Of which portfolio bond insurance

Transcription

1 20 08 Annual report

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3 Contents Key figures 1 The chief executive s comments 2 Administration report 3 Alternative income statement 5 Income statement 6 Analysis of results 7 Balance sheet 8 Statement of changes in equity 10 Cash flow statement 12 Notes 13 Five-year overview 29 Recommended appropriation of profits 30 Audit report 31 Board and management 32 Glossary 33 Key figures Key figures SEK million Premiums paid Guaranteed interest and risk insurance Unit-linked insurance Total Assets under management Guaranteed interest and risk insurance Unit-linked insurance Total Of which portfolio bond insurance Total return (%) for insurance with guaranteed rate of interest SPP Liv Fondförsäkring AB is included from 1 July 2004 to 31 December The decrease in premiums paid for unit-linked insurance between 2006 and 2007 is due to the sale of Euroben Life & Pension Ltd. Total premiums written including portfolio bond insurance were SEK 8,170m in 2007 and SEK 8,251m in

4 The chief executive s comments A year of financial turbulence Our total yield for 2008 was -1.2 percent. Naturally, we are not satisfied with a negative yield. At the same time, our total yield can be compared with the Stockholm stock exchange, which declined by over 40 percent during the year. Our cautious investment strategy has worked, and by rapidly reducing our portfolio s exposure to equities, we were able to partly withstand the sharp decline. The administration result was SEK 165 million (178), a 7-percent decrease over the previous year. Expenses were reduced by 24 percent, while fee income decreased by 19 percent, due to the market trend. The risk result increased to SEK 177 million (155). The total yield for the year was lower than the guaranteed rates, and therefore there was no yield split. The financial result declined to SEK -19 million (28). Overall, profit before tax decreased by 16 percent to SEK 355 million (422). Satisfied customers and higher net flows Premiums paid at Handelsbanken Liv were SEK 5,859 million (6,346). Net flows showed a positive performance, increasing by 2 percent to SEK 1,399 million (1,371). In accordance with the original sales agreement with SPP, at the turn of the year, Handelsbanken Liv took over SPP s portfolio bond insurance. Premiums written in 2008, including portfolio bond insurance, would have been SEK 8,251 million (8,170) and the net flow would have been SEK 3,509 million (2,932). Positive net flows are an indication that customers appreciate our method of working. This is corroborated by the most recent survey from Swedish Quality Index, which shows that Handelsbanken Liv has the most satisfied customers. We are the only insurance company whose customers are as satisfied as they are loyal. In addition, when customers rate how the insurance companies provide information on their products, we are also ranked No.1. Customers feel secure with our flexible solutions We offer our customers financial security. The changes that have been made in the Swedish pension system in recent years mean that individuals must now take more responsibility for their own financial security. They have to ensure that their savings are sufficient to secure their financial future and realise their dreams. Furthermore, the need for financial security changes from one stage of life to another. Therefore, offering flexible solutions that allow our customers to make their choices quickly and simply is a guiding principle in our operations. Thanks to Handelsbanken s branch network with its 3,400 licensed insurance advisers, our online service and our customer service by phone, we are always close to our customers when the need for advisory services arises. Becoming even better In 2008, we worked a great deal with developing our asset management model. In 2009, we are changing our management strategy for insurance with a guaranteed rate of interest and are adapting the management to fit the customer s age and the guaranteed rate for the policy. We are also constantly working to make our offering of mutual funds even better, including new fund solutions that provide more help in selecting suitable funds in line with the risk profile specified by the customer. More and more of our customers are opting to use our online service to take out new policies or make extra deposits. Of the endowment insurance products that can be taken out either at bank branches or on the internet, roughly a quarter are now being taken out online. For private pension insurance, the proportion of new policies taken out online is somewhat lower, although the internet is used frequently for making extra payments to existing pension policies. We are well equipped for the future In 2008, the door was re-opened for transfers of pensions assets between life insurance companies. So far, there has been limited transfer activity, but we expect to see an increase in the coming year. The advantages of being a customer in a profit-distributing company such as ours will become more pronounced as time goes on. When many of our competitors among the mutual companies need time to build up their reserves, we will be able to give our customers a better yield directly, if the market shows an upturn. We are a medium-sized player, and therefore flexible. This is something we have benefited from during the financial crisis. We will continue striving to be a better, faster, simpler provider of financial security solutions. With this as our goal, we are well equipped for the future. Snorre Storset, Chief executive 2

