Annual Report Danica Pension

Transcription

1 Annual Report 2006 Danica Pension

2 Contents MANAGEMENTS REPORT Financial highlights... 3 Summary... 4 Competitive situation...4 Sales of Danica Balance, Danica Link and Danica Traditionel... 6 Customers and service... 6 International activities...7 Risk management and investment strategy... 8 Organisation, management and partnerships...11 Financial results...12 Outlook for Management...19 STATEMENTS AND REPORTS Statement by the management...21 Audit reports...22 GROUP ACCOUNTS Accounting policies...24 Consolidated accounts...34 Parent company accounts...55 Group holdings and undertakings...71 This Annual Report 2006 is a translation of the original report in the Danish language (Årsrapport 2006). In case of discrepancies, the Danish version prevails. 2 DANICA PENSION ANNUAL REPORT 2006

3 Financial highlights for the Danica Pension group DKr m INCOME STATEMENT Life insurance Premiums 14,813 13,958 Return on investment 7,030 21,708 Claims and benefits 13,975 12,583 Change in life insurance provisions and outstanding claims provisions 3,869 11,573 Change in collective bonus potential 2,597 3,726 Change in provision for unitlinked contracts 6,131 4,340 Total operating expenses relating to insurance 1,056 1,070 Result of reinsurance Transferred return on investment Technical result of life insurance 1,056 1,576 Technical result of health and accident insurance Return on investment allocated to equity Profit before tax 1,557 1,775 Tax Net profit for the year 1,142 1,302 BALANCE SHEET Total assets 239, ,104 Provisions for insurance and investment contracts 218, ,477 Collective bonus potential 13,864 11,266 Total shareholders equity 14,997 15,811 As Danica Pension in 2006 issued bonds listed on the Irish Stock Exchange, Danica Pensions consolidated accounts for 2006 have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU. DANICA PENSION ANNUAL REPORT

4 Summary 2006 was a good year for Danica s customers. The return on investment and processing times were satisfactory and more than 100,000 policyholders benefited from price reductions on Danica Balance, Danica Link and Danica Traditionel. Premiums rose from DKr16.5bn to DKr17.8bn. Total premiums on the market products Danica Balance and Danica Link rose by 87% to DKr6.0bn. The net profit amounted to DKr1,142m, corresponding to a return on equity of 7.8%. Danica Balance customers with 30 years to retirement and a mediumrisk option in 2006 saw a return of 10.5% before tax, while customers with a highrisk option saw a return of 14.0% before tax. Most Danica Link customers opt for medium risk, and their return before tax was 5.3% while customers opting for high risk saw a return before tax of 9.1%. Customers with Danica Traditionel received a rate of interest of 4.5% on their savings, equalling a return of 5.3% before tax in The group s expense ratio dropped for the sixth consecutive year, from 6.9% in 2005 to 6.3% in In 2006, Danica focused further on processing times, for instance deciding to introduce financial compensation to customers if their pension scheme is not set up within 20 working days. entities in the longer term. Towards the end of the year, the Norwegian corporate portfolio was converted to the common system. Its financial strength of DKr24bn and an excess capital base of DKr10bn make the Danica Pension group one of the financially strongest groups in the industry. This provides customers with a high degree of security in their savings. In 2006, Standard & Poor s confirmed Danica s AA rating, which is the highest rating of any pension company in Scandinavia. The positive development in Danica s business is expected to continue in 2007 with increasing premium income. The net profit for the year is expected to be in line with that of 2006, provided that the company is able to book the risk allowance in 2007 as well. Competitive situation 2006 saw growing public interest in pension savings. The higher life expectancy and the dream of an active retirement lead more and more people to recognise the need to save up for their pension. This, combined with continuously increasing pension savings, has also drawn media attention to the area. Under the theme of The Dream of the good life, Danica in 2006 again invited customers to the Day of Dreams. The arrangements were held in five locations around the country and were based on analyses showing that Danes dream particularly of living abroad, having more time for their families and living a long life in good health. The positive development of Danica s international activities continued. In 2006, the Danish insurance systems were adjusted so that they can also be used by international The objective of the Day of Dreams is to get customers, particularly the younger ones, to think ahead and consider what is necessary in terms of savings, among other things to 4 DANICA PENSION ANNUAL REPORT 2006

