DEMUTUALISED MODEL PROVIDES SUCCESSFUL TENDER

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1 Annual report 2004

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3 2004 Highlights of the year DEMUTUALISED MODEL PROVIDES SUCCESSFUL TENDER Major success was noted in a tender process for eligible suppliers of alternative ITP, socalled ten-pointer solutions for high earners, carried out by four major companies in Sweden. Handelsbanken Liv was one of two eligible companies for traditional insurance and one of two alternatives for unit-linked insurance. ACQUISITION OF SPP LIV FONDFÖRSÄKRING AB Handelsbanken Liv acquired SPP Liv Fondförsäkring AB on 1 July. The purchase price amounted to SEK 1.1 billion. NEW REGION WITH FOCUS ON INTERNATIONAL BUSINESS Further reorganisation was carried out in August to integrate the remaining units of Handelsbanken Liv and SPP, in addition to the purely formal integration. This included the establishment of an eighth region, responsible for sales with an international focus. MAJOR FOCUS ON CONTRACTUAL PENSIONS Extensive marketing activities were carried out in the autumn designed to increase our share of the contractual pensions market, also known as the selection centre market. These activities yielded excellent results in a short time. STILL TOP OF THE CUSTOMER SATISFACTION LEAGUE In the Swedish Quality Index s annual survey, Handelsbanken Liv together with its sister company SPP had the highest rating for customer satisfaction in the life insurance industry. Contents Highlights of the year 1 Chief executive s comments 2 Report of the Board of Directors 4 Strategic direction 4 Market and sales 5 Asset management 6 Risks and risk management 7 The company s performance 9 Alternative income statement 10 Five-year summary 11 Accounting principles 12 Income statement 14 Analysis of results 15 Balance sheet 16 Notes 18 Specification of shares and participations 25 Proposed appropriation of profits 27 Audit report 28 Key figures Premiums written, SEK million Guaranteed rate Unit-linked insurance Total Management and Board 29 Glossary 30 Managed assets, SEK million Guaranteed rate Unit-linked insurance Total Total return (Insurance with a guaranteed return) Handelsbanken Liv, together with its sister company SPP, is a market leader with a complete range of life insurance products for occupational and private pensions, as well as wealth management solutions for companies, organisations and private individuals. DIRECTORS REPORT 1

4 CHIEF EXECUTIVE S COMMENTS Three good results I can now look back on another good year for Handelsbanken Liv. A life insurance company that can report not just one, but actually three good results. Three different results, each one of which illuminates and measures our operations from its own perspective. In every respect, 2004 was a really good year. The first of the three results is the so-called risk result. From an historical perspective, this is perhaps the most genuine insurance result. The original idea of an insurance company was in fact to pay a premium in order to share its risks with others. Not everyone is affected by whatever they are insured against, but everyone pays a small part. Together, they pay enough to cover compensation to those affected. The payment the premium must always be placed in relation to the risk. If premiums are set too high in relation to the risk, customers will not buy the insurance. If the premium is set too low, the insurance company will make a loss. A balance is achieved through continuous follow-up. During the year we have extended resources for this follow-up and this had a very clear and immediate effect in the autumn. Our risk result of SEK -21 million in 2003 had been transformed into SEK +44 million by year-end. In my opinion, however, the risk result will never be our biggest source of income. This is partly because risk insurance is a comparatively small part of our operations compared with savings insurance. But perhaps above all for the very reason that the company must balance risk and market demands. The second result is the administration result. This shows how efficiently we run the company. The premiums and capital charges we take in must cover the company s operating expenses. At the same time low charges are clearly a key competitive tool. But Handelsbanken Liv operates in a market where the main players are mutually operated and can therefore set charges that do not cover the company s costs. The deficits that arise are covered instead by these companies taking part of the policyholders return. With our demutualised model, we cannot do this. I believe that it is dubious whether a system where you receive two payments one open and one hidden can really be justified. We have chosen instead to operate Handelsbanken Liv more cost efficiently than other life insurance companies, and this allows us to keep our charges at a competitive level. The fact that our administration result was still not more than SEK 5 million is due, among other things, to the fact that the entire cost of focus on contractual pensions was charged to this year s closing accounts. If we look at the number of new customers, expectations have already been exceeded. By year-end, we had acquired more than 26,000 new contractual pension customers in two months. The cost has already been recognised, while the fruits will be harvested for a long time ahead. But in my opinion, nor does the administration result have any potential to provide significant income in the present situation. This is mainly because of the unusual competitive conditions under which we now operate. So far, we are pretty much alone in openly reporting the entire price to our customers. The financial result, on the other hand, is and should be our largest. This is where we make money if we manage our customers assets in a skilled manner. We get paid in relation to our skills. If we achieve a return higher than the one we guaranteed our customers, we get 10%. If we do not, we get nothing. I think this is a relation that is healthy and equitable. Our guaranteed rates are currently between 3% and 5%. The total return for the year was 6.83% which meant a full return allocation. Customers then get 90% of the total return in the form of a 6.15% upward adjustment of their assets. This meant that for the second consecutive year, our customers with traditional insurance received the best interest in the industry. The average for other companies was 2.5%. Naturally, this is highly gratifying but at the same time I am not satisfied. Our total return is below the average for the industry. This is not where it should be. Our customers still receive most because we always distribute at least 90%. The mutually operated companies are now at approximately 30%. These companies use the rest of their customers return to cover the deficit that arose in the crisis years and to build up new risk capital. Once this has been achieved and the situation has stabilised, these companies will gradually 2 HANDELSBANKEN LIV ANNUAL REPORT 2004

5 be able to raise the proportion of the total return that accrues to their customers. Normally, a well-run mutual company should be able to reach roughly 90% over time. This means that our asset management must outperform our competitors. Partly for reasons of competition and partly for the obvious reason that we will then earn more money. I also have a fourth result to report. Every year the Swedish Quality Index measures customer satisfaction in a number of different industries, including the life insurance industry. In 2004 we moved from second place to the first place that is a basic requirement within the Handelsbanken Group. We must have the highest number of satisfied customers. The efficient way we provide financial services must never affect the quality and service that customers pay for. The survey also shows where the proportion of satisfied customers is rising. One explanation for this is, I believe, the transparency of our demutualised model. The customer sees what he or she is getting. Other life insurance companies with traditional insurance and their mutual models cannot make their operations transparent to customers and owners in the same way that we can. At the same time there is obviously a risk in putting your cards on the table when no one else does. Particularly since Handelsbanken Liv also has one of the most liberal transfer rights in the market which means that private customers can leave us if we do not produce the results or do even better than customers expect. This, however, is a challenge that I find extremely inspiring. The survey also shows where the proportion of satisfied customers is rising. One explanation for this is, I believe, the transparency of our demutualised model. STOCKHOLM, FEBRUARY 2005 Hans Hagman HANDELSBANKEN LIV ANNUAL REPORT

6 REPORT OF THE BOARD OF DIRECTORS Strategic direction Handelsbanken Liv will continue to advance its positions in the occupational pensions market. The competitive advantage provided by the profit-distributing, demutualised model will be used to take in business that is profitable over time. At the same time, Handelsbanken Liv s established position in the retail market will be strengthened. This will be achieved via an increasingly extended and integrated cooperation with Handelsbanken s branch offices. The goal of merging the two companies once SPP has demutualised remains unchanged. SPP Liv Fondförsäkring AB was acquired in This acquisition was part of the now almost completed integration between Handelsbanken Liv and SPP. The increasingly efficient utilisation of the strengths of each company, where competence and resources can be allocated where they are needed most at the time, is starting to have significant effects. One example of this was the success in the joint procurement of alternative ITP which was carried out by four major Swedish listed companies during the year. SPP s considerable experience of similar business combined with Handelsbanken Liv s demutualised model, was a combination that was hard to beat. Handelsbanken Liv was the only company chosen for both unit-linked and traditional insurance. In the occupational pensions market, however, most of the sales volumes go via insurance brokers. Handelsbanken Liv will therefore continue its recently started co-operation with brokers. Approximately 25% of the total premium volume in the market is so-called contractual pensions. At the end of last year, Handelsbanken Liv conducted an extensive campaign in this market where the Bank s branches played a decisive role. The results of these efforts exceeded expectations and they will therefore continue. The Bank s branch offices are also the insurance business s most important channel to the retail and wealth market. There is still major potential for cross-sales of traditional banking and insurance services. As the branches gain competence in insurance this potential will have an even bigger effect. In 2005, Handelsbanken Liv is launching a new insurance product that combines the advantages of endowment and pension insurance including exemption from wealth tax, a low policyholder tax and tax-free payments. There is already considerable demand for this insurance. The position of the life insurance company with the highest number of satisfied customers in the Swedish market will be maintained through pro-active customer care, attractive products and competitive asset management. The increasingly efficient utilisation of the strengths of each company, where competence and resources can be allocated where they are needed most at the time, is starting to have * Avser enbart livförsäkringsbolag, det vill säga exklusive sjukoch olycksfallsförsäkring i sakförsäkringsbolag. significant effects. 4 HANDELSBANKEN LIV ANNUAL REPORT 2004 DIRECTORS REPORT