5 Administration report Administration report Handelsbanken Liv Försäkringsaktiebolag (Handelsbanken Liv), corporate identity number , is domiciled in Stockholm. The company is a wholly-owned subsidiary of Svenska Handelsbanken AB (publ), corporate identity number (Handelsbanken). Since 2002, Handelsbanken Liv has conducted life insurance business with traditional insurance and unit-linked insurance in the same company. The company was demutualised into a profit-distributing company in OPERATIONS Handelsbanken Liv offers customers a broad range of savings products for life insurance. This is within the framework of Handelsbanken s universal bank concept, where life insurance is a natural part of long-term savings. SIGNIFICANT EVENTS On 21 December 2007, Handelsbanken sold Handelsbanken Liv s fellow subsidiary SPP Livförsäkring AB to the Norwegian company Storebrand ASA. The deal also included the Irish insurance company Handelsbanken Life & Pension Ltd (name changed to Euroben Life & Pension Ltd after the sale). On 30 December 2008, Handelsbanken Liv acquired the portfolio bond operations of the Irish company Euroben Life & Pension, as per the sales agreement with SPP. These operations are run in the newly formed company, Handelsbanken Life & Pension Ltd. RESULTS The Handelsbanken Liv s post-tax profit/loss was SEK 307m (-1,191). The parent company s post-tax profit was SEK 292m (359). The Handelsbanken Liv s results are described in the alternative income statement on page 5. Internally, Handelsbanken Liv works with an alternative income statement, which makes it easier to understand how the results arise. The Handelsbanken Liv s result, financial position and important key figures are summarised in the five-year overview on page 29. According to the proposed distribution of profits on page 30, the year s profit of SEK 292m will be transferred to retained earnings. It is proposed that no dividend be paid. ASSETS UNDER MANAGEMENT Assets under management at year-end were SEK 54bn (63), with SEK 27bn (35) invested in unit-linked and portfolio bond insurance. SOLVENCY The available solvency margin for the Handelsbanken Liv as at 31 December 2008 was SEK 1,985m (2,911). This should be compared to the required solvency margin, which was SEK 1,493m (1,738). The solvency ratio was thus 1.33 (1.68). ASSET MANAGEMENT Handelsbanken Liv manages its customers insurance assets with guaranteed interest (traditional insurance) in a diversified portfolio consisting of fixed income securities, listed equities, real estate and alternative investments. Handelsbanken Liv s board establishes the company s investment guidelines that set the overall framework for asset allocation with the aim of creating strong long-term returns through well-balanced risk-taking. Investments were broken down as follows as at 31 December 2008: fixed income securities 77%, listed equities 10%, real estate 6%, and alternative investments 7% was an extreme year on global equity and fixed income markets: it will go down in history as one of the worst years for financial markets across the globe. In the face of this turbulence, Handelsbanken Liv actively reduced its proportion of equity holdings during the year, in favour of fixed income investments. The total yield on the traditional portfolio was -1.22% (1.18), despite the global stock market declines of 30% to 60%. The average total yield for the most recent five-year period was 5.34%. For savings in unit-linked insurance and portfolio bonds, Handelsbanken Liv provides no guarantees in terms of value growth. Unit-linked customers are primarily offered mutual funds managed by Handelsbanken Asset Management. Portfolio bond customers may invest their premiums in mutual funds, equities, equity-linked bonds, bonds, certificates, warrants and options. The market turmoil of 2008 also had an adverse effect on value growth in unit-linked insurance and portfolio bonds. MARKET AND SALES The latest survey from Swedish Quality Index (SKI) showed that Handelsbanken Liv is the highest ranked life insurance company among private customers. This was reflected in the still-strong positive inflow to our products in For the second year running, Kapitalspar Depå, an endowment insurance product allowing investments in securities, attracted the most new business. Handelsbanken Liv has one of the broadest ranges of endowment insurance products on the market: as well as Kapitalspar Depå, Handelsbanken branches offer endowment insurance with unit-linked management, unitlinked portfolios, and guaranteed-yield products. The proportion of customers taking out new insurance policies online continues to increase. Just over a quarter of all unit-linked and guaranteed-yield policies are now taken out via the online service. In May 2008, the right to transfer pension assets was reinstated. Handelsbanken Liv worked to create high-quality, simple procedures to encourage customers to gather all their pension savings with us. So far there has been little transfer activity on the market. We envisage that the demand for pension savings will continue to be large since the changes in the pension system place more responsibility on the individual. Handelsbanken s branches continue to market Handelsbanken Liv s occupational pension product. This and other insurance products paid for by companies are targeted primarily at small and medium-sized firms. RISKS AND RISK CONTROL The Handelsbanken Liv s operations include insurance, operational and financial risks. Financial risks comprise market, liquidity and credit risks. Handelsbanken Liv is continually working on measuring, following up and limiting these risks for the entire, including the subsidiaries. There is a depart- 3

