Topdanmark Annual Report and Accounts 1999

Transcription

1 Topdanmark Annual Report and Accounts 1999

2 Contents 2 Topdanmark in brief 3 Organisational chart summary 5 Financial highlights 6 Directors and Management s report 10 Objectives, goals and strategies 14 Prospects 16 Risk factors 18 Investment policy and funding 22 Non-life insurance activities 30 Life assurance activities 36 Alliance partners 39 Shareholders 44 Organisation, culture and employees 46 Information technology 48 Accounting policies 53 Financial review 58 Signatures 59 Auditors reports 60 Profit and loss account 62 Balance sheet 64 Cash flow analysis 65 Notes 79 Five-year summary 80 Technical result, non-life insurance 82 Assets and yields at market value, life assurance Topdanmark Forsikring 83 Profit and loss account 84 Balance sheet 86 Notes 92 Five-year summary 93 Corporate Governance 95 Representative Assembly 96 Board of Directors 97 Management 98 Topdanmark in Denmark 99 Financial calendar/analysts Topdanmark in brief Topdanmark covers private households and businesses insurance needs for life and nonlife insurance in Denmark. Just over half of all Danish farms, about every fourth person in Denmark and every eighth business is insured with the Company. At the core of Topdanmark s management ethos is the principle of creating shareholder value, and as such, a long-term, competitive and stable return is a prerequisite for maintaining the Company s independence. The Group s business philosophy is based upon strong inter-relationships between shareholders, customers and employees. Satisfied customers and qualified employees are key to creating satisfied shareholders. Topdanmark has a multi-line distribution strategy. Most sales are effected through the Company s own certified insurance sales representatives, sales centres and telephone sales. In the Danish market Topdanmark s own distribution network is supplemented by distribution agreements with BG Bank and Den Danske Bank. Internationally, Topdanmark is a partner of the insurance alliance, Eureko. The Company has about 2,100 employees. One of its goals is to attract qualified staff, both for the betterment of the business and to enhance the Company s culture and its working environment. Topdanmark is listed on the Copenhagen Stock Exchange and is owned by 63,000 private and institutional investors. Information Technology is an essential element within Topdanmark and as such the theme of this year s Annual Report is How Topdanmark uses IT in its business. 2

3 Organisational chart Legal structure Topdanmark A/S Topdanmark Invest A/S Topdanmark Forsikring A/S Danske Forsikring Skade I A/S Danske Forsikring Skade, Forsikringsaktieselskab Topdanmark Livsforsikring A/S BG Pension, Livsforsikringsaktieselskab Topdanmark Livsforsikring ll A/S Topdanmark Ejendom A/S Business structure Management Administrative departments Services Personal Partners Agricultural Commercial Industrial & Marine Life and pensions Reinsurance Treasury 3

4 1999 summary 1999 was an eventful year for Topdanmark as it was affected by two significant events: the acquisition of Den Danske Bank s non-life insurance activities and the claim paygments following the hurricane of the century on 3 December. In 1999 Topdanmark suffered a loss of DKK 163m. Excluding the claim payments on own account of DKK 1,040m resulting from the hurricane, the result would have been a posttax profit of DKK 596m with the underlying operating profit increasing 34% from DKK 508m in 1998 to DKK 679m in Development in non-life and life premiums DKKm 5,000 4,000 3,000 2,000 1,000 Following the hurricane Topdanmark supplemented its existing reinsurance cover and now it is of the opinion that such exceptional claim payments as it suffered in 1999 will not recur Development in premiums, non-life Development in premiums, life Although the expense ratio continued its declining trend in 1999, the combined ratio increased from 95.1% to 121.5% due to the hurricane claims. Excluding these claims the combined ratio would have been 95.8% in At 31 December 1999 Topdanmark took over Den Danske Bank s non-life insurance activities. The acquisition is expected to improve Topdanmark s competitiveness in the Danish market. Earnings and share buy-back per share DKK The favourable trend in the underlying operating profit is expected to continue into 2000 with an improvement from DKK 679m in 1999 to DKK m in (5) Subject to an annual 7% return on equities and stable foreign exchange and interest rates unchanged from the level as at 14 March 2000 the result is expected to be a DKK m post-tax profit in In 2000 it is intended - giving due regard to the Company s results trend and financing requirements - to buy back own shares for DKK m for a subsequent write down in share capital. In 2000 Topdanmark will start to publish its results quarterly. Share buy-back per share Earnings per share Net assets per share and share price at 31 December Net assets per share Share price 4

5 Financial highlights (DKKm) Key figures Premiums earned: Non-life insurance 4,178 3,984 3,735 3,398 3,064 Life assurance 1,979 1,978 1, ,000 6,157 5,962 5,034 4,387 4,064 Insurance: Topdanmark Forsikring excl. life (563) Topdanmark Livsforsikring Other companies (6) Total profit / loss on insurance (484) Parent company * 123 (6) 45 7 (172) Pre-tax profit / (loss) (361) Extraordinary items (64) 6 44 (1) (104) Taxation (4) (8) 0 Profit / (loss) for the year (163) Underlying operating profit Exceptional / extraordinary items (1,104) (1) (104) Taxation (4) (8) 0 Profit / (loss) for the year (163) Shareholders funds 3,580 4,127 3,338 2,917 2,645 Ratios Return on shareholders funds (%) (4) Earnings per share (DKK) ** (4) Net assets per share (DKK) ** Share buy-back per share (DKK) ** Share price at 31 December (DKK) * Including non-insurance subsidiaries ** Net of shares bought back Non-life insurance Loss ratio (%) Reinsurance ceded (%) (21.6) Expense ratio (%) Combined ratio (%)

6 Directors and Management s report Laus Mikkelsen, head of the claims department for buildings/contents, in front of a farm on Sealand hit by the hurricane on 3 December When the hurricane in December had died down, claims notification on the Internet underwent a baptism of fire. Against around a normal 20 Internet claims notifications a week, Topdanmark received several thousand each week in the period following the hurricane. The use of the Internet saved time and resources in the claims department and also secured a quicker service to customers. A DKK 163m loss as a result of the December hurricane. The acquisition of Den Danske Bank s non-life insurance activities is expected to improve Topdanmark s competitive situation 1999 was an eventful year for Topdanmark as it was affected by two significant events: the acquisition of Den Danske Bank s non-life insurance activities (Danica Forsikring/Danske Trend in results Forsikring) and the worst Danish hurricane on record that century. The Group recorded a post-tax loss of DKK 163m in 1999 (1998: DKK 906m profit). The 1999 result was affected by two opposing factors: developments in insurance operations were better than expected, whilst claim payments following the hurricane that hit Denmark on 3 December 1999 resulted in a considerable non-recurring loss. DKKm (incl. hurricane claims) (excl. hurricane claims) Non-life insurance (673) Kapital Holding Life assurance Parent company etc (6) 45 Operating profit (361) Exceptional / extraordinary items excl. hurricane claims (64) (64) Taxation 262 (19) 129 (4) Profit/(loss) for the year (163)

7 Excluding claim payments from the hurricane, Topdanmark s operating result continued its upward trend with a 34% improvement in results from DKK 508m in 1998 to DKK 679m in This came about from both the improvement in the result on non-life insurance as well as an increase in investment income in the parent company. The hurricane claims turned out to be four times greater than the claim payments following the worst storm in Denmark s history. Claim payments relating to the hurricane have been calculated to be DKK 1,850m at the finalisation of the accounts. However, it is expected that the final total of claim payments will not be calculated until the middle of At the time Topdanmark s reinsurance ceiling on storms was DKK 800m (including a DKK 20m retention) and the net exceptional expense on the hurricane claims was DKK 1,040m after the using DKK 30m of equalisation provisions. Including DKK 69m extraordinary expenses on the purchase of Danica Forsikring/Danske Forsikring, the result on exceptional/extraordinary items including hurricane claims was a loss of DKK 1,104m in 1999 (1998: DKK 269m gain). Excluding the hurricane claims the Board of Directors considers the improvement in the operating result to be satisfactory. The loss on the hurricane is deeply regrettable, but is considered to be a non-recurring event. Following the hurricane, Topdanmark has supplemented its existing reinsurance programme with another DKK 1,000m reinsurance cover providing a ceiling of just under DKK 1,800m. Besides the increased cost of the additional reinsurance cover and extra expenditure on handling the many additional claims in 2000, the hurricane is expected to have no effect on the future operational development in the Topdanmark Group. In the 1998 Annual Report Topdanmark s 1999 profit forecast was DKK m. This was upgraded after both the first and second quarters in line with the trend in the underlying operational results being better than expected. Following the acquisition of Danica Forsikring/Danske Forsikring the profit forecast for 1999 was charged with extraordinary integration expenses and consequently the expected profit was revised to DKK m. At the end of 1999 Topdanmark announced that the estimate of the size of claim payments relating to the hurricane was subject to considerable uncertainty and that there was a risk that the reinsurance ceiling would be exceeded. At the same time the forecast for the underlying operating result was upgraded once more. For comparative purposes therefore the profit forecast for 1999 should be compared to a profit of DKK 596m, after excluding the exceptional costs of the hurricane. Purchase of Danica Forsikring/Danske Forsikring In an environment affected by increased competition and structural changes it is Topdanmark s opinion that the insurance market will be dominated by those companies with the greatest distribution efficiency and the lowest expense ratios. It is Topdanmark s strategy to grow organically, through working agreements with its partners with strong distribution networks and by acquisition. In order to improve its competitive position Topdanmark acquired the non-life insurance companies, Danica Forsikring/Danske Forsikring from Den Danske Bank with a payment for goodwill of DKK 722m, with effect from 31 December With the purchase Topdanmark took over a non-life insurance portfolio, which in 1999 had premium income of DKK 1,326m, a loss ratio after reinsurance of 69.7% and an expense ratio of 32.3%. Following the acquisition Topdanmark s premium income in non-life insurance will increase. Including the acquired non-life insurance portfolio Topdanmark s premium income in non-life insurance would have been DKK 5,504m in 1999 reflecting a market share of just over 18%. With the purchase Topdanmark took over only those 299 employees working directly with the administration part of the non-life insurance business. Consequently, following an integration period in 2000, the acquired portfolio is expected to have an expense ratio of about 18%. It is therefore believed that the acquisition will have a favourable effect on the Topdanmark Group s overall expense ratio. It is expected to decline from 23.4% in 1999 to % in 2000 dependent on the overall expenditure on handling the many hurricane claims. At the same time Topdanmark established a five-year working agreement with Den Danske Bank with the effect that the bank will continue 7

8 to sell non-life insurance products through its own distribution channels, i.e. through its branch network and Danica s certified insurance sales representatives and pension advisers. The working agreement is being operated purely on a commercial basis and with no agreements on cross-holdings. Topdanmark believes that the acquisition of the non-life insurance activities in Danica Forsikring/Danske Forsikring will increase its competitive power and have a positive effect on Topdanmark s future results. Kapital Holding Since 1996 Topdanmark has had a working agreement with BG Bank and later Kapital Holding following the merger in 1998 between Realkredit Danmark and BG Bank. The relationship with Kapital Holding concentrates on the sale of life and non-life insurance products through BG Bank supported by cross-holdings. Topdanmark owns 5% of the share capital in Kapital Holding, while correspondingly Kapital Holding owns 15% of the share capital in Topdanmark. The agreements with both BG Bank and Den Danske Bank provide that the two banks nonlife insurance products are being marketed under the banks own brands. Administration functions and claims handling are carried out by Topdanmark in both cases. With the two working agreements Topdanmark has gained access to 30% of the distribution channels in the Danish banking market, and the Company believes that Topdanmark s own sales channels supplemented by the two working agreements provide a strong distribution basis for Topdanmark. Share options and employee shares In order to secure an incentive structure common to shareholders and employees/management Topdanmark created a share option scheme for its management and issued employee shares to those remaining employees. In doing this it is following the principle that the directors and employees opportunity for increased earnings as well as their risk should be proportionate to their influence in building shareholder value. Accordingly, those who have greater influence will have opportunity of increasing their earnings, but correspondingly they will also bear a risk of suffering a loss if there is no improvement in shareholder value. The revolving share option scheme, which was introduced in 1998, includes the Board of Directors, Board of Management and executives. On the occasion of its 100-year anniversary Topdanmark issued employee shares in 1999 Niels Lillemose, general manager, Topdanmark s IT department, in front of the extension to Topdanmark s head office in Ballerup I look forward to having transferred the Danske Forsikring/Danica Forsikring s portfolios to Topdanmark s systems. Without comparison it is the largest IT task in the Group this year. As early as next summer the Danica employees will move in with Topdanmark and at that time the first transfers of policies must be effected. 8

