Topdanmark's Annual Report 2003

Transcription

1 Topdanmark's Annual Report March 2004 Announcement No. 03/2004 The Board of Directors of Topdanmark has today adopted the audited Annual Report for Key features: The post-tax profit for 2003 was DKK 1,001m after transferring DKK 55m to the equalisation provisions (2002: DKK 184m profit after including as income DKK 95m of the equalisation provisions plus non-recurring income of DKK 112m taken to shareholders' funds). The result for 2003 represented a 28.1% post-tax return on average shareholders' funds. Cash flow increased from DKK 481m in 2002 to DKK 1,191m in Cash flow per share increased from DKK 17.8 in 2002 to DKK 47.9 in Premium income increased 10.1% in non-life insurance and 22.0% in life insurance. The expense ratio declined from 20.2% in 2002 to 19.8% in The combined ratio declined from 98.8% in 2002 to 94.8% in Reserves on primarily personal injury claims were strengthened by DKK 206m creating an adverse effect of 2.9 percentage points on the combined ratio. The return on investments in Topdanmark Livsforsikring (life insurance) was 9.4% before PAL-tax (pension return tax). The collective potential bonus reserve (bonus ratio) in Topdanmark Livsforsikring increased from 3.5% in 2002 to 5.8% in The 2003 result was impacted by investment income being just under 400 million kroner more than originally expected. Topdanmark expects a post-tax profit of DKK m for It is anticipated that 2004 will see an ordinary share buy-back of DKK 650m. Furthermore, there is the remaining buy-back for 2003 of DKK 150m giving a total of about DKK 800m, representing just over 10% of the present market value. It is recommended that this Annual Report is read together with containing detailed and supplementary information to the Annual Report. On Presentations a webcast is available in which Topdanmark s CEO, Michael Pram Rasmussen, presents the Company s financial highlights for 2003 and comments on the forecast. Based on the Annual Report and the webcast, a conference call will be held today at 15:30 (CET) when Michael Pram Rasmussen, CEO, and Poul Almlund, Managing Director, will be available for questioning. The conference will be conducted in English. In order to access the conference call, please call: UK dial in number: US dial in number: minutes before the conference asking the operator to connect you to the Topdanmark conference call. Please direct any queries to: Michael Pram Rasmussen, Chief Executive Officer Tel Poul Almlund, Managing Director Tel Steffen Heegaard, Communication and IR Manager Tel / Page 1 of 56

2 Topdanmark's Annual Report 2003 Contents key features 3 Financial highlights 4 Report 8 Non-life insurance 10 Life insurance 13 Parent company etc. 13 Investment activities 15 Goodwill amortisation 15 Taxation 16 Risk factors 18 Prospects for Share buy-back 21 Change to International Financial Reporting Standards 22 Annual General Meeting 23 Financial calendar 24 Board of Directors / Board of Management 25 Signatures 26 Auditors' reports 27 Accounting policies 33 Five-year summary 34 Profit and loss account 36 Assets 37 Liabilities 38 Movement in shareholders funds 39 Cash flow statement 40 Notes to the accounts Topdanmark A/S Borupvang 4 DK Ballerup Tel Fax Reg.No topdanmark@topdanmark.dk Web: This publication is a translation. In case of divergences, the original Danish text shall prevail. Page 2 of 56

3 Topdanmark's Annual Report 2003 Financial highlights (DKKm) EURm** Premiums earned: Non-life insurance 4,178 5,724 6,039 6,465 7, Life insurance 1,979 2,091 1,257 1,660 2, ,157 7,815 7,296 8,125 9,140 1,228 Results: Non-life insurance (before goodwill amortisation) (642) Life insurance Parent company etc Pre-tax profit before goodwill (cash flow) (448) 1, , Goodwill amortisation 0 (72) (79) (79) (79) (11) Tax (26) (71) (111) (15) Profit / (loss) for the year (163) 1, , Non-recurring adjustment, life, taken to shareholders' funds Earnings / (loss) for the year incl. non-recurring adjustment for 2002 (163) 1, , Shareholders' funds beginning of period 4,127 3,580 4,243 3,640 3, Earnings / (loss) for the year incl. non-recurring adjustment for 2002 (163) 1, , Cancellation of own shares (394) (342) (1,025) (615) (742) (100) Employee shares Shareholders' funds at 31 December 3,580 4,243 3,640 3,321 3, Average number of shares ('000) 37,763 35,026 29,943 26,975 24,891 24,891 Ratios Profit / (loss) for the year, as a percentage (4.1) of shareholders' funds* Earnings / (loss) for the year, incl. non-recurring adjustment for 2002, as a percentage of shareholders' funds* (4.1) Cash flow per share incl. non-recurring adjustment for 2002 (DKK)* (12) Earnings / (loss) for the year, incl. non-recurring adjustment for 2002, per share (DKK)* (4) Net assets per share (DKK)* Cancellation per share (DKK) Share price 31 December (DKK) *Net of cancelled shares Non-life insurance (%) Loss ratio Net reinsurance ratio (21.6) (5.7) Claims trend Expense ratio Combined ratio Non-life insurance (%) (excluding 1999-hurricane ) Loss ratio Net reinsurance ratio (2.9) (3.7) Claims trend Expense ratio Combined ratio **Converted to EUR at the exchange rate as at 31 December 2003 (744.46) Page 3 of 56