6 Administration report ment for independent risk control and a compliance function. The department for independent risk control has overall responsibility for ensuring that Handelsbanken Liv maintains good management and control of the various risks. The aim is to ensure via internal controls that company operations comply with established goals and requirements. The department is independent of the business operations, and reports directly to the chief executive and board. The work complies with the general guidelines of the Swedish Financial Supervisory Authority on governance and control of financial companies and their general guidelines on reporting significant events. A review of the risks and their significance for operations is presented separately in note 2, Risks and risk control. Capital-related matters The solvency ratio is the statutory capital requirement for insurance companies. There is also the Traffic Light Model where the company s risks are compared with its available solvency margin. When the risks are deemed to be greater than the available solvency margin, the company is given a red light indicating that it should reduce its risks. Handelsbanken Liv had a green light throughout The EU is currently conducting a project with the aim of producing new solvency rules called Solvency II. It will be many years before Solvency II can be implemented in Swedish law. In 2008, Handelsbanken Liv participated in the quantitative pre-study (QIS 4) arranged by the Committee of European Insurance and Occupational Pension Supervisors. BOARD AND MANAGEMENT The company has had a new chief executive Snorre Storset since 1 September Since October 2008, Elisabeth Norberg, head of administration, has been a member of the senior management team. No other changes have occurred in the composition of the board or the management during the year. EMPLOYEES Handelsbanken Liv complies with the joint policies and guidelines on personnel within the Handelsbanken. At the end of 2008, Handelsbanken Liv had 200 employees, with some 80% of them employed in Sweden. On average there were 195 employees in the Handelsbanken Liv during the year. Principles and processes for remuneration to senior management are presented in note 13, Operating expenses. Staff development At Handelsbanken Liv, employees are responsible for their own competence development, and for sharing their competence with others in the Handelsbanken. The knowledge acquired by employees in their daily work is the most important source of increased professionalism. For Handelsbanken Liv, competence is the ability to solve the tasks employees meet at work. All employees take part in their unit s business planning process to create a sense of commitment to reach set targets. Guided by the business plan, employees meet their immediate superior for a personal development dialogue where the employee s contribution to operational goals and the conditions required to deal with specific tasks are discussed. This results in an individual action plan which is continuously monitored and forms the basis of the salary dialogue review between manager and employee. Equality Handelsbanken Liv complies with the Handelsbanken s equal opportunity policy which states that equal conditions must apply to men and women regarding career development in the. The goal is for the proportion of female and male managers to correspond to the overall gender distribution at Handelsbanken Liv. The Equal opportunity plan 2008/2009 for Sweden showed that 60% of employees are women and 50% of managers are women. Work continues to identify future management material and to identify potential female managers at an early stage. The work on promoting equality aims to facilitate for both men and women to combine employment with parenthood. Working environment and health Handelsbanken Liv complies with the Handelsbanken s working environment policy. The overall objective in matters regarding the work environment focus on health. The aim is to have a working environment where the employees enjoy good health, develop on a personal level and function in an optimal way. This is a long-term goal that includes factors such as balance in life, clear and honest communication, having the skills and competence needed to perform tasks and deal with work-related situations, pride in one s work, and trust and respect. Health promotion activities are an important factor in staff care and health care, and aim to make employees more active. GROUP STRUCTURE In addition to the parent company Handelsbanken Liv, the Handelsbanken Liv comprises the wholly-owned subsidiary SHB Liv Forsikringsaktieselskab (SHB Liv) and Handelsbanken Life and Pension Ltd. SHB Liv provides life insurance products through branches in Norway and Finland. Risk insurance in Norway and Finland is sold through branches of the parent company Handelsbanken Liv. Handelsbanken Life and Pension Ltd provides Handelsbanken Liv s portfolio bond products. Policyholders savings in unit-linked insurance are mainly invested in Handelsbanken s mutual funds. Handelsbanken Liv purchases IT services and asset management from its parent company Handelsbanken. Internal prices within the Handelsbanken Liv comply with the rules and guidelines applied within the Handelsbanken. Prices are set at cost, although never higher than market prices. ENVIRONMENTAL ISSUES Environmental issues are a vital element in the Handelsbanken s operations, in terms of the direct environmental impact of the Bank s operations and any indirect impact. Environmental work aims to promote long-term and environmentally sustainable development. Action is taken to cause as little negative impact on the environment as possible. Handelsbanken has signed and complies with voluntary agreements, such as the ICC Business Charter for Sustainable Development and the UN Environment Programme - Banks and the Environment. UNEP FI (United Nations Environmental Program Finance Initiative) states that economic development must be compatible with social welfare and a sound environment. For a more detailed description of Handelsbanken Liv s environmental work, see page 19. ETHICAL STANDARDS AND SOCIAL RESPONSIBILITY Handelsbanken Liv follows Handelsbanken s ethical guidelines that state that operations must observe high ethical standards. Employees must behave in a manner that upholds confidence in the Bank. Handelsbanken s board annually ratifies the ethical guidelines. A basic premise is that operations and employees comply with the laws and regulations governing operations in various ways. General recommendations and statements from the Swedish Financial Supervisory Authority and other authorities must be observed when forming procedures and instructions. All employees have a clear responsibility for their actions, professionally and in social and ethical issues. The success of the company on the market depends on the trust of the public and authorities. 4

