprises a capital plan a 200-year period on a statistical basis. The model calculates the and a capital contingency plan illustrating the implications of the com- capital requirement while taking account of the actual business mix, pany’s business plan and documenting the adequacy of the capital profitability, provisions profile, reinsurance protection, investment mix base, even in a selection of stressed situations. Such an assessment and scenarios for the additional risk which you may experience in will be a statutory requirement under Solvency II. particularly stressed situations. The calculation takes account of the geographical spread and the effect of the chosen investment policy; The Executive Management’s responsibility for all risk and capital man - the interest rate risk attaching to the bond portfolio corresponds to a gement is exercised on a daily basis through a risk management environ- the interest rate risk for the discounted provisions, which means that ment in which underwriting and reinsurance, provisions, investment Tryg’s net interest rate risk is insignificant. risk and operational risk are managed by separate subcommittees. An external credit rating is obtained from Standard & Poor’s, and Capital structure Tryg is given an ‘A-’ rating. Tryg’s capital base consists of equity and subordinate loans. The relative sizes of these two categories are subject to ongoing assessment with a The Danish authorities demand active capital management based view to maintaining an optimum structure which takes account of the on quarterly calculations of an individual solvency need. These return on equity, capital costs and flexibility. Different models are used requirements are precursors of the future Solvency II rules. Tryg’s to calculate the actual capital under the various regimes, but regardless calculation of its individual solvency need is based on the Group’s of the model applied, Tryg has a high level of internal financing (low internal capital model. The individual solvency need was DKK gearing). In 2005, Tryg took out a 20-year subordinated bond loan of 6,410m at the end of 2012 against DKK 6,320m at the end of 2011. EUR 150m listed on the London Stock Exchange. In connection with the With a capital base of DKK 8,832m less proposed dividend, Tryg has acquisition of Moderna in Sweden in 2009, Tryg took out a sub ordinated a surplus cover of DKK 2,422m. In addition to the internal capital loan with expiry in 2032 of EUR 65m from TryghedsGruppen. Tryg’s 38 | Tryg A/S | Annual report 2012 | Capital and risk management total subordinated debt subsequently amounted to EUR 215m. All in believes that the likely start date of Solvency II will be 1 January 2016 all, debt amounted to 15% of equity at the end of 2012, correspond- or later. It is unknown at present to which extent the individual parts of ing to 10% of the capital base. Interest expenses on the subordinated the Solvency II regime will be implemented earlier in Danish legislation. loan capital totalled DKK 80m in 2012. For further details on loan Solvency II allows for the use of full or partial internal models. Tryg’s terms and capital mangement in Tryg, see note 2, pages 88-89. plan is to use the existing internal model in areas where the risk deviates from the risk assessed using the standard model. Within the As part of the assessment of the capital structure, Tryg has decided area of insurance risk, Tryg is of the opinion that it will be able to to repay the existing subordinated loan from TryghedsGruppen of model its own risk more correctly. For example, the standard model EUR 65m in 2013 and to replace it with a new subordinated loan of does not take account of geographical diversification between the DKK 800m. The current capital requirement rules limit the amount Nordic countries, which is an aspect of Tryg’s exposure. On the other of fixed-term subordinated loan capital which can be included in the hand, the existing internal model’s treatment of investment risks is capital base, which has meant that the existing subordinated loan very like the standard model, which must be seen in light of the from TryghedsGruppen of EUR 65m cannot be included in Tryg’s homogeneous investment risk which is generally hedged across capital base. The new subordinated loan will be of a perpetual term, national borders based on efficient financial markets. The aim is that, which means that the loan can be included in the capital base in full, under Solvency II, Tryg will in future use a partial internal model in its which thus increases by DKK 800m. Against the background of the capital planning consisting of the insurance module in Tryg’s existing above, treasury shares worth DKK 800m will be acquired as part of an model, supplemented with the other modules (investment, opera- extraordinary distribution. Together with the new subordinated loan, tional risk etc.) from the standard model. the distribution will result in an unchanged capital base, but with a lower proportion of equity, which in isolation will contribute positively Tryg engages in ongoing dialogue with the Danish Financial Super- to the future return on equity for the benefit of Tryg’s share holders. visory Authority on requirements for the development of a partial Moreover, the new subordinated loan is expected to be included as internal model. The plan is for Tryg to submit an application which Tier 2 capital under the new Solvency II capital adequacy rules. the Financial Supervisory Authority will then consider for approval. Reinsurance At the end of 2012, Tryg had a capital buffer of 27% (after expected dividend) based on the standard model under Solvency II, and the Reinsurance is an important tool when it comes to protecting Tryg’s approval of the internal model is expected to further increase the capital base. The need for reinsurance is assessed on an ongoing capital buffer. basis using Tryg’s internal capital model, in which the reinsurance premium is compared with the reduction in the capital requirement that can be achieved. Tryg’s reinsurance programme comprises single claims (large claims), and events which may impact several policies at the same time (catastrophe cover). The most important programmes Capital covering large claims include buildings, contents, motor, goods transport, liability and fish farming. catastrophe cover has been taken out for buildings, contents and risks in respect of which frequency protection has been arranged which limits the aggregate annual deductible in the event of, for example, hurricanes and cloudbursts. The reinsurance programme also comprises catastrophe cover for accidents and workers’ compensation. For a detailed description of Tryg’s reinsurance programme, see Note 1 on page 77. Implementation of Solvency II The Omnibus II Directive, which was to introduce the Solvency II regime on 1 January 2014, was not adopted in 2012 as planned. Tryg DKKm 12,000 10,000 8,000 6,000 4,000 2,000 0 Individual Solvency Solvency II Capital requirement Buffer Capital and risk management | Annual report 2012 | Tryg A/S | 39 Tryg share and dividend policy It is important for Tryg that investors, shareholders and other stake- of DKK 6.52, the share rose by 33.7% during 2012 (31.7% excluding holders are able to form a true and fair view of Tryg’s development. dividend). By comparison, the OMXC20 index rose by 27.2% in 2012. For this reason, we emphasise openness, transparency and the The index of insurance shares in Europe, the STOXX Euro Insurance accommodation of stakeholder information requirements. The Index, rose by 33.4% in 2012. The positive development in perfor- Executive Management and Investor Relations go on a roadshow mance and increased stability contributed to increasing the value of every quarter following publication of the financial statements to the Tryg share throughout 2012. The development was also supported meet with investors and equity analysts. by a generally higher demand for insurance shares, which are regarded In 2012, Tryg held 220 investor meetings and participated in ten that the demand for insurance is largely constant, which benefits the as safe investments in turbulent times. The financial crisis has shown conferences for both institutional investors and private shareholders. insurance industry in times of crisis. The Tryg share is covered by 21 investment analysts. See a list of analysts and their recommendations of Tryg at tryg.com > Investor. Nasdaq OMX Copenhagen continues to be the primary exchange for The Tryg share trading in the Tryg share. This is the venue of approximately 80% of the trading that generates liquidity in the share and determines the The Tryg share is listed on the Nordic exchange Nasdaq OMX Copen- price of the Tryg share. However, the share continues to be increasingly hagen and is covered by the OMX Copenhagen C20 index (OMXC20), traded on alternative exchanges (MTF trades through, among others, comprising the 20 most traded shares on the exchange. In accordance Chi-X and Turquoise), as other trading platforms are gaining ground in with the recommendations issued by Nasdaq OMX Copenhagen, Tryg step with the increased focus of the major investment funds on trading does not comment on financial results or outlook four weeks before costs. OTC (over-the-counter) and dark pools (non-transparent tradings) the publication of financial statements. All financial information is represent a large share of this trade which takes place outside of the published on tryg.com in Danish and English. It is possible to order an- established exchanges and, thus, does not have a direct impact on nual reports and subscribe for news and RSS feeds on the website. the price of and the liquidity in the Tryg share. In 2011, the Tryg share ended at a price of 319, and during 2012 it From 2011 to 2012, the total annual turnover (including OTC trades) increased, reaching 426.50 at the end of the year. Including a dividend fell from 50 million shares in 2011 to 34 million shares in 2012. Shareholders At 31 December 2012 11 Per cent 60 17 12 TryghedsGruppen Large Danish shareholders a) Large international shareholders a) Small shareholders Free float – geographical distribution At 31 December 2012 8 4 Per cent 51 15 22 Denmark UK United States Nordic region Others a) Shareholders holding more than 10,000 shares. Free float is exclusive TryghedsGruppen. Tryg share and dividend policy | Annual report 2012 | Tryg A/S | 41 Capital and dividend distribution DKKm Dividend Dividend per share (DKK) Payout ratio Share buyback 2008 442 6.5 52% 0 2009 991 15.5 49% 799 2010 256 4 43% 0 2011 2012a) 400 6.52 35% 0 1,594 26 72% 800 a) Proposed by the Supervisory Board for adoption by the annual general meeting. Share capital and ownership • A general objective of creating long-term value for the company’s Tryg has a total share capital of DKK 1,532,902,575, comprising a sin- shareholders. gle share class (61,316,103 shares with a nominal value of DKK 25), • A competitive dividend policy in comparison with those of our and all shares rank pari passu. The principal shareholder, Trygheds- Nordic competitors. Gruppen smba, Denmark, owns 60% of the issued shares and is the only shareholder owning more than 5% registered in the company’s register of shareholders. TryghedsGruppen invests in peace-of-mind and healthcare providers in the Nordic region, and supports charit- able activities. • • • • Distribution of 60-90% of the profit after tax. Aspiration to distribute a dividend which is steadily increasing in nominal terms. An unchanged return on equity of 20% after tax. The capital level must at all times reflect the objective of a 20% return on equity as well as the Group’s strategic plans. As of 31 December 2012, there was a free float of 40% of the shares, • The capital level may extraordinarily be adjusted through a share divided among 25,213 registered shareholders. The 200 largest buyback. shareholders owned 88% of the shares. At the end of 2012, Tryg held 621,292 treasury shares, corresponding to 1.0% of the share capital. At the 2013 annual general meeting, the Supervisory Board will pro- pose the payment of a cash dividend of DKK 1,594m, corresponding Dividend policy to DKK 26 per share. From the year 2012, Tryg has changed its dividend policy to achieve a higher degree of stability in the annual distribution. The new dividend Tryg has decided to take out an irredeemable subordinate loan, and policy reflects our expectations of high earnings in the insurance for that purpose purchase treasury shares of DKK 800m in order to business and a low risk profile within the investment activities, as well reduce equity by a corresponding amount. Read more in the as the requirement to have a solid capital position based on Tryg’s chapter Capital and risk management on page 38. internal capital model (Individual Solvency). In future, Tryg’s internal capital model will provide the framework for the company’s capital Annual general meeting requirement. Tryg’s future dividend policy will be based on the Tryg’s annual general meeting will be held on 18 April 2013 at 14:00 following assumptions: at Falkoner Centret, Falkoner Allé 9, 2000 Frederiksberg, Denmark. The notice will be advertised in the daily press in March 2013 and will be sent to shareholders, if requested. The annual general meeting will also be announced on tryg.com, where shareholders not able to attend can follow the proceedings live via webcast. 42 | Tryg A/S | Annual report 2012 | Tryg share and dividend policy Financial calendar 2013 18 April 2013 19 April 2013 24 April 2013 30 April 2013 10 July 2013 Annual general meeting Tryg shares trade ex-dividend Payment of dividend Interim report for Q1 Interim report for H1 2013 10 October 2013 Interim report for Q1-Q3 2013 Company announcements published in 2012 Date No. Company announcement 8 February 2012 8 February 2012 13 February 2012 22 March 2012 29 March 2012 17 April 2012 19 April 2012 19 April 2012 2 May 2012 18 June 2012 19 June 2012 2 August 2012 14 August 2012 12 October 2012 6 November 2012 8 November 2012 13 December 2012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Annual report 2011 Tryg reconsiders strategy for Finland Annual general meeting Notice of annual general meeting Election of employee representatives for Supervisory Board Tryg changes reporting structure from Q1 2012 New Investor Relations Director in Tryg Resolutions from annual general meeting Interim report for Q1 2012 Changes in Group Executive Management Announcement of new financial targets and Capital Markets Day in London Interim reports for Q2 2012 and H1 2012 Revised financial calendar 2012 Financial calendar 2013 Tryg sells Finnish business and concludes new partnership agreement with Nordea Interim report for Q1-Q3 2012 New dividend policy and repayment of subordinate loan Tryg share and dividend policy | Annual report 2012 | Tryg A/S | 43 Innovative claims prevention Many corporate customers in the Copenhagen area remember the cloudburst on 2 July 2011. The cloudburst flooded many basements and destroyed millions of kroner’s worth of electronics. Thanks to an innovative idea, our customers can now install a sensor which makes the lift in a building stop before it reaches the water in the basement. The 2011 cloudburst led us to start reflecting on how we could prevent and minimise damage to, for example, electronics. Together with one of our small subsuppliers, we have developed a solution: a sensor which stops lifts if there is water in the basement and switches electrical panels off automatically if water is leaking into the basement. A modest investment of DKK 7,500 which will save our customers a lot of trouble if a new cloudburst strikes. One of Tryg’s corporate customers, AP Pension, suffered several million kroner’s worth of damage as a result of the cloudburst. The cost of repairing its lifts alone was significant. Although the damage is covered by insurance, it causes great inconvenience to a business of this size to have to go through a claims procedure. AP Pension has now been one of the first to install sensors in its basements. Corporate governance Tryg focuses on managing the Group in accordance with the principles Each year, the Supervisory Board proposes the distribution of dividend for good corporate governance. Tryg complies to the widest possible and possibly a share buyback. In 2010, the annual general meeting au- extent with the Recommendations on Corporate Governance prepared thorised the Supervisory Board to allow Tryg to acquire treasury shares by the Danish Committee on Corporate Governance, which were up to 10% of the share capital until 14 April 2015. most recently updated in 2011. The recommendations are available at www.corporategovernance.dk. Tryg has published the statutory Annual general meeting report according to the ‘comply-or-explain’ principle for each Tryg holds its annual general meeting each year before the end of April. recommendation at tryg.com. A summary of the report is provided As required by the Danish Companies Act and the Articles of Association, below. Download Tryg’s statutory corporate governance report the annual general meeting is convened via a company announcement at tryg.com > Investor > Download. and at tryg.com subject to at least three weeks’ notice. Shareholders may also opt to receive the notice by post or email. The notice contains Dialogue between Tryg and its shareholders information about time and venue as well as an agenda for the Tryg issues press releases and company announcements, and pub- meeting, which as a minimum includes the following items: lishes annual and interim reports, which are available at tryg.com. Tryg provides quarterly updates of the Group’s outlook. This material • Report by the Supervisory Board on the company’s activities during provides all stakeholders with a comprehensive picture of Tryg’s the past financial year. position and performance. The consolidated financial statements are • Presentation of the annual report for adoption, including remunera- prepared in accordance with IFRS, and all company announcements tion for the Supervisory Board and discharge from liability of the and financial statements are published in Danish and English. Stake- Supervisory Board and Executive Management. holders may order printed annual reports and subscribe to news at • Resolution concerning the appropriation of profits or the cover of tryg.com. A number of internal guidelines ensure that the disclosure losses in accordance with the annual report. of price-sensitive information complies with the stock exchanges’ • Proposals from the Supervisory Board or from shareholders. code of conduct. • Election of members to the Supervisory Board. • Appointment of auditors. Investor Relations maintains regular contact with analysts and • Any other business. investors. The Executive Management and Investor Relations also organise investor meetings, teleconferences and webcasts and All shareholders are encouraged to attend the annual general meeting. attend conferences in Denmark and abroad. The Supervisory Board The annual general meeting is webcast, allowing stakeholders to is informed of the dialogue with investors and other stakeholders on watch the annual general meeting at tryg.com both during and after a regular basis. the meeting. Share and capital structure Shareholders may propose items to be included on the agenda for the Tryg’s share capital comprises a single share class, and all shares annual general meeting and may ask questions at the annual general rank pari passu. The principal shareholder, TryghedsGruppen smba, meeting. Shareholders may vote in person at the annual general meet- Kgs. Lyngby, Denmark, owns 60% of the issued shares and is the only ing, by post or appoint the Supervisory Board or a third party as their shareholder owning more than 5% to be registered in the company’s proxy. Shareholders may consider each item on the agenda. The proxy register of shareholders. form and form for voting by post are available at tryg.com prior to the The Supervisory Board ensures that Tryg’s capital structure is in line annual general meeting. with the needs of the Group and the interests of its shareholders and The annual general meeting is held by personal attendance as the complies with the requirements applicable to Tryg as a financial un- Supervisory Board values personal contact with the Group’s share- dertaking. Tryg has adopted a capital plan and a contingency capital holders. The Supervisory Board and the Group Executive Management plan, which are reviewed annually by the Supervisory Board. attend the annual general meeting whenever possible, and this has high priority. 46 | Tryg A/S | Annual report 2012 | Corporate governance Download statutory corporate governance report Takeover bids Each year, the Supervisory Board discusses Tryg’s activities to The Supervisory Board will consider any public takeover bid as guaran tee diversity at management levels. Tryg places great emphasis prescribed by legislation and, depending on the nature of such bid, on diversity at all levels of management, and in January 2012 the convene an extraordinary general meeting. company signed the ‘Charter for More Women in Management’. Tryg supports the charter which aims to guarantee equal career opportuni- Stakeholders and corporate social responsibility ties for women and men. Tryg has prepared an action plan which sets Identification of stakeholders is an integral part of the strategy review out specific targets to ensure diversity and equal opportunities and at the Supervisory Board’s annual strategy seminar, which always access to management positions for qualified men and women. In focuses on investors, customers, society and employees. The Super- 2012, the number of women at management level was 34.0%, and visory Board also receives regular reports about Tryg’s investor mix Tryg aims to increase the total number of women in management by and employee and customer satisfaction. 2% by 2014. See the action plan at tryg.com > CSR. Tryg has adopted a number of policies describing Tryg’s relationship Rules of procedure with various stakeholders, including a CSR policy which describes Each year, the Supervisory Board reviews the rules of procedures for Tryg’s CSR strategy and policy on corporate social responsibility. the Supervisory Board and the Executive Management with relevant See the Investor Relations policy at tryg.com > Investor guidelines and instructions describing reporting requirements and > IR contacts > IR policy and the CSR policy at tryg.com > CSR requirements for communication with the Executive Management. > CSR strategy > CSR policy. Financial legislation also requires the Executive Management to disclose all relevant information to the Supervisory Board and report Openness and transparency on compliance with limits defined by the Supervisory Board and Tryg has adopted an Investor Relations policy which states, among in legislation. other things, that all company announcements and financial state- ments are published in Danish and English and that Tryg publishes Chairman and Deputy Chairman of the Supervisory Board interim financial statements each quarter. The Supervisory Board is headed by a Chairman and a Deputy Chair- man. The Deputy Chairman will act in the Chairman’s absence and Duties and responsibilities of the Supervisory Board serves as a discussion partner for the Chairman. The Supervisory Board is responsible for the central strategic manage- ment and financial control of Tryg and for ensuring that the business The tasks of the Chairman and Deputy Chairman are defined in the is organised in a sound way. This is achieved by monitoring targets Supervisory Board’s rules of procedure. The tasks of the Chairman and framework on the basis of regular and systematic review of include chairing and assessing the work of the Supervisory Board, the strategy and risks. The Executive Management reports to the organising, convening and chairing board meetings and being in Supervisory Board on strategies and action plans, market develop- charge of the cooperation with the Executive Management. The ments and Group performance, funding issues, capital resources Chairman also acts as spokesman for the Supervisory Board. and special risks. The Supervisory Board holds an annual strategy seminar to define and/or adjust the Group’s strategy. The Executive The Chairman and Deputy Chairman hold preparatory meetings with Management works with the Supervisory Board to ensure that the the Executive Management before all board meetings. According Group’s strategy is developed and monitored. The Supervisory Board to the Supervisory Board’s rules of procedure, no board member ensures that the necessary competencies and financial resources are may perform work for Tryg without a prior decision to that effect by available for Tryg to achieve its strategic targets. The framework is the Supervisory Board. Furthermore, such work must be of a non- discussed at the strategy seminar and at an annual budget meeting. recurring nature. The Supervisory Board specifies its activities in the company’s rules of procedure and annual cycle. Composition and organisation of Supervisory Board The Supervisory Board has 12 members, and the Supervisory Board deems the number of members adequate to ensure a constructive Corporate governance | Annual report 2012 | Tryg A/S | 47 debate, sufficient diversification and an efficient decision-making sory Board in terms of, among other things, age, gender and nationality process. The Supervisory Board considers the number of board is sought, and the need for integrating new talent is considered. members each year when preparing the annual general meeting. Furthermore, the Supervisory Board performs an annual evaluation New board members are given an introduction to Tryg when taking of the performance and achievements of the Supervisory Board and up office. See CVs and descriptions of the competencies of the its members’ competencies to assess whether the Supervisory Board Supervisory Board in the section Supervisory Board on pages 54-55 has the competencies required to perform its duties in the best and at tryg.com > Governance > Management > Supervisory Board. possible way. In 2012, new requirements from the Danish Financial Supervisory Authority came into effect, prompting the Supervisory Independence of the Supervisory Board Board to carry out a further self-evaluation in October. The Super- Eight members of the Supervisory Board are elected by the annual visory Board focuses, in particular, on competencies in the fields of general meeting for one year at a time. Of the eight members elected insurance, economics, accounting, financial knowledge and experi- at the annual general meeting, four are independent persons as ence, manage ment experience, M&A experience, market insight and stated in recommendation 5.4.1 in Recommendations on Corporate international experience. See the description of competencies at Governance, while the other four members are not independent tryg.com and in the notice convening the annual general meeting. persons as they are appointed by the principal shareholder Trygheds- The Supervisory Board has carried out a self-evaluation as required in the section Supervisory Board on pages 54-55 and at tryg.com by the Danish Financial Supervisory Authority’s guidelines on > Governance > Management > Supervisory Board. This is also evaluation of board members’ knowledge and experience in general described in the notice convening the general meeting. Gruppen. See details about the independent board members insurance companies. The evaluation concludes that the Supervisory Board as a whole has the knowledge and experience necessary to Board members elected by employees perform its tasks. Under the Danish Companies Act, employees are entitled to elect a number of representatives to the Supervisory Board, equal to half The Articles of Association stipulate that the Chairman of Trygheds- the number of other members at the time employee elections are Gruppen’s Supervisory Board must also be Chairman of Tryg’s held. Tryg has agreed with Tryg’s staff organisations that two board Supervisory Board. Furthermore, TryghedsGruppen’s Supervisory members are elected among employees in Denmark, one member Board recommends three members to Tryg’s Supervisory Board from among employees in Norway and one member among employees in among the members of TryghedsGruppen’s Supervisory Board. Sweden. Employee representative elections were held in 2012. The next election will be held in 2016. Danish law states that employee The Supervisory Board includes members from Denmark, Sweden representatives have the same rights, obligations and responsibilities and Norway and has five female members, including three female as the other board members. employee representatives. Meeting frequency New board members The Supervisory Board holds at least seven meetings a year and an The process of selecting new board members is thorough and trans- annual strategy seminar to discuss and define strategies and targets parent for the board members. The Nomination Committee selects for the years ahead. In 2012, the Supervisory Board held seven board new candidates for the four board positions, which are not selected meetings and the annual strategy seminar. The Supervisory Board from among the members of TryghedsGruppen’s Supervisory Board, discusses the Supervisory Board’s tasks on a regular basis, and at the and presents its recommendation for the selection of candidates to last meeting of the year at the latest, it determines its meeting and the Supervisory Board. work schedule for the coming year. Prior to the election of new members, the Supervisory Board prepares a Number of other directorships description of the candidates’ background, directorships, professional The Supervisory Board and the individual board members deem that qualifications and experience. A balanced composition of the Supervi- each member has adequate time and resources to perform their 48 | Tryg A/S | Annual report 2012 | Corporate governance office as board members of Tryg in a satisfactory manner. Information as well as accounting and auditing in publicly listed companies. The about the board members’ position, directorships and shareholding Audit Committee held four meetings in 2012 and reported regularly and changes in portfolios can be found under their CVs. to the Supervisory Board. In August 2012, the Audit Committee See the CVs in the section Supervisory Board on pages 54-55 and carried out an evaluation of the preceding year’s work. See the at tryg.com > Governance > Management > Supervisory Board. tasks of the Audit Committee in 2012 at tryg.com > Governance > Management > Supervisory Board > Board committees. Retirement age and election period Board members elected by the annual general meeting are up for Risk Committee election each year at the annual general meeting. See pages 54-55 for Tryg has had a Risk Committee since 2010. The Risk Committee is information on when the individual members joined the Supervisory responsible for supervising asset and risk management. The Risk Board, were re-elected and when their current election period expires. Committee monitors the risk management environment as well as To ensure the integration of new talent on the Supervisory Board, associated processes. The Committee has four members, and in members elected by the annual general meeting may hold office for a 2012 the Risk Committee held four meetings. maximum of nine years. Furthermore, members of the Supervisory See the tasks of the Risk Committee at tryg.com > Governance Board must retire at the first annual general meeting following their > Management > Supervisory Board > Board committees. 