4 Topdanmark's Annual Report 2003 Report The post-tax result for 2003 was a DKK 1,001m profit after transferring DKK 55m to the equalisation provisions (2002: DKK 184m profit after including as income DKK 95m of the equalisation provisions plus non-recurring income of DKK 112m taken to shareholders' funds). The result for 2003 represented a 28.1% post-tax return on average shareholders' funds with earnings per share increasing from DKK 11.0 in 2002 to DKK Cash flow (the result before goodwill amortisation, tax and, for 2002, the non-recurring income taken to shareholders' funds) increased from DKK 481m in 2002 to DKK 1,191m in 2003; cash flow per share increased from DKK 17.8 to DKK In the 2002 Annual Report Topdanmark said that it expected a profit of DKK m for Furthermore it expected a loss of DKK 85m on its shareholding in Danske Bank. However, during the year Topdanmark upgraded its profit forecast in the interim reports for Q1, Q2 and Q3. Profit forecast and actual result for 2003 (DKKm) Profit forecast on Profit forecast on Announcement own operations stake in Danske Bank Total profit forecast Annual Report (85) Q interim report H interim report Q interim report * Actual Actual Annual Report * 1,001 * Up to and including 19 September 2003, being the date of sale of the majority of the stake The principal reasons for the actual results for 2003 being better than the profit forecasts in the 2002 Annual Report and the Q interim report, are the lower than expected combined ratio and higher than expected investment return. As a result of the extraordinarily favourable claims trend which was due to, among other things, fewer storm claims and fewer large claims than expected, the combined ratio was only 94.8% as compared with the 96% expected in both the 2002 Annual Report and the Q interim report. The 9.8% return on investments in the Topdanmark Group (excluding life insurance) reflects the high equity and corporate bond prices during the year. The 18.2% return on equities was primarily due to the profit of DKK 168m arising from the investment in Topdanmark's Danske Bank shares up until 19 September, the date on which the investment was reduced. The 9.4% return on investments in Topdanmark Livsforsikring before PAL-tax (pension return tax) was higher than the annualised 5.0% assumed on 10 March 2003 in the 2002 Annual Report. The return benefited from an investment policy being maintained where a not insignificant proportion of the portfolio was invested in equities in March 2003 when the equity markets bottomed out. This policy gave Topdanmark Livsforsikring a considerable advantage over its immediate competitors. In 2003 shareholders' funds were increased by DKK 291m to DKK 3,612m representing the DKK 1,001m profit for the period, less DKK 742m from the cancellation of shares following the share buy-backs, plus proceeds of DKK 20m and a tax credit of DKK 12m following an issue of employee shares. Page 4 of 56

5 Topdanmark's Annual Report 2003 Trend in results Q4 Q4 DKKm Non-life insurance Danske Bank* 42 0 (149) 168 Life insurance Parent company etc Pre-tax profit / (loss) before goodwill ,191 Goodwill amortisation (20) (20) (79) (79) Tax (40) (24) (71) (111) Profit for the period ,001 Post-tax income taken to shareholders' funds Earnings for the period incl. non-recurring adjustment for ,001 *Up to and including 19 September 2003, being the date of sale of the majority of the stake Shareholding in Danske Bank On 19 September Topdanmark reduced its 1.6% shareholding in Danske Bank to that of an ordinary portfolio investment. Basically, Topdanmark believes that in order to add value the Company should accept mostly insurance risks and only to a lesser extent financial risks. The investment in Danske Bank, which was DKK 1,353m at the beginning of 2003, was a marked deviation from this principle. Therefore the stake was significantly reduced when the sale could be made without any tax consequences. Value creation in Topdanmark The control of Topdanmark's value creating activities is based on the following model: Topdanmark's value creation is based on increasing the Company's future cash flow while at the same time trying to reduce the net present value discount rate to a level that represents the Company's risk factors etc. The future cash flow is determined by: Operation of existing activities New opportunities To help manage its future cash flow Topdanmark has developed a model that provides a clear view of the relationship between the various efforts / activities undertaken and the Company's key value drivers. By using the model in its forward planning the Company can target its efforts towards these value drivers on the basis of the following value chain: Page 5 of 56

6 Topdanmark's Annual Report 2003 At a group level Topdanmark is working with a number of non-financial as well as financial value drivers. Non-financial value drivers Reputation Customer satisfaction Employee satisfaction Financial value drivers Premium growth Increase in customers Retention of customers Combined ratio Loss ratio Expense ratio Return on investments Each business sector or administrative department may supplement the three non-financial value drivers with others which are considered key to value creation in each respective area. The other element of the value creation model is the discount rate. To help reduce the discount rate Topdanmark is focusing on: Risk factors Capital structure Corporate Governance Salary structure Investor relations Detailed information on Topdanmark's value creation model is available on Business Value Creation. Corporate Governance For a number of years Topdanmark has been focusing on good Corporate Governance. Topdanmark has a practical approach to Corporate Governance and does not believe it is sufficient to just observe a set of academic rules for the Board of Directors and Board of Management. Good Corporate Governance is to a larger extent the concept of supporting the trinity between shareholders, customers and employees, which is done by incorporating and maintaining a responsible company culture and good management throughout of the organisation. Topdanmark has a decentralised organisational structure based on framework control. In the day-today activities homogenous behaviour is supported by a set of management and customer-oriented values. In 2001 the Nørby Committee published its report on Corporate Governance in Denmark. In 2004 this was followed by a "Report on Corporate Governance in Denmark" by the Copenhagen Stock Exchange s Committee. Topdanmark meets all significant recommendations included in both reports. Detailed information on Topdanmark's initiatives on good Corporate Governance, including its approach to each item of the Nørby Committee's Report on Corporate Governance in Denmark, is available on Business Value Creation Corporate Governance. This information is regularly updated, for example, following the revision of the Nørby Committee's recommendations. Salary structure Topdanmark's salary structure is intended to optimise long-term value creation at a group level. Therefore the remuneration of the Board of Management and a number of executives is based upon a fixed basic pay supplemented by the option of purchasing warrants or share options, but not by the payment of individual bonuses. In recent years increase in management's fixed basic pay has been modest whilst since 1998 the Board of Management and a number of executives have been given the opportunity to participate in a revolving share option / warrant scheme. As the expected value creation at group level is reflected in the share price, the share option / warrant scheme encourages the executives to be more holistic in their approach to value creation. Share options / warrants From 1998 to 2003 Topdanmark has had a revolving share option scheme based on call options, but due to changes in tax legislation from 2004 the scheme will now be based on warrants. For 2004 Topdanmark has already granted 235,000 warrants under this scheme to its Board of Management and a number of executives. The strike price of DKK 349 was fixed at 110% of the market Page 6 of 56

