DEMUTUALISATION OF SPP PROVIDES NEW BUSINESS OPPORTUNITIES

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1 Annual report 2005

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3 Highlights of 2005 DEMUTUALISATION OF SPP PROVIDES NEW BUSINESS OPPORTUNITIES In late 2005, the Handelsbanken board took the final decision to turn SPP into a profit-distributing life insurance company with a capital contribution of SEK 11.2bn, which means that the total capital contribution is SEK 13bn. This, coupled with SPP s unique expertise and range of occupational pension products, creates an excellent basis for increased sales and high returns for both customers and the owner of the company. NEW HEAD OF PENSIONS & INSURANCE AND NEW CHIEF EXECUTIVE FOR SPP Since the beginning of the year, Mr Michael Zell has been head of Handelsbanken s Pensions & Insurance business area, which includes SPP and Handelsbanken Liv. In mid-january 2006, Mr Zell was also appointed chief executive of SPP. At the same time, Mr Göran Holgerson, former chief executive, was appointed head of the SPP business area, as well as deputy chief executive of the company. SPP and its sister company Handelsbanken Liv continue to be run as separate companies, each with its own brand. SALES FOCUS HAS PRODUCED RESULTS On the local public authorities market, business involving the administration, calculation and disbursement of municipal pensions has increased. In addition, sales of SPP s international insurance rose by 50% in The focus on strengthening relations with insurance brokers has started to pay off, which confirms SPP s potential as a long-term occupational pensions partner. REDUCTION IN THE HIGHEST INTEREST RATE BURDENED PROFITS The Finansinspektionen (the Swedish Financial Supervisory Authority) lowered the highest interest rate on old insurance contracts from 3.50% to 3.25%. This reduction did not affect the value of customers savings, but did burden SPP s profit figure for the third quarter. LOWERING OF CERTAIN PENSIONS BEING DISBURSED On 1 January 2005, the supplementary amounts for defined-contribution pensions being disbursed were lowered. On average, the reduction in pension was 3.4%, the maximum being 6%. The amounts for 2006 are unchanged from Contents Highlights of Chief executive s comments 2 Administration report 3 Market and sales 3 Asset management 4 Risks and risk control 5 The company s performance 7 Five-year summary 11 Accounting policies 12 Income statement 14 Analysis of results 15 Balance sheet 16 Notes 18 Specification of shares and participations 25 Proposed appropriation of profits 26 Audit report 27 Management and board 28 Glossary inside back cover Key figures Premiums written, SEK m Traditional life insurance 4,406 4,821 5,981 8,869 9,633 Unit-linked insurance - 1,815 3,215 3,087 3,006 Elimination of group transactions Total 4,406 6,605 9,153 11,927 12,627 Assets under management, SEK m Traditional life insurance 83,073 79,369 75,151 72,799 80,694 Unit-linked insurance ,843 7,447 6,519 Total 83,073 79,369 86,994 80,246 87,213 SPP, together with its sister company Handelsbanken Liv, is a market leader with a complete range of life insurance products for occupational and private pensions, as well as asset protection schemes for companies, organisations and private individuals. Total return, % Collective consolidation ratio, % Bonus rate, gross % SPP ANNUAL REPORT

4 THE CHIEF EXECUTIVE S COMMENTS Securer and stronger SPP has been a profit-distributing company since 1 January 2006, which creates great advantages for us and our customers. For our customers, it means fairness, security and freedom. This, coupled with our experience and unique expertise in the occupational pensions market, means that SPP now stands stronger than ever. And we have one of the world s strongest banks behind us. We are now full of confidence, and can look ahead with great optimism. Last year was a challenging one, and it feels satisfying that it is now behind us. I refer mainly to the Swedish Financial Supervisory Authority s decision on a new supervisory model for life insurance companies financial risks, with laws and regulations for life insurance operations which were being amended right up until the last minute. This changed the conditions for the demutualisation of SPP. Thus 25 October 2005 was a particularly important date when Handelsbanken announced that the demutualisation would be carried out with total risk capital of SEK 13 billion. This gives us completely new opportunities to increase the returns on our customers insurance assets. With a sound financial position, the allocation in the investment portfolio can be optimised. We can increase the proportion of equities, if we deem this to be the best approach. And as we are able to tap into Handelsbanken s investment expertise, we are well prepared. However, we cannot merely rely on increased returns. We must also maintain our cost-cutting efforts. I am proud of the streamlining work that has been done all over the company. We know that, in the long term, low costs are a vital factor for competition in the life insurance business. We must also increase our sales. We must get out and meet existing and prospective customers through our sales team and our partners, the insurance brokers. They have great expertise and close relationships with corporate customers. In 2005, we strengthened our relations and the nature of our collaboration with the insurance brokers, and this work will continue in We have grouped SPP s own occupational pensions specialists in a nationwide sales organisation, with four regional of- fices. In this way we ll be able to forcefully target our markets: large and medium-sized companies, municipalities, organisations, and all the individuals who make up our end-customer base. We have central units with business responsibility for further improving our efforts in targeting municipal and private customers and acting as a partner for the insurance brokers. Our consulting operations are also centrally based; in our view, they represent the market s greatest source of expertise on pension issues: trusted and independent. I think I can say that no other company on the Swedish market has so much experience and know-how in occupational pensions. Now we must ensure that we have the most satisfied customers, too. We are the first of all the major life insurance companies to give our customers the freedom to transfer all their occupational pension assets to a different company, or to move them between unit-linked and traditional insurance. I believe that every individual should have the right to choose the asset manager and the form of asset management that they wish. SPP has made the rules very clear, and it s no coincidence that we are the first company to introduce a true right of transfer for occupational pensions. I can understand the concern of companies who have chosen not to give their customers this right. But that is not the case with SPP. We are now one of the strongest life insurance companies in Sweden. This is the first annual report I have presented as chief executive of SPP. Together with our sister company Handelsbanken Liv we make up Handelsbanken Pensions & Insurance. Göran Holgerson, my predecessor as chief executive, is continuing in this business area as deputy CEO and head of the SPP business area. Let me conclude by thanking our customers, our collaboration partners and our suppliers, all our colleagues at Handelsbanken branches, the board, and naturally the entire staff of SPP for a great performance. It has been a demanding year, but now we see the opportunities ahead. A great trust has been placed in me to make the most of these. With the tangible support of Handelsbanken and our own manifest expertise, I am convinced that we can do this. We are stronger than ever. And this is only the beginning. Stockholm February 2006 Michael Zell 2 SPP ANNUAL REPORT 2005 THE CHIEF EXECUTIVE S COMMENTS

5 SPP 2005 Market and sales In January 2006, SPP was demutualised to become a profit-distributing life insurance company. Combined with SPP s unique expertise and product range in occupational pensions, this creates very good conditions for a boost in sales and high returns for SPP s customers and owners. SPP s strength lies in providing a comprehensive solution consisting of advisory services, fee-paying services, administration and asset management. Together with the company s advanced range of occupational pension solutions, this creates very good conditions for satisfied customers and an increase in sales. Via its own sales team and insurance brokers, SPP focuses on selling occupational pension and security solutions to mediumsized and large companies as well as municipalities and organisations. The market for collectively agreed occupational pensions is also important and is addressed via direct marketing. Sale of products from the sister company Handelsbanken Liv will continue to take place via bank branches, with emphasis on private pension savings, asset protection schemes, collectively agreed occupational pensions as well as pension and investment solutions for small companies. THE MARKET S PREMIUMS WRITTEN AND NEW BUSINESS Total premium volume in the open competitive life and pension insurance market in Sweden were SEK 124bn (98) according to reports issued by the Swedish Insurance Federation. Unit-linked insurance was the product that increased most, which is principally due to the addition of the new product area of endowment pensions. Premium volume for open competitive occupational pensions amounted to SEK 67bn (64), an increase of about 5%. Total new business for Swedish life insurance companies totalled SEK 40bn (22) a leap of 83%. The increase is nearly entirely due to the introduction of the new product area endowment pensions. New business in the area of occupational pensions was SEK 14.4bn (14.0). SPP S PREMIUMS WRITTEN AND NEW BUSINESS Here SPP refers to the unit-linked and traditional insurance marketed under the SPP brand. The fact that SPP Fondförsäkring legally belonged to Handelsbanken Liv as from July 2004 is not taken into account. SPP s total premiums written were SEK 7.67bn (8.02), equivalent to a market share of 6.2% (8.2). The reduction is largely due to more early retirement pensions being subscribed for in Handelsbanken Liv s Irish subsidiary Euroben in SPP s total new business amounted to SEK 1.28bn (1.41), equivalent to a market share of 3.2% (6.6). Premiums written in terms of SPP s occupational pensions totalled SEK 6.95bn (7.36), and the market share was 10.4% (11.6). New occupational pensions totalled SEK 1.03bn (1.26), and the market share was 7.2% (9.0). MARKET WITH ROOM TO GROW The occupational pension market has enjoyed considerable premium volume growth for a long time, and there are good prospects of this trend continuing. There are still areas that may be deregulated or expanded. Premium volume is also boosted by higher employment figures, combined with salary increases. At the same time, competition has increased in the occupational pension market. Additional players operate in the market and the product range has expanded. A total of 3.6 million salaried employees at companies with collectively agreed occupational pensions are entitled to make individual choices between several life insurance and unitlinked insurance companies. Many high earners in the private and public sector have further choices for their occupational pension. Many companies without collective agreements provide occupational pensions for their employees as well. A new element for the year is the municipal pension agreement, which will add to the growth in this market. The occupational pension market is therefore large and stable with good opportunities for growth. INSURANCE BROKERS SHOW GREATER CONFIDENCE As insurance brokers constitute one of the most important channels for sale of occupational pensions, SPP has worked hard to strengthen relations with the major insurance brokers. The positive trend during the year confirmed SPP s potential as a long-term occupational pension partner. For example, SPP is one of the choices available in a procurement conducted by the insurance broker Max Mathissen for 40 Swedish corporate groups. The insurance broker Söderberg & Partner has also conducted a procurement process for 113 of its customer companies in which SPP is one of the options. Another example is a cooperation agreement signed with the broker Säkra for municipalities, county councils and municipal companies. POSITIVE TREND IN SEVERAL MARKETS SPP s offer of administration, calculation and payment of municipal pensions resulted in deals with a large number of municipalities in the counties of Stockholm, Västra Götaland and Gävleborg. Through the cooperation with Handelsbanken Asset Management, several deals were supplemented by tailored management of the pension liability. Special expertise in occupational pension solutions is offered via the subsidiaries SPP Konsult AB and SPP Liv Pensionstjänst AB, and a number of new assignments were received during the year. Activities have also increased that are targeted at the collectively agreed pensions market, which has generated a positive flow of new premiums. SUCCESS IN INTERNATIONAL DEALS SPP was very successful in international deals in New sales to companies with staff working abroad increased by around 50%. SPP has a long tradition of providing products to employees working abroad and their accompanying family members, partly through its own products, and partly through the Guernsey-based and jointly owned company Nordben Life and Pension Insurance Co Ltd. ADMINISTRATION REPORT SPP ANNUAL REPORT