7 Market and sales Handelsbanken Liv focuses on private pension savings and wealth management solutions. In 2004, Handelsbanken Liv s sales increased compared with 2003 within several market segments, including the open competitive occupational pensions market and also the contractual pensions market. The latter is sometimes referred to as the selection centre market. PREMIUMS WRITTEN The total premium volume in the open competitive market for life and pension insurance in Sweden (Swedish Insurance Federation members only) amounted to SEK 97.6 billion (94.0), which is 4% more than in It was primarily premiums for unit-linked insurance that increased by 9% compared with the previous year, while the premium volume for traditional insurance was largely unchanged. The breakdown into the different sub-markets was: occupational pensions 65% (65), endowment insurance 23% (23), private pension insurance 10% (10), and private disability and accident insurance 2% (2). Handelsbanken Liv s and SPP s total premiums written in Sweden were SEK 13.1 billion (13.7), equivalent to a market share of 13.4% (14.6). Handelsbanken Liv s total premiums written amounted to SEK 7.2 billion (4.9). The increase is due to heightened interest in profit-distributing insurance and the premium income generated through the purchase of SPP Liv Fondförsäkring AB. Of premiums written, Norway accounted for SEK 236 million (204) and Finland for SEK 64 million (46). NEW BUSINESS New business for Swedish life insurance companies, measured as single premiums plus regular premiums, amounted to SEK 21.6 billion (23.8) in This was a decrease of 9% compared with Handelsbanken Liv s and SPP s combined new business amounted to SEK 2.9 billion (4.2), which provided a market share of 13.4% (17.6). INCREASED PRIVATE SAVINGS IN INSURANCE The trend in the market for private pension savings in insurance was weakly negative during the year, but premiums written increased for Handelsbanken Liv and SPP, which resulted in an increased market share to 12.9% (11.5). The market for endowment insurance increased compared with Handelsbanken Liv s and SPP s premiums written, however, were slightly lower than in 2003 which meant that market share decreased to 11.3% (12.1). Endowment insurance offers a good investment solution in many situations, for example as a strengthening of income and distribution of capital to future generations. As a result of the abolition of death duties and gift tax on 1 January 2005, endowment insurance solutions linked to inheritance and gifts decreased somewhat since the decision was known in MAJOR PROCUREMENT OF OCCUPATIONAL PENSIONS The trend with several companies joining forces to purchase occupational pension solutions continued. In one of the largest tender processes in 2004, four major Swedish listed companies joined forces for joint procurement of a supplier of alternative ITP, so-called ten-pointer solutions for high earners. Handelsbanken Liv was chosen as one of two suppliers of savings in traditional insurance and one of two suppliers of savings in unit-linked insurance. During the autumn, Handelsbanken Liv and SPP together with Handelsbanken had a strong focus on the contractual pensions market. This provided an excellent result in the form of approximately 26,000 new customers for Handelsbanken Liv within the various agreement areas. Euroben established itself seriously during the year within occupational pensions and several new corporate customers were acquired. FOCUS ON INTERNATIONAL BUSINESS A new joint region the International Region was formed during the year to enable growth outside Sweden together with Handelsbanken. In an international perspective, a deregulation of the occupational pensions market is under way similar to the deregulation that has taken place in Sweden. As part of this, Handelsbanken s performance pension was launched in the Norwegian market at year-end This is occupational pension insurance for small and medium-sized companies. In 2004, Handelsbanken Liv s sales in Norway increased sharply, including unit-linked insurance which rose by almost 40% compared with the previous year. In Finland, Handelsbanken Liv s sales of private pension insurance rose although the market for new business decreased substantially due to new tax legislation. Insurance operations are conducted in the Nordic countries through the subsidiary SHB Liv Forsikringsaktieselskab A/S. Outside the Nordic region, operations are conducted in Ireland through Handelsbanken Liv s wholly-owned subsidiary Euroben Life & Pension Ltd, both in the UK through SPP s associate Nordben Life and Pension Insurance Co Ltd in Guernsey. SPP also has a branch office in London. The International Region is also responsible for handling pensions for expatriate employees, a market that has started to grow again following a slack period of a couple of years. DIRECTORS REPORT HANDELSBANKEN LIV ANNUAL REPORT

8 Asset management Asset management at Handelsbanken Liv is conducted in two separate portfolios. The portion of investments that matches insurance obligations with guaranteed interest, known as traditional insurance, is managed in a diversified portfolio consisting of fixed income securities, equities, real estate and alternative asset classes. The portion of investments attributable to the company s equity is mainly invested in fixed income securities. SAVINGS CUSTOMERS INVESTMENTS Total return was 6.8% (6.3). The average total return over the last ten years amounted to 9.0%. In the first nine months of 2004, the stock markets were characterised by relatively substantial fluctuations without any real trend. Following a strong fourth quarter, most leading stock exchanges could show a positive annual return of between 5% and 10%. The Stockholm Stock Exchange performed even better and noted an annual return corresponding to 20.8%. In 2004, Handelsbanken Liv conducted active asset allocation. The proportion of equities at 31 December was 32% corresponding to an increase of 10 percentage points during the calendar year. The return on equities was 11.0%. Relatively large fluctuations also occurred in the fixed income markets. Bond rates fell at the beginning of the year and then climbed sharply in the second quarter. During the second half of the year, long-term interest rates fell once more to end the year at lower levels than at the start of the year. Throughout the year, Handelsbanken Liv worked with a comparatively short duration in its fixed income portfolio. Return on the fixed income portfolio amounted to 4.8%. Throughout the year all asset exposure in foreign currency was hedged. This made a positive contribution to the total return since the Swedish krona strengthened against most key currencies during the year. During 2003, the traditional, long-term normal portfolio was abandoned as a benchmark for the company s asset management. Instead, asset allocation is governed by a more short-term reference portfolio that is decided on a monthly basis by the company s allocation committee. Current market perceptions are allowed to influence composition but primarily it is the balance sheet s ability to withstand market fluctuations that dictates the content of the reference portfolio. The company s commitments to customers are formulated in absolute figures and this fact has greater control over the focus of asset management than how sub-portfolios develop in relation to various market indexes. The total return relates to the assets managed for savings customers with guaranteed interest. Return is calculated according to the principles for timeweighted return. Calculations are made in accordance with Global Investment Performance Standards (GIPS). Calculations are based on the value development of all holdings adjusted for cash flows. Calculations are performed on a daily basis. The return is calculated after deduction for asset management charges. Breakdown of assets 31 December 2004 Total return 2004 % Fixed income 60 % Equities 32 % Real estate 7 % Hedge funds 1 % Fixed income 4.8 Equities 11.0 Real estate 6.4 Total 6.8 Fixed income investments 31 December 2004 Equity investments 31 December 2004 Swedish government 63 % Swedish mortgage institutions 31 % Other Swedish issuers 4 % Foreign 2 % Sweden 46 % Europe 45 % USA 9 % 6 HANDELSBANKEN LIV ANNUAL REPORT 2004 DIRECTORS REPORT