7 Topdanmark's Annual Report 2003 price of Topdanmark's shares on 30 December 2003 and the granting of warrants is based upon the actual payment made by the individual. For 2004 and beyond no options / warrants will be granted to the Board of Directors. Besides the revolving scheme a further 40,000 warrants have been granted for 2004 to a number of other executives who have made a special effort or otherwise contributed extraordinarily to value creation in the Company. These warrants were granted free of charge. The warrants granted in 2004 may not be exercised any earlier than subsequent to the publication of the 2006 Annual Report in 2007 and no later than subsequent to the publication of the 2008 Annual Report in In the intervening period the warrants may be exercised up until three banking days subsequent to Topdanmark's publication of annual, half-yearly or quarterly reports. The value of the warrants has been calculated to be DKK 16m using the Black and Scholes model assuming a share price of DKK (Topdanmark's share price on 30 December 2003), an interest rate equivalent to the zero coupon rate based on the swap curve of 30 December 2003, future annual volatility of 26%, corporation tax of 30% and a pattern of exercise similar to Topdanmark's previous allocations of share options. The value of the share options that have been sold was significantly lower than the value originally calculated using the Black & Scholes model at the time they were granted. Employee shares From time to time Topdanmark issues employee shares and in 2003 it issued 200,000 in a combination of free shares, subscription at a fixed price by seniority (seniority model), subscription at a fixed price by salary (salary model) and a further issue by tender. The proceeds on this issue were DKK 20m. Detailed information on Topdanmark's incentive arrangements is available on Business Value Creation Salary Structure. Besides the incentive arrangement and ordinary salaries there have been no other transactions with connected parties. Topdanmark does not have any connected parties who have a controlling influence in the Group. Breakdown of share options / warrants granted Board of Board of Year Directors Management Executives Total 2002 (number) 18,219 84, , , (number) 21,448 84, , , (number) 0 74, , ,000 Market value of 2004 warrants (DKKm) Market value of all outstanding options granted as at 31 December 2003, excl. options of resigned individuals (DKKm) Page 7 of 56

8 Topdanmark's Annual Report 2003 Non-life insurance Non-life insurance market in 2003 In 2003 the non-life insurance market was characterised by: an expected premium growth of 7 9%; a generally favourable claims trend; and provisions being strengthened for personal injury claims. Due to, among other things, an increase in both reinsurance prices and weather-related claims in 2002 most of the companies in the Danish market implemented extraordinary premium increases in Furthermore, the effect of the premium increases from 1 July 2002 due to the Danish Act on civil liability was also reflected in the first half year's result. In 2003 the non-life insurance market benefited from an extraordinarily favourable claims trend due to fewer weather-related claims and a general decline in largescale claims. However, the market was also affected by an insufficient level of reserves in prior years primarily for personal injury claims due to, among other things, a change in practice for granting compensation where the claimants are entitled to more frequent and higher value payouts. Trend in Topdanmark's non-life insurance business Non-life insurance made a profit of DKK 653m before the result of the shareholding in Danske Bank up to and including 19 September and goodwill amortisation (2002: DKK 345m). The improvement on the 2002 result was generated as follows: Improvement in result (DKKm) Technical interest 59 Combined ratio 286 Provisions for equalisation (150) Investment income excl. Danske Bank 113 Total improvement in result 308 The improvement in the overall investment result (technical interest + investment income excluding Danske Bank) was due to the rise in equity and corporate bond prices. In 2002 it was necessary to use DKK 95m of the equalisation provisions whilst in 2003 DKK 55m was transferred to the provisions of which DKK 49m was for weather-related claims and the remaining DKK 6m for workers' compensation insurance. Weather-related claims amounted to DKK 36m in As Topdanmark strengthens its equalisation provisions if the overall retention for weather-related claims is lower than DKK 85m, DKK 49m was provided in In its Q3 interim report Topdanmark expected a 9 10% growth in premiums. However actual growth was 10.1% giving total premium income of DKK 7,116m, which was both slightly above expectations and exceeded the market. About 2.5 percentage points of the growth was due to extraordinary increases in premium rates following the Danish Act on civil liability which took effect from 1 July There were further other extraordinary premium increases as well as indexation, each providing about 3 percentage points of the increase. Organic growth of just over 1.5% was an improvement, demonstrating Topdanmark's strong competitive position. The loss ratio declined from 75.9% to 70.0% in 2003 reflecting a favourable claims trend with fewer storm and cloudburst claims and fewer large-scale fire claims. Page 8 of 56