9 to those employees who are not part of the share option scheme. The share option scheme and the employee share programme together represent about 5% of the share capital. For further description of the share options and the issue of employee shares see page 40. Share buy-back It is Topdanmark s policy to not operate with capital in excess of that required to meet solvency margins whilst still allowing for growth in the business. In order to optimise its capital structure Topdanmark buys back its own shares. Up until now Topdanmark had intended to buy back shares for DKK 500m by the end of However, in October 1999 this share buy-back programme was revised following review of the Company s trend in results and capital structure. At that time Topdanmark believed that a DKK 500m share buy-back by the end of 2001 would be insufficient in preventing the Company s share capital from being unnecessarily high. Therefore it was intended - giving due regard to the Company s results trend and financing requirements - to increase Topdanmark s share buy-back to DKK 850-1,200m by the end of However, as a result of the increase in claim payments relating to the hurricane the planned share buy-back was reduced by DKK m. Accordingly it is now intended - while continuing to take account of the Company s results trend and financing requirements - to buy back own shares for DKK m by the end of In 2000 Topdanmark intends to buy back own shares for DKK m for subsequent write-down in the share capital a working year In 2000 Topdanmark will continue to focus on improving the competitive power of its core business: life and non-life insurance business in the Danish market. The main challenge in 2000 will be the successful integration of the Danica Forsikring/Danske Forsikring non-life insurance activities into Topdanmark s organisation. Acquisitions which appear perfect on paper often end up as a failure as a result of poor management of the integration process. Management is well aware that this should not happen to Topdanmark. It has an historic opportunity for improving its competitive power, and management will do everything to maximise this opportunity. Another considerable challenge will be to settle the about 60,000 additional claim notifications following the hurricane. A special task force has been established to handle these claims so that the remaining organisation is not burdened. The Company s goal is to handle the many additional claims quickly and efficiently in such a way that customers will feel that they have chosen the right insurance company, whilst at the same time claim payments should be kept to the level customers are entitled to. Following the integration of Danica Forsikring/Danske Forsikring Topdanmark will be ready to create value for shareholders, customers and employees and to take advantage of the opportunities that are bound to arise in the Danish market where the rate of change is rapidly increasing and technological developments continue to create new opportunities. With regard to new shareholder-oriented measures the Board of Directors has decided to start publishing quarterly results in Additionally, in 1999 Topdanmark s Representative Assembly and Board of Directors discussed the concept of Corporate Governance and decided to take a keen and active approach to this concept, see Corporate Governance page 93. Titken Lipinski, web librarian, Topdanmark Partners, demonstrating TopNet Share of knowledge is the key for Intranets. In Topdanmark we have chosen to develop our own version, TopNet. During the latter months of 1999 almost half of the Company s employees were connected to TopNet. The rest will follow in line with training and the exchange of hardware. 9

10 Objectives, goals and strategies Steffen Heegaard, general manager, Topdanmark s communication and IR department, with the Annual Report In 1999 Topdanmark became the first Danish company ever to publish its complete annual report in Danish and English on the Internet at the same time as its annual results were published. This is one among the many services Topdanmark is offering shareholders and analysts on Topdanmark s development strategy is based on maintaining and building up a virtuous circle that unites consideration for shareholders, customers and employees There have been no fundamental changes in Topdanmark s goals and strategies from However, there have been a few clarifications and additions. Topdanmark wishes to operate as an independent and self-sufficient insurance group focused on the Danish market. This is conditional upon the fair pricing of Topdanmark s shares. Topdanmark s development strategy is based upon the continuous increase in the rate of change and future development being less predictable than in the past. As a result, Topdanmark s development is based upon dynamism and the constant optimising of its operations and capital structure. 10

11 Objectives: Goals: Strategy: to carry out nation-wide, Danish life and non-life insurance and pension fund business to be attractive to customers by being an independent and preeminent insurance group to ensure that its shareholders achieve a long-term, competitive, stable return to improve its position in the Danish insurance market to ensure that its expense ratio is lower than the general market level to ensure that its growth in life and non-life insurance as well as pension fund business is higher than that of the market to ensure that the Topdanmark share reflects insurance risk rather than investment risk to ensure that the Topdanmark share is both attractive and liquid to be able to attract and keep qualified employees to concentrate primarily on organic growth, but also include close co-operation with alliance partners and acquisitions, should the opportunity arise to participate in international insurance business through Eureko to optimise its shareholders return/risk profile by ensuring that shareholders funds continue to reflect both the volume of business and the corresponding investment policy to be a dynamic company encouraging personal and career development to align the goals of management and employees with those of its shareholders It is Topdanmark s ambition to create added value for its shareholders through a long-term, competitive, stable return. A decisive factor is the ability to create and keep satisfied customers and employees. It is therefore a central feature to maintain and build up a virtuous circle that unites consideration for shareholders, customers and employees. Shareholders Shareholders Topdanmark wishes to create value for its shareholders by optimising both its operations and capital structure. Operational value creation The operational key features to creating value are: an increase in premium income higher than the market; a declining expense ratio lower than the market; and a reduced level of expenditure on reinsurance cover. Employees Customers Topdanmark wishes to improve its competitiveness through gradually reducing the expense ratio (administrative expenses and acquisition costs as a percentage of gross premium income) so that it continues to be lower than the market. The reduction of the expense ratio is on the basis of the growth in premiums being higher 11

12 than the market whilst at the same time restrictions on expenditure will ensure that the cost trend will be lower than the growth in premiums. With a continued low expense ratio, Topdanmark does not need to raise its premiums like the rest of the market, enabling it to offer customers increasingly more competitive rates. Given this business philosophy, Topdanmark can allow a slightly increasing loss ratio for the benefit of customers while continuing an increasing market share and a profitable combined ratio. Besides focusing on administrative expenses and acquisition costs, Topdanmark is also looking to reduce the costs of reinsurance cover. In order to reduce its vulnerability to major isolated claims or a series of claims, in recent years Topdanmark has built up its equalisation provisions thus gradually increasing the retention of claims in order to reduce expenses on reinsurance. However, following the hurricane in December 1999 Topdanmark reconsidered the need for catastrophe cover and in the future it intends to be covered for even major disasters. Capital structure Concurrently with improving operational efficiency, Topdanmark also intends to optimise shareholders risk/return by ensuring that shareholders funds continue to reflect the volume of business transacted and the corresponding investment policy pursued. It is Topdanmark s opinion that only operational and insurance risks and not financial risks contribute to creating value for shareholders. Shareholders could profit from making investments themselves reflecting their own risk profiles without paying administration costs to Topdanmark. The returns on investment achieved by Topdanmark would typically correlate with shareholders other returns on investments. However, the return generated from insurance risks would create value for shareholders, as it would not correlate with the shareholders returns on other investments. Therefore Topdanmark aims to have a capital structure in which shareholders funds are not burdened with excess capital over and above that required to meet the growth in the business as well as the solvency margins. Gert Holm-Petersen, project manager, Topdanmark s finance department, in his office in the Top House With an implementation period of ten months Topdanmark s accounting system and internal purchasing/inventory system as well as a few staff administration systems were replaced by the integrated SAP R/3 system. 12

13 Consequently, Topdanmark intends to buy back its own shares to avoid unnecessary excess capital. It also intends to increase the Company s operational risks by increasing the volume of business and reducing the extent of reinsurance cover by way of greater retention. In 1999 Topdanmark s business volume increased by 32% following the purchase of Den Danske Bank s non-life insurance activities. The purchase was financed by the liquid funds in Topdanmark Forsikring. This was in line with Topdanmark s business philosophy as it reduced financial risk and correspondingly increased business risk. Customers / expansion plan Topdanmark s development strategy on the Danish insurance market is based on a combination of organic growth; growth via alliance partners; and acquisitions. Organic growth Topdanmark s own sales channels comprise a locally based team of certified insurance sales representatives and a sales network supplemented by telephone sales. Topdanmark is continually endeavouring to enhance its distribution efficiency by, for example, improving on the proficiency of its certified insurance sales representatives through training and an increased use of automated PCbased sales and administration tools. As Topdanmark also wants to be visible in the local community, sales centres are a natural part of Topdanmark s network. In spite of increased distribution efficiency of Topdanmark s own sales channels in recent years, Topdanmark believes that due to increasing competition, even under the best conditions, organic growth can only match market growth in the future. In order to continue to see an improvement in premium income greater than that of the market, Topdanmark has initiated distribution links with selected alliance partners. Alliance partners and acquisitions Since distribution links were established with BG Bank in 1996, an increasingly larger share of Topdanmark s new business has been written through this channel. Besides working with BG Bank, in 1999 Topdanmark agreed with Den Danske Bank to take over most of the bank s non-life insurance activities. At the same time it was agreed to sell non-life insurance products through Den Danske Bank s distribution channels. Furthermore, Topdanmark also sells life assurance products through a number of regional banks. Topdanmark believes that the distribution efficiency through its own sales channels and those of its alliance partners will be sufficient to continue to see premium income increase at a greater rate than the market. With a financial base and a flexible organisation ready for change, Topdanmark is ready to seize any opportunity for additional working agreements or acquisitions should the insurance market offer them. Employees Topdanmark endeavours to be perceived as a dynamic company with plenty of opportunity for personal and career development. A decentralised organisational structure based on framework control contributes to creating a flexible organisation that encourages initiative and secures a quick and efficient decisionmaking structure. Topdanmark believes that the recent years success is the result of motivated employees making huge efforts combined with a simple and sound business philosophy. Since 1998 Topdanmark has concentrated on communicating the Group s basic values and principles to its employees. This has provided the opportunity to delegate responsibility and promote initiative further out into the organisation, with the confidence that the employees behaviour and decisions will follow the same basic attitudes throughout the organisation. Regular appraisal interviews between each employee and his/her superior are a firmly established feature of Topdanmark s everyday life. Specific agreement on what needs to be done helps to create a results-oriented climate which in turn offers the opportunity for individual growth and job satisfaction. In order to make employees performance agree better with shareholders demand for value creation Topdanmark has regularly issued employee shares, most recently when Topdanmark celebrated its 100-year anniversary in June In 1998 a revolving share option scheme was also introduced for the Board of Directors, Board of Management and executives. 13