7 Alternative income statement Alternative income statement The traditional income statement in a life insurance company is difficult to comprehend and offers the reader few opportunities to understand how the result was reached. Internally, Handelsbanken Liv has worked with an alternative income statement which provides a better basis for understanding how the results arise. SEK million Administration result Risk result Financial result Other result Profit before tax in insurance company The result is based on the Handelsbanken Liv s pre-tax result and excludes earnings in companies that are not insurance companies. Link to primary income statement Profit before tax in insurance company Profit/loss in non-insurance company Profit/loss before tax Tax Profit/loss for the year Administration result 4 Other result Fee income Net fee and commission income Operating expenses Total Return on equity Interest expense on subordinated loans Total The administration result, which is the difference between the fees charged on the insurance contracts to cover administration and the company s actual expenses, fell by SEK 13m. One reason for this is that income from the occupational pensions part of Euroben Life & Pension Ltd was included in the 2007 figures. Another reason is that the assets fell due to the heavy slump on the stockmarket. This led to lower income from asset management fees. Income from premium fees also fell. The operating expenses for 2007 include costs for staff who worked for SPP Livförsäkring AB, and also income on services sold to SPP Livförsäkring AB. 5 Profit/loss in non-insurance company Capital loss from disposal of Handelsbanken Varumärkes AB Other Total Risk result Handelsbanken Varumärkes AB was sold in connection with the sale of SPP Livförsäkrings AB which led to a capital loss of SEK 1,458m. The profit/loss in noninsurance company 2007 refers in its entirety to Handelsbanken Varumärkes AB, where Other is the impairment loss for the year relating to intangible assets. Premiums written Change of claims outstanding Insurance claims paid Result of reinsurance -7 0 Other Total The risk result is the difference between the fees which the company charges to cover the insurance risks (mortality, longevity, morbidity and accident) and the actual cost of these. 3 Financial result Received yield split 0 0 Other Total The total return on policyholders assets was -1.22% (1.18). Since the total return was lower than the guaranteed rate of interest, which is between 3 and 5% depending on when the policy was taken out, the company received no part of the total return. The policyholders had their insurance assets adjusted by -1.22% (1.18). 5

8 Income statement Income statement SEK million Technical account, life insurance business Premiums written (net of reinsurance) Note Investment income Note Unrealised gains on investments Note Increase in value of investments for which policyholders bear the investment risk, unit-linked insurance assets Other technical income Note Claims incurred (net of reinsurance) Note Change in other technical provisions Note Operating expenses Note Investment charges Note Unrealised losses on investments Note Decrease in value of investments for which policyholders bear the investment risk, unit-linked insurance assets Other technical charges Note Investment income transferred to financial operations Balance on the technical account, life insurance business Non-technical account Balance on the technical account, life insurance business Investment income Note Unrealised gains on investments Note Investment income transferred from insurance operations Investment charges Note Unrealised losses on investments Note Profit/loss before tax Tax Note Profit/loss for the year

9 Analysis of results Analysis of results SEK million Direct insurance of Swedish risks Direct insurance of foreign risks Received reinsurance Occupational pension insurance Other life insurance Technical account, life insurance business Total 2008 Definedcontribution traditional insurance Unitlinked insurance Occupational linked disability insurance and premium waiver insurance Individual traditional life insurance Unit-linked insurance Noncancellable disability and accident insurance and premium waiver insurance life and occupational group life insurance Premiums written (net of reinsurance) Investment income Unrealised gains on investments Other technical income Claims incurred (net of reinsurance) Change in insurance provisions Operating expenses Investment charges Unrealised losses on investments Decrease in value of investments for which policyholders bear the investment risk Investment income transferred to financial operations Balance on the technical account, life insurance business Premiums written Premiums written (gross) Premiums ceded Total premiums written (net of reinsurance) Claims incurred Insurance claims paid Gross Reinsurers share Changes in provision for claims outstanding Gross Reinsurers share Total claims incurred (net of reinsurance) Technical provisions 31 Dec 2008 Provisions for life insurance Provision for claims outstanding Technical provisions for which policyholders bear the risk 31 Dec 2008 Conditional bonus Unit-linked commitments

