interim financial report

Transcription

1 interim financial report 2011 Delta Lloyd Group The future secured

2 1 Report of the Executive Board 1.1 Developments during the first half year Strong performance in turbulent financial markets Delta Lloyd Group showed good operational results in the first half-year. The Group confirmed its leading position in the Dutch group pension market with a substantial increase in new contracts. Total written premiums rose by 5%. In addition, BeFrank, the joint venture of Delta Lloyd Group and Binck Bank, became the first Premium Pension Institution (PPI) in the Netherlands to obtain the required licence from the Dutch Central Bank (DNB). The growth in banksparen (tax-efficient bank savings) continued. Partly thanks to the initiated cost savings and the earlier improved longevity provisions, the operational result increased 28% to 213 million, while the Group s regulatory solvency improved further to 203% (year-end 2010: 199%). In view of these results, Delta Lloyd Group plans to raise the interim dividend by 5%: from 0.40 to 0.42 per ordinary share. Delta Lloyd Group, too, was not immune to the volatility in the financial markets. Changes in the yield curve had a strong negative impact on the IFRS result. This, in combination with the marked-to-market balance sheet, led to an IFRS result after tax and non-controlling interests in the first half-year of million against an extremely high positive IFRS result of 767 million in the first half of Combined with the adverse equity portfolio developments, this led to a decline in the shareholders funds from 4,621 million at year-end 2010 to 4,016 million as at 30 June In view of the volatility of the IFRS result, Delta Lloyd Group decided earlier to assess its results on the basis of the more relevant operational result. At General Insurance, the impact of the economic downturn was noticeable in higher cyclically-sensitive claims. This resulted in a Combined Ratio (COR) for the first half-year of 102.4%, which was above the targeted 98% across the cycle. Delta Lloyd Group is closely monitoring the volatile developments in the financial markets with the aid of a dynamic risk-return management policy. Section 2.7 of this interim financial report contains an extensive section on risk management. Following the decision in early 2010 to place the German activities in run-off, Delta Lloyd Group is seeking a full withdrawal from the German market. The Group has therefore stated its German activities as held for sale. Delta Lloyd Group Interim financial report

3 Report of the Executive Board Refined strategy is successful The refined Future Secured strategy that was initiated last year clearly bore fruit in the first half of The most salient relevant trend in the refined strategy is the need for further simplification. Customers are looking to insurers for clear, transparent and easy-to-understand products at low cost. That is the basis for the renewed organisation and for the way in which Delta Lloyd Group intends to serve its customers in the future. The commercial activities in the Netherlands have been combined into a single commercial division. This concentration led to good commercial results in the first half year. In addition, Delta Lloyd Group can point to notable successes in the re-opening market for large pension contracts, while the pipeline is also well-filled. Delta Lloyd Group is among the leading players in this market. The start-up of the BeFrank joint venture as the first PPI institution to receive a license to operate further demonstrates our strategic focus on pensions. The simplification of the organisation also led to a structurally lower cost level. With a 10% cost reduction compared to the same period in the previous year, Delta Lloyd Group is well on the way to surpassing its cost target. Results The operational result improved by 28% to 213 million (H1 2010: 167 million). This remarkably strong increase in the operational result was due to a higher technical result; the normalised investment income decreased slightly. The operational result is benefiting from the initiated cost savings and the robust longevity provision which was strengthened last year. The volatile IFRS result after tax and non-controlling interests was million (H1 2010: 767 million). The negative result was mainly caused by movements in the market rate whose effect is directly visible in the IFRS result due to Delta Lloyd Group s marked-to-market balance sheet. Due to the movement in market interest rates, the 10-year interest-spread between the collateralised AAA curve and the ECB AAA curve narrowed by 62 basis points in the first-half of As announced in the 7 April press release, several bonds were removed from the collateralised AAA curve in March 2011 as a result of credit rating downgrades. The reduction of the curve on 30 June 2011 compared to 31 December 2010 was about 57 basis points on 10-year maturity. A lower curve leads to higher provisions for life insurance, which has a negative impact on the IFRS result before tax. The above again underlines the volatility of results under IFRS in which interest rate and valuation effects play a major role. As stated earlier Delta Lloyd Group considers the operational result to be a more relevant measure of its performance. This is hence the reason for linking the dividend to among other the operational result after tax and non-controlling interests taking solvency into account. Delta Lloyd Group Interim financial report

4 Report of the Executive Board Equity and solvency Shareholders' funds decreased to 4,016 million or per ordinary share compared to 4,621 million at year-end Delta Lloyd Group is the only Dutch insurance company which largely recognises both the investments and insurance liabilities on its balance sheet on a marked-to-market basis. The decrease of the collateralised AAA curve led to higher insurance liabilities and, hence, to lower shareholders funds. (The 10-year ECB AAA yield curve was 5 basis points higher on 30 June 2011 compared to 31 December 2010, while the 10-year collateralised AAA curve was 57 basis points lower on 30 June 2011 compared to 31 December The combined effect was a narrowing of the spread by 62 basis points.) In addition, the shareholders funds also decreased due to the negative development of the equity portfolio. Even so, Delta Lloyd Group s capital position remains of a high standard with a high share of tangible assets of 90%. The strong capital position is also expressed in the regulatory (IGD) solvency which, notwithstanding the payment of the final dividend in June 2011 ( 70 million) and the negative development of the equity portfolio, increased to 203% (year-end 2010: 199%). The regulatory solvency for the combined insurance activities increased to 237% (year-end 2010: 227%). The BIS ratio of the banking operations is 12.5% (year-end 2010: 11.8%). Commercial From a commercial perspective, the first half-year went well for Delta Lloyd Group. Gross written premiums excluding the German activities in run-off increased by 5% to 2,853 million (H1 2010: 2,712 million). The Dutch life activities, in particular, showed impressive growth of 11% to 1,567 million. This was mainly attributable to the re-opening of the market for large pension contracts. Delta Lloyd Group is a leading player in this market thanks to its strong solvency and widely recognised risk management qualities. Ten larger pension contracts representing a total of 1 billion single premium opted for Delta Lloyd Group in 2011 so far. 299 Million is shown as Gross Written Premium in the first half year. Life gross written premiums in Belgium decreased by 2% to 413 million because, unlike in the first half of 2010, no major pension contract was concluded. With an IRR of 10%, total new life business (NAPI) came to 238 million, 17% higher than a year earlier. The general insurance market remains in flux. New business amounted to 102 million, a marked improvement on last year ( 92 million). Due to a higher number of lapses however, the total general gross written premiums remained stable in the first half of 2011 at 872 million (H1 2010: 875 million). The COR rose to 102.4% in the first half of 2011 (H1 2010: 95.9%) which, combined with slightly lower costs and commission ratios, can be attributed to higher claims on fire, transport and income insurance. Despite initiated actions to achieve a further reduction in the claims ratio, a COR across the cycle of 98% for full-year 2011 is an ambitious target. Delta Lloyd Group Interim financial report

5 Report of the Executive Board Delta Lloyd Group is continuing to perform well in the savings market with its tax-efficient 'banksparen' products, which consumers are increasingly taking up as an alternative to individual life products. In the first half of 2011, 'banksparen' deposits were 218 million higher than at year-end 2010, rising to a total of 933 million. This represents an increase of 76% compared to a year ago ( 529 million). Total savings rose 7% to 6.2 billion compared to the first half of last year. In the mortgage market, Delta Lloyd Group strongly improved its position both in new mortgage volume and in market share. The new mortgage business of 1,253 million in the first half of 2011 represented an increase of 78% compared to the previous year. Just over three-quarters of the new business is realised in the Netherlands, while the remaining quarter is generated in Belgium. Net new assets at Asset Management were 242 million (H1 2010: 825 million) due to the loss of a large mandate in the first quarter and reluctance among retail investors to invest. Net new assets is corrected for an asset-allocation from fixed income to mortgage investments of 348 million from Delta Lloyd Asset Management to Delta Lloyd Bank. Sustainability and community involvement Sustainable entrepreneurship is an integral part of the corporate strategy. Delta Lloyd Group has set the following five priorities for its sustainability policy: customer interest, integrity, good employment practices, community involvement and the environment. Based on the defined policy, the first steps were taken in the first half of 2011 to formulate the performance indicators for sustainable entrepreneurship. These will subsequently be embedded in the variable remuneration policy for all directors and managers of Delta Lloyd Group. Customer interest is included in the functional objectives of all directors and managers. A central focus on the customer means that Delta Lloyd Group offers its customers security by anticipating their requirements, providing a high level of service, fulfilling commitments and a good complaints procedure. The objectives relating to our central focus on the customer currently constitute 15% of the variable remuneration. Meanwhile, all products are being reassessed on their added value for the customer. The criteria are: cost-efficient, useful, safe and easy-to-understand. The theme of the new advertising campaign Delta Lloyd launched in the first half of 2011 is critical at the right time. The campaign emphasises the importance of making a good critical assessment before buying a financial product. In June 2011 all employees received a booklet containing the new Integrity Code of Conduct. The Code of Conduct, which is also on the intranet and the external website is seamlessly aligned with Delta Lloyd Group s three new core values: honest, approachable, we work together. The Code of Conduct is a summary of all sorts of behavioural rules about e.g. and internet usage as well as issues like inside information and fraud prevention. To promote good employment practices, a further study was carried out in the first half of 2011 into the wishes and opportunities relating to the New Way of Working. A pilot will be conducted at four business units of Delta Lloyd Group to lay the groundwork for a possible group-wide implementation. The Delta Lloyd Group Foundation is dedicated to improving financial self-reliance and financial awareness, particularly among vulnerable groups. In this connection, one of the Foundation s initiatives in the first half of 2011 is called BASTA and aims to unite the Amsterdam business community in an effort to fight poverty and make people more financially self-reliant. Delta Lloyd Group Interim financial report