9 Risks and risk management INSURANCE RISKS Life insurance is a financial product where the result at least to some extent is uncertain. This uncertainty depends in some way on the life or health of the insured individual. Life insurance with a savings component is also uncertain in terms of future investment returns. Different types of insurance risks premature death death benefit insurance payment in the event of the death of the insured person longevity life insurance/pension insurance payment if the insured person lives disability disability insurance/waiver of premium insurance payment in the event of disability/inability to work combinations many insurance policies offer combinations of the above three. In a mutual insurance company, it is the policyholder collective that takes the risks since the policyholders have the role of both owner and customer. In demutualised, profit-distributing Handelsbanken Liv policyholders are only customers who pay a price a premium for their insurance. The risk result is borne by the company. Limiting insurance risks Before risk insurance can be granted the insured party must be approved in a medical risk assessment. The purpose of the risk assessment is to reduce reliance on information provided by the person about his or her health. This is essential in order to be able to offer long-term term insurance at a reasonable premium in a profitable manner. The insurance applied for must also meet the policyholder s insurance needs and ability to pay. In order to limit the company s risk exposure, major risks on individual lives are normally reinsured. Future risks Mortality continues to fall, which is positive with regards to death benefit insurance. Falling mortality means a rising average length of life which, on the other hand, can be a concern as regards pension insurance. On the other hand, this should not be over-dramatised. Sweden has had detailed population statistics for centuries. The really major change is mortality related to children and young people for whom it has been reduced to almost zero. On the other hand, mortality among the old has not changed to the same extent. In 250 years the length of life for pensioners has been extended by a relatively modest 7 10 years. For disability insurance, the future is not so predictable. The rapidly rising disability in the form of people on the sick list not only represents a major human and socio-economic problem. The large premium increases resulting from this may result in a reduced range of voluntary disability insurance. In the future it may not be possible to take out voluntary disability insurance. Trends in this direction can already be seen. This development is counteracted by major awareness of the problem throughout society. FINANCIAL RISKS Insurance with a savings component, both pension insurance and endowment insurance, is associated with financial risks. In traditional insurance at a guaranteed interest rate, the financial risk is shared between the individual policyholder and the company. If the total return exceeds the guaranteed rate, the return is allocated so that the policyholder receives 90% and Handelsbanken Liv 10%. As a counterbalance to dividing the return, the policyholder has a guaranteed return on his or her guaranteed capital. For savings in unit-linked insurance, the policyholder accepts the entire financial risk by choosing the funds in which savings should be invested. The company has no risk nor does it receive any of the return. Risks within asset management Risk generally means uncertainty about a future result. The risk component that is most important for Handelsbanken Liv to quantify and control is the possibility that negative variances from an anticipated result should arise. Asset management operations are exposed to market risks, liquidity risks, credit risks and operational risks. The company works with Asset and Liability Management (ALM), which means integrated management of assets and liabilities. Market risk In practice, market risk is a possible price fall on the company s assets caused by changed interest rates, share prices, property prices or exchange rates. In order to manage market risk, Handelsbanken Liv s allocation committee decides on a reference portfolio. The composition of the reference portfolio is primarily governed by the extent to which the balance sheet can withstand market fluctuations. Current market opinion also affects the composition of the reference portfolio, but these considerations take second place. The limited risk resistance of the balance sheet in 2004 did not allow exposure to the stock markets in line with historical average levels. Against the background of a positive view of equities as an asset class, share price risk s share of total market risk was high in relation to available risk scope. DIRECTORS REPORT HANDELSBANKEN LIV ANNUAL REPORT

10 Liquidity risk Liquidity risk is the risk of loss that results from not being able to sell a financial instrument immediately without a significant price reduction. This risk is limited through most of the total portfolio being invested in listed securities with good liquidity. Credit risk Credit risk is the risk that borrowers or counterparties are unable to meet their commitments to Handelsbanken Liv. The creditworthiness of issuers, borrowers and counterparties is determined via both internal and external credit assessments. OPERATIONAL RISKS Operational risks are risks in the company s operations that can result in financial loss, non-receipt of income, disruption of operations or damaged confidence. The reasons can be inadequate or erroneous routines and systems, inappropriate organisation, mistakes made by own employees or external events. Responsibility for managing operational risks is a wellintegrated part of managerial responsibility at all levels. Operational risks must be identified, assessed, reported and controlled. Responsibility for this, i.e. for ensuring internal controls within the company, therefore rests with the function manager concerned. The existence of descriptions of routines, effective and secure systems support, appropriate descriptions of responsibility and working duties, as well as effective reporting channels are all factors that affect the level of our operational risks. Management of operational risks is largely a management and organisational matter. A key thesis here is that division of responsibility and working duties must be defined on the basis of control aspects and be designed to ensure that no single person handles a transaction throughout the entire processing chain. As a complement to ongoing control of operational risks, for a couple of years the Handelsbanken Group, including Handelsbanken Liv, has performed a self-assessment of operational risks every year. This assessment is designed to identify operational risks and quantify the losses that might arise. Furthermore, measures are both proposed and taken to reduce these risks. The central board of the Bank and SPP s own board are informed of the results of these annual analyses. In addition to responsibility for operational risks, the company together with SPP has employees with special responsibility for information security and physical safety. Compliance officer During the year the company s board decided to establish a compliance function in accordance with the Swedish Financial Supervisory Authority s proposal for general guidelines on governance of financial companies. This function, which will be shared with SPP, will ensure that operations are conducted in accordance with current rules and good practice. Compliance will continuously identify, assess, monitor and inform about risks that may arise due to failure to comply with regulations (laws, directives, internal instructions, rules of conduct and good practice). Another duty is to ensure that the relevant employees are given information and training on new or changed rules. The risks, compliance risks, that may result from failure to comply with regulations are increased operational risks, risks of legal sanctions, supervisory sanctions, economic loss or damage caused by rumours. This function has an independent position in relation to business operations, and reports to the relevant chief executive and company board. 8 HANDELSBANKEN LIV ANNUAL REPORT 2004 DIRECTORS REPORT

11 The company s performance HANDELSBANKEN LIV Handelsbanken Liv, corporate identity number , is domiciled in Stockholm. The company is a wholly owned subsidiary of Svenska Handelsbanken AB (publ), corporate identity number (Handelsbanken). Since 2002, Handelsbanken Liv has conducted both life insurance business with traditional insurance and unit-linked insurance in the same company. The company is demutualised which means that profits accrues to its owner. The Group also includes the subsidiaries SPP Liv Fondförsäkring AB (SPP Fond), SHB Liv Forsikringsaktieselskab A/S (SHB Liv), which provides life insurance products in Norway and Finland, and the Irish insurance company Euroben Life & Pension Ltd (Euroben). Policyholders savings within unit-linked insurance are mainly invested in Handelsbanken s mutual funds. Handelsbanken Liv purchases IT services and asset management from the parent company Handelsbanken. The company also purchases from and sells services to its sister company SPP. Intra-group prices are set within the framework for the work in the planning committees within the Handelsbanken Group. The work of the planning committees complies with the rules and guidelines applied within the Handelsbanken Group. Prices are set at cost, although never higher than market prices. The charge for asset management is based on market prices. In 2004, Handelsbanken Liv carried out internal services for and invoiced its sister company SPP for SEK 72 million. At the same time, Handelsbanken Liv purchased services for SEK 166 million in the same period. OPERATIONS Handelsbanken Liv is the only major and life insurance company in Sweden that provides traditional insurance with guaranteed interest rates in a demutualised company. The company also offers transfer rights to other companies for all private individuals. Furthermore, all customers can switch their form of savings within the company between traditional insurance with guaranteed rates and unit-linked insurance. Handelsbanken Liv, SPP and Handelsbanken offer customers a broad range of savings products related to both pensions and other savings. This takes place within the framework of Handelsbanken s universal bank concept, where life insurance is a natural part of the product range. Sales of savings insurance in other Nordic countries are conducted through the Danish subsidiary SHB Liv Forsikringsaktieselskab which conducts operations through branch offices in Finland and Norway. Sales of risk insurance in Norway are conducted by a branch office. Sales in Denmark and Finland are handled as cross-border operations from Sweden. SIGNIFICANT EVENTS On 1 January 2004, Hans Hagman took over as the new chief executive of Handelsbanken Liv. On 1 July, SPP Liv Fondförsäkring AB (SPP Fond) was acquired for SEK 1.1 billion. At acquisition, assets under management in SPP Fond amounted to SEK 14.2 billion. Premiums written for SPP Fond amounted to SEK 1.3 billion in the second half of In conjunction with the acquisition, Handelsbanken Liv issued a debenture to Handelsbanken for SEK 900 million. At the same time, Handelsbanken Liv received a shareholders contribution of SEK 300 million. In December, Handelsbanken Liv provided a shareholders contribution of SEK 100 million to SPP Fond. VOLUME DEVELOPMENT Insurance assets under management amounted to SEK 57 billion (37), of which SEK 33 billion (16) was invested in unit-linked insurance. In addition to the acquisition of SPP Livförsäkring AB, a positive net flow and a good investment return contributed to this increase. In both SHB Liv and Euroben, assets under management exceeded SEK 1 billion in Since approximately 75% of administrative charges on savings insurance is derived from capital charges, the size of assets under management is a key component in the administration result. SOLVENCY The capital base for the Group at 31 December 2004 amounted to SEK 2,000 million (1,548). This should be placed in relation to the required solvency, which amounted to SEK 1,441 million (1,220). The solvency ratio thus amounted to 1.39 (1.27). Handelsbanken Liv s target for its solvency ratio is 1.3. DIRECTORS REPORT HANDELSBANKEN LIV ANNUAL REPORT