9 Topdanmark's Annual Report 2003 However, there were exceptions to this favourable claims trend and as a result Topdanmark has implemented premium increases on large farms, accident insurance and the industrial business with effect from 1 January Furthermore new legislation has been introduced on improved insurance cover in workers' compensation insurance which allows the insurance companies to raise premiums in line with expected increases in expenditure. Due to the favourable claims trend fewer claims had to be covered by Topdanmark's reinsurance programme. Net expenses on reinsurance therefore increased from 2.7% of premiums earned in 2002 to 5.0% in Overall expenses on claims, reinsurance, sales and administration as a percentage of premiums earned (combined ratio) declined from 98.8% to 94.8%. The combined ratio for 2003 included strengthening of provisions - so-called run-off losses - of DKK 206m primarily on accident, motor liability and workers' compensation insurance creating an adverse effect of 2.9 percentage points on the combined ratio. With effect from 31 December 2003, in order to clarify the financial position of non-life insurance companies, the Danish Financial Supervisory Authority introduced new calculations on various risk scenarios to demonstrate the company's strength in a downturn in the financial markets. Accordingly, the claims trend (loss ratio + net reinsurance ratio) improved from 78.6% in 2002 to 75.0% in Topdanmark does not capitalise selling expenses but they are immediately charged to the profit and loss account and therefore despite an increase due to the organic growth, the expense ratio actually declined from 20.2% in 2002 to 19.8% this year. All of Topdanmark's non-life insurance companies are in the Danish Financial Supervisory Authority's green classification implying they are able to withstand devastating market conditions including a 30% decline in equity prices simultaneous with a one percentage point adverse change in interest rates. Financial highlights - Non-life insurance Q4 Q4 (DKKm) Gross premiums earned 1,685 1,813 6,465 7,116 Technical interest Claims incurred (1,206) (1,241) (4,901) (4,980) Net reinsurance (73) (105) (175) (363) Expenses (340) (359) (1,308) (1,406) Equalisation provision 3 (7) 95 (55) Technical result Investment income excluding Danske Bank Non-life insurance before Danske Bank Danske Bank* 42 0 (149) 168 Profit on non-life insurance Loss ratio (%) Net reinsurance ratio (%) Claims trend (%) Expense ratio (%) Combined ratio (%) *Up to and including 19 September 2003, being the date of sale of the majority of the stake Page 9 of 56

10 Topdanmark's Annual Report 2003 In 2003 Topdanmark Livsforsikring made agreements with several trade unions, banks and savings banks to sell insurance against involuntary unemployment in order to supplement the benefits the trade union members receive from their unemployment insurance funds. The schemes have proved very popular and Topdanmark Livsforsikring expects to make similar arrangements with more trade unions in The schemes are administered by Topdanmark Livsforsikring but are included in the accounts of Topdanmark Forsikring. At the end of 2003 Topdanmark decided to invest in a new claims system, which will be the biggest IT investment in Topdanmark's history. The new system is intended to combine more efficient claims administration with customers benefiting from an improved service. Some of the elements of the new claims system are: increased integration and automation of work processes providing quicker and improved claims handling; improved use of working agreements with, among others, garages, building craftsmen and suppliers; and more efficient registration of information which may indicate insurance fraud. It is expected that the system will be launched in personal insurance in 2006 and will be completely operational throughout Topdanmark's business sectors by The new system is expected to have a favourable effect on the combined ratio from Life insurance Life insurance market in 2003 In 2003 the life insurance market was characterised by: an expected premium growth of about 10%; an investment return higher than the bonus rate; a higher bonus ratio. The substantial growth in pension savings continued in 2003, primarily within traditional guaranteed benefit schemes. The market for unit-linked schemes also improved but from a relatively low base. Most of the companies fixed their customers' bonus rate at 4.5%. Due to the rise in equity prices in 2003 most companies' return on investments generally exceeded the bonus rate of 4.5% enabling those in the Danish life insurance market to increase their bonus reserves. Trend in Topdanmark's life insurance business The operating result from life insurance was a profit of DKK 149m (2002: DKK 83m). This was calculated in accordance with the life insurance company's definition of profit, see Business Business Sectors Life Insurance Calculation of Profit. However, in 2003 the profit calculated as defined in "Calculation of Profit" was reduced by DKK 15m to take into account the life insurance group's impact on Topdanmark's overall tax position. Result of life insurance (DKKm) Q Q Return on investments Allowance for risk Profit / (loss) in Topdanmark Link 0 4 (20) 6 Taxation 0 (15) 0 (15) Transferred from shadow account Profit on life insurance Page 10 of 56

11 Topdanmark's Annual Report 2003 As compared with the prior year the result for 2003 was primarily affected by the favourable investment result achieved. The investment return on shareholders' funds was DKK 105m (2002: DKK 44m). In accordance with Topdanmark Livsforsikring's definition of profit, interest on shareholders' funds (excluding shareholders' funds in the unit-linked company) is calculated using the rate of the return on investments before PAL-tax. Furthermore an allowance for risk can be included in income if, in general terms, the return on investments exceeds the customers' granted average capitalisation rate. It did in 2003 and Topdanmark therefore included in income an allowance for risk of DKK 53m (2002: DKK 59m). In its Q3 interim report Topdanmark expected growth in premiums to be about 20%. The actual out-turn for the year was 22.0% growth to DKK 2,024m exceeding both the market and expectations. Growth was seen in all segments reflecting Topdanmark's improved competitive position which in turn means that the Company is increasingly invited to pitch for major pension schemes. Topdanmark focuses on growth in regular income, where premiums are paid year on year, typically corporate pension schemes in which a company regularly pays the premiums for its employees. The 18.2% increase in regular premiums was significantly higher than the market and it is expected that this growth will continue to exceed 10% in In 2003 single premiums increased 32.6% due to a number of large corporate pension schemes being enhanced or taken over from other life insurance and pension fund companies. The growth in single premiums varies from year to year and therefore due to the number of large schemes written in 2003 this level of increase is not expected to continue into Change in gross premiums Q4 Q4 (DKKm) Individual schemes Corporate schemes Group life Unit-linked schemes Regular premiums ,226 1,448 Individual schemes Corporate schemes Unit-linked schemes Single premiums Gross premiums ,660 2,024 In line with other life insurance companies, with effect from 1 January 2003, Topdanmark Livsforsikring changed its accounting policy for the calculation of life insurance provisions to one based on market value. As such, all life insurance provisions are now calculated using a zero-coupon interest rate structure less a 5% security margin. Also taken into account is the best possible estimate of all risks, including death and disability as well as administrative expenses. Due to the new rules, acquisition costs on new policies are no longer deferred and written off on an accruals basis over theriod of the policy's cover, but are now expensed in the year the policy is written. Consequently, the expense result after payment of bonus was a loss in 2003 due to commission being paid in the year on large new policies written. As a result of the change in the calculation of the life insurance provisions to the market value policy, the Page 11 of 56

12 Topdanmark's Annual Report 2003 Danish Financial Supervisory Authority's stress tests will now include the potential bonus reserves thereby improving the risk scenarios and creating a better balance in the distribution of risk between customers and shareholders' funds. Accordingly, at 31 December 2003 the life insurance provisions included potential bonus reserves of about DKK 1.8bn on paid-up polices which to a large extent could be used to cover the customers share of any losses on securities. The collective potential bonus reserve increased from DKK 381m to DKK 770m in 2003 primarily due to the 8% return on investments after PAL-tax being greater than the 4.5% bonus paid out to customers. Accordingly, at the end of 2003 the bonus ratio represented 5.8% (2002: 3.5%). of policies written before 1 July 1994 with guaranteed pension benefits of 4.5% from newer policies with guaranteed pension benefits of 2.5% and 1.5%. The portfolio of life insurance policies will be divided between the two companies by transferring all the 4.5% policies to a new affiliated company, while the existing life insurance company will keep the 2.5% and 1.5% policies and write new business. Along with transferring the portfolio, the related potential bonus reserve as well as the assets supporting those liabilities will also be transferred to the new life insurance company. With a bonus ratio of 5.8% and an excess solvency margin (capital base exceeding solvency requirement as a percentage of provisions) of 7.2%, Topdanmark Livsforsikring s reserve to withstand future losses on equities was 13.0% at the end of In addition there are also the DKK 1.8bn potential bonus reserves on paid-up policies referred to above. Topdanmark Livsforsikring continues to be in the Danish Financial Supervisory Authority's green classification implying it is able to withstand devastating market conditions including a 30% decline in equity prices simultaneous with a one percentage point adverse change in interest rates and a 12% decline in property prices. To supplement these stress tests additional ratios were added in the 2003 accounts to clarify the companies' exposure to given adverse changes in the insurance risks, that is, changes in the mortality and disability rates of the portfolio including the effect of such changes on shareholders' funds. These calculations also show that Topdanmark Livsforsikring is able to withstand material adverse changes in all insurance risks. The bonus rate for 2004 is currently set at an unchanged level of 4.5% but may be subject to change later in the year. Topdanmark Livsforsikring has split the life insurance company into two companies with effect from 1 January It is intended to separate the portfolio Topdanmark Livsforsikring has discussed the principles of the split with the Danish Financial Supervisory Authority who is yet to approve it. The fundamental principle of the split is that no customer will be in a poorer position than beforehand. The new company structure will make it possible for the company with the 2.5% and 1.5% policies to pursue an investment policy with a higher proportion of equities providing the customers with the opportunity of achieving a higher expected long-term return. At the same time it will be possible to pursue a more cautious investment policy by focusing on efficient hedging of the interest rate risk in the company with the 4.5% policies. The split makes it explicit that new customers will not contribute to the financing of the previously guaranteed pension benefits of 4.5%. Following the split the bonus ratio was 7.5% in the company writing new business and 4.7% in the other at 1 January At present the bonus ratio in the two companies have increased to 9.3% and 5.4% respectively. Page 12 of 56

13 Topdanmark's Annual Report 2003 Financial highlights - Life insurance Q4 Q4 (DKKm) Premiums ,660 2,024 Allocated investment income on own account ,050 Claims and benefits paid (192) (214) (897) (836) Change in the life insurance provisions (390) (370) (1,249) (1,339) Change in collective bonus (159) (117) 407 (381) Change in provisions for unit-linked policies (10) (69) (119) (215) Expenses (54) (57) (192) (238) Net reinsurance (1) (6) (5) (1) Technical profit / (loss) 70 (8) Other investment income etc Taxation (7) 20 (37) (8) Profit on life insurance Parent company etc. The result in the parent company etc. increased from DKK 55m to DKK 221m in A number of Topdanmark Groups investment exposures, as well as the costs associated with the share option scheme for all of its management, are covered by the parent company. These transactions generated an accounting profit of DKK 178m in 2003 offset by a charge made in the subsidiaries. Cash flow analysis To help finance the regular share buy-backs the parent company received dividends of DKK 342m from its subsidiaries in After deducting DKK 98m of interest charges, expenses and tax the overall cash flow from operations was DKK 244m. The reduction in portfolio assets and amounts due from affiliated companies was DKK 25m and 291m respectively and to cover the exercise of share options, shares on which the options were based were sold for DKK 64m, giving a total reduction in investments of DKK 380m. Accordingly cash flow from operations and investments was DKK 624m. The company has bought back own shares of DKK 628m for subsequent cancellation. There was a DKK 2m net increase in the parent company's liquid funds to DKK 7m. Investment activities Topdanmark Group excluding Topdanmark Livsforsikring Profit on investment activities in Topdanmark Group excluding Topdanmark Livsforsikring was DKK 867m in 2003 including income from affiliated and associated companies but before the transfer to the technical result (2002: DKK 343m). The rise in equity prices on both the Danish and all of the key foreign markets affected the return. The investment in Danske Bank, sold in September 2003, generated a return of 12.8% in the first nine months of the year and other equities 28.7% in the full year. By way of comparison the KFX Index increased 22.5%, the S&P 500 Index 26.4% and the Euro Stoxx 50 Index 10.5% in Given the Topdanmark Group's restrictive limits of interest rate exposure, the return on bonds is considered to be satisfactory. In particular, the return on foreign bonds, being mostly corporate bonds, benefited from the relatively significant narrowing of credit spreads in The overall return on investment assets was 9.8% after management expenses. The market value of interest bearing investment assets owned by the Group, excluding life insurance, was DKK 8,608m at 31 December 2003, equivalent to 80% of total investment assets. The Group's investments have no significant concentration of credit exposure except the investments in Danish mortgage Page 13 of 56

14 Topdanmark's Annual Report 2003 bonds which are considered to be particularly safe assets according to the Danish Insurance Act. Overall Topdanmark Livsforsikring's investment assets generated an 8.0% return after PAL-tax. The limit of the interest rate exposure has been fixed at DKK 100m after taxation and including the interest rate exposure of granted annuities in workers' compensation insurance. That of foreign exchange exposure has been fixed at DKK 3.9m per day after taxation, calculated by the value-at-risk method as the size of the loss which, with a 97.5% probability, will not be exceeded. At 31 December 2003 the actual interest rate exposure was calculated as DKK 31m and the foreign exchange exposure DKK 0.3m per day, both after taxation. At the end of 2003 the investment in Topdanmark Livsforsikring was DKK 1,350m of the total equity investments of DKK 2,121m. The value of nonconsolidated subsidiaries and associated companies was DKK 87m, while other equities had a value of DKK 684m. In addition the effect of financial instruments contributed to an exposure in equities of DKK 243m at 31 December Topdanmark Livsforsikring Profit on investment business in the Topdanmark Livsforsikring Group was DKK 1,177m in 2003 (2002: DKK 539m). The return on Danish and foreign equities was positive, affected by the general increase in equity prices. The return on bonds exceeded the assumptions in the budget. The return on both equities and interest bearing investment assets are considered to be satisfactory in comparison with general market trends. At 31 December 2003 the market value of the life insurance group's investment assets was DKK 17,020m of which DKK 4,561m was in Danish fixedrate bonds, DKK 3,758m in foreign bonds and DKK 154m in mortgage deeds. A large number of the policies written by Topdanmark Livsforsikring have 4.5% guaranteed pension benefits. To hedge against the risk represented by these pension benefits, Topdanmark Livsforsikring acquired CMS floors in a type of interest rate option in which the payments correspond to the difference between the current swap rate and the strike rate - the size of which reflects the expected change in the size of the guaranteed pension benefits. The maturity of the acquired CMS floors is either 10 or 20 years and the strike rate is 5%. The acquisition of interest options is intended to limit the overall interest rate exposure because a requirement to increase the liability in the event of a decline in interest rates will be offset by increases in the value of the interest options. Therefore, other things being equal, if there is a one per cent parallel shift downwards in the interest rate curve, the value of the options would increase about DKK 484m after PAL-tax. If the curve makes a parallel shift upwards one per cent, the value of the interest options will decline about DKK 153m after PAL-tax. Excluding these interest options Topdanmark Livsforsikring's interest rate exposure after PAL-tax and corporation tax in subsidiaries was DKK 140m and the foreign exchange exposure after PAL-tax and corporation tax was DKK 0.7m per day. Investment in index-linked bonds was DKK 1,121m with the majority expiring in 2026 or later. The investment in equities totalled DKK 2,562m, comprising DKK 1,480m in Danish listed shares and DKK 1,072m in foreign listed shares. The exposure in foreign equities was adjusted by means of financial instruments. At 31 December 2003 the exposure in foreign equities including financial instruments was DKK 1,284m. Page 14 of 56

15 Topdanmark's Annual Report 2003 The life insurance group's property investments have been vested in Topdanmark Ejendom, whose assets are properties with a total book value of DKK 2,656m. The Topdanmark Ejendom Group realised a profit of DKK 209m, including value adjustments and before financial items - corresponding to a return of 7.9% on the average investment. Investment assets at market value at 31 December 2003 Group excl. (DKKm) life insurance Life insurance Interest bearing investment assets 8,608 10,447 Equities 684 2,562 Index-linked bonds 0 1,121 Land and buildings 23 2,656 Non-consolidated subsidiaries 49 0 Associated companies ,402 17,020 Shares in Topdanmark Livsforsikring 1,350 - Total investment assets 10,752 17,020 Topdanmark Kapitalforvaltning (Asset Management) Following the introduction of unit-linked products it was decided to improve the competitiveness of asset management. Therefore with effect from 1 January 2001 the asset management function was vested in the company Topdanmark Kapitalforvaltning and further resources were allocated to it. This company manages all investment assets for the entire Group. The result of Topdanmark Kapitalforvaltning is performance dependent and it generated a profit of DKK 27m in 2003 (2002: DKK 26m). Financing The goal for Topdanmark's capital structure is to ensure that shareholders' funds are sufficient to reasonably support current operations. Funds in excess of this amount are distributed to shareholders by way of regular share buy-backs throughout the year. Taking into consideration that at the same time the corresponding earnings are accumulated in the subsidiaries, it is considered appropriate to finance the share buy-back with temporary loans. Following the annual payment of dividends from subsidiaries the amount of loan capital outstanding is returned to the optimum long-term level. Topdanmark's loan capital includes short-term money market loans, with a typical maturity of a maximum of one month. To secure a sufficiently liquid base in situations where this source of financing might decline, Topdanmark has purchased an irrevocable right to raise two loans on normal terms. One of these can be up to DKK 500m with expiry no later than 2007 and another of up to DKK 500m with expiry no later than in Goodwill amortisation As in the previous year goodwill amortisation was DKK 79m in In accordance with Topdanmark's accounting policies goodwill is amortised over ten years. Taxation In 2003 there was a tax charge of DKK 111m, most of which was netted off against the tax asset. At the end of the year the Group's tax asset was DKK 296m having also taken into account an increase of DKK 102m following a revaluation reflecting its shorter remaining life. Page 15 of 56

16 Topdanmark's Annual Report 2003 Risk factors It is Topdanmark's underlying belief that accepting primarily insurance risks and to a lesser extent financial risks creates value for the company. Having now sold its stake in Danske Bank, Topdanmark meets this principle. Topdanmark's risk profile should be considered together with its level of capital and volume of business. It is Topdanmark's goal always to optimise its shareholders' return / risk profile by the continued alignment of shareholders' funds, including substitutes thereof in the form of equalisation reserves, reinsurance, financial instruments and loan capital. Due to a decline in the capacity of the reinsurance markets, the conditions surrounding the purchase of reinsurance were tightened up in 2001 and were further accelerated after the terror attacks in the USA on 11 September This resulted in a higher price cost of reinsurance cover. Consequently Topdanmark has increased its retention (excess) in a number of areas in order to reduce the increase in expenses on reinsurance cover. Topdanmark's highest risk areas are those of storm and fire. The reinsurance contracts for storm, which were renewed for one year on 1 August 2003, now cover storm claims for up to DKK 3.6bn with a retention of DKK 72m after tax per storm. The fire reinsurance programme for 2003 was unchanged with a maximum retention of about DKK 18.0m after tax per fire, capped to DKK 14.4m after one claim with a maximum retention. To protect these retentions on storm and fire claims Topdanmark has built up equalisation provisions of DKK 148m at 31 December 2003 to be utilised if the accumulated retentions on events exceeding DKK 4m exceed DKK 82.8m after tax (DKK 115m before tax). However, if the accumulated retentions after tax are lower than DKK 61.2m (DKK 85m before tax), the equalisation provisions will be increased. Until the end of 2001 the reinsurance cover included terror. Since 11 September reinsurance companies have changed their emphasis to focus their attention on the cover of terrorist attacks. Generally, losses resulting from acts of terror are covered by reinsurance contracts with certain restrictions as to the size of cover of isolated events and the number of events covered. Topdanmark believes that terrorist attacks resulting in significant losses which are not covered by reinsurance are so unlikely that they should be excluded from the Group's risk profile. In other areas Topdanmark's risk cover is practically unchanged. The life insurance group is protected against risks by its bonus reserve. Most negative fluctuations in assets as a result of increases in interest rates, changes in foreign exchange rates and declining prices of the equity and property portfolios are provided for by the bonus reserve, i.e. in reality paid for by the customers. The Group has guaranteed that certain policyholders will receive a pension benefit of 1.5%, 2.5% or 4.5% after PAL-tax, according to when the policy was written. These pension benefit guarantees are linked to the risk of a downturn in the financial markets. Therefore in the summer of 2001 Topdanmark acquired interest rate options - so-called CMS floors - hedging against a decline in the long-term Euro swap rate to below 5%, see "Investment activities". Topdanmark already changed its bonus rules with effect from 1998 providing that any bonus added to policyholders' accounts would be included to cover the overall pension benefits until expiry. Previously the bonus was used for improving just the guaranteed pension benefits. At 20 February 2004 the bonus reserves of the life insurance group were about DKK 892m. Accordingly, adverse fluctuations in the Group's assets would impact shareholders' funds in the proportion of shareholders' funds to the balance sheet total. If the adverse fluctuations exceed the bonus reserves, the impact on shareholders' funds could be significant but it would be limited as the potential bonus reserves on the individual policies would act as a buffer against even significant losses. The Group's risk factors in the event of realisation of different scenarios are illustrated in the table below. This table is not a representation of all of Topdanmark Group's risks, but merely an illustration of the impact of various assumptions on the most significant risk factors. The given assumptions do not reflect Topdanmark's expected risks, but are shown only as examples. Page 16 of 56

17 Topdanmark's Annual Report 2003 In the column "Overall effect on Group results" and the two following columns it is assumed that the bonus reserves and the individual potential bonus reserves in life insurance could offset adverse fluctuations at the levels described as currently the overall collective potential bonus reserve is estimated to be around DKK 1bn and the individual potential bonus reserves DKK 1.8bn. If all the events of the table occurred at the same time, losses arising in the life insurance group in excess of those covered by the bonus reserves would be covered by the potential bonus reserves on the individual policies. Thus, the overall effect for the Group would be a loss of DKK 348.1m representing 9.6% of the Group's shareholders' funds. As a result of the split of the life insurance portfolio into two companies, policies with high guaranteed benefits will be accumulated in one company and those with low guaranteed benefits in another. This required a change in the investment strategy ensuring policyholders' requirements are met to an even higher extent. Risk factors in the event of realisation of different risk scenarios at 20 February after taxation and pension return tax Change in Overall parent Change in Life Remaining effect on company's net asset insurance Topdanmark Group sharehol- value Risk group Group results ders' funds per share scenario (DKKm) (DKKm) (DKKm) (%) (DKK) Interest-bearing investment assets a (310.8) (51.0) (77.9) (2.2) (3.3) Index-linked bonds b (57.7) 0.0 (5.0) (0.1) (0.2) Foreign exchange c (14.7) (4.8) (6.1) (0.2) (0.3) Equities d (258.3) (87.1) (109.5) (3.0) (4.7) Loans e (6.7) (7.1) (7.7) (0.2) (0.3) Property f (244.9) (1.7) (22.9) (0.6) (1.0) Expenses g (1.6) (10.9) (11.1) (0.3) (0.5) Claims on own account h 0.0 (35.9) (35.9) (1.0) (1.5) Storm catastrophes and fire claims i 0.0 (72.0) (72.0) (2.0) (3.1) a: One percentage point increase in effective interest rate b: 5% decline in market price c: Annual loss on foreign exchange, with a 2.5% probability or less d: 10% loss on equity portfolios e: 5% loss on loans f: 10% decline in market value of properties g: 1% increase in expenditure h: 1% increase in claims i: Storms generating claims of up to DKK 100m (If the storm claims exceed DKK 100m, a reinstatement premium would be paid of up to DKK 137m, depending on the size of the claims incurred. Claims exceeding DKK 3,600m are on the Group's own account. In the event of post-tax expenses on own account exceeding DKK 82,8m on storm and fire claims combined, the loss will be covered by up to DKK 148m of equalisation provisions. Page 17 of 56

18 Topdanmark's Annual Report 2003 Prospects for 2004 Expected trend in non-life insurance market It is expected that in 2004 the non-life insurance market will be characterised by: a new Act on workers' compensation insurance; a budding market for unemployment insurance; an estimated premium growth of 6 8%; and a change from gross to net settlement with insurance brokers. On 1 January 2004 a new Act took effect on workers' compensation insurance providing increased cover for injured persons. The Act allows the insurance companies to increase prices corresponding to the increase in claims payments. In 2003 Topdanmark made its first agreements with trade unions, banks and savings banks to sell insurance against involuntary unemployment. This market is expected to grow in From this year a number of insurance companies, including Topdanmark, has changed the principle of settlement with insurance brokers from gross to net. Up to now the commission paid to the insurance broker has been included in the customer's total payment to the insurance company. From 2004 this has been changed to the insurance broker settling directly with the customer. As a result of the new principle there will be a decline in the expense ratio and a corresponding increase in the loss ratio. Expected trend in life insurance market It is expected that in 2004 the life insurance market will be characterised by: an estimated premium growth of about 10%; a profit on investments; most of the companies choosing to continue with a bonus rate of 4.5%; and most of the companies expecting to introduce lower transfer charges. Given the increasing equity and bond prices in 2004 to date it is expected, on the basis of the existing level of prices, that the general return on investments will be sufficient to cover the companies' guaranteed rate of interest. Therefore an allowance for risk is expected to be included in income in most of the companies. In spite of the low level of interest rates most companies, like Topdanmark, have chosen to continue with a bonus rate of 4.5% in They will also introduce lower transfer charges, which is expected to help create the basis for an increase in customer mobility in the market. Topdanmark is in a strong competitive position and welcomes this change. Topdanmark's prospects for 2004 A number of positive factors impacted Topdanmark Group's result for Due to an increase in equity and corporate bond prices the return on investments was just under DKK 400m more than originally expected. The profit on the shareholding in Danske Bank also made a significant contribution. In non-life insurance the Group was hit by fewer largescale and weather-related claims than in a normal year whilst the trend in personal injury claims was worse than expected and the Group had to strengthen its reserves on previous years by DKK 206m creating an effect of 2.9 percentage points on the loss ratio. However, the net effect of these factors was positive and therefore the combined ratio for 2003 was 1.2 percentage points lower than originally expected. Non-life insurance In general, non-life insurance developed satisfactorily in However, due to continued highly unsatisfactory results in certain areas, premium increases were made in accident insurance and fire insurance for large farms and industrial customers. Furthermore, there were premium increases averaging 50% in workers' compensation insurance due to new legislation providing for increased cover for claimants. It is expected that the combination of these premium increases, organic growth and ordinary premium indexation will generate an increase in premium income of 8% 10% in The claims trend is expected to be impacted by the following factors in 2004: Page 18 of 56