Highlights of the year. Contents INTEGRATED ORGANISATION ACQUISITION OF EUROBEN STILL TOP OF THE CUSTOMER SATISFACTION LEAGUE NO REDUCTION OF PENSIONS

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1 Annual Report 2003

2 HIGHLIGHTS OF THE YEAR 2003 Highlights of the year INTEGRATED ORGANISATION On 1 March, Handelsbanken Liv and SPP merged their sales organisations and arranged them on the same lines as Handelsbanken s regional bank operations. All central units were also integrated, with the exception of the accounting and actuarial units. Contents ACQUISITION OF EUROBEN In September, a 50% holding was acquired in the non-mutual Irish insurance company Euroben Life & Pension Ltd. The remaining shares were acquired in October, making Euroben a wholly owned subsidiary of Handelsbanken Liv. STILL TOP OF THE CUSTOMER SATISFACTION LEAGUE Concerted efforts always to keep the customer in focus have paid off. In the Swedish Quality Index s autumn survey, Handelsbanken Liv was among the life insurance companies with the highest ratings for customer satisfaction. NO REDUCTION OF PENSIONS In November, the company decided for the time being not to reduce pension payments to policyholders with guaranteed return. SEK 229 million was allocated for this purpose. NEW CHIEF EXECUTIVE AT START OF 2004 Barbro Johansson, Chief Executive, retired at year-end 2003 and was succeeded by Hans Hagman, formerly Regional Manager of the sales organisation in South Norrland. SPP s Chief Executive, Stefan Nilsson, also left his position to become head of Handelsbanken Pensions & Insurance. Highlights of the year 1 Chief Executive s comments 2 Strategic direction 3 Our markets and products 4 Alternative profit and loss account 5 Report of the Board of Directors 6 Five-year summary 9 Profit and loss account 10 Analysis of results 11 Balance sheet 12 Accounting principles 14 Notes 16 Proposed appropriation of profits 23 Auditors report 24 Management and Board 25 Key Figures Premiums written, SEK million Guaranteed rate Unit linked insurance Total Managed assets, SEK million Guaranteed rate Unit linked insurance Total Glossary 26 Handelsbanken Liv, together with its sister company SPP, is a market leader with a complete range of life insurance products for occupational and private pensions, as well as wealth management solutions for companies, organisations and private individuals. Total return, % (Insurance with a guaranteed return) HANDELSBANKEN LIV ANNUAL REPORT

3 CHIEF EXECUTIVE S COMMENTS 2003 showed the success of the demutualised model For our industry, the past year can be summarised in one word: crisis. Life insurance companies ran the gauntlet for their lack of openness about how the mutual model functions. After three difficult stock market years, all the industry s emperors had no clothes. Suddenly, people realised that the mutual model was not a particularly reliable, fair or free form of saving. What had previously been regarded as a new and slightly odd alternative, now became an obvious solution: Handelsbanken Liv and our demutualised model. When first of all the media and later the public and its politicians became aware of how mutually operated companies work, there were demands for better transparency, improved security for savers, greater fairness among savers, and the possibility to transfer their savings. Reasonable demands, but very difficult to meet in a mutually operated company. This model is based on savers themselves being responsible for security, on the customer being locked in throughout the entire savings period and on it being slightly unfair some win, some lose. Nor is it possible to exactly show the individual saver how large a part of the collective capital belongs to just him or her. Handelsbanken Liv and our profit-distributing, demutualised model, on the other hand, does not merely meet these demands the entire model is based on them. There is total transparency: every saver can see at any given moment exactly how much is on his or her account and we report all costs completely openly. We are responsible for the basic security, with our shareholders equity it is we, not the savers, who guarantee both the guaranteed capital and the guaranteed return. Savings are also strictly individual, no saver subsidises another, which provides the fairness that the market is now demanding. And of course we have transfer rights, without complicated rules or high charges. So much for the differences between these two models. But during the year the debate has also been about how mutually operated companies have been exploited by their owners in an inappropriate or unethical manner. Much has been written about how the owner companies tried to circumvent the prohibited profit distribution in order to gain access to the mutual companies assets in various ways. We are totally outside the scope of this debate we are profit distributing and fully consolidated in the results of our owner Handelsbanken. There is neither reason nor opportunity to secretly transfer money from us to our owners. It would be just like moving money from one pocket to another. The sharing of total return that takes place, does so openly. This also means that we are the only life insurance company in Sweden that has a common interest with its savers. High returns are good for both parties. If we can deliver a higher return than we promised, we get 10% of this. This year the insurance business in Handelsbanken Liv could have contributed SEK 125 million to the s profits. But we did not do this. Instead we chose to make a reserve provision of SEK 229 million in order not to be forced to reduce payments for pensions and other traditional life insurance, such as endowment insurance with guaranteed interest. We are doing this when our competitors are forced to reduce their payments in order not to weaken their savers capital even more. But we pay with our own money, not with the savers money. We are doing this to show yet another advantage with our demutualised model: namely that if we want to reward a saver, this is not done at the cost of another. I see this as a marketing measure, in a unique market situation. I believe that the mutual companies will never be as naked as they are today. We can already see action to avoid this being taken by our competitors. Some are even talking of demutualising and becoming profit distributing like us. Waiting for this we stand alone with a superior model for traditional life insurance. So in other words it is in extremely exciting times for both the company and the industry that I am now taking over as Handelsbanken Liv s new Chief Executive after Barbro Johansson. At year-end 2003, after 42 years with Handelsbanken, she reached contractual retirement age. During the years we at Handelsbanken Liv have had the advantage of working with Barbro Johansson, the company has enjoyed fantastic development. We have not only shown that our demutualised model works, we have shown that this is an excellent model for both customers and owners. During 2003 this became obvious and recognised by the market and media showed the success of the demutualised model. This success will continue. That is my clear goal and conviction. stockholm, february 2004 Hans Hagman 2 HANDELSBANKEN LIV ANNUAL REPORT 2003