12 Alternative income statement (excluding result in non-insurance companies) SEK million Administration result 5 29 Risk result Financial result Return on equity 9 55 Result before tax The traditional income statement in a life insurance company is difficult to comprehend and offers the reader few opportunities to understand how the result was reached. Among other things flows, such as premiums written and claims paid, are reported via the income statement. Comparable items in many other sectors are reported in the balance sheet. Internally, Handelsbanken Liv has worked with an alternative income statement which provides a better basis for understanding how the results arise. In the alternative income statement the result is divided into four components: administration result risk result financial result return on equity The result is based on the Handelsbanken Liv Group s pre-tax result and excludes earnings in companies that are not insurance companies. The result is also adjusted for policyholder tax. The result amounted to SEK 193 million (-32). Comparison with the previous year is affected by the SEK 229 million provision made in 2003 in order to keep pensions in payment at an unchanged level for the time being. This provision is recognised in the financial result. SPP Liv Fondförsäkring AB was acquired on 1 July The acquisition reduced the result by SEK 75 million. It was primarily the administration result that was affected but return on equity was also reduced by goodwill amortisation and financing costs. The administration result fell from SEK 29 million to SEK 5 million. This was due partly to the acquisition of SPP Liv Fondförsäkring AB, and partly to the sales activities for contractual pensions started in autumn Together these reduced the result by approximately SEK 70 million. A number of measures have been taken in recent years to improve the risk result. Premiums have been raised and new premium structures introduced. Combined with an improved claims result, this led to an improvement in the risk result, from SEK -21 million to SEK 44 million. The total return on policyholders capital amounted to 6.83% (6.27). This meant that the policyholders received 90% of the return and the company 10%. The return allocation was SEK 138 million (115). Policyholders in Handelsbanken Liv received 6.15% (5.64) in Return on equity was charged with goodwill amortisation of SEK 26 million (1). During the year, Handelsbanken Liv issued a debenture loan of SEK 900 million. Interest expenses on debenture loans amounted to SEK 24 million (0). Excluding these items, return on equity amounted to SEK 59 million (54). Handelsbanken Liv s result is also reported in the Handelsbanken Group as a separate business segment. The business segment s result differs from the legal result, due among other things to the business segment result being charged with interest expenses for financing shareholders equity. DEFINITIONS OF THE RESULT COMPONENTS The administration result is the difference between the charges made on the insurance contracts to cover administration and the company s actual costs. The charges made can be based on capital, premium, number of policies or number of payments. Costs include staff costs, commissions and IT costs. The risk result comprises the charges made by the company to cover insurance risks and the actual costs of these risks. The insurance risks are mortality, longevity, disability and accident. For products where there is not a specific charge to cover the insurance risk, for most products 80% of premiums written is attributed as income within the risk result. The remaining 20% is reported as income within the administration result. The financial result is the difference between the return on assets managed on behalf of the policyholders and the amount allocated to policyholders. In unit-linked insurance customers values change with the return, regardless of whether the return is positive or negative. The financial result for unit-linked insurance is always 0. For traditional insurance with guaranteed rates there are two components that affect the financial result: return allocation and capital contributions to cover the guaranteed capital. If the total return exceeds the guaranteed rate (which is between 3% and 5%, depending on when the policy was taken out) the return is divided. In such a case the customer receives 90%, but never less than the guaranteed rate. The company receives the remainder. The company s share of the total return is then an income item within the financial result. Customers are guaranteed to receive a return on the guaranteed capital of at least the guaranteed rate. If the value of a customer s insurance should be less than the guaranteed value, the company provides capital up to the guaranteed value. The return on risk products is also reported within the financial result. The return on equity comprises return on the assets that are not managed on behalf of policyholders, and also goodwill amortisation. 10 HANDELSBANKEN LIV ANNUAL REPORT 2004 DIRECTORS REPORT

13 Five-year summary SEK million Result Premiums written Investment income net in insurance business Claims incurred Operating expenses Balance on the technical account, life insurance business Net profit/loss for the year Financial position Land and buildings Shares and participations Bonds and other fixed income securities Other financial investments Total investments Investments for which the life insurance policyholders bear the risk Technical provisions Technical provisions for life insurance where the policyholders bear the risk Shareholders equity Deferred tax Subordinated debenture Total funding capital Capital base for the insurance group Required solvency margin for the insurance group Solvency ratio Key Ratios Expense ratio, % Management expense ratio, % Total return, savings insurance with guaranteed rate, % Funding ratio, % Capital base Required solvency margin Solvency ratio As of 1 January 2002, the traditional, demutualised life insurance operations and the unit-linked insurance operations were combined in the same company. Previously, traditional insurance operations were conducted in a separate company. Comparative figures for apply solely to the unit-linked insurance operations. It is impossible to recalculate comparative figures for to show results for the mutually operated traditional insurance operations as a demutualised entity during this period. DIRECTORS REPORT HANDELSBANKEN LIV ANNUAL REPORT

14 Accounting principles The annual report has been prepared in conformity with the Swedish Annual Accounts Act for Insurance Companies (ÅRFL) and the instructions and general guidelines regarding the annual accounts of insurance companies issued by the Swedish Financial Supervisory Authority (FFFS 2003:13). CONSOLIDATED ACCOUNTS The consolidated accounts include all companies in which Handelsbanken Liv directly or indirectly has a decisive influence. A decisive influence normally exists when the holding amounts to more than 50% of the voting rights. Subsidiaries are consolidated in accordance with the purchase method. Companies in which Handelsbanken Liv directly or indirectly has a significant influence are reported as associated companies. A significant influence normally exists when the holding amounts to a minimum of 20% and an maximum of 50% of the votes. Associated companies are reported in the consolidated accounts in accordance with the equity method. All operations outside Sweden are classified as independent. The classification is based on the fact that each such operation, in line with the Group s decentralised organisation, is operated independently and that transactions between the parent company and the unit concerned only comprise part of its operations. Translation of the balance sheets and income statements of foreign operations is effected according to the current rate method. Assets, liabilities and minority shares in equity are translated at the closing rate. Shareholders equity is translated at the exchange rate on the date of investment and earning respectively. The income statement is translated according to the average exchange rate for the year. Any translation differences that arise are stated directly in shareholders equity. INTANGIBLE ASSETS An intangible asset is an identifiable, non-monetary asset without physical substance held for use in the production or supply of goods and services, for rental to others, or for administrative purposes. An asset is a resource from which future economic benefits are expected over which control is exercised as a result of past events. When a company is acquired, an acquisition balance sheet is prepared where identifiable assets and liabilities are valued at fair value on the acquisition date. To the extent the acquisition price can be attributed to identifiable assets and liabilities this difference is reported as goodwill. Brands are reported in the balance sheet at their historical cost. Investment in both own developed and acquired computer software is recognised as an expense as incurred where such expenditure relates to maintenance of existing business operations or an existing intangible assets. In development of a new intangible asset, or a new business enterprise for an existing intangible asset, the expenditure incurred is capitalised from the date when it is probable that economic benefits will accrue which can be estimated in a reliable manner. Asset recognition of expenditure on an existing intangible asset is also subject to the requirement that the economic benefits must clearly exceed the economic benefits associated with the existing asset in its original condition. Examination of whether an impairment loss requirement exists takes place when there is an indication that the asset may have decreased in value. VALUATION OF INVESTMENTS All investments, apart from investments in group companies, are valued at fair value. This means that changes in value, both realised and unrealised. are reported in the income statement. Investments in group companies are valued at the lower of cost and fair value. Land and buildings are valued individually taking cash flows into account. Valuations are conducted by external valuers. Unlisted shares are valued according to the EVCA s principles (European Private Equity and Venture Capital Association). Derivative transactions with a positive market value on the closing date are stated under Investments, and transactions with a negative market value are reported under Liabilities. Purchases and sales of money and capital market instruments on the spot market are reported applying transaction date accounting. When investments are valued at fair values, deferred tax is calculated on the part of operations subject to income tax. Reserve for unrealised gains The gains that arise when fair value exceeds the historical cost are placed in a reserve for unrealised gains. For properties this is calculated as the sum of unrealised gains on individual properties. For other investments, this calculation is performed collectively per balance sheet item. Provision is not made for the portion of unrealised changes in value that corresponds to changes in provisions for which policyholders bear the risk. VALUATION OF ASSETS AND LIABILITIES IN FOREIGN CURRENCY Assets and liabilities in foreign currency are valued at the closing rate. DEFERRED ACQUISITION COSTS Acquisition costs related to acquisition insurance contracts and which are assessed as being of significant value, are capitalised. The depreciation period varies between three and five years. PROVISIONS Provisions are reported as a result of a past event where it is probable that an outflow of resources will be required to settle the commitments. The provision is valued at the amount that is judged most likely taking the date of settlement into account. Technical provisions are described separately. 12 HANDELSBANKEN LIV ANNUAL REPORT 2004 ACCOUNTING PRINCIPLES