10 Balance sheet assets Balance sheet assets SEK million Assets Intangible assets Goodwill Note Other intangible assets Note Investment assets Buildings and land Note Shares and participating interests in group companies Note Shares and participating interests Note Bonds and other interest-bearing securities Note Other loans Derivatives Note Other financial assets Note Investments for which the policyholders bear the investment risk Unit-linked insurance assets Reinsurers share of technical provisions Claims outstanding Receivables Receivables referring to direct insurance operations Note Receivables referring to reinsurance Other receivables Note Other assets Property and equipment Note Cash and bank balances Note Prepaid expenses and accrued income Accrued interest income Deferred fee and commission expense Note Other prepaid expenses and accrued income Total assets Other intangible assets and Property and equipment have a longer maturity than one year. Other items mature within one year. 8

11 Balance sheet liabilities Balance sheet liabilities SEK million Equity, provisions and liabilities Shareholders equity Share capital (100,000 shares) Statutory reserve Other restricted reserves Profit brought forward Profit for the year Total equity Subordinated liabilities Perpetual subordinated loans Technical provisions (gross) Provision for life insurance Note Provision for claims outstanding Note Technical provisions for life insurance for which the policyholders bear the risk Conditional bonus Note Unit-linked commitments Note Provisions for other risks and charges Provisions for taxes Note Deposit from reinsurers Liabilities Liabilities referring to reinsurance Derivatives Note Other liabilities Note Accrued expenses and deferred income Other accrued expenses and deferred income Note Total equity, provisions and liabilities Memorandum items Pledges and comparable collateral pledged for own liabilities and for commitments reported as provisions Assets registered on behalf of policyholders Other pledged assets and comparable collateral Other commitments Note Perpetual subordinated loans, Provision for life insurance, Conditional bonus, and Unit-linked commitments have a maturity of more than one year. Other items mature within one year. 9

12 Statement of changes in equity Statement of changes in equity Restricted equity Non-restricted equity Share capital Statutory reserve Other restricted reserves Profit brought forward Profit for the year Total Closing balance 31 Dec Opening balance 1 Jan Appropriation of profits Change in translation differences Transfer between other restricted reserves and profit brought forward Profit for the year Total change before transactions with the owners Dividend contribution received - Shareholder contribution received - Total transactions with the owners Closing balance 31 Dec Opening balance 1 Jan Appropriation of profits Change in translation differences 5 5 Transfer between other restricted reserves and profit brought forward - Profit for the year Result adjustment Total change before transactions with the owners Dividend - contribution received - Shareholder contribution received Total transactions with the owners Closing balance 31 Dec In 2008, a shareholder contribution was received from Svenska Handelsbanken AB in order to transfer the portfolio in Handelsbanken Life & Pension Ltd. The transfer between restricted reserves and profits brought forward in 2007 is due to the reversal of untaxed reserves resulting from the sale of Handelsbanken Varumärkes AB. Other restricted reserves are in their entirety the translation reserve arising in conjunction with conversion of foreign subsidiaries and their branches. 10

13 Statement of changes in equity Share capital Restricted equity Statutory reserve Other restricted reserves Profit brought forward Non-restricted equity Profit for the year Total Closing balance 31 Dec Opening balance 1 Jan Appropriation of profits Change in translation differences 6 6 Transfer between other restricted reserves and profit brought forward Profit for the year Total change before transactions with the owners Dividend contribution received - Shareholder contribution received - Total transactions with the owners Closing balance 31 Dec Opening balance 1 January Appropriation of profits Change in translation differences -4-4 Profit for the year Result adjustment 1 1 Total change before transactions with the owners Dividend - contribution received - Shareholder contribution received Total transactions with the owners Closing balance 31 Dec In 2008, a shareholder contribution was received from Svenska Handelsbanken AB in order to transfer the portfolio in Handelsbanken Life & Pension Ltd. Other restricted reserves are in their entirety the translation reserve arising in conjunction with conversion of foreign branches of the parent company. 11