4 STRATEGIC DIRECTION Strategic direction In the year ahead, Handelsbanken Liv will take advantage of its head start as a demutualised life insurance company. Having Euroben as a wholly owned subsidiary has also considerably strengthened our profitdistributing offering to the market. At the same time the work of integrating Handelsbanken Liv and SPP will continue. Once SPP has demutualised, the intention is to merge the two companies. PROFITABILITY Handelsbanken Liv has a unique position as a demutualised company in the Swedish market, where its mutually operated competitors find themselves in a recovery phase in terms of both confidence and economy. This means we have a very good starting position in the immediate future. This will be exploited intensively through increased marketing and sales activities. Expansion will take place, however, with profitability and satisfied customers in focus. CUSTOMER SATISFACTION We will also more actively nurture our existing customers through improved information, administration services and personal advice. The Dublin-based life insurance company Euroben was acquired in The acquisition was carried out in two stages. First, Handelsbanken Liv purchased the 50% shareholding in the company owned by the Norwegian insurer Storebrand. Second, SPP s 50% holding was acquired. The entire deal was carried out in September-October Handelsbanken Liv thus acquired a very important complement to its offering to customers. Previously the company mainly worked with pension and wealth management solutions for private individuals and small companies. With Euroben we can now also offer more complicated occupational pension solutions, such as early retirement pensions. INTEGRATION The integration between SPP and Handelsbanken Liv continues, and we now have a joint organisation for sales, administration and staffs, as well as a joint executive management. On 1 January 2004 a joint management function was formed in the Bank, with SPP s former Chief Executive, Stefan Nilsson, as overall head of both SPP and Handelsbanken Liv. Göran Holgerson, formerly Executive Vice President of Handelsbanken Liv, became the new Chief Executive of SPP. At the same time Hans Hagman, formerly Regional Manager for the sales organisation in South Norrland, took over as the new Chief Executive of Handelsbanken Liv. He succeeded Barbro Johansson, who left the company having reached contractual retirement age. Handelsbanken Liv has a unique position as a demutualised company in the Swedish market, where its mutually operated competitors find themselves in a recovery phase in terms of both confidence and economy.

5 MARKETS AND PRODUCTS Our markets and products Handelsbanken Liv s products focus mainly on pension and endowment insurance as well as disability, personal accident and life insurance. In 2003, Handelsbanken Liv largely retained its market share and we are strongly placed ahead of Following the extensive organisational changes during the year, our joint sales organisation now sells products and services from both Handelsbanken Liv and SPP. Sales are conducted via Handelsbanken s approximately 450 branches and client companies workplaces, as well as via direct marketing to private individuals. Sales are also conducted via independent insurance brokers. The total open competitive market for life and pension insurance in Sweden is assessed as largely unchanged compared with 2002, with approximately SEK 96 billion 1 in paid-in premiums. Premiums for occupational pensions are estimated to have risen by 8-10% while premiums for endowment insurance decreased by 17%. Payments to private pension insurance are also assessed as having declined slightly, by approximately 3%. SUCCESS FOR GUARANTEED RETURNS IN THE RETAIL MARKET Our demutualised concept is enjoying success. One key reason is that most of the return accrues to the customers through return allocation. Market interest can be clearly seen in higher demand for both pension and endowment insurance with guaranteed rates. Interest in endowment insurance has fallen sharply overall since the record year This is mainly due to the stock market decline and some uncertainty regarding future tax legislation. When a long-term, positive tend can be noted in the securities market, interest in endowment insurance will rise again. In our efforts to ensure that every product is profitable in itself, we have changed the premium structure for all group life insurance. Premiums are now set according to the age and gender of the insured individual. This also makes it fairer for customers, since no one saver now has to subsidise another. In 2004 we will take action to handle the deficit in disability insurance, although not with premium increases in the first instance. INTEREST IN DEMUTUALISATION IN THE OCCUPATIONAL PENSIONS MARKET Increased interest has also been noted from the corporate sector for non-mutual occupational pension products and here we offer Handelbanken s Occupational Pensions Program. Our acquisition of Euroben 2 from SPP and Storebrand, gives us another non-mutual life insurance company for occupational pensions. Many companies have been attracted by Euroben s profit-distributing model, which has led to a large inflow of premiums when the companies took out early retirement pension contracts. The total contractual pensions market, also known as the selection centre market, has increased during the year. The reason is an enlargement in the collective agreements 3 for employees who are entitled to chose their pension manager, as well as salary increases which lead to higher occupational pension premiums. Handelsbanken Liv s share continues to rise. POTENTIAL IN THE NORDIC MARKET The Norwegian market has considerable potential. Interest in endowment insurance, with the possibility of taxfree fund switches, has risen following a 48% rise on the Norwegian stock exchange during the year. The endowment insurance Fondkapitalspar was therefore launched in Norway from year-end We will also be launching an occupational pension insurance during the year. In the Finnish market there is some uncertainty regarding future tax legislation. Interest in endowment insurance has declined, largely due to falls on the stock market. Interest in private pension insurance has increased among young people, however. 1) Includes pension associations and pension societies, but not pension foundations. 2) Euroben Life & Pension Ltd is a non-mutual life insurance company domiciled in Ireland. 3) Increase relates to private sector employees SAF-LO contractual pensions, municipal employees PFA individual choice and civil servants PA 03. HANDELSBANKEN LIV ANNUAL REPORT 2003

6 ALTERNATIVE PROFIT AND LOSS ACCOUNT Alternative profit and loss account (excluding result in non-insurance companies) SEK million Administration result Risk result Financial result Return on equity Result before tax and provisions Provision for non-reduced pensions Result before tax The traditional profit and loss account in a life insurance company is difficult to comprehend and offers the reader few opportunities to understand how the result was reached. Among other things flows, such as premiums written and claims paid, are reported via the profit and loss account. Comparable items in many other sectors are reported in the balance sheet. Internally, Handelsbanken Liv has worked with an alternative profit and loss account which provides a better basis for understanding how the results arise. In the alternative profit and loss account the result is divided into four components: administration result risk result financial result return on equity The result is based on the Handelsbanken Liv s pre-tax result and excludes earnings in companies that are not insurance companies. The result is also adjusted for policyholder tax. The result amounted to SEK -32 million (-122). In November 2003, Handelsbanken Liv decided, for the time being, not to lower pensions being paid out to savers with policies with guaranteed rates. An allocation of SEK 229 million was made to a reserve, which corresponds to the estimated cost of keeping pensions unchanged for the next five years. Excluding this provision, profit amounted to SEK 197 million. Despite lower income in the administration result, this improved from a deficit in 2002 to a surplus in This was achieved through reduced costs. A number of measures were taken during the year to improve the risk result. Disability insurance premiums were raised by an average of 65%, and a new premium structure was introduced for group insurance. These measures contributed to a significant improvement of the risk result. The total return on policyholders capital amounted to 6.27%. This meant that the policyholders received 90% of the return and the company 10%. Since the average capital for insurance policies with guaranteed interest rates amounted to approximately SEK 18 billion, the return allocation was SEK 115 million. Policyholders in Handelsbanken Liv received 5.64% in In the Swedish mutual life insurance companies, customers received between 0 and 3.25%. In 2002, when the total return amounted to -7.38%, Handelsbanken Liv instead contributed SEK 113 million in order to meet the rates guaranteed to policyholders. The provision made to keep pensions at an unchanged level was charged against the financial result. Excluding this provision, the financial result amounted to SEK 134 million. Handelsbanken Liv s result is also reported in the Handelsbanken as a separate business segment. The business segment s result differs from the legal result, due among other things to the business segment result being charged with interest expenses for financing shareholders equity. DEFINITIONS OF THE RESULT COMPONENTS The administration result is the difference between the charges made on the insurance contracts to cover administration and the company s actual costs. The charges made can be based on capital, premium, number of policies or number of payments. Costs include staff costs, commissions and IT costs. The risk result comprises the charges made by the company to cover insurance risks and the actual costs of these risks. The insurance risks are mortality, longevity, disability and accident. For products where there is not a specific charge to cover the insurance risk, for most products 80% of premiums written is attributed as income within the risk result. The remaining 20% is reported as income within the administration result. The financial result is the difference between the return on assets managed on behalf of the policyholders and the amount allocated to policyholders. In unit linked insurance customers values change with the return, regardless of whether the return is positive or negative. The financial result for unit linked insurance is always 0. For insurance with guaranteed rates there are two components that affect the financial result - return allocation and capital contributions to cover the guaranteed capital. If the total return exceeds the guaranteed rate (which is between 3 and 5%, depending on when the policy was taken out) there is a return allocation. In such a case the customer receives 90%, although at least the guaranteed rate. The company receives the remainder. The company s share of the total return is then an income item within the financial result. Customers are guaranteed to receive a return on the guaranteed capital of at least the guaranteed rate. If the value of the customer s insurance should be less than the guaranteed value, the company provides capital up to the guaranteed value. The return on risk products is also reported within the financial result. The return on equity comprises return on the assets that are not managed on behalf of policyholders. HANDELSBANKEN LIV ANNUAL REPORT