6 SPP 2005 Asset management As a result of the demutualisation, with a capital injection of SEK 13bn, SPP is one of the strongest players in the insurance market. The capital injection entails greater security for SPP s customers and creates the conditions to make it possible to invest in assets with higher risk which are expected to give higher return. The aim of SPP s asset management is to provide a long-term high rate of return. At the same time, the amount of risk taken must be restricted so as to ensure return which corresponds to the guaranteed commitments. The assets are managed in a diversifed portfolio. The risks are spread by allocating the investments over different asset categories such as fixed income securities, equities, property and alternative assets such as risk capital and hedge funds. Total return was 6.6% (6.0). The average total return over the last five years was 0.9%, and over the last ten years 7.5%. Most stock exchanges performed well during the year. The Stockholm stock exchange rose by 37%. In the US, the stock market was weaker and return there was only a few percent. The return on SPP s total holdings in equities amounted to 19.6%. As at 31 December, the proportion of equities was 27%. On the Swedish fixed income market, interest rates fell during the spring to record low levels by the summer. During the last quarter interest rates rose again but overall market rates finished the year at lower levels than at the beginning. Throughout the year, the fixed income portfolio had a relatively short duration. Return on the fixed income portfolio was 3.6%. During the whole of 2005, all asset exposure in foreign currencies was hedged. Without currency hedging the total return would have been slightly higher since the Swedish krona weakened against the main foreign currencies. The asset allocation is determined by a benchmark portfolio which is fixed every month by the company s allocation committee. Current market perceptions influence the composition but primarily it is the balance sheet s ability to withstand market fluctuations that dictates the content of the benchmark portfolio. The company s guaranteed commitments to customers are formulated in absolute figures and these commitments are an important factor in determining the asset allocation. Breakdown of assets Equity investments Fixed income investments 31 December December December 2005 Fixed income 68 % Foreign equities 15 % Swedish equities 12 % Hedge funds 2 % Foreign fixed income 3 % Real estate 0 % Sweden 46 % USA 6 % Europe 44 % Japan 4 % Swedish government 50 % Swedish mortgage institutions 28 % Other Swedish issuers 18 % Other foreign issuers 4 % INVESTMENT INCOME Market value Net investment 2005 Change in value Market value Yield Total return SPP Livförsäkring AB SEKm % SEKm SEKm % SEKm % SEKm % SEKm % Fixed income, Swedish 61, , , , , Fixed income, foreign 1, , Total fixed income 63, , , , , Equities, Swedish 4, ,856 1, , , Equities, foreign 9, ,195 1, , , Total equities 13, ,051 2, , , Other investments 1, , Real estate Total investments 79, , , , , Other -1, , Total 77, ,141 1,847 5,050 4 SPP ANNUAL REPORT 2005 ADMINISTRATION REPORT

7 SPP 2005 Risks and risk control In the demutualised, profit-distributing SPP, the policyholders no longer need to bear the risks collectively. The company bears the insurance risks and the financial risks are shared between the company and the policyholder. The company s operations include insurance risks, financial risks and operational risks. The financial risks include market risks, liquidity risks and credit risks. Good risk control is a prerequisite for sound business activity, and the company therefore has several services and departments that are responsible for limiting, measuring and following up risks. The company also has a compliance function with the task of following up the operations to ensure that they are run according to applicable regulations and good practice. With the exception of the senior actuary, the organisation is shared with Handelsbanken Liv. FINANCIAL RISK Insurance with a savings component, in both pension insurance and endowment insurance, is associated with financial risks to a greater or lesser extent. If the savings are in traditional insurance at a guaranteed interest rate, the financial risk is shared between the individual policyholder and the policyholder collective, provided that the insurance company is run according to mutual principles. As from 1 January 2006, when SPP became a demutualised company, the financial risk for traditional insurance is instead shared between the policyholder and the company. For savings in unit-linked insurance, the policyholder accepts the entire financial risk by choosing the funds in which to invest the saved capital. The company does not bear any risk and does not receive any of the return. Risks within asset management Risk generally means uncertainty about future results. The risk component that is most important for SPP to quantify and control is the possibility of negative variances arising from an anticipated result. Asset management operations are exposed to market risks, liquidity risks, credit risks and operational risks. The company works with Asset and Liability Management (ALM), which means integrated management of assets and liabilities. Market risk In practice, market risk comprises possible price falls on the company s assets caused by changed interest rates, share prices, property prices or exchange rates. In order to manage market risk, SPP s allocation committee decides on a reference portfolio. The composition of the benchmark portfolio is primarily influenced by the extent to which the balance sheet can withstand market fluctuations. Current market opinion also affects the composition of the benchmark portfolio, but these considerations take second place. The limited risk resistance of the balance sheet did not allow exposure to the stock markets in 2005 in line with historical average levels. Against the background of a positive view of equities as an asset class, the share price risk s proportion of total market risk was high in relation to available risk scope. Liquidity risk Liquidity risk is the risk of loss that results from not being able to sell a financial instrument immediately without a significant price reduction. This risk is limited through most of the total portfolio being invested in listed securities with good liquidity. Credit risk Credit risk is the risk that borrowers or counterparties are un-able to meet their commitments to SPP. The creditworthiness of issuers, borrowers and counterparties is determined via both internal and external credit assessments. INSURANCE RISKS Life insurance is a financial product where the result, at least to some extent, is uncertain. This uncertainty depends in some way on the life or health of the insured individual. Life insurance with a savings component is also uncertain in terms of future investment returns. Different types of insurance risks premature death death benefit insurance payment in the event of the death of the insured person longevity life insurance/pension insurance payment as long as the insured person lives disability disability insurance/waiver of premium insurance payment in the event of disability/inability to work combinations many insurance policies offer combinations of the above three. In a mutual insurance company, it is the policyholder collective that takes the risks, since the policyholders have the role of both owner and customer. Also in a mutually operated life insurance limited company which SPP was until and including 2005 the policyholders are the ones who bear all the risks. In a demutualised (profit-distributing) life insurance company, the policyholders no longer need to bear the risks collectively. The risk result is borne by the company. Limiting insurance risks Before risk insurance can be granted, a medical risk assessment is performed for the insured party. The purpose is to assess whether and on what terms the insured party can be granted insurance on the basis of his or her state of health. This is essential in order to be able to offer long-term insurance at a reasonable premium in a profitable manner. The ADMINISTRATION REPORT SPP ANNUAL REPORT

8 insurance applied for must also meet the policyholder s insurance needs and ability to pay. This is why risk assessment may also include a financial assessment. Future risks Mortality continues to fall, which is positive with regard to death benefit insurance. Falling mortality means a rising average length of life which, on the other hand, may be a concern as regards pension insurance. As this affects the entire life insurance industry, in 2006 the Försäkringstekniska Forskningsnämnden (FTN an industry organisation for the Swedish insurance industry) will conduct a comprehensive analysis of mortality. The aim of the survey is firstly to document actual insurance mortality (= mortality among those who have taken out insurance), broken down by a number of subpopulations. Possibly the most important breakdown is based on the way the policyholder took out the insurance: through an active individual decision or automatically without his or her involvement via a collective agreement or similar solution. Secondly, the analysis includes estimating change trends, which enables a mortality forecast to be made. A mortality forecast is a fundamental factor for pricing both mortality insurance and pension insurance. The products are often designed so that the original premium calculation is based on a mortality that applies throughout the insurance period. The future is not as predictable when it comes to disability insurance. Changes in disability occur much more rapidly than changes in mortality. This is partly due to the difficulties in determining the underlying reason and degree of disability. Disability rose rapidly during the first few years of this century. This entailed a major human and socioeconomic problem. The large premium increases that ensued made several insurance companies doubtful to the possibility of being able to offer voluntary disability insurance in the future. In 2005 however the upper limit appeared to have been reached in terms of disability. The entire disability insurance sector has entered a much more balanced phase. Disability insurance products are generally designed in such a way that the insurance company can change the premium annually, which is an option that the company can utilise to balance the rapid changes in disability. OPERATIONAL RISK Operational risks are defined as risks of losses caused by inadequate or erroneous internal routines and system solutions, as well as mistakes made by own employees. Causes may also consist of external events and legal risks. Operational risks may lead to economic losses and a drop in confidence among our customers and in the market. Responsibility for managing operational risks is part of managerial responsibility at all levels. The departments managers also have an expressed responsibility to identify, assess, report, act upon and control operational risks. Regional managers and the chief executives of subsidiaries have equivalent responsibility within their respective units. Sound management of operational risks is also a way of assuring internal control in the company. Surveys and improvements regarding processes and routines have been carried out within the framework of the demutualisation process. This has helped strengthen and assure the quality of internal control within our administrative routines. The main aim of the quality assurance is to ensure that: requisite flows and control stages have been secured requisite reports and documents can be produced operational risks are under control and minimised A key starting point has been that division of responsibility and working duties must be defined on the basis of control aspects and be designed to ensure that no single person handles a transaction throughout the entire processing chain. During the year the company s board of directors established a policy for operational risks, and the chief executive established guidelines for management of such risks. Both the policy and the guidelines follow the general guidelines of the Swedish Financial Supervisory Authority on governance and control of financial companies and general guidelines on reporting significant events. The guidelines include descriptions of how operational risks and losses are to be reported in the company. Furthermore, the overall responsibility for operational risks was transferred to the Risk Management department during the year. The department s tasks include conducting an independent risk check of operational risks and assisting the business operation in its work on operational risks. As a complement to ongoing control of operational risks, and in a similar way to the rest of the Handelsbanken Group, the company performs a self-assessment of operational risks every year. To increase the focus on operational risks even more, it became compulsory during the year for each unit, in conjunction with the annual operations planning process, to conduct an analysis of its own operational risks. The analysis is to show the operational risks, their possible consequences, and plans for necessary action to eliminate or reduce the risks. An overall review of the Group s operational risks is conducted twice a year; the results are reported to the central board of Handelsbanken and the board of SPP. In addition to responsibility for operational risks, the company together with Handelsbanken Liv has employees with special responsibility for information security and physical safety. Compliance Compliance is to continuously identify, assess, monitor and inform about risks that may arise due to failure to comply with regulations (such as laws, ordinances and internal instructions). Another duty is to ensure that relevant employees are given information and training on new or changed rules. The risks compliance risks that may result from failure to comply with regulations are increased operational risks, risks of legal sanctions, supervisory sanctions, economic loss, or damage caused by loss of reputation. This function has an independent position in relation to business operations, and it reports directly to the chief executive and company board. 6 SPP ANNUAL REPORT 2005 ADMINISTRATION REPORT

9 SPP 2005 The company s performance THE SPP GROUP SPP Livförsäkring AB, corporate identity number , has its head office in Stockholm. The company is a wholly-owned subsidiary of Svenska Handelsbanken AB (publ), corporate identity number (Handelsbanken). SPP Livförsäkring AB is a life insurance company that provides traditionally managed insurance and was run according to mutual principles until and including 31 December This means that SPP cannot pay dividends: instead the earnings are returned to the policyholders irrespective of whether it is a profit or loss and affect the amount of bonus. The Group includes the subsidiary SPP Liv Pensionstjänst AB and its subsidiary SPP Konsult AB as well as the dormant subsidiary SPP Kundcenter AB. These subsidiaries supply consulting and other services in the field of pensions and financial security. SPP Liv Fondförsäkring AB was sold to Handelsbanken Liv on 1 July 2004 and was re-acquired by SPP on 1 January Life insurance operations outside Sweden are conducted through the associated company Nordben Life and Pension Insurance Co. Ltd, with its head office on Guernsey, as well as through SPP s London branch. OPERATIONS SPP offers pension and insurance solutions for medium-sized and large companies in the open competitive occupational pensions market. SPP also offers advanced consulting services covering occupational pensions, as well as insurance and administrative solutions for municipalities and organisations. Collectively agreed occupational pensions form another important market. Sales mainly take place via the company s own sales team, insurance brokers and direct marketing. SPP, Handelsbanken Liv and Handelsbanken offer customers a wide range of savings solutions in the field of pensions as well as other forms of savings. This takes place within the framework of Handelsbanken s universal bank concept, where life insurance is a natural part of the product range. SIGNIFICANT EVENTS On 1 January 2006, SPP was demutualised to become a profitdistributing life insurance company, and the financial year was marked by continued work on this process. Handelsbanken has intended to demutualise SPP since acquiring the company in March In June 2004 the policyholders voted in favour of a demutualisation. On 1 April 2005, the Swedish Financial Supervisory Authority approved the demutualisation of SPP, and the statutory requirements were thereby met. In December, the central board of Handelsbanken decided on a capital contribution of SEK 11.2bn, meaning that the total capital contribution is SEK 13bn. SPP received a shareholders contribution on 2 January About SEK 3.5bn of this was used to cover the underfunded agreements that were in parts of SPP s portfolio. Michael Zell has been the head of the Handelsbanken Pensions & Insurance business segment since 1 January He was previously the head of the Central Sweden regional bank at Handelsbanken. Michael Zell became chief executive of SPP on 17 January A more market-oriented organisation was presented in conjunction with him taking up his position, to create better conditions for increased sales. SPP s former chief executive, Göran Holgersson, became the deputy chief executive with responsibility for the SPP business area. On 1 January 2006, the former subsidiary SPP Liv Fondförsäkring AB was re-acquired from the sister company Handelsbanken Liv. The purchase price amounted to SEK 1,310m. This re-acquisition was made possible by the demutualisation of SPP. SPP transferred occupational group life insurance (TGL) operations to Bliwa Livförsäkring AB on 1 January SPP will continue to forward TGL business to Bliwa. PERFORMANCE Comments on significant items Performance Profit after tax was SEK 756m (2,130), which is a decrease of SEK 1,374m. The lower profit is above all due to a SEK 1.9bn increase in reserves in conjunction with the Swedish Financial Supervisory Authority s cut in the highest interest rate from 3.50% to 3.25% for old insurance agreements. The highest interest rate is the maximum discount rate permitted for calculation of the value of the insurance commitments in the balance sheet. The profit for the previous year included capital gains of about SEK 900m following the sale of the subsidiary SPP Liv Fondförsäkring AB. Operations in SPP Liv Fondförsäkring AB are included in the consolidated profit until the transfer date, 1 July See page 26 for appropriation of profits. Profits for other Group companies are reported under other income and expenses in the non-technical accounts. Premiums written Premiums written amounted to SEK 4,406m (6,605), which is a decrease of 33%. This is largely due to the inclusion of SPP Liv Fondförsäkring AB s first six months of 2004 in the comparative year. Premiums written for the parent company were down 9%, amounting to SEK 4,406m (4,821). The change in premiums written for the parent company is partly due to lower sales of single-premium insurance for early retirement pensions. Investment income Investment income from traditional insurance operations amounted to SEK 5,305m (4,553), which gives a return of 6.6% (6.0). Average share exposure during the year was 18%. The proportion of equities increased significantly in December and stood at 27% on 31 December. The return on share portfolios amounted to 19.6%, and return on fixed income investments totalled 3.6%. ADMINISTRATION REPORT SPP ANNUAL REPORT

10 Net return in the parent company was SEK 5,050m (5,196). Last year s figures include capital gains of about SEK 900m from the sale of the subsidiary SPP Liv Fondförsäkring. Claims incurred and life insurance provisions Claims incurred fell by 14% to SEK 3,697m (4,318). The change in other technical provisions was SEK 3,623m (4,645), 22% lower than the previous year. This is due to the fact that technical provisions for life insurance, in which the risk is borne by the policyholder, are only included for the first six months as a result of the transfer of SPP Liv Fondförsäkring AB. In the parent company, the change in provisions rose by 57%, mainly following an increase in reserves of SEK 1.9bn in conjunction with the Swedish Financial Supervisory Authority cutting the highest interest rate from 3.50% to 3.25% on old insurance agreements. Operating expenses Operating expenses totalled SEK 844m (881), which is a fall of 4%. This reduction is above all due to the inclusion of SPP Liv Fondförsäkring AB in the results for the first half of The expense ratio for the SPP Group amounted to SEK 19.2% (13.3). Operating expenses in the parent company increased by 10%, which is above all attributable to the costs of demutualising SPP. Tax The tax expense for the year amounted to SEK 480m (513) and comprises the cost for policyholder and income tax. Staff The average number of employees at year-end was 518 (582), which is a reduction of 11%. Information on salaries and other staff costs is stated in Note 6. Solvency ratio The available solvency margin at 31 December 2005 amounted to SEK 4,626m (4,386) and was therefore SEK 1,407m more than the required solvency margin. The solvency ratio improved to 1.44 (1.42). In conjunction with the demutualisation of SPP on 1 January 2006, the solvency ratio has increased to just over 2%. The available solvency margin includes a debenture loan of SEK 1,600m, issued by SPP to Handelsbanken in The Swedish Financial Supervisory Authority has authorised the inclusion of this item in the available solvency margin. INSURANCE COMMITMENTS Bonus Funding, which comprises a solvency reserve and other funds in the parent company, totalled SEK 2,826m (2,586) at yearend. Occupational pension insurance with collective calculation of bonus Bonuses can be paid to policyholders in the form of pension supplements and by revaluation of earned pension rights. The maximum amount of the pension supplement is the trend in the consumer price index. For 2005, pensions being paid out were adjusted upwards by 0.54%, and the equivalent adjustment for 2006 will be 0.61%. Earned pension rights were not revalued for 2005, nor will this be done for Insurance with individual calculation of bonus For other insurance contracts, i.e. those where the bonus is calculated individually, SPP lowered the supplementary amounts on 1 January 2005 for insurance policies being disbursed. The reduction in the total pension was on average 3.4% (maximum 6%) of the entire pensions being disbursed. The guaranteed portion of the insurance is, however, never lowered. A large proportion of the insurance contracts are therefore not affected by the reductions, because they do not include a supplementary amount. The amounts for 2006 are virtually unchanged from The allocated bonus, based on the contribution principle, is the difference between the insurance contract s pension capital and its guaranteed value. One of the most important components in calculation of the pension capital is the bonus rate, which averaged 1.5% during the year. The guaranteed value is however based on the guaranteed interest for each insurance contract of 2.5-5%, depending on when the policy was taken out. The allocated bonus is not guaranteed and can therefore be reversed if required by the company s financial situation. COLLECTIVE CONSOLIDATION RATIO The collective solvency reserve in the parent company amounted to SEK 3,401m (1,003) at the end of At the 8 SPP ANNUAL REPORT 2005 ADMINISTRATION REPORT

11 same point in time, the collective consolidation ratio amounted to 105% (101). CHANGES IN ACCOUNTING PRINCIPLES AS FROM 2006 Valuation of insurance commitments The occupational pension directive came into force in Swedish law on 1 January This means that insurance commitments for occupational pension insurance must be calculated with prudent assumptions in terms of discount interest rate, mortality, sickness/disability and other factors. The commitments must be discounted at a risk-free market interest rate. In the past, the Swedish Financial Supervisory Authority stipulated the highest permitted interest rate that could be applied when calculating the guaranteed insurance commitments. A risk-free market interest rate has been applied to all insurance commitments in their recalculation. DEMUTUALISATION OF SPP SPP s demutualisation from being a limited company run on mutual principles to a profit-distributing company implies a change in the nature of the insurance contracts and that all surplus funds that were in SPP as at 31 December 2005 were paid to the policyholders. The insurance capital is subsequently individual. Through this individualisation, the reported liability will rise, so that it at least amounts to the guaranteed capital per customer. When SPP was run on mutual principles, these underfunded insurance contracts were balanced by the surplus of other policyholders. This is not permitted in the profit-distributing SPP. These deficits have not been realised; they are dependent on future return. Any remaining deficit will not be realised until the insurance is due to be paid out. Due to the change of principle, the opening equity is expected to decrease by some SEK 3.2bn. The effects of the demutualisation on opening equity for 2006 are based on preliminary calculations. The final effects cannot be calculated until all surplus funds in SPP have been paid to policyholders which is expected to be completed at the end of March DESCRIPTION OF MODEL FOR SHARING OF TOTAL RETURN IN SPP Until 31 December 2005, SPP was run on mutual principles. This means that all profits arising in the insurance company go back to the policyholders, who also bear any losses which arise. The company cannot take any part of the profits arising but neither does it bear any losses arising in the operations. On 1 January 2006, SPP was demutualised into a profit-distributing insurance company, which means that SPP is permitted to pay profits to its owner. In a profit-distributing insurance company, profits and losses arise through the administration result, the risk result and the financial result. The distribution between SPP and the policyholders is performed by means of a well-defined model for sharing returns, which a large majority of the policyholders have voted in favour of, and which was then approved by the Swedish Financial Supervisory Authority. Administration result The model for sharing return means that SPP bears the administration result in full. The policyholders pay a fee to SPP for operating expenses as agreed in the terms of the insurance contract. If the actual operating expenses exceed the fees SPP charges, SPP will bear the loss. In the opposite case, the profit goes to SPP. This part of the result is relatively easy to forecast and compared to the financial result, is not particularly volatile. In the last few years, when SPP was run on mutual principles, the administration result has been negative but has gradually improved. It is expected that the administration result will make a positive contribution to the Group s results from 2007 inclusive. Risk result The risk result is attributable to the insurance risks which SPP assumes. The insurance risks are divided into three categories: death, SPP compensates the insured party (the survivor) in the case of death with a specified amount. life, SPP compensates the insured party with a specified amount as long as the insured party is alive, or as long as stated in the insurance contract. disability, SPP compensates the insured party with a specified amount in the case of disability/sickness during the period stipulated in the contract. The model for sharing return means that SPP in all essentials bears the risk result. The insurance contract states the risk in question, the terms of compensation and the amount to be paid. The policyholders pay SPP a specified amount for this. If the actual cost of the contracted risk exceeds the fees SPP charges, SPP will bear the loss. In the opposite case, the profit goes to SPP. The greatest short-term uncertainty is generated by disability cases, while the long-term result of life cases is more difficult to forecast. In the short term, the result of death and life risks is fairly stable. In the last few years, when SPP was run on mutual principles, the risk result has been positive. The risk result is expected to be positive but varies to a greater extent than the administration result, mainly due to uncertainty in the disability risks. Financial result The financial result derives from the financial guarantees which SPP issues in the insurance contracts and to the real return on the assets managed on behalf of the policyholders. The model for sharing return means that SPP receives at most 10% of the return on the policyholders assets. The return is ADMINISTRATION REPORT SPP ANNUAL REPORT

12 only shared when the return exceeds the guaranteed rate for the insurance contract in question. In order for full share of return to be achieved, for half the insurance portfolio, there is also a requirement that the company can secure the value of pensions being paid out and paid-up policies. If the return is less than the contracted guaranteed rate, the return goes to the policyholders. SPP also compensates the policyholders if the insurance assets fall below the value guaranteed at a specific contracted date. This applies for half of the contracts. For the other half, SPP contributes five percent of any deficit based on the balance at every year-end. In addition, SPP guarantees the contracted benefit, often in the form of a contracted monthly amount during the contracted payment period. Valuation of the guarantees is complex and is based on the current market interest rate. Changes to this rate may lead to volatility in the total liability. The outcome of the financial result has varied a great deal during the last few years. From 2006, the insurance liability as an individual item will vary even more since the liability will be linked more directly than previously to changes in long-term market rates. At the same time as there will be greater variation in the size of the liability, it will also be easier to hedge for negative impact on the results due to the variation in the size of the liability by investing in assets with the corresponding, but reversed, variation in value. This is a governing factor in the asset management, but the portfolio composition is also based on the expectations our asset management has of various asset categories. CAPITAL ALLOCATION IN CONNECTION WITH THE DEMUTUALISATION When demutalising a mutually run life insurance limited company to form a profit-distributing company, the whole surplus must be divided among the policyholders. In the case of insurance contracts with individually calculated bonus, the allocation takes place in proportion to the insurance capital as at 31 December 2005 for each contract. For contracts with collectively calculated bonus, the surplus is distributed in several stages. The surplus of risk insurances is distributed among policyholders in proportion to their risk premium in January Surpluses attributable to special indexation funds are distributed to policyholders in proportion to the guaranteed capital. This distribution is made separately for each sub-group of insurance contracts that includes special indexation funds. Any remaining surplus is then distributed in proportion to the amount of guaranteed capital. 10 SPP ANNUAL REPORT 2005 ADMINISTRATION REPORT

13 SPP 2005 Five-year summary Amounts in SEK million GROUP Results Premiums written 4,406 6,605 9,153 11,927 12,627 Net investment income in insurance business 5,053 5,958 5,011-9,936-2,693 Claims incurred -3,697-4,318-4,385-4,515-3,872 Bonus and rebates Operating expenses ,160-1,425-1,223 Balance on the technical account, life insurance business 1,242 2,660 2,219-8,458-5,837 Profit/loss for the year 756 2,130 1,608-9,129-6,599 Financial position Buildings and land Shares and participating interests in associated companies Shares and participating interests 23,704 16,086 14,605 9,301 29,137 Bonds and other interest-bearing securities 50,673 57,426 52,945 59,089 47,657 Other financial investments , Total investment assets 74,855 74,035 73,062 68,660 77,012 Investments assets for which policyholders bear the risk ,843 7,447 6,519 Technical provisions for traditional life insurance 78,135 74,790 72,476 70,551 67,642 Technical provisions for which policyholders bear the risk ,902 7,509 6,578 Shareholders equity 3,030 2,789 1, ,041 Subordinated loans 1,600 1,600 1,600 1,600 - Surplus value Group companies Total solvency capital 4,630 4,389 3,801 3,237 13,041 Key ratios Expense ratio, % Management expense ratio, % PARENT COMPANY Available solvency margin 4,626 4,386 3,827 3,282 12,977 Required solvency margin 3,219 3,097 2,991 2,914 2,881 Solvency ratio Collective solvency capital 3,401 1, ,794 5,822 Solvency capital 4,626 4,386 3,827 3,282 12,977 Key ratios Expense ratio, % Management expense ratio, % Policyholders yield, % Policyholders total return, % Collective consolidation ratio, % ADMINISTRATION REPORT SPP ANNUAL REPORT

14 SPP 2005 Accounting policies This annual report has been prepared in conformity with the Swedish Annual Accounts Act for Insurance Companies (ÅRFL) and the instructions and general guidelines regarding the annual accounts of insurance companies issued by the Swedish Financial Supervisory Authority (FFFS 2003:13). CONSOLIDATED FINANCIAL STATEMENTS The consolidated accounts encompass all companies in which SPP directly or indirectly has a controlling influence. A controlling influence normally exists when the holding amounts to more than 50% of the voting rights. Subsidiaries are consolidated in accordance with the acquisition accounting method. Companies in which SPP directly or indirectly has a significant influence are reported as associated companies. A significant influence normally exists when the holding amounts to a minimum of 20% and a maximum of 50% of the votes. Associated companies are reported in the consolidated accounts in accordance with the equity method. When converting the foreign operations balance sheets and income statements, the current method has been used. Assets, liabilities and minority interests in equity are translated at the closing rate. Shareholders equity is translated at the exchange rate on the date of investment and earning respectively. The resulting translation differences have been classed as shareholders equity. The income statement is translated according to the average exchange rate for the year. INTANGIBLE ASSETS An intangible asset is an identifiable, non-monetary asset without physical substance that is held for use in production, supply of goods or services, for hiring out to others or for administrative purposes. An asset is a resource that is expected to provide future economic benefit over which there is control as a result of past events. When acquiring companies, an acquisition balance sheet is drawn up, where identifiable assets and liabilities are valued at fair value at the time of acquisition. The part of the acquisition price which cannot be attributed to identifiable assets and liabilities is reported as goodwill. Investments in both software developed by the Bank and acquired software are carried as an expense on a current basis, where the expenditure refers to maintenance of existing business operations or an existing intangible asset. In the case of development of new intangible assets, or new business operations for existing intangible assets, the direct expenditure accrued is capitalised from the time when it is probable that economic benefit that can be reliably measured will arise. For capitalisation of expenses referring to existing intangible assets, there is the additional requirement that the economic benefits must clearly exceed the economic benefits that were associated with the existing asset in its original state. An impairment test is performed when there is any indication that the asset may have decreased in value. VALUATION OF INVESTMENT ASSETS All investment assets, apart from investments in group companies, are valued at fair value. Investments in group companies are valued at the lower of cost and fair value. Land and buildings are valued individually, applying cash flow analyses. Valuations are conducted by external valuers. Both realised and unrealised changes in the value are booked in the income statement. For equities and property, the unrealised result is calculated as the difference between cost and fair value. For interest-bearing instruments, the unrealised result is calculated as the difference between amortised cost and fair value. This amortised cost is the discounted present value of future payments where the discount interest rate is the effective interest rate at the time of acquisition. This takes into account any premiums or discounts at acquisition which are spread over the remaining maturity of the instrument. Derivative transactions with a positive market value on the closing date are stated under Investment assets, and transactions with a negative market value are reported under Liabilities. Securities which have been lent out are reported as securities in the balance sheet. Remuneration received is allocated over the remaining period to maturity and is reported as interest. Lent securities are reported at fair value under Other pledged assets and comparable collateral. Remuneration received for bonds related to repurchase agreements (repos) is reported as a liability under Other liabilities. The bonds covered by the agreement are reported in the balance sheet under Bonds and other fixed-income securities. Sold securities are reported as a pledged asset under Assets and other comparable collateral pledged for own liabilities and for commitments reported as provisions. Paid purchase sums for bonds which relate to repurchase agreements (repos) are reported as receivables under Other financial investments. Acquired securities are not reported as assets. The difference between the spot component and the forward component of the purchase sum is allocated over the remaining period to maturity and reported as interest. Purchases and sales of money market and capital market instruments on the spot market are subject to trade date accounting. Business that is not settled as at the closing date is reported gross as a receivable from or liability to the recipient under other receivables or other liabilities. Reserve for unrealised gains The gains that arise when the fair value of the investment assets exceeds the historical cost are placed in a reserve for unrealised gains. The reserve for unrealised gains is included in shareholders equity in the balance sheet. The reserve for unrealised gains consists of the difference between the total historical cost (for interest-bearing investments historical cost) and the total fair value for the asset in the original currency, translated at the closing rate. Calculations are performed collectively per balance sheet item, with the exception of land and buildings, where provision is made on an individual basis. 12 SPP ANNUAL REPORT 2005 ACCOUNTING POLICIES

15 VALUATION OF ASSETS AND LIABILITIES IN FOREIGN CURRENCY Assets and liabilities in foreign currency are valued at the closing rate. PROPERTY AND EQUIPMENT Machinery and equipment are valued at cost. An impairment test is performed if there is any indication of a decrease in value. DEFERRED ACQUISITION COSTS Acquisition costs that vary with and which are directly or indirectly related to acquisition or renewal of insurance contracts and which are assessed as being of significant value, are capitalised in the balance sheet. The depreciation period is five years. PROVISIONS Provisions are reported as a consequence of past events when it is probable that an outflow of resources will be required to settle the obligation. The provision is recorded in the amount estimated to be most probable taking into account the time of settlement. Technical provisions are described separately. IMPAIRMENT LOSSES This section describes the criteria applied for impairment losses on property and equipment and intangible assets, as well as shares in subsidiaries and associates. Impairment losses are reported if the recoverable amount is less than the carrying amount. The recovery value is calculated as the higher of an asset s value in use or net realisable value. The recovery value is determined when there is an indication that the asset has fallen in value. DEPRECIATION Equipment Equipment is depreciated on a straight-line basis over the useful life of the asset. This means that personal computers are depreciated over three years and other equipment is depreciated over five years. Intangible assets Goodwill attributable to acquisition of associated companies is amortised after an estimated useful life of ten years which is based on the value of the associated company s business, contracts and customer base. TAXES Tax is calculated individually for each company. Tax expense for the year includes policyholder tax and income tax. Income tax includes deferred tax on the unrealised result in the portion of the Group s operations that is liable for income tax. VALUATION OF TECHNICAL PROVISIONS Technical provisions consist of life insurance provisions and provisions for unsettled claims. Life insurance provisions correspond to the expected capital value of the company s guaranteed commitments under prevailing insurance agreements after deduction for the expected capital value of future contracted premium payments. The capital values are calculated taking into account assumptions on future interest, mortality and other risk measurements, expenses and taxes. These assumptions are used when calculating the life insurance provisions in the company s balance sheet. There is no direct and automatic connection with the assumptions applied to individual insurance contracts when calculating premiums and bonus. Mortality assumptions For occupational pensions insurance with collectively calculated bonus (pension supplements) the mortality assumption is based on the company s actual experience. For other traditional life insurance, the mortality assumption is applied which was jointly developed by the industry in Operating expenses assumptions The company applies a cost that is proportional to the technical provisions and one which is proportional to paid-in premiums. The operating expenses assumption is based on the company s current expenditure. Interest rate assumptions and tax The interest rate assumption is 3.25% for old contracts taken out before the end of April On contracts taken out from 1 May 2003 until the end of February 2005, the interest rate assumption is 3.0%. For policies entered into thereafter the interest rate assumption is 2.7 percent. The Financial Supervisory Authority sets out in a directive (FFFS 2005:23) the highest permitted interest rate assumption at which life insurance provisions may be calculated. The interest rate assumption applied by SPP complies with this directive. A tax burden occurs through a reduction of the assumed interest rate by 0.5 percentage points for old contracts and 0.4 percentage points for new contracts. Provision for unsettled claims The provision for unsettled claims mainly comprises the estimated capital value of the company s responsibility for disability pensions and waiver of premium for disabilities that have already occurred. A small portion relates to insurance amounts due for payment but where payment has not been made, as well as an amount for anticipated but not yet known sickness cases. INTERNATIONAL FINANCIAL REPORTING STANDARD, IFRS For the period during which SPP was run according to mutual principles, there is no transition to international accounting standards. A project was carried out during 2005 with the aim of harmonising SPP s accounting policies with IFRS. As of 1 January 2006, accounting is in accordance with the Financial Supervisory Authority s directive FFFS 2004:21 (Statutory IAS). ACCOUNTING POLICIES SPP ANNUAL REPORT

16 SPP 2005 Income statement GROUP PARENT COMPANY SEK million TECHNICAL ACCOUNT, LIFE INSURANCE BUSINESS Premiums written Note 1 4,570 6,799 4,570 5,015 Premiums ceded Premiums written (net of reinsurance) 4,406 6,605 4,406 4,821 Investment income Note 2 6,136 4,766 6,136 4,463 Unrealised gains on investments Note 3 1,762 1,508 1,759 1,491 Change in value of investments for which policyholders bear the investment risk Note Claims incurred (gross) Note 5-4,000-4,258-4,000-4,258 Reinsurers share Claims incurred (net of reinsurance) -3,956-4,199-3,956-4,199 Change in provision for claims outstanding (gross) Note Reinsurers share Change in provision for claims outstanding (net of reinsurance) Total claims incurred (net of reinsurance) -3,696-4,318-3,696-4,318 Life insurance provisions Note 24-3,623-2,302-3,623-2,302 Life insurance provisions for which the policyholders bear the risk Unit-linked commitments - -2, Change in other technical provisions (net of reinsurance) -3,623-4,645-3,623-2,302 Bonuses and rebates (net of reinsurance) Operating expenses Note Investment charges Note Unrealised losses on investments Note 8-1, ,886 - Result from participating interests in associates Balance on the technical account, life insurance business 1,242 2,660 1,236 2,571 Non-technical account Balance on the technical account, life insurance business 1,242 2,660 1,236 2,571 Investment income Unrealised gains on investments Investment charges Unrealised losses on investments Other income Other expenses Result before tax 1,236 2,643 1,236 2,571 Tax Note Net profit for the year 756 2, , SPP ANNUAL REPORT 2005 INCOME STATEMENT

17 SPP 2005 Analysis of results PARENT COMPANY SEK million Total 2005 DIRECT INSURANCE OF SWEDISH RISK Group pension and occupational pension insurance GROUP INSURANCE Group life and occupational group life insurance Non-cancellable disability and accident insurance and waiver of premium insurance Premiums written (net of reinsurance) 4,406 3,858,2 546 Investment income 6,136 5, Unrealised gains on investments 1,759 1, Claims incurred (net of reinsurance) -3,696-3, Change in other technical provisions (net of reinsurance) -3,623-3, Bonuses and rebates (net of reinsurance) Operating expenses Investment charges Unrealised losses on investments -1,886-1, Balance on the technical account, life insurance business 1, PREMIUMS WRITTEN Premiums written (gross) 4,570 3, Premiums ceded Total premiums written (net of reinsurance) 4,406 3, CLAIMS INCURRED Claims paid (gross) -4,000-3, Reinsurers share Total claims incurred (net of reinsurance) -3,956-3, Change in provision for claims outstanding (gross) Reinsurers share Total change in provision for claims outstanding (net of reinsurance) Total claims incurred (net of reinsurance) -3,696-3, Technical provisions Life insurance provisions 75,828 75, Provision for claims outstanding 2, ,307 Total technical provisions 78,135 75,828-2,307 ANALYSIS OF RESULTS SPP ANNUAL REPORT

18 SPP 2005 Balance sheet GROUP PARENT COMPANY SEK million 31 Dec Dec Dec Dec 2004 ASSETS Investments Land and buildings Note Shares and participating interests in group companies Note Shares and participating interests in associates Note Shares and participating interests Note 13 23,704 16,086 23,704 16,086 Bonds and other fixed income securities Note 14 50,673 57,426 50,673 57,426 Derivatives Note ,855 74,035 74,859 74,042 Reinsurers share of technical provisions Claims outstanding Receivables Receivables arising out of direct insurance operations Note Other receivables Note Other assets Tangible assets Note Cash at bank and in hand Note 19 7,581 4,806 7,491 4,760 7,591 4,843 7,501 4,797 Prepayments and accrued income Accrued interest income Deferred acquisition costs Note Other prepayments and accrued income , ,081 Total assets 83,664 80,988 83,571 80, SPP ANNUAL REPORT 2005 BALANCE SHEET