14 Prospects Jan Nyholm Albertsen, project manager, Topdanmark s IT department, in Hareskoven, a forest close to Copenhagen moderately hit by the hurricane in December When we start developing Topdanmark s new claims systems, it will be a pure Topdanmark project, which will ensure the system can be optimised to meet the Company s requirements and at the same time provide the necessary knowledge for later changes and development. Post-tax profit in 2000 expected to be DKK m The 1999 result was substantially affected by the hurricane on 3 December. Following this Topdanmark significantly increased its reinsurance cover. As the turn-around to the DKK 163m loss solely arose from the exceptional claim payments due to the hurricane, Topdanmark believes that by supplementing the reinsurance cover the risk of similar fluctuations in its results has been significantly reduced. Non-life insurance If the additional claim payments are excluded, the improvement in the underlying operating profit in 1999 was satisfactory. This trend is expected to continue into 2000 when the Group s earnings will be increased following the acquisition of Danica Forsikring/Danske Forsikring. The earnings base in the Group s non-life insurance business grew organically during 1999 with premium income improving 4.9% to DKK 4,178m. Furthermore premium income acquired on the purchase of Danica Forsikring/Danske Forsikring was DKK 1,326m in Experience shows a certain level of customer lapse arises in a period following an acquisition of a new non-life insurance portfolio. Therefore for 2000 it is assumed that the lapse from the Danica Forsikring/Danske Forsikring portfolio will be slightly higher than the rate of new sales. Due to this, combined with continued strong competition in the non-life insurance market, growth in Topdanmark Group s premium income is expected to be lower than it was in After excluding the hurricane claims and one massive fire claim the average loss ratio for Topdanmark and Danica Forsikring/Danske Forsikring was 71.9% in The loss ratio for 1999 included the effect of more large fire claims than in a normal year. The underlying 2000 loss ratio is expected to be maintained at around 72%. Following the December hurricane a new record was set for claim payments relating to storms in Denmark and as a result Topdanmark s reinsurance cover was increased. This, combined with increasing prices in the reinsurance market, is expected to raise reinsurance expenditure by about DKK 35m. When Topdanmark s existing cover expires in August 2001, the cost of 14

15 reinsurance cover is expected to increase even further. As a consequence of the increase in future insurance risks on storms it is expected that the insurance industry will compensate for the increased cost of reinsurance cover by raising its premium rates on storm insurance policies. However, such increases are expected to have only a limited effect on the results for Topdanmark s expense ratio declined from 23.6% in 1998 to 23.4% in 1999 in spite of the increase in expenditure following the hurricane. In 2000 the take-over of Danica Forsikring/Danske Forsikring is expected to have a positive effect on the expense ratio. Following an integration period in 2000 the expense ratio of the acquired portfolio is expected to decline to about 18%. Consequently, the overall expense ratio for the Topdanmark Group is expected to fall to about % in 2000 dependent on the overall expenditure on handling the many hurricane claims. The combined ratio for the Group is expected to be about 96% in The investment result in the non-life insurance business in 2000 will be affected by slightly higher interest rates than in The effect on the investment return of the DKK 722m payment for goodwill in the two new non-life insurance companies was eliminated by a DKK 800m capital injection from the parent company Topdanmark into Topdanmark Forsikring. As the hurricane claims exceeded the reinsurance cover this drain on liquidity will reduce the return on investment by about DKK 10m in Furthermore the investment result in the non-life insurance business will also be affected by the relatively significant investment in Kapital Holding of DKK 1,187m excluding the dividend at the end of It is a budgetary assumption that the investment in Kapital Holding will generate a pretax return of about 10%, equivalent to DKK 125m. The result from non-life insurance business is therefore expected to be DKK m before amortisation of goodwill on the purchase of Danica Forsikring/Danske Forsikring, but including DKK 125m from the investment in Kapital Holding. Life assurance The profit generated in Topdanmark Livsforsikring is limited by the bonus rate the company pays to its policyholders. For 2000 the bonus rate has been fixed at 4.5% after tax on returns on pensions, after which the return on shareholders funds will be 7.5% including three percentage points plus the result from health and accident insurance. The result of life assurance activities is expected to be DKK 80-90m in Parent company In the parent company administrative expenses in 2000 are expected to be in line with The return on investments in the parent company will be adversely affected by the DKK 800m reduction in investment assets following the capital injection into Topdanmark Forsikring. Overall the result of the parent company is expected to be between a DKK 10m loss and a DKK 10m profit. Accordingly, the overall operating profit before tax and exceptional items is expected to be DKK m in 2000 against DKK 679m (excluding hurricane claims) in Exceptional items As mentioned above, the accounts for 2000 will be affected by a DKK 72m goodwill amortisation following the acquisition of Danica Forsikring/Danske Forsikring for a payment of goodwill of DKK 722m being amortised over ten years. Taxation The loss incurred in 1999 generated a loss carried forward resulting in a deferred tax asset of DKK 262m being recognised in the consolidated accounts. The total deferred tax asset in the parent company in 2000 will be DKK 416m, which will be available to offset the taxable profits within in the Group. Consequently, there will be no tax paid by the parent company in spite of a tax charge being included in its accounts. For 2000 the Group expects a tax charge of DKK m. Post-tax profit The result after tax and exceptional items is expected to be DKK m in 2000 subject to an annual 7% return on equities and stable foreign exchange and interest rates unchanged from the level as at 14 March Profit forecast for 2000 DKKm Non-life insurance Kapital Holding Life assurance Parent company etc. (10) (6) Underlying operating profit Exceptional / extraordinary items (72) (72) (1,104) 269 Taxation (138) - (158) Profit / (loss) for the year (163)

16 Risk factors Poul Erik Mathiasen, head of Topdanmark s analysis department, in front of Topdanmark s main server In the future the huge volume of information on Topdanmark s customers and their insurance policies will be assembled in a data warehouse. This initiative is intended to improve and support the decentralised business operations that are in daily contact with customers. The assembled knowledge is also intended for further product development, risk assessment, fixing of insurance rates and identification of areas where risk management would be an advantage. Topdanmark has increased its reinsurance cover and is operating with a relatively conservative risk profile As a consequence of the hurricane in December 1999 the Group has reconsidered its storm risk. Until then the Group s reinsurance cover for storms was based on the worst storm in Denmark on record, namely a storm in 1981 which, indexed and adjusted for portfolio changes, generated claims of just under DKK 500m. The reinsurance programmed provided a safety margin of just over 60% in excess of the largest loss, therefore the reinsurance ceiling was DKK 800m. The 1999 hurricane resulted in claims around four times greater than the 1981 storm setting a new record. As a result Topdanmark supplemented its reinsurance cover with another DKK 1,000m providing a reinsurance ceiling on storms of just under DKK 1,800m. The Group s risk factors are illustrated in the table on the following page. This table is not a representation of all of the Group s risks, but merely an illustration of the impact of various assumptions on the most significant risk factors. The given assumptions do not reflect Topdanmark s expected risks, but are shown only as examples. Life assurance group The life assurance group is protected against risks by its bonus reserve. Negative fluctuations in the Group s assets as a result of increases in interest rates, changes in foreign exchange rates and declining prices of the equity and property portfolios will first be provided for by the bonus reserve, i.e. in reality paid for by the customers. Therefore such fluctuations do not affect shareholders funds or the result recorded by the Topdanmark Group. Only if the negative fluctuations exceed the bonus reserve will the Group s shareholders funds and results be affected. The life assurance group s bonus reserves represented 8.5% of policyholders savings at the end of

17 The Group has guaranteed that policyholders will receive a minimum pension benefit of 1.5%, 2.5% or 4.5%, after tax on returns, according to when the policy was written. These pension benefit guarantees are linked with the risk of a downturn in the financial markets, particularly following the Danish government s introduction in 1998 of fixed tax rates on pension savings returns, whereas in the past the duty rate declined when the return declined and it even lapsed in certain cases. The insurance industry is negotiating with the government for a reduced tax rate should the interest rate fall from the level it was at the time the act was amended. The outcome of these negotiations is still unclear. In the light of this, the Group has changed its bonus rules with the effect that any bonus added to policyholders accounts will be included to cover the overall pension benefit guarantee until expiry. Besides this precaution the Group uses, as required by the Danish Financial Supervisory Authority, a lower rate for fixing the reserves for that proportion of the portfolio which has a minimum pension benefit calculated on an actuarial basis of 4.5%. Accordingly, a post-tax return of 4.0% will be sufficient to cover all the guarantees issued. Kapital Holding Topdanmark s 5% stake in Kapital Holding represents an investment of DKK 1,187m. Kapital Holding is an associated company and the value of the investment has been recorded at net asset value. At the end of 1999 the market value of this investment was DKK 203m lower than its net asset value. The investment in Kapital Holding is the Group s largest individual asset. Topdanmark Group Besides the specific risks described above, the individual risk factors are illustrated in the table below. After having raised its reinsurance cover to just under DKK 1,800m Topdanmark believes that the Group is operating with a relatively conservative risk profile. In the case of negative developments in all of the risk factors on the given assumptions, as illustrated by the figures in the table, the total loss would be DKK 183m equivalent to 5.1% of shareholders funds at the beginning of a: One percentage point increase in effective interest rate b: 5% decline in market price c: Annual loss on foreign exchange, with a 2.5% probability or less d: 10% loss on equity portfolios e: 5% loss on loans f: 10% decline in market value of properties g: 10% loss on phase-out activities h: 1% increase in expenditure i: 1% increase in claims j: Storms generating claims of up to DKK 1,770m (If the storm claims exceed DKK 750m, a reinstatement premium would be paid of up to DKK 26.3m, depending on the size of the claims incurred. Claims exceeding DKK 1,770m are on the Group s own account). Danica Forsikring/Danske Forsikring has a separate storm programme covering up to DKK 300m. Risk factors in the event of realisation of different risk scenarios as at 17 February (after taxation and tax on pension returns) Risk scenario Life assurance Remaining Topdanmark Change in parent company s Change in net group (DKKm) Group (DKKm) shareholders funds (%) asset value (DKK) Interest-bearing investment assets a (243.0) (38.0) (1.1) (1.1) Index-linked bonds b ( Foreign exchange c (13.0) (2.1) (0.1) (0.1) Equities d (394.7) (60.9) (1.7) (1.7) Loans e (8.6) (3.4) (0.1) (0.1) Properties f (224.7) Phase-out activities g 0 (18.6) (0.5) (0.5) Expenses h (1.9) (8.3) (0.2) (0.2) Claims on own account i 0 (25.9) (0.7) (0.7) Storm catastrophes j 0 (25.8) (0.7) (0.7) 17

18 Investment policy and funding Lars Lindsby, senior manager, Topdanmark s treasury department, in front of the old stock exchange building in Copenhagen Topdanmark is putting a new treasury system into operation in 2000, which will improve the efficiency of treasury administration and via that department s data warehouse, make risk management even more efficient than it is today. Based on a prudent investment strategy Topdanmark achieved a 6.5% return on investments Topdanmark s risk profile Topdanmark s risk profile reflects relatively greater insurance risk than financial risk. Insurance risks are an inevitable consequence of the core business, and Topdanmark believes that they could be attractive to those investors who want to diversify the risk profile of their equity portfolios. Financial risks arise from investment activities in the non-life and particularly life insurance businesses. It is not necessarily attractive to investors if Topdanmark undertakes financial risks as generally; they can assume such risks themselves through other channels. However, Topdanmark is aware that a large proportion of the Company s shareholders are subject to restrictions for example they may be unable to raise loans or use financial instruments which prevent them from increasing their financial risk from that inherent in their Topdanmark investment. For the benefit of these shareholders, Topdanmark has chosen to retain a certain level of financial risk. Management of financial risks Continuous monitoring of the overall position is achieved through a daily assessment of financial results as well as all relevant risks and their influence on the total exposure. Assets, liabilities and exposures in off-balance instruments are all included in order to assess the total interest rate exposure. This total interest rate exposure reflects the loss incurred in the event of a one percentage point increase in interest rates. When assessing the overall foreign exchange exposure Topdanmark uses a method which takes into account not only the volatility of each currency but also the correlation between the currencies. On the basis of historical movements in the market, an estimate is made of the probability distribution of a profit or a loss as a result of changes in the value of each currency. As a result, the foreign exchange exposure is defined 18