7 REPORT OF THE BOARD OF DIRECTORS Report of the Board of Directors The Board of Directors and the Chief Executive of Handelsbanken Liv Försäkringsaktiebolag (publ) (Handelsbanken Liv) hereby submit the annual report for the 2003 financial year. Handelsbanken Liv, corporate identity number is domiciled in Stockholm. The company is a wholly owned subsidiary of Svenska Handelsbanken AB (publ), corporate identity number , (Handelsbanken). THE HANDELSBANKEN LIV GROUP Since 2002, Handelsbanken Liv has conducted both unit linked life insurance operations and life insurance operations with guaranteed rates in the same company. The company is demutualised which means that its net profits accrue to its owners. The also includes the subsidiary SHB Liv Forsikringsaktieselskab A/S (SHB Liv) which provides life insurance products in Norway and Finland, and the Irish life insurance company Euroben Life & Pension Ltd (Euroben). Policyholders unit linked insurance savings are mainly invested in Handelsbanken s funds. Handelsbanken Liv purchases IT and asset management services from the parent company Handelsbanken. The company also purchases from and sells services to its sister company SPP. Intra-group prices are set within the framework of the work of Handelsbanken Liv s and SPP s Planning Committee. The work of the Planning Committee complies with the rules and guidelines applied in the rest of the Handelsbanken. Prices are set at cost, although never higher than market prices. OPERATIONS Handelsbanken Liv is the only major life insurance company in Sweden that conducts life insurance with guaranteed rates as a demutualised company. The company also offers transfer rights to other companies to all private individuals. Furthermore, all customers can switch their form of savings within the company between insurance with guaranteed rates and unit linked insurance. Handelsbanken Liv, SPP and Handelsbanken offer customers a broad range of savings products related to both pensions and other savings. This takes place within the framework of Handelsbanken s universal bank concept, where life insurance is a natural part of the product range. Sales of savings insurance in other Nordic countries are carried out through the Danish subsidiary SHB Liv Forsikringsaktieselskab which conducts operations through branch offices in Finland and Norway. Sales of risk insurance in Norway are conducted by a branch office. Sales in Denmark and Finland are handled as cross-border operations from Sweden. SIGNIFICANT EVENTS Handelsbanken Liv and SPP s integration towards a joint demutualised life insurance company, is a process that has been under way in both companies ever since Handelsbanken acquired SPP. As part of this integration, a new joint regional organisation was introduced on 1 March These operations coincide geographically with Handelsbanken s seven regional banks in Sweden. At the same time, a joint executive management was established for Handelsbanken Liv and SPP. In September 2003, Handelsbanken Liv acquired 50% of the shares in Euroben Life & Pension Ltd from Storebrand. In October, Handelsbanken Liv acquired the remaining 50% of the shares from SPP. Euroben is an Irish life insurance company with its head office in Dublin. The company has two business areas traditional occupational pension insurance for companies and endowment insurance for private individuals. Euroben, like Handelsbanken Liv, is a demutualised company. Today, Euroben conducts its occupational pensions business through its own branch offices in Sweden and Norway and sells its endowment insurance cross-border from Ireland to Sweden. In November 2003, Handelsbanken Liv decided for the time being not to reduce current pension payments for savers who have insurance with guaranteed rates. The company made a provision of SEK 229 million which corresponds to the estimated cost over the next five years of keeping pensions at an unchanged level. In December, Handelsbanken Liv issued a subordinated debenture to Handelsbanken of SEK 229 million. On 1 January 2004, Hans Hagman took over as the new Chief Executive of Handelsbanken Liv. He was previously Regional Manager for the sales organisation in South Norrland. The former Chief Executive, Barbro Johansson, reached contractual retirement age and retired on 31 December NEW BUSINESS Premiums written for new business by Swedish life insurance companies totalled SEK 24 billion (28) in This represents a decrease of 14% compared with Total premiums written, including renewals, amounted to SEK 94 billion (95). Handelsbanken Liv s total premiums written amounted to SEK million (5 248). Measured in premiums written, market share was 5% (5). 6 HANDELSBANKEN LIV ANNUAL REPORT 2003