70th birthday. See the ages of the individual board members on pages 54-55 and at tryg.com > Governance > Management Nomination Committee > Supervisory Board. Board committees Tryg has set up a Nomination Committee which is primarily tasked with ensuring the correct composition and size of the Executive Management and the Supervisory Board. The committee consists of Tryg’s Supervisory Board has set up an Audit Committee, a Risk the Chairman and Deputy Chairman and meets as needed, although Committee, a Nomination Committee and a Remuneration Com- at least twice a year. See the tasks of the Nomination Committee mittee. The board committees’ terms of reference are available at at tryg.com > Governance > Management > Supervisory Board > tryg.com and include descriptions of members, meeting frequency, Board committees. responsibilities and the activities of the committees during the year. The special competencies of each member are also described Remuneration Committee separately at tryg.com. The Remuneration Committee carries out preparatory work on behalf of the Supervisory Board relating to remuneration for the Supervisory Two out of four members of the Audit Committee and the Risk Com- Board, the Group Executive Management and significant risk-takers. mittee, including the chairman of the committees, are independent The Remuneration Committee has four members, and the Chairman persons. One out of four members of the Remuneration Committee of the Supervisory Board is Chairman of the Remuneration Commit- is an independent person, while one out of two members of the tee. Moreover, the committee must consist of at least one member of Nomination Committee is independent. TryghedsGruppen and at least one independent board member. The committee has one independent member at the present time. Board committee members are elected primarily on the basis of their special competencies that are considered important by the Supervi- The Remuneration Committee held four meetings in 2012. The work sory Board. It is also considered important to involve the employee of the Remuneration Committee is based on Tryg’s remuneration representatives in the committees. The committees exclusively policy. See the tasks of the Remuneration Committee at tryg.com prepare matters for decision by the entire Supervisory Board. > Governance > Management > Supervisory Board > Board committees. Audit Committee Evaluation of the work of the Supervisory Board and In 2006, Tryg set up an Audit Committee. The framework of the Audit the Executive Management Committee’s work is defined in its terms of reference. The committee The Supervisory Board has defined an evaluation procedure for has four members with knowledge and experience of financial matters assessing the composition of the Supervisory Board and the Corporate governance | Annual report 2012 | Tryg A/S | 49 achievements and performance of the Supervisory Board and its Remuneration of the Executive Management individual members. Members of the Executive Management are employed on a con- tractual basis, and all terms of their remuneration are fixed by the The Chairman is in charge of the evaluation and holds evaluation Super visory Board. The Supervisory Board fixes the remuneration of interviews with each member at the beginning of the year, according the Executive Management for one year at a time. There is an annual to an agenda agreed in advance. The outcome is discussed at the review based on the requirements for attracting and retaining the first board meeting of the year. The Supervisory Board carries out best-qualified Executive Management members. The fixed salary must an annual evaluation of the achievements and performance of the be competitive and appropriate for the market in order to provide Executive Management in accordance with clearly pre-defined criteria sufficient motivation for each director to do his or her best in order and of the cooperation between the Supervisory Board and the to achieve the company’s defined targets. Executive Management. In addition, the Supervisory Board reviews and approves the rules of procedure of the Supervisory Board and The Executive Management’s remuneration consists of a fixed salary, the Executive Management each year to ensure they are aligned with pension and a variable salary. The variable salary constitutes only a Tryg’s requirements. limited part of the overall remuneration. The Supervisory Board can decide that the fixed salary be supplemented with a variable salary Remuneration of the management of up to 10% of the fixed basic salary including pension at the time Tryg has adopted a policy for remuneration of the Supervisory Board of allocation. The Supervisory Board has decided that the variable and the Executive Management, including general guidelines for salary consists of a matching shares programme. Four years after the incentive pay. The remuneration policy was adopted by the Super- purchase by a member of the Executive Management of a specified visory Board in February 2011 and approved by the annual general number of shares, such member is allocated a corresponding number meeting on 14 April 2011. of free shares in Tryg. The allocation of matching shares at the time of allocation is not dependent on Tryg’s financial performance. The Chairman of the Supervisory Board reports on Tryg’s remunera- The purpose of the matching shares programme is both to retain tion policy each year in connection with the consideration of the an- the member of the Executive Management, and to create a joint nual report at the annual general meeting. The Supervisory Board’s financial interest between the Executive Management and the proposal for remuneration to the Supervisory Board for the current company’s shareholders. Read more about the matching financial year is also submitted for approval by the shareholders at shares programme in the remuneration policy at tryg.com the annual general meeting of each year. > Governance > Remuneration. The remuneration policy also covers Tryg employees whose activities Some members of the Executive Management still have unexercised have a significant influence on the Group’s risk profile, known as risk- share options, which were allocated under a previously adopted takers, as well as employees in control functions such as compliance share-option programme. Please refer to Note 7 on page 98 for and internal audit. See the remuneration policy at tryg.com further details. > Governance > Remuneration. Retention and severance schemes Remuneration of the Supervisory Board Each member of the Executive Management is entitled to 12 months’ Members of Tryg’s Supervisory Board receive a fixed fee and are not notice of termination and 12 months’ severance pay. However, the comprised by any form of incentive or severance programme. The board Group CEO is entitled to 12 months’ notice and 18 months’ severance members’ remuneration is fixed on the basis of trends in peer companies, pay plus pension contributions during the same period. taking into account board members’ required competencies, efforts and the scope of the board’s work, including the number of meetings. Each member of the Executive Management has 25% of the basic The Chairman of the Supervisory Board receives a triple remunera- salary paid into a pension scheme. One of the members of the tion, while the Deputy Chairman receives a double remuneration. Execu tive Management, however, receives a defined-benefit pension. The Supervisory Board is not comprised by any pension scheme. This is paid on an ongoing basis upon retirement. The benefit depends 50 | Tryg A/S | Annual report 2012 | Corporate governance on years of service and constitutes part of the salary earned immedi- ORSA is to link strategy, risk management and solvency as the aim ately prior to retirement. of the ORSA is to ensure a sensible correlation between the strategy for assuming risks and the available capital over a period of three to Risk management and internal control five years. Being an insurance business, Tryg is subject to the risk manage- ment requirements set out in the Danish Financial Business Act. The Supervisory Board and the Executive Management monitor the The Supervisory Board uses policies to define the framework for risk Group’s general policies and guidelines, procedures and controls in management in Tryg in the areas of insurance risk, investment risk significant risk areas, and receive reports on trends in these areas as and operational risk, as well as IT security. With reference to these well as the application of the defined frameworks. The Supervisory frameworks, guidelines are issued from the Supervisory Board to the Board checks that the company’s risk management and internal Executive Management. A Risk Management Committee comprising controls are effective. Any non-compliance with frameworks and the Group CFO, Head of Group Risk and Head of Investments monitors guidelines is reported to the Supervisory Board. the risk management environment. The Supervisory Board’s Risk Committee monitors the company’s Tryg conducts an annual risk identification process, mapping insurance risk management and control on an ongoing basis and reports on risks and other risks related to the realisation of the Group’s strategy this quarterly to the Supervisory Board. or which may have a potentially substantial impact on the Group’s financial position. The process involves registering and quantifying the The Group’s internal control systems are based on clear organisa- risks identified. Quantification of the risks identified is included in the tional structures and guidelines, general IT controls and segregation state ment of the individual solvency requirement that the Supervisory of functions, which are supervised by the internal auditors. In 2012, Board considers every quarter. In 2012, Tryg performed an assessment Tryg introduced decentralised risk management whereby risk manag- of the company’s risk and solvency (Own Risk and Solvency Assess- ers in the individual business areas carry out controlling tasks for the ment, also known as ‘ORSA’) in preparation for future requirements for risk management environment and Tryg’s compliance function. insurance companies under EU law (Solvency II). The purpose of the Total remuneration of the Supervisory Board in 2012 DKK Mikael Olufsen Torben Nielsen Jens Bjerg Sørensen Paul Bergqvist Jesper Hjulmand Lene Skole Tina Snejbjerg Bill-Owe Johansson Mari Thjømøe Jørgen Huno Rasmussen Vigdis Fossehagen Lone Hansen Jørn Wendel Andersen a) Christian Brinch a) Rune Torgeir Joensen a) Berit Torm a) a) Resigned board members. Fee Audit Committee Risk Remuneration Committee Committee 900,000 600,000 300,000 300,000 300,000 300,000 300,000 300,000 209,167 209,167 209,167 209,167 90,833 90,833 90,833 90,833 225,000 104,583 150,000 69,722 150,000 104,583 100,000 69,722 45,417 30,278 45,417 30,278 112,500 75,000 75,000 52,292 22,708 Total 1,012,500 975,000 474,306 375,000 375,000 550,000 474,306 300,000 209,167 209,167 261,458 209,167 166,528 90,833 166,528 113,542 Corporate governance | Annual report 2012 | Tryg A/S | 51 Total remuneration of the Executive Management in 2012 Basic salary Pension Car/ car allowance Total fixed salary Value of matching shares a) Total fee 8,215,144 4,638,741 4,121,583 2,053,786 1,007,173 1,030,396 255,000 154,564 255,000 10,523,930 5,800,478 5,406,979 850,000 550,000 400,000 11,373,930 6,350,478 5,806,979 DKK Morten Hübbe Tor Magne Lønnum Lars Bonde a) At the time of allocation. The Executive Management has established a formal group reporting Each year, the annual general meeting appoints an independent process comprising monthly reporting, including budget reporting and auditor recommended by the Supervisory Board. In connection with deviation reporting, among other things. the Supervisory Board’s review of the annual report, it discusses Going concern assumption accounting policies and other issues. The results of the audit are discussed in the Audit Committee and at board meetings for the When discussing and adopting the annual report, the Supervisory purpose of assessing the auditor’s observations and conclusions. Board considers whether the financial statements have been prepared The internal and independent auditors’ long-form audit reports are on a going-concern basis, including the underlying assumptions and reviewed by the Supervisory Board. The audit agreement and asso- uncertainties. Whistleblowing scheme ciated audit fee are agreed between the Supervisory Board and the auditor on the basis of a recommendation from the Audit Commit- tee. Each year, the Audit Committee reviews the framework for the Tryg has set up an Ethical Hotline which is managed by an external independent auditors’ performance of non-audit services. partner, which allows employees, customers or business partners to report any serious wrongdoing or suspicions of such. Reporting At least once a year, the internal and external auditors meet with takes place in confidence to the Chairman of the Audit Committee the Audit Committee without the presence of the Executive and Tryg’s internal Audit Manager. See more about Tryg’s Ethical Management. The Chairman of the Audit Committee will deal with Hotline at tryg.com > Governance > Ethical Hotline. any matters that need to be reported to the Supervisory Board. Openness about risk management Internal audit Risk management is an integral part of Tryg’s business operations. The Tryg has set up an internal audit department which regularly Group seeks at all times to minimise the risk of unnecessary losses in reviews the quality of the Group’s internal control systems and order to optimise returns on the company’s capital. Read more business procedures. The department is responsible for planning, about Tryg’s risk management in the section Capital and risk manage- performing and reporting the audit work to the Supervisory Board. ment on page 38 and in note 1 page 77. Deviations and explanations Audit The Supervisory Board follows the Recommendations on Corporate The Supervisory Board ensures that the Group is monitored by compe- Governance with the exception of the recommendation for the tent and independent auditors. The Group’s internal auditor attends all number of independent members of the board committees as stated meetings of the Supervisory Board. The independent auditor attends in item 5.10.2 of the Recommendations on Corporate Governance. the annual board meeting at which the annual report is presented. The deviation is explained in Tryg’s statutory corporate governance report, which is available at tryg.com > Downloads. 52 | Tryg A/S | Annual report 2012 | Corporate governance Supervisory Board Mikael Olufsen a) Chairman Born 1943. Joined: 1997. Nationality: Danish. Professional board member. Former CEO of Toms Chokoladefabrikker A/S. Education: MSc in Forestry, PMD Harvard Business School. Chairman: TryghedsGruppen smba, Tryg A/S, Tryg Forsikring A/S, Egmont Fonden (Egmont Foundation), Egmont International Holding A/S, Ejendomsselskabet Gothersgade 55 ApS, Ejendomsselskabet Vognmagergade 11 ApS, Malaplast Co. Ltd and Gigtforeningen (Danish Rheumatism Association). Board member: WWF Verdensnaturfonden (WWF in Denmark) and Danmark-Amerika Fondet (Denmark-America Foundation). Committee memberships: Chairman of Remu- neration and Nomination Committee in Tryg A/S. Number of shares held: 3,018 Change in portfolio in 2012: 0 Experience from managing international companies, including strategic development, and experience as a board member of Danish and international companies. Torben Nielsen b) Deputy Chairman Born 1947. Joined: 2011. Nationality: Danish. Professional board member. Adjunct Professor, CBS. Former Governor, Danmarks Nationalbank. Education: Savings bank training, Graduate Diplo- mas in Organisation and Work Sociology as well as Credit and Financing. Chairman: Investeringsforeningen Sparinvest, Eik banki p/f, Plass Data A/S, VP Lux S.à.r.l., Investeringsforeningen Sparinvest SICAV, Luxembourg and Museum Sydøstdanmark. Deputy Chairman: Tryg A/S, Tryg Forsikring A/S, VP Securities A/S and Bankernes Kontantservice A/S. Board member: Nets Holding A/S and member of the Executive Board of Bombebøssen and DLR Kredit A/S. Committee memberships: Audit and Risk Committee (Chairman) and Nomination Committee in Tryg A/S. Number of shares held: 3,500 Change in portfolio in 2012: +2,000 Special skills in management, governance, finance, financial services and risk management from his role as Governor of Danmarks Nationalbank and board positions. Paul Bergqvist b) Born 1946. Joined: 2006. Nationality: Swedish. Professional board member. Former CEO of Carlsberg A/S. Education: Economist and engineer. Chairman: Sverige Bryggerier AB, East Capital Explorer AB, HTC Group AB, Pieno Zvaigzdes AB, Svenska Returpack AB, Norrköpings Segel Sällskap and Östkinds Häradsallmänning. Board member: Tryg A/S, Tryg Forsikring A/S and Björk Eklund Group AB. Committee memberships: Remuneration Committee in Tryg A/S. Number of shares held: 100 Change in portfolio in 2012: 0 International management and board experience within M&A, strategic development, marketing, branding and financial management. Being a Swedish citizen, Paul Bergqvist has special insights into Swedish market conditions. Bill-Owe Johansson Employee representative Born 1959. Joined: 2010. Nationality: Swedish. Claims Handler (Moderna). Employed in 2002. Education: Insurance training courses. Board member: Tryg A/S and Tryg Forsikring A/S. Number of shares held: 200 Change in portfolio in 2012: 0 Vigdis Fossehagen Employee representative Born 1955. Joined: 2012. Nationality: Norwegian. Chairman of Finansforbundet (Finance Sector Union of Norway) in Tryg, Norway. Employed in 1996. Education: Educated in the area of agricultural mechanics. Board member: Tryg A/S and Tryg Forsikring A/S. Committee memberships: Remuneration Committee in Tryg A/S. Number of shares held: 0 Jens Bjerg Sørensen a) Born 1957. Joined: 2011. Nationality: Danish. CEO of the public limited company Schouw & Co and Dutch Consul. Former CEO of BioMar A/S. Education: Academy Economist, Graduate Diploma in Marketing Management and IEP – Executive Programme from Insead. Chairman: Dovista A/S. Chairman or Deputy Chairman in Schouw & Co companies. Board member: Tryg A/S, Tryg Forsikring A/S, TryghedsGruppen smba and Aida A/S. Committee memberships: Audit and Risk Committee in Tryg A/S. Number of shares held: 118 Change in portfolio in 2012: 0 Experience from international management, stra- tegic development, finance, M&A and branding. 54 | Tryg A/S | Annual report 2012 | Supervisory Board a) Dependent board member. b) Independent board member, see definition in Corporate Governance Recommendations. Jesper Hjulmand a) Born 1963. Joined: 2010. Nationality: Danish. CEO of SEAS-NVE amba. Former CFO and CEO of NVE and Budget Manager and Chief Accountant of Rockwool A/S. Education: MSc in Economics and Business Administration and Lieutenant-Colonel in the Royal Danish Air Force Reserve. Chairman: Dansk Energi- og Forsyningsselskabers Arbejdsgiverforening, Energi Danmark A/S, CLEVER A/S. Board member: TryghedsGruppen smba, Tryg A/S, Tryg Forsikring A/S, DI General Council and Forskerparken CAT A/S. Committee memberships: Remuneration Committee in Tryg A/S. Number of shares held: 1,750 Change in portfolio in 2012: 0 Experience from positions with SEAS-NVE and the Royal Danish Air Force, within the fields of M&A, strategy, organisational and management development, communication and business development. Mari Thjømøe b) Born 1962. Joined: 2012. Nationality: Norwegian. Professional board member and independent advisor. Former CFO of KLP. Education: Master of Economics and Business Administration, Financial Analyst (CFA) and management programme at the London Business School. Chairman: Bank2 ASA, Norgani Hotels AS and Seilsport Maritimt Forlag AS. Board member: Tryg A/S, Tryg Forsikring A/S, Petoro AS, SinOceanic Shipping ASA, Argentum Fondsinvesteringer AS and Sevan Marine ASA. Number of shares held: 200 Change in portfolio in 2012: +200 Management experience from a number of major enterprises such as Norsk Hydro and Statoil. She has special knowledge of strategic and financial planning, restructuring, investment and investor relations. As a Norwegian citizen, she has special insights into Norwegian market conditions. Jørgen Huno Rasmussen a) Born 1952. Joined: 2012. Nationality: Danish. CEO of FLSmidth & Co. A/S. Education: Graduate Diploma in Organisation, Graduate Engineer and Ph.d. Chairman: Subsidiaries in the FLSmidth Group, LundbeckFond Invest A/S and the Lundbeck Foundation. Deputy Chairman: Cembrit Holding A/S and TryghedsGruppen smba. Board member: Tryg A/S, Tryg Forsikring A/S, Vestas Wind Systems A/S and Bladt Industries A/S. Number of shares held: 366 Change in portfolio in 2012: 0 As the CEO of FLSmidth, Jørgen Huno Rasmussen has experience in international management and special competencies within strategy, business development, communication, risk management and finance. Lene Skole b) Born 1959. Joined: 2010. Nationality: Danish. Executive Vice President of Coloplast A/S. Former CFO of The Maersk Company Ltd., UK. Education: A.P. Møller Group international shipping education, Graduate Diploma in Financing and various international management programmes. Board member: Tryg A/S, Tryg Forsikring A/S and DFDS A/S. Committee memberships: Audit and Risk Committee in Tryg A/S. Number of shares held: 745 Change in portfolio in 2012: +335 Experience from international corporations via her work in Coloplast and Mærsk UK and skills in strategy, economics, financing and communication. Tina Snejbjerg Employee representative Born 1962. Joined: 2010. Nationality: Danish. Senior clerk in Tryg’s personnel department. Employed since 1987. Education: Insurance training. Board member: Tryg A/S and Tryg Forsikring A/S. Committee memberships: Audit and Risk Committee in Tryg A/S. Number of shares held: 86 Change in portfolio in 2012: 0 Lone Hansen Employee representative Born 1966. Employed in 1990. Joined: 2012. Nationality: Danish. Chairman of the Association for Tied Agents and Key Account Managers in Tryg. Education: Certified commercial insurance agent. Various insurance and sales courses and negotiation training. Board member: Tryg A/S and Tryg Forsikring A/S. Number of shares held: 86 Change in portfolio in 2012: 0 Supervisory Board | Annual report 2012 | Tryg A/S | 55 Back row, from left Truls Holm Olsen, Lars Bonde, Rikke Larsen, Nicklas Larsen, Tor Magne Lønnum. Front row, from left Morten Hübbe, Per Fornander, Birgitte Kartman. Group Executive Management Morten Hübbe Group CEO Tor Magne Lønnum Group CFO Born 1972. Employed in 2002. Joined the Group Executive Management in 2003. Appointed Group CEO in 2011. Member of the Executive Management and the Group Executive Management. Education: BSc in International Business Administration and Modern Languages, MSc in Finance and Accounting and management programme at Wharton. Board member: Forsikring & Pension (Danish Insurance Association) and Tjenestemændenes Forsikring. Number of shares held: 9,910 Change in portfolio in 2012: +2,820 Born 1967. Employed in 2011. Joined the Group Executive Management in 2011. Member of the Executive Management and the Group Executive Management. Education: State-authorised public ac- countant, Executive Master of Business and Administration, University of Bristol and École Nationale des Ponts et Chaussées. Board member: Tryg Garantiforsikring A/S (Chairman), Thermopylae AS (Chairman) and Finansnæringens Fellesorganisasjon. Number of shares held: 3,510 Change in portfolio in 2012: +1,810 Lars Bonde Group Executive Vice President, Private, Country Manager in Denmark and COO Born 1965. Employed in 1998. Joined the Group Executive Management in 2006. Member of the Executive Management and the Group Executive Management. Education: Insurance training and LL.M. Board member: Finanssektorens Arbejdsgiverforening (Danish Employers’ Association for the Financial Sector) and Tjenestemændenes Forsikring. Number of shares held: 3,687 Change in portfolio in 2012: +733 Truls Holm Olsen Group Executive Vice President, Corporate and Country Manager in Norway Rikke Larsen Group Executive Vice President, People & Reputation Born 1964. Employed in 1998. Joined the Group Executive Management in 2009. Born 1971. Employed in 2000. Joined the Group Executive Management in 2012. Education: LL.M. Board member: Tryg Garantiforsikring A/S, Energon AS, Norsk Naturskadepool (Norwegian Natural Perils Pool) and Tryg Almennyttige Stiftelse. Number of shares held: 2,017 Change in portfolio in 2012: +1,000 Education: LL.M. and lawyer. Number of shares held: 35 Change in portfolio in 2012: 0 Birgitte Kartman Group Executive Vice President, Claims Born 1960. Employed in 1996. Joined the Group Executive Management in 2009. Education: LL.M. Board member: The Danish Insurance Academy Number of shares held: 2,617 Change in portfolio in 2012: +1,010 Per Fornander Group Executive Vice President and Country Manager in Sweden Nicklas Larsen Acting Group Executive Vice President, Commercial Born 1963. Employed in 2011. Joined the Group Executive Management in 2011. Born 1973. Employed in 2011. Joined the Group Executive Management in 2012. Education: Marketing DIHM, IHM Business School in Stockholm. Education: Graduate engineer and MSc in Business Administration and Financing. Board member: Tryg Garantiforsikring A/S, Svensk Försäkring, Försäkringsbranschens Arbetsgivarorganisation and Försäkrings- branschens Pensionskassa. Number of shares held: 2,110 Change in portfolio in 2012: +1,010 Number of shares held: 0 Change in portfolio in 2012: 0 Group Executive Management | Annual report 2012 | Tryg A/S | 57 Back row, from left Truls Holm Olsen, Lars Bonde, Rikke Larsen, Nicklas Larsen, Tor Magne Lønnum. Front row, from left Morten Hübbe, Per Fornander, Birgitte Kartman. Corporate Social Responsibility In Tryg, corporate social responsibility is an integrated part of running Such initiatives benefit society significantly in that they minimise dam- a healthy business. Thus, responsibility and sustainability are key to developing our business and to our branding. More specifically, age to infrastructure and buildings as well as reducing CO2 emissions. See the climate targets at tryg.com > CSR > Thematic areas > Tryg focuses on reducing the climate impact of its activities and on Climate. protecting and promo ting human rights in the Nordic countries. Tryg’s CSR commitment concentrates on four thematic areas: Another focus area is Tryg’s Mobility Management programme Climate, Prevention, Inclusion and Well-being. which unites our interest in reducing CO2, improving the health of our employees and cutting costs with society’s interest in reducing Moreover, anti-corruption and responsible sourcing and investments road congestion and promoting sustainable transport. Key to the guide all Tryg’s processes and planning activities. See Tryg’s CSR programme is changing the transport habits of Tryg’s employees, policy at tryg.com > CSR > CSR strategy > CSR policy. both those who drive to and from work and those who take a taxi Climate when going to meetings. The programme has been developed in collaboration with the Municipality of Ballerup, Formel M and In handling claims, we come face to face with the consequences of climate neighbouring businesses in Ballerup. change every year. Damage caused by cloudbursts, landslides and hur- ricanes impacts Tryg’s customers considerably. The prevention of climate- Specific initiatives aimed at making it easier for employees to choose related claims is therefore a key priority, and together with customers, to go by bike or public transport as alternatives to private motor researchers and the authorities, Tryg is focusing on finding new ways of vehicles include access to commuter bicycles to and from the minimising and handling the consequences of such perils. The climate nearest bus and train station, more bicycle parking spaces, more perspective is also used to identify new ways of cutting operating costs. changing and showering facilities and the offer of bicycle repairs at the main office. Two electric cars are available when attending In 2012, Tryg made its expertise available to the Danish Ministry of meetings and supple ment a new taxi arrangement with a company the Environment and participated in the recording of the ministry’s offering environmentally friendly solutions. Moreover, air travel has climate campaign movie. The campaign focuses on how citizens been reduced considerably since 2009 through the use of video can prevent water damage caused by climate change. In 2013, we conference facilities. expect to launch a climate check programme for our customers which will help them identify preventive measures and give benefits to customers who implement such measures. The main sources of CO2 emissions from Tryg’s buildings and trans- port activities come from heating, electricity and waste as well as air CO2 emissions Tonnes 3,000 2,500 2,000 1,500 1,000 500 0 Electricity Heating oil Air travel Motor Waste Kg 300,000 250,000 200,000 150,000 100,000 50,000 0 Paper waste Corrugated cardboard Biowaste Residual waste 2011 2012 2011 2012 58 | Tryg A/S | Annual report 2012 | Corporate Social Responsibility travel. Tryg has introduced a number of initiatives aimed at reducing At Tryg, we are devoted to creating an attractive workplace character- emissions. These include the use of low-energy bulbs and LED lighting, ised by equal opportunities for men and women. We have signed electricity savings achieved by having cleaning done in daylight hours the ‘Charter for Women in Management’ and submitted our first rather than at night and increased focus on reducing waste. For paper report in 2012. In spring 2012, Tryg’s action plan was turned into an waste alone, Tryg in Norway achieved a 53% reduction in 2012 com- activity plan for the year, comprising specific initiatives such as a pared to 2011. An internal campaign planned for 2013 will encourage course for employees who are planning a management career, a employees to act more sustainably in terms of their paper consump- new programme for ‘successor planning’ to promote equal access to tion, waste handling and transport and travel. management positions for men and women, a new internal mentor CO2 emissions were reduced by a total of 27.5% from 2007 to 2012. The CO2 reduction target for 2013 is 23% compared to 2007. Since 2007, Tryg has produced climate accounts on its consumption of scheme for managers and employees and introductory courses on diversity and inclusion for new managers and new employees. Moreover, we have examined whether higher levels of sickness absence among young women hamper their access to management electricity, energy, air travel and vehicular transport. See the positions. In order to prevent sickness absence, the office in Bergen climate accounts at tryg.com > CSR > Thematic areas > Climate. has taken on a health visitor who advises mothers on the work/ Human rights life balance. Today, Tryg is finding that social responsibility is a significant competi- With a view to ensuring equal pay for women and men performing tion parameter in the insurance market. In particular, inclusion and the same work, or work of the same value, Tryg carried out a number diversity are central issues in our partnerships with customers, NGOs of job assessments in 2012 and ensured an equalisation of pay and public institutions. Read more about the targets for our where inequalities were identified. human rights efforts at tryg.com > CSR > Thematic areas > Inclusion. Read more about labour rights at tryg.com > CSR > Thematic In 2012, the proportion of women in management fell from 37.5% to areas > Well-being > Labour rights. 34.0%. The aim is to increase the share by 2% by 2014. See the Inclusion action plan for women in management at tryg.com > CSR strategy > Plans of action. See the report for the Charter for More Women Today, non-discrimination is an important human rights issue in in Management (in Danish only) at tryg.com/dk > CSR > Inclusion. the Nordic countries. Tryg is therefore taking active steps to ensure equal treatment and to create an inclusive culture in Tryg. By Translating diversity into improved well-being and better customer reflecting the society of which we are part and exploring diversity service requires knowledge about legislation prohibiting discrimin- as a quality and a resource, we want to contribute to creating an ation, but also insights into the stereotypes and prejudices which we inclusive society. all carry with us and which are inherent in our daily routines. Tryg has therefore developed a workshop on diversity, aimed at disseminating The purpose of Tryg’s efforts within the fields of diversity and inclusion information about diversity and at removing structural barriers to is to make the most of the potential which arises when employees from diversity in connection with recruitment, employment, promotion different backgrounds work together for the benefit of customers and and dismissal, and at using diversity actively in the consultancy colleagues. For this reason, we work actively with diversity emanating offered to customers and in the development of the business. from gender, age, ethnicity, disability, sexual orientation, faith and religion. Priority is given to efforts aimed at women in management, the In 2012, the Private sales function held a total of ten workshops, active recruitment of employees of different ethnicities, accessibility and the aim is to hold 30 workshops in 2013. In 2012, as a supple- for employees with disabilities, marking of religious festivals and ment to these workshops, Tryg took part in the City of Copenhagen’s access to rooms for reflection as well as tolerance of different sexual Innovækst project, the purpose of which is to measure the results of orientations. Read more about the activities at tryg.com > CSR diversity efforts. Tryg also signed the City of Copenhagen’s Diversity > Thematic areas > Inclusion. Charter. Watch the film on diversity in Tryg (in Danish) at tryg.com > CSR > Thematic areas > Inclusion. Corporate Social Responsibility | Annual report 2012 | Tryg A/S | 59 In August 2012, Tryg commissioned a study on access for people peace-of-mind provider in the Nordic region and its ability to with disabilities at our main office in Ballerup. Access to Tryg and the increase customer satisfaction and loyalty. canteen facilities were assessed, and the study showed that all mini- mum requirements were met, and Tryg was given seven out of seven A total of fourteen new refugee guides were recruited in 2012. The points. This means, among other things, that access for wheelchair plan for 2013 is to strengthen and disseminate knowledge about the users and people with visual, hearing and developmental disabilities project, to extend it to the Oslo area and to develop a set of guide- was satisfactory, which is in line with Tryg’s efforts to ensure non- lines for children, young people and unaccompanied asylum seekers discrimination and socially responsible conduct. on life i Norway. In 2012, Tryg held a career day for people with disabilities, which Personal data was attended by 60 people. The career day was intended to provide As an insurance company, we handle a variety of personal data every inspiration for people with physical or mental disabilities on how day. The correct processing of personal data and the promotion of to improve their chances in the job market. The day was part of a correct data protection are therefore Tryg’s contribution to protecting national campaign for job seekers launched by the Danish Ministry of and promoting the right to privacy. Ensuring the correct use of personal Employment and Disabled Peoples Organisations Denmark. data in our daily customer contact and claims handling activities is crucial to our customer services. In order to increase Tryg employees’ One of the central partnership agreements made in 2012 was with knowledge about the significance and importance of the consent to the Union of Education Norway (UDF) and resulted in a joint project use and disclose information on insurance matters and claims history, with the Norwegian Red Cross on training refugee guides. The guides 40 seminars on personal data protection were held in 2012 by Tryg are volunteers who help refugees to become integrated into their local departments and units in business areas and staff functions. communities. Guides for the project are recruited among Tryg and UDF employees and as part of a regional partnership with local Red Tryg also advises its employees on good behaviour in the social Cross offices. The partnership agreement runs for three years and media when topics on which they communicate relate to Tryg. aims to create dialogue and common values for Tryg, customers and See Tryg’s guidelines on social media communication at society. The efforts strengthen Tryg’s ambition of being the leading tryg.com > CSR > CSR strategy > Plans of action. Employee survey Employee mix Score 100 80 60 40 20 0 Environmenta) Sociallyb) Genderc) Backgroundd) No. 2,000 1,600 1,200 800 400 0 Men Women Age <30 yrs Age 30-49 yrs Age >50 yrs Flexi job Non- western background a) a) Tryg is environmentally responsible b) Tryg is socially responsible c) Tryg offers equal opportunities for women and men d) Tryg’s employees are accepted regardless of their background and lifestyle a) Non-western background is calculated by Statistics Denmark. 60 | Tryg A/S | Annual report 2012 | Corporate Social Responsibility CSR in sourcing CSR in investments In 2012, responsible sourcing was introduced as a new provision in A small proportion of Tryg’s investment portfolio is invested in shares Tryg’s general procurement terms and conditions, requiring suppliers and corporate bonds which are managed by external partners. They to comply with human rights and reduce the climate impact of their are all obliged to integrate environmental considerations and social activities. All new contracts include a similar requirement and a right and governance (ESG) issues into their investment decision-making, to rescind contracts with suppliers who aid and abet human rights for example through membership of UN PRI. violations. Moreover, 2012 also saw suppliers of motor services being introduced to an extended CSR programme, whereby they Tryg contributes to the DI Frontier Market Energy and Carbon Fund, are required to report annually on their CO2 emissions, measures introduced to protect human rights and labour rights as well as the purpose of which is to establish, run and sell plants for the generation of renewable energy in sub-Saharan Africa based on anti-corruption measures. Watch the film on CSR for caravan hydropower, wind power, solar power and biomass. See more workshops (in Danish) at tryg.com > CSR > CSR in sourcing. about CSR in investments at tryg.com. > CSR > CSR in investments. Corporate Social Responsibility | Annual report 2012 | Tryg A/S | 61 Claims prevention in Norway In 2012, Tryg focused on claims prevention and implemented a range of different measures to prevent and limit the claims that may occur. This benefits customers and provides peace of mind, while also serving the interests of the company and our investors. In 2012, Tryg organised Security Days in cooperation with the University of Trondheim (NTMU), Norway. The seminar in Trondheim was a pilot project which will inform the development of tailored claims prevention seminars, which may in future be extended to Tryg’s departments in Bergen and Oslo. The objective was to strengthen our customers’ competencies and inspire them to implement health, environmental and safety concerns in their day-to-day operations. Providing our customers with knowledge within areas of specific importance to them will both help to reduce claims and increase customer value. However, it also strengthens our role as a peace-of-mind provider and should be viewed in the context of Tryg’s strong focus on corporate social responsibility. Tryg’s Group consolidated financial statements are prepared in accordance with IFRS and published in Danish and English. Contents – Financial statements Financial statements 2012 Note Tryg Group Statement by the Supervisory Board and the Executive Management Independent auditor’s reports Financial highlights Income statement Statement of comprehensive income Statement of financial position Statement of changes in equity Cash flow statement 1 Risk management 2 Capital management 3 Operating segments 3 Geographical segments 3 Technical result, net of reinsurance, by line of business 4 Premium income, net of reinsurance 5 6 Claims, net of reinsurance 7 8 Interest income and dividends etc. 9 Price adjustments Insurance technical interest, net of reinsurance Insurance operating costs, net of reinsurance Intangible assets Investment property 10 Tax 11 Profit/loss on discontinued and divested business 12 13 Property, plant and equipment 14 15 Equity investments in associates 16 Financial assets 17 Reinsurers’ share 18 Current tax 19 Assets held for sale and associated liabilities 20 Equity 21 Premium provisions 21 Claims provisions 22 Pensions and similar liabilities 23 Deferred tax 24 Other provisions 25 Amounts owed to credit institutions 26 Debt relating to unsettled funds transactions and repos 27 Earnings per share 28 Contractual obligations, collateral and contingent liabilities 29 Related parties 30 Financial highlights 31 Accounting policies Tryg A/S (parent company) Income statement – Tryg A/S (parent company) Statement of financial position – Tryg (parent company) Statement of changes in equity (parent company) Notes (parent company) Q4 2012 Q4 2012 | Quarterly outline Q4 2012 | Geographical segments Other key ratios Glossary Disclaimer Group chart Product overview Page 66 67 69 70 71 72 74 76 77 88 90 92 94 96 96 96 96 101 101 102 102 104 106 108 109 110 114 115 115 116 116 117 118 120 121 121 121 121 122 123 124 125 136 137 138 139 142 144 146 148 150 151 152 Statement by the Supervisory Board and the Executive Management The Supervisory Board and the Executive Management have today parent company’s assets, liabilities and financial position at 31 Decem- considered and adopted the annual report for 2012 of Tryg A/S and ber 2012 and of the results of the Group’s and the parent company’s the Tryg Group. operations and the cash flows of the Group for the financial year 1 January-31 December 2012. The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards Furthermore, in our opinion the Management’s report gives a true and as adopted by the EU, and the financial statements of the parent fair view of developments in the activities and financial position of company have been prepared in accordance with the Danish Finan- the Group and the parent company, the results for the year and of the cial Business Act. In addition, the annual report has been presented Group’s and the parent company’s financial position in general and in accordance with additional Danish disclosure requirements for describes significant risk and uncertainty factors that may affect the the annual reports of listed financial enterprises. Group and the parent company. In our opinion, the accounting policies applied are appropriate, and We recommend that the annual report be adopted by the shareholders the annual report gives a true and fair view of the Group’s and the at the annual general meeting. Ballerup, 7 February 2013 Executive Management Morten Hübbe Group CEO Supervisory Board Mikael Olufsen Chairman Tor Magne Lønnum Group CFO Lars Bonde Group Executive Vice President Torben Nielsen Deputy Chairman Paul Bergqvist Vigdis Fossehagen Lone Hansen Jesper Hjulmand Bill-Owe Johansson Jørgen Huno Rasmussen Jens Bjerg Sørensen Lene Skole Tina Snejbjerg Mari Thjømøe 66 | Tryg A/S | Annual report 2012 | Notes Independent auditor’s reports To the shareholders of Tryg A/S statements, whether due to fraud or error. In making those risk assess- Report on the consolidated financial statements ments, the auditor considers internal control relevant to the entity’s and parent financial statements preparation of consolidated and parent financial statements that give a We have audited the consolidated and parent financial statements of true and fair view in order to design audit procedures that are appropri- Tryg A/S for the financial year 1 January to 31 December 2012, page ate in the circumstances, but not for the purpose of expressing an opin- 69-141, which comprise the income statement, statement of compre- ion on the effectiveness of the entity’s internal control. An audit also hensive income, statement of financial position, statement of changes includes evaluating the appropriateness of accounting policies used in equity and notes, including the accounting policies, for the Group as and the reasonableness of accounting estimates made by manage- well as for the parent company, and the consolidated cash flow state- ment, as well as the overall presentation of the consolidated and parent ment. The consolidated financial statements are prepared in accord- financial statements. We believe that the audit evidence is sufficient and ance with International Financial Reporting Standards as adopted by appropriate to provide a basis for our audit opinion. Our audit has not the EU and the parent financial statements are prepared in accordance resulted in any qualification. with the Danish Financial Business Act. In addition, the consolidated and parent financial statements are prepared in accordance with Danish Opinion disclosure requirements for listed financial services companies. In our opinion, the consolidated financial statements give a true and fair view of the Group’s financial position at 31 December 2012, and Management’s responsibility for the consolidated of the results of its operations and cash flows for the financial year financial statements and parent financial statements 1 January to 31 December 2012 in accordance with International Management is responsible for the preparation of consolidated Financial Reporting Standards as adopted by the EU and Danish disclo- financial statements that give a true and fair view in accordance with sure requirements for listed financial services companies. Moreover, in International Financial Reporting Standards as adopted by the EU and our opinion, the parent financial statements give a true and fair view of Danish disclosure requirements for listed financial services companies the parent company’s financial position at 31 December 2012, and of the as well as for the preparation of parent financial statements that give results of its operations for the financial year 1 January to 31 December a true and fair view in accordance with the Danish Financial Business 2012 in accordance with the Danish Financial Business Act and Danish Act and Danish disclosure requirements for listed financial services disclosure requirements for listed financial services companies. companies, and for such internal control as management determines is necessary to enable the preparation and fair presentation of con- Statement on the management commentary solidated and parent financial statements that are free from material Pursuant to the Danish Financial Business Act, we have read the man- misstatement, whether due to fraud or error. agement commentary. We have not performed any further procedures Auditor’s responsibility in addition to the audit of the consolidated and parent financial state- ments. On this basis, it is our opinion that the information provided in Our responsibility is to express an opinion on the consolidated and the management commentary is consistent with the consolidated and parent financial statements based on our audit. We conducted our parent financial statements. audit in accordance with International Standards on Auditing and additional requirements under Danish audit regulation. This requires that we comply with ethical requirements and plan and perform Ballerup, 7 February 2013 Deloitte the audit to obtain reasonable assurance about whether the con- Statsautoriseret Revisionspartnerselskab solidated and parent financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated and parent financial statements. The procedures selected depend Lars Kronow on the auditor’s judgement, including the assessment of the risks of State Authorised material misstatements of the consolidated and parent financial Public Accountant Lone Møller Olsen State Authorised Public Accountant 67 Notes | Annual report 2012 | Tryg A/S | 68 | Tryg A/S | Annual report 2012 | NotesFinancial highlights DKKm 2008 2009 2010 2011 2012 Gross premium income Gross claims Total insurance operating costs Profit/loss on gross business Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result Investment return after insurance technical interest Other income and costs Profit/loss for the year before tax Tax Profit/loss for the year, continuing business Profit/loss on discontinued and divested business after tax a) Profit/loss for the year Run-off gains/losses, net of reinsurance Statement of financial position Total provisions for insurance contracts Total reinsurers’ share of provisions for insurance contracts Total equity Total assets Key ratios Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio Gross expense ratio without adjustment Operating ratio Relative run-off gains/losses Return on equity after tax (%) Solvency ratio (Solvency I) 16,622 -11,262 -2,810 17,390 -12,467 -2,861 18,894 -15,111 -3,136 19,948 -15,783 -3,271 20,314 -14,675 -3,295 2,550 -597 474 2,427 -937 -49 1,441 -513 928 -82 846 783 25,228 1,036 8,209 38,445 67.8 3.6 71.4 16.5 87.9 16.9 85.8 4.1 9.3 100 2,062 -518 145 1,689 1,083 -38 2,734 -625 2,109 -101 2,008 692 29,042 1,320 9,631 44,740 71.7 3.0 74.7 16.6 91.3 16.5 90.4 3.6 22.5 97 647 -311 124 460 550 -4 1,006 -265 741 -148 593 824 32,031 1,588 8,458 50,591 80.0 1.6 81.6 16.7 98.3 16.6 97.6 3.9 6.6 125 894 507 171 1,572 61 -30 1,603 -455 1,148 -8 1,140 944 34,220 2,067 9,007 53,184 79.1 -2.5 76.6 16.6 93.2 16.4 92.2 4.0 13.1 112 2,344 86 62 2,492 585 -60 3,017 -837 2,180 28 2,208 1,015 34,355 2,317 10,979 54,313 72.2 -0.4 71.8 16.4 88.2 16.2 87.8 4.1 22.1 90 The gross expense ratio without adjustment is calculated as the ratio of actual gross insurance operating costs to gross premium income. Other key ratios are calculated in accordance with ‘Recommendations & Financial Ratios 2010’ issued by the Danish Society of Financial Analysts. The adjustment, which is made pursuant to the Danish Financial Supervisory Authority’s and the Danish Society of Financial Analysts’ definitions of expense ratio and combined ratio, involves the addition of a calculated expense (rent) in respect of owner-occupied property based on a calculated market rent and the deduction of actual depreciation and operating costs on owner-occupied property. a) Profit/loss on discontinued and divested business after tax includes Marine Hull insurance, which was divested in 2010, and the Finnish branch of Tryg Forsikring, which was sold in 2012, but is awaiting authority approval. Comparative figures are restated accordingly. Financial highlights | Annual report 2012 | Tryg A/S | 69 Income statement DKKm Note General insurance Gross premiums written Ceded insurance premiums Change in premium provisions Change in reinsurers’ share of premium provisions 4 Premium income, net of reinsurance 5 Insurance technical interest, net of reinsurance Claims paid Reinsurance cover received Change in claims provisions Change in the reinsurers’ share of claims provisions 6 Claims, net of reinsurance Bonuses and premium discounts Acquisition costs Administration expenses Acquisition costs and administration expenses Reinsurance commissions and profit participation from reinsurers 7 Insurance operating costs, net of reinsurance 2011 2012 20,192 -1,123 -96 45 19,018 171 -15,250 1,142 -533 354 -14,287 -148 -2,368 -903 -3,271 89 -3,182 20,128 -1,147 354 35 19,370 62 -15,480 964 805 131 -13,580 -168 -2,490 -805 -3,295 103 -3,192 3 Technical result 1,572 2,492 15 Investment activities Income from associates Income from investment property Interest income and dividends 8 9 Price adjustments Interest expenses 8 Administration expenses in connection with investment activities Total investment return 5 Return on insurance provisions Total investment return after insurance technical interest Other income Other costs Profit/loss before tax 10 Tax Profit/loss on continuing business 11 Profit/loss on discontinued and divested business Profit/loss for the year 27 Earnings per share of DKK 25 – continuing business Earnings per share of DKK 25 Diluted earnings per share of DKK 25 Earnings per share of DKK 25 – discontinued and divested business Diluted earnings per share of DKK 25 – discontinued and divested business 70 | Tryg A/S | Annual report 2012 | Income statement 1 118 1,252 -264 -113 -92 902 -841 61 136 -166 1,603 -455 1,148 -8 6 123 1,196 -16 -100 -99 1,110 -525 585 106 -166 3,017 -837 2,180 28 1,140 2,208 19.0 18.9 18.9 -0.1 -0.1 36.0 36.5 36.4 0.5 0.5 Statement of comprehensive income DKKm Profit/loss for the year Other comprehensive income Other comprehensive income which cannot subsequently be reclassified as profit or loss Revaluation of owner-occupied property for the year Tax on revaluation of owner-occupied property for the year Actuarial gains/losses on defined-benefit pension plans Tax on actuarial gains/losses on defined-benefit pension plans Deferred tax on contingency fund provision Other comprehensive income which can subsequently be reclassified as profit or loss Foreign currency translation adjustment of foreign entities for the year Hedging of currency risk in foreign entities for the year Tax on hedging of currency risk in foreign entities for the year Total other comprehensive income Comprehensive income 2011 1,140 20 -6 -399 111 -22 -296 29 -27 7 9 -287 853 2012 2,208 42 -12 -62 16 0 -16 193 -184 46 55 39 2,247 Statement of comprehensive income | Annual report 2012 | Tryg A/S | 71 Statement of financial position DKKm Note Assets 12 Intangible assets Operating equipment Owner-occupied property Assets under construction 13 Total property, plant and equipment 14 Investment property 15 Equity investments in associates Total investments in associates Equity investments Unit trust units Bonds Deposits with credit institutions Derivative financial instruments Total other financial investment assets 2011 2012 952 759 102 1,745 10 1,857 138 1,443 11 1,592 2,199 2,081 14 14 187 2,378 38,400 1,635 614 43,214 21 21 199 3,261 38,862 949 547 43,818 16 Total investment assets 45,427 45,920 17 Reinsurers’ share of premium provisions 21 Reinsurers’ share of claims provisions 17 Total reinsurers’ share of provisions for insurance contracts Receivables from policyholders Total receivables in connection with direct insurance contracts Receivables from insurance enterprises Receivables from Group undertakings Other receivables 16 Total receivables 18 Current tax assets 16 Cash at bank and in hand 19 Assets held for sale Total other assets Interest and rent receivable Other prepayments and accrued income Total prepayments and accrued income 192 1,875 2,067 1,158 1,158 317 1 189 1,665 93 402 0 495 497 224 721 237 2,080 2,317 1,149 1,149 227 1 612 1,989 0 504 742 1,246 369 121 490 Total assets 53,184 54,313 72 | Tryg A/S | Annual report 2012 | Statement of financial position Statement of financial position DKKm Equity and liabilities Note 20 Equity 2 Subordinate loan capital 21 Premium provisions 21 Claims provisions Provisions for bonuses and premium discounts Total provisions for insurance contracts 22 Pensions and similar liabilities 23 Deferred tax liability 24 Other provisions Total provisions Debt relating to direct insurance Debt relating to reinsurance 25 Amounts owed to credit institutions 26 Debt relating to unsettled funds transactions and repos 16 Derivative financial instruments 18 Current tax liabilities 19 Liabilities associated with assets held for sale Other debt Total debt Accruals and deferred income Total equity and liabilities 1 Risk management 2 Capital management 28 Contractual obligations, collateral and contingent liabilities 29 Related parties 30 Financial highlights 31 Accounting policies 2011 2012 9,007 10,979 1,589 1,597 6,932 26,904 384 34,220 1,026 1,191 11 2,228 410 191 11 4,161 35 260 0 740 5,808 6,688 27,242 425 34,355 1,102 1,143 98 2,343 415 256 14 1,470 66 652 742 1,030 4,645 332 394 53,184 54,313 Statement of financial position | Annual report 2012 | Tryg A/S | 73 Statement of changes in equity DKKm Revalua- Reserve for foreign currency tion translation reserves adjustment Equalisa- tion reserves Share capital Other reserves Retained Proposed dividend earnings Total Equity at 31 December 2010 1,598 28 82 59 1,078 5,357 256 8,458 2011 Profit/loss for the year Revaluation of owner-occupied property for the year Foreign currency translation adjustment of foreign entities for the year Hedging of currency risk in foreign entities for the year Actuarial gains and losses on pension obligation Tax on changes in equity Total comprehensive income Nullification of treasury shares Dividend paid Dividend, treasury shares Purchase of treasury shares Exercise of share options Issue of share options and matching shares 20 -6 14 30 -27 7 10 0 -65 0 76 76 664 400 1,140 -1 -399 89 353 65 14 -91 15 14 370 20 29 -27 -399 90 853 0 -256 14 -91 15 14 549 9,007 400 -256 144 400 76 1,154 5,727 Total changes in equity in 2011 Equity at 31 December 2011 -65 1,533 14 42 10 92 0 59 74 | Tryg A/S | Annual report 2012 | Statement of changes in equity Statement of changes in equity DKKm Revalua- Reserve for foreign currency tion translation reserves adjustment Equalisa- tion reserves Share capital Other reserves Retained Proposed dividend earnings Total Equity at 31 December 2011 1,533 42 92 59 1,154 5,727 400 9,007 2012 Profit/loss for the year Change in equalisation reserve for the year Revaluation of owner-occupied property Foreign currency translation adjustment of foreign entities for the year Hedging of currency risk in foreign entities for the year Actuarial gains and losses on pension obligation Tax on changes in equity Total comprehensive income 0 Dividend paid Dividend, treasury shares Purchase and sale of treasury shares Exercise of share options Issue of share options and matching shares 42 -12 30 192 -184 46 54 2,208 0 42 193 -184 -62 50 2 -40 654 -2 1,594 -1 2 2 -41 -62 16 608 6 66 44 9 1,594 2,247 -400 -400 6 66 44 9 Total changes in equity in 2012 Equity at 31 December 2012 0 1,533 30 72 54 146 2 61 -41 733 1,194 1,972 1,113 6,460 1,594 10,979 Proposed dividend per share DKK 26 (DKK 6.52 in 2011). Dividend per share is calculated as the total dividend proposed by the Supervisory Board after the end of the financial year divided by the number of shares at the end of the year (61,316,103 shares). The dividend is not paid until approved by the shareholders at the annual general meeting. In the financial statements of Tryg Forsikring A/S’s Norwegian branch, it has included contingency fund provisions in the amount of DKK 2,394m (DKK 2,430m in 2011). In the financial statements of Tryg Forsikring A/S’s Swedish branch, it has included contingency fund provisions in the amount of DKK 160m (DKK 144m in 2011). In Tryg Forsikring A/S, these provisions, due to their nature as additional provisions, are included in equity (retained earnings), net of deferred tax. Tryg Forsikring A/S’s possible payment of dividend to Tryg A/S is influenced by this amount. The dividend payment is also affected by a contingency fund provision of DKK 670m, which is included in equity in Tryg Forsikring A/S. Tryg Garantiforsikring A/S has a similar contingency fund provision amounting to DKK 139m, which is also included in the company’s equity. The contingency fund provisions can be used to cover losses in connection with the settlement of insurance provisions or otherwise for the benefit of the insured. Statement of changes in equity | Annual report 2012 | Tryg A/S | 75 Cash flow statement DKKm 2011 2012 Cash from operating activities Premiums Claims Ceded business Costs Changes in other debt and other amounts receivable Cash flow from insurance activities Interest income Interest expenses Dividend received Taxes Other income and costs Cash flow from operating activities, continuing business Cash flow from operating activities, discontinued and divested business Total cash flow from operating activities Investments Acquisition and refurbishment of real property Sale of real property Acquisition and sale of equity investments and unit trust units (net) Purchase/sale of bonds (net) Deposits with credit institutions Purchase/sale of operating equipment (net) Hedging of currency risk Investments, continuing business Investments, discontinued and divested business Total investments Financing Exercise of share options/purchase of treasury shares (net) Dividend paid Change in amounts owed to credit institutions Financing, continuing business Financing, discontinued and divested business Total financing Change in cash and cash equivalents, net Cash and cash equivalents – discontinued and divested business at 1 January 2012 Foreign currency exchange rate adjustment of cash and cash equivalents, beginning of year Change in cash and cash equivalents, gross Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year 19,991 -15,121 -25 -3,252 112 1,705 1,379 -109 10 -210 -30 2,745 -168 2,577 -50 2 -191 -3,523 1,124 -18 -27 -2,683 1 -2,682 -76 -256 -19 -351 0 -351 -456 0 1 -455 857 402 20,200 -15,105 42 -3,094 -137 1,906 1,340 -100 15 -425 -61 2,675 37 2,712 -53 278 -563 -1,897 163 -54 -184 -2,310 -74 -2,384 110 -400 3 -287 58 -229 99 -11 14 102 402 504 76 | Tryg A/S | Annual report 2012 | Cash flow statement Notes 1 Risk management Risk management principles Risk management is an integral part of Tryg’s business model. Tryg seeks at all times to minimise the risk of unnecessary losses in order to optimise returns on the company’s capital. Risk management at Tryg is organised on the basis of three lines of defence: The first line of defence is the business managers, who manage and control all significant risks associated with their own activities. This takes place on an operational level and involves establishing business procedures, contingency plans and control descriptions and ensuring that risks are hedged as appropriate. The second line of defence is the risk management function, which en- sures a consistent risk management approach across business areas. This function carries out measurements and assessments at Group level, and recommendations for capital management and general risk hedging (reinsurance, inflation swaps, currency hedging etc.) are made. The third line of defence is the internal audit, which most important task is to carry out an independent assessment of the control environ- ment etc. for the Supervisory Board. Risk management The Supervisory Board has overall responsibility for the company’s risk management and proactively defines risk appetite and the risk manage- ment framework, assessing the total risk and capital requirements within Tryg on an ongoing basis. This is achieved by means of policies and guidelines drawn up in accordance with Section 71 of the Danish Financial Business Act and by continuously taking a view on the calcu- lation of the company’s capital requirements. In order to be able to monitor the organisation’s risk management work closely, the Supervisory Board has appointed a special Risk Committee consisting of representatives from the Supervisory Board, which reviews Tryg’s capital and risk status on a quarterly basis. Tryg’s risk management is administered through a risk management environment, in which the Risk Management Committee, with repre- sentatives from the Group Executive Management, monitors the overall risk and asset management process. The areas of underwriting and reinsurance, provisions, investment risk as well as operational risk and security are administered by similar sub-committees. To support risk management in the organisation, Tryg has established a structure where each business area is supported by a risk manager responsible for risk identification, risk control, event registration, contingency plans and compliance. Effective risk management involves identifying, assessing and quantifying risk in all significant areas. As an insurance company, Tryg is able to utilise statistical experience as a basis for identifying and quantifying most risks. This takes place within the framework of Tryg’s internal model, which is used for calculating the capital requirement, determining the investment profile, selecting a reinsurance programme and defining earnings require- ments for product and business areas. In addition, there will be several risks, often associated with the company’s strategy, operational matters or similar, which cannot be readily assessed based on historical expe- rience. In order to reflect these risks as well, an identification process has been established where all business managers and the Group Executive Management assess significant risks relating to business plans and the most important activities. Further to this, Tryg has established an ORSA (Own Risk and Solvency Assessment) process, which is to demonstrate the correlation between risk assessments and profiles relative to the assumptions used in the internal model. In addition to the ORSA, a capital plan is prepared to demonstrate that the company’s capital base can support the selected business plan over a three to five-year period taking into account the dividend policy, also when the business plan is subjected to a number of negative stress scenarios. The ORSA process is part of the future Solvency II regime. Line of defence Supervisory Board 1. Line of defence 2. Line of defence 3. Line of defence External audit • Operational control • Business controls • Risk management • Internal audit Executive Management 77 Notes | Annual report 2012 | Tryg A/S | Notes Under the internal capital model, the capital requirement (individual solvency requirement) is determined using a 99.5% safety level, equal to the safety level applied in the future Solvency II requirements. The actual capital contains a buffer in relation to the individual solvency requirement, which helps to ensure that the company with a high degree of certainty will be able to comply with the dividend policy, which aims for a steadily rising nominal dividend per share corresponding to a payout ratio of 60-90% of net profit/loss for the year. This also supports Tryg’s A rating with a stable outlook from the credit rating agency Standard & Poor’s. Risk types Underwriting risk The underwriting risk is the risk relating to the conclusion of insurance contracts and thus the risk that premium income does not adequately cover the claims that Tryg is obliged to pay when damage has occurred. This risk can be assessed and managed based on statistical analyses of historical experience within various business sectors. The insurance premium must be adequate to cover expected claims, but must also comprise a risk premium equal to the return on the part of Tryg’s capital that is used to protect against random fluctuations. All things being equal, this means that insurance sectors or areas which, from experience, are subject to major fluctuations, must comprise a larger risk premium as these areas require a larger capital base. The ongoing assessment of the underwriting risk is based on Tryg’s internal capital model, which defines the target premium levels for each area of the insurance business. This applies both when determining and updating tariffs, and when individually pricing major agreements for the corporate and partner segments. The underwriting risk is managed by means of ongoing profitability monitoring, business processes, accep- tance policy, proxies and reinsurance. The overall management frame- work is defined by the Supervisory Board in Tryg’s insurance policy. Reinsurance is used to reduce the risk in areas where a special need for this exists. The need for reinsurance is assessed on an ongoing basis using Tryg’s internal capital model, in which the price of reinsurance is com- pared with the reduction in the capital requirement that can be achieved. In light of the considerable cloudburst claims in Denmark in 2010 and 2011 and similar cloudburst claims in the rest of Europe, Tryg has adjusted its risk assessment associated with weather-related events upwards. As a consequence of this, in 2012/2013 Tryg took out what is known as an aggregate cover for small or medium-sized events resulting in nature-related claims. The aggregate cover amounts to DKK 500m, with an annual retention of DKK 400m. In the field of buildings and contents insurance, major events in 2013 were covered by catastrophe reinsurance cover of DKK 5.5bn with re- tention of DKK 150m. The primary risk for individual events is storms, and the scope of the cover is defined using simulation models such that this cover will prove insufficient in statistical terms less than once every 250 years. The reinsurance programme for catastrophes also covers other disastrous events, including terrorist attacks, up to a maximum of DKK 4.0bn. For accident and workers’ compensation policies, Tryg has bought catastrophe reinsurance with retention of DKK 50m and with coverage of up to DKK 1.5bn for claims originating from the same event, including terrorism. Tryg's risk management environment Supervisory Board Executive Management Risk management environment Policies Risk Management Committee Policies Risk reporting Recommen- dations Underwriting Reinsurance Committee Provisions Committee Investment Risk Committee Operational Risk Committee Systematic risk assessment reporting • Contingency • Control • Risk identification • Risk management • Risk appetite • Capital • Strategy • Crisis management 78 | Tryg A/S | Annual report 2012 | Notes Notes Major risk types Underwriting risk The risk relating to the conclusion of insurance contracts. The risk that claims at the end of an insurance contract deviate significantly from our pricing assumptions when concluding the contract. Handled by the Underwriting Reinsurance Committee Provisioning risk We make technical provisions at the end of a financial period to cover expected future payments in respect of claims already incurred. The provisioning risk is the risk that future payments deviate significantly from our assumptions when making the provisions. Handled by the Provisions Committee Investment risk The risk of volatility in the financial markets impacting the Group’s results. Investment risk includes elements such as interest rate risk, equity risk, currency risk, credit risk and liquidity risk. Handled by the Investment Risk Committee Operational risk The risk of errors, fraud or failures in internal procedures, systems and processes. Handled by the Operational Risk Committee Strategic risk The risk of changes to the conditions under which Tryg operates, including changed legislation, competition, partnerships or market conditions. Handled by the Risk Management Committee Sensitivity analysis Insurance risk DKKm Underwriting risk Effect of 1% change in: Combined ratio (1 percentage point) Claim frequency (1 percentage point) Average claim Premium rates Provisioning risk 1% change in social inflation 10% error in the assessment of long-tailed lines of business (workers’ compensation, motor liability, liability, accident) Investment risk Interest rate market Effect of 1% increase in interest curve: Impact of interest-bearing securities Higher discounting of claims provisions Net effect of interest rate rise Impact of Norwegian pension obligation a) Equity market 15% decline in equity market Effect of derivatives Real estate market 15% decline in real estate markets Currency market Equity: 15% decline in exposed currency (exclusive of EUR) relative to DKK Impact of derivatives Technical result per year: Effect of 15% change in exchange rates of NOK and SEK relative to DKK 2011 2012 +/- 196 +/- 1,608 +/- 153 +/- 194 +/- 200 +/- 1,599 +/- 141 +/- 197 +/- 738 +/- 779 +/- 1,725 +/- 1,826 -850 -851 889 39 296 -279 7 864 13 291 -367 18 -593 -530 -659 629 -851 868 +/- 83 +/- 175 a) Additional sensitivity information about pay increase rate and mortality in Note 22 ‘Pensions and similar obligations’ 79 Notes | Annual report 2012 | Tryg A/S | Notes Denmark has established a national guarantee scheme to cover NBCR (Nuclear Biological Chemical Radioactive) terrorist attacks. Insurance companies in the Danish market pay claims of up to DKK 500m for these types of events, and joint reinsurance then covers up to DKK 5bn. Claims above DKK 5bn will be covered by a government guarantee of DKK 15bn. Tryg’s share of the total retention will be approximately DKK 100m, which will be the maximum claim as a consequence of NBCR events. Natural disasters in Norway are covered by the Norwegian Natural Perils Pool (NNP). Insurance companies in the Norwegian market pay claims of up to DKK 600m for these types of events, and joint re- insurance then covers up to NOK 12.5bn. Tryg pays a market share of this retention, which is again covered by Tryg’s catastrophe programme. Tryg also utilises the option of member companies to act as reinsurers for NNP correspon ding to its own share of the pool. The risk assumed is subsequently hedged through Tryg’s catastrophe programme, thereby reducing costs. In addition, reinsurance is bought for a number of sectors which, from experience, are exposed to major claims. The largest single risks in Tryg’s corporate portfolio are in the area of buildings and contents insurance, protected by reinsurance cover of DKK 1.7bn and with reten- tion of DKK 50m, but with additional annual retention. This means that, in practice, retention is DKK 100m for the first claim, DKK 75m for the second claim and DKK 50m for subsequent claims. If there are more than four major claims in the same year, additional frequency cover has been purchased, reducing retention to DKK 25m for subsequent claims. Tryg buys individual reinsurance cover for buildings and contents risks above this limit. Other sectors covered by reinsurance include liability, motor, fish farming and guarantee insurance. In the event of a major insurance event covered by the reinsurance programme, receivables from reinsurers may increase, entailing a credit risk. This risk is managed through requirements to assess the reinsurers’ credit ratings and to spread reinsurance across several reinsurers. Provisioning risk At the end of the term of insurance, the insurance risk relates to the claims provisions made to cover future payments in respect of damage which has already occurred. When damage occurs, there is a certain delay before the customer submits a claim. Depending on the complexity of the claim, a longer or shorter period of time may pass before the size of the claim is finally agreed. This may be a prolonged process, particularly for personal injuries. Even once the claim has been settled, there is a risk that it will be reopened at a later date, triggering further payments. In determining the claims provisions, both individual assessments and statistical calculations are used. At the end of 2012, claims provisions totalled DKK 27,242m. The duration of these provisions, that is, the average time until these amounts were disbursed to customers, was 3.6 years. Most of the claims provisions relate to personal injury claims. These provisions are exposed to changes in inflation, the discount rate, disbursement patterns, economic trends, legislation and court decisions. The calculation of claims provisions will always be subject to uncertainty. Historically, many insurers have experienced substantial positive as well as negative impacts on profit (run-off) resulting from provisioning risk, and this is also expected to be the case in future. The Supervisory Board defines the overall framework for managing provision risk in Tryg’s insurance policy. This entails, among other things, that assessments of provisions are based on an underlying model analysis, and that internal control calculations and evaluations are performed. Claims provisions relating to annuities under Danish workers’ compen- sation insurance are discounted using the current market rate and simul taneously increased based on the wage inflation rate each year. This exposes Tryg to an explicit inflation risk. To hedge this, Tryg uses a number of zero coupon inflation swaps in Danish kroner, in which Tryg receives a fixed amount in return for payment of an amount based on the trend in Danish consumer prices. 80 | Tryg A/S | Annual report 2012 | NotesNotes DKKm Claims provisions – estimated accumulated claims Gross 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Estimated acc. claims, end of year 11,683 12,074 1 year later 12,068 2 years later 12,123 3 years later 12,111 4 years later 12,022 5 years later 12,011 6 years later 11,743 7 years later 11,857 8 years later 11,746 9 years later 11,676 10 years later 11,676 11,084 11,189 10,834 10,836 10,855 10,824 10,609 10,617 10,535 10,549 11,408 11,401 11,252 11,136 10,866 10,659 10,729 10,617 10,576 12,147 12,050 11,864 11,458 11,187 11,543 11,441 11,454 11,954 12,208 11,703 11,462 11,876 11,863 11,841 12,908 13,552 13,572 14,134 14,120 14,017 13,637 14,340 14,934 14,940 14,888 14,284 15,838 15,872 15,624 17,551 17,652 17,591 17,854 18,296 15,287 10,549 10,576 11,454 11,841 14,017 14,888 15,624 17,591 18,296 15,287 151,801 Cumulative payments to date Provisions before discounting, end of year Discounting Reserves from 2001 and prior years Other Gross claims pro- visions, end of year -11,242 -9,909 -9,925 -10,604 -10,621 -12,406 -12,566 -12,997 -14,012 -13,449 -7,442 -125,172 434 -55 640 -69 651 -89 850 -115 1,221 -160 1,611 -174 2,323 -219 2,627 -226 3,579 -244 4,847 -261 7,845 -290 26,629 -1,900 2,114 400 27,242 Ceded 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Estimated acc. claims, end of year 1 year later 2 years later 3 years later 4 years later 5 years later 6 years later 7 years later 8 years later 9 years later 10 years later Cumulative payments to date Provisions before discounting, end of year Discounting Reserves from 2001 and prior years Other Reinsurers’ share of claims provi- sions, end of year 2,141 2,261 2,135 2,127 2,125 2,141 2,149 2,070 2,071 2,029 2,017 2,017 1,005 961 957 1,023 934 929 937 934 999 1,042 923 935 979 977 961 933 967 955 953 959 852 857 850 816 869 851 851 305 303 288 286 321 316 314 520 483 467 503 525 494 192 219 221 209 209 255 393 370 317 734 815 812 1,512 2,280 290 1,042 953 851 314 494 209 317 812 2,280 290 9,578 -1,958 -909 -880 -817 -303 -488 -180 -283 -550 -1,415 -93 -7,876 59 -2 133 -5 72 -5 33 -1 11 0 6 0 29 -1 34 -1 263 -4 865 -17 198 -7 1,702 -44 235 187 2,080 81 Notes | Annual report 2012 | Tryg A/S | Notes DKKm Claims provisions – estimated accumulated claims Net of reinsurance 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Estimated accu- mulated claims End of year 1 year later 2 years later 3 years later 4 years later 5 years later 6 years later 7 years later 8 years later 9 years later 10 years later Cumulative payments to date Provisions before discounting, end of year Discounting Reserves from 2001 and prior years Other Claims provisions, net of reinsurance, end of year 9,542 9,812 9,933 9,996 9,986 9,881 9,862 9,673 9,785 9,718 9,659 9,659 10,079 10,228 9,877 9,813 9,921 9,896 9,672 9,683 9,536 9,507 10,485 10,466 10,273 10,159 9,906 9,726 9,762 9,661 9,623 11,188 11,198 11,007 10,609 10,371 10,675 10,590 10,603 11,649 11,905 11,415 11,176 11,555 11,547 11,527 12,387 13,069 13,104 13,631 13,595 13,523 13,445 14,121 14,713 14,731 14,680 14,029 15,446 15,502 15,307 16,817 16,837 16,779 16,341 16,017 14,997 9,507 9,623 10,603 11,527 13,523 14,680 15,307 16,779 16,017 14,997 142,223 -9,283 -9,000 -9,044 -9,787 -10,317 -11,918 -12,386 -12,715 -13,463 -12,035 -7,349 -117,297 376 -52 508 -64 579 -84 816 -113 1,210 -160 1,605 -174 2,294 -218 2,593 -226 3,317 -240 3,982 -244 7,648 -283 24,927 -1,856 1,879 213 25,162 Estimated accumulated claims regarding Moderna: 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 End of year 1 year later 2 years later 3 years later 4 years later 5 years later 6 years later 7 years later 8 years later 9 years later 10 years later 366 361 363 364 256 254 256 256 140 138 139 139 124 123 124 123 800 1,161 1,166 1,182 1,521 1,526 1,566 1,862 1,842 1,654 681 894 898 893 547 623 637 637 449 431 433 433 The acquisition of Moderna in April 2009 affects the diagonals with its share of the claims, net of reinsurance. As a consequence of the merger of Moderna and Tryg’s Swedish branch in Malmö in 2010, the diagonal is changed corresponding to its share of the claims, net of reinsurance. Other provisions comprise the claims provisions for Tryg Garantiforsikring A/S and in 2011 the Finnish branch of Tryg Forsikring A/S. In 2012, the Finnish branch is included under liabilities associated with assets held for sale. The amounts in foreign currency in the table are translated to Danish kroner using the exchange rate at 31 December 2012 to prevent the impact of exchange rate fluctuations. 82 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 0-1 year 1-2 years 2-3 years > 3 years Other Expected cash flow Claims provisions (continued) 2012 Premium provisions, gross Premium provisions, ceded Claims provisions, gross Claims provisions, ceded 2011 Premium provisions, gross Premium provisions, ceded Claims provisions, gross Claims provisions, ceded 6,107 -222 9,914 -941 14,858 6,175 -180 10,135 -995 15,135 180 0 4,562 -387 4,355 204 0 4,452 -258 4,398 182 0 2,956 -190 2,948 199 0 2,796 -176 2,819 189 0 9,410 -375 9,224 192 0 8,776 -326 8,642 30 -15 400 -187 228 162 -12 745 -120 775 Carrying amount Total 6,688 -237 27,242 -2,080 31,613 6,932 -192 26,904 -1,875 31,769 Other comprises Tryg Garantiforsikring A/S and in 2011 the Finnish branch of Tryg Forsikring A/S. In 2012, the Finnish branch is included under liabilities associated with assets held for sale. Operational risk Operational risk relates to errors or failures in internal procedures, fraud, breakdown of infrastructure, IT security and similar factors. As operational risks are mainly internal, Tryg focuses on establishing an adequate control environment for its operations. In practice, this work is organised by means of procedures, controls and guidelines that cover the various aspects of Tryg’s operations, including the IT security policy. Tryg has also set up a security and investigation unit to handle internal fraud, IT security, physical security and contingency plans. Tryg has prepared contingency plans to handle the most important areas, such as contingency plans for handling prolonged IT breakdowns in the individual areas of the business. A crisis management structure has also been established to deal with the eventuality that Tryg is hit by a major crisis. The Supervisory Board defines the overall framework for managing operational risk in Tryg’s IT security policy and operational risk policy. Strategic risk Strategic risk relates to Tryg’s choice of strategic position, including IT strategy, flexibility relative to the market, business partners and reputation, as well as changed market conditions. The Supervisory Board is closely involved in the management of strategic risk. Investment risk The overall framework for managing investment risk is defined by the Supervisory Board in Tryg’s investment policy. Interest rate risk Interest rate risk is the risk of losses resulting from changes in market interest rates. Tryg’s investment portfolio is divided into a match portfolio and a free portfolio. The match portfolio corresponds to the value of the discounted claims provisions and is designed to replicate the interest rate sensitivity of the discounted provisions to the widest possible extent. Tryg carries out daily monitoring, follow-up and risk management of the Group’s interest rate risk. The bond portfolio is thus adjusted continuously to minimise the net interest rate risk. In practice, it is not possible or expedient to aim for a complete match. The administration costs alone associated with a complete match mean that, in practice, a certain degree of mismatch is acceptable within an appropriate limit defined in the investment policy. Add to this that the provisions are discounted using a mathematical interest rate curve specified by the Danish Financial Supervisory Authority, meaning that it cannot be perfectly replicated in the market and that a certain degree of mismatch is therefore to be accepted. 83 Notes | Annual report 2012 | Tryg A/S | Notes Interest rate basis risk The positive or negative additional return stemming from the bond spread risk reflects changes in the price of the bond investment resulting from changes in the market’s assessment of the expected credit quality of the specific security and the level of the general credit demand in the market. Tryg covers risk from five years and onwards, primarily using local interest rate swaps, which is a different curve than the Danish Financial Supervisory Authority’s discount curve. For example, illiquidity of Norwegian government bonds included in the Danish Financial Supervisory Authority’s curve may occasionally result in sharp declines or increases in the value of the Norwegian provisions whereas Tryg’s hedging of Norwegian interest rate swaps shows a more moderate response. The net interest rate risk of the match portfolio versus the insurance obligations can thus generate relatively large short-term fluctuations of up to DKK 200-300m, while long-term hedging turns out to have ideal properties. price its financial interest rate assets. In the interest rate curve between one to five years, the interest rate risk is hedged by means of invest- ments in AAA-rated Nordic and European mortgage bonds, government bonds and possibly highly rated corporate bonds with relevant regulatory interest curve properties. Even though the interest rate risk of these cor- responds to the interest rate risk of the provisions, there is still a differ- ence and thereby risk as the investments also carry a bond spread risk. They will thus generate a positive or negative additional return relative to the interest rate curve, to which should be added refinancing and invest- ment costs which are not included in the regulatory interest curve. Tryg manages its bond spread risk by means of ratings and credit rat- ings, among other things, and uses these to set nominal limitations on purchases from the different bond issuers. Furthermore, Tryg regularly calculates the price sensitivity of its bond portfolio in the event of a change in the bond spread. Bond spread risk Interest rate basis risk is the risk of various changes in the discount curve and the market interest rate curve, respectively, used by Tryg to Norwegian pension scheme Tryg is also exposed to interest rate changes as a result of its liabilities under the Norwegian pension scheme, which is a defined-benefit plan Investment risk Bond portfolio Duration 1 year or less Duration 1-5 years Duration 5-10 years Duration more than 10 years Total Duration 2011 2012 19,132 10,187 4,213 3,700 37,232 2.1 20,427 15,735 2,641 2,216 41,019 2.1 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. Listed shares Nordic countries United Kingdom Rest of Europe United States Asia etc. Total The portfolio of unlisted shares totals The share portfolio includes exposure of DKK -120m sold on futures contracts (DKK -44m in 2011). Unlisted equity investments are measured based on an estimated market price. 2011 2012 395 82 331 565 242 1,615 187 458 102 483 632 429 2,104 199 84 | Tryg A/S | Annual report 2012 | Notes Notes covering approximately 1,428 employees. This scheme was closed to new employees in 2008, and the total provision was DKK 1,042m at the end of 2012. Changes in the pension provision are not recognised in the income statement, but are charged directly to changes in equity. Equity and real estate risk The equity and real estate portfolios are exposed to risks as a consequence of changes in equity markets and real estate markets, respectively. At the end of 2012, the equity portfolio accounted for 4.5% of the total invest- ment assets. This proportion is expected to be in the range 2.3-6.0% in 2013. In 2008, Tryg bought the head office in Ballerup, significantly in- creasing the proportion of real estate. This proportion is expected to be reduced over time. In addition to owner-occupied property, Tryg’s real estate portfolio consists of office and rental property, which account for 17.8% and 22.3%, respectively, of total investment assets. Currency risk Currency risk is the risk of incurring a loss on foreign positions as a result of changes in exchange rates. Tryg keeps the currency risk low. Tryg’s premium income in foreign currencies is matched by claims and costs in the same currencies, and only the profit for the period is therefore exposed to currency risk. The risk of a loss of value of statement of financial position items as a consequence of exchange rate fluctuations is hedged by means of currency derivatives in accordance with a general hedging rate of 90-100% per currency. The aim is for the net carrying amount of the Norwegian entity to be hedged 98-100% over time. Foreign currency translation adjustments and hedging of foreign entities are charged directly to equity. To manage currency risk, Tryg uses currency spots as well as forward exchanges and currency swaps with a typical duration of one to three months. Furthermore, Tryg uses so-called NDF contracts (non-deliver- able forward contracts), which are short-term forward contracts on a currency with limited revenue. The contracts are needed to hedge the currency risk relating to Tryg’s equity portfolio and Tryg’s insurance exposure to these currencies. Exposure to exchange rate risk Property Bonds incl. derivatives Shares incl. derivatives Insurance Hedge Exposure 2012 USD EUR GBP NOK SEK Other Total 2011 USD EUR GBP NOK SEK Other Total 0 0 0 941 1 0 0 0 0 873 1 0 0 1,819 0 14,785 2,702 731 -7 1,845 -3 14,112 3,107 0 728 412 94 577 589 508 640 222 78 391 88 305 -15 -1,547 10 -12,950 -1,741 -87 -74 -2,174 5 -12,470 -1,683 -16 -700 -338 -104 -3,481 -1,546 -1,003 -566 1,450 -83 -3,013 -1,208 -186 13 346 0 -128 5 149 641 -7 1,343 -3 -107 305 103 1,866 85 Notes | Annual report 2012 | Tryg A/S | Notes Impact of exchange rate fluctuations in SEK and NOK on technical result Gross premium income Gross claims Total insurance operating costs Profit/loss on gross business Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result Impact of exchange rate fluctuations in SEK and NOK on technical result Gross premium income Gross claims Total insurance operating costs Profit/loss on gross business Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result Impact of exchange rate fluctuations in SEK and NOK on statement of financial position Assets Intangible assets Total property, plant and equipment Investment property Investments in associates Other financial investment assets Reinsurers’ share of provisions for insurance contracts Receivables Other assets Prepayments and accrued income Total assets Equity and liabilities Equity Subordinate loan capital Provisions for insurance contracts Total provisions Other debt Accruals and deferred income Total equity and liabilities 86 2011 19,948 -15,783 -3,271 894 507 171 1,572 2010 18,894 -15,111 -3,136 647 -311 124 460 2012 Change Currency Change excl. effect currency effect 20,314 -14,675 -3,295 2,344 86 62 2,492 366 1,108 -24 1,450 -421 -109 920 376 -274 -65 37 2 3 42 -10 1,382 41 1,413 -423 -112 878 2011 Change Currency Change excl. effect Currency effect 19,948 -15,783 -3,271 894 507 171 1,572 1,054 -672 -135 247 818 47 1,112 383 -291 -69 23 -11 5 17 671 -381 -66 224 829 42 1,095 2011 2012 Change Currency Change excl. effect Currency effect 952 1,857 2,199 14 43,214 2,067 1,665 495 721 53,184 9,007 1,589 34,220 2,228 5,808 332 53,184 759 1,592 2,081 21 43,818 2,317 1,989 1,246 490 54,313 10,979 1,597 34,355 2,343 4,645 394 54,313 -193 -265 -118 7 604 250 324 751 -231 1,129 1,972 8 135 115 -1,163 62 1,129 24 33 23 1 1,153 74 46 23 4 1,381 7 0 929 138 300 7 1,381 -217 -298 -141 6 -549 176 278 728 -235 -252 1,965 8 -794 -23 -1,463 55 -252 | Tryg A/S | Annual report 2012 | Notes Notes Impact of exchange rate fluctuations in SEK and NOK on statement of financial position Assets Intangible assets Total property, plant and equipment Investment property Investments in associates Other financial investment assets Reinsurers’ share of provisions for insurance contracts Receivables Other assets Prepayments and accrued income Total assets Equity and liabilities Equity Subordinate loan capital Provisions for insurance contracts Total provisions Other debt Accruals and deferred income Total equity and liabilities 2010 2011 Change Currency Change excl. effect Currency effect 968 1,856 2,158 13 40,126 1,588 1,922 1,157 803 50,591 8,458 1,591 32,031 2,059 6,095 357 50,591 952 1,857 2,199 14 43,214 2,067 1,665 495 721 53,184 9,007 1,589 34,220 2,228 5,808 332 53,184 -16 1 41 1 3,088 479 -257 -662 -82 2,593 549 -2 2,189 169 -287 -25 2,593 5 3 2 0 116 6 6 2 1 141 2 0 98 11 29 1 141 -21 -2 39 1 2,972 473 -263 -664 -83 2,452 547 -2 2,091 158 -316 -26 2,452 Credit and counterparty risk Credit risk and counterparty risk is the risk of incurring a loss if counter- parties fail to meet their obligations. In connection with investment ac- tivities, the primary counterparties are bond issuers and counterparties in other financial instruments. Tryg uses limits and rating requirements to manage credit risk. As already mentioned, Tryg matches the interest rate sensitivity of the provisions with interest rate swaps, leading to counterparty risk on the derivative contracts. However, a framework agreement concerning cash collateral has been concluded for most of them if the value of the interest rate swap exceeds a certain threshold level (CSA agreement), which reduces the counterparty risk. Moreover, Tryg is exposed to a natural credit risk as a result of its considerable exposure to different mortgage forms (covered bonds), including mortgage bonds in the Nordic region. The risk is primarily AAA-rated, with an AA-rated risk in exceptional circumstances, and is diversified with a broad range of issuers. Credit risks from reinsurance counterparties are managed according to framework conditions, such as minimum rating requirements and through the Credit Committee, which monitors the quality of reinsu- rance counterparties on an ongoing basis. The minimum requirements include a BBB rating from Standard & Poor’s for short-tailed business and an A rating from Standard & Poor’s for long-tailed business. Credit risk Bond portfolio by ratings AAA to A Other Not rated Bond portfolio by ratings Included in assets held for sale Bonds according to statement of financial position Reinsurance balances AAA to A Other Not rated Total 2011 DKKm 37,940 372 88 38,400 0 38,400 1,901 0 50 1,951 2011 % 98.8 1.0 0.2 100.0 97.4 - 2.6 100.0 2012 DKKm 38,387 716 246 39,349 487 38,862 1,578 9 136 1,723 2012 % 97.6 1.8 0.6 100.0 91.6 0.5 7.9 100.0 87 Notes | Annual report 2012 | Tryg A/S | Notes Concentration risk Concentration risk is the risk that arises as a result of either single large commitments or exposure to relatively few sectors/portfolios. Tryg identifies any risk concentrations by continuously monitoring the credit portfolio, and risk is managed via exposure limits and rating require- ments for the exposure. Liquidity risk Liquidity risk is the risk that Tryg fails to meet its financial liabilities or cannot meet such liabilities without sustaining a loss. A general insurance company such as Tryg naturally has good liquidity, as premium payments fall due before claims are paid. Payments received are largely invested in securities that can easily be realised and/or mortgaged (repos). Tryg also has access to funding and liquidity from the money and bond markets. Tryg continuously monitors the liquidity requirement and adapts its contingency plans so that it can obtain the necessary liquidity at all times. Liquidity risk Maturity of the Group’s financial obligations 2012 Subordinate loan capital Amounts owed to credit institutions Debt relating to unsettled funds transactions and repos Derivative financial instruments Other debt 2011 Subordinate loan capital Amounts owed to credit institutions Debt relating to unsettled funds transactions and repos Derivative financial instruments Other debt 0-1 year 1-5 years > 5 years 485 14 1,470 66 3,095 5,130 0 11 4,161 35 1,601 5,808 0 0 0 0 0 0 0 0 0 0 0 0 1,112 0 0 0 0 1,112 1,589 0 0 0 0 1,589 Total 1,597 14 1,470 66 3,095 6,242 1,589 11 4,161 35 1,601 7,397 The subordinate loan to TryghedsGruppen smba, which represented DKK 485m at the end of 2012, is scheduled for refinancing in Q1 2013. 2 Capital management Tryg’s capital base consists of equity and additional subordinate loan capital. The relationship between these is evaluated on an ongoing basis in order to maintain an optimum structure which takes into account the return on equity, the capital cost and flexibility. The actual capital is assessed differently by authorities and Standard & Poor’s. The authorities require companies to determine the capital base consisting of equity minus intangible assets, discount effect and other statutory corrections plus additional capital. The additional capital can be included by up to 50% of the Solvency I requirement, although additional capital with a definite maturity may not exceed 25% of the Solvency I requirement. Standard & Poor’s uses the term ‘Total Adjusted Capital’ (TAC), where the subordinate loan capital may generally not exceed 25% of the total capital. In 2005, Tryg took out a 20-year subordinate bond loan of EUR 150m listed on the London Stock Exchange. In 2009, in connection with the acquisition of Moderna, Tryg took out a subordinate loan with expiry in 2032 of EUR 65m from TryghedsGruppen, which owns 60% of Tryg. Tryg’s total holding of subordinate debt subsequently amounted to approximately EUR 215m. In total, debt amounted to 18% of equity at the end of 2012, and interest expenses in 2012 amounted to DKK 80m. Given Tryg’s desire to optimise its capital structure in light of the currently favourable market conditions for core capital, Tryg has decided to refi- nance the subordinate loan from TryghedsGruppen. Due to the most recent reports about the postponement of the commencement of Solvency II, Tryg has decided that the new subordinate loan should be such that it can be fully recognised according to the current capital adequacy rules. This includes the option of including subordinate loan capital with an indefinite maturity in the capital base by up to 50% of the company’s capital requirement. Moreover, it is expected that the subordinate loan can be included as Tier 2 capital under Solvency II. Viewed separately, the new loan combined with early repayment of the existing subordinate loan will strengthen Tryg’s capital base by DKK 800m. Tryg has therefore decided to purchase treasury shares worth DKK 800m as part of an extraordinary distribution. 88 | Tryg A/S | Annual report 2012 | Notes Notes Capital adequacy Equity according to annual report Proposed dividend Solvency requirements for subsidiaries – 50% Tier 1 capital Subordinate loan capital Solvency requirements for subsidiaries – 50% Capital base Weighted assets Solvency ratio 2011 2012 9,007 -400 -2,508 6,099 848 -2,507 4,440 10,979 -1,594 -2,406 6,979 873 -2,405 5,447 3,953 6,048 112 90 The capital base and the solvency ratio are calculated in accordance with the Danish Financial Business Act. Subordinate loan capital The fair value of the loan at the statement of financial position date The fair value of the loan at the statement of financial position date is based on a price of Total capital losses and costs at the statement of financial position date Interest expenses for the year Bond loan 2011 962 86 10 50 2012 1,119 100 7 50 TryghedsGruppen smba 2012 2011 464 96 0 33 490 101 0 30 The share of capital included in the calculation of the capital base totals DKK 873m (DKK 848m in 2011). The loans are initially recognised at fair value on the date on which a loan is entered and subsequently measured at amortised cost. Loan terms: Subordinate bond loan a) Subordinate loan capital b) Lender Principal Issue price Issue date Maturity year Loan may be called by lender as from Repayment profile Interest structure Listed bonds EUR 150m 99.017 December 2005 2025 2015 Interest-only 4.5% (until 2015) 2.1% above EURIBOR 3M (from 2015) Effective interest rate 4.4% TryghedsGruppen EUR 65m 100 April 2009 2032 30 June 2012 Interest-only 5.13% above EURIBOR 3M (interest until 30 June 2012) 7.63-6.63% (max. and min. until 30 June 2012) 5% above EURIBOR 3M (interest 1 July 2012-30 June 2019) 6% above EURIBOR 3M (interest from 1 July 2019) 0.4 % a) In December 2005, Tryg Forsikring A/S took out a subordinate bond loan with no option for the creditor to call the loan before maturity or otherwise terminate the loan agreement with Tryg Forsikring A/S. The loan is automatically accelerated upon the liquidation or bankruptcy of Tryg Forsikring A/S. b) Tryg Forsikring A/S has subscribed the subordinate loan capital in connection with acquisitions made in April 2009. The loan is scheduled for refinancing in Q1 2013. The prices used for determining fair value in respect of both loans are based on an assessment of the credit spread of the loans conducted by Nordea. 89 Notes | Annual report 2012 | Tryg A/S | Notes DKKm Private Commercial Corporate Sweden Other Group 3 Operating segments 2012 Gross premium income Gross claims Gross operating expenses Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result Total investment return after insurance technical interest Other income and costs Profit/loss before tax Tax Profit/loss on continuing business Profit/loss on discontinued and divested business after tax Profit/loss Run-off gains/losses, net of reinsurance Intangible assets Equity investments in associates Reinsurers’ share of premium provisions Reinsurers’ share of claims provisions Assets held for sale Other assets Total assets Premium provisions Claims provisions Provisions for bonuses and premium discounts Liabilities associated with assets held for sale Other liabilities Total liabilities 9,733 -7,084 -1,524 81 27 1,233 3,687 -2,372 -748 32 5 604 5,258 -3,929 -648 -37 6 650 1,654 -1,267 -306 -3 24 102 -18 -23 -69 13 0 -97 326 212 506 1 249 0 319 236 1,448 2,899 6,479 291 1,397 6,203 1,414 13,011 32 101 -29 502 0 64 978 1,549 0 0 257 21 0 0 742 50,474 0 0 1 742 8,237 20,314 -14,675 -3,295 86 62 2,492 585 -60 3,017 -837 2,180 28 2,208 1,015 759 21 237 2,080 742 50,474 54,313 6,688 27,242 425 742 8,237 43,334 90 | Tryg A/S | Annual report 2012 | Notes Notes DKKm Private Commercial Corporate Sweden Other Group 3 Operating segments 2011 Gross premium income Gross claims Gross operating expenses Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result Total investment return after insurance technical interest Other income and costs Profit/loss before tax Tax Profit/loss on continuing business Profit/loss on discontinued and divested business after tax Profit/loss Run-off gains/losses, net of reinsurance Intangible assets Equity investments in associates Reinsurers’ share of premium provisions Reinsurers’ share of claims provisions Other assets Total assets Premium provisions Claims provisions Provisions for bonuses and premium discounts Other liabilities Total liabilities Description of segments 9,425 -7,469 -1,542 273 80 767 3,715 -2,801 -755 132 19 310 5,259 -4,227 -671 107 41 509 1,586 -1,319 -303 -9 31 -14 -37 33 0 4 0 0 185 147 630 1 256 2 374 189 1,182 2,877 5,688 238 1,461 6,644 1,474 12,794 23 123 -18 499 0 62 982 1,300 0 0 453 14 0 1 50,151 138 478 0 9,957 19,948 -15,783 -3,271 507 171 1,572 61 -30 1,603 -455 1,148 -8 1,140 944 952 14 192 1,875 50,151 53,184 6,932 26,904 384 9,957 44,177 Please refer to the accounting policies for a description of operating segments. Amounts relating to eliminations, restructuring expenses and discontinued and divested business are included under ‘Other’. Other assets and liabilities are managed at Group level and are therefore not allocated to the individual segments but are included under ‘Other’. Costs are allocated according to specific keys, which are believed to provide the best estimate of assessed resource consumption. The operating business segments consist of Private, Commercial, Corporate and Sweden (Private and Commercial). Finland is included under ‘Discontinued and divested business’/‘Other’. The comparative figures have been restated accordingly. 91 Notes | Annual report 2012 | Tryg A/S | Notes DKKm 2008 2009 2010 2011 2012 3 Geographical segments Danish general insurance Gross premium income Technical result Run-off gains/losses, net of reinsurance Key ratios Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio 9,393 1,678 674 65.0 3.7 68.7 16.2 84.9 9,533 1,190 423 71.4 2.5 73.9 14.6 88.5 9,648 195 615 81.6 0.7 82.3 16.2 98.5 10,019 1,033 770 83.3 -8.1 75.2 15.1 90.3 9,910 1,441 571 71.1 -0.2 70.9 14.5 85.4 Number of full-time employees, end of period 2,356 2,296 2,349 2,315 2,187 Norwegian general insurance Gross premium income Technical result Run-off gains/losses, net of reinsurance Key ratios Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio 7,009 831 109 70.6 3.6 74.2 16.9 91.1 6,750 618 277 70.8 3.7 74.5 17.0 91.5 7,490 389 177 76.7 3.1 79.8 15.7 95.5 7,916 598 181 73.2 3.2 76.4 17.0 93.4 8,239 1,017 464 72.4 -1.0 71.4 16.8 88.2 Number of full-time employees, end of period 1,450 1,398 1,338 1,338 1,282 Swedish general insurance a) Gross premium income Technical result Run-off gains/losses, net of reinsurance Key ratios Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio Number of full-time employees, end of period 225 -93 0 95.1 0.9 96.0 48.4 144.4 105 1,111 -75 -8 80.6 1.8 82.4 25.1 107.5 425 1,769 -124 32 84.6 0.8 85.4 22.4 107.8 414 2,050 -59 -7 82.0 2.6 84.6 20.3 104.9 423 2,183 131 -21 75.3 1.5 76.8 18.6 95.4 444 92 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 2008 2009 2010 2011 2012 3 Geographical segments Other b) Gross premium income Technical result Tryg Gross premium income Technical result Run-off gains/losses, net of reinsurance Key ratios Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio c) Combined ratio -5 11 -4 -44 -13 0 -37 0 -18 -97 16,622 2,427 783 17,390 1,689 692 18,894 460 824 19,948 1,572 944 67.8 3.6 71.4 16.5 87.9 71.7 3.0 74.7 16.6 91.3 80.0 1.6 81.6 16.7 98.3 79.1 -2.5 76.6 16.6 93.2 20,314 2,492 1,015 72.2 -0.4 71.8 16.4 88.2 Number of full-time employees, end of period, continuing business 3,911 4,119 4,101 4,076 3,913 Number of full-time employees, end of period, discontinued and divested business 180 217 191 242 189 a) Moderna Försäkringar is included in ‘Swedish general insurance’ from 2 April 2009. b) Amounts relating to eliminations, restructuring expenses and discontinued and divested business are included under ‘Other’. c) Adjustment of gross expense ratio included only in ‘Tryg’. Explanation of adjustment as a footnote to Financial highlights. 93 Notes | Annual report 2012 | Tryg A/S | NotesNotes DKKm 3 Technical result, net of reinsurance, by line of business 2011 2,435 2,461 -1,543 -431 -35 30 482 62.7 81.6 5.2% 23,977 75,681 2011 915 853 -641 -148 -4 6 66 75.1 93.0 2012 2,400 2,456 -1,742 -430 -12 14 286 70.9 88.9 5.1% 25,090 72,300 2012 945 918 -718 -139 10 0 71 78.2 92.3 19.9% 10,960 264,163 18.1% 11,244 240,070 23.2% 60,838 3,320 20.1% 84,256 2,659 2011 4,039 3,903 -2,866 -629 -7 31 432 73.4 89.7 2011 258 260 -169 -65 -21 2 7 65.0 98.1 1.1% 50 2012 4,013 4,011 -2,617 -641 -4 16 765 65.2 81.3 2012 309 307 -201 -61 -28 3 20 65.5 94.5 1.2% 57 2011 408 403 -205 -44 -75 3 82 50.9 80.4 2011 498 488 -501 -74 -1 5 -83 102.7 118.0 12.4% 8,502 53,321 2012 392 386 -158 -39 -25 0 164 40.9 57.5 2012 564 569 -413 -79 -1 3 79 72.6 86.6 6.8% 55,012 10,436 10.0% 76,535 8,927 3,387,982 3,700,928 12.3% 8,889 53,491 Accident and health Health care Workers’ compensation Motor TPL insurance Motor comprehensive insurance Marine, aviation and cargo insurance 2011 1,803 1,790 -1,176 -250 -15 11 360 65.7 80.5 4.2% 37,586 35,293 2012 1,838 1,831 -1,456 -241 -12 4 126 79.5 93.3 4.2% 39,432 36,243 2011 361 360 -279 -32 0 4 53 77.5 86.4 2012 327 350 -224 -29 0 1 98 64.0 72.3 109.0% 5,765 51,597 106.3% 5,837 47,547 2011 1,192 1,225 -418 -162 -89 -2 554 35.1 55.6 18.6% 88,842 11,507 2012 1,076 1,089 -687 -135 -14 -21 232 63.1 76.8 16.5% 97,258 9,582 Fire and contents (Private) Fire and contents (Commercial) Change of ownership Liability insurance Credit and guarantee insurance Tourist assistance insurance 2011 4,758 4,665 -4,193 -829 308 37 -12 89.9 101.1 2012 4,803 4,831 -3,664 -863 97 20 421 75.8 91.7 8.6% 12,303 345,104 7.8% 11,856 306,088 Other insurance c) 2011 80 79 -6 -45 -58 1 -29 7.6 138.0 12,399 1,129 2012 114 100 -127 -159 30 0 -156 127.0 256.0 34,658 512 2011 2,850 2,793 -3,103 -490 506 28 -266 111.1 110.5 24.6% 70,676 44,803 2012 2,758 2,793 -2,051 -436 46 14 366 73.4 87.4 18.6% 58,678 32,471 2011 50 112 -178 -8 0 4 -70 158.9 166.1 9.5% 26,050 6,236 2012 35 89 -81 -7 0 0 1 91.0 98.9 7.2% 25,631 4,280 Total Norwegian Group Life 1-year policies 2011 2012 2011 19,647 19,392 -15,278 -3,207 509 160 1,576 78.8 92.7 19,574 19,730 -14,139 -3,259 87 54 2,473 71.7 87.7 545 556 -505 -64 -2 11 -4 90.8 102.7 2012 554 584 -536 -36 -1 8 19 91.8 98.1 Gross premiums written Gross premium income Gross claims Gross operating expenses Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result Gross claims ratio Combined ratio Claims frequency a) Average claims DKK b) Total claims Gross premiums written Gross premium income Gross claims Gross operating expenses Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result Gross claims ratio Combined ratio Claims frequency a) Average claims DKK b) Total claims Gross premiums written Gross premium income Gross claims Gross operating expenses Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result Gross claims ratio Combined ratio Average claims DKK b) Total claims 94 | Tryg A/S | Annual report 2012 | Notes Notes Accident and health Health care Workers’ compensation Motor TPL insurance Motor comprehensive insurance Marine, aviation and cargo insurance 2011 2,435 2,461 -1,543 -431 -35 30 482 62.7 81.6 5.2% 23,977 75,681 2012 2,400 2,456 -1,742 -430 -12 14 286 70.9 88.9 5.1% 25,090 72,300 2011 4,039 3,903 -2,866 -629 -7 31 432 73.4 89.7 2012 4,013 4,011 -2,617 -641 -4 16 765 65.2 81.3 2011 408 403 -205 -44 -75 3 82 50.9 80.4 2012 392 386 -158 -39 -25 0 164 40.9 57.5 19.9% 10,960 264,163 18.1% 11,244 240,070 23.2% 60,838 3,320 20.1% 84,256 2,659 Fire and contents (Private) Fire and contents (Commercial) Change of ownership Liability insurance Credit and guarantee insurance Tourist assistance insurance 2011 915 853 -641 -148 -4 6 66 75.1 93.0 2012 945 918 -718 -139 10 0 71 78.2 92.3 2011 258 260 -169 -65 -21 2 7 65.0 98.1 2012 309 307 -201 -61 -28 3 20 65.5 94.5 6.8% 55,012 10,436 10.0% 76,535 8,927 1.1% 3,387,982 50 1.2% 3,700,928 57 2011 498 488 -501 -74 -1 5 -83 102.7 118.0 12.4% 8,502 53,321 2012 564 569 -413 -79 -1 3 79 72.6 86.6 12.3% 8,889 53,491 a) The claims frequency is calculated as the number of claims incurred in the year in proportion to the average number of insurance contracts in the year. b) Average claims are total claims before run-off in the year relative to the number of claims incurred in the year. c) Other insurance, gross claims and gross operating expenses include restructuring costs of DKK 28m and DKK 69m, respectively, in 2012. 95 Gross premiums written Gross premium income Gross claims Gross operating expenses Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result Gross claims ratio Combined ratio Claims frequency a) Average claims DKK b) Total claims Gross premiums written Gross premium income Gross claims Gross operating expenses Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result Gross claims ratio Combined ratio Claims frequency a) Average claims DKK b) Total claims Gross premiums written Gross premium income Gross claims Gross operating expenses Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result Gross claims ratio Combined ratio Average claims DKK b) Total claims 2011 1,803 1,790 -1,176 -250 -15 11 360 65.7 80.5 4.2% 37,586 35,293 2011 4,758 4,665 -4,193 -829 308 37 -12 89.9 101.1 8.6% 80 79 -6 -45 -58 1 -29 7.6 138.0 12,399 1,129 2012 1,838 1,831 -1,456 -241 -12 4 126 79.5 93.3 4.2% 39,432 36,243 2012 4,803 4,831 -3,664 -863 97 20 421 75.8 91.7 2012 114 100 -127 -159 30 0 -156 127.0 256.0 34,658 512 2011 361 360 -279 -32 0 4 53 77.5 86.4 109.0% 5,765 51,597 2011 2,850 2,793 -3,103 -490 506 28 -266 111.1 110.5 24.6% 70,676 44,803 19,647 19,392 -15,278 -3,207 509 160 1,576 78.8 92.7 2012 327 350 -224 -29 0 1 98 64.0 72.3 106.3% 5,837 47,547 2012 2,758 2,793 -2,051 -436 46 14 366 73.4 87.4 18.6% 58,678 32,471 19,574 19,730 -14,139 -3,259 87 54 2,473 71.7 87.7 2011 1,192 1,225 -418 -162 -89 -2 554 35.1 55.6 18.6% 88,842 11,507 2011 50 112 -178 -8 0 4 -70 158.9 166.1 9.5% 26,050 6,236 545 556 -505 -64 -2 11 -4 90.8 102.7 2012 1,076 1,089 -687 -135 -14 -21 232 63.1 76.8 16.5% 97,258 9,582 2012 35 89 -81 -7 0 0 1 91.0 98.9 7.2% 25,631 4,280 2012 554 584 -536 -36 -1 8 19 91.8 98.1 12,303 345,104 7.8% 11,856 306,088 Other insurance c) 2011 Total Norwegian Group Life 1-year policies 2011 2012 2011 Notes | Annual report 2012 | Tryg A/S | Notes DKKm 2011 2012 4 Premium income, net of reinsurance Direct insurance Indirect insurance Unexpired risk provision Ceded direct insurance Ceded indirect insurance 20,022 36 20,058 38 20,096 -1,008 -70 19,018 Direct insurance, by location of risk 2011 2012 20,395 60 20,455 27 20,482 -1,051 -61 19,370 Ceded -541 -61 -449 Ceded -573 -100 -335 Gross 9,947 2,176 8,299 -1,008 20,422 -1,051 Gross 10,022 2,040 7,998 20,060 Denmark Other EU countries Other countries 5 Insurance technical interest, net of reinsurance Interest on insurance provisions Discounting transferred from claims provisions 6 Claims, net of reinsurance Claims Run-off previous years, gross Reinsurance cover received Run-off previous years, reinsurers’ share Run-off previous years, gross, was DKK 756m lower in 2012 than in 2011, primarily due to a negative run-off of DKK 554m relating to the cloudburst on 2 July 2011 and the Norwegian Natural Perils Pool. These run-offs are covered to a wide extent by reinsurance of DKK 518m. The run-off gain from the reinsurance agreement concerning the weather claims frequency is included by DKK 136m. 7 Insurance operating costs, net of reinsurance Commission regarding direct insurance contracts Other acquisition costs Total acquisition costs Administration expenses Insurance operating costs, gross Commission from reinsurers 96 2011 841 -670 171 -16,822 1,039 -15,783 1,591 -95 -14,287 -432 -1,936 -2,368 -903 -3,271 89 -3,182 2012 525 -463 62 -14,958 283 -14,675 363 732 -13,580 -477 -2,013 -2,490 -805 -3,295 103 -3,192 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 2011 2012 7 Insurance operating costs, net of reinsurance (continued) Administration expenses include fee to the auditors appointed by the annual general meeting: Deloitte The fee is divided into: Statutory audit Tax advice In adddition, expenses have been incurred for the Group’s Internal Audit Department. In the calculation of the expense ratio, costs are stated exclusive of depreciation and operating costs on the owner-occupied property but including a calculated rent concerning the owner-occupied property based on a calculated market rent of DKK 46m (DKK 33m in 2011). Insurance operating costs, gross, classified by type Commissions Staff expenses Other staff expenses Office expenses and fees, headquarter expenses IT operating and maintenance costs, software expenses Depreciation, amortisation, impairment losses and write-downs Other income Total lease expenses amount to DKK 36m (DKK 39m in 2011). Insurance operating costs and claims include the following staff expenses: Salaries and wages Commission Allocated share options and matching shares Pension Other social security costs Payroll tax -7 -7 -6 -1 -7 -432 -1,901 -210 -528 -230 -149 179 -3,271 -2,277 -11 -14 -323 -4 -351 -2,980 -6 -6 -6 0 -6 -477 -1,977 -206 -473 -218 -129 185 -3,295 -2,379 -10 -9 -393 -5 -369 -3,165 Remuneration for the Supervisory Board and Executive Management is disclosed in Note 29 ‘Related parties’. Average number of full-time employees during the year (continuing business) 4,095 4,016 Restructuring costs To achieve the anticipated cost-efficiency and profitability in the new efficiency improvement project, Tryg plans to reduce its staff by approximately 400 employees in 2012-2014. Restructuring costs relating to the streamlining project are included with DKK 97m in 2012, consisting primarily of staff expenses. 97 Notes | Annual report 2012 | Tryg A/S | Notes 7 Share option programmes Spec. of outstanding options: 2012 Allocation 2007-2010 Allocated in 2007-2010, beginning of year Category changes Exercised Cancelled Expired Outstanding options from 2007-2010 allocation at 31 Dec. 2012 Allocation 2011 Allocated in 2011, beginning of year Category changes Exercised Cancelled Expired Outstanding options from 2011 allocation at 31 Dec. 2012 Number of options exercisable at 31 Dec. 2012 2011 Allocation 2006-2010 Allocated in 2006-2010, beginning of year Category changes Exercised Cancelled Expired Outstanding options from 2006-2010 allocation at 31 Dec. 2011 Allocation 2011 Allocated in 2011 Category changes Exercised Cancelled Expired Outstanding options from 2011 allocation at 31 Dec. 2011 Number of options exercisable at 31 Dec. 2011 98 TOTAL NUMBERS MARKET VALUE Executive Manage- Other Other senior ment employees employees Total Per option Total value at time of at time of allocation allocation (DKKm) (DKK) at 31 Per option Total value at 31 December December (DKKm) (DKK) 113,353 -11,575 0 -17,245 479,921 19,895 -103,177 -3,502 -100,012 71,886 -19,895 -6,780 -1,197 -4,000 665,160 -121,532 -4,699 -121,257 99/69/94/75 99/69/94/75 99/69/94/75 99/69/94/75 99/69/94/75 54 60/118/115 -10 60/118/115 0 60/118/115 -12 52 -10 -1 84,533 293,125 40,014 417,672 - 32 - 41 8,285 0 0 0 101,169 -1,036 0 -1,381 0 26,220 1,036 0 -690 0 135,674 0 0 -2,071 0 8,285 98,752 26,566 133,603 51,165 153,305 18,670 223,140 72 0 72 0 10 0 0 0 10 137 19 137 0 192,916 30,757 -10,480 -78,880 -20,960 588,355 -30,757 -45,850 -26,587 -5,240 77,773 0 0 -5,887 0 859,044 64/99/69/94/75 0 64/99/69/94/75 -56,330 64/99/69/94/75 -111,354 64/99/69/94/75 -26,200 64/99/69/94/75 69 0/12/43/53 0 0/12/43/53 -3 0/12/43/53 -9 0/12/43/53 -2 0/12/43/53 113,353 479,921 71,886 665,160 8,285 104,967 27,600 0 0 0 0 -3,798 0 0 -1,380 0 140,852 0 0 -5,178 0 8,285 101,169 26,220 135,674 53,417 236,068 28,666 318,151 - 72 0 72 0 55 10 0 0 0 10 - 70 0 70 0 19 22 0 0 -4 0 18 10 0 0 0 10 | Tryg A/S | Annual report 2012 | Notes Notes 7 Share option programmes Specification of outstanding options: Year of allocation Years of exercise 1 Jan. 2012 Additions Exercised Cancelled Expired 31 Dec. 2012 2007 2008 2009 2010 2011 2010-2012 2011-2013 2012-2014 2013-2015 2014-2016 Outstanding options at 31 Dec. 2012 121,257 196,894 149,808 197,201 135,674 800,834 0 0 0 0 0 0 0 -71,216 -50,316 0 0 0 -700 -1,330 -2,669 -2,071 -121,257 0 0 0 0 0 124,978 98,162 194,532 133,603 -121,532 -6,770 -121,257 551,275 Assumptions for calculation of market value at time of allocation Year of allocation 2007 2008 2009 2010 2011 Average share price at time of allocation (DKK) Years of exercise Expected volatility Expected maturity Risk-free interest rate Average time to expiry, 31 Dec. 2012 Average exercise price, 31 Dec. 2012 2010-2012 2011-2013 2012-2014 2013-2015 2014-2016 456.76 378.24 313.51 320.04 295.83 24.10% 20.30% 37.70% 29.20% 30.00% 4 years 4 years 4 years 4 years 4 years 3.90% 3.60% 2.80% 2.70% 3.00% 0.00 0.08 0.58 1.15 2.11 0.00 366.54 312.34 326.02 314.90 Tryg did not allocate share options in 2012. At 31 December 2012, the share option plan comprised 551,275 share options (800,834 share options at 31 December 2011). Each share option entitles the holder to acquire one existing share with a nominal value of DKK 25 in Tryg A/S. The share option plan entitles the holders to buy 0.9% of the share capital in Tryg A/S if all share options are exercised. In 2012, the fair value of share options recognised in the consolidated income statement amounted to DKK 7m (DKK 13m in 2011). At 31 December 2012, a total amount of DKK 76m was recognised for share option programmes issued in 2006-2011. Fair values at the time of allocation are based on the Black & Scholes option pricing formula. The Group Executive Management includes retired managers with a total of 27,465 units with a value of DKK 2.2m at the time of allocation. Risk-takers are included under ‘Other senior employees’. The following assumptions were applied in calculating the market value of outstanding share options at the time of allocation: The expected volatility is based on the average volatility of Tryg shares. The expected term is 4 years, corresponding to the average exercise period of 3 to 5 years. The risk-free interest rate is based on a bullet loan with the same term as the expected term of the options at the time of allocation. The calculation is based on the strike price as set out in the option agreement and the average share price at the time of allocation. The dividend payout ratio is not included in the calculation as the strike price is reduced by dividends paid in order to prevent option holders from being placed at a disadvantage in connection with the company’s dividend payments. The assumptions for calculating the market value at the end of term are based on the same principles as for the market value at the time of allocation. 99 Notes | Annual report 2012 | Tryg A/S | Notes 7 Matching shares TOTAL NUMBERS MARKET VALUE Executive Manage- ment Risk- takers Total Average per matching Average per Total share at Total value matching share at at time of time of value 31 Dec. at 31 Dec. allocation allocation (DKKm) (DKKm) (DKK) (DKK) 2012 Allocated in 2012 Matching shares allocated at 31 Dec. 2012 Allocated in 2011 Matching shares allocated at 31 Dec. 2012 5,948 5,948 4,979 4,979 3,846 3,846 5,996 5,996 9,794 9,794 10,975 10,975 2011 Allocated in 2011 Matching shares allocated at 31 Dec. 2011 4,979 4,979 5,996 5,996 10,975 10,975 301 301 302 302 302 302 3 3 4 4 4 4 427 427 427 427 319 319 4 4 5 5 4 4 In 2011 and 2012, Tryg entered into an agreement on matching shares for the Executive Management and selected risk-takers as a consequence of the Group’s remuneration policy. The Executive Management and selected risk-takers are allocated one share in Tryg A/S for each share that the Executive Management member or risk-taker acquires in Tryg A/S at market rate for liquid cash at a contractually agreed sum. The shares are reported at market value and are accrued over the 4-year maturation period. In 2012, the reported fair value of matching shares for the Group amounted to DKK 2m. 100 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 2011 2012 8 Interest and dividends etc. Interest income and dividends Dividends Interest income cash at bank and in hand Interest income bonds Interest income other Interest expenses Interest expenses subordinate loan capital and credit institutions Interest expenses other 9 Price adjustments Price adjustments concerning financial assets or liabilities at fair value with value adjustment in the income statement: Equity investments Unit trust units Share derivatives Bonds Interest derivatives Other loans Price adjustments concerning assets or liabilities that cannot be attributed to IAS 39: Investment property Owner-occupied property Discounting Other statement of financial position items 10 51 1,173 18 1,252 -83 -30 -113 1,139 13 -100 16 160 465 1 555 15 -10 -757 -67 -819 -264 15 26 1,133 22 1,196 -80 -20 -100 1,096 2 378 -2 202 263 0 843 82 -350 -475 -116 -859 -16 Value gains Value losses Price adjustments, net 743 -1,007 -264 1,001 -1,017 -16 Foreign currency translation adjustments concerning financial assets or liabilities which cannot be stated at fair value total DKK 37m (DKK 31m in 2011). 101 Notes | Annual report 2012 | Tryg A/S | Notes DKKm 10 Tax Tax on accounting profit/loss Difference between Danish and foreign tax rates Tax adjustment, previous years Adjustment of non-taxable income and costs Change in valuation of tax assets Change in tax rate Other taxes Effective tax rate Tax on accounting profit/loss Difference between Danish and foreign tax rates Tax adjustment, previous years Adjustment of non-taxable income and costs Change in valuation of tax assets 11 Profit/loss on discontinued and divested business Gross premium income Gross claims Total insurance operating costs Profit/loss on gross business Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result Total investment return after insurance technical interest Other income and costs Profit/loss before tax Tax Profit/loss on discontinued and divested business 102 2011 2012 -401 -13 32 -64 -7 0 -2 -455 % 25 1 -2 4 1 29 633 -471 -159 3 -8 13 8 -7 -1 0 -8 -8 -754 -57 2 49 -89 12 0 -837 % 25 2 0 -2 3 28 611 -484 -244 -117 -4 4 -117 32 113 28 0 28 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 11 Profit/loss on discontinued and divested business (continued) Technical result, net of reinsurance, by line of business Motor TPL insurance Motor comprehensive Fire and contents insurance (Private) Other line of business Total 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 174 177 -138 -27 0 168 170 -144 -41 0 157 157 -122 -24 0 151 152 -126 -37 0 147 143 -122 -53 0 150 149 -126 -85 3 153 156 -89 -55 -8 129 140 -88 -81 -7 631 633 -471 -159 -8 598 611 -484 -244 -4 5 2 0 0 2 1 6 1 13 4 Gross premiums written Gross premium income Gross claims Gross operating expenses Profit/loss on ceded business Insurance technical interest, net of reinsurance Technical result 17 -13 11 -11 -30 -58 10 -35 8 -117 Gross claims ratio Combined ratio 78.0 93.2 84.7 108.8 77.7 93.0 82.9 107.2 85.3 122.4 84.6 139.6 57.1 97.4 62.9 125.7 74.4 100.8 79.2 119.8 Claims frequency a) Average claims DKK b) Total claims 2.3% 48,875 2,818 2.5% 49,614 2,906 14.8% 9,509 12,872 16.0% 9,493 13,324 2.9% 16,503 7,375 3.3% 15,435 8,132 a) The claims frequency is calculated as the number of claims incurred in the year in proportion to the average number of insurance contracts in the year. b) Average claims are total claims before run-off in the year relative to the number of claims incurred in the year. Other line of business include accident and health, workers’ compensation, marine insurance, fire and contents (commercial), liability insurance and tourist assistance insurance, which are the line of business in which premium income does not exceed DKK 70m. Tryg Forsikring A/S and If P&C Insurance Company Ltd (Finland) entered into agreement on 6 November 2012 on If’s acquisition of Tryg’s Finnish branch at a total price of DKK 112m. The sale is expected to be finalised in spring 2013, pending authority approval. The comparative figures have been restated to reflect the sale. 103 Notes | Annual report 2012 | Tryg A/S | Notes DKKm 12 Intangible assets 2012 Cost Balance at 1 January Foreign currency translation adjustments Transferred to assets held for sale Transferred from assets under construction Additions for the year Disposals for the year Balance at 31 December Amortisation and write-downs Balance at 1 January Foreign currency translation adjustments Transferred to assets held for sale Amortisation for the year Impairment losses and write-downs for the year Reversed amortisation Balance at 31 December Trademarks and customer relations Goodwill Assets under construction Software 380 17 0 0 0 0 397 0 0 0 0 0 0 0 170 8 0 0 0 0 178 -51 -2 0 -20 0 0 -73 882 12 -4 14 13 -48 869 -632 -9 3 -143 -2 36 -747 257 0 0 -14 82 -98 227 -54 0 0 0 -38 0 -92 Total 1,689 37 -4 0 95 -146 1,671 -737 -11 3 -163 -40 36 -912 Carrying amount at 31 December 397 105 122 135 759 2011 Cost Balance at 1 January Foreign currency translation adjustments Transferred from assets under construction Additions for the year Disposals for the year Balance at 31 December Amortisation and write-downs Balance at 1 January Foreign currency translation adjustments Amortisation for the year Impairment losses and write-downs for the year Balance at 31 December 377 3 0 0 0 380 0 0 0 0 0 168 2 0 0 0 170 -32 0 -19 0 -51 786 1 74 22 -1 882 -446 -1 -172 -13 -632 115 0 -74 216 0 257 0 0 0 -54 -54 1,446 6 0 238 -1 1,689 -478 -1 -191 -67 -737 Carrying amount at 31 December 380 119 250 203 952 Software developed in-house is included in ‘Software and assets under construction’ by DKK 110m at 31 December 2012 (DKK 210m at 31 December 2011) 104 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 12 Intangible assets (continued) Impairment test Goodwill At 31 December 2012, management performed an impairment test of the carrying amount of goodwill based on the allocation of the cost of goodwill to the cash-generating unit, which consists of the total Swedish insurance activities. In 2009, Tryg acquired Moderna Försäkringar Sak AB, Modern Re S.A., Netviq AB and MF Bilsport & MC Specialförsäkringar. The insurance activities were incorporated into the Tryg Group’s business structure in 2009 and are reported under Sweden. In 2010, the companies, excluding Modern Re S.A., were merged into Tryg Forsikring A/S as Moderna Forsäkringar, a branch of Tryg Forsikring A/S. Modern Re S.A. was discontinued in 2011. Assumptions for impairment test: The value-in-use method is used. The cash flows appearing from the latest budgets approved by management for the next 5 financial years are used when calculating the value in use of the total Swedish activities acquired. The cash flows in the latest budget period have been extrapolated for financial years after the budget periods (terminal period) and adjusted for expected growth rates determined on the basis of expectations for the general economic growth. The required return is based on an assessment of the risk profile of the tested business activities. Higher return require- ments or lower growth would entail a lower value of the activities, whereas lower return requirements or higher growth expectations would entail a higher value. The impairment test shows a calculated equity of approximately DKK 1.8bn relative to a recognised equity of DKK 0.8bn and did not indicate any impairment. 2012 Moderna 2011 Moderna Assumed annual growth > 5 years Required return before tax 2.0% 12.4% 2.0% 12.7% Trademarks and customer relations The impairment test performed for trademarks and customer relations did not indicate any impairment. Software and assets under construction In 2010, Tryg launched an IT project ‘Tryg Transition’, the aim of which was to design new IT processes and achieve efficiency improvements at Tryg. In 2012, management chose to change the direction of the project and instead focus on improving the efficiency of the existing processes. Based on this, Tryg Transition is impaired, including the related pilot project in Finland. A total impairment of DKK 123m has been made for Tryg Transition. The part relating to the pilot project in Finland is recognised under discontinued business. All other impairment is recognised under insurance operating costs. The impairment test compares the carrying amount with the estimated present value of future cash flows. 105 Notes | Annual report 2012 | Tryg A/S | Notes DKKm 13 Property, plant and equipment 2012 Cost Balance at 1 January Foreign currency translation adjustments Transferred to assets held for sale Transferred from assets under construction Additions for the year Disposals for the year Balance at 31 December Accumulated value adjustments Balance at 1 January Foreign currency translation adjustments Value adjustments for the year at revalued amount in income statement Value adjustments for the year at revalued amount in other comprehensive income Balance at 31 December Accumulated depreciation Balance at 1 January Foreign currency translation adjustments Transferred to assets held for sale Reversed depreciation Depreciation for the year Balance at 31 December Operating Owner-occupied property equipment Assets under construction Total 187 3 -8 0 55 -9 228 0 0 0 0 0 -85 -1 4 8 -16 -90 1,760 27 0 10 8 -19 1,786 27 0 -350 42 -281 -42 -1 0 0 -19 -62 98 2 0 -10 11 0 101 -88 -2 0 0 -90 0 0 0 0 0 0 2,045 32 -8 0 74 -28 2,115 -61 -2 -350 42 -371 -127 -2 4 8 -35 -152 Carrying amount at 31 December 138 1,443 11 1,592 106 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 13 Property, plant and equipment (continued) 2011 Cost Balance at 1 January Foreign currency translation adjustments Transferred from assets under construction Additions for the year Disposals for the year Balance at 31 December Accumulated value adjustments Balance at 1 January Value adjustments for the year at revalued amount in income statement Value adjustments for the year at revalued amount in other comprehensive income Balance at 31 December Accumulated depreciation Balance at 1 January Reversed depreciation Depreciation for the year Balance at 31 December Operating Owner-occupied property equipment Assets under construction Total 228 0 0 18 -59 187 0 0 0 0 -110 48 -23 -85 1,397 2 340 21 0 1,760 17 -10 20 27 -29 0 -13 -42 441 0 -340 -3 0 98 -88 0 0 -88 0 0 0 0 2,066 2 0 36 -59 2,045 -71 -10 20 -61 -139 48 -36 -127 Carrying amount at 31 December 102 1,745 10 1,857 External experts were involved in valuing the owner-occupied property. Impairment test Property, plant and equipment A valuation of the owner-occupied property has been carried out, including the improvements made, and a revaluation of DKK 42m (DKK 20m in 2011) was subsequently included in other comprehensive income and impairment of DKK 350m (DKK 10m in 2011) in the income statement. The impairment test performed for operating equipment did not indicate any impairment. In establishing the market value of the owner-occupied property, the following return percentages were used: Return percentages weighted average Office property 2011 6.3 2012 6.9 107 Notes | Annual report 2012 | Tryg A/S | Notes DKKm 14 Investment property Fair value at 1 January Foreign currency translation adjustments Additions for the year Disposals for the year Value adjustments for the year Reversed on sale Fair value at 31 December 2011 2012 2,158 2 29 -1 12 -1 2,199 2,199 24 35 -259 47 35 2,081 Total rental income for 2012 is DKK 152m (DKK 156m in 2011). Total expenses for 2012 are DKK 29m (DKK 39m in 2011). Of this amount, expenses for non-let property total DKK 2m (DKK 2m in 2011); total expenses for the income-generating investment property are DKK 27m (DKK 37m in 2011). External experts were involved in valuing the majority of the investment property. In establishing the market value of the properties, the following return percentages were used for each property category: Return percentages weighted average Business property Office property Residential property Total 2011 2012 7.3 6.3 4.8 6.3 7.0 6.4 5.9 6.5 108 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 15 Equity investments in associates Cost Balance at 1 January Balance at 31 December Revaluations at net asset value Balance at 1 January Foreign currency translation adjustments Value adjustments for the year Balance at 31 December Carrying amount at 31 December 2011 2012 0 0 13 0 1 14 14 0 0 14 1 6 21 21 Shares in associates according to the latest annual report: Name and registered office Assets Equity and liabilities Equity Revenue Profit/loss for the year Ownership share in % 2012 Komplementarselskabet af 1. marts 2006 ApS, Denmark Bilskadeinstituttet AS, Norway AS Eidsvag Fabrikker, Norway 2011 Komplementarselskabet af 1. marts 2006 ApS, Denmark Bilskadeinstituttet AS, Norway AS Eidsvag Fabrikker, Norway 0 9 60 0 5 49 0 3 19 0 0 5 0 5 42 0 5 44 0 15 22 0 1 19 0 0 9 0 0 4 50 30 28 50 30 28 Individual estimates are made of the degree of influence under the contracts made. 109 Notes | Annual report 2012 | Tryg A/S | Notes DKKm 16 Financial assets Financial assets at fair value with value adjustment in the income statement Equity investments Unit trust units Bonds Deposits with credit institutions Derivative financial instruments Assets held for sale Financial assets at fair value with value adjustment in the income statement Loans and receivables measured at amortised cost Total receivables in relation to direct insurance contracts Receivables from insurance enterprises Receivables from Group undertakings Other receivables Current tax assets Cash at bank and in hand Assets held for sale Total loans and receivables measured at amortised cost Total financial assets Financial assets at amortised cost only deviate to a minor extent from fair value. Financial liabilities Financial liabilities at fair value with value adjustment in the income statement Derivative financial instruments Total financial liabilities at fair value with value adjustment in the income statement Financial liabilities measured at amortised cost Subordinate loan capital Debt relating to direct insurance Debt relating to reinsurance Amounts owed to credit institutions Debt relating to unsettled funds transactions and repos Current tax liabilities Liabilities associated with assets held for sale Other debt Total financial liabilities measured at amortised cost Total financial liabilities Information on valuation of subordinate loan capital at fair value is stated in Note 2. Other financial liabilities measured at amortised cost only deviate to a minor extent from fair value. 2011 2012 187 2,378 38,400 1,635 614 0 43,214 1,158 317 1 189 93 402 0 2,160 199 3,261 38,862 949 547 487 44,305 1,149 227 1 612 0 504 141 2,634 45,374 46,939 35 35 1,589 410 191 11 4,161 260 0 740 7,362 7,397 66 66 1,597 415 256 14 1,470 652 742 1,030 6,176 6,242 110 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 16 Financial assets (continued) Other financial investment assets Fair value hierarchy for financial instruments measured at fair value in the statement of financial position 2012 Equity investments Unit trust units Bonds Deposits with credit institutions Derivative financial instruments Assets held for sale 2011 Equity investments Unit trust units Bonds Deposits with credit institutions Derivative financial instruments Quoted market prices Observable input Non- observable input Total 0 3,261 24,794 949 0 487 29,491 0 2,378 26,713 1,635 0 30,726 0 0 14,058 0 481 0 14,539 0 0 11,657 0 579 12,236 199 0 10 0 0 0 209 187 0 30 0 0 217 199 3,261 38,862 949 481 487 44,239 187 2,378 38,400 1,635 579 43,179 2011 2012 Financial instruments measured at fair value in the statement of financial position based on non-observable input: Carrying amount at 1 January Foreign currency translation adjustments Gains/losses in the income statement Purchases Sales Transfers to/from the group ‘non-observable input’ Carrying amount at 31 December Gains/losses in the income statement for assets held at the statement of financial position date recognised in price adjustments 227 0 11 8 -29 0 217 11 Bonds measured on the basis of observable input mainly consist of Norwegian bonds issued by banks and to some extent Danish semi-liquid bonds, where no quoted prices based on actual trades are available. Non-observable input, total result DKK -13m (DKK 11m in 2011), mainly comprises unlisted shares and bonds. Inflation derivatives are measured at fair value on the basis of non-observable input and are included under claims provisions at a fair value of DKK 3m (DKK 37m in 2011). 217 5 -13 15 -10 -5 209 -13 111 Notes | Annual report 2012 | Tryg A/S | Notes DKKm Bonds Shares Property Total 16 Financial assets (continued) Reconciliation between investment assets as per ‘Investment activities’ in the management’s review and the statement of financial position 2012 Investment assets as per the section ‘Investment activities’ in the management’s review Consisting of: Cash and cash equivalents allocated to portfolio management Debt and receivables relating to unsettled funds and property transactions Unit trust units Deposits with credit institutions Derivative financial instruments Repo debt and reverse receivables Assets held for sale Associated shares Investment assets according to statement of financial position Unit trust units Deposits with credit institutions Derivative financial instruments Associated shares Total investment assets according to statement of financial position 2011 Investment assets as per the section ‘Investment activities’ in the management’s review Consisting of: Cash and cash equivalents allocated to portfolio management Debt and receivables relating to unsettled funds and property transactions Unit trust units Deposits and derivatives Repo debt and reverse receivables Associated shares Investment assets according to statement of financial position Unit trust units Deposits with credit institutions Derivative financial instruments Associated shares Total investment assets according to statement of financial position 41,019 2,444 2,081 45,544 -61 905 -1,037 -949 -511 94 -598 0 38,862 0 0 -2,224 0 0 0 0 -21 199 0 0 0 0 0 0 0 0 2,081 -61 905 -3,261 -949 -511 94 -598 -21 41,142 3,261 949 547 21 45,920 37,232 1,860 2,199 41,291 -33 779 -719 -2,241 3,382 0 38,400 0 0 -1,659 0 0 -14 187 0 0 0 0 0 0 2,199 -33 779 -2,378 -2,241 3,382 -14 40,786 2,378 1,635 614 14 45,427 112 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 16 Financial assets (continued) Sensitivity information Impact on equity from the following changes: Interest rate increase of 0.7-1.0 percentage point Interest rate fall of 0.7-1.0 percentage point Equity price fall of 12% Fall in property prices of 8% Exchange rate risk (VaR 99) Loss on counterparties of 8% 2011 2012 -24 87 -223 -330 -23 -500 112 -182 -279 -283 -19 -320 The impact on the income statement is similar to the impact on equity. The statement complies with the disclosure requirements set out in the Executive Order on Financial Reports for Insurance Companies and Multi-Employer Occupational Pension Funds issued by the Danish FSA. Derivative financial instruments Derivatives with value adjustment in the income statement at market value: 2011 2012 Market value in statement of financial position Nominal Market value in statement of financial position Nominal Interest derivatives Share derivatives Exchange rate derivatives Derivatives according to statement of financial position Inflation derivatives included in claims provisions Total derivative financial instruments Due after less than 1 year Due within 1-5 years Due after more than 5 years 16,971 44 8,131 25,146 2,931 28,077 10,288 3,656 14,133 606 0 -27 579 37 616 -57 -21 694 Derivatives, repos and reverses are used continuously as part of the cash and risk management carried out by Tryg and its portfolio managers. Derivative financial instruments used in connection with hedging of foreign entities for accounting purposes Gains and losses on hedges charged to other comprehensive income: Balance at 1 January Price adjustments for the year Balance at 31 December Gains 983 273 1,256 2011 Losses -1,280 -300 -1,580 Net Gains -297 -27 -324 1,256 191 1,447 27,078 -120 2,411 29,369 2,590 31,959 2,301 10,955 18,703 2012 Losses -1,580 -375 -1,955 511 0 -30 481 3 484 -30 42 472 Net -324 -184 -508 113 Notes | Annual report 2012 | Tryg A/S | Notes DKKm 16 Financial assets (continued) 2011 2012 Price adjustments Price adjustments of foreign entities recognised in other comprehensive income in the amount of: Balance at 1 January Price adjustments for the year Balance at 31 December Receivables Receivables from insurance enterprises Receivables from Group undertakings Other receivables Specification of write-downs on receivables from insurance contracts: Balance at 1 January Foreign currency translation adjustments Transferred to assets held for sale and write-downs and reversed write-downs for the year Balance at 31 December Reversed write-downs are estimated at DKK 48m (DKK 52m in 2011) in one year, but may vary due to major cases/disputes. Written-down receivables are collected by an external collection agency. Receivables in connection with insurance contracts include overdue receivables totalling: Falling due: Within 90 days After 90 days Including write-downs of due amounts Other receivables do not include overdue receivables 17 Reinsurers’ share Reinsurers’ share Write-downs after impairment test Balance at 31 December 307 30 337 1,475 1 189 1,665 135 0 8 143 170 151 321 143 337 192 529 1,376 1 612 1,989 143 2 -32 113 160 108 268 113 2,086 -19 2,067 2,354 -37 2,317 Impairment test At 31 December 2012, management performed a test of the carrying amount of total reinsurers’ share of provisions for insurance contracts. The impairment test resulted in impairment charges totalling DKK 37m (DKK 19m in 2011). Write-downs for the year include reversed write-downs totalling DKK 16m (DKK 1m in 2011). There is no overdue reinsurers’ share over and above the share already provided for. 114 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 18 Current tax Current tax, beginning of year Foreign currency translation adjustments Current tax for the year Current tax on equity entries Adjustment of current tax in respect of previous years Tax paid for the year Net current tax, end of year Current tax is recognised in the statement of financial position as follows: Under assets, current tax Under liabilities, current tax Net current tax, end of year 19 Assets held for sale and associated liabilities Intangible assets Property, plant and equipment Investment assets and cash equivalents Reinsurers’ share of claims provisions Receivables Assets held for sale Premium provisions Claims provisions Other debt Liabilities associated with assets held for sale Net assets held for sale 2011 2012 90 0 -500 7 26 210 -167 93 -260 -167 0 0 0 0 0 0 0 0 0 0 0 -167 -16 -949 46 9 425 -652 0 -652 -652 112 2 603 7 18 742 125 540 77 742 0 In the statement of financial position at 31 December 2012, assets and liabilities relating to the Finnish branch are classified as ‘Assets held for sale’ and ‘Liabilities associated with assets held for sale’. The proceeds from the sale of the activity are expected to correspond to or exceed the carrying amounts of the associated assets and liabilities. The activity did not fulfil the conditions for classification as assets held for sale and associated liabilities at 31 December 2011. The Group had no other assets held for sale and associated liabilities at 31 December 2011. 115 Notes | Annual report 2012 | Tryg A/S | Notes DKKm 20 Equity Share capital Number of shares, exclusive of treasury shares Balance at 1 January Bought during the year Sold during the year Used in connection with exercise of share options 2011 2012 Number of Nominal value (DKK ’000) shares Number of Nominal value (DKK ’000) shares 60,633,701 -316,792 56,360 0 1,515,843 -7,920 1,409 0 60,373,269 0 200,000 121,532 1,509,332 0 5,000 3,038 Balance at 31 December 60,373,269 1,509,332 60,694,811 1,517,370 2011 2012 Number of Nominal value (DKK ’000) shares % of share capital Number of Nominal value (DKK ’000) shares % of share capital Treasury shares Balance at 1 January Bought during the year Sold during the year 3,297,872 316,792 0 82,447 7,920 0 Cancellation in connection with buyback programme -2,615,470 -65,387 Used in connection with issue of employee shares Used in connection with exercise of share options Balance at 31 December 0 0 -56,360 942,834 -1,409 23,571 5.16 0.50 0.00 -4.03 0.00 -0.09 1.54 942,834 0 -200,000 0 -10 23,571 0 -5,000 0 0 -121,532 621,292 -3,039 15,532 1.54 0.00 -0.33 0.00 0.00 -0.20 1.01 Pursuant to the authorisation granted by the shareholders, Tryg may acquire up to 10.0% of the share capital in the period up until 14 April 2015. Treasury shares are acquired for use in the Group’s incentive programme and as part of the share buyback programme. 21 Premium provisions Premium provisions, beginning of year Price adjustment of provisions, beginning of year Paid in the financial year Change in premiums in the financial year Foreign currency translation adjustments Premium provisions, end of year Other a) 2011 6,659 22 20,016 -19,924 -3 6,770 162 6,932 2012 6,770 185 20,139 -20,434 -2 6,658 30 6,688 116 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 21 Claims provisions 2012 Claims provisions, beginning of year Price adjustment of provisions, beginning of year 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 Gross Ceded Net of reinsurance 26,159 720 26,879 -7,442 -8,233 -15,675 14,978 -300 14,678 1,755 44 1,799 -92 -867 -959 268 740 1,008 24,404 676 25,080 -7,350 -7,366 -14,716 14,710 -1,040 13,670 Discounting and foreign currency translation adjustments 960 45 915 Claims provisions, end of year Other a) 2011 Claims provisions, beginning of year Price adjustment of provisions, beginning of year 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 and foreign currency translation adjustments Claims provisions, end of year Other a) 26,842 400 27,242 24,255 69 24,324 -8,413 -6,921 1,893 187 2,080 1,333 5 1,338 -750 -341 24,949 213 25,162 22,922 64 22,986 -7,663 -6,580 -15,334 -1,091 -14,243 16,623 -1,005 15,618 1,551 26,159 745 26,904 1,483 -34 1,449 15,140 -971 14,169 59 1,492 1,755 120 1,875 24,404 625 25,029 a) Comprises premiums and claims provisions for Tryg Garantiforsikring A/S and, in 2011, the Finnish branch of Tryg Forsikring A/S. In 2012, the Finnish branch is included under ‘Liabilities associated with assets held for sale’. 117 Notes | Annual report 2012 | Tryg A/S | Notes DKKm 2011 2012 22 Pensions and similar liabilities Jubilees, schemes for elderly employees etc. Recognised liability, end of year Defined-benefit pension plans: Present value of pension obligations funded through operations Present value of pension obligations funded through establishment of funds Pension obligation, gross Fair value of plan assets Pension obligation, net Specification of change in recognised pension obligations: Recognised pension obligation, beginning of year Adjustment beginning of year regarding plan changes not recognised in the income statement and expected estimate deviation Foreign currency translation adjustments Present value of pensions earned during the year Capital cost of previously earned pensions Actuarial gains/losses Paid during the period Recognised pension obligation, end of year Change in carrying amount of plan assets: Carrying amount of plan assets, beginning of year Adjustment beginning of year regarding plan changes not recognised in the income statement and expected estimate deviation Foreign currency translation adjustments Investments in the year Estimated return on pension funds Actuarial gains/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 Specification of pension cost for the year: Present value of pensions earned during the year Interest expense on accrued pension obligation Expected return on plan assets Accrued employer contributions Total year’s cost of defined-benefit plans The premium for the following financial years is estimated at: Number of active persons and number of pensioners Estimated distribution of plan assets: Shares Bonds Property Average return on plan assets 118 49 49 122 1,868 1,990 1,013 977 60 60 106 2,045 2,151 1,109 1,042 1,572 1,990 57 13 49 58 310 -69 0 120 81 52 -22 -70 1,990 2,151 951 1,013 -17 9 88 41 -15 -44 1,013 977 1,026 40 57 -41 10 66 0 58 130 41 -84 -49 1,109 1,042 1,102 69 51 -40 11 91 80 1,472 114 1,428 % 5 77 18 4.0 % 9 74 17 2.5 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 22 Pensions and similar obligations (continued) Assumptions used: Discount rate Estimated return on pension funds Salary adjustments Pension adjustments G adjustments Turnover Employer contributions Mortality table Sensitivity information Impact on equity shareholders from the following changes: Interest rate increase of 0.3 percentage points Interest rate decrease of 0.3 percentage points Increase in expected return of 1.5 percentage points Pay increase rate, increase of 1 percentage point Pay increase rate, decrease of 1 percentage point Mortality +1 year’s life 2011 2012 % % 2.7 4.0 4.0 3.8 3.8 6.0 14.1 Adj. K2005 2.4 2.5 3.5 3.3 3.3 7.0 14.1 Adj. K2005 96 -89 18 -109 92 73 84 -90 18 -105 86 70 Pension obligation Plan assets Surplus/deficit Actuarial gains/losses associated with the pension obligation Actuarial gains/losses associated with pension assets Actuarial gains/losses in other comprehensive income, end of year 2008 2009 2010 2011 2012 1,123 628 495 -23 -173 -196 1,304 856 448 70 -42 28 1,572 951 621 -181 -47 -228 1,990 1,013 977 -367 -32 -399 2,151 1,109 1,042 22 -84 -62 Moderna Försäkringar, a branch of Tryg Forsikring A/S, complies with the Swedish industry pension agreement, the FTP plan, which is insured with Försäkringsbranschens Pensionskassa – FPK. Under the terms of the agreement, the Group’s Swedish branch has undertaken, along with the other businesses in the collaboration, to pay the pensions of the individual employees in accordance with the applicable rules. The FTP plan is primarily a defined-benefit plan in terms of the future pension benefits. FPK is unable to provide sufficient information for the Group to use defined-benefit accounting. For this reason, the Group has accounted for the plan as if it were a defined-contribution plan in accordance with IAS 19.30. This year’s premium paid to FPK amounted to DKK 15m, which is about 3% of the annual premium in FPK (2011). FPK writes in its interim report for 2012 that it had a collective consolidation ratio of 104 at 30 June 2012 (consolidation ratio 134 at 30 June 2011). The collective consolidation ratio is defined as the market value of the plan assets relative to the total collective pension obligations. 119 Notes | Annual report 2012 | Tryg A/S | Notes DKKm 23 Deferred tax Tax asset Operating equipment Debt and provisions Capitalised tax loss Tax liability Intangible rights Land and buildings Bonds and loans secured by mortgages Contingency funds Deferred tax, end of year Unaccrued timing differences of statement of financial position items Reconcillation of deferred tax Deferred tax, beginning of year Foreign currency translation adjustments Change in deferred tax relating to change in tax rate Change in deferred tax previous years Change in capitalised tax loss Change in deferred tax taken to the income statement Change in valuation of tax assets Change in deferred tax taken to equity Tax value of non-capitalised tax loss Denmark Sweden 2011 2012 31 284 81 396 136 228 49 1,174 1,587 1,191 30 1,282 9 -10 0 0 -6 0 -84 1,191 18 4 22 422 13 457 76 253 78 1,193 1,600 1,143 118 1,191 56 -12 7 65 -247 89 -6 1,143 18 4 The loss in Tryg A/S cannot be utilised in the Danish joint taxation scheme. The loss can be carried forward indefinitely. Loss determined according to Swedish rules 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 offset the tax loss. The total current and deferred tax relating to items recognised in equity is recognised in the statement of financial position in the amount of DKK 50m (DKK 90m in 2011). 120 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 24 Other provisions Other provisions, beginning of year Change in provisions Other provisions, end of year Other provisions relate to provisions for the Group’s own insurance claims and restructuring costs. A provision of DKK 97m has been made for restructuring in connection with management’s plans for efficiency improvements and aims to reduce the Group’s cost level. 25 Amounts owed to credit institutions Overdraft facilities 26 Debt relating to unsettled funds transactions and repos Unsettled funds transactions Repo debt Unsettled funds transactions include debt for bonds purchased in 2011 and 2012; however, with settlement in 2012 and 2013, respectively. 27 Earnings per share Profit/loss on continuing business Profit/loss on discontinued and divested business Profit/loss for the year Average number of shares (1,000) Diluted number of shares (1,000) Diluted average number of shares (1,000) Earnings per share, continuing business Earnings per share, discontinued and divested business Diluted earnings per share, discontinued and divested business Earnings per share Diluted earnings per share 2011 2012 1 10 11 11 11 11 87 98 14 14 779 3,382 4,161 1,050 420 1,470 1,148 -8 1,140 60,401 0 60,401 19.0 -0.1 -0.1 18.9 18.9 2,180 28 2,208 60,491 223 60,714 36.0 0.5 0.5 36.5 36.4 121 Notes | Annual report 2012 | Tryg A/S | Notes DKKm 28 Contractual obligations, collateral and contingent liabilities Contractual obligations 2012 Operating leases Other contractual obligations 2011 Operating leases Other contractual obligations <1 year 136 397 533 130 479 609 1-3 years Obligations due by period 3-5 years > 5 years 215 86 301 230 183 413 65 0 65 106 0 106 57 0 57 84 0 84 Total 473 483 956 550 662 1,212 The amounts include the following: Tryg Forsikring A/S and Tryg Forsikring, a Norwegian branch of Tryg Forsikring A/S, have signed a 5-year outsourcing agreement with CSC for an amount of DKK 365m. The contract expires in 2015. Tryg Forsikring A/S has signed the following contracts with amounts above DKK 50m: Telephony services contract with Telenor for DKK 105m, which expires after 2015. Lease contracts on premises for DKK 313m. The contracts expire after 5 years. Collateral The Danish companies in the Tryg Group are jointly taxed with TryghedsGruppen smba. As of 1 July 2012, the companies and the other jointly taxed companies are thus jointly and severally liable for any obligation to withhold tax deducted at source on interest, royalties and dividends in respect of the jointly taxed companies. Tryg Forsikring A/S and Tryg Garantiforsikring A/S have registered the following assets as having been furnished as security for the insurance provisions: Equity investments in associates Equity investments Unit trust units Bonds Deposits with credit institutions Receivables relating to reinsurance Bonds and cash and cash equivalents included in the item ‘Assets held for sale’ Interest and rent receivable Equity investments in and receivables from Group undertakings which have been eliminated in the consolidated financial statements Total 2011 2012 0 0 2,378 33,942 1,637 1,563 0 522 1,672 41,714 21 199 3,261 37,458 949 1,614 587 365 2,128 46,582 The Group has received DKK 315m as cash and cash equivalents (DKK 66m in 2011) as security for current derivative contracts. DKK 420m (DKK 3,382m in 2011) of the Group’s bond portfolio was sold in repo transactions and must be repurchased. The value of the bond portfolio is still recognised in the statement of financial position and has been furnished as security for financial liabilities concerning repo transactions. Contingent liabilities Companies in the Tryg Group are party to a number of disputes. Management believes that the outcome of these legal proceedings will not affect the Group’s financial position over and above the receivables and liabilities recognised in the statement of financial position at 31 December 2012. 122 | Tryg A/S | Annual report 2012 | Notes Notes DKKm 29 Related parties The Group has no related parties with a decisive influence other than the parent company, TryghedsGruppen smba. Related parties with a significant influence include the Supervisory Board, the Executive Management and their members’ family. 2011 2012 0.3 0.6 2.9 0.1 0.0 1.4 0.3 0.4 3.0 0.0 0.1 0.2 Supervisory Board and Executive Management Premium income - Parent company (TryghedsGruppen smba) - Key management - Other related parties Claims payments - Parent company (TryghedsGruppen smba) - Key management - Other related parties Specification of remuneration 2012 Supervisory Board Executive Management Risk-takers Of which retired: Supervisory Board Executive Management Risk-takers Number of persons Basic salary Variable salary Pension Total a) 0 2 1 3 0 4 5 9 6 24 28 58 12 3 11 26 6 18 22 46 Number of persons Severance pay 4 0 1 5 0 0 20 20 The maximum amount paid in severance pay to an individual is DKK 20m. 2011 Supervisory Board Executive Management Risk-takers Of which retired: Supervisory Board Executive Management Risk-takers Number of persons Basic salary Variable salary Pension Total a) 0 0 1 1 0 4 7 11 5 29 39 73 14 5 14 33 5 25 31 61 Number of persons Severance pay 2 2 4 8 0 8 0 8 The maximum amount paid in severance pay to an individual is DKK 4m. a) Exclusive of severance pay. 123 Notes | Annual report 2012 | Tryg A/S | Notes DKKm 29 Related parties (continued) Fees are charges incurred during the financial year. Variable salary includes the charges for matching shares, which are recognised over 4 years, and share options, which are recognised over 3 years. The Executive Management and risk-takers are included in incentive programmes. Please refer to Note 7 for information concerning this. The members of the Supervisory Board in Tryg A/S are paid a fixed remuneration and are not covered by the incentive schemes. The Executive Management is paid a fixed remuneration and pension. The variable salary is awarded in the form of a matching share programme, see ‘Corporate governance’. Each member of the Executive Management is entitled to 12 months’ notice and severance pay equal to 12 months’ salary plus pension contributions (the Group CEO is entitled to severance pay equal to 18 months’ salary). Members of the Executive Management can assert no further claims in this respect, for example claims for compensation pursuant to Sections 2a and/or 2b of the Danish Salaried Employees Act, as such claims are regarded as being included in the severance pay. Risk-takers are defined as employees whose activities have a significant influence on the company’s risk profile. The Supervisory Board decides which employees should be considered to be risk-takers. Parent company TryghedsGruppen smba TryghedsGruppen smba controls 60% of the shares in Tryg A/S. Intra-group trading involved: - Subordinate loan capital - Interest expenses 2011 464 33 2012 490 30 Transactions between TryghedsGruppen smba and Tryg A/S are conducted on an arm’s length basis. Intra-group transactions: Administration fee etc. is fixed on a cost-recovery basis. Intra-group accounts are offset and carry interest on market terms. The companies in the Tryg Group have entered into reinsurance contracts on market terms. Transactions with Group undertakings have been eliminated in the consolidated financial statements in accordance with the accounting policies. 30 Financial highlights See page 69. 31 Accounting policies This table concerns a change in accounting policies for 2012 – page 125 (opposite page). Reconciliation of profit/loss DKKm Profit/loss – IFRS Current year’s effect of actuarial gains and losses on pension obligation after tax Profit/loss – Danish FSA executive order 124 2011 1,140 -288 852 Change 2011 1,140 2012 2,208 Change 288 288 0 -46 1,140 2,162 46 46 2012 2,208 0 2,208 | Tryg A/S | Annual report 2012 | Notes Notes 31 Accounting policies (continued) The consolidated financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU on 31 December 2012 and in accordance with the Danish Statutory Order on Adoption of IFRS. • Amendments to IFRS 7 ‘Disclosures – Transfers of Financial Assets’ • Amendments to IAS 12 ‘Deferred Tax – Recovery of Underlying Assets’ • Amendments to IAS 1 ‘Presentation of Items of Other Comprehen- sive Income’ The annual report of the parent company is prepared in accordance with the Executive Order on Financial Reports for Insurance Companies and Multi-Employer Occupational Pension Funds issued by the Danish Financial Supervisory Authority. The deviations from the recognition and measurement requirements of IFRS are: • Investments in subsidiaries are valued according to the equity method, whereas under IFRS valuation is made at cost or fair value. Furthermore, the requirements regarding presentation and disclos- ure are less comprehensive than under IFRS. • The Danish Financial Supervisory Authority’s executive order does not allow provisions for deferred tax of contingency reserves allo- cated from untaxed funds. Deferred tax and the other comprehensive income of the parent company have been adjusted accordingly on the transition to IFRS. Change in accounting policies Following an amendment to the Executive Order on Financial Reports for Insurance Companies and Multi-Employer Occupational Pension Funds issued by the Danish Financial Supervisory Authority and applicable from 1 January 2013, but which Tryg has decided to implement early, actuarial gains and losses are recognised directly in other comprehen- sive income in the parent company. These were previously recognised in the income statement – see the table at the bottom of page 124 (opposite page). In 2011, there was a minor reclassification between derivative financial instruments and claims provisions of DKK 37m. The comparative figures have been restated to reflect the above changes. Except as noted above, the accounting policies have been applied con- sistently with last year. New and revised executive orders, standards and interpretations which the Group has not yet applied and that have been issued but which are not yet effective: • Amendments to IFRS 7 related to the offsetting of assets and liabilities a) • IFRS 9 ‘Financial Instruments’ c) • Reissue of IFRS 9 to include requirements for the classification and measurement of financial liabilities and incorporate existing derecognition requirementsc) • IFRS 10 ‘Consolidated Financial Statements’ a) • IFRS 11 ‘Joint Arrangements’ a) • IFRS 12 ‘Disclosure of Interests in Other Entities’ a) • Amendments to IFRS 10, 11 and 12 ‘Transition Guidance’ a) • IFRS 13 ‘Fair Value Measurement’ a) • Amendments to IAS 1 ‘Presentation of Items of Other Comprehen- sive Income’ b) • Amendments to IAS 1 ‘Annual Improvements 2009-2011 Cycle (comparative information)’ a) • Amendments to IAS 16 ‘Annual Improvements 2009-2011 Cycle (servicing equipment)’ a) • IAS 19 (as revised in 2011) ‘Employee Benefits’ a) • IAS 27 (as revised in 2011) ‘Separate Financial Statements’ a) • IAS 28 (as revised in 2011) ‘Investments in Associates and Joint Ventures’ a) • Amendments to IAS 32 ‘Offsetting Financial Assets and Financial Liabilities’ d) • Amendments to IAS 32 ‘Annual Improvements 2009-2011 Cycle (tax effect of equity distribution)’ a) a) Effective for annual periods beginning on or after 1 January 2013. b) Effective for annual periods beginning on or after 1 July 2012. c) Effective for annual periods beginning on or after 1 January 2015. d) Effective for annual periods beginning on or after 1 January 2014. Accounting regulation The changes will be implemented going forward from 2013. Implementation of changes to financial reporting standards and interpretations in 2012 The International Accounting Standards Board (IASB) has issued a num- ber of amendments to the International Financial Reporting Standards, and the International Financial Reporting Interpretations Committee (IFRIC) has also issued a number of interpretations. No standards or interpretations have been implemented for the first time for the financial year beginning on 1 January 2012 that have had a significant impact on the Group. New or amended standards and interpretations that have been implemented but have not significantly affected the Group: Changes to accounting estimates In June 2012, the Danish Financial Supervisory Authority adjusted the discount curve used for discounting claims provisions. The effect of the transition to a new curve on 30 June 2012 is: DKKm Total investment return after insurance technical interest Profit/loss before tax Claims provisions Equity and capital base are affected by the same amounts. Effect 150 150 -150 125 Notes | Annual report 2012 | Tryg A/S | Notes Significant accounting estimates and assessments The preparation of financial statements under IFRS requires the use of certain critical accounting estimates and requires management to exercise its judgement in the process of applying the Group’s account- ing policies. The areas involving a higher degree of judgement or com- plexity, or areas where assumptions and estimates are significant to the consolidated financial statements are: • Liabilities relating to insurance contracts • Valuation of defined-benefit plans • Fair value of financial assets and liabilities • Valuation of property • Valuation of goodwill Liabilities relating to insurance contracts Estimates of provisions for insurance contracts represent the Group’s most critical accounting estimates, as these provisions involve a num- ber of uncertainty factors. Claims provisions are estimated based on actuarial and statistical pro- jections of claims and the administration of claims. The projections are based on Tryg’s knowledge of historical developments, payment patterns, reporting delays, duration of the claims settlement process and other factors that might influence future developments in the liabilities. The Group makes claims provisions, in addition to provisions for known claims, which cover estimated compensation for losses that have been incurred, but not yet reported to the Group (known as IBNR reserves) and future developments in claims which are known to the Group but have not been finally settled. Claims provisions also include direct and indirect claims settlement costs or loss adjustment expenses that arise from events that have occurred up to the statement of financial position date even if they have not yet been reported to Tryg. The calculation of the claims provisions is therefore inherently uncertain and, by necessity, relies upon the making of certain assumptions as re- gards factors such as court decisions, amendments to legislation, social inflation and other economic trends, including inflation. The Group’s actual liability for losses may therefore be subject to material positive or negative deviations relative to the initially estimated claims provisions. Claims provisions are discounted. As a result, initial changes in discount rates or changes in the duration of the claims provisions could have positive or negative effects on earnings. Discounting affects the motor third-party liability, general third-party liability, workers’ compensation classes, including sickness and personal accident, in particular. The Financial Supervisory Authority’s adjusted discount curve, which is based on euro swap rates, national spreads and Danish swap rates, and also an option-adjusted mortgage interest rate spread, is used to discount Danish claims provisions. The Norwegian and Swedish provisions are discounted based on euro swap rates, to which a country-specific interest rate spread is added that reflects the difference between Norwegian and Swedish government bonds and the interest rate on German government bonds. Finnish provisions are discounted using the Danish discount curve. Several assumptions and estimates underlying the calculation of the claims provisions are mutually dependent. This has the greatest impact on assumptions regarding interest rates and inflation. Defined-benefit pension schemes The Group operates a defined-benefit plan in Norway. A defined-benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, depending on age, years of service and salary. The net obligation with respect to the defined- benefit plan is based on actuarial calculations involving a number of assumptions. The assump- tions include discount interest rate, expected future salary and pension adjustments, turnover, mortality and expected future return on pension assets. Fair value of financial assets and liabilities Measurements of financial assets and liabilities for which prices are quoted in an active market or which are based on generally accepted models with observable market data are not subject to material esti- mates. For securities that are not listed on a stock exchange, or for which no stock exchange price is quoted that reflects the fair value of the instrument, the fair value is determined using a current OTC price of a similar financial instrument or using a model calculation. The valua- tion models include the discounting of the instrument cash flow using an appropriate market interest rate with due consideration for credit and liquidity premiums. Valuation of property Property is divided into owner-occupied property and investment pro- perty. Owner-occupied property is assessed at the reassessed value that is equivalent to the fair value at the time of reassessment, with a deduction for depreciation and write-downs. The fair value is calculated based on a market-determined rental income, as well as operating expenses in proportion to the property’s required rate of return in per cent. Investment property is recognised at fair value. The calculation of fair value is based on market prices, taking into consideration the type of property, location and maintenance standard, and based on a market- determined rental income as well as operating expenses in proportion to the property’s required rate of return. Measurement of goodwill Goodwill is acquired in connection with the acquisition of businesses. Goodwill is allocated to the cash-generating units under which manage- ment manages the investment. The carrying amount is tested for im- pairment at least once annually. Impairment testing involves estimating future cash flows and is affected by a number of factors, including dis- count rates and other circumstances dependent on economic trends, such as customer behaviour and competition. 126 | Tryg A/S | Annual report 2012 | NotesNotes Description of accounting policies Recognition and measurement The annual report has been prepared under the historical cost conven- tion, as modified by the revaluation of owner-occupied property, where increases are recognised in other comprehensive income, and revalua- tion of investment property, financial assets held for trading and finan- cial assets and financial liabilities (including derivative instruments) at fair value in the income statement. Assets are recognised in the statement of financial position when it is probable that future economic benefits will flow to the Group, and the value of such assets can be measured reliably. Liabilities are recognised in the statement of financial position when the Group has a legal or constructive obligation as a result of a prior event, and it is probable that future economic benefits will flow out of the Group, and the value of such liabilities can be measured reliably. On initial recognition, assets and liabilities are measured at cost, with the exception of financial assets, which are recognised at fair value. Measurement subsequent to initial recognition is effected as described below for each item. Anticipated risks and losses that arise before the time of presentation of the annual report and that confirm or invalidate affairs and conditions existing at the statement of financial position date are considered at recognition and measurement. Income is recognised in the income statement as earned, whereas costs are recognised by the amounts attributable to this financial year. Value adjustments of financial assets and liabilities are recognised in the income statement unless otherwise described below. All amounts in the notes are shown in millions of DKK, unless otherwise stated. Consolidation The consolidated financial statements comprise the financial state- ments of Tryg A/S (the parent company) and subsidiaries controlled by the parent company. Control is achieved where the parent company directly or indirectly holds more than 50% of the voting rights or is otherwise able to exercise or actually exercises a controlling influence. The consolidated financial statements are prepared on the basis of the financial statements of the parent company and its subsidiaries by com- bining items of a uniform nature. The financial statements of subsidiar- ies that present financial statements under other legislative rules are restated with reference to the accounting policies applied by the Group. Undertakings in which the Group exercises significant influence but not control are classified as associates. Significant influence is typically achieved through direct or indirect ownership or control of more than 20% but less than 50% of the votes. Investments in joint ventures are recognised using the pro rata consoli- dation method. Using pro rata consolidation, the Group’s share of joint venture assets and liabilities is recognised in the statement of financial position. The share of income and costs and assets and liabilities are pre- sented on a line-by-line basis in the consolidated financial statements. On consolidation, intra-group income and costs, shareholdings, intra-group accounts and dividends, and gains and losses arising on transactions between the consolidated enterprises are eliminated. Newly acquired or divested subsidiaries are consolidated with the results for the period subsequent to taking over or before surrendering control, respectively. Profit and loss in divested subsidiaries and profit and loss from discontinued activities are included under discontinued and divested business in the income statement. Unrealised gains on transactions between consolidated companies (including associates) are eliminated to the extent of the Group’s interest in the companies. Unrealised losses are eliminated in the same way as unrealised gains unless impairment has occurred. Business combinations Newly acquired undertakings are recognised in the consolidated finan- cial statements from the date of acquisition. Comparative figures are not restated to reflect new acquisitions. The purchase method is applied for new acquisitions if the Tryg Group gains control of the company acquired. Identifiable assets, liabilities and contingent liabilities in undertakings acquired are measured at fair value at the date of acquisition. The tax effect of revaluations is taken into account. The date of acquisition is the date on which control of the acquired company actually passes to Tryg. The cost of a company is the fair value of the agreed consideration paid plus, for acquisitions before 1 January 2010, costs directly attributable to the acquisition. If the final amount of the consideration is conditional on one or more future events, these adjustments are only recognised in cost if the event in question is likely to occur and its effect on cost can be measured reliably. Any excess of the cost of acquisition of the enterprise over the fair value of the acquired identifiable assets, liabilities and contingent liabilities is recognised as goodwill under intangible assets. Goodwill is tested for impairment at least once a year. If the carrying amount of an asset exceeds its recoverable amount, the asset is written down to the lower recoverable amount. Foreign currency translation A functional currency is determined for each of the reporting entities in the Group. The functional currency is the currency used in the primary economic environment in which the reporting entity operates. Transac- tions in currencies other than the functional currency are transactions in foreign currencies. 127 Notes | Annual report 2012 | Tryg A/S | Notes On initial recognition, transactions in foreign currencies are translated into the functional currency using the exchange rate applicable at the transaction date. Assets and liabilities denominated in foreign curren- cies are translated using the exchange rates applicable at the statement of financial position date. Translation differences are recognised in the income statement under price adjustments. On consolidation, the assets and liabilities of the Group’s foreign operations are translated using the exchange rates applicable at the statement of financial position date. Income and expense items are translated using the average exchange rates for the period. Exhange rate differences arising on translation are classified as other comprehensive income and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the activities are divested. All other foreign currency translation gains and losses are recognised in the income statement. The presentation currency in the annual report is DKK. Segment information Segment information is based on the Group’s management and internal financial reporting system and supports management decisions con- cerning the allocation of resources and the assessment of the Group’s results divided into segments. The operational business segments in Tryg are Private, Commercial, Corporate and Sweden. Private encompasses the sale of insurance products to private individuals in Denmark and Norway. Commercial encompasses the sale of insurance products to small and medium-sized businesses in Denmark and Norway. Corporate sells insurance products to industrial clients in Denmark and Norway. In addition, Corporate handles all activities involving brokers. Sweden encompasses the sale of insurance products to private individuals and corporate customers in Sweden. Geographical information is presented for the economic areas in which the Tryg Group operates. The geographical areas are Denmark, Norway and Sweden. Segment income and segment costs as well as segment assets and liabilities comprise those items that can be directly attributed to each individual segment and those items that can be allocated to the individual segments on a reliable basis. Unallocated items primarily comprise assets and liabilities relating to investment activities managed at Group level. Key ratios Earnings per share (EPS) are calculated according to IAS 33. This and other key ratios are calculated in accordance with Recommendations and Ratios 2010 issued by the Danish Society of Financial Analysts and the Executive Order on Financial Reports for Insurance Companies and Multi-Employer Occupational Pension Funds issued by the Danish Financial Supervisory Authority. Income statement Premiums Premium income represents gross premiums written during the year, net of reinsurance premiums and adjusted for changes in premium pro- visions, corresponding to an accrual of premiums to the risk period of the policies, and in the reinsurers’ share of the premium provisions. Premiums are calculated as premium income in accordance with the risk exposure over the cover period, calculated separately for each indi- vidual insurance contract. The calculation is generally based on the pro rata method, although this is adjusted for an unevenly divided risk be- tween lines of business with strong seasonal variations or for policies lasting many years. The portion of premiums received on contracts that relate to unexpired risks at the statement of financial position date is reported under pre- mium provisions. The portion of premiums paid to reinsurers that relate to unexpired risks at the statement of financial position date is reported as the reinsurers’ share of premium provisions. Insurance technical interest According to the Danish Financial Supervisory Authority’s executive order, insurance technical interest is presented as a calculated return on the year’s average insurance liability provisions, net of reinsurance. The cal- culated interest return for grouped classes of risks is calculated as the monthly average provision plus a co-weighted interest from the present yield curve for each individual group of risks. The interest is weighted according to the expected run-off pattern of the provisions. Insurance technical interest is reduced by the portion of the increase in net provisions that relates to unwinding. Claims Claims are claims paid during the year and adjusted for changes in claims provisions less the reinsurers’ share. In addition, the item includes run-off gains/losses in respect of previous years. The portion of the increase in provisions which can be ascribed to unwinding is transferred to insurance technical interest. Claims are shown inclusive of direct and indirect claims handling costs, including costs of inspecting and assessing claims, costs to combat and mitigate damage and other direct and indirect costs associated with the handling of claims incurred. Changes in claims provisions due to changes in yield curve and exchange rates are recognised as a price adjustment. Tryg hedges the risk of changes in future pay and price figures for provi- sions for workers’ compensation. Tryg uses zero coupon inflation swaps acquired with a view to hedging the inflation risk. Value adjustments of these swaps are included in claims, thereby reducing the effect of changes to inflation expectations under claims. 128 | Tryg A/S | Annual report 2012 | NotesNotes Bonuses and premium discounts Bonuses and premium discounts represent anticipated and refunded premiums to policyholders, where the amount refunded depends on the claims record, and for which the criteria for payment have been defined prior to the financial year or when the insurance was taken out. Insurance operating costs Insurance operating costs represent acquisition costs and adminis- tration expenses less reinsurance commissions received. Expenses re- lating to acquiring and renewing the insurance portfolio are recognised at the time of writing the business. Underwriting commission is recog- nised when a legal obligation occurs and is accrued over the term of the policy. Administration expenses are all other expenses attributable to the administration of the insurance portfolio. Administration expenses are accrued to match the financial year. Leases Leases are classified either as operating or finance leases. The assessment of the lease is based on criteria such as ownership, right of purchase when the lease term expires, considerations as to whether the asset is custom- made, the lease term and the present value of the lease payments. Assets held under operating leases are not recognised in the statement of financial position, but the lease payments are recognised in the income statement over the term of the lease, corresponding to the economic lifetime of the asset. The Group has no assets held under finance leases. Share-based payment The Tryg Group’s incentive programmes comprise share option pro- grammes and matching shares. Share option programme The value of services received as consideration for options granted is measured at the fair value of the options. Equity-settled share options are measured at fair value at the time of allocation and recognised under staff expenses over the period from the time of allocation until vesting. The balancing item is recognised directly in equity. The options are issued at an exercise price that corresponds to the market price of the Group’s shares at the time of allocation plus 10%. No other vesting conditions apply. Special provisions are in place concerning sick- ness and death and in case of change to the Group’s capital position etc. The share option agreement entitles the employee to the options unless the employee resigns his position or is dismissed due to breach of the contract of employment. In case of termination due to restructuring or retirement, the employee is still entitled to the options. The share options are exercisable exclusively during a 15-day period following the publication of full-year, interim and quarterly reports and in accordance with Tryg’s internal rules on trading in the Group’s shares. The options are settled in shares. A part of the Group’s holding of treasury shares is reserved for settlement of the options allocated. On initial recognition of the share options, the number of options ex- pected to vest for employees and members of the Executive Manage- ment is estimated. Subsequently, adjustment is made for changes in the estimated number of vested options to the effect that the total amount recognised is based on the actual number of vested options. The value for retired employees who retain their right to options is reported for the remaining period of the financial year in which the employee retires. The fair value of the options granted is estimated using the Black & Scholes option model. The calculation takes into account the terms and conditions of the share options granted. Matching shares Members of Executive Management and risk-takers have been allocated shares in accordance with the matching shares programme. Under this programme, the individual management member is allocated one share in Tryg A/S for each share the Executive Management member or risk- taker acquires in Tryg A/S at the market rate for own liquid cash at a contractually agreed sum in connection with the matching share programme. The shares are provided free of charge, four years after the time of purchase. The holder must acquire the shares in the open window following publication of the annual report for the previous year. In 2011, however, the shares were traded in the first open window after the Tryg A/S annual general meeting. The holder may not sell the shares until six months after the matching time. The shares are recognised at market value and are accrued over the four-year maturation period, based on the market price at the time of acquisition. Recognition is from the end of the month of acquisition under staff expenses with a balancing entry directly in equity. If an Executive Management member or risk-taker retires during the matura- tion period but remains entitled to shares, the remaining expense is recognised in the current accounting year. Investment activities Income from associates includes the Group’s share of the associates’ net profit/loss. Income from investment property before fair value adjustment repre- sents the profit from property operations less property management expenses. Interest and dividends represent interest earned and dividends received during the financial year. Realised and unrealised investment gains and losses, including gains and losses on derivative financial instruments, value adjustment of investment property, foreign currency translation adjustments and the effect of movements in the yield curve used for discounting, are recognised as price adjustments. Investment management charges represent expenses relating to the management of investments. 129 Notes | Annual report 2012 | Tryg A/S | Notes Other income and costs Other income and costs include income and expenses which cannot be ascribed to the Group’s insurance portfolio or investment assets, including the sale of products for Nordea Liv og Pension. Discontinued and divested business Discontinued and divested business is consolidated in one item in the income statement and supplemented with disclosure of the discontinued and divested business in a note to the financial statements. Discontinued and divested business includes gross premiums, gross claims, gross costs, profit/loss on ceded business, insurance technical interest net of reinsurance, investment return after insurance technical interest, other income and costs and tax in respect of the discontinued business. Any reversal of earlier impairment is recognised under other income and costs. The statement of financial position items concerning discontinued activities are reported unchanged under the respective entries whereas assets and liabilities concerning divested activities are consolidated under one item as assets held for sale and liabilities associated with assets held for sale. The comparative figures in the income statement, including result figures in the five-year financial highlights and key figures, have been restated to reflect discontinued business. Discontinued and divested business in the income statement includes the profit/loss after tax of the sale of the right to renew the marine hull business in 2010 and the divested activities in the Finnish branch. Discontinued business also comprises the Tryg Forsikring A/S run-off business. Costs for Group-developed software that are directly connected with the production of identifiable and unique software products, where there is sufficient certainty that future earnings will exceed the costs in more than one year, are reported as intangible assets. Direct costs include staff costs for software development and directly attributable relevant fixed costs. All other costs connected with the development or maintenance of software are expensed on an ongoing basis. After completion of the development work, the asset is amortised according to the straight-line method over the assessed economic lifetime, though over a maximum of 4 years. The amortisation basis is reduced by any impairment and write-downs. Assets under construction Group-developed intangible assets are recognised under assets under construction until they are put into use, after which they are reclassified as software and amortised in accordance with the amortisation periods stated above. Property, plant and equipment Operating equipment Fixtures and operating equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. Cost encompasses the purchase price and costs directly attributable to the acquisition of the relevant assets until the time when such assets are ready to be brought into use. Depreciation of operating equipment is calculated using the straight-line method over its estimated economic lifetime as follows: Statement of financial position Intangible assets Goodwill Goodwill is acquired in connection with the acquisition of undertakings. Goodwill is calculated as the difference between the cost of the under- taking and the fair value of acquired identifiable assets, liabilities and contingent liabilities at the time of acquisition. Goodwill is allocated to the cash-generating units under which management manages the investment and is recognised under intangible assets. Goodwill is not amortised but is tested for impairment at least once per year. • IT, 4 years • Vehicles, 5 years • Furniture, fittings and equipment, 5-10 years Leasehold improvements are depreciated over the expected economic lifetime, however maximally the term of the lease. Gains and losses on disposals and retired assets are determined by comparing proceeds with carrying amounts. Gains and losses are recognised in the income statement. When revalued assets are sold, the amounts included in the revaluation reserves are transferred to retained earnings. Trademarks and customer relations Trademarks and customer relations are identified as intangible assets on acquisition. The intangible assets are recognised at fair value at the time of acquisition and amortised on a straight-line basis over the expected economic lifetime of 5-12 years. Land and buildings Land and buildings are divided into owner-occupied property and invest- ment property. The Group’s owner-occupied properties consist of the head office buildings in Ballerup and Bergen and a small number of holiday homes. The remaining properties are classified as investment property. Software Acquired computer software licences are capitalised on the basis of the costs incidental to acquiring and bringing to use the specific software. The costs are amortised based on an estimated economic lifetime of up to 4 years. Owner-occupied property Owner-occupied property is property that is used in the Group’s opera- tions. Owner-occupied properties are measured in the statement of financial position at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation 130 | Tryg A/S | Annual report 2012 | NotesNotes and impairment losses. Revaluations are performed regularly to avoid material differences between the carrying amounts and fair values of owner-occupied property at the statement of financial position date. The fair value is calculated on the basis of market-specific rental income per property and typical operating expenses for the coming year. The resulting operating income is divided by the required return on the property in per cent, which is adjusted to reflect market interest rates and property characteristics, corresponding to the present value of a perpetual annuity. Increases in the revalued carrying amounts of owner-occupied property are recognised in the revaluation reserve in equity. Decreases that offset previous revaluations of the same asset are charged against the revalua- tion reserves directly in equity; all other decreases are charged to the income statement. Subsequent costs are included in the asset’s carrying amount or recog- nised as a separate asset, as appropriate, when it is probable that future economic benefits associated with the item will flow to the Group, and the cost of the item can be measured reliably. Ordinary repair and main- tenance costs are expensed in the income statement when incurred. Depreciation on owner-occupied property is calculated based on the straight-line method and using an estimated economic lifetime of up to 50 years. Land is not depreciated. Assets under construction In connection with the refurbishment of owner-occupied property, costs to be capitalised are recognised at cost under owner-occupied property. On completion of the project, it is reclassified as owner-occupied pro- perty, and depreciation is made on a straight-line basis over the expected economic lifetime, up to the number of years stated under the individual categories. Investment property Rental properties that are not occupied by the Group are classified as investment property. Investment property is recognised at fair value. Fair value is based on market prices, adjusted for any differences in the nature, location or maintenance condition of specific assets. If this information is not available, the Group uses alternative valuation methods such as discounted cash flow projections and recent prices in less active markets. The fair value is calculated on the basis of market-specific rental income per property and typical operating expenses for the coming year. The re- sulting operating income is divided by the required return on the property in per cent, which is adjusted to reflect market interest rates and property characteristics, corresponding to the present value of a perpetual annuity. The value is subsequently adjusted with the value in use of the return on prepayments and deposits and adjustments for specific property issues such as vacant premises or special tenant terms and conditions. Changes in fair values are recorded in the income statement. Impairment test of intangible assets and property, plant and equipment Operating equipment and intangible assets are assessed at least once a year to ensure that the depreciation and amortisation methods and the depreciation and amortisation periods that are used are in line with the expected economic lifetimes. This also applies to the residual value. Impairment is performed if a decrease in value has been demonstrated. A continuous assessment of owner-occupied property is performed using the same method as for investment property. Goodwill is tested annually for impairment, or more often if there are indications of impairment, and impairment testing is performed for each cash-generating unit to which the asset belongs. The present value is normally established using budgeted cash flows based on business plans. The business plans are based on past experience and expected market developments. Equity investments in Group undertakings The parent company’s equity investments in subsidiaries are recognised and measured using the equity method. The parent company’s share of the enterprises’ profits or losses after elimination of unrealised intra-group profits and losses is recognised in the income statement. In the statement of financial position, equity investments are measured at the pro rata share of the enterprises’ equity. Subsidiaries with a negative net asset value are recognised at zero value. Any receivables from these enterprises are written down by the parent company’s share of such negative net asset value where the receivables are deemed irrecoverable. If the negative net asset value exceeds the amount receivable, the remaining amount is recognised under provisions if the parent company has a legal or constructive obligation to cover the liabilities of the relevant enterprise. Net revaluation of equity investments in subsidiaries is taken to reserve for net revaluation under equity if the carrying amount exceeds cost. The results of foreign subsidiaries are based on translation of the items in the income statement using average exchange rates for the period. Income and costs in domestic enterprises denominated in foreign currencies are translated using the exchange rates applicable on the transaction date. Statement of financial position items of foreign subsidiaries are trans- lated using the exchange rates applicable at the statement of financial position date. Equity investments in associates Associates are enterprises in which the Group has significant influence but not control, generally in the form of an ownership interest of between 20% and 50% of the voting rights. Equity investments in associates are measured using the equity method so that the carrying amount of the investment represents the Group’s proportionate share of the enter- prises’ net assets. 131 Notes | Annual report 2012 | Tryg A/S | Notes Profit after tax from equity investments in associates is included as a separate line in the income statement. Income is made up after elimi- nation of unrealised intra-group profits and losses. Associates with a negative net asset value are measured at zero value. If the Group has a legal or constructive obligation to cover the associate’s negative balance, such obligation is recognised under liabilities. Investments Investments include financial assets at fair value which are recognised in the income statement. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments on initial recognition and re-evaluates this at every reporting date. Financial assets measured at fair value with recognition of value adjust- ments in the income statement comprise assets that form part of a trading portfolio and financial assets designated at fair value with value adjustment via the income statement. Financial assets at fair value recognised in income statement Financial assets are recognised at fair value on initial recognition if they are entered in a portfolio that is managed in accordance with fair value. Derivative financial instruments are similarly classified as financial assets held for sale, unless they are classified as security. Realised and unrealised profits and losses that may arise as a result of changes in the fair value for the category financial assets at fair value are recognised in the income statement in the period in which they arise. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired, or if they have been transferred, and the Group has also transferred substantially all risks and rewards of ownership. Financial assets are recognised and derecognised on a trade date basis, the date on which the Group commits to purchase or sell the asset. The fair values of quoted securities are based on stock exchange prices at the statement of financial position date. For securities that are not listed on a stock exchange, or for which no stock exchange price is quoted that reflects the fair value of the instrument, the fair value is determined using valuation techniques or using OTC prices. These include the use of similar recent arm’s length transactions, reference to other instruments that are substantially the same and a discounted cash flow analysis. Derivative financial instruments and hedge accounting The Group’s activities expose it to financial risks, including changes in share prices, foreign exchange rates, interest rates and inflation. Forward exchange contracts and currency swaps are used for currency hedging of portfolios of shares, bonds, hedging of foreign entities and insurance statement of financial position items. Interest rate derivatives in the form of futures, forward contracts, repos, swaps and FRAs are used to manage cash flows and interest rate risks related to the portfolio of bonds and insurance provisions. Share derivatives in the form of futures and options are used from time to time to adjust share exposures. Derivative financial instruments are reported from the trading date and are measured in the statement of financial position at fair value. Positive fair values of derivatives are recognised as bonds and shares or derivatives if they cannot unambiguously be attributed to the former. Negative fair values of derivatives are recognised under derivative financial instruments. Positive and negative values are only offset when the company is entitled or intends to make net settlement of more financial instruments. Calculation of value is generally performed on the basis of rates sup- plied by Nordea with relevant information providers and is checked by the Group’s valuation technicians. Discounting on the basis of market interest rates is applied in the case of derivative financial instruments involving an expected future cash flow. Recognition of the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of investments in foreign entities. Changes in the fair value of derivatives that are designated and qualify as net investment hedges in foreign entities and which provide effective currency hedging of the net investment are recognised directly in equity. The net asset value of the foreign entities estimated at the beginning of the financial year is hedged 90-100% by entering into short-term forward exchange contracts according to the requirements of hedge accounting. Changes in the fair value relating to the ineffective portion are recognised in the income statement. Gains and losses accumulated in equity are included in the income statement on disposal of the foreign entity. Reinsurers’ share of provisions for insurance contracts Contracts entered into by the Group with reinsurers under which the Group is compensated for losses on one or more contracts issued by the Group and that meet the classification requirements for insurance contracts are classified as reinsurers’ share of provisions for insurance contracts. Contracts that do not meet these classification requirements are classified as financial assets. The benefits to which the Group is entitled under its reinsurance con- tracts held are recognised as assets and reported as reinsurers’ share of provisions for insurance contracts. Amounts receivable from reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in accordance with the terms of each reinsurance contract. Changes due to unwinding are recognised in insurance technical interest. Changes due to changes in the yield curve or foreign exchange rates are recognised as price adjustments. The Group continuously assesses its reinsurance assets for impairment. If there is objective evidence that the reinsurance asset is impaired, the Group reduces the carrying amount of the reinsurance asset to its recoverable amount. Impairment losses are recognised in the income statement. 132 | Tryg A/S | Annual report 2012 | NotesNotes Receivables Total receivables comprise accounts receivable from policyholders and insurance companies as well as other accounts receivable. Other receivables primarily contain accounts receivable in connection with property. Derivative financial instruments are reported from the trading date and are measured in the statement of financial position at fair value. Receivables that arise as a result of insurance contracts are classified in this category and are reviewed for impairment as a part of the impairment test of accounts receivable. Receivables that are not derivative financial instruments are recognised initially at fair value and are subsequently assessed at amortised cost. The income statement includes an estimated reservation for expected unobtainable sums when there is a clear indication of asset impairment. The reservation entered is assessed as the difference between the carrying amount of an asset and the present value of expected future cash flows. Assets held for sale and associated liabilities Assets held for sale comprise non-current assets and disposal groups held for sale. A disposal group is a group of assets which an entity intends to dispose of in a single transaction. Liabilities associated with assets held for sale are liabilities which are directly associated with these assets, which will be transferred as part of the transaction. Assets are classified as ‘held for sale’ when their carrying amount will be recovered primarily via a formally planned sale within a period of 12 months rather than through continued use. Impairment or reversal of earlier impairment arising in connection with the first classification as held for sale and gains or losses in connection with subsequent measurements at the lower of carrying amount and fair value less costs to sell are recognised in the income statement under the relevant items. Gains and losses are specified in the notes. Assets and disposal groups held for sale are measured at the lower of carrying amount at the time of classification as held for sale and fair value less costs to sell. Assets are not depreciated or amortised from the time of classification as held for sale. Assets and associated liabilities are specified separately in the state- ment of financial position, and the main items are specified in the notes. Comparative figures in the statement of financial position are not restated. Other assets Other assets include current tax assets and cash at bank and in hand. Current tax assets are receivables concerning tax for the year adjusted for on-account payments and any prior-year adjustments. Cash at bank and in hand is recognised at nominal value at the statement of financial position date. Prepayments and accrued income Prepayments include expenses paid in respect of subsequent financial years and interest receivable. Accrued underwriting commission relat- ing to the sale of insurance products is also included. Equity Share capital Shares are classified as equity when there is no obligation to transfer cash or other assets. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax. Revaluation reserves Revaluation of owner-occupied property is recognised in other compre- hensive income unless the revaluation offsets a previous impairment loss, and relates primarily to owner-occupied property. Foreign currency translation reserve Assets and liabilities of foreign entities are recognised using the exchange rate applicable at the statement of financial position date. Income and expense items are recognised using the average monthly exchange rates for the period. Any resulting differences are recognised in equity. When an entity is wound up, the balance is transferred to the income statement. The hedging of the currency risk in respect of foreign entities is also offset in other comprehensive income in respect of the part that concerns the hedge. Contingency fund reserves Contingency fund reserves are recognised as part of retained earnings under equity. The reserves may only be used when so permitted by the Danish Financial Supervisory Authority and when it is for the benefit of the policyholders. The Norwegian contingency fund reserves include provisions for the Norwegian Natural Perils Pool, security reserve, administration reserve and guarantee reserve. The Danish and Swedish provisions comprise contingency fund provisions. Deferred tax on the Norwegian and Swedish contingency fund reserves is allocated. Dividend Proposed dividend is recognised as a liability at the time of adoption by the shareholders at the annual general meeting (date of declaration). Treasury shares The purchase and sale sums of treasury shares and dividends thereon are taken directly to retained earnings under equity. Treasury shares include shares acquired for incentive programmes and for a share buyback programme. Proceeds from the sale of treasury shares in connection with the exer- cise of share options or employee shares are taken directly to equity. Subordinate loan capital Subordinate loan capital is recognised initially at fair value, net of trans- action costs incurred. Subordinate loan capital is subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the borrowing period using the effective interest method. 133 Notes | Annual report 2012 | Tryg A/S | Notes Provisions for insurance contracts Premiums written are recognised in the income statement (premium income) proportionally over the period of coverage and, where necessary, adjusted to reflect any time variation of the risk. The portion of premiums received on in-force contracts that relates to unexpired risks at the statement of financial position date is reported as premium provisions. Premium provisions are generally calculated according to a best estimate of expected payments throughout the agreed risk period; however, as a minimum as the part of the premium calculated using the pro rata tem- poris principle until the next payment date. Adjustments are made to reflect any risk variations. This applies to gross as well as ceded business. Claims and claims handling costs are expensed in the income statement as incurred based on the estimated liability for compensation owed to policyholders or third parties sustaining losses at the hands of the policy- holders. They include direct and indirect claims handling costs that arise from events that have occurred up to the statement of financial position date even if they have not yet been reported to the Group. Claims provi- sions are estimated using the input of assessments for individual cases reported to the Group and statistical analyses for the claims incurred but not reported and the expected ultimate cost of more complex claims that may be affected by external factors (such as court decisions). The provisions include claims handling costs. Claims provisions are discounted. Discounting is based on a yield curve reflecting duration applied to the expected future payments from the provision. Discounting affects the motor liability, professional liability, workers’ compensation and personal accident and health insurance classes, in particular. Provisions for bonuses and premium discounts etc. represent amounts expected to be paid to policyholders in view of the claims experience during the financial year. Claims provisions are determined for each line of business based on actuarial methods. Where such business lines encompass more than one business area, short-tailed claims provisions are distributed based on number of claims reported while long-tailed claims provisions are distributed based on premiums earned. The models currently used are Chain-Ladder, Bornhuetter-Ferguson, the Loss Ratio method and De Vylder’s credibility method. Chain-Ladder techniques are used for lines of business with a stable run-off pattern. The Bornhuetter-Ferguson method, and sometimes the Loss Ratio method, are used for claims years in which the previous run-off provides insufficient information about the future run-off performance. De Vylder’s credibility method is used for areas that are somewhere in between the Chain-Ladder and Bornhuetter-Ferguson/Loss Ratio methods, and may also be used in situations that call for the use of exposure targets other than premium volume, for example the number of insured. The provision for annuities under workers’ compensation insurance is calculated on the basis of a mortality corresponding to the G82 calcula- tion basis (official mortality table). In some instances, the historic data used in the actuarial models is not necessarily predictive of the expected future development of claims. For example, this is the case with legislative changes where an a priori estimate is used for premium increases related to the expected increase in claims. In connection with legislative changes, the same estimate is used for determining the change in the level of claims. Subsequently, this estimate is maintained until new loss history materialises which can be used for re-estimation. Several assumptions and estimates underlying the calculation of the claims provisions are mutually dependent. Most importantly, this can be expected to be the case for assumptions relating to interest rates and inflation. Workers’ compensation is an area in which explicit inflation assump- tions are used, with annuities for the insured being indexed based on the workers’ compensation index. An inflation curve that reflects the market’s inflation expectations plus a real wage spread is used as an approximation to the workers’ compensation index. For other lines of business, the inflation assumptions, because present only implicitly in the actuarial models, will cause a certain lag in predict- ing the level of future losses when a change in inflation occurs. On the other hand, the effect of discounting will show immediately as a conse- quence of inflation changes to the extent that such changes affect the interest rate. Other correlations are not deemed to be significant. Reserve adequacy test Tests are continuously performed to ensure the adequacy of the insurance provisions. In performing these tests, current best estimates of future cash flows of claims, gains and direct and indirect claims handling costs are used. Any deficiency results in an increase in the relevant provision, and the adjustment is recognised in the income statement. Employee benefits Pension obligations The Group operates various pension schemes. The schemes are funded through contributions to insurance companies or trustee-administered funds. In Norway, the Group operates a defined-benefit plan. A defined- benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, dependent on age, years of service and salary. In Denmark, the Group operates a defined-contribution plan. A defined-contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions. In Sweden, the Group complies with the industry pension agreement, FTP-Planen. FTP-Planen is primarily a defined-benefit plan as regards the future pension benefits. Försäkringsbranschens Pensionskassa (FPK) is unable to provide sufficient information for the Group to use defined-benefit accounting. The plan is therefore accounted for as a defined-contribution plan. 134 | Tryg A/S | Annual report 2012 | NotesNotes The liability recognised in the statement of financial position in respect of defined-benefit pension plans is the present value of the defined- benefit obligation at the statement of financial position date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. Expectations as regards returns on plan assets are based on the returns for each asset class and the current allocation thereof. Market expecta- tions of future returns are taken into consideration. The defined-benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined-benefit obligation is determined by discounting the estimated future cash outflows by a duration that matches the conditions of the underlying pension obligation. The actuarial gains and losses arising from experience-based adjustments and changes in actuarial estimates is recognised in other comprehen- sive income. Deferred income tax is provided on temporary differences concerning investments, except where Tryg controls when the temporary difference will be realised, and it is probable that the temporary difference will not be realised in the foreseeable future. Other provisions Provisions are recognised when the Group has a legal or constructive obligation as a result of an event prior to or at the statement of financial position date, and it is probable that future economic benefits will flow out of the Group. Provisions are measured at the best estimate by management of the expenditure required to settle the present obligation. The measurement of provisions is based on a discounting of the costs necessary to settle the obligation if this has a significant effect on the measurement of the obligation. Provisions for restructurings are recognised as obligations when a detailed formal restructuring plan has been announced prior to or at the statement of financial position date at the latest to the persons affected by the plan. The plan is closed for new business. Other employee benefits Employees of the Group are entitled to a fixed payment when they reach retirement and when they have been employed with the Group for 25 and for 40 years. The Group recognises this liability at the time of sign- ing the contract of employment. In special instances, the employee can enter into a contract with the Group to receive compensation for loss of pension benefits caused by reduced working hours. The Group recognises this liability based on statistical models. Own insurance is included under other provisions. The provisions apply to the Group’s own insurance claims and are reported when the damage occurs according to the same principle as the Group’s other claims provisions. Debt Debt comprises debt in connection with direct insurance and rein- surance, amounts owed to credit institutions, current tax obligations and other debt. Derivative financial instruments are assessed at fair value according to the same practice that applies to financial assets. Other liabilities are assessed at amortised cost based on the effective interest method. Income tax and deferred tax The Group expenses current tax according to the tax laws of the jurisdictions in which it operates. Current tax liabilities and current tax receivables are recognised in the statement of financial position as estimated tax on the taxable income for the year, adjusted for change in tax on prior years’ taxable income and for tax paid under the on-account tax scheme. Cash flow statement The consolidated cash flow statement is presented using the direct method and shows cash flows from operating, investing and financing activities as well as the Group’s cash and cash equivalents at the beginning and end of the financial year. No separate cash flow statement has been prepared for the parent company because it is included in the consolidated cash flow statement. Deferred tax is measured according to the statement of financial position liability method on all timing differences between the tax and accounting value of assets and liabilities. Deferred income tax is measured using the tax rules and tax rates that apply in the relevant countries on the statement of financial position date when the deferred tax asset is realised or the deferred income tax liability is settled. Cash flows from operating activities are calculated whereby major classes of gross cash receipts and gross cash payments are disclosed. Cash flows from investing activities comprise payments in connection with the purchase and sale of intangible assets, property, plant and equipment as well as financial assets and deposits with credit institutions. Deferred income tax assets, including the tax value of tax losses carried forward, are recognised to the extent that it is probable that future taxable profit will be realised against which the temporary differences can be offset. Cash flows from financing activities comprise changes in the size or composition of Tryg’s share capital and related costs as well as the raising of loans, repayments of interest-bearing debt and the payment of dividends. Cash and cash equivalents comprise cash and demand deposits. 135 Notes | Annual report 2012 | Tryg A/S | Income statement (parent company) DKKm Note 1 Investment activities Income from Group undertakings Price adjustments Administration expenses in connection with investment activities Total investment return 2 Other expenses Profit/loss before tax 3 Tax Profit/loss on continuing business Profit/loss for the year Proposed distribution for the year: Dividend Transferred to reserve for net revaluation according to the equity method Transferred to retained profit Statement of comprehensive income Profit/loss for the year Other comprehensive income Other comprehensive income which cannot subsequently be reclassified as profit or loss Revaluation of owner-occupied property for the year Tax on revaluation of owner-occupied property for the year Actuarial gains/losses on defined-benefit pension plans Tax on actuarial gains/losses on defined-benefit pension plans Deferred tax on contingency fund provision Other comprehensive income which can subsequently be reclassified as profit or loss Foreign currency translation adjustment of foreign entities for the year Hedging of currency risk in foreign entities for the year Tax on hedging of currency risk in foreign entities for the year Total other comprehensive income Total comprehensive income 136 | Tryg A/S | Annual report 2012 | Income statement (parent company) 2011 2012 1,189 1 -8 2,265 0 -8 1,182 2,257 -57 -67 1,125 2,190 15 18 1,140 2,208 1,140 2,208 400 911 -171 1,140 1,594 1,865 -1,251 2,208 1,140 2,208 20 -6 -399 111 -22 -296 29 -27 7 9 -287 853 42 -12 -62 16 0 -16 193 -184 46 55 39 2,247 Statement of financial position (parent company) DKKm Note Assets 4 Equity investments in Group undertakings Total investments in Group undertakings Total investment assets Receivables from Group undertakings Total receivables 5 Current tax assets Cash at bank and in hand Total other assets Total assets Equity and liabilities Equity Debt to Group undertakings Other debt Total debt Total equity and liabilities 6 Deferred tax assets 7 Capital adequacy 8 Contractual obligations, contingent liabilities and collateral 9 10 11 Accounting policies Related parties Reconciliation of profit/loss and equity 2011 2012 8,985 8,985 10,889 10,889 8,985 10,889 23 23 17 0 17 85 85 24 1 25 9,025 10,999 9,024 10,996 1 0 1 0 3 3 9,025 10,999 Statement of financial position (parent company) | Annual report 2012 | Tryg A/S | 137 Statement of changes in equity (parent company) DKKm Share capital Revaluation reserves Retained earnings Proposed dividend Equity at 31 December 2010 1,598 1,352 5,269 2011 Profit/loss for the year Revaluation of owner-occupied property for the year Foreign currency translation adjustment of foreign entities for the year Hedging of currency risk in foreign entities for the year Actuarial gains and losses on pension obligation Tax on changes in equity Total comprehensive income Nullification of treasury shares Dividend paid Dividend, treasury shares Purchase of treasury shares Exercise of share options Issue of share options Total changes in equity in 2011 Equity at 31 December 2011 2012 Profit/loss for the year Revaluation of owner-occupied property for the year Foreign currency translation adjustment of foreign entities for the year Hedging of currency risk in foreign entities for the year Actuarial gains and losses on pension obligation Tax on changes in equity Total comprehensive income Dividend paid Dividend, treasury shares Purchase and sale of treasury shares Exercise of share options Issue of share options Total changes in equity in 2012 Equity at 31 December 2012 911 20 29 -27 -399 112 646 646 1,998 1,865 42 193 -184 -62 50 1,904 0 -65 -65 1,533 0 0 1,533 1,904 3,902 256 400 400 -256 144 400 -171 -22 -193 65 14 -91 15 14 -176 5,093 -1,251 1,594 -1,251 6 66 44 9 -1,126 3,967 1,594 -400 1,194 1,594 Total 8,475 1,140 20 29 -27 -399 90 853 0 -256 14 -91 15 14 549 9,024 2,208 42 193 -184 -62 50 2,247 -400 6 66 44 9 1,972 10,996 Proposed dividend per share DKK 26 (DKK 6.52 in 2011). Dividend per share is calculated as the total dividend proposed by the Supervisory Board after the end of the financial year divided by the number of shares at the end of the year (61,316,103 shares). The dividend is not paid until approved by the shareholders at the annual general meeting. Tryg Forsikring A/S’s Norwegian branch has in its branch financial statements included contingency fund provisions in the amount of DKK 2,394m (DKK 2,430m in 2011). Tryg Forsikring A/S’s Swedish branch has in its branch financial statements included contingency fund provisions in the amount of DKK 160m (DKK 144m in 2011). In Tryg Forsikring A/S, these provisions, due to their nature as additional provisions, are included in equity (retained earnings), net of deferred tax. Tryg Forsikring A/S’s possible payment of dividend to Tryg A/S is influenced by this amount and by a contingency fund provision of DKK 670m, which is included in equity in Tryg Forsikring A/S. Tryg Garantiforsikring A/S has a similar contingency fund provision amounting to DKK 139m, which is also included in the company’s equity. The contingency fund provisions can be used to cover losses in connection with the settlement of insurance provisions or otherwise for the benefit of the insured. 138 | Tryg A/S | Annual report 2012 | Statement of changes in equity (parent company) Notes (parent company) DKKm 1 Income from Group undertakings Tryg Forsikring A/S 2 Other expenses Administration expenses 2011 2012 1,189 1,189 2,265 2,265 -57 -57 -67 -67 Remuneration for the Executive Management is paid partly by Tryg A/S and partly by Tryg Forsikring A/S and Tryg Forsikring, a Norwegian branch of Tryg Forsikring A/S, and is charged to Tryg A/S via the cost allocation. Remuneration for the Supervisory Board, the Executive Management and risk-takers can be seen from Note 29 concerning related parties of the Tryg Group. Refer to Note 7 of the consolidated financial statements for a specification of the audit fee. Average number of full-time employees during the year 0 11 3 Tax Reconciliation of tax costs Tax on accounting loss before profit/loss in subsidiaries and tax Tax adjustment, previous years Effective tax rate Tax on accounting profit Change in respect of previous years 4 Equity investments in Group undertakings Cost Balance at 1 January Balance at 31 December Revaluation and impairment to net asset value Balance at 1 January Revaluations for the year Dividend paid Balance at 31 December Carrying amount at 31 December Name and registered office 2012 Tryg Forsikring A/S, Ballerup 2011 Tryg Forsikring A/S, Ballerup 15 0 15 % 25 -2 23 6,987 6,987 1,352 902 -256 1,998 8,985 Ownership share in % 19 -1 18 % 25 -1 24 6,987 6,987 1,998 2,304 -400 3,902 10,889 Equity 100 100 100 100 Notes (parent company) | Annual report 2012 | Tryg A/S | 139 Notes (parent company) DKKm 5 Current tax assets Tax payable, beginning of year Current tax for the year Adjustment of current tax in respect of previous years Tax paid for the year 6 Deferred tax assets Capitalised tax losses Tryg A/S Non-capitalised tax losses Tryg A/S The loss in Tryg A/S can only be utilised in Tryg 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 offset the tax losses. 7 Capital adequacy Equity according to annual report Proposed dividend Solvency requirements for subsidiaries – 50% Tier 1 capital Subordinate loan capital Solvency requirements for subsidiaries – 50% Capital base Weighted items Solvency ratio 2011 2012 17 16 0 -16 17 0 18 17 24 -7 -10 24 0 18 9,024 -400 -2,508 6,116 848 -2,507 4,457 10,996 -1,594 -2,406 6,996 873 -2,405 5,464 3,970 6,078 112 90 8 Contractual obligations, contingent liabilities and collateral The Danish companies in the Tryg Group are taxed jointly with TryghedsGruppen smba. As of 1 July 2012, the companies and the other jointly taxed companies are thus jointly and severally liable for any obligation to withhold tax deducted at source on interest, royalties and dividends in respect of the jointly taxed companies. Companies in the Tryg Group are party to a number of disputes. Management believes that the outcome of these legal proceedings will not affect the Group’s financial position over and above the receivables and liabilities recognised in the statement of financial position at 31 December 2012. 140 | Tryg A/S | Annual report 2012 | Notes (parent company) Notes (parent company) DKKm 9 Related parties Tryg A/S has no related parties with a controlling influence other than the parent company, Trygheds- Gruppen smba. Related parties with a significant influence include the Supervisory Board, the Execu- tive Management and their members’ related family. Related parties are the same as for the Tryg Group; please see Note 29 in the consolidated financial statements. 2011 2012 Parent company TryghedsGruppen smba TryghedsGruppen smba controls 60% of the shares in Tryg A/S. Transactions with Group undertakings and associates Tryg A/S exercises full control over Tryg Forsikring A/S. Intra-group trading involved: - Providing and receiving services - Intra-group account Administration fee etc. is settled on a cost-recovery basis. Intra-group accounts are offset and carry interest on market terms. 10 Reconciliation of profit/loss and equity The executive order on application of International Financial Reporting Standards for companies subject to the Danish Financial Business Act issued by the Danish FSA requires disclosure of differences between the format of the annual report under International Financial Reporting Standards and the rules issued by the Danish FSA. The following is a reconciliation of profit/loss and equity. Reconciliation of profit/loss Profit/loss – IFRS Profit/loss – Danish FSA executive order Reconciliation of equity Equity – IFRS Deferred tax provisions for contingency funds Equity – Danish FSA executive order 11 Accounting policies Please refer to the Tryg Group’s accounting policies. -61 23 -40 84 1,140 1,140 9,007 17 9,024 2,208 2,208 10,979 17 10,996 Notes (parent company) | Annual report 2012 | Tryg A/S | 141 Q4 2012 | Quarterly outline DKKm Private Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Gross premium income 2,283 2,329 2,338 2,385 2,373 2,401 2,405 2,478 2,449 Technical result 124 123 221 231 192 152 351 404 326 Key ratios Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio 77.3 1.1 78.4 16.9 95.3 Combined ratio exclusive of run-off 101.5 Commercial Gross premium income Technical result Key ratios Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio Combined ratio exclusive of run-off Corporate 938 56 73.2 -0.1 73.1 21.3 94.4 99.1 78.4 1.3 79.7 16.1 95.8 97.3 924 4 78.9 2.2 81.1 19.6 100.7 99.1 73.3 1.3 74.6 16.9 91.5 92.7 929 104 61.6 7.0 68.6 21.0 89.6 87.6 89.2 -14.3 74.9 16.1 91.0 94.3 946 69 96.4 -24.9 71.5 21.2 92.7 102.0 76.0 0.3 76.3 16.3 92.6 94.4 916 133 64.2 2.1 66.3 19.4 85.7 95.9 80.4 -2.3 78.1 16.0 94.1 98.4 920 87 78.2 -7.1 71.1 20.0 91.1 95.7 71.8 -2.1 69.7 16.0 85.7 90.1 930 168 62.6 -1.4 61.2 21.1 82.3 90.4 69.0 -0.1 68.9 15.0 83.9 87.0 931 193 56.8 2.3 59.1 20.1 79.2 86.3 70.1 1.1 71.2 15.6 86.8 88.4 906 156 59.8 2.8 62.6 20.0 82.6 85.8 Gross premium income 1,330 1,282 1,313 1,356 1,308 1,305 1,312 1,311 1,330 Technical result 98 141 176 163 29 150 284 95 121 Key ratios Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio Combined ratio exclusive of run-off 78.3 2.3 80.6 12.8 93.4 99.9 68.2 9.4 77.6 12.6 90.2 102.8 77.2 -2.9 74.3 13.0 87.3 98.4 85.8 -9.5 76.3 12.3 88.6 98.5 90.0 -4.6 85.4 13.1 98.5 112.9 78.9 -2.2 76.7 12.6 89.3 96.7 64.0 1.8 65.8 12.7 78.5 92.1 78.2 2.5 80.7 11.9 92.6 97.3 77.8 0.7 78.5 12.2 90.7 103.4 142 | Tryg A/S | Annual report 2012 | Q4 2012 | Quarterly outline DKKm Sweden Gross premium income Technical result Key ratios Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio Combined ratio exclusive of run-off Other a) Gross premium income Technical result Tryg Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 351 -1 353 -1 80.1 0.3 80.4 21.4 101.8 105.8 76.5 4.0 80.5 22.4 102.9 103.5 412 14 81.1 1.5 82.6 16.7 99.3 93.7 451 17 86.3 -2.9 83.4 14.0 97.4 96.7 370 -44 361 -28 88.1 0.5 88.6 24.9 113.5 115.1 87.5 0.6 88.1 21.9 110.0 107.8 417 28 77.7 -0.2 77.5 17.7 95.2 92.8 477 48 75.3 1.0 76.3 14.5 90.8 88.7 399 54 67.2 -0.8 66.4 21.1 87.5 87.2 -3 0 -9 0 -6 0 -5 0 -17 0 -2 0 -7 0 -1 -88 -8 -9 Gross premium income 4,899 4,879 4,986 5,133 4,950 4,985 5,057 5,196 5,076 Technical result Investment return Profit/loss before tax Profit/loss Key ratios Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio 277 262 524 369 77.0 1.1 78.1 16.9 95.0 Combined ratio exclusive of run-off 100.8 267 111 359 271 75.7 3.7 79.4 16.5 95.9 99.6 515 -5 498 362 72.4 1.7 74.1 16.7 90.8 93.5 480 -189 279 163 89.5 -14.1 75.4 16.1 91.5 97.3 310 144 467 344 78.5 -0.9 77.6 16.9 94.5 101.2 361 353 702 556 79.9 -2.7 77.2 16.6 93.8 98.5 831 -111 701 515 68.7 -1.0 67.7 16.5 84.2 91.1 652 338 976 733 70.3 1.0 71.3 16.4 87.7 91.5 648 5 638 404 70.2 0.9 71.1 16.3 87.4 92.1 a) Amounts relating to eliminations, restructuring expenses and discontinued and divested business are included under ‘Other’. A more detailed version of the table can be found at tryg.com > investor > Downloads Q4 2012 | Quarterly outline | Annual report 2012 | Tryg A/S | 143 Q4 2012 | Geographical segments DKKm Danish general insurance Gross premium income Technical result Run-off gains/losses, net of reinsurance Key ratios Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio Q4 2011 Q4 2012 2011 2012 2,488 273 266 82.0 -6.0 76.0 13.1 89.1 2,456 536 159 62.6 2.4 65.0 12.7 77.7 10,019 1,033 770 83.3 -8.1 75.2 15.1 90.3 9,910 1,441 571 71.1 -0.2 70.9 14.5 85.4 Number of full-time employees, end of period 2,315 2,187 Norwegian general insurance Gross premium income Technical result Run-off gains/losses, net of reinsurance Key ratios Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio Number of full-time employees, end of period Swedish general insurance a) Gross premium income Technical result Run-off gains/losses, net of reinsurance Key ratios Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio Combined ratio Number of full-time employees, end of period 1,991 2,091 84 49 72.6 5.2 77.8 18.9 96.7 488 -47 16 83.4 2.9 86.3 25.8 112.1 54 79 79.9 -0.6 79.3 18.5 97.8 537 67 -2 65.7 1.9 67.6 20.7 88.3 7,916 598 181 73.2 3.2 76.4 17.0 93.4 8,239 1,017 464 72.4 -1.0 71.4 16.8 88.2 1,338 1,282 2,050 -59 -7 82.0 2.6 84.6 20.3 104.9 423 2,183 131 -21 75.3 1.5 76.8 18.6 95.4 444 144 | Tryg A/S | Annual report 2012 | Q4 2012 | Geographical segments DKKm Other b) Gross premium income Technical result Tryg Gross premium income Technical result Investment return Other income and costs Profit/loss before tax Run-off gains/losses, net of reinsurance Key ratios Gross claims ratio Net reinsurance ratio Claims ratio, net of ceded business Gross expense ratio c) Combined ratio Number of full-time employees, end of period, continuing business Number of full-time employees, end of period, discontinued and divested business Q4 2011 Q4 2012 2011 2012 -17 0 -8 -9 -37 0 -18 -97 4,950 5,076 19,948 20,314 310 144 13 467 331 78.5 -0.9 77.6 16.9 94.5 648 5 -15 638 237 70.2 0.9 71.1 16.3 87.4 1,572 61 -30 1,603 944 79.1 -2.5 76.6 16.6 93.2 4,076 242 2,492 585 -60 3,017 1,015 72.2 -0.4 71.8 16.4 88.2 3,913 189 a) Moderna Försäkringar is included in ‘Swedish general insurance’ from 2 April 2009. b) Amounts relating to eliminations, restructuring expenses and discontinued and divested business are included under ‘Other’. c) Adjustment of gross expense ratio included only in ‘Tryg’. The adjustment is explained in a footnote to Financial highlights. Q4 2012 | Geographical segments | Annual report 2012 | Tryg A/S | 145 Other key figures Claims ratio, net Expense ratio, net with adjustment Combined ratio, net with adjustment Expense ratio, net without adjustment Gross profit ratio Profit ratio, net of reinsurance Gross technical interest ratio Technical interest ratio, net of reinsurance Return on equity before tax on continuing business (%) Return on equity after tax on continuing business (%) Average premium provisions Average claims provisions Average reinsurers’ share of provisions for insurance contracts Reserve ratio, premium provisions (%) Reserve ratio, claims provisions (%) Total reserve ratio Number of full-time employees, end of period, continuing business Number of full-time employees, end of period, discontinued and divested business Share performance Earnings per share (DKK) Diluted earnings per share (DKK) a) Earnings per share (DKK) of continuing business Number of shares, end of period (1,000) Average number of shares (1,000) Diluted average number of shares (1,000) a) Share price at 31 December (DKK) Net asset value per share (DKK) Market price/net asset value Dividend per share (DKK) Price/earnings a) There has been no dilution of earnings or equity in 2008. 2008 2009 2010 2011 2012 70.3 16.9 87.2 17.3 14.6 15.3 2.9 3.0 15.8 10.2 5,252 20,454 1,312 30.7 118.8 149.5 73.8 16.9 90.7 16.8 9.7 10.2 0.8 0.9 30.7 23.6 5,654 21,110 1,178 35.7 129.2 164.9 81.4 17.1 98.5 17.0 2.4 2.6 0.7 0.7 11.1 8.2 6,514 23,677 1,454 36.1 131.7 167.8 75.7 17.0 92.7 16.9 7.9 8.3 0.9 0.9 18.4 13.1 6,876 25,894 1,828 34.8 134.9 169.7 70.7 16.9 87.6 16.6 12.3 13.0 0.3 0.3 30.2 21.8 6,810 27,073 2,192 32.9 134.1 167.0 3,911 4,119 4,101 4,076 3,912 180 217 191 242 189 12.8 14.0 64,378 66,184 328.0 127.5 2.6 6.5 23.4 31.7 31.7 33.3 63,228 63,334 63,448 342.8 152.3 2.3 15.5 10.3 9.5 9.5 11.9 60,634 62,362 62,444 257.5 139.5 1.8 4.0 21.7 18.9 18.9 19.0 60,373 60,401 60,401 319.0 149.2 2.1 6.52 16.8 36.5 36.4 36.0 60,695 60,491 60,714 426.5 180.9 2.4 26.00 11.8 The expense ratio, net without adjustment, is calculated as the ratio of actual insurance operating costs, net of reinsurance, to premium income, net of reinsurance. Other key ratios are calculated in accordance with ‘Recommendations & Financial Ratios 2010’ issued by the Danish Society of Financial Analysts. The adjustment, which is made pursuant to the Danish Financial Supervisory Authority’s and the Danish Society of Financial Analysts’ definitions of expense ratio and combined ratio, involves the addition of a calculated cost (rent) in respect of owner-occupied property based on a calculated market rent and the deduction of actual depreciation and operating costs on owner-occupied property. 146 | Tryg A/S | Annual report 2012 | Other key figures Glossary The financial highlights and key ratios of Tryg have been prepared in accordance with the Executive Order issued by the Danish Financial Supervisory Authority on the Financial Reports for Insurance Companies and Multi-Employer Occupational Pension Funds and also comply with ‘Recommendations & Financial Ratios 2010’ issued by the Danish Society of Financial Analysts. Run-off gains/losses The difference between the claims provisions at the beginning of the fi- nancial year (adjusted for foreign currency translation adjustments and discounting effects) and the sum of the claims paid during the financial year and that part of the claims provisions at the end of the financial year pertaining to injuries and damage occurring in earlier financial years. Capital base Equity plus share of subordinate loan capital and less intangible assets, tax asset, discounting, equalisation reserve and proposed dividend. Gross claims ratio Gross claims x 100 Gross premium income Gross premium income Calculated as gross premium income adjusted for change in gross premium provisions, less bonuses and premium discounts. Market price/net asset value Share price Net asset value per share Combined ratio The sum of the gross claims ratio, the net reinsurance ratio and the gross expense ratio. Danish general insurance Comprises the legal entities Tryg Forsikring A/S (excluding the Norwegian and Swedish branches) and Tryg Garantiforsikring A/S (including Finnish branch). Discounting Expresses recognition in the financial statements of expected future pay- ments at a value below the nominal amount, as the recognised amount carries interest until payment. The size of the discount depends on the market-based discount rate applied and the expected time to payment. Gross insurance technical interest ratio Percentage return on equity Insurance technical interest net of reinsurance x 100 Gross premium income Profit for the year x 100 Average equity Gross expense ratio Calculated as the ratio of gross insurance operating costs, including adjustment and gross premium income. The adjustment involves the deduction of depreciation and operating costs on the owner-occupied property and the addition of a calculated cost (rent) concerning the owner-occupied property based on a calculated market rent. Gross insurance operating costs with adjustment x 100 Gross premium income Gross expense ratio without adjustment Gross insurance operating costs x 100 Gross premium income Gross profit margin Equity margin Premium income, net of reinsurance x 100 Tier 1 capital Individual solvency New Danish solvency requirements for insurance companies comprising the companies’ own determination of their capital requirements calculated using their own methods. The rules entered into force on 1 January 2008, and the figures must be reported to the Danish Financial Supervisory Authority four times a year. Net asset value per share Year-end equity Number of shares at year-end Technical result x 100 Gross premium income Tier 1 capital Equity less proposed dividend and share of capital claims in subsidiaries. 148 | Tryg A/S | Annual report 2012 | Glossary Solvency II New solvency requirements for insurance companies issued by the EU Commission. The new rules are expected to come into force in 2014/2015, at the earliest. Solvency ratio Ratio between capital base and weighted assets. Swedish general insurance Comprises Tryg Forsikring A/S, Swedish branch, and the Swedish branch of Tryg Garantiforsikring A/S. Dividend per share Proposed dividend Number of shares at year-end Diluted number of shares Average number of shares adjusted for number of share options which may potentially dilute. Diluted earnings per share (continuing business) Diluted earnings from continuing business after tax Diluted average number of shares Unwinding Unwinding of discounting takes place with the passage of time as the expected time to payment is reduced. The closer the time of payment, the smaller the discount. This gradual increase of the provision is not recognised under claims, but under technical interest in the income statement. Net reinsurance ratio Profit or loss from reinsurance x 100 Gross premium income Norwegian general insurance Comprises Tryg Forsikring A/S, Norwegian branch, and the Norwegian branch of Tryg Garantiforsikring A/S. Operating ratio Calculated as the combined ratio plus insurance technical interest in the denominator. Claims + insurance operating costs + profit or loss from reinsurance x 100 Gross premium income + insurance technical interest Price/earnings ratio Share price Earnings per share Relative run-off gains/losses Run-off gains/losses net of reinsurance relative to claims provisions net of reinsurance, beginning of year. Reserve ratio, claims provisions Claims provisions x 100 Gross premium income Reserve ratio, premium provisions Premium provisions x 100 Gross premium income Total reserve ratio Reserve ratio, claims provisions + premium provisions Earnings per share Profit or loss for the year x 100 Average number of shares Claims ratio, net of ceded business Gross claims ratio + net reinsurance ratio Glossary | Annual report 2012 | Tryg A/S | 149 Disclaimer Certain statements in this annual report are based on the beliefs of developments in the financial markets, extraordinary events our management as well as assumptions made by and information such as natural disasters or terrorist attacks, changes in currently available to management. Statements regarding Tryg’s legislation or case law and reinsurance. Should one or more future operating results, financial position, cash flows, business of these risks or uncertainties materialise, or should any strategy, plans and future objectives other than statements of underlying assumptions prove to be incorrect, Tryg’s actual historical fact can generally be identified by the use of words such financial condition or results of operations could materially differ as ‘targets’, ‘believes’, ‘expects’, ‘aims’, ‘intends’, ‘plans’, ‘seeks’, from that described herein as anticipated, believed, estimated ‘will’, ‘may’, ‘anticipates’, ‘would’, ‘could’, ‘continues’ or similar or expected. Tryg is not under any duty to update any of the expressions. forward-looking statements or to conform such statements to actual results, except as may be required by law. Read more A number of different factors may cause the actual performance in the chapter Capital and risk management in the annual report to deviate significantly from the forward-looking statements in on page 38, and in Note 1 on page 77, for a description of some this annual report, including but not limited to general economic of the factors which may affect the Group’s performance or the developments, changes in the competitive environment, insurance industry. 150 | Tryg A/S | Annual report 2012 | Disclaimer Group chart Tryg A/S Tryg Forsikring A/S Tryg Garanti- forsikring A/S (Dansk Kaution) Moderna Försäkringar (Swedish branch) Tryg Forsikring, (Norwegian branch) Respons Inkasso AS (Norway) Tryg (Finnish branch) Tryg Garanti (Norwegian branch) Moderna Garanti (Swedish branch) Tryg Garanti (Finnish branch) Ejendoms- selskabet af 8. maj 2008 A/S Tryg Ejendomme A/S Vesta Eiendom AS (Norway) Komplementar- selskabet af 1. marts 2006 ApS (50%) Thunesvei 2 AS 946 919 845 (Norway) Ejendoms- selskabet af 1. marts 2006 P/S (50%) ANS Grensen 3 848 383 082 (99%) (Norway) Group chart at 1 January 2013. Companies and branches are wholly owned by Danish owners and domiciled in Denmark, unless otherwise stated. Company Branch The branch has been sold. Final authority approval expected in Q1 2013. Group chart | Annual report 2012 | Tryg A/S | 151 Product overview Being one of the largest insurance companies in the Nordic region, Tryg sells its products primarily via its own sales channels such as Tryg offers a broad range of insurance products to both private call centres, the Internet, tied agents, franchisees (Norway), interest individuals and businesses. Tryg continuously develops new organisations, car dealers, real estate agents, insurance brokers and products and adapts existing peace-of-mind solutions to customer Nordea branches. Moreover, Tryg engages in international cooperation requirements and developments in society. Also, Tryg focuses with the AXA Group. It is an important element of Tryg’s distribution strongly at all times on striking a better balance between price strategy to be available in places where customers want it and that and risk. most distribution takes place via the company’s own sales channels. Motor insurance Workers’ compensation insurance Motor insurance accounts for 32% of total premium income and comprises mandatory third-party liability insurance providing cover for injuries to a third party or damage to a third party’s property, and a voluntary comprehensive insurance policy that provides cover for damage to the customer’s own vehicle from collision, fire or theft. Workers’ compensation insurance accounts for 5% of total premium income and covers employees against bodily injury sustained at work (in Norway, also occupational diseases). Workers’ compensation insurance is mandatory and covers a company’s employees (except for public sector employees and persons working for sole proprietors). In Denmark, motor insurance taken out by concept customers includes Tryg’s roadside assistance, such as towing and battery jump-start. Fire and contents – Private Fire and contents insurance for private customers represents 24% of total premium income and includes, for example, house and contents insurance. House insurance covers damage to properties caused by, for example, fire, storm or water, legal assistance and the customer’s liability as owner of the property. The contents insurance covers loss of or damage to private household contents and covers in and outside of the home. Moreover, the insurance includes liability and legal assistance, to which can be added a number of supplementary covers, for example cover of sudden damage and damage to electronic equipment. Tryg works with the concept of proactive claims handling, pursuing a close dialogue with the claimant to optimise the process. Our proactive claims handling team consists of claims handlers, social counsellors, legal experts, occupational health practitioners, orthopaedic surgeons and a network of psychologists. Proactive claims handling has three winners: the company, the claimant and Tryg in the form of shorter periods of sick leave, enhanced self-esteem for the injured person and reduced expenses. General third-party liability insurance General third-party liability insurance represents 5% of total premium income and covers various types of liability, including claims incurred by a company arising from the conduct of its business or in connection with its products, and third-party liability for professionals. Personal accident insurance Personal accident insurance accounts for 9% of total premium income and covers accidental bodily injury and death resulting from accidents. Transport insurance represents 2% of total premium income and covers damage to goods in transit due to the collision, overturning or crashing of the means of transport. Transport insurance Compensation takes the form of a lump sum intended to help the customer cope with the financial consequences of an accident, thereby making their daily lives easier. The insurance can include a number of supple- mentary covers, including treatment by a physiotherapist or chiropractor. Fire and contents – Commercial Commercial fire and contents insurance, which includes building insurance, represents 14% of total premium income and covers the loss of or damage to the buildings, stock or equipment of commercial customers. Moreover, Tryg provides cover for operating losses in connection with covered claims. Health insurance Health insurance represents 2% of total premium income. The insurance covers the costs of examinations, treatment, medicine, surgery and rehabilitation at a private health facility. In recent years, increasing health costs and waiting times in the public system have led to a significant demand for private health insurance. The growth in health insurance is, however, expected to decline, as the new government has removed the tax deduction from schemes funded by employers. 152 | Tryg A/S | Annual report 2012 | Products Products | Annual report 2012 | Tryg A/S | 153 Tryg A/S Klausdalsbrovej 601 2750 Ballerup Denmark +45 70 11 20 20 tryg.com CVR no. 26460212 

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