5 be able to live the good life throughout their lives. As in previous year, competition further intensified in Danica Pension maintained its competitive strength in the market due to increased efficiency and a good product range, with Danica Balance setting new standards for market products. The efficiency increased, and Danica Pension consequently lowered the prices of Danica Balance, Danica Link and Danica Traditionel in The price reduction benefited more than 100,000, mainly corporate, customers, although private customers with large premium payments or savings also saw lower prices. This was a contributing factor to Danica Pension s growth in an increasingly competitive market. In recent years, the health care area has been subject to increasing focus in many companies as a means to generate greater employee loyalty and satisfaction. This may be done by offering employees health care insurance as part of the company pension scheme and by focusing on healthy eating, fitness offers etc. To focus on this, at this year s HR fair Danica awarded a health prize to a Danish company that has made a targeted effort in this area. Danica s proposals should be seen in light of the view that the competition for new customers should not be at the expense of the existing customers. There is a risk of this happening today, as the industry is experiencing significant negative cost and risk results, reducing the collective bonus potential. Danica therefore proposed that negative cost and risk results should in future be taken to the pension company s net profit, so that it is the owners rather than the customers who bear the losses. This would ensure increased transparency. This annual report comprises key figures for the cost and risk results and a calculation of their total effect on customer funds. Danica will also in future disclose this information. For increased transparency, Danica also proposed that customers should be informed of their share of bonus reserves. To further promote mobility in the pension industry, Danica also proposed that customers should be allowed to take with them the additional provisions when moving from a traditional pension scheme to a different pension company or to a market product. Such a solution would require agreement by everyone in the industry. At its annual meeting on November 16, 2006, the Danish Insurance Association presented 18 proposals for greater openness and transparency in the pension industry. Before as well as after the annual meeting, Danica argued that the proposals were a step in the right direction, but inadequate, and Danica therefore put forward supplementary proposals. Additional provisions are the pension company s provisions made in excess of the customers savings to meet its future pension liability toward the customers. It is typically customers with high guaranteed benefits who have additional provisions. In 2006, the Danish parliament passed a new insurance broker act. The new act is generally designed to ensure the impartiality of DANICA PENSION ANNUAL REPORT

6 insurance brokers. This can be ensured only if the customers pay their own insurance broker expenses, so that other customers do not end up paying them. Judgement is expected to be passed in early 2007in an EU case against Denmark concerning the deductibility of pension contributions to foreign pension companies. If the judgement goes against Denmark, it could affect customers ability to make contributions to foreign companies. It could also have an impact on the future of the existing Danish act on tax on pension returns. Sales of Danica Balance, Danica Link and Danica Traditionel Danica Balance rose by 182% and Danica Link by 47%. The two market products represent a total premium of DKr6.0bn, corresponding to approximately 30% of total premiums from the Danish business. Sales of Danica Balance and Danica Link developed satisfactorily in 2006, and many customers have also chosen to move their savings from Danica Traditionel to one of the two market products. The increasing interest that private individuals as well as companies are showing in market products means that these will over time replace the traditional pension product.total premiums in Danica Traditionel fell by 6%. Generally, Danica recommends that younger customers whose existing scheme is Danica Traditionel with guaranteed benefits based on 1.5% or 2.5% interest convert their pension to either Danica Balance or Danica Link. For customers who have a traditional pension scheme with guaranteed benefits based on 4.5% interest, the matter is slightly more complex, and it is therefore important that such customers receive careful guidance before any conversion of their pension. PRODUCT RANGE DANICA BALANCE Simple product with a range of choices Guarantee only when necessary. Individual adjustment of investments. Equity share optimised to customer needs. High degree of transparency Customers select investment profile. Return directly linked to market return. DANICA LINK Extensive freedom of choice Optional guarantee. Customers select equity share. High degree of transparency Customers are able to trade among 43 funds. Return directly linked to market return. DANICA TRADITIONEL Simple product without choices Mandatory guarantee conservative investment strategy. Customers are not able to influence investments. Lower relative equity share. Lack of transparency Common basis without choice of investment profile. Rate of interest on savings determined by Danica Pension. Possibility of unguaranteed surrender value. The group held a share of 31% of the market on which Danica competes at the end of the first half of For market products alone, the market share was just over 50%. Customers and service In 2006 as well as in previous years, Danica focused on improving processing times in connection with establishing or changing policies and in connection with assessment of claims. This was a subject of attention throughout the pension industry, and in the autumn the media also focused on the issue. 6 DANICA PENSION ANNUAL REPORT 2006

7 PROCESSING TIMES (%) New policies within 5 days Policy changes within 10 days Assessment of claims within 10 days Short processing times are important to customers, and for Danica it is important to meet customer expectations. In 2006, Danica of its own accord introduced compensation to customers if a new pension scheme is not set up within 20 working days of receipt of the customer s signature. Overall, 259 customers received compensation in 2006 in the total amount of DKr192,000. Service targets and processing times for new business, policy changes and claims assessments are available on Danica s Danish website. In 2007, Danica will strive to further improve processing times. In the spring of 2006, Danica conducted a customer satisfaction survey which indicated that customers consider Danica a reliable, trustworthy company offering good, personal service. The survey also revealed that customers still consider the wording of Danica s letters, insurance terms and conditions, annual statements etc. poor. Although Danica has made numerous improvements to its written communication over the past few years, this will remain a focal point in In 2006, Danica Pension contributed actively to the development of Pensionsinfo, which is a common online industry solution providing pension information from all Danish banks and pension companies. The solution is expected to be available to customers from mid2007. International activities Norway In the Norwegian market, sales to private customers take place through local banks and Fokus Bank, which is part of the Danske Bank Group, while the corporate market is serviced by Danica s sales force and brokers. Sales to the Norwegian market are made through the Danica Pension group as well as through the sister company Danica Pensjonsforsikring. Danica s insurance systems were adjusted in 2006 so that they are also able to handle the regulations in the Norwegian market, and at the end of the year the Norwegian corporate portfolio was converted to the common system. This opened up the possibility of selling products such as Danica Balance and Danica Link with payment guarantees. There are no comparable products in the Norwegian market today, and sales of the two products are expected to contribute to an increased market share in Norway. In the private customer market, sales were negatively affected by the uncertainty generated in connection with the Norwegian government s announced intention of abolishing the tax benefits on personal pension savings. Corporate pension plans became compulsory in Norway in This has led to an increase in the number of pension companies and thus intensified competition. Sweden In Sweden, Danica sells unitlinked products through Danske Bank Sweden and brokers. The positive business development continued in 2006, and gross premiums were up by 22% to DKr1.561m. DANICA PENSION ANNUAL REPORT