8 REPORT OF THE BOARD OF DIRECTORS Handelsbanken Liv s premiums written in the other Nordic countries amounted to SEK 251 million (320), of which Norway accounted for SEK 204 million (266) and Finland for SEK 46 million (53). ASSET MANAGEMENT Asset management is conducted in two different portfolios. The portion of investments attributable to savings customers assets at a guaranteed rate, is placed in a portfolio consisting of fixed-income securities, equities and real estate. The portion of investments not attributable to savings customers assets at a guaranteed rate is mainly placed in fixedincome securities. Savings customers investments Total return amounted to 6.3% (-7.4). The average total return over the last five years amounted to 3.7%. In 2003 the world s stock markets turned positive again after three years of falling prices. Handelsbanken Liv conducted active asset allocation in During the first quarter the equity portion was reduced considerably and starting in the second quarter rose steadily for the rest of the year. At 31 December the equity portion amounted to 22% (18). Breakdown of assets Equity investments Fixed-income investments Swedish fixed-income 69% Swedish equities 12% Foreign equities 10% Real estate 7% Hedge funds 2% Sweden 56% Europe 28% USA 16% Swedish government 53% Swedish mortgage institutions 32% Other Swedish issuers 15% Highly active management was also conducted in the fixedincome portfolio. After a substantial decrease in long-term market interest rates in the first half, duration was shortened considerably. Another change carried out was a significant increase in mortgage and corporate bonds in the bond portfolio in place of government securities. These active portfolio decisions made a positive contribution to the return. All asset exposure in foreign currency was hedged throughout the year. Since the krona strengthened substantially during the year, in particular in relation to the US dollar, this also made a positive contribution to return. Several changes in the control measures of the company s asset management were made in The traditional normal portfolio, which in practice functioned as a benchmark for management, was abandoned. Instead the composition of assets is controlled by a more short-term reference portfolio which is established on a monthly basis by the company s asset manager in consultation with the company s Asset Liability Management (ALM) Committee. The composition of the reference portfolio is primarily governed by the extent to which the balance sheet can withstand market fluctuations. In this respect risks on the liability side are equally important as the sensitivity of the investment assets. The current market opinion also affects the composition of the reference portfolio. These changes mean that the portfolios relative return in relation to different market indexes has become less important. The company s customer commitments are formulated in absolute terms this fact has increasingly governed the focus of asset management. Two examples of this new focus are found within equity management where two new portfolios have been developed. Portfolio 1: The aim has been to identify a number of investment criteria that must be met before a particular stock is approved as a potential purchase candidate. This portfolio, which will be concentrated and focus on the European stock markets, will barely outperform relevant stock indexes during bull markets but should over time show greater stability than average equities. At year-end this portfolio accounted for 4% of the total portfolio. Portfolio 2: Another way of achieving a better control of the risks in an equity portfolio has been to structure a mixed portfolio (equities/cash) where the maximum permitted loss has been quantified as a percentage of the portfolio s initial value. In practice this technique means that the equity portion of the portfolio is gradually increased when a positive return (risk buffer) is generated and vice versa. All equity exposure is established via listed index-linked funds in order to ensure liquidity and low transaction costs. Only the most liquid indexes (S&P 500 and Euro STOXX) have been used so far. At year-end this portfolio accounted for 12% of the total portfolio. HANDELSBANKEN LIV ANNUAL REPORT