14 Cash flow statement Cash flow statement OPERATING ACTIVITIES Operating profit before tax Adjustment for items in the operating result which do not affect the cash flow: Depreciation, amortisation and impairments Unrealised gains/losses on investments Paid income tax Change in the assets and liabilities of operating activities: Investment assets Conditional bonus Provisions for life insurance Unit-linked assets Unit-linked commitments Other Cash flow from operating activities INVESTING ACTIVITIES Divestment of subsidiary Investment in property and equipment Investment in intangible non-current assets Cash flow from investing activities FINANCING ACTIVITIES 3 Shareholders contribution Dividend paid contribution - - Cash flow from financing activities Cash flow during the period Liquid funds at beginning of period Note Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Liquid funds at end of period Liquid funds comprise cash and bank balances. 1 Divestment of subsidiary Divested assets and liabilities Intangible fixed assets Investment assets - 0 Investments for which the policyholders bear the investment risk Receivables - 8 Other assets Prepaid expenses and accrued income Total assets Technical provisions (gross) Technical provisions for life insurance for which the policyholders bear the risk - 0 Provisions for taxes Liabilities Accrued expenses and deferred income - 7 Total liabilities Selling price Surplus/deficit Divested subsidiaries in 2007 refers to Handelsbanken Varumärkes AB and Handelsbanken Life & Pension Ltd. 2 Investment assets Buildings and land Note Shares and participating interests Note Bonds and other interest-bearing securities Note Derivatives Note Other financial assets Note Net investment assets Financing activities Dividend received - - Dividend to shareholders Shareholder s contribution Total Information concerning interest paid and received Interest received during the period Interest paid during the period Total In addition to paid income tax of SEK 48m (83), SEK 407m (356) has been paid in and out for yield tax. See note 38, Taxes. 12

15 Notes Notes Note 1 Accounting policies This annual report is issued as at 31 December The parent company follows the provisions of the Swedish Annual Accounts Act for Insurance Companies and the instructions and general guidelines regarding the annual accounts of insurance companies issued by the Swedish Financial Supervisory Authority (FFFS 2006:17). FFFS 2006:17 implies that the Swedish Accounting Standards Board s recommendation no. 32 and international accounting standards have been applied with certain limitations (statutory IFRS). Handelsbanken Liv applies the same accounting policies in the parent company as in the. The financial reports are presented in the s functional currency, which is Swedish kronor. Amounts are rounded off in SEK million. The annual accounts and the consolidated annual accounts were authorised for publication by the board on 16 April The s income statement and balance sheet and the parent company s income statement and balance sheet will be presented for adoption at the annual general meeting on 16 April The accounting policies presented below have been applied consistently for all periods presented in the financial reports unless otherwise stated. BASIS OF VALUATION The insurance company s functional currency is Swedish kronor and the financial reports are presented in Swedish kronor. Unless otherwise stated, all amounts are rounded off to the nearest million. Assets and liabilities are recognised at cost, except for certain financial assets and liabilities which are recognised at fair value. Financial assets and liabilities at fair value comprise derivative instruments, financial assets classified as financial assets at fair value in profit or loss or as available-for-sale financial assets, financial assets in unit-linked insurance and real estate. IMPORTANT ESTIMATES AND ASSUMPTIONS The assumptions used when calculating the technical provisions have the most significant effect on the amounts presented in the financial statements. When calculating technical provisions, assumptions are made concerning interest rates, mortality, morbidity, taxes, charges and other measurements of risk that affect the valuation. Changes in these assumptions may affect existing provisions and the company s reported profit. A more detailed description of these risks is given in note 2 Risks and risk control. ACCOUNTING FOR INSURANCE CONTRACTS AND FINANCIAL CONTRACTS Contracts that include significant insurance risk are classified in the consolidated accounts and in the parent company as insurance contracts. Insurance risk is considered to be significant if the event insured, in any scenario that is of commercial substance for the, entails an obligation to pay compensation that is significant in comparison with the compensation that would have been paid if the insured event had not taken place. Contracts that do not transfer significant insurance risk are classified as investment contracts. All insurance products are constructed so as to make it simple to distinguish between the insurance and savings components. The financial components of the contracts are disclosed separately from the insurance components. Handelsbanken Liv recognises payments in and out referring to customers savings assets directly in the balance sheet. The risk component is normally valued using the risk-taking in the premium calculation and is therefore zero. If there is reason to use assumptions which deviate from the assumptions used in the premium calculation, a special provision is made for the risk component. In this way, the statutory accounting is closer to the alternative income statement (see page 5) which Handelsbanken Liv has used for a long time for internal and external communication purposes to achieve better understanding of how the result has arisen. The alternative income statement is already used as the basis for how the insurance operations are reported in the parent company, Handelsbanken s, consolidated accounts. ACCOUNTING FOR ACQUISITION COSTS Commissions paid to branch offices are reported as acquisition costs where the main part is annual commission on the insurance assets. Deferred acquisition costs do no arise due to sales via branch offices. CONSOLIDATED ACCOUNTS The consolidated accounts include all companies in which Handelsbanken Liv directly or indirectly has a decisive influence. A controlling influence normally exists when the holding amounts to more than 50% of the voting rights. The consolidated accounts have been prepared in accordance with the acquisition accounting method. When acquiring subsidiaries, identifiable assets, liabilities and contingent commitments are recognised at fair value on the acquisition date. The part of the acquisition cost that exceeds the fair value of identifiable net assets is recognised as goodwill. If the acquisition cost is lower than the fair value of identifiable net assets, the difference is recognised as income in the income statement. 13