19 as the loss incurred which, with a 97.5% probability, will not be exceeded. This method is a generally acknowledged measure of financial risk under the name of Value at Risk. Exposures in equities, index-linked bonds and properties are accepted in accordance with Board decisions on their quantum. Credit exposure is managed according to the investment rules of the Danish Insurance Act supplemented by limits for each counterparty. The structure of the portfolio as well as the level of financial risk differs between the life assurance group and the remaining group because of the differences between the two units in respect of investment horizon, regulation, tax conditions and owner interest. Topdanmark Group excluding Topdanmark Livsforsikring Profit on investment activities in the Topdanmark Group excluding Topdanmark Livsforsikring before the transfer to technical result was DKK 461m in 1999 as compared with DKK 636m in However, DKK 262m of the profit in 1998 arose from the establishment of Kapital Holding when Topdanmark s shares in BG Bank were replaced by shares in Kapital Holding carrying a higher value. Therefore, taking this into account, profit on investment activities increased DKK 87m from 1998 to The return on portfolio assets after management costs increased from DKK 233m in 1998 to DKK 360m in This should be seen in the light of the highly favourable equity market in 1999, while on the other hand the return on bonds was quite low due to increases in interest rates. Also the return on equities relating to Topdanmark s principal activities, for example Sydbank, was relatively low. The return on assets after management costs was 6.5%. The market value of interest bearing investment assets owned by the Group excluding life assurance was DKK 5,825m at 31 December 1999, equivalent to 65% of total investment assets. The limit of the interest rate exposure has been fixed at DKK 70m after taxation and that of foreign exchange exposure at DKK 3.8m per day after taxation. At 31 December 1999 the actual interest rate exposure was DKK 25m and the foreign exchange exposure DKK 0.6m per day, both after taxation. At the end of 1999 total equity investments of DKK 3,088m comprised primarily the investments in Kapital Holding (DKK 1,187m) and Topdanmark Livsforsikring (DKK 1,029m). Other equity investments totalling DKK 872m related mostly to the core business. At 31 December 1999 the value of the actual equity portfolio was about DKK 402m, primarily vested in Danish listed companies. After including the effect of financial instruments, the exposure in equities was DKK 487m. Life assurance group At 31 December 1999 the market value of the life assurance group s investment assets was DKK 16,326m most of which were in Danish nominal bonds (DKK 7,495m), while the investment in foreign bonds was DKK 1,365m. DKK 255m was invested in mortgage deeds. Topdanmark Livsforsikring s interest rate exposure after real interest rate duty was DKK 161m and the foreign exchange exposure after real interest rate duty was DKK 0.5m per day. Investment in index-linked bonds was DKK 1,303m, the majority expiring in 2026 or before. The equity investment was DKK 3,395m, comprising DKK 2,211m in Danish listed shares, DKK 1,140m in foreign listed shares and DKK 44m in unlisted shares. The exposure in foreign Erik Olsen, deputy general manager, Topdanmark s IT development department, in front of the Danish central bank Another major task is soon awaiting Topdanmark s IT department. If within a few years Topdanmark joins the euro, our estimates show that we will have a project that may be even greater than the solution of the year 2000 problems. 19

20 Keld Henriksen, equity manager, Topdanmark s treasury department, on his way out on the Internet Via the Internet I currently receive many up-to-date reports, analyses and stock exchange announcements ensuring a faster and a much higher level of information. At the same time the Internet provides an excellent database for historical information. equities include certain financial instruments, which, when the value of the inherent risk is included, totalled DKK 1,642m as at 31 December The life assurance group s property investments have been vested in the companies Topdanmark Ejendom and Ejendomsselskabet BGP, whose assets are properties comprising a total book value of DKK 2,247m against DKK 1,988m in Topdanmark Ejendom realised a profit of DKK 192m in 1999 against DKK 199m in Profit in Ejendomsselskabet BGP was DKK 35m in 1999 as compared with DKK 19m in The forecast rate of return for 2000 is 7.1% for both Topdanmark Ejendom and Ejendomsselskabet BGP. Most of the property portfolio is invested in office buildings primarily in the Greater Copenhagen area. Residential investments represent less than 20% of the portfolio and just under a third of the properties are occupied by the Group. More than 99% of the property group s properties are let. The return generated by the life assurance group after real interest rate duty, calculated at market value, was 7.8% in 1999 (1998: 5.9%). Taxation In the course of 1998 and 1999 the Danish Parliament passed a number of new acts which fundamentally changed the tax situation for the insurance industry affecting both corporate tax and taxation of pension savings. Corporate taxation Under existing legislation for life assurance companies, amounts transferred to provisions for the benefit of customers were deductible for tax purposes. However, some of the underlying income being transferred included tax-free returns on equities and properties. As a consequence of this lack of symmetry, life assurance companies generated tax losses, which via joint taxation arrangements, could be utilised by other companies in the group. According to the new act an insurance company s taxfree income (being the return on equities and properties) should be deducted from the insurance companies allowances for provisions and payments to policyholders and allowances for real interest rate duty, all calculated according to the mark to market principle. If tax-free income exceeds deductible expenses in a given year, the excess income will be carried forward to the following year. If the tax-free net income is in fact a loss, the loss is also carried forward to the following year. Briefly, the passing of the act means that the growth in the shareholders funds of life assurance companies calculated at market value is fully taxed, but not necessarily in the year in which the income was earned. Investment assets at market value DKKm Group excl. life assurance Life assurance Interest bearing investment assets 5,825 9,381 Equities 823 3,395 Index-linked bonds 0 1,303 Land and buildings 0 2,247 Non-consolidated subsidiaries 17 0 Associated companies 1, ,884 16,326 Shares in Topdanmark Livsforsikring 1,029 - Total investment assets 8,913 16,326 20

21 Investment income Group excl. life assurance Life assurance DKKm Income from affiliated companies (12) Income from associated companies Income from affiliated and associated companies Income from land and buildings Interest and dividend etc. net Realised gains and losses, net (42) (42) (70) Unrealised gains and losses, net Administrative expenses (9) (9) (10) (14) (18) (10) Exchange rate adjustments (3) (25) (35) (76) 35 (99) Real interest rate duty (31) (30) (16) Income from portfolio assets , ,017 Total investment income , ,017 Taxation of pension savings The basis of real interest rate duty has been expanded as both realised and unrealised returns on equities and shares have been subject to a special 5% tax with effect from 2 June In addition, a quota scheme, which provided the opportunity to receive tax-free returns on investments in certain types of properties, was abolished from the same date. From 2000, real interest rate duty, which in principle taxed real return over a specific amount, will be replaced by a nominal taxation on returns on pensions based on a fixed rate of 26%. The taxable return should be calculated according to the mark to market principle. The tax exemption for return on savings from before 1983 will be maintained, including the specific calculation rules on exemption in proportion to the capital value of high rate annuities written before Returns on equities will be exempt from the 26% tax, but will continue to be subject to the 5% tax. Index-linked bonds issued prior to 1 January 1999 will be exempt from tax on returns on pensions. The gain on the shift to market valuation of bonds and properties will be calculated at the end of year The consequent taxation will be distributed over the next five years. Funding It is part of Topdanmark s funding strategy to achieve a capital structure which reflects the liquidity of its investments. Topdanmark therefore endeavours to finance investments in affiliates and associated companies by shareholders funds, while portfolio assets principally are financed by raising loans of sufficient maturity to secure a comfortable future liquidity base. At the end of 1998 Topdanmark s shareholders funds were DKK 4,127m and investments in affiliates and associated companies totalled DKK 2,557m. Topdanmark does not want to operate with capital in excess of that required to meet solvency margins whilst still allowing for growth in the business. Therefore when announcing the results for 1998 the Board of Directors proposed to reduce the significant difference between financing by shareholders funds and capital tied up in fixed assets by way of share buy-back. Following the hurricane in December 1999 Topdanmark Forsikring s 1999 result turned out to be a considerable loss. In light of this it was decided to strengthen Topdanmark Forsikring s shareholders funds by a DKK 800m capital injection in order to compensate it for the losses caused by the hurricane. Due to the increased investment in Topdanmark Forsikring it is not appropriate to buy back own shares for the amounts previously announced, see Share buyback page 39. However, Topdanmark will continue with the considerable share buy-backs every year and in spite of the losses arising from the hurricane it intends to have bought back own shares for DKK m by the end of Topdanmark Forsikring will not declare a dividend for Therefore, at least temporarily, the share buy-backs will be financed by borrowings. To additionally secure its liquidity base Topdanmark has acquired an irrevocable right to raise a sevenyear loan of DKK 500m on normal terms. At present Topdanmark has not raised any long-term debt. 21

22 Non-life insurance activities Egon Jensen, chief claims assessor, Topdanmark s claim district of Southern Jutland, in front of one of the farm buildings ruined by the hurricane Our claims assessors work from their home offices. Linked to Topdanmark s claims systems they collect information about major claims to be inspected. They also put the finalised claims statements directly into the main system. During the months following the hurricane the lines to Topdanmark s claims assessors were humming and within in a few hours they received claims notifications corresponding to six months work. Although the declining trend in the expense ratio was continued, the combined ratio increased to 121.5%. Excluding hurricane claims the combined ratio was 95.8% In 1999 the non-life insurance activities comprised Topdanmark Forsikring including Topdanmark Arbejdsskadeforsikring (workers compensation insurance), which was merged into Topdanmark Forsikring at the beginning of 1999, and the health and accident insurance business which has been placed in the life assurance group for legislative reasons. Topdanmark Forsikring recorded a loss of DKK 555m in 1999 (1998: DKK 759m profit). The 1999 result was adversely affected by estimated claim payments of DKK 1,850m following the hurricane in December After the use of the reinsurance cover of DKK 800m (including a DKK 20m retention) and equalisation provisions of DKK 30m the hurricane caused Topdanmark to incur an exceptional expense of DKK 1,040m in If the effect of the hurricane was excluded, the result recorded by Topdanmark Forsikring in 1999 would have been a DKK 485m profit. After the hurricane Topdanmark Forsikring supplemented its reinsurance cover by DKK 1,000m thereby raising the reinsurance ceiling relating to storms to just under DKK 1,800m. Topdanmark believes that this has significantly reduced the risk of similar fluctuations in its results in the future. It is Topdanmark s opinion that the level of premiums should reflect the future insurance risk. Following the December hurricane a new Danish level was set for the size of any future claim payments relating to hurricanes. Therefore the additional expense of the increase in reinsurance cover must be compensated for by premium increases on those policies which bear the increased risk. In the course of 2000 having assessed the competition Topdanmark will consider the need for premium rate rises, particularly in agricultural insurance, to compensate for the increase in reinsurance expenditure. It is therefore expected 22

23 that Topdanmark s future operational development will not be significantly affected by such increased reinsurance costs. Apportionment of premium income, non-life insurance Gross premium income in non-life insurance increased 4.9% from DKK 3,984m in 1998 to DKK 4,178m in 1999, estimated to be slightly higher than the market increase generating a greater market share in 1999 than the 13.8% in In 1999 the improvement in premiums was affected by intensified competition primarily from bank-owned non-life insurance companies. By way of Topdanmark s working agreements with BG Bank and Den Danske Bank its non-life insurance policies are distributed through 30% of the sales channels in the banking sector giving Topdanmark the ability to withstand the competition in the Danish market place. However, it is expected that 2000 will see an impact on premium income following the acquisition of Danica Forsikring/Danske Forsikring as experience has shown a certain level of customer lapse in a period following the acquisition of non-life insurance portfolios. It has been assumed that in 2000 the Danica Forsikring/Danske Forsikring portfolio will suffer a lapse slightly in excess of the level of new business written. Consequently, the growth in premiums for this part of the Topdanmark Group s non-life insurance portfolio is expected Personal 40% Agricultural 24% Commercial 17% Industrial & Marine 15% Partners 4% to be lower than the automatic indexation, which is expected to be 4.5% in 2000 in the personal customer market. The impact of this on the entire Topdanmark Group s non-life insurance portfolio is expected to be an increase in premium income in 2000, but at a rate slightly less than in Per Beyer, certified agricultural insurance sales representative, Topdanmark s agricultural department in Aabenraa, visiting a customer at a farm in Southern Jutland When issuing policies for farmers on our PC sales system Topland, we include an electronic sketch of the farm s various buildings with comments on the cover provided, for example storm cover. This was very useful after the hurricane when many buildings were razed to the ground. 23

24 Financial highlights Topdanmark Forsikring DKKm Key figures Technical result (excl. hurricane) Impact of hurricane claims (1,040) 0 0 Technical result (719) Investment income (excl. Topdanmark Livsforsikring and Kapital Holding) Topdanmark Livsforsikring Kapital Holding/BG Bank André A. Andersen, risk manager of Skanska-Jensen A/S, customer of Topdanmark s industrial & marine department We are taking part in a pilot project using an extra net between Topdanmark s industrial & marine department and us. Topdanmark is responsible for its development to ensure a more flexible and resource saving system for Skanska-Jensen s management of its many policies. Together with Topdanmark we can add further information to the system for our mutual benefit. Pre-tax profit / (loss) on ordinary activities (484) Extraordinary items (69) 6 (13) Taxation (2) (24) (4) Profit / (loss) for the year (555) Shareholders funds 2,712 2,467 2,408 Technical provisions on own account 4,874 3,740 3,482 Total assets 8,165 8,287 6,574 Ratios (%) Loss ratio Reinsurance ceded (22.3) Expense ratio Combined ratio Return on shareholders funds (25.3) The loss ratio of the Topdanmark Group rose from 70.4% in 1998 to 119.7% in If the effect of the hurricane was excluded, the loss ratio would have been 75.3% in This deterioration reflects an exceptionally good claims trend in 1998 due to, for example, low claims frequency in motor insurance during the trade union strike and an exceptionally mild winter, as well as one major fire claim in 1999 that had an impact on the loss ratio of 2.5 percentage points. The reinsurance profit in 1999 represented 21.6% of gross premium income compared with expenditure of 1.1% in 1998, and after excluding the effect of the hurricane it represented a 2.9% profit. The sum of the loss ratio and reinsurance ratio reflects the overall claims trend. In 1999 Topdanmark s overall claim payments 24

25 represented 98.1% of total gross premium income (72.4% after excluding the hurricane claims) against 71.5% in The expense ratio was reduced from 23.6% in 1998 to 23.4% in It is expected that the acquisition of Danica Forsikring/Danske Forsikring will contribute to a further reduction for the Topdanmark Group in the future. Following a period of integration in 2000 the expense ratio of the Danica Forsikring/Danske Forsikring portfolio is expected to be around 18%. The expense ratio for the entire Topdanmark Group s non-life insurance portfolio is expected to be reduced to %. Group ratios, non life insurance (incl. hurricane) (excl. hurricane) Loss ratio (%) Reinsurance ceded (%) (21.6) (2.9) Expense ratio (%) Combined ratio (%) Total expenses on claims, reinsurance, sales and administration as a percentage of gross premium income (combined ratio) increased from 95.1% in 1998 to 121.5% (95.8% after excluding the hurricane claims) in In the light of the expected overall level of claim payments as a percentage of gross premium income and the expected expense ratio, the combined ratio is expected to be around 96% in Ole Rasmussen, sales manager, Topdanmark s personal insurance department, in front of Topdanmark s newest insurance sales centre in Frederikssund Efficient telephone services are no longer a question of lifting the receiver. Our new telephone system automatically transfers calls to the nearest available employee, first in the insurance sales centre, then the nearest sales centre and finally, if all the other telephones are busy, the telephone sales department at the main office. This ensures that practically all customers calling Topdanmark receive an immediate response. 25

26 Review of business sectors Profile Distribution Gross premium income Personal Serving private households and small businesses Second largest supplier in personal customer market with share of about 11% Offering total customer products to people under 28 people 28 to 49 people over 50 people over 60 Most customers are total customers Product range supplemented with travel insurance in sales centres 77 certified insurance sales representatives Telephone sales Car dealers DKKm 2,000 1,500 1, Partners Responsible for development and establishment of new sales channels in personal customer market Distribution agreements established with BG Bank and Den Danske Bank/Danica Relationship with BG Bank organised in independent entity BG Skade At 1 January 2000 Partners took over the non-life insurance portfolios in Danica Forsikring/Danske Forsikring Relationship with Den Danske Bank/Danica organised in separate entity Danske Forsikring Responsible for developing Topdanmark's Internet and intranet activities About 9% share of personal market BG Bank's 253 branches Danica's certified insurance sales representatives Den Danske Bank's 415 branches Internet DKKm Commercial Serving primarily businesses with 5 to 50 employees Market share about 15%; third largest in Danish market Offering total customer products to small businesses Offering more individual insurance policies to medium-sized businesses Certified commercial insurance sales representatives using PC-based sales administration systems ensuring for example a systematic check of customer's insurance needs 2 customer service centres 62 certified insurance sales representatives Sales and referrals through BG Bank Sales and referrals through Den Danske Bank/Danica DKKm

27 1999 key features 2000 and beyond 2.6% increase in gross premium income in a market affected by severe competition from banks, among others Introduction of total customer product - TopPlus - for people aged 50 to 60 Satisfactory level of loss ratio after excluding hurricane claims Increasing trend in expense ratio due to declining growth rate of premium income Apart from hurricane, overall satisfactory trend in technical result More new sales centres expected to be opened Appointment of a number of junior consultants to serve customers under 28 Further development of PC-based sales tools Continued strong competition expected Increase in premium income expected to continue slightly lower than market Claims trend expected to continue to be satisfactory Gross premium income originated primarily from sales through BG Bank 18.5% increase in gross premium income representing 12.4% of Topdanmark's overall increase in premiums Modest sales through the Internet Due to hurricane claims higher, but still satisfactory, loss ratio Expense ratio higher than Topdanmark's due to more new business written in proportion to size of portfolio Overall satisfactory technical result Sales through BG Bank expected to generate increase in premium income higher than market Integration of Danica Forsikring/Danske Forsikring in Planned conversion to Topdanmark's IT systems Lapse expected to slightly exceed new business written by Danica Forsikring/Danske Forsikring Modest sales via the Internet expected again in 2000 Overall growth in premiums expected to be lower than market Satisfactory trend in expense ratio expected after integration of Danica Forsikring/Danske Forsikring Satisfactory claims trend expected In a competitive market unchanged gross premiums as compared with 1998 due to transfer of some of the portfolio to Personal Continued enhancement of certified insurance sales representatives' PC-based sales and administration system Loss ratio affected by hurricane claims After excluding hurricane claims favourable overall claims trend Expense ratio increased due to unchanged premium income After excluding hurricane claims continued satisfactory level for technical result Take-over of Danica Forsikring/Danske Forsikring expected to neutralise competitive situation Measures to improve product range and provision of services Integration of Danica Forsikring's and Topdanmark's commercial departments Start-up of sales and referrals through Den Danske Bank/Danica Continued focus on sales via referrals from BG Bank Expected premium growth lower than or in line with market Satisfactory claims trend expected 27

28 Profile Distribution Gross premium income Agricultural Serving all types of farms, private households and small businesses in agricultural communities Leader in agricultural market with about 50% share Certified agricultural insurance sales representatives serving customers from PC-based sales and administration system Total customer products offered to small farms medium-sized farms large farms Total customer agreements representing about 95% of premium income 5 customer service centres 150 certified insurance sales representatives Referrals from BG Bank Referrals from Den Danske Bank/Danica DKKm 1, Industrial & Marine Serving industrial enterprises and businesses with at least 50 employees. Responsible for marine, air and offshore insurance 30 of 100 largest Danish industrial enterprises and businesses as customers Customer-oriented activities founded upon advisory services on loss prevention and risk management. Loss prevention centre in Ballerup - only one of its type in Denmark - provides these services and is used for demonstrations and training Customers offered individual insurance policies 2 industrial centres 1 marine department 1 insurance broker department 16 industrial consultants Referrals from BG Bank Referrals from Den Danske Bank/Danica DKKm

29 1999 key features 2000 and beyond Gross premium income increased 7.2% Deeply unsatisfactory trend in loss ratio due to claim payments of about DKK 1,400m relating to hurricane After excluding hurricane claims satisfactory trend in loss ratio Satisfactory trend in expense ratio Unsatisfactory trend in overall technical result After excluding hurricane claims satisfactory level for technical result Increased competition demanding continued high level of activity Continued development of sales and business processes to create added value for customers Increased focus on product development Enhancement of sales links with BG Bank, Realkredit Danmark and Den Danske Bank Hurricane in 1999 set a new level for agricultural insurance risks. Premium increases therefore being considered Expected growth in premiums in line with market More normal claims trend expected 6.1% increase in gross premium income Market affected by severe competition with pressure on premiums Loss ratio affected by hurricane claims and one major fire claim Satisfactory claims trend after excluding hurricane claims Expense trend slightly higher than Topdanmark's Unsatisfactory level for technical result More satisfactory level for technical result after excluding hurricane claims Slightly increasing level of premiums expected in the market Continuation of strategy of enhancing competitiveness through loss prevention and risk management Continuation of development of customer-oriented IT tools Start-up of referrals from Den Danske Bank/Danica and expected increase in referrals from BG Bank Expected growth in premiums slightly higher than or in line with market due to strong competitive position Expected improvement in claims trend 29

30 Life assurance activities Erik Eriksen, senior manager and system supervisor in Topdanmark Livsforsikring, in front of the life assurance company The entire administration in BG pension is IT based. All documents in claims handling are scanned and stored electronically. Employees can immediately obtain an overall view of documents, notes and relevant claims trend on the screen. In spite of the Danish population being very reluctant to establish private pension schemes, regular premiums increased 8.1% The business activities of the Topdanmark Livsforsikring Group are carried out by the parent company Topdanmark Livsforsikring and its subsidiary BG Pension. Topdanmark Livsforsikring Group Topdanmark Livsforsikring and BG Pension are two separate entities each marketed under their own name, identity and logo. However, the two companies are being operated as a group with joint management, administration and location. During the summer of 2000 the Topdanmark Livsforsikring Group will move into the new extension to Topdanmark s headquarters. Topdanmark Livsforsikring sells life assurance policies and pension schemes through Topdanmark Forsikring s sales force and to increasing extent corporate pension schemes are also distributed through insurance brokers and BG Bank s commercial centres. Gross premiums in the Topdanmark Livsforsikring Group increased marginally to DKK 1,979m in 1999 (1998: DKK 1,978m). Premium income was adversely affected by the unsettled situation following the Danish Parliament s passing of the Whitsun-package in the summer of 1998 which tightened the tax on the return on pensions, see page 21. Furthermore the agreement concerning the Finance Act in 1998 changed the conditions of the early retirement benefit. Due to these two factors the Danish population was very reluctant to instigate private pension schemes, contributing to a 13.6% decline in the Topdanmark Livsforsikring Group s single premiums. However, regular premiums increased 8.1%. In spite of this moderate growth as compared with previous years, the growth in premiums in the Topdanmark Livsforsikring Group in 1999 is expected to have been higher than the market. DKK 79m profit In 1999 Topdanmark Livsforsikring achieved a profit of DKK 79m after charges to the bonus 30