9 REPORT OF THE BOARD OF DIRECTORS Total return 2003, % Fixed-income 4.5 Equities 15.1 Real estate 6.0 Total 6.3 The total return pertains to assets managed for savers with guaranteed rates. The return is calculated according to the principles for time-weighted return. The calculations are performed in accordance with Global Investment Performance Standards (GIPS). Calculations are based on the value development of all holdings adjusted for cash flows. Calculations are performed on a daily basis. The return is calculated after deduction for asset management charges. RESULTS The loss after tax amounted to SEK -229 million (-221). Earnings were charged with a provision of SEK 229 million. This corresponds to the estimated cost of keeping current pension payments at an unchanged level. The company s administration result improved from a deficit in 2002 to a surplus in In 2003 a number of actions were taken to improve the company s risk result. Disability insurance premiums were raised by an average of 65%. A new premium structure was introduced for group life insurance where the premium is based on age and gender. These changes contributed to a significant improvement in the risk result for 2003, although it is still negative. The total return amounted to 6.3%. This meant that the return exceeded the guaranteed rate on all insurance contracts and the company received a return allocation of SEK 115 million. In the previous year, when the return was negative, the company covered policyholders guaranteed values with SEK 113 million. For appropriation of profits, see page 23. SOLVENCY The capital base in the parent company amounted to SEK million at 31 December This should be placed in relation to the required solvency, which amounted to SEK million. The solvency ratio thus amounted to 1.33 (1.27). Handelsbanken Liv s target for its solvency ratio is 1.3. RISKS IN INSURANCE OPERATIONS Limitation of insurance risks In order to limit the company s risk exposure, and also reduce the volatility in the risk result, major risks on individual lives must always be reinsured. If many insured are injured or die because of one and the same event, the total insurance amount can be high. In order to reduce risk exposure in such cases, the company has taken out a catastrophe reinsurance policy. Insurance risks Mortality continues to decline which is positive as regards insurance policies with death benefits. The falling mortality means rising average longevity which, on the other hand, can be a concern for pension insurance contracts. This means that pension payments on many insurance contracts are being made over a longer period. This change is slow and could affect the company s result over time. In order to counteract these trends, the company makes every effort to formulate insurance terms in such a way that a dynamic adjustment to actual longevity is achieved. With regard to disability insurance the future is not equally predictable. The large premium increases in response to increased ill health may lead to a reduction in the range of voluntary disability insurance. The socioeconomic problem of high numbers on the sick list is very high on the political agenda and there is also major interest in the media. Financial risks Insurance with a savings component, both pension insurance and endowment insurance, entails financial risk. In unit linked insurance it is the policyholder who bears the entire financial risk. In insurance with guaranteed rates, the financial risk is shared between the policyholder and the company. If the total return exceeds the guaranteed rate, the return is divided so that the policyholder receives 90% and Handelsbanken Liv 10%. As a counterbalance to return allocation, the policyholder has a guaranteed return on his or her guaranteed capital. Operational risks Operational risk can occur in all the company s operations. Operational risk is the risk of losses arising as a result of internal processes and systems that are not adequately designed for the business. Human error or other external events can also result in losses. A strict division of responsibility is applied whereby business decisions, risk measurement, reporting and liquidity management are organised with different functions. Identification, governance and control of operational risks are a clear and integrated part of management responsibility at all levels within the Handelsbanken. A decentralised way of working encourages cost awareness which leads to vigilance against potential risks of loss in daily operations. 8 HANDELSBANKEN LIV ANNUAL REPORT 2003

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

11 PROFIT AND LOSS ACCOUNT Profit and loss account GROUP PARENT COMPANY SEK million TECHNICAL ACCOUNT, LIFE INSURANCE BUSINESS Premiums written (net of reinsurance) Premiums written Note Premiums ceded Investment income Note Unrealised gains on investments Note Increase in value of investments for which policyholders bear the investment risk Other technical income Note Claims incurred (net of reinsurance) Claims paid Gross Note Reinsurers share Change in provision for claims outstanding Gross Reinsurers share Change in other technical provisions (net of reinsurance) Life insurance provisions Life insurance provisions for which policyholders bear the risk Conditional bonus Unit linked commitments Operating expenses Note Investment charges Note Unrealised losses on investments Note Decrease in value of investments for which policyholders bear the investment risk Other technical charges Note Share in result of associated companies Investment income transferred to finance business Balance on the technical account, life insurance business NON-TECHNICAL ACCOUNT Balance on the technical account, life insurance business Investment income Note Unrealised gains on investments Note Investment income transferred from life insurance business Investment charges Note Unrealised losses on investments Note Profit before appropriations and tax Appropriations Profit before tax Tax Note NET PROFIT/LOSS FOR THE YEAR HANDELSBANKEN LIV ANNUAL REPORT 2003

12 ANALYSIS OF RESULTS Analysis of results Direct insurance of Swedish risks Technical account, Individual insurance insurance life insurance business Non-cancellable disability and accident Individual insurance pension and and occupational 2003 and waiver occupational pension group life Life Unit linked of premium SEK million Total insurance insurance insurance insurance insurance Unit linked insurance Non-cancellable disability and accident insurance and waiver of premium insurance Direct insurance of foreign risks Reinsurance accepted Premiums written (net of reinsurance) Investment income Unrealised gains on investments Increase in value of investments for which the policyholders bear the investment risk Claims incurred (net of reinsurance) Change in other technical provisions Operating expenses Investment charges Unrealised losses on investments Investment income transferred to finance business Balance on the technical account, life insurance business PREMIUMS WRITTEN Premiums written (gross) Premiums for reinsurance ceded Total premiums written (net of reinsurance) CLAIMS INCURRED Claims paid (gross) Reinsurers share Change in provision for claims outstanding (gross) Reinsurers share Total claims incurred (net of reinsurance) Technical provisions 31 Dec 2003 Life insurance provisions Provision for claims outstanding Technical provisions for which policyholders bear the risk 31 Dec 2003 Conditional bonus Unit linked insurance commitments HANDELSBANKEN LIV ANNUAL REPORT