15 IMPAIRMENT LOSSES This section describes the criteria applied for impairment losses on tangible and intangible assets as well as shares in subsidiaries and associates. Impairment losses are reported if the recoverable amount is less than the carrying amount. The recoverable amounts is calculated as the higher of an asset s value in use and net selling price. The recoverable amount is determined when there is an indication that the asset has decreased in value. DEPRECIATION Equipment Equipment is depreciated on a straight-line basis over the useful life of the asset. This means that personal computers are depreciated over three years and other equipment is depreciated over five years. Intangible assets Goodwill is amortised over its estimated useful life, normally ten years. Since brands are normally judged to have a very long useful life, amortisation for these is set at 20 years. The amortisation period is assessed individually both at new acquisitions and on an ongoing basis when there is an indication that useful life may have changed. TAXES The company pays standard policyholder tax on the assets managed on behalf of policyholders. The return on equity and result from risk insurance is taxed with ordinary corporation tax of 28%. Deferred tax is tax attributable to temporary differences between the value of an asset or liability in the accounts and its taxable value. VALUATION OF TECHNICAL PROVISIONS Technical provisions comprise life insurance provisions and provision for claims outstanding. Life insurance provisions are the anticipated capital value of the company s guaranteed commitments according to insurance contracts in force after deduction for the anticipated capital value of future contracted premium payments. Capital values are calculated taking into account assumptions on future interest rates, mortality and other risk measurements, charges and taxes. These assumptions are used in the calculation of life insurance provisions in the company s balance sheet. There is no direct and automatic connection with the assumptions applied to individual insurance contracts when calculating premiums, guaranteed value and bonus. Mortality assumptions Mortality assumptions vary depending on when different insurance was taken out. The assumptions used are based on shared industry statistics. For most of the portfolio the mortality assumptions are applied which were developed in These assumptions take future anticipated increase in longevity into account. Charges assumptions Charges assumptions vary depending on when the insurance was taken out and are based on the charges that applied when the insurance contract was signed. Principally, this means a charge that is proportion to the premium and a charge that is proportional to the life insurance provisions. Interest rate assumptions The interest rate assumption is 3.5% for old contracts signed before For subsequent contracts the assumption is 3.0%. The Swedish Financial Supervisory Authority issues directives stipulating the highest permitted interest rate assumption at which life insurance provisions may be calculated. The interest rate assumptions applied by Handelsbanken Liv comply with this directive. Assumption on tax The assumption on tax varies depending when the insurance was taken out and is based on the tax withdrawal that applied when the insurance was purchased. Tax is charged through a reduction of the assumed interest rate. Provision for claims outstanding The provision for claims outstanding comprises of claims incurred at the end of the financial year but not yet paid as well as the estimated future operating expenses for adjusting these claims. The provision also includes a reserve for claims incurred but not yet reported to the company at the end of the financial year. LIFE INSURANCE PROVISIONS FOR WHICH THE POLICYHOLDERS BEAR THE RISK Unit-linked insurance commitments Provisions correspond to the anticipated capital value of the company s guaranteed commitments according to insurance contracts in force after deduction for the anticipated capital value of future contracted premium payments. The capital values are calculating taking into account assumptions n future mortality and other risk measurements, charges and taxes. In general, this means that the provision is the sum of the redemption value of all fund units on behalf of policyholders on the balance sheet date. Mortality assumptions The mortality assumptions applied are based on shared industry statistics produced in These assumptions take the anticipated future increase in longevity into account. Charges assumptions Charges assumptions are based on the charges that applied when the insurance was taken out. Principally this means one charge that is proportional to premium and one charge that is proportional to life insurance provisions. Conditional bonus Each savings insurance with a guaranteed rate is entitled according to the rules in the insurance terms to a conditional bonus. The conditional bonus in the balance sheet is determined so that life insurance provisions and the conditional bonus combined are as much as the sum of the insurance capital on all savings insurance contracts. Thus the conditional bonus in the balance sheet is a balancing item. ACCOUNTING PRINCIPLES HANDELSBANKEN LIV ANNUAL REPORT

16 Income statement SEK million TECHNICAL ACCOUNT, LIFE INSURANCE BUSINESS Premiums written Note Premiums ceded Premiums written (net of reinsurance) Investment income Note Unrealised gains on investments Note Increase in value of investments for which policyholders bear the investment risk Claims incurred (net of reinsurance) Gross Note Reinsurers share Claims paid Gross Reinsurers share Change in provision for claims outstanding Total claims incurred (net of reinsurance) Life insurance provisions Life insurance provisions for which policyholders bear the risk Conditional bonus Unit-linked commitments Change in other technical provisions (net of reinsurance) Operating expenses Note Investment charges Note Unrealised losses on investments Note Other technical charges Note Share in result of associated companies Investment income transferred to finance business Balance on the technical account, life insurance business NON-TECHNICAL ACCOUNT Balance on the technical account, life insurance business Investment income Note Unrealised gains on investments Note Investment income transferred from life insurance business Investment charges Note Unrealised losses on investments Note Profit before appropriations and tax Appropriations Profit before tax Tax Note Net profit/loss for the year HANDELSBANKEN LIV ANNUAL REPORT 2004 INCOME STATEMENT

17 Analysis of results Parent company SEK million Technical account, life insurance business 2004 Total INDIVIDUAL INSURANCE Life insurance Unit-linked insurance DIRECT INSURANCE OF SWEDISH RISKS Non-cancellable disability and accident insurance and waiver of premium insurance Group pension and occupational pension insurance INSURANCE Group life and occupational group life insurance Unit-linked insurance Non-cancellable disability and accident insurance and waiver of premium insurance Direct insurance of foreign risks Reinsurance accepted Premiums written (net of reinsurance) Investment income Unrealised gains on investments Increase in value of investments for which the policyholders bear the investment risk Claims incurred (net of reinsurance) Change in other technical provisions Operating expenses Investment charges Unrealised losses on investments Investment income transferred to finance business Balance on the technical account, life insurance business PREMIUMS WRITTEN Premiums written (gross) Premiums for reinsurance ceded Total premiums written (net of reinsurance) CLAIMS INCURRED Claims paid (gross) Reinsurers share Change in provision for claims outstanding (gross) Reinsurers share Total claims incurred (net of reinsurance) Technical provisions 31 Dec 2004 Life insurance provisions Provision for claims outstanding Technical provisions for which policyholders bear the risk 31 Dec Conditional bonus Unit-linked insurance commitments ANALYSIS OF RESULTS HANDELSBANKEN LIV ANNUAL REPORT

18 Balance sheet SEK million ASSETS Intangible assets Goodwill Note Other intangible assets Note Investments Land and buildings Note Shares and participations in group companies Note Shares and participations Note Bonds and other fixed income securities Note Other loans Derivatives Note Investments for which the policyholders bear the investment risk Reinsurers share of technical provisions Claims outstanding Receivables Receivables arising out of direct insurance operations Note Receivables arising out of reinsurance operations Other receivables Note Other assets Tangible assets Note Cash at bank and in hand Note Prepayments and accrued income Accrued interest income Deferred acquisition costs Note Other prepayments and accrued income Total assets HANDELSBANKEN LIV ANNUAL REPORT 2004 BALANCE SHEET

19 SEK million SHAREHOLDERS EQUITY, PROVISIONS AND LIABILITIES Shareholders equity Share capital ( shares par value SEK 1 000) Statutory reserve Reserve for unrealised gains Note Other restricted reserves Profit brought forward Net profit/loss for the year Total shareholders equity Note Untaxed reserves Tax allocation reserve - 15 Subordinated liabilities Note Technical provisions (gross) Life insurance provisions Note Provision for claims outstanding Note Provisions for life insurance where the policyholders bear the risk Conditional bonus Note Unit-linked commitments Note Provisions for other risks and charges Provisions for taxes Note Deposits from reinsurers Liabilities Liabilities arising out of direct insurance operations Note Liabilities arising out of reinsurance operations Derivatives Note Other liabilities Note Accruals and deferred income Other accruals and deferred income Note Total shareholders equity, provisions and liabilities Pledges and comparable collateral for own liabilities and for reported commitments for provisions Other pledged assets and comparable collateral Shares on loan Other commitments Note BALANCE SHEET HANDELSBANKEN LIV ANNUAL REPORT

20 NOTES (Amounts in SEK million unless otherwise stated) NOTE 1 Premiums written NOTE 4 Claims paid (gross) Paid-in and recognised premiums Total premiums written (gross) (Of which premiums written from Group companies) (141) (149) (141) (149) Claims paid Cancellations and repurchases Operating costs for claims management Total claims paid (gross) Premiums written for direct insurance Group Regular premiums Single premiums Regular premiums Single premiums Contracts for which policyholders bear the investment risk Contracts for insurance with guaranteed rate NOTE 2 Operating surplus from land and buildings Investment income Rental revenue Operating expenses Total operating surplus from land and buildings Dividends received Interest receivable Bonds and other fixed income securities Other interest receivable Total interest receivable (Of which interest receivable from Group companies) (37) (56) (36) (43) Exchange gains, net Capital gains, net Shares and participations Bonds and other fixed income securities Other investments Total capital gains, net Total capital gains, net NOTE 3 Unrealised gains on investments Shares and participations Bonds and other fixed income securities Derivatives NOTE 5 Operating expenses Acquisition costs Change in deferred acquisition costs Administrative expenses Reinsurance commissions and profit participations Total operating expenses Operating expenses for claims management Asset management charges Total operating expenses The company s total operating expenses for purchases, administration, claims management and treasury management are broken down into the following items: Commission expense Commission income Staff costs Premises Depreciation Other Total Operating expenses for claims management are reported under the heading Claims paid and operating expenses related to treasury management are reported under Investment charges. STAFF COSTS Salaries and fees Social security costs Pension costs Provision to profit-sharing foundation Other staff costs Pension costs relate to paid pension premiums. There are no additional pension obligations. Of which salaries and fees to the board and chief executive Salaries and fees Pension costs PRINCIPLES FOR COMPENSATION TO SENIOR EXECUTIVES The compensation level for senior executives is revised annually according to the decision-making process that applies throughout the Handelsbanken Group. One main principle in the process is that compensation may only be issued in the form of fixed salary and customary employee benefits. Variable compensation benefits such as bonus and percentage of profits are not paid. Decision-making process Handelsbanken s Board appoints a special compensation committee composed of two board members, one of whom is appointed chairman of the committee. The compensation committee convenes when its chairman calls a meeting and its assignments include establishing principles for the salaries, benefits and pensions of presidents of subsidiaries. Based on these guidelines the board of Handelsbanken Liv decides the terms for the chief executive. 18 HANDELSBANKEN LIV ANNUAL REPORT 2004 NOTES

21 TERMS AND COMPENSATION FOR SENIOR EXECUTIVES Terms The retirement age for the chief executive and other senior executives is 65. The pension plan complies with the Bank s occupational pension (BTP Plan). Full retirement pension is paid at the following percentages of pensionable salary: Pensionable salary component Pension from month of 65th birthday 7.5 income base amounts 10% income base amounts 65% income base amounts 32.5% Compensation In 2004 the chief executive received a total salary of SEK 1,096 thousand (2,911), of which profit-related salary amounted to SEK 0 (0). In addition, benefits were provided with a total value of SEK 89 thousand (94). Five (five) other senior executives received remuneration and other benefits of SEK 5,136 (4,762), of which other benefits comprise SEK 445 thousand (400). Other senior executives includes the senior actuary, head of administration, head of business support, head of finance and head of communications. Non-executive board members, outside the Handelsbanken Group, received fees totalling SEK 53 thousand (50). No fees were paid to the chairman of the board. No fees were paid to employee representatives on the board and their deputies. The chief executive and other senior executives, in common with other employees in the Handelsbanken Group, received compensation with a unit in Handelsbanken s profit-sharing system Oktogonen. One Swedish unit corresponded to SEK 66 thousand (76). NUMBER OF EMPLOYEES (AVERAGE DURING THE YEAR) Sweden Norway Finland Ireland All employees are office staff Gender breakdown Men Women Men Women Sweden Norway Finland Ireland Gender breakdown Men Women Men Women Sweden Norway STAFF COSTS IN EACH COUNTRY Sweden Norway Finland Denmark Ireland SICKNESS ABSENCE RATE IN THE SWEDISH OPERATIONS SICKNESS ABSENCE, % Age Men Women Total Total Of whom on long-term sick leave, percentage points of total sickness absence Total GENDER BREAKDOWN, SENIOR EXECUTIVES Senior executives in SPP and Handelsbanken Liv total 17 people, of whom 11 are employed at SPP. Men Women Senior executives 15 2 of which Handelsbanken Liv 5 1 Board of directors 6 2 FEES TO AUDITORS KPMG Bohlins AB, Audit KPMG Bohlins AB, Consultancy BDO Feinstein Revision AB, Audit/Öhrlings Pricewaterhouse Coopers Internal audit Handelsbanken NOTE 6 Investment charges Investment management charges Interest payable Other interest payable Total interest payable (of which costs to Group compa (0) (0) (0) (0) Impairment losses Shares Exchange losses, net Capital losses, net Shares and participations Other Total capital losses, net Total investment charges NOTES HANDELSBANKEN LIV ANNUAL REPORT

22 NOTE 7 Unrealised losses on investments NOTE 11 Investment charges NOTE 9 Investment income Dividends received Interest receivable Bonds and other fixed income securities Other interest receivable Total interest receivable (of which interest receivable from Group companies) (10) (10) (9) (8) Exchange gains, net Capital gains, net Shares and participations Fixed income securities Other investments Total capital gains, net Total investment income NOTE 10 Unrealised gains on investments Shares and participations Fixed income securities Derivatives Total unrealised gains on investments Land and buildings Shares and participations Bonds and other fixed income securities Derivatives NOTE 8 Other technical charges Amortisation of intangible assets Other technical charges Investment management charges Interest payable Other interest payable Total interest payable (of which costs to Group companies) (-48) (-46) (-25) 0 Exchange losses Capital losses, net Shares and participations Total capital losses, net Total investment charges NOTE 12 Unrealised losses on investments AND Fixed income securities NOTE 13 Tax Policyholder tax Income tax Deferred tax Total tax NOTE 14 Goodwill Cost opening balance 24 - Cost of assets acquired during the year Total cost Amortisation for the year Accumulated amortisation according to plan -1 - Total amortisation Book value NOTE 15 Other intangible assets Cost opening balance Total cost Amortisation for the year Accumulated amortisation according to plan Total amortisation Book value Handelsbanken guarantees the book value of the SPP brand. 20 HANDELSBANKEN LIV ANNUAL REPORT 2004 NOTES