16 Notes When transferring a company or business operations within the same, the consolidated book values are used for the transfer. If the sales price in such a transfer differs from the consolidated book values, the difference is recognised as profit or loss in the income statement. All foreign operations have activities that could cause their functional currency to deviate from the currency that the uses for reporting. Salary payments and purchases are normally made in local currency. When translating the foreign subsidiaries balance sheets and income statements, the current method has been used. Assets and liabilities are translated at the closing day rate. Shareholders equity is translated at the exchange rate on the date of investment or earning respectively. The income statement has been translated at the average annual rate. The resulting translation differences have been classed as shareholders equity. INTANGIBLE ASSETS Investments in software developed in-house are carried as an expense on a current basis where the expenditure refers to maintenance of existing business operations or an existing intangible asset. For development of new intangible assets, or new business operations for existing intangible assets, the costs accrued are capitalised from the time when it is probable that economic benefit that can be reliably measured will arise. An impairment test is performed when there is any indication that the asset may have decreased in value. In addition, in cases where the intangible asset has an indefinite useful life, an annual impairment test is performed at the same point in time each year. FINANCIAL INSTRUMENTS Financial instruments recognised as assets are cash and bank balances, shares and participating interests, interest-bearing securities, derivatives, other financial assets, unit-linked insurance assets, other assets and accrued interest income. Financial instruments recognised as liabilities are subordinated loans, derivatives, unit-linked commitments and other liabilities. At the time of initial recognition, financial assets and liabilities have been classified on the basis of the purpose for which the instrument was acquired. The classification is presented in note 5, Classification of financial assets and liabilities. Financial assets at fair value through the income statement This category comprises two sub-groups: held-for-trading financial assets and other financial assets that the company has initially decided to place in this category (according to what is called the fair value option). Financial instruments in this category are measured on a regular basis at fair value with value changes recognised in profit/loss. The first sub-group contains derivatives with a positive fair value. The second sub-group contains all other investment assets except for investments in group companies. Handelsbanken Liv s principle is to group all investment assets that are financial instruments and that are not shares in subsidiaries or associated companies in the Financial assets at fair value category via profit/loss. This is partly because the company continually evaluates the asset management operations on the basis of fair values and partly because where interest-bearing assets are concerned, this reduces some of the inconsistency and volatility in accounting terms that would otherwise arise when life insurance technical provisions are continuously evaluated. Loans and customer receivables Loans and customer receivables are financial assets that are not derivatives, and which have payment flows that are established or can be established and that are not listed on an active market. These assets are recorded at the amortised cost. The amortised cost is determined on the basis of the effective rate of interest calculated at the initial time of acquisition. Customer and loan receivables are recognised at the amount that is expected to be received, i.e. after a deduction for bad debts. Financial liabilities at fair value through profit/loss This category comprises two sub-groups: held-for-trading financial liabilities and financial liabilities that upon initial recognition were identified as belonging to this category. The first sub-category includes the insurance company s derivatives with a negative fair value. The second sub-category includes unit-linked commitments. Changes in fair value are recognised in profit or loss. Handelsbanken Liv s principle is to include all unit-linked commitments in the category of financial liabilities at fair value in profit/loss in those cases where the contracts are classified as investment contracts (see also the section on insurance contracts) and that do not contain the right to a discretionary portion (bonus). This is because this approach eliminates a mismatch in the accounting that would other arise due to the linked assets being measured at fair value. The Swedish Financial Supervisory Authority s directives FFFS 2006:17 also require that these commitments are measured at fair value. Other financial liabilities Funding and other financial liabilities such as accounts payable are included in this category. The liabilities are measured at amortised cost. RECOGNITION AND MEASUREMENT OF INVESTMENT ASSETS All investment assets, apart from investments in group companies, are measured at fair value. This means that changes in value, both realised and unrealised, are recognised in profit or loss under the headings Investment income (realised gains and losses) and Unrealised gains/losses on investments. Realised profits and losses are included in investment income. Investments in group companies are measured at amortised cost. Unlisted shares are valued according to the EVCA s principles (European Private Equity and Venture Capital Association). Derivative transactions with a positive market value on the closing date are reported under Investment assets, and transactions with a negative market value are reported under Liabilities. Purchases and sales of money market and capital market instruments on the spot market are subject to trade date accounting. When investments are measured at fair value, deferred tax is calculated on the part of operations subject to income tax. As far as possible official prices are used for valuing instruments listed on a market. 14

17 Notes VALUATION OF ASSETS AND LIABILITIES IN FOREIGN CURRENCY Assets and liabilities in foreign currency are valued at the closing-day rate. Provisions Provisions are reported as a consequence of past events when it is probable that an outflow of resources will be required to settle the obligation. The provision is recorded in the amount estimated to be most probable, taking into account the time of settlement. Technical provisions are described separately. Income Income is reported in the income statement when it is probable that future economic benefits will be gained and these benefits can be reliably measured. Premiums written Reported as premiums written are premiums and premium fees regarding risk for those contracts that are classified as insurance contracts according to IFRS 4. Other technical income Other types of income in the insurance operations are reported here. Capital fees and other fees (not tax) are included as other income. Fees which are charged to the customers for investment contracts are recognised as income at the pace the company provides the services. This occurs evenly distributed over the life of the contracts. Claims incurred Risk costs regarding contracts that are classified as insurance according to IFRS 4 are reported as claims incurred. Changes in other technical provisions This item reports allocated yield referring to insurance with a guaranteed rate of interest and unit-linked insurance as well as the change in provisions for surplus premiums. Other technical expenses Amortisation of intangible assets is reported here. Depreciation, amortisation and impairment of property and equipment and intangible assets Depreciation and amortisation All assets that have been classified as property and equipment are depreciated over an estimated useful life. A linear depreciation plan is applied. The material assets that consist of components with different set periods of useful life are divided into different categories with separate depreciation plans. Normally this only applies to properties. Personal computers are depreciated over three years and other equipment over five years. Intangible assets are divided into two categories. The first category applies to assets for which it is possible to assess a useful period. These are amortised over this set period of useful life. The other category involves intangible assets for which it is not possible to establish a definite useful life. These are not amortised. Instead, they are subject to annual impairment testing. Intangible assets for which it is possible to establish an estimated useful life are amortised. Normally the useful life does not exceed five years. Brand names are normally regarded as having a very long useful life, and thus the amortisation period can be considerably longer. The same applies to customer contracts in the insurance business. The amortisation period is tested on an individual basis at the time of new acquisition and also on a continuous basis if there are indications that the useful life period may have changed. Impairment losses This section describes the criteria applied to write-downs/amortisation of property, equipment and intangible assets as well as shares in subsidiaries, associated companies and any participation in joint ventures. Impairment losses are recognised when the recovery value is less than the carrying amount. The recovery value is calculated as the higher of an asset s value in use or net realisable value. The recovery value is determined when there is an indication that the asset has fallen in value. NON-TECHNICAL ACCOUNT Investment income that does not come from the return on assets managed on behalf of the policyholders is reported in the nontechnical account. Taxes The company pays standard policyholder tax on the assets managed on behalf of policyholders. Tax charges paid from the insurance to cover the yield tax are reported in the income statement under Tax on the year s profits, see note 38, Taxes. The return on equity and result from risk insurance are taxed at the normal corporation tax rate of 28 percent. Deferred tax is tax referring to temporary differences between the value of an asset or liability in the accounts and its taxable value. LAND AND BUILDNINGS All Handelsbanken Liv s properties have been classified as operating properties. In accordance with the Annual Accounts Act, Handelsbanken Liv has opted to account for the properties in the same way as investment properties. This means that the properties are recognised at fair value and that the value changes are reported in the income statement. Income and expense from properties are reported under investment income in the income statement. Land and buildings are valued individually taking cash flows into account. Valuations are conducted by external valuers. PROVISIONS FOR LIFE INSURANCE Liabilities related to insurance with a guaranteed rate of interest are calculated for each policy as the higher of the insurance capital and amortised cost. The amortised cost is calculated at the contracted, guaranteed rate of interest. In addition, the amortised cost is affected by yield tax, charges, mortality and other risk measurements. The guaranteed interest rate and all assumptions are agreed on when the policy is taken out. The company has different guaranteed interest rates in its portfolio, of which three percent and five percent are the predominant rates. 15