8 The increase in sales is predominantly related to capital pension products sold through Danske Bank Sweden. In addition, premiums on the accident and health products launched in 2005 increased. The Swedish company realised a net loss for the year of DKr29m, computed according to Danish accounting policies. To ensure the relationship between the return on investment of customer funds and the customers guaranteed benefits, the group monitors the financial risk and has set limits for maximum price and interest rate risks. Stress tests are conducted on a regular basis to ensure that the company is able to withstand a 30% drop in equity prices and a significant change in the level of interest rates. Risk management and investment strategy The group s overall insurance risk consists of financial risk (market risk and credit risk), insurance risk and operational risk. Financial risk Financial risks relate to the development of the assets allocated to shareholders equity and to the risk that a low return on customer funds in comparison with the guaranteed benefits cannot be covered by the collective bonus potential or the bonus potential of paidup policies. Assets allocated to shareholders equity were in 2006 invested in shortterm bonds with low credit risk, a broadlybased equity portfolio and Danish properties. The most important factor is the market risk relating to the conventional life insurance products, which covers the relation between investment assets and life insurance obligations. If the return on investment for the year is inadequate to cover customers returns, the necessary strengthening of life insurance obligations etc., the deficit is covered first by the collective bonus potential and then by the bonus potential of paidup policies. If these bonus potentials are inadequate to cover the remaining deficit, funds are allocated from shareholders equity. The credit risk on Danica s bond portfolio is limited as the majority of the bonds are government bonds or mortgage bonds with high ratings from the international credit rating agencies. The liquidity risk is also limited, as a large part of the portfolio is placed in ultraliquid listed bonds and marketable international equities. The risk of Investment assets related to unitlinked contracts is to a large extent borne by the policyholders. The risk related to the guarantees in Danica Link is hedged by means of equity derivatives and by means of refinancing the investments in the last five years prior to payment. The risk relating to the guarantees in Danica Balance is managed primarily through the investment strategy. Insurance risk Insurance risks relate to the development in mortality, disability, critical illness etc. For example, an increase in life expectancy affects the time during which pensions are payable under certain pension products while the development in the number of deaths, cases of sick leave and subsequent recoveries affect the benefits paid under insurance policies covering death and disability. Regular actuarial analyses of the various risk elements are made in connection with the computation of insurance obligations and the determination of any measures to be taken. 8 DANICA PENSION ANNUAL REPORT 2006

9 Insurance provisions are calculated by discounting the expected future benefits to their present values. The expectations are based on the group s own portfolio of insurance contracts and are updated regularly. For life insurance, the expected future benefits are based on expected mortality rates. Danica Pension based the calculation of life insurance provisions on a rise in life expectancy of almost three years relative to the assumptions at the time the policies were written; this results in additional provisions of just under DKr5bn. An additional 10% decline in the mortality rate, corresponding to a rise in life expectancy of about one year, would reduce the collective bonus potential by DKr1.4bn while shareholders equity would not be affected. Note 18 in the Parent Company s accounts discloses the effect on shareholders equity and on collective bonus potential and the bonus potential of paidup policies of isolated changes in interest rates, equity prices and property prices as well as changes in the mortality rate and the disability rate. For health and accident insurance, the insurance obligations are calculated based on assumptions of recoveries and reopenings of old claims. In order to reduce insurance risk, a minor part of the risk relating to death and disability is covered by reinsurance. Moreover, disaster risk is covered. Operational risk Operational risks relate to compliance with legislation, rules and standards, etc. losses resulting from exposure to sanctions, claims and damaged reputation as a result of noncompliance with legislation, rules and standards. Compliance uses the tools and methods laid down by the Danske Bank Group s central group compliance and regularly reports to Danica Pension s management and group compliance in Danske Bank. A few customers have brought actions against Danica, claiming that the administrative fee may not be set off against the bonus on paidup policies and on current insurance policies. This has been industry practice for a number of years, and in our opinion is in accordance with the current rules. Investment strategy The Board of Directors determines the Danica Pension group s investment strategy and follows up on the results, while the general management prepares specific investment plans. Savings in Danica Balance are invested in combinations of four investment funds, specially developed for Danica Balance. For each customer, Danica continually adjusts the distribution among the four funds based on the customer s age and chosen risk profile. One of the funds invests in equities, based on a portfolio of indexlinked international equities supplemented by active investment in selected areas. The remaining three funds invest in bonds, and their main difference consists in the maturities of the bonds. The funds primarily invest in Danish and European bonds. Danica systematically reviews its business areas so as to minimise the risk of financial DANICA PENSION ANNUAL REPORT

10 Danica Link is Danica s most flexible pension product, giving individual policyholders significant freedom to choose the risk profile of their investments. Pension savings are invested based on a fund universe consisting of 43 investment funds from a number of Danish and international fund managers. The development of the individual fund is followed closely, and any funds that do not meet Danica s requirements are replaced. This ensures that the quality of the investment funds offered is high. The individual Danica Link customer can either decide which investment funds to invest in or leave the choice to Danica by choosing one of the six Danica Valg portfolios. The Danica Valg portfolios have different risk levels with equity shares of between 0% and 100%. The investment strategy for customer funds in Danica Traditionel is adjusted in respect of: Life insurance obligations Bonus and capital reserves Large portfolio diversification The return and risk potential in individual investment areas To increase the expected future return on investment, the equity share of investment assets was increased from 16% to 23% during At the same time, the share of bonds was reduced to 68% while properties account for some 9%. The majority of the bonds are DKr or EURdenominated government or mortgage bonds. A quarter of these are indexlinked bonds, which contributes to a stable real return. In addition, 7% is invested in credit bonds, which are expected to yield a higher return than conventional bonds. Most of the funds invested in foreign equities are invested according to an index strategy, thus ensuring a return close to the market return. More active investment management is pursued in selected areas. Investment in unlisted Danish and foreign equities takes place through funds. Danica's ethical guidelines on investment in equities are available on Danica s Danish website, Investments in real property traditionally contribute a stable and inflationproof return. Danica, which is the largest owner of shopping centres in Denmark, also holds many commercial properties. Property investments are concentrated on the Danish market. Danica sold most of its residential properties in Danica employs a number of investment managers to manage its investments. Danske Capital manages some 83% of the investment assets. In equities and bonds, six other investment managers are also used. In unlisted equities, the group employs Danske Private Equity, APAX, EQT, Polaris Management and Paul Capital Partners, among others. In the property portfolio, shopping centres are managed by Steen & Strøm and Dan Ejendomme, while Datea manages Danica s other investment properties. 10 DANICA PENSION ANNUAL REPORT 2006

11 Of assets allocated to shareholders equity in Danica Pension, approximately 24% is invested in equities and approximately 10% in properties according to the same profile as that of customer funds, while approximately 66% is invested in shortterm bonds. Contribution and profit policy The low level of interest rates increases focus on bonus distribution to prevent redistribution of major amounts between the various groups of insurance. This applies for instance to insurance policies written before July 1, 1994, on which the guaranteed benefits were calculated based on a technical rate of interest of 4.5%, and insurance policies written subsequently, on which the guaranteed benefits were calculated based on a technical rate of interest of 2.5% or 1.5%. In accordance with the Executive Order on the Contribution Principle, the Danish FSA has been notified of Danica Pension s profit policy. Generally, the executive order permits the recognition of the full risk allowance only if it does not exceed the technical basis for risk allowance. In brief, the technical basis for risk allowance may be defined as the difference between the annual return on investment and the technical rate of interest used to calculate the guaranteed benefits payable to policyholders. Consequently, the contribution principle entails fluctuating results. To the extent that the Executive Order does not permit the recognition of the full risk allowance, the amount outstanding is transferred to a shadow account. The amount may be booked over future years if justified by, among other things, the return on investment. Organisation, management and partnerships The Danica group handles the Danske Bank Group s activities within insurancebased pension savings, life insurance and health care insurance for companies and private individuals. The Board of Directors of Danica Pension consists of five directors elected by the general meeting, three directors elected by the employees and one director appointed by the Minister of Finance pursuant to the Act on Privatisation of Statsanstalten for Livsforsikring. In 2006, Jørgen Klejnstrup joined Danica as Senior Executive Vice President with responsibility for Customer Service, International Business and HR. Jørgen Klejstrup previously held a position on the Executive Committee of Danske Bank as Head of International Business Development. The Company's Executive Board subsequently consists of Henrik RamlauHansen, CEO, Jørgen Klejnstrup and Jesper Winkelmann. The employees of Danica Pension are very loyal to the company. An employee survey conducted in the autumn of 2006 confirms this. To maintain the high degree of loyalty and strengthen the employees satisfaction and motivation, Danica set up an HR department in The HR department is to create an HR strategy to support the business and help management ensure that it applies best practice management principles. In 2006, the responsibility for the pension advice and support in the Danish part of the Danske Bank Group was brought together in Danica. The new structure creates advantages in terms of development of advisory tools, training opportunities etc. DANICA PENSION ANNUAL REPORT

12 Danica s own organisation handles all core activities concerning the insurance business, but has outsourced its IT operations and development, investment management, property management, HR administration, logistics and marketing, primarily to the Danske Bank Group. In addition, Danica compensates Danske Bank, Fokus Bank and Danske Bank Sweden for their sale of and services on its insurance products. Due to the increasing business activity and the combining of group functions, the number of employees has been increased by 52 to 915. The increased number of employees also reflects Danica s focus on increasing the number of training positions, so as to be well prepared in terms of employees for the expected future growth. It is important to Danica that its employees have a high level of professional skills, and Danica therefore arranges relevant development activities, focused on specialist knowledge as well as work processes, in order to meet its own high customer advice and service standards. 574 Danica Pension employees in 2006 accepted the offer of having their personal health profiles drawn up. The health profiles are a selfhelp measure that enables employees to lead healthier lifestyles. Financial results The Danica Pension group and the Parent Company realised a profit before tax of DKr1,557m, against DKr1,775m in The net profit amounted to DKr1,142m, against DKr1,302m in The Board proposes that the net profit for the year be transferred to shareholders' equity. The profit before tax of Danica Pension comprises the return on investment of assets allocated to shareholders equity, including the result of Danica Pension I, the risk result in relation to Forenede Gruppeliv and a risk allowance for 2006 of DKr836m. The risk allowance for 2006 equals 0.47% of average technical provisions against 0.61% in As expected in the interim report, the profit was lower in 2006 than in This was due primarily to the fact that DKr441m was booked from the shadow account in 2005 and that the risk allowance was reduced in 2006 for the benefit of policyholders. The technical basis for risk allowance amounted to DKr5.8bn, and the risk allowance could therefore be booked in full in DANICA PENSION, PROFIT BEFORE TAX (DKr m) Share of technical provisions etc. 1,037 1,127 Health and accident Risk allowance 836 1,053 Investment return on equity Danica Pension I Risk result of Forenede Gruppeliv Transferred to life insurance customers due to contribution and negative health and accident result 173 Booked as income from shadow account 441 Profit before tax 1,557 1,775 Danica Pension s return on equity was 7.8% in In 2005, the return on equity was 8.6% including the amount booked as income from the shadow account, and 6.5% not including this amount. Gross premiums Gross premiums including health and accident insurance and payments received on investment contracts amounted to DKr17.8bn in 2006 an increase of DKr1.3bn or 8% over Of the total gross premiums, DKr5.1bn 12 DANICA PENSION ANNUAL REPORT 2006

13 derived from contracts sold via the Danske Bank Group s branches in Denmark, Norway and Sweden. PREMIUMS (INCLUDING INVESTMENT CONTRACTS) (DKr bn) Danica Balance Danica Link Danica Traditionel Internal transfers Health and accident International Total premiums Premiums for the market products Danica Balance and Danica Link rose by 87% in Denmark, and at the end of ,000 customers had opted for market products. Gross premiums in Danica Traditionel fell slightly, mainly due to the fact that customers increasingly chose market products. In Sweden, gross premiums were up by 22% to DKr1.6bn. In the Norwegian branch, gross premiums amounted to DKr205m. Return on investment In 2006, the Danica Pension group had a satisfactory return on investment before tax on pension returns of DKr7,595m. The return on equities and properties was generally good, while the return on bonds and derivatives was marked by value adjustments due to rising interest rates. For customer funds in Danica Pension, a large portion of the value adjustments on bonds and derivatives were countered by the reduced insurance provisions. During 2006, the 10year Danish yields rose by 0.65 of a percentage point, and shortterm yields rose even more. Bonds with very long maturities yielded negative returns while the rest of the market yielded minor positive returns. The consistently strong growth in company earnings supported the equity markets in 2006 as well. In May, the market experienced a drop in prices of 510%, but the rest of the year was characterised by equity price increases with an overall return of 15.0% for the year. The Danish property market generally saw price increases in 2006, and the demand for commercial leases was up. The price increases were particularly high for residential rental properties in the Copenhagen area. The total return on investment before tax on pension returns of DKr7,595m corresponds to a return of 3.4%. Af det samlede investeringsafkast før pensionsafkastskat kan mio. kr. henføres til kunder med markedsprodukter, mio. kr. til kunder med Danica Traditionel og 175 mio. kr. til syge og ulykkesforsikring. The return on investment of assets allocated to shareholders equity amounted to DKr749m or 5.4% in 2006, against 1.9% in At the end of 2006, 66% of the allocated assets were invested in shortterm bonds, 24% in equities and 10% in real property. Danica Balance customers under the medium equity risk option and with 30 years to retirement age saw a return of 10.5% in Since the launch of Danica Balance in the spring of 2005, these customers have seen a total return before tax of 15.3% p.a. DANICA PENSION ANNUAL REPORT

14 DANICA BALANCE, RETURN BEFORE TAX (%) 30 years to maturity 5 years to maturity Risk Return Equity share Return Equity share High Medium Low The majority of the Danica Link customers had opted for Danica Valg with medium risk, and they received a return of 5.3% against 21.7% in Over a twoyear period, the average return was 13.2% p.a. The return before tax for customers who had opted for high risk was 9.1% and for customers with a 100% equity share 11.4%. Generally, the return on market products is likely to fluctuate more from year to year than the return on Danica Traditionel. DANICA VALG PORTFOLIOS RETURN BEFORE TAX (%) Danica Valg Guarantee Danica Valg 100% Bonds Danica Valg Low Risk Danica Valg Medium Risk Danica Valg High Risk Danica Valg 100% Equities DANICA PENSION, CUSTOMER FUNDS HOLDINGS AND RETURNS (DKr bn) Value Return Value Return % % Property Danish bonds Indexlinked bonds Foreign bonds Credit bonds Total bonds Danish equities Foreign equities Total equities Other financial assets Total return on assets Return after change in additional provisions The equity share in Danica Pension s customer funds was up from 16% at the beginning of 2006 to 23% at the end of the year, the net investment in equities amounting to DKr8.6bn. In addition, the net investment in credit bonds was DKr0.4bn and the net amount of Danish bonds sold was DKr3.6bn. The return on investment of customer funds in Danica Pension stood at 2.9% or DKr 5.1bn before tax on pension returns. This is satisfactory, the chosen risk profile considered. The total return of customer funds on bonds and derivatives was a negative 2.1%, which was satisfactory considering the market developments. A substantial part of the capital losses were offset by a reduction of insurance provisions. The return on Danish listed equities was 18.2% while foreign listed equities yielded a return of 13.9%. The portfolio of unlisted equities yielded a return of 30.5%. A large part of the foreign exchange exposure to USD and JPY was hedged. 40% of the trade in Danish bonds and approximately 34% of the trade in Danish equities took place via Danske Bank, and Danske Bank is also the main banker. 14 DANICA PENSION ANNUAL REPORT 2006

15 In 2006, Danica sold 11 residential properties at a total profit of DKr729m. The total return on real property was 18.2%, which was satisfactory. The return on real property breaks down at 12% in value adjustments and 6.2% in direct returns. Collective bonus potential The collective bonus potential rose by DKr2.6bn to DKr13.9bn in COLLECTIVE BONUS POTENTIAL (DKr bn) Policyholders returns Change in the value of insurance obligations Tax on pension returns Interest added for the period Change of yield curve, beginning of year 0.5 Cost and risk results 0.2 Risk allowance of provisions Shadow account reversed 0.4 Reinsurance etc. 0.2 Change in collective bonus potential The change is among other things due to a drop in the present value of future insurance obligations as a result of the general rise in interest rates. Another factor is the difference between the realised return on investment of customer funds after tax and the 4.5% interest on policyholders savings received by Danica Traditionel customers in The collective bonus potential is further affected by the risk allowance allocated to shareholders equity and the cost and risk results. Return allocated to shareholders equity In 2006, in addition to the return on shareholders equity, the return allocated to shareholders equity comprised 0.48% of provisions, against an average of 0.73% for the period Without transfer to or from the shadow account, the average was 0.58% for the period RETURN ALLOCATED TO SHAREHOLDERS EQUITY (DKr m) Share of provisions 1) 1,037 1, Health and accident Risk allowance 836 1, Transferred to life insurance customers due to negative health and accident result 173 Forenede Gruppeliv Total before shadow account Transferred to/from shadow account Total 869 1,356 1,412 1,854 0 In % of provisions ) Before 2006, 30% of the risk and cost results were also included 2) Before 2006, the health and accident result was included in the risk allowance at 30%, whereas for 2006 it is included at 100%. Charge on customer funds The total charge on customer funds in Danica Pension not only comprises the amount allocated to shareholders equity, but also the recognition of risk and cost results. The cost and risk results in 2006 reduced the charge on customers by DKr180m. CHARGE ON CUSTOMER FUNDS (DKr m) Share of provisions 1) 1,037 1, Health and accident 2) Cost result Risk result Subordinated loan capital 12 Total charge 869 1,079 1,200 1,122 1,111 Transferred to/from shadow account Total 869 1,520 1,682 2, In % of provisions ) Before 2006, 30% of the risk and cost results were also included 2) In 2005 and 2006 the entire loss on health and accident was covered by shareholders equity In 2006, Danica lowered the risk allowance, resulting in an estimated reduction of the charge on customers and a consequent strengthening of the collective bonus potential of approximately DKr200m before tax. In 2006, the total charge on customers amounted to DKr869m, equalling 0.48% of provisions, against an average of 0.88% for DANICA PENSION ANNUAL REPORT

16 the period and 0.73% without transfer from the shadow account. To this should be added investment management expenses in the amount of DKr223m, or approximately 0.1%, which has been deducted from the return on investment. Claims and benefits Claims and benefits amounted to DKr14.0bn in 2006 against DKr 12.6bn in The increase in claims and benefits should be seen in relation to the increased competition and the low transfer fees. Expenses Operating expenses relating to insurance declined by DKr17m to DKr1,053m. In 2006, IT development amounted to DKr27m, which will be charged over the next three years. The IT development mainly concerned the development of the insurance system for the international entities. The Danica Pension group paid DKr440m to Danske Bank for investment management, IT operations and development, internal auditing, HR administration, logistics and marketing. In addition, the Danica Pension group paid DKr191m to the Danske Bank Group for its sale of life insurance policies and services to Danica Pension (see note 25). Danica Pension Group, expense ratio The level of expenses dropped for the sixth consecutive year. The Danica Pension group s expense ratio fell from 6.9% in 2005 to 6.3% in The difference between the cost premium and the actual expenses in Danica is a surplus of DKr35m. Any excess of costs over income is paid by the customers, as an amount corresponding to such cost deficit is deducted from the collective bonus potential. The average number of employees was 892 in 2006 and at the end of the year the Danica Pension group employed 915. Health and accident insurance The result of health and accident insurance remained unsatisfactory with a loss of DKr282m against a loss of DKr291m in The loss in 2006 was due to a low return of investment amounting to DKr175m. For insurance operations, the result was dissatisfactory with a claims ratio of 102% in Denmark. However, the development in the number of claims and the number of recoveries was positive in 2006 compared with previous years. Total provisions regarding the health and accident business amounted to DKr6.4bn. In recent years, pension funds have lost substantial amounts on their health and accident business. This is mainly due to the fact that claims have gone up considerably in particular claims in relation to mental disorders and stress. Add to this the increased price competition, which has meant that the development in the price of insurance has not matched the rise in claims. Corporation tax The group's corporation tax totalled DKr415m. Tax charged on the profit for the 16 DANICA PENSION ANNUAL REPORT 2006

17 year amounted to DKr431m, corresponding to 28% of the profit before tax. Balance sheet The group s total assets rose to DKr239bn at the end of 2006 from DKr230bn at the end of At DKr211bn at the end of 2006, investment assets were in line with the end of 2005, while investment assets related to unitlinked contracts rose to DKr22bn at the end of 2006 from DKr14bn at the end of The recognition of the present value of future administrative results of unitlinked insurance contracts was reversed at January 1, 2006 as a result of new rules from the Danish FSA. As a result of this change, shareholders equity was reduced by DKr421m. Shareholders equity amounted to DKr15.0bn at the end of 2006, against DKr15.8bn at the end of The solvency requirement in the Parent Company amounted to DKr7.3bn and the capital requirement in subsidiaries amounted to DKr0.6bn. Provisions for insurance and investment contracts totalled DKr218bn, against DKr211bn at the end of Life insurance provisions stood at DKr175bn, against DKr179bn at the end of 2005 and break down into guaranteed benefits, bonus potential of future premiums and bonus potential of paidup policies. The provisions are calculated at an estimated zerocoupon yield curve at 31 December In October 2006, Danica Pension raised EUR400m in subordinated loan capital, which in part was used to repay existing subordinated loans of DKr2bn and in part will be used to fund further expansion. The loan, which has a Standard & Poor s rating of A+, is quoted on the Irish Stock Exchange and carries interest at 4.35% p.a. The Danica Pension group s capital base amounted to DKr18bn. The Danica Pension group s total financial strength, i.e. capital base and collective bonus potential less solvency requirement, amounted to DKr24bn at the end of DANICA PENSION GROUP, FINANCIAL STRENGTH (DKr m) Shareholders equity Subordinated loan capital Capital base Solvency requirement in Danica Pension Capital requirement in subsidiaries The collective bonus potential at the end of 2006 amounted to DKr13.9bn, corresponding to a bonus rate of 8.8%, against 7.3% at the end of Provisions for unitlinked contracts rose to DKr22bn from DKr15bn at the end of Excess capital base Collective bonus potential Financial strength To this should be added a bonus potential of paidup policies of DKr10.7bn, part of which can be used for offsetting capital losses. The DANICA PENSION ANNUAL REPORT

18 financial strength reflects the security provided for the customers funds. In 2006, the Danica Pension group complied with the requirements of the Danish FSA s risk scenarios, the socalled red and yellow traffic lights. A fall in equity prices of 30% at the end of 2006 would reduce the collective bonus potential by DKr11.2bn and would affect shareholders equity by DKr0.9bn. An increase in interest rates of 1.0 percentage point would reduce the collective bonus potential by DKr1.2bn and shareholders equity by DKr0.1bn. A fall in interest rates of 1.0 percentage point would increase the collective bonus potential by DKr2.1bn and shareholders equity by DKr0.1bn. Danica has been assigned an AA rating in the Insurer Financial Strength category by Standard & Poor s. Outlook for 2007 Despite the strong competition, Danica expects to see premium income growth in 2007, and expects the market products proportion of the overall business volume to continue to rise. FSA has changed its rules regarding risk allowance, with the effect that the health and accident result will no longer be included in the risk allowance. The profit for the year will among other factors depend on developments in the financial markets, as these developments will determine whether the risk allowance can be booked for At an unchanged level of interest rates and a 2% return on equities, it will be possible to book the risk allowance in full, and on this basis the profit for 2007 is expected to be in line with For 2007, a rate of interest on policyholders savings before tax on pension returns has been fixed at 5.3%, corresponding to 4.5% after tax. Danica intends to apply the rate of interest on policyholders savings throughout Events after the balance sheet date No events have occurred between December 31, 2006, and the date of the signing of the annual report that, in the opinion of the management, will materially affect the financial position of the company or the group. Danica Pension s profit policy is unchanged in 2007, apart from the fact that the Danish 18 DANICA PENSION ANNUAL REPORT 2006

19 Management Board of Directors The following states the occupations of the board members, directorships held in other Danish and foreign undertakings (with the exception of whollyowned subsidiaries of the parent company, Danske Bank). Peter Straarup (Chairman) Chairman of the Executive Board Danske Bank. Sven Lystbæk, (Deputy Chairman) Member of the Executive Board Danske Bank. Director of: Værdipapircentralen A/S (Chairman) PBS Holding A/S (Chairman) PBS A/S (Chairman) Ejendomsselsk. Lautrupbjerg A/S (Chairman) Multidata Holding A/S (Chairman) Multidata A/S (Chairman) Jens Rasmussen, Senior Chief Consultant Danica Pension. Erik Sevaldsen, Executive Vice President Danske Bank. Director of: Investeringsselskabet af 23. marts 2001 A/S Tonny Thierry Andersen, Member of the Executive Board Danske Bank. Director of: Investeringsselskabet af 23. marts 2001 A/S Jakob Brogaard, Deputy Chairman of the Executive Board Danske Bank. Director of: LR Realkredit A/S (Deputy Chairman) Thomas Falck, Senior Vice President Danica Pension. Gitte Jensen, Clerk Danica Pension. Ib Katznelson, Head of Administration (appointed by the Minister of Economic Affairs) DANICA PENSION ANNUAL REPORT

20 Executive Board Under section 80(8) of the Danish Financial Business Act, financial institutions are required to publish information at least once a year about directorships, etc. held with the approval of the Board of Directors by persons employed by the Board according to statutory regulations (section 80(1) of the Act). Information on directorships, etc. in whollyowned subsidiaries is provided in the overview of group holdings and undertakings. Henrik RamlauHansen, Chief Executive Officer Chief Executive Officer of: Forsikringsselskabet Danica Director of: Forenede Gruppeliv A/S (Chairman) Jørgen Klejnstrup, Member of the Executive Board Member of the Executive Board of: Forsikringsselskabet Danica Director of: PBS Holding A/S PBS A/S Ejendomsselskabet Lautrupbjerg A/S Multidata Holding A/S Multidata A/S home a/s Northern Bank Limited National Irish Bank Limited DDB Invest AB DDB Invest Ltd. Danica Pensjonsforsikring AS Jesper Winkelmann, Member of the Executive Board Member of the Executive Board of: Forsikringsselskabet Danica 20 DANICA PENSION ANNUAL REPORT 2006

21 Statements and reports Statement by the management The Board of Directors and the Executive Board have today reviewed and approved the Annual Report of Danica Pension, Livsforsikringsaktieselskab for the financial year The consolidated accounts of Danica Pension have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU, and the annual accounts of Danica Pension, Livsforsikringsaktieselskab (the Parent Company) have been prepared in accordance with the Danish Financial Business Act. In addition, the annual report has been presented in accordance with additional Danish disclosure requirements for the annual reports of financial companies. In our opinion, the Annual Report gives a true and fair view of the Group s and the Parent Company's assets, liabilities and financial position at December 31, 2006 and of the results of the Group s and the Parent Company s operations and the Group s cash flows for the financial year Management will submit the Annual Report to the general meeting for approval. Copenhagen, January 31, 2007 Executive Board Henrik RamlauHansen Jørgen Klejnstrup Jesper Winkelmann CEO Board of Directors Peter Straarup Sven Lystbæk Tonny Thierry Andersen Chairman Deputy Chairman Jakob Brogaard Thomas Falck Gitte Jensen Ib Katznelson Jens Rasmussen Erik Sevaldsen DANICA PENSION ANNUAL REPORT

22 Audit reports Internal audits report We have audited the annual report of Danica Pension, Livsforsikringsaktieselskab for the financial year 2006, which comprises the management s report, the statement by the management, accounting policies, income statement, balance sheet, capital, cash flow statement and notes. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU, and the Parent Company s financial statements have been prepared in accordance with the Danish Financial Business Act. In addition, the annual report has been presented in accordance with additional Danish disclosure requirements for the annual reports of financial companies. Auditor s responsibility and basis of opinion We conducted our audit in accordance with the executive order of the Danish Financial Supervisory Authority on auditing financial enterprises and financial groups and in accordance with Danish auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance that the Annual Report is free from material misstatement. In addition, the audit was conducted in accordance with the division of duties agreed with the external auditors, according to which the external auditors to the widest possible extent base their audit on the work performed by the internal auditors. We planned and conducted our audit such that we have, during the year, assessed the business and internal control procedures, including the risk management implemented by the management aimed at the Group s and the Parent Company s reporting processes and major business risks. The audit also involves performing procedures to obtain audit evidence about the amounts and disclosures in the Annual Report. The procedures selected depend on the auditor s judgment, including the assessment of the risk of material misstatement of the Annual Report, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the preparation and fair presentation of the Annual Report in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the Annual Report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Our audit did not result in any qualification. Opinion In our opinion, the business procedures and internal control procedures, including the risk management implemented by the management, aimed at the Group s and the Parent Company s reporting processes and major business risks work satisfactorily. Furthermore, we believe that the Annual Report gives a true and fair view of the Group's and the Parent Company's assets, liabilities and financial position at December 31, 2006, and of the results of the Group's and the Parent Company's operations and the Group s cash flows for the financial year 2006 in accordance with the International Financial Reporting Standards as adopted by the EU in respect of the consolidated accounts, in accordance with the Danish Financial Business Act in respect of the Parent Company s accounts and in accordance with additional Danish disclosure requirements for annual reports of financial companies. Copenhagen, January 31, 2007 Jens Peter Thomassen Group Chief Auditor Palle Mortensen Senior Vice President 22 DANICA PENSION ANNUAL REPORT 2006