6 Report of the Executive Board As part of our environmental efforts, an environment information system was implemented in the first half of 2011 for the specific purpose of registering the Group s energy procurement. Delta Lloyd Group opted to implement the ISO environmental care system in the second half of the year, ahead of its certification in Cost reductions The simplification of the organisation also led to a structurally lower cost level. With a 10% cost reduction compared to the same period in the previous year, Delta Lloyd Group is well on its way to reach its operating expenses target for full-year 2012 of a maximum of 850 million. The lower operating expenses are largely attributable to the discontinued sale of new products in Germany and the simplification of the organisation, including the processes and IT systems. Thanks to the achieved savings, the operating expenses for the first six months of 2011 came to 424 million (H1 2010: 469 million). Executive board As previously announced, Henk Raué left the Executive Board on 1 April 2011 on having reached the retirement age for members of the Executive Board. In the meantime Onno Verstegen has joined the Executive Board. Employees The number of employees also continued to decline in the first half of The total number of permanent and temporary employees decreased to 6,034 as at 30 June 2011 (year-end 2010: 6,327). The decrease was mainly due to the restructurings in the Netherlands and at Delta Lloyd Bank in Belgium. The number of temporary employees fell sharply, by 14%. Number of employees (full time equivalent) Number in FTEs 30 June December 2010 Change Permanent staff 5,515 5,722-4% Temporary staff % Total 6,034 6,327-5% Delta Lloyd Group Interim financial report

7 Report of the Executive Board 1.2 Dividend Dividend policy Delta Lloyd Group is aiming for a dividend pay-out ratio on the ordinary shares of around 40% to 45% of net annual operational result (that is, operational result after tax and non-controlling interests). In setting the annual dividend within the targeted pay-out ratio, Delta Lloyd Group will take into consideration the anticipated profitability over its three-year management planning period. Delta Lloyd Group aims to maintain the dividend policy, whereby the regulatory solvency ratio is at least in the range of 160% to 175% of the minimum capital requirement. Delta Lloyd Group intends to pay an annual interim dividend and final dividend on the ordinary shares. Dividend payment Payment in cash and delivery of ordinary shares in respect of the 2010 final dividend of 0.60 per share took place on 17 June Around 29.4% of the shareholders elected to receive the dividend in ordinary shares. Consequently, 1,860,349 new ordinary shares were issued as stock dividend and charged to the share premium. The other 70.6% of the shareholders took the dividend in cash. The Executive Board, with approval of the Supervisory Board, decided on the basis of the achieved operational result after tax and non-controlling interests that an interim dividend of 0.42 per ordinary share or a total of 71.2 million will be paid out. Given the uncertainty of the financial markets, no conclusion on the final dividend may be drawn from the size of the interim dividend. The dividend may be paid entirely in cash or entirely in shares at the shareholder's option. The value of the stock dividend will be approximately the same as the value of the cash dividend and will be charged to the share premium. The cash dividend will be charged to retained earnings. When setting the exchange ratio for the stock dividend, Delta Lloyd Group will use a fraction of a share based on the weighted average closing share price over a period of five consecutive trading days (to take account of the current market price). Shareholders may opt until 24 August 2011 whether they wish to receive the dividend in cash or shares. The dividend will be paid in cash to shareholders who fail to state a choice. The number of shares giving entitlement to one new ordinary share (with a nominal value of 0.20) will be decided on 24 August 2011 after hours, based on the weighted average closing price on NYSE Euronext Amsterdam in the five trading days from 18 August 2011 to 24 August The dividend will become payable on 1 September Delta Lloyd Group Interim financial report

8 Report of the Executive Board 1.3 Outlook second half-year of 2011 The situation of the financial markets remains volatile and delicate. The uncertainty regarding possible restructuring of the outstanding sovereign debts increased further in the beginning of the second half of Delta Lloyd Group has actively reduced its positions in Southern European and Irish (sub) sovereign debt and continues to exercise restraint in respect of such positions. Given the current developments, Delta Lloyd Group sees no reason to adjust its previous expectations of an annual growth by at least 3% of the operational result and dividend. The group pensions market offers scope for growth. Delta Lloyd Group is well-positioned in the market and sees sufficient opportunities to continue taking advantage of the growth potential in the second half of the year. In the second half of 2011 Delta Lloyd Group will continue to pursue its successful focus on customer interest. Cost control will remain a key focus as well. As a result achieving the 2012 target to reduce the operating costs to 850 million might already be in reach earlier. Thanks to the continuing strength of its capital position and professional risk management, even in volatile markets, Delta Lloyd Group is confident in the future. 1.4 Statement by the Executive Board The Executive Board is responsible for preparing the condensed consolidated interim financial report for the period ended 30 June 2011 in accordance with International Financial Reporting Standards as adopted by the European Union and the European Transparency Directive (2004/109/EC). The Executive Board hereby declares that, to the best of their knowledge, the condensed consolidated interim financial report for the period ended 30 June 2011, prepared in accordance with IAS 34 Interim Financial Reporting, gives a true and fair view of the assets, liabilities, financial position and income statement of Delta Lloyd NV and the undertakings included in the consolidation as a whole (collectively Delta Lloyd Group), and includes a fair review of the information required under Article 5:25 d paragraphs 8 and 9 of the Dutch Financial Market Supervision Act (Wet op het financieel toezicht). The Executive Board reviewed and approved the condensed consolidated interim report for the period ended 30 June 2011 for publication on 3 August Amsterdam, 3 August 2011 Niek Hoek, chairman Paul Medendorp Emiel Roozen Delta Lloyd Group Interim financial report

9 Report of the Executive Board Onno Verstegen Delta Lloyd Group Interim financial report

10 2 Condensed consolidated interim financial report for the period ended 30 June Consolidated statement of the financial position Consolidated statement of the financial position In millions of euros 30 June December 2010 Assets Goodwill AVIF and other intangible assets Deferred acquisition costs Property and equipment Investment property 1, ,414.2 Associates and joint ventures Debt securities , ,473.7 Equity securities , ,548.9 Derivatives ,149.2 Investments at policyholders' risk , ,772.7 Loans at fair value through profit or loss (FVTPL) , ,331.5 Loans and receivables at amortised cost , ,001.6 Reinsurance assets Plan assets Inventory of real estate projects Receivables and other financial assets 1, ,597.3 Tax assets Capitalised interest and prepayments Cash and cash equivalents 2.5 1, ,193.9 Assets held for sale , Total assets 68, ,187.4 Capital and reserves Share capital Ordinary share premium Revaluation reserves Revaluation reserves of assets held for sale Other reserves Equity compensation plan Retained earnings 3, ,452.3 Total capital and reserves attributable to parent 4, ,621.3 Non-controlling interests Shareholders funds 4, ,955.5 Liabilities Insurance liabilities , ,961.3 Liabilities for investment contracts 3, ,758.1 Pension obligations , ,809.8 Provisions for other liabilities Tax liabilities Borrowings , ,294.0 Derivatives , ,284.7 Financial liabilities 10, ,047.9 Other liabilities 2, ,390.5 Liabilities relating to assets held for sale , Total liabilities 64, ,231.9 Total equity and liabilities 68, ,187.4 Delta Lloyd Group Interim financial report

11 2.2 Consolidated income statement Consolidated income statement for the first half year In millions of euros Income Gross written premiums 2, ,711.5 Outward reinsurance premiums Net written premiums 2, ,633.7 Change in unearned premiums provision Net premiums earned , ,531.0 Investment income ,608.2 Share of profit or loss after tax of associates Net investment income ,601.1 Fee and commission income Other income Total investment and other income ,725.2 Total income 3, ,256.2 Expenses Net claims and benefits paid 1, ,120.0 Change in insurance liabilities 1, Profit sharing and discounts Expenses relating to the acquisition of insurance and investment contracts Expenses relating to the acquisition of other contracts Finance costs Other operating expenses Total expenses 3, ,199.7 Result before tax from continuing operations ,056.4 Current tax Result after tax from discontinued operations 1) Net result Attributable to: Delta Lloyd NV shareholders Non-controlling interests Net result ) Result before tax from discontinued operations for the first half year amounts to 13,1 milion (2010: 11.9 milion) Earnings per share for the first half year In euro Basic earnings per share continuing operations Basic earnings per share discontinued operations Basic earnings per share including discontinued operations Diluted earnings per ordinary share continuing operations Diluted earnings per ordinary share discontinued operations Diluted earnings per ordinary share including discontinued operations The comparative figures for 2010 have been restated in the consolidated income statement and the earnings per share as a result of the classification of the German operations as held for sale at 30 June Consequently, all income and expenses (including related taxes) are recognised in the item 'Result after tax from discontinued operations. Delta Lloyd Group Interim financial report

12 2.3 Consolidated statement of comprehensive income Consolidated statement of comprehensive income for the first half year In millions of euros Net result Other comprehensive income Changes in value of financial instruments available for sale Transfer of available-for-sale relating to DPF contracts to provisions Impairment losses transferred from equity Realised gains/losses on revaluations of financial instruments available for sale Fair value adjustments associates Aggregate tax effect Total other comprehensive income Total comprehensive income Attributable to: Delta Lloyd NV shareholders Non-controlling interests Total comprehensive income Delta Lloyd Group Interim financial report

13 2.4 Consolidated statement of changes in equity Consolidated statement of changes in equity for the first half year In millions of euros Ordinary Preferen Ordinary Revaluat Other share ce share ion reserves capital shares premiu reserves m Equity Retaine compen d Total Non-con capital trolling sation earnings and interests plan reserves attributa ble to parent 1) Total equity At 1 January , , ,211.8 Total other comprehensive income Result for the period Final dividend for Minority interest in dividend payment Shares repurchased Indirectly held shares in investment funds for own risk Indirectly held shares in investment funds at policyholders' risk Options granted At 30 June , , ,895.7 At 1 January , , ,955.5 Total other comprehensive income Result for the period Final dividend for Indirectly held shares in investment funds for own risk Indirectly held shares in investment funds at policyholders' risk Options granted At 30 June , , , ) Attributable to shareholders of Delta Lloyd NV Payment and delivery of ordinary shares in respect of the 2010 dividend of 0.60 per share took place on 17 June % of the shareholders elected to receive the dividend in ordinary shares. Consequently, 1,860,349 new ordinary shares were issued as stock dividend and charged to the share premium ( 0.4 million). The other 70.6% of the shareholders took the dividend in cash ( 70.2 million). The 1.1 million movement in options granted under the equity compensation plan consists of a value change of existing options 0.4 million and granted new options 0.7 million. Delta Lloyd Group Interim financial report

14 2.5 Condensed consolidated cash flow statement Condensed consolidated cash flow statement for the first half year In millions of euros Net cash flow from operating activities -1, Net cash flow from operating activities of discontinued operations Total -1, Net cash flow from investing activities Net cash flow from investing activities of discontinued operations Total Net cash flow from financing activities 1, Net cash flow from financing activities of discontinued operations Total 1, Net (decrease)/increase in cash and cash equivalents Net (decrease)/increase in cash and cash equivalents of discontinued operations Cash and cash equivalents at beginning of year 1, ,500.8 Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at end of period 1, ,712.7 Cash and cash equivalents of discontinued operations at beginning of year Net (decrease)/increase in cash and cash equivalents of discontinued operations Cash and cash equivalents of discontinued operations at end of the period Cash and cash equivalents at end of period 1, ,809.9 Cash and cash equivalents consolidated balance sheet 1, ,712.7 Cash and cash equivalents risk reward policyholder Cash and cash equivalents of discontinued operations Cash and cash equivalents at end of period 1, , Summary of accounting policies and basis of consolidation Delta Lloyd NV is a public limited liability company ( naamloze vennootschap') incorporated and established in the Netherlands. The company's registered address is Amstelplein 6, 1096 BC Amsterdam. Together with its subsidiaries (collectively, Delta Lloyd Group') it provides life and pension insurance, long-term savings products, general insurance, banking activities and asset management. The activities are carried out through subsidiaries, associates and branches in the Netherlands, Belgium and Germany. Until 3 November 2009, Aviva plc, with its head office in London, was the ultimate holder of Delta Lloyd NV s entire ordinary share capital. On 3 November 2009, 38.1% of the share capital was issued to third parties in a public offering. This percentage rose to 41.1% when the listing agents exercised their greenshoe option. After reallocation of 25 million ordinary shares by Aviva plc on 6 May 2011 and a number of small increases in the number of ordinary shares resulting from the granting of dividend in 2010 and 2011, the indirect interest of Aviva plc in Delta Lloyd NV by 30 June 2011 is 42.2% of the ordinary share capital and 39.5% of the total ordinary and preference shares. Fonds NutsOhra holds Delta Lloyd Group Interim financial report

15 the entire preference share capital A and, therefore, 7.2% of the voting rights in the General Meeting of Shareholders Accounting policies Delta Lloyd Group's condensed consolidated interim financial report for the period ending 30 June 2011, have been prepared in accordance with IAS 34 Interim Financial Reporting' issued by the International Accounting Standards Board (IASB) and adopted by the European Union. The condensed consolidated interim financial report does not include all of the information required for full financial statements and should therefore be read in conjunction with the 2010 financial statements of Delta Lloyd Group. The condensed consolidated interim financial report is unaudited, but has been reviewed by the auditor. All accounting policies and methods of computation applied to the condensed consolidated interim financial report for the period ended 30 June 2011 are the same as those applied in the 2010 consolidated financial statements of Delta Lloyd Group (see except for the new and amended IFRS standards and IFRIC interpretations referred to below, which have applied since 1 January 2011 in the European Union. Application of the new and amended IFRS standards and IFRIC interpretations had no effect on the financial results. All amounts are in millions of euros unless stated otherwise. Calculations in the tables are made using unrounded figures; as a result, rounding differences can occur. New and amended IFRS standards and IFRIC interpretations applied from 1 January 2011 by Delta Lloyd Group: Amendment to IAS 24 Related party disclosures This amendment relates to the disclosures required for government-related entities and clarifies the related-party definition. This amendment has not affected Delta Lloyd Group s financial statements. Amendment to IFRIC 14 Interpretation of IAS 19 Employee Benefits IFRIC 14 is an interpretation of IAS 19 Employee benefits. The amendment only affects an entity's pension provision if it is below the minimum funding requirement and an advanced payment is made to recover the situation. The amendment allows the entity to recognise the benefit of such a payment as an asset. This amendment has not affected Delta Lloyd Group s financial statements. Delta Lloyd Group Interim financial report

16 IFRIC 19 Extinguishing financial liabilities with equity instruments This interpretation clarifies the IFRS requirements when an entity renegotiates the conditions of a financial liability with its creditor and the creditor agrees to full or partial repayment of the financial obligation in shares of the entity or other equity instruments. This amendment has not affected Delta Lloyd Group s financial statements. Amendment to IAS 32 Financial instruments - Presentation (mandatory for financial years beginning on or after 1 February 2010) This amendment addresses the accounting treatment of rights issues (rights, options and warrants) denominated in a currency other than the entity's functional currency. Previously, such rights were treated as derivatives but, as a result of the amendment to IAS 32, they must be classified as equity if certain conditions are met. Delta Lloyd Group only issues rights in its functional currency and so this amendment does not affect its financial statements. On 18 February 2011 the European Union approved the 2010 Annual Improvements. Delta Lloyd Group applies these improvements from 1 January Annual Improvements These concern changes to IFRS 1, First-time adoption of IFRS, IFRS 3, Business combinations, IFRS 7, Financial instruments disclosures, IAS 1, Presentation of financial statements, IAS 27, Consolidated and separate financial statements, IAS 34, Interim financial reporting and IFRIC 13, Customer loyalty programmes. These adjustments have no material effect on Delta Lloyd Group s result and equity as they relate mainly to disclosures. During the first half year of 2011 the IASB has published the following new and restated standards and amendments, which will be applicable for Delta Lloyd Group as of 1 January 2013, provided not stated otherwise, that endorsement takes place by the European Union and no early adoption takes place. IFRS 10 Consolidated Financial Statements; IFRS 11 Joint Arrangements; IFRS 12 Disclosure of Interests in Other Entities; IFRS 13 Fair Value Measurement; IAS 19 Employee Benefits; IAS 27 Separate Financial Statements; IAS 28 Investments in Associates and Joint Ventures; Amendments to IAS 1 Presentations of items of Other Comprehensive Income; Amendment to IAS 12 deferred tax for recoverability of underlying investment property (mandatory from 1 January 2012). Delta Lloyd Group is currently assessing the possible consequences of these new and revised standards and amendments. Delta Lloyd Group Interim financial report

17 2.6.2 Use of assumptions and estimates The preparation of the condensed consolidated interim financial statements requires Delta Lloyd Group to make assumptions and estimates that affect items reported in the consolidated balance sheet and income statement and the disclosure of contingent assets and liabilities at the reporting date. This particularly concerns estimates and assumptions used to establish insurance contract provisions (including longevity risk) and provisions for doubtful debts, determining the fair value of assets and liabilities, establishing impairment (including of goodwill), employee benefits and deferred acquisition costs. These estimates and assumptions are based on management's best knowledge of current facts, circumstances and, to some extent, future events and actions. Actual results may ultimately differ, possibly significantly, from those estimates. Interim results are not necessarily indicative for the full year results Impairments Assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment losses on equity securities and goodwill can not be reversed in future periods. Greek sovereign bonds On 21 July, the European Union announced the new Greece rescue plan. There are still unclarities present with regards to the alternatives raised in this plan. Following this new Greece rescue plan, Delta Lloyd Group decided to consider as impaired its Greek sovereign bonds classified as available for sale with a redemption date on or before 2020, and recognised the related cumulative unrealised losses in the profit and loss. In determining the impairment of the Greek sovereign bonds, any potential compensating effects from the profit sharing to policyholders has not been taken into account. This is due to the fact that any entitlement to and the size of such profit sharing is only determined at 31 December. 2.7 Risk management Delta Lloyd Group Interim financial report

18 Instability on financial markets Short-term interest rates rose during the second quarter following a change in policy at the ECB. In contrast, the rise in medium-term interest rates seen at the end of 2010 and in the first months of 2011 came to a halt, partly as a result of a sharp correction (fall) in energy prices, an outbreak of turmoil in Europe and deteriorating economic figures. Very long-term interest rates also rose to the level of medium-term rates, making the yield curve flatter. After a short period of apparent calm, risk premiums between various governments in Europe increased sharply, particularly in May and June. In May, there was agreement on a 78 billion bailout for Portugal. Major problems then developed in financing Greece s debt, which were partially solved by a bailout from the EU and IMF. There is still a lack of certainty about any restructuring of the outstanding debt. Possible measures include an extension of maturities or reduction of coupon rates. The private sector is under political pressure becoming to take a share in the losses. Capital markets will remain volatile for some time while spreads on these sovereigns may widen further. It is also quite possible that there will be further cuts in the credit rating of some countries in the euro zone during the year. Great effort is being put into a new pension agreement in the Netherlands under which investment and longevity risks will be shared differently between the participants in the pension funds. The new pension arrangements could lead to a change in long-term interest rates as there will be less urgency for pension funds to cover this risk. On the equity markets, a period of increasing optimism about a global recovery (Asia, US, Northern Europe) was followed by falls caused by concerns about the debt crisis in Europe, the hesitant economic recovery in the US, the approaching end of Quantitative Easing 2 (a buy up programme for sovereign loans), lower economic growth in Japan following the nuclear disaster and tighter monetary policy in China. The AEX recorded a loss of 5% from the start of the year, which was a worse performance than the European stock markets (the Euro Stoxx 50, for example, rose by 1.5%). Interest rate risk All investments and instruments carry a risk. The yield on these assets may develop differently from the yield used for discounting the liabilities. Delta Lloyd Group sets its provisions for life insurance contracts using the collateralised AAA curve, while the assets consist of various investment instruments. The collateralised AAA curve is compiled from about 400 bonds, which meet certain criteria. A relatively large proportion of these bonds is issued by Spanish savings banks in the form of special bonds ('Cedulas'). Due to the uncertainty surrounding Spain s position in general, and that of the Spanish savings banks in particular, turmoil has arisen over the creditworthiness of these bonds. This led in 2010 and the first quarter of 2011 to a widening difference between the collateralised curve and other yield curves. In the course of March 2011 the credit rating of the Cedulas was downgraded, with the effect that certain bonds no longer meet the set AAA criteria. For this reason, these bonds were removed from the collateralised AAA curve with effect from the end of the first quarter. This Delta Lloyd Group Interim financial report

19 caused the collateralised AAA curve for 10-year maturities to decrease by 57 basis points compared to 31 December The lower curve results in higher life insurance provisions and hence lower equity. Credit risk Delta Lloyd Group has reduced its bond position in Ireland and Southern European (sub-)sovereign bonds to 1.0 billion, compared to 1.2 billion at year-end The table below gives an overview of the outstanding bond positions for own risk in (sub-)sovereign debt as of 30 June Of these bonds, million is classified as other than trading, while the remainder is classified as financial assets available for sale. The unrealised loss position on these available for sale investments as at 30 June 2011 amounts to 22.5 million (ultimo 2010: 29.7 million). This table includes the outstanding positions of the German activities that were classified as of 30 June as held for sale for an amount of million (ultimo 2010: million). Delta Lloyd Group s portfolio of Greek sovereign bonds is partly classified as 'other than trading' with changes in fair value through profit and loss, with a fair value of 31.6 million (ultimo 2010: 77.3 million), and partly as available for sale with changes in fair value through the revaluation reserve with a fair value of 20.3 million (ultimo 2010: 41.5 million). The Greek sovereign bonds classified as available for sale are fully owned by Delta Lloyd Germany. Based on recent developments, Delta Lloyd Group has concluded that there is sufficient objective evidence of an impairment on part of the Greek sovereign bonds for an amount of 11.4 million. The impairment is equal to the unrealised losses of the Greek sovereign bonds with an ending date on or before As a result, these unrealised losses are now reported in the income statement instead of the revaluation reserve. No unrealised losses have been considered impaired on Greek sovereign bonds classified as available for sale with a maturity date after 2020 and other southern European countries and Ireland as there is no reason to believe that interest payments and installments will not be received as scheduled. Position in sovereign and sub-sovereign bonds at 30 June 2011 In millions of euros Position at 30 June 2011 Position at 31 December 2010 Greece Spain Portugal Ireland Italy Total sub-sovereign and sovereign bonds ,155.1 Delta Lloyd Group has hedged the default risk on the above-mentioned (sub-)sovereign bonds by means of credit default swaps. Since July 12th this covers approximately half of the above mentioned default risk. Excluded from the overview is an amount of million (ultimo 2010: million) relating to issued loans that Delta Lloyd Germany has in Spanish sub-sovereign authorities. Delta Lloyd Group Interim financial report

20 Given the fair value valuation of Delta Lloyd Group s IFRS balance sheet, both the realised and unrealised results of the total bonds portfolio are ultimately included in equity. Risk management at Delta Lloyd Group is firmly embedded within the organisation and continuously aims to achieve the best balance between risks and the associated returns. Diversification across multiple asset categories is very important in volatile markets and Delta Lloyd Group has adjusted its positions in several asset classes, with a shift towards sovereign bonds and mortgages. Property Risk Delta Lloyd Group s property portfolio, partly in direct investments and partly in funds, is well diversified across the various classes (residential, car parks, shopping centres and commercial real estate). The occupancy rate for the commercial property portfolio remained almost equal during the past year but is still above the average for the Netherlands. Delta Lloyd Group believes that the housing market is still facing increased risks. Consumer confidence is relatively low, the continuity of mortgage interest relief is uncertain and opportunities for granting new mortgages are restricted by new regulations. Meanwhile, limited opportunities for securitisation and the unfavourable treatment of mortgage-backed securities in the Basel III and Solvency II regime are making it more difficult to fund mortgages. Delta Lloyd Group does, however, have a low mortgage default rate. Delta Lloyd Group is very vigilant on developments in the property and housing markets. Capital positions Equity (excluding non-controlling interests) under IFRS fell by million, mainly because of the 57 basis point fall in the collateralised AAA curve. This led to an IFRS solvency ratio of 293% (ultimo 2010: 313%) and a BIS ratio for the bank of 12.5% (ultimo 2010: 11.8%). Regulatory solvency increased by 4% to 203%, taking into account the dividend paid in the second quarter. For regulatory purposes, solvency is monitored on the basis of the ECB AAA curve. This curve was almost unchanged during the first half of 2011, the increase on the ten-years interest rose by an average of 5 basis points, but was faced by a rise of more than 30 basis points for the very long term. To provide information on the sensitivity of the IFRS result and equity to movements on the capital markets, the effects of changes on the main capital markets are presented below. Delta Lloyd Group Interim financial report

21 Sensitivity analysis of assets In millions of euros Impact on result before tax 30 June Effect on equity 30 June 2011 Impact on result before tax Effect on equity 31 December December 2010 Credit risk +50bps Credit risk -50bps Interest rate risk +100% -1, , , ,846.4 Interest rate risk -100% 2, , , ,309.8 Equity risk +10% Equity risk -10% Property risk -10% Property risk +10% Sensitivity analysis of liabilities In millions of euros Impact on result before tax 30 June Effect on equity 30 June 2011 Impact on result before tax Effect on equity 31 December December 2010 Credit risk +50bps Credit risk -50bps Interest rate risk +100% 1, , , ,662.6 Interest rate risk -100% -2, , , ,160.8 Equity risk +10% Equity risk -10% Property risk -10% Property risk +10% Expense risk +10% Longevity risk -5% Insured lives +5% Claims ratio +5% The biggest changes compared to December 2010 were in interest rate and equity risk. As the collateralised AAA curve fell compared to December 2010, the impact of a 100 basis points sensitivity in interest rates on both the provisions and investments increased despite better matching of the durations of the investments and liabilities. The impact of equity risk on the result and equity increased. The total equity portfolio fell while the impact of the guarantee provisions, which are included in this analysis, increased. Delta Lloyd Group Interim financial report

22 Meeting regulatory requirements In 2010, Delta Lloyd Group obtained the 'Keurmerk Klantgericht Verzekeren' (Customer-Focused-Insurance) quality label, for all its labels. This is a quality mark that represents the quality of the service and customer orientation of the insurer. A programme has been set up for 2011 to continue meeting the requirements for this label. Regulatory pressure has increased sharply across the industry as a direct consequence of the wave of international and national legislation, particularly the EU Solvency II Directive. Other significant examples are (not exhaustive): the industry-wide theme 'Klant Belang Centraal' (Customer Focused) for which the AFM starts several surveys, forthcoming changes in fee regulation, new rules on the mortgage distribution, product review and the introduction of new rules on a stable remuneration policy. Regulators are conducting more rigorous investigations and asking more probing questions, while also increasingly demanding tangible proof of the effectiveness of compliance measures. Delta Lloyd Group is complying with the changing legislation and regulations and is allocating the necessary related resources. The process of testing and documenting the effectiveness of selected controls is currently being rolled out for all business units as part of the implementation of Solvency II. Delta Lloyd Group has also set up a Regulatory Desk to answer questions and co-ordinate reviews by regulators as well as to serve as a first point of contact. The new Solvency II regulations for insurance companies operating in the European Union will probably be introduced in 2013 or Under Solvency I, the solvency calculation is based on the amount of liabilities, while under Solvency II it will be based on all balance sheet and operating risks. Delta Lloyd Group is preparing for this by enhancing risk management and internal controls, testing existing processes and implementing improvements. Solvency II is based on economic principles for measuring assets and liabilities. It is a risk-based system in which risk is measured in a consistent manner. The capital requirements depend directly on this. Solvency II imposes more uniformity and thus greater simplicity for the market. This is in line with Delta Lloyd Group s refined strategy, which centres on simplicity. Solvency II also ensures better protection for consumers as all insurance companies are required to meet the new rules. In this way, the new regulations also contribute to rebuilding and maintaining confidence in the sector. Delta Lloyd Group Interim financial report

23 Distribution fees Delta Lloyd Group must prepare for the consequences of external developments related to the distribution fees of insurers. This particular regards the prohibition of retrocession fees for brokers that will probably be effective per 1 January 2013 for complex financial products such as life insurance, occupational disability insurance and mortgages. A large majority of the parliament agreed in favour of this change in mid-june. Commissions are currently built into the gross price the customer is charged for these products. Minister of Finance, De Jager, has proposed prohibiting profit-based commissions and bonuses for agents with effect from No distinction is made here between individual and corporate insurance contracts sold by agents. Delta Lloyd Group has placed a significant proportion of its General insurance portfolio in the intermediary channel. The planned changes are causing concern and uncertainty among agents, who are now rapidly adjusting their business models. The risk for Delta Lloyd Group is that some of its current agents may no longer be viable, causing a substantial fall in the entire new business and portfolio. Delta Lloyd Group has also deployed a multi-channel strategy. The creation of the Commercial Division will lead to a well-balanced distribution strategy with sufficient attention for servicing to the needs of the broker channel, while simultaneously ensuring that Delta Lloyd Group continues to meet its obligations and comply with laws and regulations. The proposals may lead to major changes in existing financial services in terms of market relations, revenue models and market relations. While the impact of legislation and regulations on the labels varies, opportunities have been identified in every channel. Current business of Asset managers is that they pay a distribution fee, known as a retrocession fee, to banks and online platforms for offering and selling their products. The asset managers recover this fee from customers by including this into the asset management fee. Fund houses are increasingly dependent on just a few large funds for their income, while the majority of funds generally have very limited assets under management. Finance Minister De Jager intends to prohibit retrocession fees. This will be a time-consuming process in view of the significant legal components involved. However, both customers and asset managers will benefit from the resulting standardisation and simplification of information. The risk for Delta Lloyd Group is that the loss of the retrocession fee can not be adjusted sufficiently, or sufficiently quick enough, compensated for the revenue model. Delta Lloyd Group Interim financial report