31 equalisation provisions of DKK 709m (1998: DKK 87m profit after usage of equalisation provisions of DKK 474m). As agreed with the Danish Financial Supervisory Authority the return on shareholders funds in Topdanmark Livsforsikring must not exceed the customers bonus rate after real interest rate duty / tax on pension returns plus three percentage points, plus the result from health and accident insurance. Therefore, the decline in the result was partly due to Topdanmark Livsforsikring having reduced its bonus rate after real interest rate duty from 7.6% in 1998 to 4.5% in On the other hand the result from health and accident insurance increased from DKK 8m in 1998 to DKK 13m in 1999 partly due to the introduction of new products like critical illness cover and health insurance. BG Pension recorded a profit of DKK 16m in 1999 (1998: DKK 18m). As BG Pension is a subsidiary of Topdanmark Livsforsikring, its result is included in Topdanmark Livsforsikring s investment income. Bonus reserves Due to the change from the floating real interest rate duty into the increased fixed tax on pension returns, see page 21, the Danish government has acknowledged that the policies providing guaranteed pension benefits may cause problems in a period of declining interest rates. Therefore in December 1999 the government gave an account of guaranteed interest rate to the Danish Parliament suggesting a solution providing that on behalf of customers, life assurance companies would buy options to hedge against the risk of declining interest rates. However, until these initiatives have been finally determined, the bonus rates and interest rates calculated on an actuarial basis need to be prudently determined. Topdanmark Livsforsikring and BG Pension have therefore fixed the bonus rate for 2000 at 4.5% after tax on pension returns. Furthermore the life assurance group has changed its rules on bonuses to the effect that any bonus added to policyholders accounts could be utilised to cover the overall guarantee of pension benefits until the expiry of the policy. Following a satisfactory risk result and a 7.8% return on investments after real interest rate duty in 1999 the bonus equalisation provisions were increased by DKK 943m so that at the end of the year they totalled DKK 1,121m. Financial highlights Topdanmark Livsforsikring DKKm Key figures Premiums 1, Allocated investment income on own account Claims paid (454) (430) (348) Change in the life assurance provisions (542) (1,349) (811) Change in the bonus equalisation provision (709) 474 (326) Expenses (119) (107) (144) Reinsurance ceded 2 (22) 9 Technical profit /(loss) on life assurance (8) (28) (9) Technical profit / (loss) on health and accident insurance Other investment income Pre-tax profit on ordinary activities Taxation Profit Shareholders funds 1, Technical provisions on own account 9,562 8,355 7,585 Total assets 14,607 9,676 8,848 Ratios (%) Return on shareholders funds

32 Ratios Topdanmark Livsforsikring Ratios Yield ratios Yield before real interest rate duty 7.7% 5.8% 10.3% 10.8% 10.7% Yield after real interest rate duty 7.7% 5.8% 10.4% 10.3% 9.4% Yield after adjusted real interest rate duty 7.7% 5.8% 10.4% 10.3% 9.3% Expense ratios Expense ratio 11.9% 13.2% 13.9% 13.7% 10.3% Expenses calculated as interest margin 1.5% 1.6% 1.9% 1.8% 2.0% Expenses per policyholder (DKK) 1,246 1,255 1,301 1,167 1,209 Expense result (0.24)% (0.01)% (0.90)% (0.21)% (0.47)% Risk ratios Risk result 0.49% 1.17% 0.26% 0.48% 0.35% Consolidation ratios Bonus reserve 9.8% 3.3% 10.9% 7.4% 3.2% Shareholders funds reserve 4.3% 4.2% 6.5% 1.9% 1.9% Solvency ratio 156% 156% 187% 133% 134% Health and accident insurance Loss ratio on own account 86.8% 89.3% 57.4% 81.7% - Expense ratio on own account 15.2% 10.4% 9.3% 24.9% - The bonus reserve is calculated as the sum of the bonus equalisation provisions and the difference between the book value and market value of bonds, properties etc. Bonus reserves totalled DKK 1,127m at the end of In order to assess the company s financial health, the bonus reserve is added to the shareholders funds reserve, which together represent the total capital base less an amount required for solvency. The ratios of the combined bonus reserve and shareholders funds reserve to customers savings show both the future bonus ability and the financial strength needed to resist future fluctuations on the capital markets. In 1999 the bonus reserve ratio was 9.8% and the shareholders funds reserve ratio 4.3%. The company expects that these percentages will continue to increase in the future. Guaranteed pension benefit In Topdanmark Livsforsikring part of the portfolio has been guaranteed pension benefits calculated using an actuarial basis of 4.5% after real interest rate duty. Due to a combination of Jan Røssel, senior manager in Topdanmark s corporate pensions department in Albertslund Information and knowledge is being exchanged via the Internet on the Business to Business market. Via the Internet insurance brokers can communicate and receive regularly updated information ranging from daily relevant news items to administration matters. 32

33 falling interest rates and the change from the floating real interest rate duty into the increased fixed tax on pension returns as from 1 January 2000, the post-tax return on the company s assets could be lower than 4.5%, should interest rates decline further. Life assurance provisions DKKm 10,000 8,000 In this respect the Danish Financial Supervisory Authority has required the industry to strengthen its life assurance provisions in respect of business sold with guaranteed pension benefits calculated using an actuarial basis of 4.5% or greater. On the basis of a satisfactory risk and administration result, Topdanmark has found it sufficient to use an actuarial basis of 4.2%, thereby increasing the life assurance provisions by DKK 135m. 6,000 4,000 2, Given the increasing level of interest rates in 1999 and at the beginning of 2000 as well as the already strengthened bonus reserves Topdanmark believes that the guaranteed pension benefits are adequately covered. Structural alignments in the life assurance group As a result of the change in the act on real interest rate duty from 1998 to 1999 and the subsequent change to the act on the tax on return on pensions as from 1 January 2000, the conditions under which Topdanmark Livsforsikring operates have changed so radically that the existing group structure is no longer appropriate. Topdanmark Life BG Pension Topdanmark has therefore chosen to transfer the insurance portfolios of BG Pension and Topdanmark Livsforsikring II to newly established life assurance companies. A small proportion of Topdanmark Livsforsikring s portfolio will be transferred to a newly established life assurance company. The transfers will take effect from 1 January 2000 subject to the permission of the Danish Financial Supervisory Authority. When this permission is granted the new life assurance companies will continue their existing operations under the names of BG Pension, Topdanmark Livsforsikring II and other companies. Financial highlights BG Pension Livsforsikringsaktieselskab DKKm Key figures Premiums 905 1, Allocated investment income on own account Claims paid (378) (314) (225) Change in the life assurance provisions (620) (849) (669) Change in the bonus equalisation provision (235) 80 (76) Expenses (46) (44) (37) Technical profit /(loss) on life assurance (45) 11 5 Technical profit / (loss) on health and accident insurance Other ordinary items Other investment income Pre-tax profit on ordinary activities (18) Taxation 34 (7) 0 Profit Shareholders funds Technical provisions on own account 4,227 3,329 2,514 Total assets 4,622 3,843 2,895 Ratios (%) Return on shareholders funds

34 Review of business sectors Profile Distribution Gross premium income Topdanmark Livsforsikring Corporate pensions Offering pension schemes to groups of employees in corporations Primary target group is small and medium-sized businesses Seventh largest company in the Danish corporate pensions market Among Denmark's largest suppliers of group critical illness policies 62 certified commercial insurance sales representatives 16 industrial consultants Pension advisers in Topdanmark and BG Bank Insurance brokers 5 commercial and savings banks Trade organisations DKKm Topdanmark Livsforsikring. Individually written schemes Offering life assurance and pension fund schemes to personal and agricultural customers With BG Pension Denmark's fourth largest player in individually written life assurance schemes Using PC-based needs analyses to advise customers Among Denmark's largest suppliers of critical illness policies for individuals 38 sales centres 77 personal certified insurance sales representatives 150 agricultural certified insurance sales representatives Telephone sales DKKm BG Pension Offering life assurance and pension fund schemes to BG Bank's personal customers Distribution through BG Bank BG Pension is a subsidiary of Topdanmark Livsforsikring BG Pension and Topdanmark Livsforsikring operated as group with joint management, administration and location BG Bank's 253 branches 44 pension advisers BG Bank's other distribution channels DKKm 1,200 1,

35 1999 key features 2000 and beyond Gross premiums increased by 32.4% Increase resulted from 17.3% increase in regular premiums and 153.7% increase in single premiums Market affected by intensive bonus rate competition 378 new corporate pension schemes written Growth in regular premiums greater than market Group products developed to cover critical illness and health insurance Start-up of own sales force to serve commercial customers in BG Bank Measures to improve sale of pension schemes to corporations with non-life insurance policies in Topdanmark Intensifying marketing towards BG Bank's commercial customers Enhancing distribution efficiency by, for example, agreements on group schemes for trade organisations Offering split of corporate pension schemes into separate insurance and savings schemes Offering group schemes within, for example, health insurance which helps to deal with companies' social responsibility Improved cost efficiency following creation of joint IT system with BG Pension Bonus rate after tax on pension returns fixed at 4.5% for 2000 Expected growth in premiums in line with or higher than market Gross premiums declined 5.1% resulting from 5.2% fall in regular premiums and 2.3% drop in single premiums Sales adversely affected by "Whitsun-package", agreement on Fiscal Act Growth in regular premiums in line with market Increased focus via dialogue marketing on crosssales to Topdanmark Forsikring's customers Simplification of sales process by building up new schemes adapted to match personal and agricultural markets Increased focus on sales to the agricultural market Further development of the PC-based advice system Improved cost efficiency following creation of joint IT system with BG Pension Bonus rate after tax on pension returns fixed at 4.5% for 2000 Expected growth in premiums in line with or higher than market Gross premiums declined 12.9% Overall decline reflected 11.8% increase in regular premiums and 28.2% decline in single premiums Growth in regular premiums higher than market 1999 profit DKK 16m (1998: DKK 18m) Competitive level of expenditure maintained New distribution strategy in BG Bank to improve distribution efficiency Further development of the bank's advice system "Financial view" Increase in range of products by, for example, "Critical illness" Establishment of a joint IT system with Topdanmark Livsforsikring to improve cost efficiency Bonus rate after tax on pension returns at 4.5% for 2000 Expected growth in premiums in line with or higher than market 35

36 Alliance partners Mikael Heinsen, senior manager in Danica Skade, in front of his old workplace at Danica s head office in Lyngby Topdanmark already has plenty of experience in transferring a large portfolio to the Group s IT systems. It was therefore Topdanmark s non-life insurance system that was chosen to be the continuing system for integrating Danica Forsikring/Danske Forsikring s non-life insurance portfolio into Topdanmark s. Thanks to its working agreements with BG Bank s and Den Danske Bank, Topdanmark distributes non-life insurance policies through 30% of the Danish bank branches In order to improve its sales potential and to supplement its own sales channels Topdanmark has made distribution agreements with a number of alliance partners. In the Danish market it has made working agreements with BG Bank via Kapital Holding, Den Danske Bank and a number of regional banks. Internationally, Topdanmark works with the partners of the Eureko Alliance. Kapital Holding Kapital Holding was established in 1998 as the result of the merger between BG Bank and Realkredit Danmark. Kapital Holding is Denmark s third largest financial institution. Commercially, BG Bank and Realkredit Danmark, are operated as independent subsidiaries with separate identity, product lines, distribution etc. whilst Kapital Holding provides a joint administration and service function. To support the business relationship Kapital Holding owns 15% of the share capital in Topdanmark, while Topdanmark owns 5% of the share capital in Kapital Holding. BG Bank is Denmark s third largest bank. The bank has 253 branches, and an established sales link with Post Danmark. Post Danmark has about 1,100 post offices, 28 of which have a bank branch. It is planned to increase the number of bank branches at the post offices to 75. Realkredit Danmark is Denmark s second largest mortgage credit institution with a market share of just over 30%. Realkredit Danmark has established a sales link with the estate agency chain, home, operated on a franchise basis, and with a number of independent estate agents, for example RealMæglerne. In total, Realkredit Danmark s alliance partners have a market share of about 25% in the Danish estate agency market. In the future Topdanmark is keen to establish a direct sales link with Realkredit Danmark. 36

37 Non-life insurance A separate BG Bank product line is being marketed to BG Bank s personal customers, comprising a standardised range of non-life insurance policies covering 80% of the personal customer market s insurance needs. In 1999 premium income generated from sales to the personal customer market through BG Bank was DKK 141m, a 18.1% increase representing 11.6% of the increase in Topdanmark s overall growth in premiums in non-life insurance in The claims trend for the BG Bank portfolio was satisfactory. BG Bank refers commercial, industrial and agricultural customers, who require special insurance advice, to Topdanmark s certified insurance sales representatives. Life assurance The sale of life assurance policies through BG Bank s branch network is based in BG Pension, a subsidiary in the Topdanmark life assurance group. Premium income was DKK 905m in Den Danske Bank With effect from 31 December 1999 Topdanmark took over Den Danske Bank s nonlife insurance activities whose premium income was DKK 1,326m in The take-over did not include those non-life insurance activities directly related to the sale of the bank s life assurance and pension products like critical illness cover, health cover and alcohol abuse insurance. The take-over was effected by way of transfer of the shares in Den Danske Bank s two nonlife insurance companies Danica Forsikring/Danske Forsikring. Den Danske Bank s life assurance and pension fund activities will continue to operate unchanged within the framework of the bank by the company Danica Liv og Pension. Together with the acquisition of the non-life insurance portfolios Topdanmark and Den Danske Bank have established a five-year working agreement on the sale of Topdanmark s non-life insurance products through Den Danske Bank s distribution channels. Den Danske Bank is Denmark s largest bank with a distribution network which includes 415 branches and Danica Liv og Pension s certified insurance sales representatives and pension advisers. The working agreement is being operated purely on a commercial basis with no cross-holding arrangements. The sale of non-life insurance products through Den Danske Bank is being marketed under the name of Danske Forsikring. This brand contributes to emphasise customers affiliation with Den Danske Bank enabling the bank to offer its customers a full range of products with their own identity. Organisationally, Topdanmark s business sector Partners has been vested with the overall responsibility for services and sales through both BG Bank and Den Danske Bank/Danica Liv og Pension. Jesper G. Jensen, chief consultant in Topdanmark s business sector Partners, visiting the BG Bank branch in Taastrup Topdanmark has developed special IT based teaching and sales tools for BG Bank to ensure first-rate training of the bank staff and improve the system of checking the insurance needs of the bank s nonlife insurance customers. 37

38 Distribution through Den Danske Bank is on practically the same principles as that through BG Bank. Standardised products to personal customers and small commercial businesses are sold through Danica s certified insurance sales representatives and Den Danske Bank s branch network while major commercial and industrial businesses are referred to Topdanmark s certified insurance sales representatives. Following the acquisition of the non-life insurance portfolio Topdanmark took over only the 299 policy and claims employees working directly with the administration of the portfolio. These employees will be integrated into Topdanmark s existing organisation during the first half of 2000 in line with the completion of the extension of Topdanmark s head office in Ballerup. The acquisition of the non-life insurance activities excludes a number of personnel and property overheads and it is expected that after an integration period in 2000, the expense ratio of the acquired portfolio will be about 18%. This low expense ratio, combined with economies of scale offered by the acquisition, are expected to result in a reduced expense ratio for the entire Topdanmark Group. The loss ratio after reinsurance of the acquired non-life insurance portfolio was 69.6% in Topdanmark believes that it is a portfolio of high stability and standing will be a year of integration with focus on successful co-ordination of the two organisations. From 2001 the growth in premiums of the acquired portfolio is expected to be in line with the market. The Eureko Alliance is founded upon a jointly owned holding company, Eureko B.V., based in Amsterdam. Each partner of the alliance is responsible for its own domestic market, while Eureko B.V. is responsible for operating a number of foreign subsidiaries and seeking opportunities to attract new partners. The alliance is based on business relationships between the partners, including the exchange of know-how on development projects and international customer leads. The business relationship is supported by cross-holdings established between Eureko B.V. and those of the partners who have a company structure limited by shares. Topdanmark did not participate in the capital increase in Eureko B.V. in 1999 following Eureko s acquisition of 20% of the shares in the Polish insurance company PZU. Consequently, Topdanmark s stake in Eureko B.V. was reduced from 3.5% at the beginning of the year to 2.4% at 31 December The Eureko investment is included in Topdanmark s accounts as a portfolio investment. The book value was DKK 248m against DKK 207m at the end of The return on the Eureko investment includes both Topdanmark s share of the result recorded by Eureko B.V. and the business advantages of co-operating with the other partners of the alliance. In 1999 the profit arising on the Eureko investment was DKK 40m as compared with DKK 11m in Eureko Topdanmark has been a member of the European insurance alliance Eureko since it was established in Besides Topdanmark the founders of the alliance were Achmea (Holland), Friends Provident (UK) and Länsförsäkringar Wasa (Sweden). Subsequently, BCP/Atlântico (Portugal), Parion (Germany) and Swiss Mobiliar (Switzerland) joined the alliance. At the end of 1999 MAAF (France) signed a Letter of Intent to join the alliance. 38

39 Shareholders Topdanmark included in the MSCI index. It is intended to buy back own shares for DKK m by the end of 2001 to effect a share capital reduction It is Topdanmark s goal to ensure that its shareholders achieve a long-term, competitive and stable return that will ensure the share is both attractive and liquid. Shares Topdanmark s share price increased by 12.2% in During the same period the all-share index on the Copenhagen Stock Exchange increased by 21.5% and the insurance index on the Copenhagen Stock Exchange declined by 6.7%. On a European level the European insurance index increased by 4.8%. In m Topdanmark shares of DKK 10 each were traded with a total market value of DKK 3,547m. Daily average trade was just over 100,000 shares in As from 30 November Topdanmark was included in Morgan Stanley s European share index, the so-called MSCI index. However, from 17 December Topdanmark did not meet certain criteria and therefore its shares were excluded from the KFX index on the Copenhagen Stock Exchange. Policy Topdanmark wishes to increase the liquidity of its share. It will try to achieve this by following the goal of ensuring its shareholders receive a competitive return by, for example, buying back own shares and continuing the development of the investor relations programme for Danish and foreign investors and analysts. In addition Topdanmark has changed the denomination of its share with effect from 20 October 1999 from DKK 100 per share to DKK 10. Share buy-back In the ordinary share buy-back programme in 1999 Topdanmark bought back own shares for DKK 250m. The share buy-back, which Jens Jørgensen, head of Topdanmark s share administration, in front of Radisson Scandinavia, the conference centre where Topdanmark is holding its annual general meeting on 16 May 2000 Topdanmark s shareholders can follow the development in Topdanmark s share price on And within a short time it will also be possible for the Group s many employees holding shares in Topdanmark to follow the price on the Company s Intranet. 39

40 effected a subsequent reduction in share capital, comprised 1,902,155 shares of DKK 10 each. Topdanmark also bought back an additional 1,045,190 shares of DKK 10 each in the market. At the extraordinary general meeting on 8 December 1999 it was decided to cancel all these shares. Accordingly, share capital was reduced by a total of 2,947,345 own shares in 1999 at the AGM on 18 May and the extraordinary general meeting on 8 December. Topdanmark does not want to operate with capital in excess of that required to meet solvency margins whilst still allowing for growth in the business. Topdanmark believes that it is in the shareholders interest to alter the Company s capital structure by share buy-backs rather than the payment of a dividend. Originally the Board of Directors had intended - giving due regard to the Company s results trend and financing requirements - to buy back shares for DKK 250m in each of the years 2000 and 2001, i.e. a total share buy-back of DKK 500m by the end of In October this share buy-back policy was revised as the result of a review of the Company s profit forecast and capital structure. At that time the Board of Directors found that a share buy-back of DKK 500m by the end of 2001 would be insufficient to prevent the Company s shareholders funds from being too high. Therefore it was intended - taking into account the Company s results trend and financing requirements - to increase the share buy-back so that Topdanmark would have bought back shares for DKK 850-1,200m by the end of As a result of the increase in claim payments relating to the hurricane in 1999 the planned share buy-back programme was reduced by DKK m. It is now intended - continuing to take account of the Company s results trend and financing requirements - to buy back own shares for only DKK m by the end of In 2000 it is intended to buy back own shares for DKK m to effect a share capital reduction. The share buy-back in 2000 will be in two stages: following the announcement of the 1999 annual results on 14 March 2000 and then following the announcement of the 2000 half-yearly results on 22 August The Board of Directors intends to recommend to the AGM a reduction in the share capital by the number of shares bought back during the period since the last reduction on 8 December Furthermore in the future the Board of Directors intends to regularly ask the shareholders in General Meeting to authorise such reductions by the number of shares bought back. It has been agreed with the two largest shareholders, Eureko B.V. and Kapital Holding, that as part of the share buy-back they will reduce their shareholdings in Topdanmark to retain their relative stakes of 20% and 15% respectively. Share options and employee shares In order to make employees performance correlate better with shareholders demand for value creation Topdanmark has developed a share option scheme for its Board of Directors, Board of Management and executives, and it has issued employee shares. In doing this Topdanmark is following the principle that directors and employees opportunity for increased earnings as well as their risk should be proportionate to their influence in building shareholder value. Accordingly, those who have greater influence will have greater opportunity of increasing their Share key figures Share price at 31 Dec Earnings per share *) (4) P/E *) (35) 5 13 Net asset value *) Price / net asset value Share buy-back per share Number of shares *) 36,047,355 38,614,700 39,621,250 * Net of shares bought back Share groupings at 31 December 1999 Eureko B.V. 20% Danish institutional investors 16% Kapital Holding 15% Foreign portfolio shareholders 12% Danish Labour Market Supplementary Pension (including DMP, SP) 11% Own shares 10% Private shareholders, foundations, etc. 8% Danish Employees Capital Pension Fund 5% Employees 2% Nominee holdings 1% 40

41 Development in share price Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Topdanmark Composite share index Copenhagen Stock Exchange European insurance share index earnings, but correspondingly they will also bear a greater risk of suffering a loss if there is no improvement in shareholder value. In 1998 Topdanmark developed a revolving share option scheme for its Board of Directors, Board of Management and executives responsible for staff and line functions. In 2000 the scheme will operate for 32 individuals. It is based upon own payment and it only being possible to exercise the share options in three or six years if the share price has risen by at least 5% per annum from the strike price. The share options are based on the shares to be acquired in the market prior to the issue of the share options. The strike price has been fixed at the average purchase price for those shares on which the share options have been based. However, if any shares have been acquired to cover issues of options in a subsequent year, the strike price will be fixed at the quoted price at 31 December in the year prior to the issue of options. Share option scheme Year Number of Strike price share options issued (DKK per share) , , , Jette Nielsen, clerk in Topdanmark s share administration, at Ballerup railway station A new link to the Danish register of civil registration numbers has meant that Topdanmark s share custody system can be updated with missing information on the many shareholders we have lost contact with even if they forget to notify of their change of address. Therefore, one again we are able to name most of the shareholders inscribed in our own system. 41

42 Movement in share capital Number of shares Share price Net proceeds of DKK 10 each (DKKm) destiny shared by employees and shareholders in 1999 the Board of Directors issued employee shares. The issue was a combination of free shares, subscription at DKK 10.50, subscription at DKK 40 and subscription by tender. 31 December ,190, Private placement 5,000, Employee shares 420, Private placement 900, Private placement 2,851, Rights issue 7,840, Employee shares 420, Cancellation (441,000) Employee shares 380, Cancellation (752,050) Number of shares 38,808,200 Cancellation 8 December 1999 (time limit set out in a notice to creditors 14 March 2000) (2,567,820) Number of shares after expiry of above time limit 36,240,380 Number of shares bought back for subsequent cancellation (193,025) Number of shares after cancellation 36,047,355 Since 1998 Topdanmark has issued a total of 1,200,000 share options representing 3% of the share capital. 300,000 of the share options have been issued in Number and strike price is shown in the table on page 41. On the occasion of Topdanmark s 100-year anniversary and in order to enhance the common The 380,000 employee shares of DKK 10 each were issued during the period of 7-11 June 1999 and generated proceeds of DKK 10m. The total number of employee shares represents 2% of the share capital. Shareholder base Following Topdanmark s demutualisation from a mutual company to a listed public company in 1985 the share capital was allotted to its customers. Thus Topdanmark was created with about 350,000 shareholders - a number which up to 1997 had been reduced to 227,000 shareholders. In order to increase the liquidity of the shares and at the same time reduce the relatively significant costs incurred in administering a large number of shareholders Topdanmark sent an offer in 1997 and 1998 to all of the shareholders included in its own share custody system to sell up to ten Topdanmark shares free of charge. 74% of the shareholders accepted the offer and since then the number of shareholders has been reduced to 63,000. The following shareholders have informed Topdanmark that they hold more than 5% of the share capital: Eureko B.V. Entrada 501 P.O. Box GE Amsterdam The Netherlands Hanne Brink, IR secretary in Topdanmark s communication department, in front of some of the day s letter post Today the Internet and a new telefax system ensures that all interested parties can receive our stock exchange announcements, announcements of results and annual reports within a few minutes after they have been published. This provides an excellent service to customers and its saves time and money in comparison with the ordinary letter post. 42

43 Kapital Holding Højbro Plads Copenhagen K Denmark Danish Labour Market Supplementary Pension (incl. DMP, SP) ATP-Huset Kongens Vænge Hillerød Denmark Danish Employees Capital Pension Fund Vendersgade 28, Copenhagen K Denmark Share capital Topdanmark has one class of shares and no share confers any special rights upon the holder. The shares are negotiable instruments with no restrictions on their transferability. The shares are registered in the name of the holder in Topdanmark s register of shareholders or inscribed in the Company s own custody. No shareholder may exercise the voting rights for an amount exceeding 25% of the share capital, neither by proxy nor on own shares. Investor relations Topdanmark considers it vital to establish and maintain continuous contact with existing and potential institutional, Danish and foreign shareholders. Topdanmark keeps in contact with these investors through written communication, presentations following the announcement of results, and meetings, conference calls or discussions with investors and analysts. There is also communication via and the Internet, where the address of Topdanmark s homepage is Topdanmark endeavours to provide a high level of relevant information to the share market. It was therefore delighted to receive the Information Prize awarded by The Danish Society of Financial Analysts in Topdanmark keeps in contact with its small shareholders through its share administration department and its shareholder magazine Aktionærnyt. Stock Exchange announcements published in 1999 and 2000: /1999 DKK 87m profit in Topdanmark Livsforsikring - Profit in the Topdanmark Group affected by change in tax rules /1999 Group representatives for Topdanmark s Board of Directors elected by employees /1999 Topdanmark s stake in Kapital Holding again exceeding 5% /1999 Annual Results 1998 for Topdanmark /1999 Topdanmark holds 4% own shares /1999 Notice convening Annual General Meeting of Topdanmark A/S /1999 Topdanmark upgrades its profit forecast for /1999 Annual General Meeting of Topdanmark - 18 May /1999 Employee shares /1999 Topdanmark holds 6% own shares /1999 Topdanmark has completed the first stage of its share buy-back /1999 Half-yearly results 1999 for Topdanmark /1999 Cancellation of Topdanmark shares /1999 Topdanmark increases share buy-back and effects share split /1999 Change of employee elected to the Board of Directors /1999 Topdanmark s holding of own shares /1999 Topdanmark buys Den Danske Bank s two non-life insurance companies /1999 Notice Convening Extraordinary General Meeting of Topdanmark A/S /1999 Topdanmark has completed the second stage of its share buy-back for /1999 Extraordinary General Meeting of Topdanmark - 8 December /1999 Topdanmark s shareholding in Obtec A/S /1999 Topdanmark s 1999 result is expected to reflect both an upgrade of the operating and investment result as well as a possible non-recurring loss following two storms /1999 Acquisition of Den Danske bank s two non-life insurance companies in place /2000 Change of employee elected to the Board of Directors /2000 As a result of the storms in December 1999 Topdanmark expects a loss of about DKK 160m for

44 Organisation, culture and employees Anni Olsson, Instructor, Topdanmark s business sector Personal, teaches Topdanmark s staff in the use of the Group s new Intranet TopNet During the last six months almost 1,300 employees from all of Topdanmark have attended a course in Lotus Notes on the Group s new internal Intranet, TopNet. The courses are being given by the Company s own instructors. Topdanmark has 299 new employees following the acquisition of Den Danske Bank s non-life insurance activities 1999 was an eventful year for Topdanmark s employees when the acquisition of Danica Forsikring/Danske Forsikring and the hurricane put the organisation under pressure. Therefore, Topdanmark s Values Statement has had to be put to the test with employees taking on considerable challenges. Topdanmark s Values Statement Customer-oriented Professionally skilled Flexible Efficient Independent Reliable It is important to Topdanmark that its employees have a feeling of belonging to the Company, and in 1999 many initiatives were taken to ensure this. Topdanmark s 100-year anniversary was celebrated with a big party for current employees and a get-together for those who had retired. The former cattle hall Øksnehallen in Copenhagen s old central meat market was the setting for Topdanmark s anniversary party with the theme of Denmark 100 years ago. The anniversary activities were well attended with 85% of Topdanmark s employees taking part. In celebration of Topdanmark s 100-year anniversary all employees with more than one year s seniority were offered employee shares, see page 40, and as a result 93% of Topdanmark s employees are now co-owners of their workplace. Topdanmark believes that this co-ownership helps to improve its employees allegiance and increases their awareness of the common destiny shared with the Company s other shareholders. Purchase of the non-life insurance activities from Danica Forsikring/Danske Forsikring The integration of Danica Forsikring/Danske Forsikring s non-life insurance activities will be Topdanmark s greatest challenge in Topdanmark took over 299 employees, primarily those working in policy and claims administration, 44

45 while administrative and sales staff continued in Den Danske Bank s organisation. As there are relatively few employees being transferred, their integration into Topdanmark s existing organisation will not require major organisational changes. The only overlap is for claims assessors who will be affected by limited down-sizing. The integration process is proceeding according to schedule and it is gratifying that both organisations have shown great will and commitment to make a success of the integration process. Employee development Excluding the 299 employees from Danica Forsikring/Danske Forsikring there were 1,793 full-time employees at the end of the year, a reduction of 1% as compared with The fewer employees combined with strict cost controls kept the increase in staff expenses down to 3.6% in One of Topdanmark s objectives is to be able to attract and keep qualified employees, thus it is good to note that staff turnover was reduced from 9.8% in 1998 to 7.5% in Realising that it is necessary to keep up with IT development, in 1999 Topdanmark offered all its employees a home PC. By joining the scheme employees were given the opportunity to improve their PC-skills through studying material approved as qualifying by the Danish Data Association. Both employees and Topdanmark profit from the scheme as employees benefit from a favourable leasing arrangement, while Topdanmark gains by a higher level of PC-competence. More than half of Topdanmark s employees took up the offer. Again in 1999 Topdanmark carried out many training activities. The number of training days increased 21% in 1999 to 11,537 days, equivalent to just over six training days per employee. In spite of this, expenditure was kept to an increase of less than 2%. Some of the increase in training activities related to the certified insurance sales representatives learning, for example, new technological sales tools. In IT training an extensive training task was performed in Lotus Notes, the software supporting Topdanmark s Intranet. A large group of employees still remain to receive the training in A new executive training programme has been developed and implemented for newly promoted and newly appointed executives. One of the intentions of this programme is to train executives in translating Topdanmark s Values Statement into practical management. Number of full-time employees 2,500 2,000 1,500 1, Employee interviews PLUS interviews which are the basis for reviewing competence development in Topdanmark were amended in 1999 to allow the discussion of Topdanmark s Values Statement to be included as a central feature. Challenges in will be another year offering great challenges for the Topdanmark organisation and its employees. Physically, employees from Topdanmark s head office and Danica Forsikring/Danske Forsikring will move together when the extension of Topdanmark s head office in Ballerup has been completed, which is planned to be by the end of the first half of Besides the physical moving, the integration will involve a large number of tasks. The goal is to ensure that it will be a success reflecting a reasonable balance between consideration for Topdanmark s business and its employees. Ingelise Daugaard, sales centre employee in Hillerød, at her home PC Of course I said thank you when all employees were offered a home PC. It means that I will already be used to the systems when the new PC s are installed and the old terminals disposed of in the insurance sales centres. 45

46 Information technology Lisbeth Vestergaard, system consultant in Topdanmark s year 2000 task force, at some of the many computers which were tested before the turn of the year Four years work was completed at the turn of the year with 32,000 systems being thoroughly tested. Therefore even a short time after the start of the new millennium we could celebrate that the IT department and the rest of the Topdanmark Group had overcome all of the Company s year 2000 problems. In 1999 Topdanmark reached several significant IT milestones and made development resources available for new activities. In 2000 the main focus will be the integration of Den Danske Bank s non-life insurance portfolios Intranet The construction of the infrastructure of Topdanmark s Intranet, TopNet, was completed in the middle of the year, a result of which is that information suppliers are now able to input and update information themselves on TopNet without the delay of an intermediary. Most of Topdanmark s internal and external staff received access to TopNet in the course of the year and are now using it in their everyday work to collect relevant information for use in serving their customers. In general, TopNet has significantly widened the knowledge base of Topdanmark s employees. The rollout of TopNet is continuing and it is expected that all Topdanmark s employees will be using it by the end of Internet In 1999 Topdanmark s homepage was radically renovated in order to enhance its user friendliness. Topdanmark considers the Internet to be an important information channel on which, for instance it publishes its annual report. The address of Topdanmark s homepage is The Internet is also used to provide services to customers, demonstrated by the 3,000 or so claim notifications received electronically following the hurricane on 3 December. Danica Forsikring/Danske Forsikring With the take-over of Danica Forsikring/Danske Forsikring s non-life portfolios, conversion will be the key issue for It is expected that considerable resources will be utilised on converting these portfolios onto Topdanmark s IT systems. Topdanmark will also focus on developing systems to support the sale of non-life insurance through Den Danske Bank s branches and Danica s certified insurance sales representatives. SAP project On 1 September 1999 Topdanmark replaced its 46