13 BALANCE SHEET Balance sheet GROUP PARENT COMPANY SEK million ASSETS Intangible assets Goodwill Note Other intangible assets Note Investments Land and buildings Note Shares and participations in group companies Note Loans to group companies Note Shares and participations Note Bonds and other fixed-income securities Note Other loans Derivatives Note Investments for which the policyholders bear the investment risk Reinsurers share of technical provisions Claims outstanding Receivables Receivables arising out of direct insurance operations Note Receivables arising out of reinsurance operations Other receivables Note Other assets Tangible assets Note Cash at bank and in hand Note Prepayments and accrued income Accrued interest income Deferred acquisition costs Note Other prepayments and accrued income TOTAL ASSETS HANDELSBANKEN LIV ANNUAL REPORT 2003

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

15 ACCOUNTING PRINCIPLES Accounting principles The Annual Report has been prepared in conformity with the Swedish Annual Accounts Act for Insurance Companies (ÅRFL) and the instructions and general guidelines regarding the annual accounts of insurance companies issued by the Swedish Financial Supervisory Authority (FFFS 2002:21). CONSOLIDATED ACCOUNTS The consolidated accounts include all companies in which Handelsbanken Liv directly or indirectly has a decisive influence. A decisive influence normally exists when the holding amounts to more than 50% of the voting rights. Subsidiaries are consolidated in accordance with the purchase method. Companies in which Handelsbanken Liv directly or indirectly has a significant influence are reported as associated companies. A significant influence normally exists when the holding amounts to a minimum of 20% and an maximum of 50% of the votes. Associated companies are reported in the consolidated accounts in accordance with the equity method. All operations outside Sweden are classified as independent. The classification is based on the fact that each such operation, in line with the s decentralised organisation, is operated independently and that transactions between the parent company and the unit concerned only comprise part of its operations. Translation of the balance sheets and profit and loss accounts of foreign operations is effected according to the current rate method. Assets, liabilities and minority shares in equity are translated at the closing rate. Shareholders equity is translated at the exchange rate on the date of investment and earning respectively. The profit and loss account is translated according to the average exchange rate for the year. Any translation differences that arise are stated directly in shareholders equity. INTANGIBLE ASSETS An intangible asset is an identifiable, non-monetary asset without physical substance held for use in the production or supply of goods and services, for rental to others, or for administrative purposes. An asset is a resource from which future economic benefits are expected over which control is exercised as a result of past events. When a company is acquired an acquisition balance sheet is prepared where identifiable assets and liabilities are valued at fair value on the acquisition date. To the extent the acquisition price can be attributed to identifiable assets and liabilities this difference is reported as goodwill. Brands are reported in the balance sheet at their historical cost. Investment in both own developed and acquired computer software is recognised as an expense as incurred where such expenditure relates to maintenance of existing business operations or an existing intangible asset. In development of a new intangible asset, or a new business enterprise for an existing intangible asset, the expenditure incurred is capitalised from the date when it is probable that economic benefits will accrue which can be estimated in a reliable manner. Appreciation of expenditure on an existing intangible asset is also subject to the requirement that the economic benefits must clearly exceed the economic benefits associated with the existing asset in its original condition. Examination of whether an impairment loss requirement exists takes place when there is an indication that the asset may have decreased in value. VALUATION OF INVESTMENTS All investments, apart from investments in group companies, are valued at fair value. This means that changes in value, both realised and unrealised. are reported in the profit and loss account. Investments in group companies are valued at the lower of cost and fair value. Land and buildings are valued individually taking cash flows into account. Valuations are conducted by external valuers. Unlisted shares are valued according to the EVCA s principles (European Private Equity and Venture Capital Association). Derivative transactions with a positive market value on the closing date are stated under Investments, and transactions with a negative market value are reported under Liabilities. Purchases and sales of money market and capital market instruments on the spot market are reported applying transaction date accounting. When investments are valued at fair values, deferred tax is calculated on the part of operations subject to income tax. Reserve for unrealised gains The gains that arise when fair value exceeds the historical cost are placed in a reserve for unrealised gains. For properties this is calculated as the sum of unrealised gains on individual properties. For other investments this calculation is performed collectively per balance sheet item. Provision is not made for the portion of unrealised changes in value that corresponds to changes in provisions for which policyholders bear the risk. VALUATION OF ASSETS AND LIABILITIES IN FOREIGN CURRENCY Assets and liabilities in foreign currency are valued at the closing rate. DEFERRED ACQUISITION COSTS Acquisition costs related to acquisition of insurance contracts and which are assessed as being of significant value, are capitalised. The depreciation period varies between three and five years. PROVISIONS Provisions are reported as a result of a past event where it is probable that an outflow of resources will be required to settle the commitment. The provision is valued at the amount that is judged most likely taking the date of settlement into account. Technical provisions are described separately. IMPAIRMENT LOSSES This section describes the criteria applied for impairment losses on tangible and intangible assets as well as shares in subsidiaries, associated companies and any participation in joint ventures. Impairment losses are reported if the recoverable amount is less than the carrying amount. The recoverable amount is 14 HANDELSBANKEN LIV ANNUAL REPORT 2003

16 ACCOUNTING PRINCIPLES calculated as the higher of an asset s value in use and net selling price. The recoverable amount is determined when there is an indication that the asset has decreased in value. DEPRECIATION Equipment Equipment is depreciated on a straight-line basis over the useful life of the asset. This means that personal computers are depreciated over three years and other equipment is depreciated over five years. Intangible assets Goodwill is amortised over its estimated useful life, normally ten years. Since brands are normally judged to have a very long useful life, amortisation for these is set at 20 years. The amortisation period is assessed individually both at new acquisitions and on an ongoing basis when there is an indication that useful life may have changed. TAXES The company pays standard policyholder tax on the assets managed on behalf of policyholders. The return on equity and result from risk insurance is taxed at ordinary corporation tax rate of 28%. Deferred tax is tax attributable to temporary differences between the value of an asset or liability in the accounts and its taxable value. VALUATION OF TECHNICAL PROVISIONS Technical provisions comprise life insurance provisions and provision for claims outstanding. Life insurance provisions are the anticipated capital value of the company s guaranteed commitments according to insurance contracts in force after deduction for the anticipated capital value of future contracted premium payments. Capital values are calculated taking into account assumptions on future interest rates, mortality and other risk measurements, charges and taxes. These assumptions are used in the calculation of life insurance provisions in the company s balance sheet. There is no direct and automatic connection with the assumptions applied to individual insurance contracts when calculating premiums, guaranteed value and bonus. Mortality assumptions Mortality assumptions vary depending on when different insurance was taken out. The assumptions used are based on shared industry statistics. For most of the portfolio the mortality assumptions are applied which were jointly developed by the industry in Charges assumptions Charges assumptions vary depending on when the insurance was taken out and are based on the charges that applied when the insurance contract was signed. The aforementioned assumptions developed in 1990 are used for most of the portfolio. Principally, this means a charge that is proportional to the premium and a charge that is proportional to the life insurance provisions. Interest rate assumptions The guaranteed rate, which is used in calculation of the guaranteed value of the insurance, varies according to when different insurance contracts were signed and lies within the 3-5% band. The Swedish Financial Supervisory Authority decides the highest permitted interest rate assumption at which life insurance provisions may be calculated. On 31 December 2003 this rate amounted to 3.5%. Life insurance provisions for each insurance have been calculated with the lower of the guaranteed rate or 3.5%. Assumption on tax The assumption on tax varies depending on when the insurance was taken out and is based on the tax withdrawal rate that applied when the insurance was purchased. The assumptions developed in 1990 are applied to most of the portfolio. Tax is charged through a reduction of the assumed interest rate. Provision for claims outstanding The provision for claims outstanding comprises claims incurred at the end of the financial year but not yet paid as well as the estimated future operating expenses for adjusting these claims. The provision also includes a reserve for claims incurred but not yet reported to the company at the end of the financial year. LIFE INSURANCE PROVISIONS FOR WHICH THE POLICYHOLDERS BEAR THE RISK Unit linked insurance commitments Provisions correspond to the anticipated capital value of the company s guaranteed commitments according to insurance contracts in force after deduction for the anticipated capital value of future contracted premium payments. The capital values are calculated taking into account assumptions on future mortality and other risk measurements, charges and taxes. In general, this means that the provision is the sum of the redemption value of all fund units on behalf of policyholders on the balance sheet date. Mortality assumptions The mortality assumptions applied are based on shared industry statistics produced in Charges assumptions Charges assumptions are based on the charges that applied when the insurance was taken out. Principally this means one charge that is proportional to premium and one charge that is proportional to life insurance provisions. Conditional bonus Each savings insurance with a guaranteed rate is entitled according to the rules in the insurance terms to a conditional bonus. The conditional bonus in the balance sheet is determined so that life insurance provisions and the conditional bonus combined are as much as the sum of the insurance capital on all savings insurance contracts. So the conditional bonus in the balance sheet is a balancing item. HANDELSBANKEN LIV ANNUAL REPORT