19 GROUP PARENT COMPANY SEK million 31 Dec Dec Dec Dec 2004 SHAREHOLDERS EQUITY, PROVISIONS AND LIABILITIES Shareholders equity Note 21 Share capital (2,000 shares par value SEK 100,000) Solvency reserve Other reserves Reserve for unrealised gains Note 22 1,931 2,131 1,931 2,131 Other funds 200-1, ,411 Profit brought forward Net profit for the year 756 2, ,098 3,030 2,789 3,027 2,786 Subordinated liabilities Note 23 1,600 1,600 1,600 1,600 Technical provisions (gross) Life insurance provisions Note 24 75,828 72,204 75,828 72,204 Provision for claims outstanding Note 25 2,307 2,586 2,307 2,586 78,135 74,790 78,135 74,790 Provisions for other risks and charges Note Deposits from reinsurers Liabilities Liabilities arising out of direct insurance operations Note Liabilities arising out of reinsurance operations Derivatives Note Other liabilities Note , , ,438 Accruals and deferred income Total shareholders equity, provisions and liabilities 83,664 80,988 83,571 80,911 Memorandum items Pledges and comparable collateral for own liabilities and for reported commitments for provisions Note 30 82,265 77,340 82,265 77,340 Other pledged assets Note Other commitments Note 32 22,036 26,793 22,036 26,793 BALANCE SHEET SPP ANNUAL REPORT

20 SPP 2005 Notes (Amounts in SEK million unless otherwise stated) NOTE 1 Premiums written (gross) GROUP PARENT COMPANY Paid-in premium 4,569 6,775 4,569 4,991 Reversionary bonus for adjustment of paid-up values Premium tax Premiums written have been taken out in Sweden. Premiums written for direct insurance Group Group insurance 4,570 6,799 4,570 5,015 Regular premiums Single premiums Regular premiums Single premiums Bonus contracts 3, , Contracts where policyholders bear the investment risk - - 1, , ,690 1,109 Premiums written attributable to bonus contracts pertain entirely to the parent company. NOTE 2 Investment income GROUP PARENT COMPANY Operating surplus from land and buildings Rental revenue Operating expenses Total operating surplus from land and buildings NOTE 4 Change in value of investments for which policyholders bear the investment risk GROUP PARENT COMPANY Shares and participating interests Bonds and other fixed income securities NOTE 5 Claims paid (gross) Claims paid -3,955-4,193 Cancellations and repurchases Operating costs for claims management ,000-4,258 NOTE 6 Operating expenses GROUP PARENT COMPANY Acquisition costs Change in deferred acquisition costs Administrative expenses Reinsurance commissions and profit participating interests Total operating expenses in insurance operations Dividends received Interest receivable Bonds and other fixed income securities 1,330 1,750 1,330 1,750 Other interest receivable Other interest receivable, group companies Total interest receivable 1,482 1,879 1,482 1,881 Exchange gains, net Capital gains, net Shares and participating interests 1,896 1,480 1,896 1,420 Fixed income securities 2, , Total capital gains, net 4,191 2,062 4,191 2,001 Total investment income 6,136 4,766 6,136 4,463 NOTE 3 Unrealised gains on investments GROUP PARENT COMPANY Shares and participating interests 1, , Bonds and other fixed income securities Derivatives ,762 1,508 1,759 1,491 Operating expenses for claims management Investment management costs Share in results of associates Total operating expenses -1,026-1,087-1, The company s total operating expenses for acquisition, administration, claims management and treasury management are broken down into the following sub-items: Commission costs Staff costs Premises Depreciation Other Total -1,026-1,087-1, The sum total of future minimum leasing charges is SEK 259 million, of which SEK 41 million falls due within one year, SEK 173 million between one and five years and SEK 45 million later than five years. The leasing cost comprises an operating lease and pertains to rent for premises. This cost has a variable charge related to inflation and property tax. Operating expenses for claims management are reported under the heading Claims paid and operating expenses related to treasury management are reported under Investment charges. 18 SPP ANNUAL REPORT 2005 NOTES

21 Staff costs Salaries and fees Social security contributions Pension costs Provision to profit-sharing foundation Other staff costs Total Of which salaries and fees to board and chief executive Salaries and fees -2-2 Pension costs 0 0 Total -2-2 Pension costs relate to paid pension premiums. There are no additional pension commitments. The SPP Group s pension commitments are covered through current insurance. The above information pertains to SPP Livförsäkring ABB. The following companies employees are employed by SPP Livförsäkring AB: SPP Liv Pensionstjänst AB, SPP Liv Fondförsäkring AB and SPP Konsult AB. These companies purchase corresponding services from SPP Livförsäkring AB. SPP Kundcenter AB has no operations. PRINCIPLES FOR COMPENSATION TO SENIOR EXECUTIVES The compensation level for senior executives is revised annually according to the decision-making process that applies throughout the Handelsbanken Group. One main principle in the process is that compensation may only be issued in the form of fixed salary and customary employee benefits. Variable compensation benefits such as bonus and percentage of profits are not paid. Decision-making process Handelsbanken s board appoints a special compensation committee composed of two board members, one of whom is appointed chairman of the committee. The compensation committee convenes when its chairman calls a meeting and its assignments include establishing principles for the salaries, benefits and pensions of chief executives of subsidiaries. Based on these guidelines the board of SPP decides the terms for the chief executive. TERMS AND COMPENSATION FOR SENIOR EXECUTIVES Terms The chief executive s and other senior executives retirement age is 65. The pension plan follows the Bank s occupational pension plan (the BTP Plan). Full retirement pension is paid at the following percentages of pensionable salary: Pensionable salary component 7.5 income base amounts 10 percent income base amounts 65 percent income base amounts 32.5 percent Pension from month of 65th birthday Remuneration In 2005, the chief executive Göran Holgerson received a total salary of SEK 1,456 thousand (1,300), of which profit-related salary amounted to SEK 0 (0). In addition, benefits were provided with a total value of SEK 123 thousand (105). Ten (ten) other senior executives received remuneration and other benefits of SEK 10,039 thousand (11,181), of which other benefits comprise SEK 1,050 thousand (1,117). The group of other senior executives comprises the head of treasury, the regional heads and the senior actuary. Non-executive board members, outside the Handelsbanken Group, received fees totalling SEK 385 thousand (118). No fees were paid to the chairman of the board. No fees were paid to employee representatives on the board and their deputies. The chief executive and other senior executives, in common with other employees in the Handelsbanken Group, received compensation with a unit in Handelsbanken s profit-sharing system Oktogonen. One Swedish unit corresponded to SEK 35 thousand (66). Number of employees (average during year) Number of employees Number of employees Sweden Great Britain 1 1 Total Gender breakdown Men Women Men Women Sweden Great Britain Total Staff costs in each country Sweden Great Britain -3-3 Total Absence due to illness ABSENCE DUE TO ILLNESS, % Age Women Men Total Total Of which, on long-term sick list, percentage points of total absence due to illness Total GENDER BREAKDOWN, SENIOR EXECUTIVES Senior executives at SPP and Handelsbanken Liv total 17 people, of whom six are employed at Handelsbanken Liv. Women Men Senior executives 2 15 of which SPP 1 10 Board of directors 2 7 FEES TO AUDITORS GROUP PARENT COMPANY KPMG Bohlins AB, Audit costs KPMG Bohlins AB, Consultancy costs PricewaterhouseCoopers AB, Audit costs Internal audit, Handelsbanken NOTES SPP ANNUAL REPORT

22 NOTE 7 Investment charges NOTE 8 Unrealised losses on investments GROUP PARENT COMPANY Investment management charges Interest payable, etc. Other interest payable Other interest payable, group companies Total interest payable, etc Exchange rate loss, net Capital losses, net Other investment assets Total capital losses, net Bonds and other fixed income securities -1,876 - Real estate NOTE 9 Tax GROUP -1,886 - PARENT COMPANY Policyholder tax Income tax Total investment charges NOTE 10 Land and buildings Fair value Cost Tax assessment value Book value SEK/m 2 Office and commercial properties No part of the property is used in the company s own operations. NOTE 11 Shares and participating interests in group companies Specification of the parent company s and the Group s holding of shares and participating interests in group companies: Corporate ID no. Domicile No. of shares Share of equity Book value 2005 SPP Kundcenter AB Stockholm 1, % 0 SPP Liv Pensionstjänst AB Stockholm 8, % 1 Since all shares are unlisted, no market values are given. PARENT COMPANY Costs Opening balance Shareholders contribution provided Impairment loss for the year Sale of SPP Liv Fondförsäkring AB Closing balance 1 1 SPP Livförsäkring AB has provided a shareholders contribution of SEK 3 million to SPP Liv Pensionstjänst AB. An impairment loss on the shareholding was effected by a corresponding amount. On 1 July 2004, SPP Liv Fondförsäkring AB was sold to Handelsbanken Liv. 1 NOTE 12 Shares and participating interests in associates NOTE 13 Shares and participating interests GROUP PARENT COMPANY Opening balance Share of profits Rounding difference Goodwill amortisation Closing balance The closing balance of shares in associates includes goodwill of SEK 22 million. Nordben Life and Pension Insurance Co Limited is domiciled on Guernsey. SPP s shareholding amounts to 3,000,000 shares with a share of capital of 29 percent. Group and parent company Fair value Cost Fair value Cost Swedish equities ,707 1,419 Foreign equities 8,067 6,833 5,113 4,711 Units in Swedish funds 11,289 10,889 4,928 4,864 Units in foreign funds 3,699 3,640 4,338 4,351 23,704 21,945 16,086 15,345 Of which listed shares and participating interests For a complete specification of shares and participating interests, see page SPP ANNUAL REPORT 2005 NOTES

23 NOTE 14 Bonds and other fixed income securities Group and parent company Fair value Cost Fair value Cost Swedish government 29,516 29,599 34,356 33,521 Swedish mortgage institutions 16,541 16,866 19,357 19,102 Other Swedish issuers 2,778 2,800 2,528 2,466 Foreign governments Other foreign issuers Units in Swedish funds ,673 51,087 57,426 56,262 Of which unlisted The carrying amount of the fixed income securities exceeds/is less than the nominal value by SEK 4,296 million and SEK 78 million respectively. NOTE 18 Property and equipment Costs Opening balance Disposals Purchases/sales 1 0 Closing balance Accumulated depreciation Opening balance Disposals Depreciation for the year Closing balance Book value Fixed interest terms 0 1 years 15, years 6, years 16, years 4, years 8,251 Total 50,673 NOTE 19 Cash at bank and in hand GROUP PARENT COMPANY Funds on accounts at Group companies 7,130 4,794 7,041 4,749 Other cash and cash equivalents ,581 4,806 7,491 4,760 NOTE 15 Derivative instruments with positive values Book value Nominal value Book value Nominal value Interest rate futures ,311 Forward exchange contracts , , , ,257 NOTE 16 Receivables arising out of direct insurance operations NOTE 20 Deferred acquisition costs Opening book value Capitalisation for the year Capitalisation for the year Sale of SPP Liv Fondförsäkring AB Closing book value of which book value with remaining depreciation period >2 years GROUP PARENT COMPANY Amounts receivable from policyholders NOTE 17 Other receivables GROUP PARENT COMPANY Owed by Group companies Other NOTES SPP ANNUAL REPORT

24 NOTE 21 Shareholders equity Group Share capital Funding reserve OTHER RESERVES Reserve for unrealised gains Other funds Profit brought forward Net profit for the year Opening balance ,131-1, ,130 2,789 Disposition of profits 735 1, ,130 - Reversionary bonus Payment of client company funds Withdrawal from indexation funds Portfolio assignment -8-8 Provision to reserve for unrealised gains Net profit for the year Closing balance , ,030 Total 2005 Parent company Share capital Funding reserve OTHER RESERVES Reserve for unrealised gains Other funds Profit brought forward Net profit for the year Opening balance ,131-1, ,098 2,786 Disposition of profits 687 1,411-2,098 - Reversionary bonus Payment of client company funds Withdrawal from indexation funds Portfolio assignment -8-8 Provision to reserve for unrealised gains Net profit for the year Closing balance , ,027 Total 2005 Sensitivity analysis, shareholders equity Effect on shareholders equity Price fall shares 10 % -2,357 Exchange rate fall 10 % -106 Yield real estate 2 percentage points -3 Interest rate rise 1 percentage point -1,844 The sensitivity analysis relating to an interest rate rise of 1 percentage point is based solely on an estimated change in value of assets. Based on the principle applied by the Swedish Financial Supervisory Authority for determining the highest discount rate when calculating life insurance provisions, our assessment is that a 1 percentage point rise would not affect these provisions at all. NOTE 22 Reserve for unrealised gains Shares and participating interests 1, Bonds and other fixed income securities - 1,164 Derivatives ,931 2,131 NOTE 24 Life insurance provisions (gross) Opening balance 72,204 69,902 Change for the year 3,623 2,302 Rounding difference 1-75,828 72,204 NOTE 23 Subordinated liabilities Perpetual debenture 1,600 1,600 1,600 1, SPP ANNUAL REPORT 2005 NOTES

25 NOTE 25 Provision for claims outstanding (gross) Notified claims Nonnotified claims Provision for nonlife annuities and sickness annuities Total 2005 Total 2004 Opening balance ,347 2,586 2,574 Insurance portfolios transferred Change for the year Rounding difference ,208 2,307 2,586 Of inusrance portfolios transferred during the year, SEK 13 million relates to settlement to Bliwa Livförsäkring AB. NOTE 26 Provisions for other risks and costs GROUP PARENT COMPANY Provisions for pensions Policyholder and income tax liability Other provisions NOTE 27 Liabilities arising out of direct insurance operations Owed to policyholders Owed to insurance companies NOTE 30 Pledges and comparable collateral for own liabilities and for reported commitments for provisions Assets registered on behalf of policyholders 82,265 77,340 In addition to requisite pledged assets 4,130 2,550 82,265 77,340 Specification Shares and participating interests 22,821 14,573 Bonds and other fixed income securities 51,253 58,023 Real estate Cash and bank balances 7,493 4,439 82,265 77,340 NOTE 31 Other pledged assets Collateral for interest rate futures Loan secured by shares NOTE 32 Other commitments Interest-rate related forward contracts 2 14,308 Currency-related forward contacts 22,034 12,485 22,036 26,793 NOTE 28 Derivative instruments with negative values Book value Nominal value Book value Nominal value Interest rate futures ,997 Forward exchange contracts 55 3, , , ,536 NOTE 29 Other liabilities GROUP PARENT COMPANY Owed to group companies Preliminary taxes Other , All liabilities fall due earlier than five years after the balance sheet date. NOTES SPP ANNUAL REPORT

26 NOTE 33 Related-party disclosures The following is a description of the main relationships with the parent company, Svenska Handelsbanken AB and the subsidiaries which are part of the Handelsbanken Group s consolidated accounts. SPP Livförsäkring AB buys from the parent company Handelsbanken mainly IT services and asset management services. The company also purchases from and sells services to its sister company Handelsbanken Liv. Intra-group prices are set within the framework for the work in the planning committees in the Handelsbanken Group. The work of the planning committees complies with the rules and guidelines applied at the Handelsbanken Group. The planning committees discuss the content and price of all goods and services with the aim of achieving efficient operations. Based on these discussions, a price list is produced. In conjunction with the annual business planning, the planning committee decided on each unit s price list. Prices are set at cost, although never higher than market prices. For major agreements, a regular comparison is made of what the equivalent service would cost from external suppliers. The amount charged is in relation to the level of utilisation. For each new service to be bought or sold, a new agreement is entered into. All financial dealings are examined and followed up by the central controller unit. The agreements are signed by an authorised signatory. Agreements concerning related-party transactions are followed up annually. Transactions are reconciled on a monthly basis. The charge for asset management is based on market prices. In 2005, the cost of asset management was SEK 162 million (160), IT services are charged at cost, with a fair increment for risk and profit. IT services amounted to SEK 336 million (294). Cash settlement vis-a-vis Handelsbanken is performed monthly or quarterly depending on the agreement. There was no outstanding debt as at 31 December In 2005, Handelsbanken paid SEK 14 million (14) in rent for premises to SPP Livförsäkring AB. In 2005, associated company Handelsbanken Liv on behalf of SPP carried out internal services for SEK 94 million (72). In the same way, SPP has sold services to Handelsbanken Liv and its subsidiaries for SEK 280 (166) million. The amounts are settled each month. As at 31 December 2005, SPP s debt to Handelsbanken Liv and its subsidiaries was SEK 6 million. The main agreements between SPP and related companies are shown below. MAIN CONTRACTS WITH RELATED PARTIES 2005 SPP Livförsäkring AB buys from Svenska Handelsbanken AB Assignment Asset management IT Group management fee/ Group staff issues Agent services Portfolio administration Price model % of managed assets Per item and hourly price Charge per item % of paid premium % of paid premium SPP Livförsäkring AB buys from Handelsbanken Liv Försäkrings AB Assignment Legal services, Product development, Central units, System administration Price model Hourly price SPP has purchased services from Handelsbanken Liv for SEK 94 (72) million. SPP Livförsäkring AB sells to Handelsbanken Liv Försäkrings AB Assignment Price model Sales/portfolio administration Handelsbanken Liv s products % of paid premium/ per item price System administration, Business development Hourly price SPP has sold services to Handelsbanken Liv for SEK 110 (80) million SPP Livförsäkring AB sells to SPP Liv Fondförsäkring AB Assignment Price model Regular management The company has no employees and procures all services. Per item price SPP has sold services to SPP Liv Fondförsäkring AB for SEK 160 (156) million In 2002, SPP received a perpetual debenture loan for SEK 1,600 million from Handelsbanken. Interest is paid quarterly and is 3-month STIBOR with a margin of 2.0 percentage points. In 2005, SPP paid SEK 63 million (72) in interest expenses. In 2005, SPP has sold services to its subsidiaries SPP Liv Pensionstjänst AB and SPP Konsult AB for SEK 60 million (30) and SEK 7 (3) million respectively. The services are for the companies regular management. SPP has sold services for SEK 10 million (8) to Handelsbanken Liv s subsidiary, Euroben. The agreements run until further notice with a six-month mutual period of notice except for the IT agreement which has a 12-month mutual period of notice and agreement concerning group management fees which has a three-month period of notice. SPP has purchased services from Handelsbanken for SEK 520 (477) million. 24 SPP ANNUAL REPORT 2005 NOTES

27 SPP 2005 Specification of shares and participating interests 31 December 2005 SEK million PARENT COMPANY Swedish listed shares Number Carrying amount Consumer non-durables Hakon Invest 15,000 1 Oriflame 50, Total 13 Finance and real estate Bure 13,400, Bure TO1 1,000,000 2 Castellum 47, Total 47 Healthcare Getinge 100, Total 11 Industrial goods and services Ballingslöv 178, Gunnebo Industrier AB 98, Observer 1,130, Haldex 200, Proffice B 230,000 4 SAAB B 235, Svedberg B 55, Total 166 Information technology Tietoenator SDB 73, Total 21 Materials Billerud 212, Boliden 350, Total 45 Durables Clas Ohlsson B 61,000 9 MTG B 65, Nobia 165, Total 57 Swedish unlisted shares Number Carrying amount Materials Bergvik Skog Total 289 Total Swedish shares 649 Swedish mutual fund units Number Carrying amount Sweden equity funds XactOMXSB 24,863,506 7,381 Xactomx 22,500,000 2,165 HBF Hedgefond 18,310,806 1,743 Total 11,289 Total Swedish participating interests 11,289 Total Swedish shares and participating interests 11,938 Foreign listed shares Number Carrying amount Belgium Fortis Banque 5,407 1 Total 1 Foreign listed shares Number Carrying amount Denmark Danske Bank 2,128, Total 595 France Air Liquide 503, Total 768 Ireland CRH Irland 3,335, Total 778 Malaysia Promet 48,745 0 Total 0 Norway Prosafe 996, Total 336 Spain Banco Popular 5,981, Fomento de Con 871, Total 970 UK Bunzl 8,488, Davies serv 5,416, Davies serv B 5,259, Diageo 5,732, Johnson Mattey 3,778, Northerm Rock 2,911, R B of Scotland 268, Signet Group 27,084, Wolseley 3,492, Total Thailand Univestland Pu 93,880 0 Total 0 USA Prog Energy Der 6,476 0 Total 0 Total foreign shares 8,067 Foreign mutual fund units Number Carrying amount HBF Europa Protect A 30,000 3 HBF Specialplacering Cliq Europa 90 30,000 3 S&P Depos Rec 600, PG Prime Serie 900,000, DJ Eurostoxx50 1,200, Ishares MSCIEmM 1,100, SPP EMU Bland A1 871, Topix ETF 7,250, Xact OBX 390, Total 3,699 Total foreign participating interests 3,699 Total foreign shares and participating interests 11,766 Total shares and participating interests 23,704 Finland Uponor Oy A 1,352, YIT 1,262, Total 657 SPECIFICATION OF SHARES AND PARTICIPATING INTERESTS SPP ANNUAL REPORT

28 SPP 2005 Proposed appropriation of profits The board and chief executive propose that the parent company s profit for 2005 of SEK 755,906,184, after deduction for provision to the reserve for unrealised gains of SEK 199,636,292, a total of SEK 955,542,476 be transferred to the solvency reserve. The result of operations during the year and the company s financial position as at 31 December 2005 are presented in the income statements and balance sheets for the parent company and the Group, and in the notes to these accounts. STOCKHOLM 9 FEBRUARY 2006 Björn C Andersson Chairman Rolf Lundqvist Vice chairman Björn Bergman Yonnie Bergqvist Holger Eriksson Barbro Johansson Anki Jönsson Carl-Johan Tibblin Michael Zell Chief executive 26 SPP ANNUAL REPORT 2005 PROPOSED APPROPRIATION OF PROFITS

29 SPP 2005 Audit report To the annual general meeting of SPP Livförsäkring AB, corporate identity number We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the board of directors and the chief executive of SPP Livförsäkring AB for the year These accounts and the administration of the company and the application of the Swedish Annual Accounts Act for Insurance Companies when preparing the annual accounts and the consolidated accounts are the responsibility of the board of directors and the chief executive. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain a high but not absolute level of assurance that the annual accounts and the consolidated accounts are free of material misstatement. During the year, the auditing department of Handelsbanken has continuously examined the internal controls and accounts. We have received the reports that have been prepared. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An audit also includes an assessment of the accounting policies used and of their application by the board of directors and the chief executive, and of the significant estimates and judgements made by the board of directors and the chief executive in the preparation of the annual accounts and consolidated accounts as well as an evaluation of the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined significant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any board member or the chief executive. We also examined whether any board member or the chief executive has, in any other way, acted in contravention of the Swedish Insurance Business Act, the Swedish Annual Accounts Act for Insurance Companies or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below. The annual accounts and the consolidated accounts have been prepared in accordance with the Swedish Annual Accounts Act for Insurance Companies and thereby give a true and fair view of the company s and the Group s financial position and results of operations in accordance with generally accepted auditing standards in Sweden. The administration report is consistent with the other parts of the annual accounts and the consolidated accounts. We recommend to the annual general meeting that the income statements and balance sheets of the parent company and the Group be adopted, that the profit of the parent company be dealt with in accordance with the proposal in the report of the board of directors, and that the members of the board of directors and the chief executive be discharged from liability for the financial year. STOCKHOLM, 1 MARCH 2006 KPMG Bohlins AB Peter Zell Authorised Public Accountant Catarina Ericsson Authorised Public Accountant Appointed by the Swedish Financial Supervisory Authority AUDIT REPORT SPP ANNUAL REPORT

30 SPP 2005 Management SPP and Handelsbanken Liv have a joint management group Michael Zell, born 1950 Head of Handelsbanken Pensions & Insurance Chief executive of SPP Chief executive Handelsbanken Liv Göran Holgerson, born 1960 Head of SPP business area Deputy chief executive SPP Hans Hagman, born 1963 Head of Bank business area Deputy chief executive Handelsbanken Liv Pehr Wissén, born 1951 Head of Treasury & Risk Deputy chief executive SPP (from 1 May 2006) Björn G Olofsson, born 1950 Head of Administration, systems & processes Deputy chief executive Handelsbanken Liv (from 1 April 2006) Gun Ternstedt, born 1952 Head of Human Resources Bo Frogner, born 1961 Head of Control and Accounting Senior actuary Bernt Lönegren, born 1946 Senior actuary Board of directors Björn C Andersson, born 1946 Chairman Executive vice president of Handelsbanken Member since 2001 Rolf Lundqvist, born 1940 Vice chairman, former Administrative Director of SIF Member since 2000 Michael Zell, born 1950 Chief executive of Handelsbanken Liv Chief executive of SPP Head of Handelsbanken Pensions & Insurance Member since 2006 Björn Bergman, born 1942 Chairman of Ledarna Member since 1994 Yonnie Bergqvist, born 1961 Chief executive of Handelsbanken Finans Member since 2001 Holger Eriksson, born 1943 Chairman of HTF Member since 1994 Barbro Johansson, born 1944 Formerly chief executive of Handelsbanken Liv Member since 2001 Anki Jönsson, born 1949 Employee representative Member since 2003 Carl-Johan Tibblin, born 1944 Vice President, Scania CV AB Member since SPP ANNUAL REPORT 2005 MANAGEMENT AND BOARD OF DIRECTORS

31 SPP 2005 Glossary BENCHMARK PORTFOLIO The allocation of assets under management into different asset classes that are judged appropriate in the short term. The benchmark portfolio constitutes the guideline for the asset management assignment but it is also possible for asset managers to diverge from this within set limits. BONUS Surplus assigned (allocated) to policyholders in the form of immediate or later payments, premium reductions or increase in insurance benefits. The allocated bonus is not guaranteed, it can be reduced. BONUS RATE The rate at which the insured party s savings earn interest. The bonus rate includes guaranteed interest and interest (bonus) that is not guaranteed. COLLECTIVE SOLVENCY CAPITAL Market value of an insurance company s assets minus commitments to policyholders. COLLECTIVE CONSOLIDATION RATIO Market value of an insurance company s assets in relation to insurance commitments. DEMUTUALISATION In a demutualised (profit-distributing) company the shareholders bear responsibility for the risk capital and it is permitted to distribute profits. In a mutually operated life insurance company the policyholders bear responsibility for most of the risk capital and profit distribution is not permitted. EXPENSE RATIO Operating expenses in relation to premiums written. ITP Supplementary pension for salaried employees in industry and commerce. ITPK Supplementary retirement pension to ITP, the design of which can be influenced by the employee. INVESTMENT INCOME Yield, capital gains/capital losses and unrealised changes in value. LIFE INSURANCE PROVISIONS Value of future guaranteed insurance benefits (pension amounts and other guaranteed disbursements) minus the value of future premium payments. MANAGEMENT EXPENSE RATIO Operating expenses for administration, purchases and claims management in relation to average assets under management. MAXIMUM INTEREST RATE The discount rate which life insurance companies use to calculate the value of their commitments to the policyholders. This rate is lower than the market rate which means that there is a risk buffer in the valuation of the commitments in order to protect the policyholders relative to a completely realistic valuation. MUTUALITY Mutuality means that the company s entire result, both profits and losses, and bonuses accrue to the policyholders. This means, among other things, that a final price for an insurance cannot be provided until the insurance contract has expired. NEW BUSINESS Estimated value of new sales, i.e. single premiums plus current annual premiums. PENSION SUPPLEMENT (SUPPLEMENTARY AMOUNT) Bonus allocated to the insured party in addition to guaranteed pension. This may not exceed the increase in the Consumer Price Index for the year in question, calculated from the date when pension payments start. The pension supplement is decided by the Board each year. This description relates to defined benefit plans. PREMIUM REDUCTION The bonus method used to reduce premiums paid by policyholders. This method is used for risk insurance, such as occupational group life insurance (TGL) and collective risk insurance. PROVISION FOR CLAIMS OUTSTANDING The estimated value of incurred insurance claims that have not yet been paid. SOLVENCY CAPITAL Consists of shareholders equity, untaxed reserves and subordinated debentures. When calculating solvency capital, the provision for deferred tax is reversed. SOLVENCY RATIO The solvency ratio is a measure of the margin the company has to meet its commitments. The ratio for a demutualised, profit-distributing life insurance company cannot be compared with the ratio for a mutual life insurance company. The solvency ratio is the available solvency margin divided by the required solvency margin. The available solvency margin is mainly shareholders equity in the company and any subordinated debentures. The required solvency margin is mainly the sum of 4% of the life insurance provisions and % of mortality risks. The solvency ratio should normally amount to at least three, but may amount to at least one for a specific period. SOLVENCY RESERVE Item in shareholders equity in the balance sheet to which the insurance company under the Insurance Business Act is obliged to allocate profit for the year on life insurance business. The solvency reserve may only be used for bonuses and to cover losses. SPECIAL INDEXATION FUNDS Funds allocated to secure the value of pensions or for another pension-promoting purpose. Special indexation funds are not included in collective solvency capital. TECHNICAL PROVISIONS Value of insurance company s guaranteed commitments which comprise life insurance provisions and provision for claims outstanding. TOTAL RETURN The sum of change in value and return on investments. The return is calculated after deduction of charges related to asset management. YIELD The sum of interest receivable, interest payable, operating surplus from land and buildings, and dividends on shares and participating interests after deduction of operating expenses for asset management. PRODUCTION: Narva PHOTOS: Håkan Flank, Jacob Felländer and Matton PRINT: Ekotryck Redners

32 Head office: SPP, SE Stockholm. Street address: Torsgatan 14. Telephone: Fax: