Danica Pension Annual Report 2005

Transcription

1 Danica Pension Annual Report 2005

2 Contents FINANCIAL HIGHLIGHTS... 2 SUMMARY.. 3 MANAGEMENT S REPORT Competitive situation... 4 Customers and service.. 4 Risk management and investment strategy 6 Organisation, management and partnerships 9 Financial results... 9 Outlook for SIGNATURES AND REPORTS Signatures.. 15 Audit reports. 16 ACCOUNTS Accounting policies 17 Accounts Group holdings and undertakings.. 41 Management. 42 This Annual report is a translation of the original report in the Danish language (Årsrapport 2005). In case of discrepancies, the Danish report prevails.

3 Financial highlights for Danica Pension (DKr m) INCOME STATEMENT Premiums 11,466 10,995 11,676 10,154 9,412 Return on investment after tax on pension returns 19,340 14,843 8,951 4,620 1,336 Claims and benefits 11,790 10,090 9,734 9,790 8,804 Change in life insurance provisions and outstanding claims provisions 11,870 11,954 4,859 6,901 6,869 Change in collective bonus potential 3, ,663 3,307 7,219 Total operating expenses relating to insurance Profit on reinsurance Transferred return on investment 1, Technical result 1,603 1,672 1, ,394 Technical result of health and accident insurance Return on investment allocated to equity Profit before tax 1,957 1,935 2, ,253 Tax Net profit for the year 1,440 1,359 1, ,000 BALANCE SHEET Total assets 206, , , , ,682 Provisions for insurance and investment contracts 188, , , , ,523 Collective bonus potential 11,372 7,611 7,152 4,475 7,710 Total shareholders equity 16,232 14,792 13,689 11,921 11,348 RATE OF INTEREST ON POLICYHOLDERS SAVINGS (%) Rate of interest on policyholders savings before tax on pension returns Rate of interest on policyholders savings after tax on pension returns KEY FIGURES AND RATIOS (%) Return before tax on pension returns Return before tax on pension returns allocated to shareholders equity Return before tax on pension returns on customer funds Return after tax on pension returns Expenses as percent of premiums Expenses as percent of provisions Expenses per policyholder, DKr 1,206 1,317 1,409 1,407 1,343 Cost result Insurance risk result Bonus rate Equity ratio Excess core capital ratio Solvency ratio Return on equity before tax Return on equity after tax Return on customer funds after deduction of expenses before tax RATIOS FOR HEALTH AND ACCIDENT INSURANCE Gross claims ratio Gross expense ratio Combined ratio, net of reinsurance Operating ratio The accounting policies have been changed effective from 2005 in accordance with the Danish Financial Supervisory Authority s new Executive Order on financial reporting. The comparative figures for 2004 have been restated accordingly. 2 DANICA PENSION ANNUAL REPORT 2005

4 SUMMARY 2005 was a good year. Customers received a satisfactory return on investment and Danica strengthened its market position, introducing, among other things, Danica Balance. Premiums rose from DKr11.8bn to DKr12.3bn. A customer survey conducted in 2005 showed that the satisfaction and loyalty among Danica Pension s customers was at a satisfactory level. Competition intensified further during 2005, and this trend is expected to continue over the coming years. The net profit amounted to DKr1,440m, against DKr1,359m in 2004 and the return on equity was 9.3%, against 9.6% in In 2005, DKr441m from the shadow account was taken to income, against DKr445m in 2004, reducing the shadow account to zero. Danica Pension achieved a return on customer funds of 12.6% before tax on pension returns, against 10.3% in The high return strengthened the collective bonus potential, which at the end of 2005 amounted to DKr11.4bn. In light of the continued low level of interest rates, the rate of interest on policyholders savings is fixed at 4.5% for Danica Pension s expense ratio dropped for the fifth consecutive year and stood at 7.0% in In 2005, the Minister for Economic and Business Affairs proposed tighter rules on payment for insurance brokers services. In future, an insurance broker s commission is a matter exclusively between the broker and the customer. Enactment of the bill will help to solve the conflicts of interest that could occur under the types of agreements seen previously. The Welfare Commission published its report late in the year. The report proposes compulsory pension savings for persons saving up less than six percent of their gross income. In addition, the welfare report proposes the introduction of a minimum requirement as to the proportion of annuities in the makeup of annual pension savings. Danica Pension supports these proposals, not least in light of the prospect of increasing life expectancy. Its financial strength of DKr19.5bn and a capital base of DKr15.6bn make Danica Pension one of the financially strongest groups in the industry. This provides customers with a high degree of security in their savings. Danica maintained its AArating with Standard & Poor s. To give focus to the subject of pension savings, Danica Pension arranged the Day of Dreams event over five Sundays to inspire the Danes to plan ahead. The positive business performance is expected to continue in Nonetheless, the net profit for 2006 is expected to be below the 2005 level due to the recognition of in DANICA PENSION ANNUAL REPORT

5 come in 2005 from the shadow account and due to new rules on the recognition of the fair value of future administrative results, which may affect the performance of the subsidiary Danica Pension I. MANAGEMENT S REPORT Competitive situation During 2005, competition intensified further. This trend is expected to continue in the coming years due to the increasing focus on pensions and the introduction of new market products. One of the most competitive areas is insurance products with disability cover. As a result, the negative performance of Danica s health and accident business continued in The pressure on disability insurance premiums is such that premiums no longer cover claims. Danica Pension has therefore found it necessary to announce another increase in premiums in this area. The conventional products were criticised in the media for lack of transparency in Common points of criticism were that the products do not clearly state the customer s expense and that it is not possible to transfer part of the collective bonus potential when a policy is transferred to another provider. Danica agrees that the product is more complex than marketbased products, and continuous efforts are being made to improve customer information. There is no easy solution to letting customers transfer collective bonus potential when a policy is transferred to another insurance provider. This would require new customers to also bring with them collective bonus potential. Also, the collective element characterising such plans would be lost. In May, Danica launched a new lifecycle product, Danica Balance. Its reception among existing as well as new customers was very positive, and the Group is seeing strong demand for the product. Toward the end of 2004, the Minister for Economic and Business Affairs asked the Danish Financial Supervisory Authority to examine the situation relating to insurance brokers payment. Based on the Financial Supervisory Authority s report issued in March 2005, the Minister for Economic and Business Affairs proposed that the rules be tightened to the effect that payment for the services of insurance brokers was to be a matter exclusively between the broker and the customer. In November 2005, the bill was tabled in the Danish parliament. The Act will resolve most of the conflicts of interest that sometimes arose under the types of agreements seen previously. The bill proposes to abolish the right of insurance companies to pay brokers, so that brokers advice will become independent. Danica is concerned that a very long transitional period of five years has been proposed for existing commissionbased agreements between insurance companies and brokers. Customers and service During the course of 2005, Danica focused on improving the customer service and optimising work processes. Both are important to Danica s aims of greater accessibility to customers, improved processing times, profes 4 DANICA PENSION ANNUAL REPORT 2005

6 sional customer care, improved quality and reduced costs. A customer survey in May 2005 revealed that customer satisfaction and loyalty was at a satisfactory level with an index of 71 (of 100). Customers rated the personal contact provided highly satisfactory corresponding to an index of 80. With a score of 77 index points, Danica was also rated a trustworthy and reliable company. Many customers prefer to call us, and we were therefore pleased to note that Danica s service centre received the CRM Grand Prix award in the insurance and pension industry for the second year running. In addition, Danica has in the past six months made an effort to ensure that telephone calls are answered quickly. Danica receives around 4,000 telephone calls a week, and its aim is that 80% are answered within 18 seconds. Since the autumn of 2004, Danica has published its processing times of new policies and adjustments to existing policies online at and Danica Pension s processing times are, indeed, some of the fastest in the industry. In 2005, information on processing times was extended to include the processing of claims. Below, the average target achievement is shown. PROCESSING TIMES (%) New policies within 5 days Adjustments to existing policies within 10 days Processing of claims within 10 days 90 Another aim is for all processing to be completed within a fourweek period. However, a few customers may experience longer processing times, e.g. when further health information, medical examinations etc. are needed. Throughout 2005, the company has sought to improve the written communication with customers, acknowledging the fact that insurance conditions, investment conditions etc. can be quite difficult to understand. Danica simplified the insurance conditions in 2005, and as a new initiative in November 2005 introduced the ability to access insurance and investment conditions via Din Netpension. Our Danishspeaking customers can use this option if their insurance policy has been issued or changed subsequent to this date. However, standard conditions with explanations are freely accessible to all on our Web site. The joint efforts of insurance providers to create a common framework for exchanging information on pension savings continued in 2005 and are expected to be completed in In the field of staff training, Danica Akademiet (Danica Academy) is gradually being developed, giving staff members the opportunity to acquire new knowledge DANICA PENSION ANNUAL REPORT

7 through elearning. Also, Customer Service University was launched to provide lectures of a professional and/or current affairs nature. Finally, all employees attended team building and other activities supporting Danica s vision. The annual employee satisfaction survey was carried out in the autumn. The survey revealed the same high level as last year, and Danica rates well compared with competitors as well as with other industries. Risk management and investment strategy Danica Pension s insurance risks comprise financial risks as well as insurance risks. Financial risks 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 return cannot be covered by the collective bonus potential or the bonus potential of paidup policies. Assets allocated to shareholders equity were in 2005 primarily invested in shortterm bonds with low credit risk. 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 insufficient to cover customer returns, 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 are insufficient to cover the deficit, funds from shareholders equity will be allocated to cover the outstanding amount. To ensure cohesion between the return on investment of customer funds and customers guaranteed returns, the Group closely monitors the financial risk, and has set limits for maximum market and interest rate risks. Stress tests are conducted on a regular basis to ensure that the company is able at any given time to withstand a 30% drop in equity prices, a 50% drop in interest rates or a 2.5% increase in interest rates. The credit risk on Danica s bond portfolio is limited as the majority of the bonds are government bonds or mortgage bonds with an AAA rating with the international credit rating agencies. Individual risks are limited, and the Group has obtained security for the value of derivative positions hedging interest rate risks. The liquidity risk is also limited. A large part of the bond portfolio is placed in ultraliquid listed bonds and easily negotiable international equities. Insurance risks 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 6 DANICA PENSION ANNUAL REPORT 2005

8 insurance policies covering death and disability. Expectations are based on historical data from the Group s own insurance portfolio. The sensitivity of insurance obligations to changes in these assumptions is also calculated. 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. In order to reduce insurance expenses, a minor part of the risk relating to deaths and disability is covered by reinsurance. Moreover, disaster risk is covered. Danica Pension based its calculation of life insurance provisions on a rise in life expectancy of just over two years relative to the assumptions at the time the policies were written; this results in additional provisions of around 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 DKr1.6bn while shareholders equity would not be affected. Life insurance provisions are calculated at market value, future benefits being discounted to their present values. Note 22 discloses, for Danica Pension, 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. 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 for insurance policies written subsequently on which the guaranteed benefits were calculated based on a technical rate of interest of 2.5% or 1.5%. The Executive Order on the Contribution Principle applies. Danica has notified the Danish Financial Supervisory Authority of rules to prevent significant amounts from being redistributed among the abovementioned groups of insurance. In this connection, Danica Pension has also established rules to prevent redistribution of significant amounts between groups of insurance arising in connection with the most recent merger of the life insurance companies. In 2005, the Western Division of the Danish High Court found in favour of Danica Pension in its claim that the differential treatment introduced by the company in 1999 and 2000 between customers with insurance policies based on a technical rate of interest of 4.5% and customers with policies based on a technical rate of interest of 2.5% or DANICA PENSION ANNUAL REPORT

9 1.5% was in accordance with the contractual basis. The differential treatment was introduced, in part, to secure the customers benefits in the longer term. A few customers have brought actions against Danica, claiming that the administrative fee set off against the bonus on paidup policies and on current insurance policies is not contractual. This is a practice applied by Danica for a number of years, which in our opinion is in accordance with the current rules. Investment strategy The investment strategy for customer funds in Danica Pension has been adjusted in respect of Life insurance obligations Bonus and capital reserves Large portfolio diversification The return and risk potential in individual investment areas Just over 75% of the investment assets were placed in bonds at the end of 2005 while just over 16% were placed in equities and about 8% in properties. The majority of the bonds are DKr or EURdenominated government or mortgage bonds. A third are indexlinked bonds, which contributes to a stable real return. In addition, DKr12bn 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. A more active portfolio 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 Web site, Investments in real property usually contribute a stable and inflationproof return. Danica, which is the largest owner of shopping centres in Denmark, also holds many commercial properties. As the current return on residential property is significantly lower than that on commercial property, Danica owns few residential properties. Property investments are concentrated on the Danish market. Danica employs a number of investment managers to manage its investments. Danske Capital manages some 80% of the investment assets, i.e. a majority of the fund management. In equities and bonds, four other investment managers are also used. In unlisted equities, the Group employs Danske Private Equity, Apax, Polaris Management, Nordic Venture Partners and Paul Capital Partners, among others. In the property portfolio, shopping centres are managed by Steen & Strøm and DanEjendomme, while Datea manages Danica s other investment properties. Just over 40% of the trade in Danish bonds and around a third of the trade in Danish 8 DANICA PENSION ANNUAL REPORT 2005

10 equities took place via Danske Bank, and Danske Bank is also the main banker. the Act on privatisation of Statsanstanlten for Livsforsikring. In accordance with the Executive Order on the Contribution Principle, the Danish Financial Supervisory Authority has been notified of Danica Pension s consolidation policy. Generally, the Executive Order permits the recognition of the full risk allowance only if it does not exceed the realised profit. In brief, the realised profit 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 a risk of 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 as income over future years if justified, among other things, by 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 members, elected by the general meeting, three members elected by the employees and one member appointed by the Minister of Economic Affairs in pursuance of The Company's Executive Board consists of Henrik RamlauHansen, CEO, and Jesper Winkelmann, member of the Executive Board. The Board of Directors determines Danica Pension s investment strategy and follows up on the results, while the general management prepares specific investment plans. 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. Financial results Danica Pension realised a pretax profit of DKr1,957m, against DKr1,935m in The net profit amounted to DKr1,440m, against DKr1,359m in Danica Pension's pretax profit comprises the return on assets allocated to shareholders equity, the risk result of Forenede Gruppeliv, a risk allowance for 2005 of DKr1,053m and the recognition as income of DKr441m from the shadow account. The risk allowance for 2005 corresponded to 0.61% of the average technical provisions, against 0.59% in For the health and accident business, the negative trend in the claims experience continued in According to the rules in DANICA PENSION ANNUAL REPORT

11 force, the health and accident business is not allowed to negatively affect the life insurance customers over time. Consequently, the remainder of the negative DKr173m health and accident result reduced the profit of Danica Pension and consequently did not impact the life insurance customers. 2005, corresponding to an increase of 17%. The increase was due mainly to growing interest payments and pension benefits. Policyholders surrender of their plans also contributed to the increase. An amount of DKr3.8bn was set aside for collective bonus potential. The change in collective bonus potential can be calculated DANICA PENSION, PRETAX PROFIT (DKr m) Risk allowance 1, Return on investment shareholders equity Danica Pension I Risk result, Forenede Gruppeliv Transferred to life insurance customers due to contribution and negative health and accident result 173 Booked as income from shadow account Adjustment regarding prior year consolidation policy 37 Profit before tax 1,957 1,935 as follows: COLLECTIVE BONUS POTENTIAL (DKr bn) Policyholders returns Interest added for the period Increased value of insurance obligations Change of yield curve, beginning of year 0.5 Cost and risk results Tax on pension returns Risk allowance Shadow account taken to income Change in collective bonus potential Danica Pension realised a result amounting to DKr9.8bn. In 2005, DKr441m from the shadow account was taken to income, against DKr445m in 2004, reducing the shadow account to zero. The return on equity was 9.3% in 2005, against 9.6% in Not including the amount booked as income from the shadow account, the return on equity was 7.2%, against 7.4% in The income statement Gross premiums including health and accident insurance were up by 4% to DKr12.3bn. Claims and benefits totalled DKr11.8bn in DANICA PENSION, GROSS PREMIUMS (DKr bn) Regular premiums Single premiums Health and accident Total gross premiums At the end of 2005, the Group applied a zerocoupon yield curve estimated on the basis of the EUR swap market with the addition of the yield spread between Danish and German government bonds. In 2004, a Danish swap yield curve was applied. The transition to a new zerocoupon yield curve at the beginning of 2005 increased life insurance provisions by DKr533m and reduced the collective bonus potential by a corresponding amount. Operating expenses relating to insurance declined by DKr78m to DKr798m. Administrative expenses were down by DKr65m. In 2005, IT development amounted to DKr15m, which will be charged over the next three years. The development of expenses was satisfactory, and the expense ratio dropped for the fifth consecutive year and stood at 7.0% in DANICA PENSION ANNUAL REPORT 2005

12 Danica Pension, expense ratio ratio was 147% in 2005, against 135% in The corporation tax payable by Danica Pension totalled DKr517m. Tax charged on the profit for the year amounted to DKr543m, corresponding to 28% of the pretax profit, while the reduction of the corporate tax rate from 30% to 28% and the introduction of territorial taxation in Denmark reduced deferred tax by DKr33m. Adjustment of prioryear tax charge amounted to DKr7m. The cost result was neutral and improved from a negative 0.07% in 2004 to a negative 0.01% in Return on investments 2005 was characterised by price increases in most areas of investment, resulting in high returns on investments for most of Danica s pension products. The average number of employees was 777 in 2005 and, at the end of the year, Danica Pension employed 775. Danica Pension paid DKr454m to Danske Bank for investment management, IT operations and development, internal auditing, HR administration, logistics and marketing. In addition, Danica Pension paid DKr132m to the Danske Bank Group for its sale of life insurance policies (see note 19). Growth was particularly strong in the equity markets. This was for example true for the Danish market and emerging markets, which saw returns of 44% and 58%, respectively. In the bond market, longterm yields generally fell up to the summer and rose slightly for the rest of the year. At the end of 2005, 10year Danish yields had dropped by 0.57 percentage points relative to the beginning of the year. The technical result of health and accident insurance was negative at DKr247m, against a negative DKr230m in The loss in 2005 was affected by a high return on investment, while the claims experience remained unsatisfactory. The rise in the number of claims and the decline in the number of recoveries continued in The claims The Danish property market was driven by price increases, especially in residential rental properties in the Copenhagen area. In office property, vacancy rates declined. Danica Pension s return on investment before tax on pension returns in 2005 totalled DKr22,084m, corresponding to a return of 11.7%. After tax on pension returns amount DANICA PENSION ANNUAL REPORT

13 ing to DKr2,744m the return was DKr19,340m. Of the total return on investment before tax on pension returns, DKr20,932m was attributable to life insurance customers and DKr551m to the health and accident business. Danica Pension s return on assets allocated to shareholders equity was DKr601m or 4.1% in 2005, against 3.7% in At the end of 2005, 86% of the allocated assets had been invested in shortterm bonds, 8% in real property and 6% in the subsidiary Danica Pension I. The return on investment of customer funds stood at 12.6% before tax on pension returns, against 10.3% in This was satisfactory, the chosen risk profile considered. 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 The equity share in Danica Pension s customer funds was up from 11% at the beginning of 2005 to 16% at the end of the year, the net investment in equities amounting to DKr5.2bn. In addition, the net investment in foreign bonds was DKr8.6bn, in credit bonds DKr1.5bn and the net amount of Danish bonds sold was DKr10.7bn. The total return of customer funds on bonds and derivatives was satisfactory at 11.1% and was explained mainly by the general decline in interest rates in A substantial part of the price increases were offset by a corresponding increase in technical provisions. Moreover, the bond yield was pushed up by a relatively high yield on indexlinked bonds. The return on Danish listed equities was 44.4% while foreign equities yielded a return of 21.5%. The portfolio of unlisted equities yielded a return of 27.6%. A large part of the foreign exchange exposure to USD and JPY was hedged. Overall, the return on equity investments in 2005 was slightly higher than the benchmark returns. The return on real property was satisfactory at 11.6% in The return on real property breaks down at 5.5% in value adjustments and 6.1% in direct returns. The value adjustments are attributable primarily to residential and commercial properties. Balance sheet Danica Pension s total assets rose to DKr207bn at the end of 2005 from DKr188bn at the end of Provisions for insurance contracts totalled DKr188bn, against DKr172bn at the end of Life insurance provisions stood at DKr171bn at the end of 2005, against DKr159bn at the end of 2004 and break down into guaranteed benefits, bonus potential of future premiums and bonus potential of paidup policies. Life 12 DANICA PENSION ANNUAL REPORT 2005

14 insurance provisions increased by DKr0.2bn due to changes in mortality. The bonus rate stood at 7.3% at the end of 2005, against 5.1% at the end of Shareholders equity amounted to DKr16.2bn at the end of 2005, against DKr14.8bn at the end of The solvency requirement amounted to DKr7.5m. The capital base, consisting exclusively of shareholders equity, amounted to DKr15.6bn, and Danica Pension's financial strength was DKr19.5bn. DANICA PENSION, FINANCIAL STRENGTH (DKr m) Shareholders equity 16,232 14,792 Capital requirement of subsidiaries Capital base 15,600 14,270 Solvency requirement 7,452 6,935 Excess capital base 8,148 7,335 Collective bonus potential 11,372 7,610 Financial strength 19,520 14,945 To this should be added a bonus potential of paidup policies of DKr7.2bn, part of which can be used for offsetting capital losses. Allocation of profits The Board proposes that the net profit for the year be transferred to shareholders' equity. The Board proposes that the general meeting adopt a dividend of DKr2.0bn. If the general meeting adopts the proposed dividend of DKr2.0bn in 2006, the company will issue subordinated loan capital for the same amount. The capital base will therefore be unchanged. Outlook for 2006 Danica Pension announced a change to its consolidation policy effective for As a result of the change, the risk allowance is expected to be reduced from 0.61% of technical provisions in 2005 to approximately 0.5% in Due to the negative development, the health and accident result will in future be included wholly in the risk allowance and, accordingly, will not impact life insurance customers. The Group also resolved to gradually increase the share of customer funds invested in equities. It is the intention to increase the equity share to 20%25%, and at the end of January 2006, the equity share was around 20%. Aside from the investment in Danica Pension I, 90% of the assets allocated to shareholders equity were invested in shortterm bonds while about 10% were placed in real property. In 2006, 20%25% of assets attributed to equity will be invested in equities and part of the bond portfolio is expected to be reallocated to longer maturities. As a result, the return will to a greater extent reflect financial market developments. Moreover, the rules on the accounting treatment of changes in the present value of future administrative results have been changed effective from 2006, to the effect that provisions in certain cases should correspond at least to the surrender value of the policies. The changed accounting policies affect some of Danica Pension s subsidiaries. With effect from the beginning of 2006, DANICA PENSION ANNUAL REPORT

15 shareholders equity in Danica Pension will be reduced by up to DKr0.4bn. If the accounts for 2005 had been presented according to the new policy, the net profit would be up to DKr131m lower. The net profit for 2006 is expected to be lower than that for 2005, assuming unchanged interest rates and a 7% return on equities. This is explained by the recognition of income in 2005 from the shadow account and the changed accounting policy on the calculation of the present value of future administrative results. A rate of interest on policyholders savings of 4.5% has been fixed for 2006 and is intended to be applicable throughout the year. Events after the balance sheet date No events have occurred between December 31, 2005, 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. 14 DANICA PENSION ANNUAL REPORT 2005

16 Signatures The Board of Directors and the Executive Board have today reviewed and approved the Annual Report of Danica Pension for the financial year The Annual Report has been prepared in accordance with the Danish Financial Business Act. In our opinion, the Annual Report gives a true and fair view of the Company s assets, liabilities and financial position at December 31, 2005 and of the results of the Company s operations for the financial year The Annual Report will be submitted to the general meeting for approval. Copenhagen, February 3, 2006 Executive Board Henrik RamlauHansen CEO Jesper Winkelmann 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

17 Audit reports Internal audit We have audited the Annual Report of Danica Pension, Livsforsikringsaktieselskab for the financial year 2005, presented by the Board of Directors and the Executive Board, prepared in accordance with the Danish Financial Business Act. 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. Those standards require that we plan and perform the audit to obtain reasonable assurance that the Annual Report is free of 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 Board of Directors and the Executive Board, aimed at the Group s and the Parent Company s reporting processes and major business risks. The audit of the Annual Report includes examining, on a test basis, evidence supporting the amounts and disclosures in the Annual Report. The audit also includes assessing the accounting policies used and significant estimates made by the Board of Directors and the Executive Board, as well as evaluating the overall presentation of financial information included in the Annual Report. We believe that our audit provides a reasonable basis for our opinion. Our audit did not result in any qualification. Opinion In our opinion, the business procedures and internal control procedures prepared, including the risk management implemented by the Board of Directors and the Executive Board, aimed at the 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 Company s assets, liabilities and financial position at December 31, 2005, and of the results of the Company s operations for the financial year 2005 in accordance with the Danish Financial Business Act. Copenhagen, February 3, 2006 Jens Peter Thomassen Group Chief Auditor Palle Mortensen Senior Vice President External audit To the shareholders of Danica Pension, Livsforsikringsaktieselskab We have audited the Annual Report of Danica Pension, Livsforsikringsaktieselskab for the financial year 2005, presented by the Board of Directors and the Executive Board, prepared in accordance with the Danish Financial Business Act. Basis of opinion We conducted our audit in accordance with Danish auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance that the Annual Report is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Annual Report. An audit also includes assessing the accounting policies used and significant estimates made by the Board of Directors and the Executive Board, as well as evaluating the overall presentation of financial information included in the Annual Report. We believe that our audit provides a reasonable basis for our opinion. Our audit did not result in any qualification. Opinion In our opinion, the Annual Report gives a true and fair view of the Company s assets, liabilities and financial position at December 31, 2005, and of the results of the Company s operations for the financial year 2005 in accordance with the Danish Financial Business Act. Copenhagen, February 3, 2006 KPMG C.Jespersen Statsautoriseret Revisionsinteressentskab Grant Thornton Statsautoriseret Revisionsaktieselskab Per Gunslev Arne Sivertsen Svend Ørjan Jensen Ole Fabricius State Authorised Public Accountants State Authorised Public Accountants 16 DANICA PENSION ANNUAL REPORT 2005

18 ACCOUNTS Accounting policies General The annual report is prepared in compliance with the provisions of the Danish Financial Business Act and the Executive Order issued by the Danish Financial Supervisory Authority on financial reports presented by insurance companies and professionspecific pension funds. Changes to accounting policies In order to meet the EU s requirements as to the financial reporting of listed companies under IFRS, the Danish Financial Supervisory Authority has issued a new Executive Order on financial reports presented by insurance companies and professionspecific pension funds, effective from January 1, The main changes are that unitlinked contracts are classified as insurance and investment contracts, respectively, that outstanding claims provisions for health and accident policies include provisions for expected future administrative expenses and that deferred tax is no longer discounted. Insurance contracts are contracts that entail significant insurance risks or entitle policyholders to bonuses. Investment contracts are contracts that entail insignificant insurance risk. A typical example is unitlinked contracts and other marketbased contracts under which the investment risk lies with the policyholder. Proposed dividend for the financial year is now recognised in shareholders equity, until adopted by the general meeting, whereas previously it was recognised as a liability in the accounts. This change in policy includes subsidiaries, and comparative figures for Shares in subsidiary undertakings and Amounts due from subsidiary undertakings have therefore been restated. Neither profit nor shareholders equity is influenced by this change. The comparative figures for 2004 have been restated, and the accumulated effect of the adjustments is recognised in shareholders equity as at January 1, Financial highlights and ratios for have not been restated. The effects of the transition to the new Executive Order are shown in note 23. Consolidation Danica Pension is consolidated into the accounts of Forsikringsselskabet Danica, Skadeforsikringsaktieselskab af 1999, København, which are included in the consolidated accounts of Danske Bank A/S. Consequently, no consolidated accounts are presented for the Danica Pension Group. In accordance with the Executive Order on the Contribution Principle, the Danish Financial Supervisory Authority has been notified of Danica Pension s consolidation policy. The company s pretax profit consists of the return on assets allocated to shareholders equity, the result of the subsidiary Danica Pension I, the risk result of Forenede Gruppeliv plus a risk allowance of 0.5% of the technical provisions and 30% of the company s risk, cost and health and accident results. To the extent that the Executive Order on the Contribution Principle does not permit the company to include full risk allowance, the amount may be booked over the coming years if justified by the realised profit. For this purpose, a shadow account is set up. The shadow account accrues interest at the rate that applies to bonds allocated to shareholders equity. The shadow account is disclosed in the notes. Intragroup transactions Transactions between companies in the Danske Bank Group are conducted on arm s length terms or on a cost recovery basis and according to contractual agreement between the undertakings, unless the transactions are insignificant. Translation of transactions in foreign currencies The presentation currency of the consolidated accounts is Danish kroner, which is the functional currency of Danica Pension. Transactions are translated to the functional currency at the exchange rate at the transaction date. Gains and losses on exchange differences arising between the transaction date and the settlement date are recognised in the income statement. DANICA PENSION ANNUAL REPORT

19 Monetary assets and liabilities in foreign currencies are translated at the prevailing exchange rates at the balance sheet date. Exchange rate adjustments of monetary assets and liabilities arising as a result of differences in the exchange rates applying at the transaction date and at the balance sheet date are recognised in the income statement. Nonmonetary assets and liabilities in foreign currencies that are subsequently revalued at fair value are translated at the exchange rates applying at the date of revaluation. Exchange rate adjustments are included in the revaluation of the fair value of the assets/liabilities. Translation nondanish units Assets and liabilities of nondanish units are translated into Danish kroner at the exchange rates applying at the balance sheet date. Income and expenses are translated at the exchange rates applying at the date of transaction. Exchange rate gains and losses arising on the translation of net investments in nondanish units are recognised directly in shareholders equity. Exchange rate adjustments of financial instruments to hedge net investments in nondanish units are also recognised directly in equity. As from January 1, 2005, all translation differences are recognised directly in equity and specified in the notes. INCOME STATEMENT Premiums Regular and single premiums on insurance contracts are included in the income statement on the due dates. The reinsurers share of the premiums is deducted. Return on investment Income from subsidiary undertakings comprises the company s share of the subsidiaries pretax profit and realised gains and losses on sales during the year. Income from investment properties comprises the profit from operating investment properties after deduction of property management expenses. Interest income and dividends etc. comprises yield on bonds and other securities, interest on deposits and amounts due. In addition, the item comprises dividends from shares with the exception of dividends from subsidiaries and associated undertakings. Value adjustments comprises realised and unrealised gains and losses and exchange rate adjustments on investment assets other than subsidiaries and associated undertakings. Interest expenses comprises interest on loans and other amounts due. Administrative expenses related to investment activities comprises portfolio management fees to investment managers, trading costs, custody fees and own expenses related to the administration of investment assets. Tax on pension returns Tax on pension returns is calculated on the basis of the tax base for the financial year and changes in provision for deferred tax on pension returns. Claims and benefits Claims and benefits, net of reinsurance, comprises the claims and benefits paid on insurance contracts for the year, adjusted for the change for the year in outstanding claims provisions and net of the reinsurers share. Change in life insurance provisions Change in life insurance provisions, net of reinsurance, comprises the change in gross life insurance provisions net of the reinsurers share. The change is specified in the notes, divided into guaranteed benefits, bonus potential of future premiums and bonus potential of paidup policies. Income from associated undertakings comprises the company s share of the associated undertakings profit and realised gains and losses on sales during the year. Bonus The change in collective bonus potential comprises the change for the year in collective bonus potential. 18 DANICA PENSION ANNUAL REPORT 2005

20 Operating expenses relating to insurance Acquisition costs covers accrued costs related to acquiring and reviewing the insurance portfolio. Administrative expenses covers other accrued expenses related to insurance operations. The company s contributions to defined contribution plans for the employees are recognised in the income statement when they are earned by the employees. Employee bonuses are expensed as they are earned. Part of the bonuses for the year is paid in the form of share options with delivery and conditional shares in Danske Bank. Share options may not be exercised until three years after allotment and are conditional on continued employment. Similarly, purchase rights to conditional shares are conditional upon employment continuing for three years. The fair value of sharebased payment at the time of allotment is expensed over the period of service unconditionally entitling the employee to the payment. The intrinsic value of the allotment is expensed in the year when entitlement is earned, whereas the time value is accrued over the remaining service period. The expense is set off against shareholders equity. Subsequent changes to the fair value are not carried in the income statement. Transferred return on investment Transferred return on investment consists of the return on the assets allocated to shareholders equity and the return on health and accident insurance. Technical result of health and accident insurance The result of health and accident insurance is stated in a separate main item in the income statement and is specified in a note. Premiums, net of reinsurance, are included in the income statement when they fall due. Premiums, calculated net of discounts not related to claims and the like, and insurance premiums ceded are accrued. Technical interest, which is a calculated return on average technical provisions, net of reinsurance, is transferred from return on investment. The amount is calculated on the basis of the average yield to maturity before tax quoted by the Copenhagen Stock Exchange. The proportion of the increased claims provisions attributable to discounting is transferred from premiums/claims and set off against technical interest. However, market value adjustment is included in the item Investment Return on investment. Claims, net of reinsurance, comprises claims paid for the year, adjusted for changes in outstanding claims provisions, including gains and losses on outstanding claims provisions for earlier years (runoff result). Furthermore, claims include expenses for assessment of claims, expenses for damage control and an estimate of the expected administration and claims handling expenses on the insurance contracts entered into by the undertaking. Total gross claims are calculated net of reinsurance. Transferred return on investment is calculated as a proportion of the total return on investments, excluding the return allocated to shareholders equity. This proportion is calculated according to the ratio of health and accident provisions to total technical provisions. Other income Comprises income which cannot be ascribed to the insurance portfolios or investment assets. Other expenses Comprises expenses which cannot be ascribed to the insurance portfolio or investment assets. Tax Calculated current and deferred tax on the profit before tax and subsequent adjustments of tax charges for previous years are recognised in the income statement. Tax on items recognised in shareholders' equity is charged directly to shareholders equity. BALANCE SHEET ASSETS Tangible Assets Operating equipment Operating equipment, comprising machinery, equipment, vehicles, furniture and leasehold improvements, is recognised at cost less deprecia DANICA PENSION ANNUAL REPORT