23 NOTE 16 Land and buildings Group Fair Tax assess- Book value Vacancy rate value Cost ment value SEK/m 2 Yield space Office and commercial properties % 3 % The yield percentage is calculated as the operating surplus in 2004 in relation to market value at 31 December The property portfolio is concentrated to central Stockholm. Of the office and commercial properties, 11% of space is used for own operations. All properties are appraised externally. The valuations are mainly performed with the aid of cash flow analyses. NOTE 17 Shares and participations in Group companies Parent company Company Corporate ID no. Domicile No. of shares Proportion of capital Euroben Life & Pension Ltd Dublin % Handelsbanken Varumärkes AB Stockholm % Svenska RKA International Insurance Services AB Stockholm % Kvarteret Läkaren Fastighetsförvaltning AB Stockholm % Fastighets AB Malmarna Stockholm % Fastigheten Läkaren 9 KB Stockholm 100 % Fastigheten Rännilen 15 KB Stockholm 100 % SHB Liv Forsikringsaktieselskab Copenhagen % SPP Liv Fondförsäkring AB Stockholm % Equity 2004 Book value 2003 Book value NOTE 18 Shares and participations Fair value Swedish shares and participations Foreign shares and participations Of which unlisted shares and participations Cost Swedish shares and participations Foreign shares and participations Of which unlisted shares and participations A complete specification of shares and participations in provided on page 25. NOTE 19 Bonds and other fixed income securities Fair value Swedish government Swedish mortgage institutions Other Swedish issuers Foreign governments Other foreign issuers Total Of which listed Amortised cost Swedish government Swedish mortgage institutions Other Swedish issuers Foreign governments Other foreign issuers Total Of which listed Book value exceeds nominal value Book value less than nominal value Fixed-interest terms at 31 December Fair value 0 1 years years years years years NOTES HANDELSBANKEN LIV ANNUAL REPORT

24 NOTE 20 Derivative instruments with positive values Group and parent company Fair value Nominal value Fair value Nominal value Interest rate futures Forward exchange contracts Of which cleared NOTE 21 Receivables arising out of direct insurance operations AND Amounts receivable from insurance companies 8 1 Amounts receivable from policyholders 4 9 NOTE 22 Other receivables Owed by Group companies Other receivables NOTE 23 Tangible assets Cost, opening balance Cost of additional assets Cost of assets sold during the year Exchange rate differences Total cost NOTE 24 Cash at bank and in hand Funds on accounts at Group companies Other cash and cash equivalents NOTE 25 Deferred acquisition costs Capitalisation Opening balance Book value of assets acquired during the year Capitalisation for the year Depreciation for the year Closing balance Book value Of which book value with remaining depreciation period in excess of two years NOTE 26 Reserve for unrealised gains Shares and participations Bonds and other fixed income securities Depreciation for the year Accumulated depreciation according to plan Accumulated depreciation on assets sold during the year Exchange rate differences Total depreciation Book value HANDELSBANKEN LIV ANNUAL REPORT 2004 NOTES

25 NOTE 27 Shareholders equity Group Share capital Statutory reserve Reserve for unrealised gains Other restricted reserves Profit brought forward Net profit for the year Opening balance Disposition of profits Shareholders contribution received Change in reserve for unrealised gains Change in translation difference Group contribution received Transfer between restricted and unrestricted equity Net profit for the year 8 8 Closing balance Total 2004 Parent company Share capital Statutory reserve Reserve for unrealised gains Other restricted reserves Profit brought forward Net profit for the year Opening balance Disposition of profits Shareholders contribution received Change in reserve for unrealised gains Net profit for the year Closing balance Total 2004 Sensitivity analysis, consolidated shareholders equity Effect on shareholders equity Price fall shares 10% -34 Interest rate rise 1 percentage point -22 Yield requirement real estate 2 percentage points -9 Exchange rate fall 10% 0 An increase in the highest permitted interest rate assumption that may be used in calculation of life insurance provisions of 0.6 percentage points would not have any effect on shareholders equity. On the other hand, life insurance provisions would decrease by SEK 1.3 billion and the conditional bonus would increase by the same amount. NOTES HANDELSBANKEN LIV ANNUAL REPORT

26 NOTE 28 Subordinated liabilities AND Perpetual debenture NOTE 29 Life insurance provisions Opening balance Portfolio transfer Change in exchange rates Change in provisions Closing balance NOTE 30 Provision for claims outstanding AND Notified claims Non-notified claims Provision for sickness annuities NOTE 31 Conditional bonus Opening balance Change for the year Closing balance NOTE 32 Unit-linked commitments Opening balance Assets acquired during the year Change in exchange rates Change for the year Closing balance NOTE 33 Provisions for taxes Provision for income and policyholder tax Provision for deferred tax NOTE 34 Liabilities arising out of direct insurance operations Owed to insurance companies NOTE 35 Derivative instruments with negative values Group and parent company Fair value Nominal value Fair value Nominal value Equity futures Interest rate futures Forward exchange contracts Of which cleared NOTE 36 Other liabilities Received unsettled premiums Owed to Group companies Other liabilities NOTE 37 Other accruals and deferred income Accrued operating expenses Accrued commission expenses Accrued interest payable Other accruals Deferred income NOTE 38 Other commitments AND General partner in limited partnership Equity-related options - 23 Interest-rate related futures Currency-related futures HANDELSBANKEN LIV ANNUAL REPORT 2004 NOTES

27 Specification of shares and participations 31 December 2004 SEK million Swedish listed shares Number Book value Consumer non-durables Axfood Sardus Total 32 Finance and real estate Hufvudstaden A Total 20 Health care Capio Getinge B Sectra B Total 37 Industrial goods and services Ballingslöv Cardo Gunnebo Hexagon B Munters Nibe Industrier B SAAB B Svedberg B Total 120 Information technology Audiodev B Ericsson A Total 33 Materials Billerud Holmen B Total 119 Durables Clas Ohlson B Digital Illusion A Nobia Total 46 Swedish unlisted shares and participations Number Book value Bergvik skog Healthcap CoInvest KB 14 Healthcap KB 10 Mölnlycke Health Nordic Capital Nordic Capital IV 166 Nordic Capital V 82 NT Holding AB Skandia Investment KB 68 VSM Group AB Total 637 Swedish fund units Number Book value Handelsbankens Hedgefond Global Assets HB Pensionsfond 40-tal A HB Pensionsfond 50-tal A HB Pensionsfond 60-tal A HB Pensionsfond 70-tal A HB Pensionsfond 80-tal A Xact SBX Xact OMX Other funds 2 Total Total Swedish shares and participations Foreign shares and participations Number Book value Finland Uponor A YIT Total 109 France Air Liquide PG Prime Serie Total 374 Germany Dow Jones Euro Stoxx Total Ireland CRH Total 150 SPECIFICATION OF SHARES AND PARTICIPATIONS HANDELSBANKEN LIV ANNUAL REPORT

28 Foreign shares and participations, cont. Number Book value Jersey Amaranth Total 3 Norway Prosafe Total 55 Spain Banco Popular Español Fomento de Const Total 202 Unlisted foreign convertible loans Number Book value Enermet Group Convertible 99/ Total 4 Total foreign shares and participations Total shares and participations in the parent company Additional in the Group Swedish fund units Number Book value Handelsbanken Aktiefond Index Other funds 2 Total 89 UK Diageo Reckitt Benckister Royal Bank of Scotland Bunzl Wolseley Johnson Mattey PLC Davis Service Group Total 836 Foreign fund units Number Book value Capital Int Emerging Market CIF Global Equity Schroders Pacific Equity Other funds 1 Total 6 Total shares and participations in the Group Foreign fund units Number Book value Handelsbanken Flermarknadsfond Handelsbanken Amerikafond Handelsbanken Japanfond S & P Depository Receipt (ETF) Other funds 5 Total 658 Foreign unlisted shares Number Book value Sonion Consolis Oy B Nopco Paper Technology Enermet Group OY Nybron Flooring International Total HANDELSBANKEN LIV ANNUAL REPORT 2004 SPECIFICATION OF SHARES AND PARTICIPATIONS

29 Proposed appropriation of profits The opening balance of the Group s unrestricted equity amounted to SEK 1,700 million. No provision to restricted reserves is required in respect of The following amount is available for distribution by the Annual General Meeting: Profit brought forward Net profit for the year SEK 1,540 million SEK 238 million SEK 1,778 million The board of directors and the chief executive propose that SEK 1,778 million be carried forward to new account. STOCKHOLM, 10 FEBRUARY 2005 Björn C Andersson Thommy Mossinger Stefan Nilsson Chairman Vice Chairman Ann Christine Hutton Forsberg Anki Jönsson Ingvar Lessnert Magnus Uggla Hans Hagman Chief Executive PROPOSED APPROPRATION OF PROFITS HANDELSBANKEN LIV ANNUAL REPORT

30 Audit report To the Annual General Meeting of Handelsbanken Liv Försäkrings AB, corporate identity number We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the board of directors and the chief executive of Handelsbanken Liv Försäkrings AB for the year These accounts and the administration of the company and the application of the Swedish Annual Accounts Act for Insurance Companies when preparing the annual accounts and the consolidated accounts are the responsibility of the board of directors and the chief executive. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual accounts and the consolidated accounts are free of material misstatement. During the year, the auditing department of Handelsbanken has continuously examined the internal controls and accounts. We have received the reports that have been prepared. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes an assessment of the accounting policies used and of their application by the board of directors and the chief executive, and of the significant estimates and judgements made by the board of directors and the chief executive in the preparation of the annual accounts and consolidated accounts as well as an evaluation of the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any board member or the chief executive. We also examined whether any board member or the chief executive has, in any other way, acted in contravention of the Swedish Insurance Business Act, the Swedish Annual Accounts Act for Insurance Companies or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below. The annual accounts and the consolidated accounts have been prepared in accordance with the Swedish Annual Accounts Act for Insurance Companies and thereby give a true and fair view of the company s and the Group s financial position and results of operations in accordance with generally accepted auditing standards in Sweden. The report of the board of directors is consistent with the other parts of the annual accounts and the consolidated accounts. We recommend to the Annual General Meeting that the income statements and balance sheets of the parent company and the Group be adopted, that the profit of the parent company be dealt with in accordance with the proposal in the report of the board of directors, and that the members of the board of directors and the chief executive be discharged from liability for the financial year. STOCKHOLM, 15 MARCH 2005 KPMG Bohlins AB Peter Zell Authorised Public Accountant Matts Edin Authorised Public Accountant Appointed by the Swedish Financial Supervisory Authority 28 HANDELSBANKEN LIV ANNUAL REPORT 2004 AUDIT REPORT

31 Management Handelsbanken Liv and SPP have a joint organisation. Stefan Nilsson, born 1957 Executive Vice President of Handelsbanken Head of Handelsbanken Pension and Insurance Hans Hagman, born 1963 Chief Executive of Handelsbanken Liv Göran Holgerson, born 1960 Chief Executive of SPP Henrik Sandberg, born 1957 Vice President of SPP Head of Finance & Risk Jan Lund, born 1955 Regional Manager Northern Norrland Magnus Fors, born 1960 Regional Manager Southern Norrland Anne Jansson, born 1960 Regional Manager Central Sweden Started 7 February 2005 Lennart Olsson, born 1953 Regional Manager Stockholm City Mats van Rheinberg, born 1956 Regional Manager Eastern Sweden Lars Fitger, born 1955 Regional Manager Western Sweden Anders Persson, born 1963 Regional Manager Southern Sweden Jan Ahlström, born 1956 Regional Manager International Nils Berner, born 1967 Senior Actuary, Handelsbanken Liv Jakob Carlsson, born 1967 Senior Controller Anders Cato, born 1961 Head of Business Development Kenth Eldebrink, born 1955 Chief Executive of Euroben Life & Pension Ltd Bo Frogner, born 1961 Head of Control and Accounting Tibor Havas, born 1950 Head of Contractual Pensions Magnus Karlsson, born 1967 Head of Brokerage Unit Johan Lagerström, born 1961 Head of Communications Bernt Lönegren, born 1946 Senior Actuary, SPP Elisabeth Norberg, born 1950 Head of Administration Stephan Oxenborg, born 1951 Head of Development Åke Svensson, born 1955 Head of Business Support Gun Ternstedt, born 1952 Head of Human Resources Lennart Zetterfeldt, born 1950 Legal Counsel Board of directors Björn C Andersson, born 1946 Chairman Executive Vice President of Handelsbanken Member since 1990 Thommy Mossinger, born 1951 Deputy Chairman Executive Vice President of Handelsbanken Head of Southern Sweden Regional Bank Member since 2001 Stefan Nilsson, born 1957 Executive Vice President of Handelsbanken Head of Handelsbanken Pension and Insurance Member since 1998 Ann Christine Hutton Forsberg, born 1957 Head of Administration Odlander, Fredrikson & Co AB Elected by the Swedish Financial Supervisory Authority Member since 2001 Anki Jönsson, born 1949 Employee representative Member since 2003 Ingvar Lessnert, born 1950 Employee representative Member since 2002 Magnus Uggla, born 1952 Executive Vice President of Handelsbanken Head of Stockholm City Regional Bank Member since 2002 MANAGEMENT AND BOARD HANDELSBANKEN LIV ANNUAL REPORT

32 Glossary Conditional bonus Mainly return in excess of the guaranteed return on the insurance policy s guaranteed capital. The conditional bonus varies according to the insurance company s total return. Demutualisation In a demutualised (profit distributing) company the shareholders bear responsibility for the risk capital and it is permitted to distribute profits. In a mutually operated life insurance company the policyholders bear responsibility for most of the risk capital and profit-distribution is not permitted. Expense ratio Operating expenses in relation to premiums written. Funding capital Consists of shareholders equity, untaxed reserves and subordinated debentures. When calculating funding capital, the provision for deferred tax is reversed. Guaranteed rate The interest rate used for upward adjustment of the guaranteed capital in an insurance policy with guaranteed interest. Life insurance provisions Value of future guaranteed insurance benefits (pension amounts and other guaranteed disbursements) minus the value of future premium payments. Life insurance provisions for which policyholders bear the risk Life insurance provisions where policyholders themselves bear the risk to some extent. Includes both the value of unit-linked insurance contracts and the value of the conditional bonus in insurance with guaranteed interest. Management expense ratio Operating expenses for administration, purchases and claims management in relation to average assets under management. Mutuality Mutuality means that the company s entire result, both profits and losses, and bonuses accrue to the policyholders. This means, among other things, that a final price for an insurance cannot be provided until the insurance contract has expired. Provision for claims outstanding The estimated value of incurred insurance claims that have not yet been paid. Reference portfolio The allocation of assets under management into different asset classes that are judged appropriate in the short term. The reference portfolio constitutes the guideline for the asset managemetn assignemnt but it is also possible for investment managers to diverge from this within set limits. Solvency ratio The solvency ratio is a measure of the margin the company has to meet its commitments. The ratio for a demutualised, profitdistributing life insurance company cannot be compared with the ratio for a mutual life insurance company. The solvency ratio is the capital base divided by the required solvency margin. The capital base is mainly shareholders equity in the company and any subordinated debentures. The required solvency margin is mainly the sum of 4% of the life insurance provisions, plus 1% of unit-linked insurance commitments, plus 1% of conditional bonus plus % of mortality risks. The solvency ratio may amount to at least 1 for a limited period. Technical provisions Value of insurance company s guaranteed commitments which comprise life insurance provisions and provision for claims outstanding. Total return and yield The sum of change in value and yield on investments managed for savers with guaranteed interest. Yield is the sum of interest receivable, interest payable, operating surplus from land and buildings, and dividends on shares and participations after deduction of operating expenses for asset management. 30 HANDELSBANKEN LIV ANNUAL REPORT 2004

33 PHOTOGRAPHS: Elisabeth Ohlson Wallin (page 1), Jacob Felländer (page 3) PAPER: Silverblade

34 Head office: Handelsbanken Liv, P.O. Box 1325, SE Stockholm. Street address: Torsgatan 14. Telephone: Fax: