Annual Report Topdanmark A/S Reg.No

Transcription

1 Annual Report 2011 Topdanmark A/S Reg.No

2 Share profile The Topdanmark share is a value case not a growth case Focused strategy ydanish player ystable insurance risks ylow expense ratio ylimited financial risk yefficient capital management ylimited top line growth yprofitable growth - in that order yhigh net result ylarge share buy-back programme yno protection against a take-over in the Articles of Association Read more about Topdanmark s equity story on Share profile.

3 Topdanmark's Annual Report 2011 Topdanmark Annual Report March 2012 Announcement No. 02/ Key features 2011 Post-tax profit of DKK 1,023m (2010: DKK 1,168m). Better than assumed result as most recent profit forecast model for 2011 was DKK 900-1,000m (Q1- Q interim report). Profit per share was DKK 74.4 (2010: DKK 77.2). Combined ratio improved to 90.3% (2010: 93.3%). 1.5pp of the improvement was due to lower weatherrelated claims. Combined ratio excluding run-off profits improved to 92.0% (2010: 95.7%). Premiums increased 1.4% in non-life insurance but declined 2.7% in life insurance. Investment return declined to DKK 622m (2010: DKK 879m) Result of life insurance was DKK 187m after transfer of DKK 114m to shadow account (2010: DKK 384m after recognition as income of shadow account balance of DKK 144m). Topdanmark bought back own shares of DKK 1,159m. Buy-back programme was DKK 1,200m; consequently DKK 41m transferred to the 2012 programme. Q Post-tax profit of DKK 350m (Q4 2010: DKK 488m). Combined ratio increased to 89.6% (Q4 2010: 89.2%). Combined ratio excluding run-off profits improved to 91.5% (Q4 2010: 93.2%). Premiums increased 2.3% in non-life insurance and 16.4% in life insurance. Profit forecast model for 2012 Assumed combined ratio for 2012 continues at 91-92%, excluding run-off profits / losses. Assumed premium growth in non-life insurance continues at 1-2%. Capital Forecast for necessary solvency capital on change to Solvency II raised from DKK 4.5bn to DKK 4.7bn, primarily due to lower interest rates. In a webcast today Topdanmark's CEO, Christian Sagild, presents the financial highlights and comments on the forecast. A conference call will be held today at 15:30 (CET) when Christian Sagild, CEO, and Lars Thykier, CFO, will be available for questions based on the Annual Report and the webcast. The call will be conducted in English. In order to participate in the conference call, please phone: UK dial in number: +44 (0) US dial in number: quoting reference minutes before the conference asking the operator to connect you to the Topdanmark conference call or listen to the live transmission of the call. Please direct any queries to: Christian Sagild Chief Executive Officer Direct tel.: Lars Thykier Chief Financial Officer Direct tel.: Steffen Heegaard Head of IR and Group Communications Direct tel.: , mobile: Post-tax profit forecast model is DKK 1,150-1,250m, excluding run-off profits / losses, being DKK 90 profit per share. Share buy-back programme is DKK 1,300m; a 10.6% yield. Page 1 of 109

4 Topdanmark's Annual Report 2011 Contents Management s review key features 3 Financial highlights 4 Profit of DKK 1,023m in Non-life insurance 11 Life insurance 14 Investment activities 16 Parent company etc. 16 Taxation 16 Prospects for Share buy-back 19 Value creation in Topdanmark 21 Risk management 32 Solvency 34 Capital model 35 The process of accounts preparation 36 Corporate Governance 41 Remuneration structure 43 CSR 43 Investor Relations 45 Annual General Meeting 45 Financial calendar 46 List of company announcements and trading reports 47 Board of Directors and Board of Management 51 Five-year summary - Group Annual accounts - Group 52 Profit and loss account 53 Statement of comprehensive income 54 Assets 55 Shareholders' equity and liabilities 56 Cash flow statement 57 Movements in shareholders' equity 58 Notes to the accounts 86 Accounting policies 97 Annual accounts - Parent company 105 Disclaimer 106 Statement by Management on the Annual Report Auditors' reports 107 Internal auditor's report 108 Independent auditor's report 109 Group Structure Page 2 of 109

5 Topdanmark's Annual Report 2011 Financial highlights Q4 Q4 (DKKm) Premiums earned: Non-life insurance 8,883 8,952 8,665 8,548 8,668 2,153 2,201 Life insurance 3,556 3,980 3,208 3,395 3, ,439 12,932 11,873 11,943 11,971 2,984 3,169 Results: Non-life insurance 1, ,592 1,092 1, Life insurance 50 (57) Parent company etc. 27 (58) (21) Pre-tax profit / (loss) 1,657 (24) 1,863 1,506 1, Tax (386) (165) (417) (338) (326) (117) (106) Profit / (loss) 1,271 (189) 1,446 1,168 1, Shareholders' equity of parent company at 1 January 4,366 3,716 3,243 4,465 4,900 4,594 4,738 Profit 1,271 (189) 1,446 1,168 1, Share buy-back (2,026) (371) (376) (892) (1,159) (210) (186) Share-based payments Other movements in shareholders' equity Shareholders' equity of parent company end of period 3,716 3,243 4,465 4,900 4,915 4,900 4,915 Deferred tax on security funds (348) (348) (348) (348) (348) (348) (348) Shareholders' equity of Group end of period 3,368 2,895 4,117 4,553 4,567 4,553 4,567 Capital base, parent company*) 4,118 3,645 4,868 5,305 5,319 5,305 5,319 Total assets, parent company 4,826 4,819 5,467 5,712 6,408 5,712 6,408 Total assets, Group 44,645 52,035 56,554 57,542 61,013 57,542 61,013 Provisions for insurance and investment contracts: Non-life insurance 13,314 13,685 14,478 15,139 16,228 15,139 16,228 Life insurance 25,093 24,938 28,882 31,166 30,618 31,166 30,618 Financial ratios (parent company) Post-tax profit / (loss) as a % of shareholders' equity 31.2 (5.6) Post-tax profit / (loss) per share (DKK) 75.0 (12.1) Post-tax profit / (loss) per share, diluted (DKK) 73.3 (12.1) Net asset value per share (DKK) Share buy-back per share (DKK) Listed share price end of period Average number of shares ('000) 16,948 15,640 15,688 15,131 13,741 14,561 13,448 Average number of shares, diluted ('000) 17,351 15,640 15,769 15,159 13,746 14,583 13,448 Number of shares end of period ('000) 15,995 15,663 15,496 14,472 13,332 14,472 13,332 Ratios non-life insurance (%) Gross loss ratio Net reinsurance ratio (3.6) Claims trend Gross expense ratio Combined ratio Operating ratio *) Shareholders' equity and loan capital Page 3 of 109

6 Topdanmark's Annual Report 2011 Profit of DKK 1,023m in 2011 Topdanmark s post-tax profit for 2011 was DKK 1,023m (2010: DKK 1,168m) representing a profit per share of DKK 74.4 (2010: DKK 77.2). This was better than the DKK 900-1,000m assumed in the most recent profit forecast model for 2011 (Q1-Q report) due to both the technical result of non-life insurance and the life insurance result being better than assumed. Comparison between actual results and profit forecast model results Actual Forecast for 2011 Actual results for as in Q1-Q3 results for (DKKm) 2010 interim report 2011 Non-life insurance - Technical result Investment return after transfer to technical result etc Profit on non-life insurance 1, ,070 1,086 Life insurance Parent company etc Pre-tax profit 1,506 1,180 1,320 1,349 Taxation (338) (280) (320) (326) Profit for the year 1, ,000 1,023 Pre-tax profit was DKK 1,349m (2010: DKK 1,506m). The technical result increased DKK 281m to DKK 907m benefitting from weather-related claims being DKK 125 lower than the 2010 level but adversely affected by run-off profits being DKK 56m lower than in The investment return in non-life insurance declined DKK 286m due to the generally more adverse financial markets than in Profit on life insurance declined by DKK 197m because the developments in the financial markets caused a DKK 114m transfer to the shadow account whereas in 2010 DKK 144m was transferred from the shadow account. The result of the parent company etc. increased DKK 45m due to higher earnings in Topdanmark Kapitalforvaltning (asset management). Trend in pre-tax result (DKKm) Non-life insurance - Technical result Investment return after transfer to technical result etc Profit on non-life insurance 1,092 1,086 Life insurance Parent company etc Pre-tax profit 1,506 1,349 Profit of DKK 350m in Q Post-tax profit was DKK 350m in Q (Q4 2010: DKK 488m) which was somewhat better than assumed in the profit forecast model for 2011 in the Q1-Q report (Q4 2011: DKK m). As described above, the improvement was due to both the technical result and the life insurance result being better than assumed. Page 4 of 109

7 Topdanmark's Annual Report 2011 Pre-tax profit was DKK 457m (Q4 2010: DKK 605m). Although weather-related claims increased DKK 39m and run-off profit declined DKK 45m from Q4 2010, the underlying technical result declined only DKK 4m to DKK 236m in Q primarily due to a favourable underlying trend in the SME and agricultural sector. The investment return increased DKK 1m to DKK 138m. Profit on life insurance declined DKK 121m to DKK 69m. In 2010 the investment return was high enough to include in income both the risk allowance and the shadow account balance of the DKK 144m. In Q it was possible to include in income the risk allowance in Life V while the risk allowance of DKK 27m in Life I was transferred to the shadow account. Most major insurance companies in the Danish market implemented extraordinary price increases in 2010 and 2011, particularly on house, contents and SME policies. Subsequently, a number of small and medium-sized insurance companies announced price increases during the year. It is believed that these price increases will have a positive effect of about 1pp on both gross premiums earned and the combined ratio. Automatic price indexation in the personal and SME market was 2.6%, which is estimated to have an effect of around 1.5% on all insurance products. Furthermore, there was also the 1pp effect of the price increases. On the other hand, the recession and price pressure in particularly the industrial market had an adverse impact on premiums. Overall it is believed that the growth in gross premiums earned by the market was 1-2%. The result of the parent company etc. declined DKK 25m to DKK 13m in Q due to an interest rate compensation of DKK 25m in 2010 relating to taxation. Trend in pre-tax result Q4 Q4 (DKKm) Non-life insurance - Technical result Investment return after transfer to technical result etc Profit on non-life insurance Life insurance Parent company etc Pre-tax profit Non-life insurance Danish non-life insurance market Key features of the Danish non-life insurance market in 2011: Price increases Premium growth of 1-2% Weather-related claims Retirement reform Increase in payroll tax Decline in interest rates Generally improved claims trend in motor insurance etc. It is estimated that the overall combined ratio for the Danish market was around 96% in The claims trend in the Danish market in 2011 was affected by storm claims in Q1 and Q4 of approximately DKK 500m which was not reimbursed by the reinsurance companies. The claims trend was also affected by rainstorm claims in Q3 of just over DKK 5bn before reinsurance cover and DKK 1bn after cover from the reinsurance companies. Claims in Q were particularly affected by an isolated rainstorm which hit central Copenhagen on 2 July was impacted by extraordinarily large snow loading and rainstorm claims and for the entire Danish non-life insurance market it is believed that the 2011 level of weather-related claims was unchanged from that in The payroll tax for all financial businesses increased from 9.1% to 10.5% of payroll expenses, which caused a deterioration in the combined ratio of around 0.2pp. As provisions for outstanding claims are discounted to present value, lower interest rates will increase the claims trend. The decline in interest rates in 2011 had only a marginal effect on the combined ratio in 2011 because most of the decline was seen at the end of the year and average rates were similar to those in benefitted from a generally better claims trend in, for example, motor insurance and as a consequence of the mild winter in Q4. It is believed that the overall combined ratio excluding any run-off profits / losses for the entire market in 2011 was around 96. However, the combined ratio for each company differs significantly. Generally, the combined Page 5 of 109

8 Topdanmark's Annual Report 2011 ratio for major companies was lower than the average whereas the combined ratio for small and medium-sized companies was higher. Result of non-life insurance in Topdanmark Premiums earned Premiums increased 1.4% to DKK 8,668m in 2011, which was in line with the assumed premium growth of 1-2% (as in the Q1-Q interim report). Premiums benefitted 1.7pp from automatic price indexation and 1.1pp from price increases. Furthermore, in 2011 premiums benefitted from a lower level of negative premium adjustments for the previous year than in 2010 corresponding to a positive effect of 0.3pp. As announced in the 2010 Annual Report Topdanmark sold the portfolio of Nykredit Arbejdsskadeforsikring (workers' compensation insurance) to Gjensidige Forsikring with effect from 1 January 2011 having a 0.4pp adverse effect on premiums. It was also announced in the 2010 Annual Report that one large customer had given notice to terminate its relationship with the life insurance company and that the customer would also reduce its portfolio of illness / accident policies administered by life insurance (I/A). The loss of this portfolio had a 0.4pp adverse effect on premiums. Claims trend The claims trend improved to 74.6% in 2011 (2010: 77.9%) This 3.3pp improvement was a combination of a number of factors: Weather-related claims declined to DKK 285m net of reinsurance in 2011 (2010: DKK 410m) corresponding to 1.5pp. In 2010 Denmark was extraordinarily hard hit by weather-related claims such as snow loading, rainstorm and frost-related claims. On 2 July 2011 the Copenhagen area was hit by a massive rainstorm causing Topdanmark gross claims of around DKK 680m. Topdanmark's retention is DKK 50m and the reinstatement premium was around DKK 65m. Overall expenses relating to the rainstorm on 2 July were therefore around DKK 115m. Besides this significant rainstorm there were a number of smaller claims due to lightning strikes and rainstorms totalling DKK 25m. In Q1 and Q4 Topdanmark was hit by storm claims of DKK 70m and DKK 69m respectively, net of reinsurance. Price increases improved the claims trend by 0.8pp. The claims trend in motor insurance improved 0.6pp due to, among other factors, the mild winter of Q4. In general the claims trend improved in both SME / agricultural and personal areas with a 0.5pp and 0.3pp positive effect, respectively, on the claims trend. The claims level in I/A before run-off was relatively low which, seen in isolation, improved the claims trend by 0.4pp. The abovementioned premium adjustments for previous years were DKK 31m lower than the 2010 level which improved the claims trend by 0.2pp. The interest rate curve used to discount the provisions for outstanding claims was slightly higher than in 2010 which improved the claims trend marginally by 0.1pp. Page 6 of 109

9 Topdanmark's Annual Report 2011 Run-off profits were DKK 148m in 2011 (2010: DKK 204m). As compared to 2010 run-off profits had a 0.7pp adverse effect on the claims trend. Run-off profits in workers' compensation insurance represented DKK 130m of run-off profits in Workers' compensation insurance had a 0.5pp adverse effect on the claims trend due to the retirement reform and an increase in the number of reported claims. Fire claims, before reimbursement from the reinsurance companies, increased DKK 78m due to an increase in large-scale claims in SME and Industrial, in particular the fire in the KB Hall in Q3 which caused claims estimated to be DKK 95m gross and DKK 25m after reimbursement from the reinsurance companies. Fire claims after reimbursement from the reinsurance companies had a 0.3pp adverse effect on the claims trend. Expense ratio (combined ratio) improved to 90.3% (2010: 93.3%); The expense ratio increased to 15.7% (2010: 15.4%) due to, among other factors, investment in increased market pressure and the increase in payroll tax from 9.1% to excluding run-off profits the combined ratio improved to 92.0% (2010: 95.7%). 10.5% with effect from 1 January Weather-related claims of the year had a 3.3pp effect on the claims trend which was 1.3pp higher than a normal Combined ratio Overall expenses on claims, reinsurance, sales and administration as a percentage of gross premiums earned level of DKK 170m. Accordingly, the underlying combined ratio was 90.7% (2010: 92.7%) excluding run-off profits. Page 7 of 109

10 Topdanmark's Annual Report 2011 Financial highlights Non-life insurance Q4 Q4 (DKKm) Gross premiums earned 2,153 2,201 8,548 8,668 Technical interest Claims incurred (1,464) (1,587) (6,456) (6,773) Expenses (350) (351) (1,320) (1,365) Net reinsurance (106) (35) (204) 312 Technical profit Investment return after transfer to technical result Other items Profit on non-life insurance ,092 1,086 Run-off profits, net of reinsurance Gross loss ratio (%) Net reinsurance ratio (%) (3.6) Claims trend (%) Gross expense ratio (%) Combined ratio (%) Operating ratio (%) Developments in Q4 Premiums earned in Q increased 2.3% to DKK 2,201m. The claims trend deteriorated 0.8pp to 73.7% in 2011 (2010: 72.9%) due to an increase in weather-related claims (1.8pp) and lower run-off profits (2.1pp). On the other hand SME and Agricultural were hit by only a few large-scale claims which together with fewer fire claims helped improve the claims trend by 2.8pp. Furthermore, the mild winter weather in Q caused fewer traffic accidents which had a 0.5pp favourable effect on the claims trend. Two storms in Q4 caused total claims of DKK 69m. In Q weather-related claims were DKK 30m. Page 8 of 109

11 Topdanmark's Annual Report 2011 The expense ratio declined to 15.9% in Q (Q4 2010: 16.3%). The combined ratio was 89.6% this quarter (Q4 2010: 89.2%). Excluding run-off profits it improved to 91.5% (Q4 2010: 93.2%). Segment reporting Personal The Personal segment sells policies for individual households in Denmark. Premiums earned increased 0.8% to DKK 4,756m in 2011 and in Q4 growth was 0.9%. On the one hand growth was affected by the price increases implemented in house and contents insurance and on the other hand lower sales through banks. Furthermore, it was affected by a decline in premiums earned in I/A due to the termination of the major customer relationship referred to above. Sales through Topdanmark's own sales channels increased 5.2% from 2010 even though H2 was adversely affected by the change in the decentralised sales organisation from insurance outlets to larger sales centres - a change which is expected to increase market pressure in the future. Competition is severe, particularly in motor insurance. Premiums earned declined 2.8pp due to both competition and a general trend towards more small cars. The technical result increased DKK 31m to DKK 501m in The claims trend improved 1.3pp to 74.4% in spite of the rainstorm in July which had a 1.0pp adverse effect on the claims trend. Price increases improved the claims trend by 1.5pp while the remaining improvement was seen in motor and I/A insurance. Run-off profits were DKK 23m in 2011 (2010: DKK 173m) which had a 3.2pp negative effect on the claims trend as compared to The run-off result in 2011 was a combination of a loss on I/A and profits on, for example, accident and unemployment insurance. Page 9 of 109

12 Topdanmark's Annual Report 2011 The expense ratio increased to 15.8% from 15.0% due to expansion of the sales team and the increase in pay-roll tax at 1 January The combined ratio improved to 90.2% from 90.7%. Excluding run-off it improved to 90.7% from 94.3%. Personal Q4 Q4 (DKKm) Gross premiums earned 1,199 1,210 4,720 4,756 Technical interest Claims incurred (822) (903) (3,585) (3,762) Expenses (190) (197) (708) (753) Net reinsurance (39) Technical result Run-off profits, net of reinsurance Gross loss ratio (%) Net reinsurance ratio (%) 3.2 (0.0) (0.3) (4.7) Claims trend (%) Gross expense ratio (%) Combined ratio % Operating ratio (%) SME and Industrial The SME and Industrial segment offers policies for Danish-based SME, agricultural and industrial businesses. Premiums earned increased 2.2% to DKK 3,934m and in Q4 they increased 4.1%. This improvement was due to one new large customer, a small decline in customer losses and fewer negative premium adjustments than in extraordinary winter claims as in On the other hand the claims trend was affected by rainstorm claims in Q3 and the fire in the KB Hall in Q3 (DKK 25m after reimbursement from the reinsurance companies.) Fire claims in Q4 were 16.5% lower than in the same period in Run-off profits were DKK 125m in 2011 (2010: DKK 31m) giving a 2.4pp positive impact on the claims trend. This run-off profit relates primarily to workers' compensation. The technical result increased DKK 249m to DKK 403m in The claims trend improved 5.9pp to 74.9% primarily due to a favourable agricultural claims trend with no The expense ratio declined 0.3pp to 15.6%. The combined ratio improved to 90.5% in 2011 (2010: 96.7%). Excluding run-off profits it declined to 93.7% (2010: 97.5%.) Page 10 of 109

13 Topdanmark's Annual Report 2011 SME and Industrial Q4 Q4 (DKKm) Gross premiums earned ,849 3,934 Technical interest Claims incurred (647) (689) (2,892) (3,034) Expenses (160) (155) (613) (614) Net reinsurance (67) (35) (217) 86 Technical result Run-off profits, net of reinsurance Gross loss ratio (%) Net reinsurance ratio (%) (2.2) Claims trend (%) Gross expense ratio (%) Combined ratio % Operating ratio (%) Life insurance Danish life and pension market In 2011 the Danish life and pension market was characterised by: Decline in payments into pension savings due to the financial crisis and limitations on deductibility Increase in competition between insurance brokers and insurance companies Historically low interest rates for with-profit schemes Introduction of a new discount rate curve being directly served by pension fund companies not using insurance brokers to regularly service the schemes. In the past year the life and pension market was also affected by very low interest rates which challenged the guarantees and were one of the reasons why in 2011 a number of companies were compelled to lower their interest rates for with-profit schemes to an historically low level. After many years experience of a continued increase in payments made into pension savings, in 2010 and 2011 the market was characterised by a decline in payments, primarily due to the consequences of the rules which were introduced in 2009 limiting the deductibility of payments into term life insurance and terminable annuities to DKK 100,000. This both intensified competition in the market and increased the focus on costs, product alignments etc., which, among others, resulted in several companies reducing their indirect expenses on pension schemes. Competition between insurance brokers and insurance companies has also intensified. The market served by brokers has moved from large and medium-sized corporate pension schemes increasingly to also smaller pension schemes which previously were rarely served by brokers. At the same time there has been a trend that the largest corporate pension schemes in the market were In December 2011 the DFSA introduced a new discount rate curve, where the inclusion of the interest rate spread between Danish and German zero coupon rates is based on a 12-month moving average. It is believed that virtually all life insurance and pension fund companies have changed to the new curve. The decision to use this new interest rate curve adjusted for country spreads is binding until Solvency II takes effect. Result of life insurance Topdanmark's result from life insurance was a profit of DKK 187m in 2011 (2010: DKK 384m). Profit on life insurance activities comprises the sum of the profits generated by Life I and Life V plus the financing result of Life Holding. These profits were calculated in accordance with the stated policy on the calculation of profit for the life insurance companies, see Investor Business Life insurance Policy for the calculation of profit in life insurance. Page 11 of 109

14 Topdanmark's Annual Report 2011 Result of life insurance (DKKm) Life I Life V Group Life I Life V Group Investment return Risk allowance Transferred, shadow account (112) (2) (114) Other Profit on life insurance Shadow account end of period Most of the customers are spread across the three companies, Life I, Life V and Link. Policies written since 1 July 1994 with guaranteed pension benefits of 2.5%, 1.5% and 0.5% are placed in Life I which is also the company for new customers with guaranteed benefits. Unit-linked schemes are written by Topdanmark Link. Schemes written before 1 July 1994 with guaranteed pension benefits of 4.5% are placed in Life V. The decline in profit to DKK 187m in 2011 (2010: DKK 384m) was primarily due to the recognition as income of DKK 144m from the shadow account in 2010 whereas in 2011 DKK 114m was transferred to the shadow account. The balance of the shadow account will be recognised as income in line with profits being generated in those contribution groups which have made transfers to the shadow account. Trend in premiums Gross premiums declined 2.7% to DKK 3,303m in 2011 (2010: DKK 3,395m). Regular premiums declined 10.1% to DKK 2,312m in 2011 as per the forecast of around 10% (in the Q1-Q interim report). There was an overall increase of 33.9% in premiums in unit-linked pension schemes. Regular premiums increased 2.9% to DKK 520m in 2011 and single premiums 75.0% to DKK 667m. The share of new business written by unit-linked savings increased to 52.6% in 2011 (2010: 46.2%). The investment return on shareholders equity increased to DKK 105m in 2011 (2010: DKK 91m). The return on funds owned by customers, before pension return tax, was a 0.2% loss in Life I and 11.2% in Life V. The investment return on shareholders' equity was 4.9% in Life I and 4.7% in Life V in The investment return on shareholders' equity is different from that on customers' funds due to different investment strategies and separate portfolios for each; for example, at present shareholders' equity does not invest in equities nor does use instruments to hedge the guaranteed benefits. Topdanmark has chosen to use the new interest rate curve adjusted for country spreads. Furthermore, Topdanmark has adjusted the mortality rate to better match expectations, see Accounting policies. The individual and collective bonus potential is affected by these changes but they have only a marginal impact on the result and shareholders' equity. Page 12 of 109

15 Topdanmark's Annual Report 2011 Sources of gross premiums Q4 Q4 (DKKm) Individual schemes Corporate schemes ,284 1,035 Group life Unit-linked schemes Regular premiums ,572 2,312 Individual schemes Corporate schemes Unit-linked schemes Single premiums Gross premiums ,395 3,303 Developments in Q The decline in profit to DKK 69m in Q (Q4 2010: DKK 190m) was due to the recognition as income of DKK 144m from the shadow account in 2010 whereas DKK 19m was transferred to the shadow account in However, the investment return on shareholders' equity increased DKK 22m to DKK 28m. Result of life insurance Q4 Q (DKKm) Life I Life V Group Life I Life V Group Investment return 8 (2) Risk allowance Transferred, shadow account (27) 7 (19) Other 8 19 Profit on life insurance Overall premiums increased 16.4% to DKK 968m in Q4 while regular premiums declined 12.5% to DKK 562m. Rate of interest on policyholders savings in 2011 and 2012 On 1 December 2011 the rate of interest on policyholders' savings in Life I before pension return tax was reduced to 2.25% from 3.25% while the rate of 4.35% in Life V has been maintained. As in previous years these rates may be subject to change later in the year if the development in the financial markets is different from expectations. Loss participation scheme Loss participation is a temporary measure introduced in periods where the market value of the customers' assets is lower than the sum of their savings and only serves a purpose when customers who want to leave the scheme prematurely need to have their surrender value calculated correctly. Should customers choose to leave their schemes prematurely, the loss participation is taken into account in the calculation of the surrender value of their policies in order to ensure that those customers who leave do not take with them funds owned by those who stay. Loss participation only applies to with-profits products and it is not deductible in the event of retirement, death and disability. Due to the development in the financial markets with a decline in equity prices and declining interest rates, Life I introduced loss participation in As long as the loss participation scheme is in force the risk allowance of Life I will be transferred to the shadow account to be included in income in a subsequent period. The loss participation scheme is calculated and adjusted once a month. The most recently calculated loss participation is 1% for the portfolio guaranteed an interest rate of 3%. Loss participation has at no time been introduced in Life V. Page 13 of 109

16 Topdanmark's Annual Report 2011 Investment activities Topdanmark Group excluding the life insurance group The investment return in the Topdanmark Group excluding life insurance was DKK 622m in 2011 including a revaluation of provisions and income from associated companies but before the transfer to the technical result (2010: DKK 879m). It is Topdanmark's policy to accept a certain level of financial risk, given its strong liquid position and stable, high earnings from insurance operations. Topdanmark has invested in, among others, equities, properties and CDOs in order to improve the average investment return. The return in Q and 2011 on the most significant classes of assets is disclosed in the following table: Investment return Portfolio 31 Dec (DKKbn) Return Q Return Q Return 2010 Return 2011 (DKKm) % (DKKm) % (DKKm) % (DKKm) % Danish equities (55) (14.1) Foreign equities (56) (6.8) Government and mortgage bonds Credit bonds (7) (0.8) CDOs Properties Assets re I/A Money market etc (1) (0.1) Capital base (0.8) (1.2) (9) (1.2) (17) (1.4) (27) (3.7) (52) (5.3) Interest-bearing debt (1.4) (2.7) (4) (0.2) (8) (0.2) (18) (1.0) (27) (1.0) Asset management Total investment return Transferred return technical provisions Discounting (69) (65) (304) (323) Technical interest (8) (7) (58) (65) The exposure in foreign equities and credit bonds has been adjusted by use of derivatives. The return percentages are calculated as the ratio between the return on financial instruments and the size of the exposure of the underlying asset. The return on government and mortgage bonds and assets related to I/A (illness/accident) includes revaluations of claims provisions. The post-tax equity exposure was DKK 615m (pre-tax: DKK 820m) excluding associated companies but including the impact of derivatives. The equity portfolios are well diversified with no large individual positions. The composition of the portfolios is based on OMXCCAP for Danish equities (representing around 30% of the portfolio at 31 December 2011) and MSCI World in the original currency for foreign equities. The Group's investments have no significant concentration of credit risk except for AAA-rated Danish mortgage bonds which are considered to be particularly safe assets according to the Danish Financial Business Act. Since 31 October 2008 Danish insurance companies and pension funds have calculated the value of provisions by using a discount rate representing the combined weighting of the swap rate and the option-adjusted Danish mortgage credit rate. The portfolio is dominated by high-quality mortgage bonds, which ensures consistency between the investment return and the discount rate. Page 14 of 109

17 Topdanmark's Annual Report 2011 The class of government and mortgage bonds comprises primarily Danish mortgage bonds and revaluation of technical provisions. In addition, there are government and covered bonds and derivatives. Covered bonds are AAA-rated mortgage bonds where the size of the loan may not exceed 70% of the value of the security. If the value of the security declines so much that the requirement is not fulfilled, the issuer will provide further security. "Money market etc." comprises primarily money market deposits and intra-group balances but also the result of currency positions. "Capital base" comprises hybrid capital issued by the parent company and subordinated loans issued by Topdanmark Forsikring. "Interest-bearing debt" comprises other debt. Credit bonds with a rating lower than BBB (DKK 262m) comprise senior secured bank loans and high yield bonds, part of which are convertible, and subordinated bank capital issued by EU banks. Credit bonds with a rating of BBB and A (DKK 227m) are ordinary and convertible corporate bonds, annuity policies and subordinated bank capital issued by EU banks. Credit bonds with a rating higher than A (DKK 23m) are corporate bonds. The underlying assets of CDOs are mostly senior secured bank loans (DKK 524m) while the remainder are primarily CDOs with investment grade investments as the underlying assets. The maturity of the CDO investments is dependent on any changes in the payments made by the underlying assets which in turn are dependent on changes in the general economy and, therefore, it is not possible to outline the maturity distribution for the portfolio. The property portfolio comprises mainly owner-occupied property (DKK 818m), rental property (DKK 366m), rental office property (DKK 68m) and property rented for hotel use (DKK 121m). The tenancies for the residential and hotel properties are subject to a short termination notice but re-letting is not considered to be a problem. The office property is rented under contracts with no option to terminate prior to Over 99% of the property portfolio is currently let. The properties are valued in accordance with the rules of the DFSA i.e. at market value taking into account the level of rent and the terms of the tenancy agreements. The class of "Assets related to IA" (illness / accident) comprises the investments in Topdanmark Livsforsikring corresponding to the size of the illness / accident provisions. Financing Up to now the goal of Topdanmark's capital structure has been to ensure that its capital base (shareholders' equity and hybrid capital) is sufficient to support its current operations. Equity in excess of this amount has been distributed to shareholders by way of regular share buybacks throughout the year. As a result of this approach to capital structure Topdanmark is financing part of the investment in the insurance group with loans. It is expected that Solvency II will require a minimum level of solvency capital in insurance holding companies corresponding to the solvency requirements of the underlying group companies. Topdanmark has no intention of accumulating unnecessary capital in the group companies and therefore, when Solvency II has taken effect, the capital base of the parent company will be sufficient to finance the investments in the group companies. Consequently, the parent company will not need net financing in excess of its capital base. Page 15 of 109

18 Topdanmark's Annual Report 2011 However, until Solvency II takes effect, Topdanmark is subject to Solvency I, in accordance with which in its solvency cover it is only allowed to use a small portion of the tier 2 capital issued as solvency resources in relation to Solvency II. As a consequence, some of the planned distribution of dividend from the insurance group needs to be postponed until Solvency II takes effect. In the meantime the parent company Topdanmark continues to have some loan financing via intergroup accounts with the insurance group or in the money market. For details on the liquidity base see Market risk in this report. Parent company etc. The parent company Topdanmark A/S does not perform any independent activities. The result of the parent company, Topdanmark A/S, includes the results of subsidiaries excluding insurance business, (primarily Topdanmark Kapitalforvaltning, the asset management company), and financing costs. Profit increased to DKK 76m in 2011 (2010: DKK 31m) primarily due to a higher performance fee paid to Topdanmark Kapitalforvaltning. Topdanmark Kapitalforvaltning manages the Group's financial assets and liabilities and its result is dependent on the investment performance. Taxation The tax charge was DKK 326m on a pre-tax profit of DKK 1,349m corresponding to an effective tax rate of 24.2% (2010: 22.5%). Most of the tax charge is paid in Denmark, see "Tax payment" in the CSR report on Investor Report and presentations CSR reports. Prospects for 2012 Expected trend in Danish non-life insurance market It is expected that in 2012 the Danish non-life insurance market will be characterised by: Continued low economic growth Positive but lower impact of price increases Taxation of health insurance policies 1.5-2% growth in premiums Lower interest rates Continued disciplined market Increase in expenses on reinsurance 1.5pp improvement in combined ratio due to normal level of weather-related claims Overall, excluding any run-off profits / losses, the combined ratio is expected to be around is expected to be affected by continued low economic growth. It is expected that BNP growth in the Danish economy will be around 1.0%. In 2010 and 2011 most major insurance companies implemented price increases and in 2011 a number of small and medium-sized companies introduced price increases going into A few companies have given notice of further price increases which will take effect for customers in It is believed that price increases will have an effect on gross premiums of around 0.5pp in The Danish Finance Act for 2012 provides future taxation of the value of health insurance policies, which is expected to have a 10-25% adverse effect on the portfolio of health insurance policies. In the personal and SME markets automatic price indexation, allowing for claims inflation, is 1.9% which, in turn, is estimated to have an overall increase of around 1.3% on all insurance products. Prices in the industrial market are expected to continue to be under pressure in 2012 due to competition from, among others, foreign insurance companies. Including the effect of price increases growth in gross premiums earned is estimated to be 1.5-2%. Interest rates declined markedly in 2011, particularly in Q4. If interest rates remain at the low level seen at the turn of the year, the combined ratio will deteriorate by around 1.5pp in 2012 from the previous year. Continued disciplined competition is expected in the Danish market. Accordingly, all of the six largest insurance companies, representing a market share of 75%, are quoted on the stock exchange or owned by a quoted company. Furthermore, the prospects of an increase in capital requirement under Solvency II will increase the focus on profitability. It is expected that the increase in rainstorm claims in 2011 will cause an increase in reinsurance expenses in Page 16 of 109

19 Topdanmark's Annual Report corresponding to an adverse effect of around 0.5pp on the claims trend. The claims trend in 2011 was affected by both storm and rainstorm claims exceeding the normal level. If the level of weather-related claims will be normal in 2012, the claims trend will improve around 1.5pp. Assuming a normal level for large-scale claims, it is expected that the combined ratio for the market, excluding any run-off profits / losses, will be around the 2011 level of 96%. Expected trend in Danish life and pension market It is expected that in 2012 the life and pension market in general will be characterised by: Limitations on the deductibility of term life premiums No increase from the 2011 level in overall payments into pension savings Due to the limitation on the deductibility of term life premiums from an annual DKK 100,000 to DKK 50,000, the savings of term life insurance will reduce. On the other hand, there will be an increased demand for annuities for which full deductibility continues. It is expected that overall payments into pension savings in 2012 will not exceed the 2011 payments. The rate of increase is expected to follow wage increases in the future. Topdanmark's profit forecast model for 2012 Traditionally Topdanmark does not publish actual profit forecasts but instead the expected level of results if a number of assumptions of the return in the financial markets are met. As the return in the financial markets changes on a daily basis, Topdanmark's profit forecast model will already deviate from actual expectations by the time it is published. Therefore set out in Risk scenarios is additional information on how changes in the assumptions underlying the profit forecast model will affect the results. As can be seen, the investment return forecast model is not based on a specific estimate of the expected investment return for the rest of the year but solely on a long-term standard assumption of the return. Non-life insurance In the interim report for Q1-Q Topdanmark expected, for 2012, premium growth of 1-2% and a combined ratio of 91-92%, excluding any run-off profits / losses, based on the following assumptions: Price increases implemented in 2011 will have an annual effect of DKK 17m which will be recognised in the accounts for Q As stated in Value creation in Topdanmark, Topdanmark plans no further general price increases. Instead it will implement profitability promoting initiatives for less profitable customers. A normal year for weather with weather-related claims corresponding to a level of DKK 170m, broken down by quarters: Q1: DKK 50m Q2: DKK 25m Q3: DKK 45m Q4: DKK 50m Limited increase in expenses on reinsurance. A level of interest rates corresponding to the interest rate curve on 4 November A favourable effect of profitability promoting initiatives An expense ratio of 16%. Since the most recent profit forecast model was published in the Q1-Q report interest rates have declined causing a 0.5pp increase in the combined ratio. None of the other material assumptions have changed. For 2012 Topdanmark continues to assume premium growth of 1-2% and a combined ratio of 91-92%, excluding any run-off profits / losses. Overall the pre-tax result of non-life insurance is assumed to be DKK 1,120-1,220m. Life insurance Due to the limitation on deductibility of term life premiums, the sale of term life insurance schemes is expected to be lower in 2012 than in On the other hand, as a direct consequence of the reduced deductibility, Topdanmark Livsforsikring expects to increase the sale of annuities through its alliance partners Nykredit and Sydbank. Overall Topdanmark assumes a decline in regular premiums of around 5%. In the profit forecast model for 2012 it is assumed that the investment return will be sufficiently high to include an allowance for risk in income. It is also assumed that at the end of 2012 a net amount of DKK 90m from the shadow account will be included in income, after which the balance of the shadow account will be around DKK 30m. Page 17 of 109

20 Topdanmark's Annual Report 2011 Any recognition of risk allowances as income will be considered in the preparation of the 2012 Annual Report. Overall the pre-tax result of life insurance is assumed to be DKK m. Parent company The profit forecast model for the parent company including subsidiaries outside of the insurance group shows a pre-tax profit of DKK 20-30m. Taxation Given a corporation tax rate of 25%, the tax charge is expected to be DKK m. Total Group profit The overall post-tax profit forecast model is assumed to be DKK 1,150-1,250m in 2012 representing a profit per share of DKK 90. from the level on 23 February Furthermore it is assumed that the return on interest-bearing assets hedging the discounted provisions is just sufficient to cover discounting and revaluation of the provisions while the return on the remaining interest-bearing assets is assumed to be 2.89% (risk-free interest rate plus 2.0pp.) Risk factors and financial goals Topdanmark's profit forecast model for 2012 is sensitive to changes in the forecast assumptions for investment return in Life I as negative deviations of around DKK 200m will practically, krone for krone, be reflected in Topdanmark's pre-tax result. "Risk factors" shows an exposure analysis of Topdanmark's most significant risk factors. A description of Topdanmark's financial goals for non-life insurance is available in Value creation in Topdanmark. This profit forecast model is subject to an annual 7.0% return on equities and unchanged foreign exchange rates Profit forecast 2012 (DKKm) 2011 Forecast for February 2012 Non-life insurance - Technical result Investment return after transfer to technical result etc Profit on non-life insurance 1,086 1,120 1,220 Life insurance Parent company etc Pre-tax profit 1,349 1,520 1,660 Taxation (326) (370) (410) Profit for the year 1,023 1,150 1,250 Share buy-back In the Q1-Q3 interim report for 2011 it was announced that the share buy-back for the year was unchanged at DKK 1,200m. In 2011 the actual share buy-back totalled DKK 1,159m representing a buy-back yield of 9.9%. The reduction in shareholders' equity of DKK 1,159m was partly offset by DKK 150m strengthening of shareholders' equity by the sale of share options, redemption of share options and issue of employee shares. In 2012 it is intended to buy back own shares of DKK 1,300m including the buy-back of DKK 41m transferred from The buy-back of DKK 1,300m assumes a profit in line with the profit forecast model of DKK 1,150-1,250m for The share buy-back programme for 2012 represents a buy-back yield of 10.6% (calculated on the basis of the price of Topdanmark's shares on 23 February 2012). Page 18 of 109

21 Topdanmark's Annual Report 2011 To date in 2012 Topdanmark has bought back own shares of DKK 133m which leaves a balance of DKK 1,167m of the 2012 programme. Since 2000 the annual average buy-back yield has been 9%. Value creation in Topdanmark Topdanmark's focus on value creation is based on its value creation model. The number of Topdanmark's shares was 14,825,896 on 23 February 2012 of which 566,104 shares are held by Topdanmark to cover Management's share option scheme. Furthermore, at present Topdanmark holds 1,075,896 of own shares to be written down at the AGM on 19 April If before the AGM, contrary to expectation, no further shares to be written down are bought back, the number of voting shares will be 13,183,896 shares at 19 April. Since 1998 when Topdanmark started buying back own shares, it has made decisions to cancel DKK 9.5bn of shares representing a 64.1% write-down of the share capital, with an average price of DKK 358 per share that has been written down. Topdanmark does not buy back own shares in those periods where the Company would be considered an insider and during the three weeks immediately preceding the announcement of interim and annual reports. Furthermore, it does not buy back own shares during the period of five banking days after the announcement of a quarterly report as this is the period in which the executives may exercise their share options or warrants. In addition it does not buy back own shares for another three days after the announcement of the interim report for Q1-Q due to the allocation of employee shares. Below is a table of the periods when Topdanmark is allowed to buy back own shares. Share buy-back allowable 14 Mar Apr May Jul Aug Oct Nov Feb 2013 Topdanmark's value creation efforts are intended to increase its current cash flow while at the same time reduce the discount rate used by the market to discount the future cash flow to net present value. Topdanmark's systematic value creation efforts have built a strong business model which, with relatively limited financial risk, substantially ensures a profit is made even in years with devastating financial markets. Cash flow Topdanmark believes that success in the Danish insurance market is best achieved by combining distribution power with risk-appropriate prices, an efficient organisation and satisfied customers. Share buy-back not allowable 14 Feb Mar May May Jul Aug Oct Nov Feb Mar 2013 Page 19 of 109

22 Topdanmark's Annual Report 2011 Pricing Topdanmark's pricing philosophy is that it has differentiated pricing based on risk-appropriate prices, i.e. micro rating. This makes Topdanmark an attractive insurance company to customers with relatively favourable claims trends while typically customers with less favourable claims trends change to other insurance companies with a less risk-dependent pricing structure. Distribution power Topdanmark has a multi-distribution strategy in which its own sales channels (certified insurance sales representatives, sales centres, telephone sales etc.) are supplemented by sales or referral of leads through its distribution partners such as banks, car dealers and insurance brokers. Activities under distribution power Topdanmark has renewed its distribution agreement for non-life insurance with Danske Bank. Non-life insurance continues to be a strategically important product for Danske Bank. However, in the future Topdanmark will be responsible for sales and advice while Danske Bank will only refer leads to Topdanmark's sales organisation. This new distribution agreement is expected to have a minor adverse effect on premium growth in 2012 but to improve growth from Topdanmark has decided to concentrate sales through its own sales channels in the personal market. It has therefore been decided to close down 26 small insurance sales centres and instead increase the number of large sales centres from four to nine. This is intended to increase market pressure and create more efficient outbound sales environments in the sales centres. It is expected that growth will be slightly lower in 2012 due to the change in the sales organisation but that premium growth will benefit from it in future years. Activities under pricing Topdanmark continues its work with more finely meshed and risk-based prices. Topdanmark has no immediate plans to make general price increases. Instead it is implementing measures for less profitable customers (e.g. loss prevention, lower sums insured, increased retention and selective price increases). The rejection of general price increases and Topdanmark's initiatives for less profitable customers will improve its competitive strength in profitable customer segments in the long term. Efficiency Topdanmark wishes to operate its insurance business as efficiently as possible in order to combine value creation for customers by providing good service and offering competitive prices with value creation for shareholders by generating a significant return. A number of activities have been implemented which impact upon both the expense ratio and the claims trend. Activities under efficiency With payments of just under DKK 7bn on claims Topdanmark is a significant buyer of work time and materials. Therefore it is focusing on utilising the Company's purchasing power. In 2011 Topdanmark merged its two business areas of SME and Industrial into a larger and more efficient unit: "SME and Industrial". Topdanmark has an internal Lean concept (TRIM) which regularly reviews relevant departments in the Company in order to create efficiency gains. Customer satisfaction It is Topdanmark's ambition that its customers feel "wellhelped" in all communication between them and the Company. Therefore all customer contacts are regularly measured: Telephone, , letters or personal contact Page 20 of 109

23 Topdanmark's Annual Report 2011 showing the customers' opinion of their contact with Topdanmark. Around 60,000 customer interviews are conducted each year and if a customer's answer indicates that Topdanmark's services were not satisfactory, they will be contacted within 24 hours. Besides the internal monitoring, Topdanmark also participates in the annual EPSI survey across most major insurance companies. Activities under customer satisfaction Topdanmark sponsors "the Golden Four", Denmark's most winning rowing boat ever, having won, among others, gold medals in three of the last four Olympic Games. The sponsorship is aimed internally at Topdanmark's 950 customer-oriented service and claims employees. Based on the working methods used by "the Golden Four", it is intended to motivate and inspire employees to provide even better customer service. Topdanmark wishes to be good with new customers but best with existing customers. Generally, profitability is better for existing customers than for new customers. Therefore Topdanmark has implemented a number of initiatives in order to increase its retention percentage, which was just over 90% in the personal segment in Discount rate To help increase the value of its future cash flow Topdanmark continually works to reduce the risk premium used by the equity market to price Topdanmark's shares, which is achieved by focusing on: Risk management Capital consumption Corporate Governance Remuneration policy CSR Investor Relations Detailed description of each element is available on Investor Relations. Financial goals Topdanmark's operational goals in non-life insurance are unchanged: Premium growth To ensure that growth in gross premiums earned is 1pp higher than ordinary indexation, adjusted for any price changes. Expense ratio To ensure that the expense ratio is lower than the general Danish market level. Earnings To ensure a profit margin of 10% which, given the current level of interest rates, corresponds to a combined ratio of around 91% excluding any run-off profits / losses. Risk management Risk profile Topdanmark's policy is to hedge against risks arising from the Company's activities or to limit such risks to a level that allows the Company to maintain normal operations and implement its planned measures even in the case of highly unfavourable events in the outside world. As a consequence of this policy the Company has for a number of years identified and reduced or eliminated those risks which could potentially cause losses exceeding what Topdanmark considers to be acceptable. For example, major strategic shareholdings have been sold, the catastrophe cover for storm or terror has been increased significantly and the financial risk reduced. In this light it is Topdanmark's opinion that the Company's future annual results would, with a very high probability, be a profit even in the event of, for example, another breakdown in the financial markets as in Page 21 of 109

24 Topdanmark's Annual Report 2011 In order to ensure strict control of the overall risk, the exposures are calculated as often as deemed necessary, i.e. daily, monthly or in a few cases more rarely according to the nature of the exposure. The elements of the overall risk profile are brought together in the central risk management function which is responsible for ensuring that the data for and processes of risk calculations and profiling are of a high quality. The risk management function reports to the Risk Committee which is responsible for the SCR (solvency capital requirements) calculation, internal model, use test, risk limits, risk policies, standard calculation and ORSA (own risk and solvency assessment). The members of the Risk Committee are the CFO of the Group, a representative from the board of management of the life insurance company and the heads of the primary risk areas: Asset Management, Statistical Services, Life Actuarial Services, Group Finance, Life Finance and Reinsurance. The Risk Committee reports, recommends and proposes to the Board of Directors via the Board of Management. The Board of Directors determines the overall risk policies and limits. The internal auditors report to the Board of Directors on, among other things, the observance of the risk policies and limits set within them. Review Topdanmark's risk management relates to the following main areas: Insurance risk Market risk Credit risk Operational risk Insurance risk Acceptance policy Topdanmark's acceptance policy is based on a desire to make a profit from both products and customers. Topdanmark varies the pricing of its products depending on the relevant risk criteria and the costs of administering those products. Page 22 of 109

25 Topdanmark's Annual Report 2011 Topdanmark's pricing has been aligned with the individual markets and types of customers. In the personal and commercial markets prices are mostly based on standardised rates while major commercial and industrial customers are offered more individualised charges. Follow-up policy In order that both products and customers are profitable, Topdanmark systematically acts upon changes in its customer portfolios. The historical profitability of major industrial and commercial customers with individual insurance schemes is monitored using customer assessment systems. General insurance rates are re-calculated at least every three years and, for example, in motor and workers' compensation they are reviewed annually. Provisions are generally calculated on a monthly basis across all lines of business. The claims trend is assessed monthly, followed up by any necessary price changes. For example, in both 2009 and 2010, the prices of the house and contents policies were adjusted. In 2011 the price of change of ownership policies was raised significantly. Topdanmark continues to improve its administration systems to achieve more finely meshed data capture which in turn enables it to identify the claims trends at an earlier point in time and compile information on the constituent parts of the various types of claims. An example of this is the new claims system which was first implemented in 2007 and which now manages all claims handling. Claims handling In order to ensure uniform and efficient claims handling Topdanmark has grouped the handling of all types of claims into one operational unit. The handling of claims is intended to make the customers feel "well-helped" while at the same time ensure efficient management and control of the claims incurred. Topdanmark is continuously focusing on making its claims handling processes more efficient under the following three main headings: Promptness Better replacement purchasing power Quality Promptness It is important to promptly obtain an overall impression of the size of a claim, implement any damage controlling actions and / or commence the claims handling process. Prompt attention not only reduces the compensation paid but also provides a better experience for the customer. Typically, the claims department operates with day-to-day management of claims notifications and other claims handling in order that the value of the claim does not increase. Simple notification is attended to immediately over the telephone. The time it takes to handle a claim is continuously monitored. Better replacement purchasing power The claims department's purchasing power in terms of replacement products and services provides financial advantages for customers and shareholders alike. The responsibility for arranging service and purchase agreements has been channelled into one centralised purchasing function to ensure the highest possible discount, quality and security when delivering products and services. Service agreements have been made with, for example, Falck, Falck Health Care, Scalepoint, Bygma, tradesmen, garages and damage service companies. Quality Topdanmark has developed routines for all major claims processes to ensure that they are handled in a uniform and controlled manner. These are supplemented by rules governing the level of professional and financial competence expected of each of the claims employees. The overall professionalism is controlled by regular quality assessment of a random sample of claims. For example, it is investigated whether the cover, reason for the claim and provisioning are correct, the recourse possibilities have been tested and that the excess, VAT etc. have all been charged. Claims handling supported by a new claims handling system Topdanmark has implemented a new claims handling system intended to support, among other things, professional accuracy. From measurements taken of the system it can be seen that there has been a significant improvement in the quality of claims handling. Page 23 of 109

26 Topdanmark's Annual Report 2011 The claims organisation has implemented the Lean / TRIM concept in several departments where it has improved the time it takes to handle a claim, the quality of the claims handling and employee satisfaction. Customers satisfaction with telephone and internet contact is monitored daily to act immediately on dissatisfied customers. Emergency plan Topdanmark has an emergency plan to ensure that prompt, correct and targeted action is taken on a major weather event such as storm, hurricane, rainstorm or flood. The emergency programme is on several levels which enables a proportional response depending on the size of the event. Topdanmark has appointed emergency helpers throughout the company whose claims handling knowledge is regularly kept up-to-date. Furthermore alert drills are held twice a year in order to prepare the employees and improve the emergency programme. Provisioning risk Provisions for unearned premiums The risk on provisions for unearned premiums is relevant particularly within change of ownership insurance where typically the policy covers a period of ten years and the full ten-year payment is made up front. Topdanmark's level of provisions for change of ownership policies is based on statistical analyses of the pattern of claims notifications as compared to the remaining period of the policies. Provisions for outstanding claims Traditionally, the insurance classes are divided into shorttail (i.e. those lines where the period from notification until settlement is short) and long-tail (those lines where the period from notification until settlement is long). Examples of short-tail lines are building, personal property and comprehensive motor insurance. Long-tail lines relate to personal injury and liability: workers' compensation, commercial liability, accident and third party insurance. The following chart shows the distribution of Topdanmark's total provisions for outstanding claims. The much higher provision risk in long-tail than in shorttail lines is due to the longer period of claims settlement. It is not unusual that claims in long-tail lines are settled three to five years after notification and in rare cases up to years. During such a long period of settlement the levels of compensation could be significantly affected by changes in legislation, case-law or practice in the award of damages adopted by the Danish National Board of Industrial Injuries who awards compensation for injury and disability in all cases of serious industrial injuries. The practice adopted by the Danish National Board of Industrial Injuries also has some impact on the levels of compensation for accident and personal injury within motor, liability and commercial liability insurance. The provisioning risk represents mostly the ordinary uncertainty of calculation and claims inflation, i.e. an increase in the level of compensation due to the annual increase in compensation per policy being higher than the Page 24 of 109

27 Topdanmark's Annual Report 2011 level of general indexation or due to a change in judicial practice / legislation. The sufficiency of the provisions is tested in key lines by calculating the provisions using alternative models as well and then comparing the compensation with information from external sources, primarily statistical material from the National Board of Industrial Injuries and the Danish Road Sector / Road Directorate. The actuarial team is in constant dialogue with the claims departments on any changes in the practices flowing from new legislation, case law or compensation awards as well as the impact of such changes on the routines used to calculate individual provisions. Reinsurance Topdanmark has a restrictive acceptance policy in its choice of reinsurance companies as normally it only buys cover from insurance companies which, as a minimum, have a rating corresponding an S&P rating of A-. Weather The reinsurance contracts for storm cover claims up to DKK 5.1bn with a retention of DKK 100m. Events like snow loading, snow thawing and rainstorm are covered by the same contract as the storm cover. When using its reinsurance cover, Topdanmark will have to pay a reinstatement premium proportional to the amount of the reinsurance programme that has been utilised. In the event of another storm within the same year the reinsurance contracts will cover further storm claims up to DKK 5.1bn with a retention of DKK 100m. In the event of a third or fourth storm in the same year there is cover up to DKK 670m with a retention of DKK 20m. Most of the cover of the third and fourth storm is dependent on it not having been hit previously by two individual storms each exceeding DKK 3.8bn. Unlike other reinsurance cover, which follows the calendar year, the storm programme is renewed annually on 1 July. Topdanmark has specific reinsurance cover of DKK 100m for rainstorms. This cover takes effect if accumulated annual rainstorm claims exceed DKK 50m. For a claim to be accumulated, the event must exceed DKK 10m. Topdanmark's maximum retention in the event of an extreme rainstorm is DKK 75m plus reinstatement premiums. Fire Topdanmark has a proportional reinsurance programme for fire with a maximum retention of DKK 25m per claim on any one business. Terror Until the end of 2001 reinsurance cover included terror. Since 11 September 2001 reinsurance companies have particularly focused 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 and the number of terror attacks covered. A national guarantee scheme of DKK 15bn covering terror claims including an element of NBCR (nuclear, biological, chemical, radiological) was established on 31 March The Danish Terror Insurance Board decides whether an event is an NBCR event or not. The national guarantee scheme covers any market retention in excess of DKK 5bn. On 1 January 2011 the Danish non-life insurance companies established a terror pool to protect the market retention, with each company's share of the pool being based on its market share of the non-life insurance market. The Workers' Compensation Act has been changed such that the cover of industrial injuries caused by any type of terror has now been taken over by the Government except that those injured persons whose job it is to hinder, prevent or avert acts of terror and those rescuers deployed in the aftermath of terror attacks are not covered. This also applies to individuals sent out to work in countries where there is a particular risk of terror. Cumulative risk Cumulative risk comprises both known and unknown cumulative risks. Known cumulative risk is where it has been recognised prior to the event that several policyholders could suffer from the same event. An example of known cumulative risk is where Topdanmark insures several shops in the same shopping centre. In the event of a fire it is foreseeable that several policyholders could suffer together. Unknown cumulative risk is where several policyholders could suffer from the same individual event without the common risk being recognised prior to the event occurring. An example of this is the fireworks disaster in Seest in 2004 when many personal, commercial and Page 25 of 109

28 Topdanmark's Annual Report 2011 industrial customers, quite unexpectedly, were hit by the same event. In personal lines Topdanmark's retention on known cumulative risk is DKK 15m for the first claim and / or event, DKK 5m for the second and DKK 15m for any third or subsequent risk. The retention is a maximum of DKK 25m in SME and industrial lines and on unknown cumulative risk it is a maximum of DKK 50m. Industrial accident and disease Industrial accident insurance is a compulsory policy paid by employers by taking out workers' compensation policies with Danish insurance companies. In workers' compensation the reinsurance companies cover up to DKK 1bn of all claims with a retention of DKK 30m. Insurance against industrial disease can not be taken out with insurance companies but only with the public institution AES, a self-funding institution financed by compulsory payments from employers. Floods and storm-damaged forests Danish insurance companies do not cover damage arising from floods, including those from lakes and streams, or the cost of replanting forests following storms. These types of claim are covered by the Danish Flood Fund which is a self-sustaining, public fund financed by an annual fee of DKK 30 per fire policy charged on to the customers by the insurance companies. War, earthquake and nuclear perils Danish insurance companies do not cover claims directly or indirectly relating to the following: War, warlike acts, neutrality violence, civil war, rebellion or civil commotion Earthquake or other natural disasters Release of nuclear energy or radioactive power unless the damage is due to nuclear reactions for specific industrial, medical or scientific purposes Market risk Market risk represents the risk of losses due to changes in the market value of the Group's assets, liabilities and off-balance items as a result of changes in market conditions. Market risk includes interest rate, equity, property, currency, inflation and liquidity risk. The limits for these financial risks are fixed by Topdanmark's Board of Directors. In practice, Topdanmark Kapitalforvaltning (asset management) handles the investment, finance and risk alignment processes. It is controlled on a day-to-day basis to ensure that the limits set by the Board of Directors are observed. The result of this is reported to the Board of Directors. Interest rate risk Topdanmark's provisions for outstanding claims are recorded net of discount using the DFSA's current adjusted discount rates (however, the new discount rates adjusted for country spreads are used in illness and accident insurance). The resulting interest rate exposure is alleviated by investing in interest-bearing assets in order to reduce the overall interest rate exposure of the assets and liabilities to the desired level. When calculating the interest rate exposure, the Group's debt is included on the same basis as the calculation of the assets. The interest rate exposure is calculated as the value of the change in the event of a 1pp parallel shift in the interest rate curve ignoring convexity. Equity risk Topdanmark is exposed to equity risk from direct investments as well as those investments made via derivatives. The equity risk is calculated as the loss arising if there was a 10% decline in all equities. Property risk Topdanmark is exposed to property risk from investments in properties rented out for business or private residence. The property risk is calculated as the loss arising if there was a 10% decline in the value of all properties. Currency risk Topdanmark's currency risk relates in practice only to investments and is alleviated by derivatives. The risk is calculated by the value-at-risk method as the size of the loss which, with a 97.5% probability, will not be exceeded. Inflation risk Future inflation is implicitly included in a number of the models Topdanmark uses to calculate its provisions. An expected higher future inflation rate would generally be included in the provisions with a certain time delay while at the same time the result would be impacted by higher future indexation of premiums. Therefore a change in the expected future inflation rate would only have a marginal impact on the profit for the year. Page 26 of 109

29 Topdanmark's Annual Report 2011 Workers' compensation and illness / accident insurance differ from the general principles regarding the inclusion of an allowance for inflation. The provisions in workers' compensation insurance are directly linked to the expected future indexation of wages and salaries and those in illness / accident insurance are directly linked to the net price index. In order to reduce the risk of inflation within workers' compensation and illness / accident insurance Topdanmark has written inflation swap contracts and bought index-linked bonds hedging a significant proportion of the expected cash flows if the trend in real earnings remains stable. Consequently, any changes in the expected future inflation rate will have a relatively limited effect on the result from these lines of business. Liquidity risk In 2007 the parent company Topdanmark issued EUR 55m (nominal value) of hybrid capital (subordinated notes). This hybrid capital has no defined maturity and in terms of capital management it is considered to be equivalent to shareholders' equity. In the years Topdanmark has issued DKK 75m of employee bonds with a five-year maturity. Topdanmark also finances its activities by using its subsidiaries' surplus liquidity via inter-group accounts. If Topdanmark has further financing requirements, they are covered by shortterm money market loans, with a typical maturity of a maximum of one month. Outstanding debt is reduced after receiving dividends from the subsidiaries. To secure a sufficiently liquid base in situations where the possibility of utilising the sources of financing previously used might decline, Topdanmark has purchased an irrevocable right to raise loans on normal terms. This right comprises a loan of up to DKK 500m with expiry no later than in The liabilities of the Group's insurance companies are primarily technical provisions on which the payment obligation is met by means of the cash flow generated from operations. The Group uses derivatives to hedge investment risks. The hedging of currency risk in particular often results in significant positive or negative changes to balance sheet values. Topdanmark pays or receives cash security for any changes in value. The extent of these daily changes is limited such that there is no challenge to liquidity. Generally, there are no maturity concentrations on derivative contracts. In June 2011 Topdanmark Forsikring raised a new subordinated loan of DKK 400m expiring in 2019, which may be terminated by Topdanmark Forsikring in Previously it raised another subordinated loan of DKK 350m expiring in 2018, which may be terminated by Topdanmark Forsikring in All of the Group's insurance companies may raise money market loans as part of the day-to-day liquidity management. Typically the maturity of such loans is less than a month. Both the subordinated loans raised by Topdanmark Forsikring and any outstanding money market loans will be repaid from the cash generated from operations. Furthermore, the Group has a significant liquidity base of high-quality liquid bonds. Risk of investments in the life insurance group The goal and risk profile for those customers who are saving in the life insurance companies is different from the profile for Topdanmark's investment in the shareholders' equity of the life insurance group. Consequently, from Q Topdanmark separated its investment policy for funds owned by customers, (the life insurance provisions) from that of the funds owned by shareholders (the shareholders' equity of the life insurance group and provisions for illness / accident insurance). This ensures an appropriate distribution of risk and return. Bonus potential The DFSA has issued a new contribution order taking effect on 1 January 2011 applying to all life insurance policies entitled to a bonus. As a result of the new order, all insurance policies are to be split into interest rate, risk and cost groups of homogeneous characteristics. The interval between the interest rate groups must not exceed 1 pp. Accordingly, each policy will belong to one interest rate group, one / more risk groups and one cost group. The old contribution order treated the elements of interest rates, risk and cost result as one single item in the "insurance technical result before bonus", which allowed for a set-off of losses of one group against profits of another. The new contribution order requires that the "insurance technical result before bonus" be distributed Page 27 of 109

30 Topdanmark's Annual Report 2011 on basis of the Company's contribution groups and consequently transferred to those policies within those groups. In the event of a loss in a group, this loss must be transferred to a shadow account which can only be recognised as income when that group returns to being in profit. Therefore, from now on, shareholders will not be allowed to recognise an allowance for risk as income if there is a balance in the shadow account. Seen in isolation this implies a greater risk for the owners. A proportion of the customers accumulated value comprises both collective and individual bonus potential. The collective bonus potential is an undistributed reserve acting as a buffer against fluctuations in the value of the customers share of assets and liabilities. At 31 December 2011 the overall collective bonus potential for the interest rate, risk and cost groups was DKK 24m in Life I and DKK 516m in Life V. Looking at it simply, the individual bonus potential is calculated as the difference between the customer s savings and the market value of the accrued commitment earned by the customers at the time of the calculation. If the market value of the customers share of the assets is lower than their savings, the individual bonus potential will be reduced. Thus the individual bonus potential also acts as a buffer against fluctuations in the value of the customers share of assets and liabilities. A significant proportion of the individual bonus potential in Life I can be used before its shareholders' equity would be affected. In Life V the adverse fluctuations exceeding the value of the collective bonus potential will be partially covered by a reduction in the individual bonus potential. The remainder will be covered by shareholders equity. As the total individual bonus potential was DKK 2,228m in Life I and DKK 78m in Life V at 31 December 2011, together they represent considerable protection of shareholders equity. The order applies to all life insurance policies entitled to a bonus, with classical saving in with-profit schemes. Hedging / guaranteed benefits The Group has guaranteed that policyholders will receive a pension benefit of 0.5%, 1.5%, 2.5% or 4.5%, according to when the policy was written. These benefit guarantees are linked to the risk of a downturn in the financial markets. Topdanmark changed its bonus rules in 1998 with the effect that any bonus added to the individual policy would be included to cover the overall pension benefits until expiry. Previously the bonus was used for an annual improvement of the guaranteed pension benefits. In January 2004 all the 4.5% policies were transferred to a newly established company (Life V), the investment policy of which is intended to ensure that the company can meet the benefits guaranteed. The proportion of equities is low and most of the interest rate risk in liabilities has been hedged. Risk of increase in life expectancy Topdanmark has introduced a new mortality rate assumption to calculate its life insurance provisions at market value. This new rate is calculated by considering the DFSA's population mortality rate, Topdanmark's own observed mortality rate and the DFSA's assessed improvement in future life expectancy. Until the end of 2011 the mortality rate used had been based on an increase of up to five years for men and 6.6 years for women from the G82 life expectancy assumptions developed by the insurance industry in the 1980's. An increase in life expectancy above the existing best estimate will increase the life insurance provisions and will be covered by the collective and individual bonus potential as described above. A significant change of a 20% reduction in the mortality rate assumptions as at 31 December 2011 would reduce the collective bonus potential about DKK 95m in Life I and about DKK 175m in Life V. Credit risk Credit risk is the risk of losses caused by one or more counter-parties' full or partial breach of their payment obligations. Topdanmark is exposed to credit risk in both its insurance and investment business. Within insurance the reinsurance companies' ability to pay is the most important risk factor. Topdanmark minimises this risk by spreading and primarily buying reinsurance cover from reinsurance companies with a minimum rating of A-. Accordingly almost all of its storm cover has been placed with such reinsurance companies. Topdanmark's investment risk is the inability of bond, loan or financial contract counter-parties to meet their obligations. Most of Topdanmark's interest-bearing assets comprise Danish mortgage bonds and debt issued or Page 28 of 109

31 Topdanmark's Annual Report 2011 guaranteed by top-rated European states. The risk of losses is considered to be very small due to the high quality of the issuers and a desired spread on both issuers and issues. To limit the risk on other bond and loan debtors the portfolio is well diversified both geographically and with regard to type of debtor - and therefore the exposure to the concentration of risks is insignificant. To limit the counter-party risk of financial contracts the choice of counter-parties is restrictive and security is required when the value of the financial contracts exceeds the predetermined limits. The size of the limits depends on the counter-party's credit rating and the term of the contract. The return on the assets is allocated periodically to the investors according to their position in the subordination order, the so-called "waterfall". The Articles of Association of the CDO provide a set of rules and tests on how far down in the subordination order the return will be allocated. If all the tests have been met, the return will be allocated to all the tranches. If there are tests that have not been met, the return will be allocated only to those tranches specified in the Articles of Association. Normally the tests will include factors such as excess cover, rating quality, diversification and liquidity security. The investors of the top tranche will incur losses only if these are of such a size that the lower tranches lose their value. It is opposite for the sub-tranche in the opposite end of the subordination order. The sub-tranche is the first to bear any losses that cannot be covered by earnings but is not without protection. If the underlying assets perform adversely, the cash flow of the subtranche will stop for a shorter or longer period or stop completely but before then a good deal of the original investment will have returned by way of regular payments. Operational risk Operational risk is a term for all those risks of financial losses a company is exposed to besides credit risk, market risk and liquidity risk. It includes the occurrence of unforeseen events with an adverse impact on the company, for example, errors in internal processes, human errors, system errors, breakdowns of IT systems and losses incurred due to external events. CDOs CDO is a general term for a class of independent legal entities established to invest in a portfolio of interestbearing assets and allocate the return in accordance with the investors' risk appetite. The assets of the CDO are financed by investors in loan and equity tranches. The top tranche has an AAA-rating, the intermediary tranches have ratings typically decreasing to BB while the lower tranche (or tranches) are not rated. The rated tranches usually bear interest at LIBOR plus a margin. The bottom tranche, referred to as the equity or sub-tranche, receives the residual return after payment of the return promised to the higher ranking tranches. Topdanmark is continuing to develop IT systems, routines and procedures. The responsible business units are also responsible for the risk management of this development. Risk assessments are carried out for all projects to establish the risks, possible consequences and measures to limit these risks, combined with the implementation of new IT systems only being effected after extensive testing. Topdanmark s IT security policy is reviewed once a year by the Board of Management and accepted by the Board of Directors. The routines and procedures in all critical areas are regularly checked by the auditors in order to assess the risks and recommend measures to limit each individual risk. Page 29 of 109

32 Topdanmark's Annual Report 2011 IT exposure Topdanmark s IT emergency strategy is revised each year by the Board of Management to be accepted by the Board of Directors. The actual IT emergency plan includes plans for re-establishing the IT environment if the systems suffer breakdowns. The IT emergency plan is tested regularly. Topdanmark's business critical systems can be inaccessible for 24 hours without causing significant business problems. In order to reduce the probability of breakdowns of the IT systems and limit the duration of them, Topdanmark has invested in, for example, emergency power plants with a diesel generator, disk mirroring, alarms and automatic fire fighting equipment. Critical IT equipment is in duplicate and placed in two physically separated machine rooms. Periodically Topdanmark s critical IT systems are tested to see if they can be compromised from outside and whether the IT systems have vulnerabilities to be repaired. These tests are made by an external company with special expertise in this area. Topdanmark s IT security committee discusses and prioritizes the performance and results of the tests. It is Topdanmark's goal that the accessibility of its main systems is no less than 99.5%, and for many years it has been better for the central applications. Risk scenarios The Group's risk factors are illustrated in the table overleaf. This table is 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. In the column "Overall effect on Group results" and the two following columns it is assumed that the bonus reserves and the individual bonus potential in the life insurance group could offset adverse fluctuations at the levels described as the overall collective bonus potential was DKK 540m (2010: DKK 554m) and the individual bonus potential DKK 2,306m (2010: 4,260m) at 31 December If all the events of the table occurred at the same time, the losses would to a great extent be covered by the collective and individual bonus potential. The overall effect for Topdanmark would be a loss of DKK 492.1m (2010: DKK 592.2m) representing 10.0% (2010: 12.1%) of the parent company's shareholders' equity. Page 30 of 109

33 Topdanmark's Annual Report 2011 Risk factors in the event of realisation of different risk scenarios - after taxation and pension return tax Change in Overall parent Change in Life Rest of effect on company's net asset insurance Topdanmark Group sharehold- value Risk group Group results ers' equity per share scenario (DKKm) (DKKm) (DKKm) (%) (DKK) 31 December 2010 Interest-bearing assets a (461.5) (368.7) (448.1) (9.1) (31.0) Provisions for claims and benefits a Index-linked bonds b (56.5) (12.1) (21.0) (0.4) (1.5) Foreign exchange c (27.5) (4.8) (9.5) (0.2) (0.7) Equities d (384.5) (71.3) (73.3) (1.5) (5.1) CDOs < AA e (94.2) (47.1) (62.5) (1.3) (4.3) Properties f (387.1) (98.6) (156.4) (3.2) (10.8) Expenses g (2.5) (10.6) (11.9) (0.2) (0.8) Gross claims incurred h (47.7) (47.7) (1.0) (3.3) Reinsurers' share h Storm disasters, net of reinsurance i (75.0) (75.0) (1.5) (5.2) 31 December 2011 Interest-bearing assets a (358.7) (355.5) (492.8) (10.0) (37.0) Provisions for claims and benefits a Index-linked bonds b (67.4) (19.0) (29.7) (0.6) (2.2) Foreign exchange c (34.1) (5.2) (14.5) (0.3) (1.1) Equities d (333.6) (60.4) (61.5) (1.3) (4.6) CDOs < AA e (95.3) (44.4) (61.1) (1.2) (4.6) Properties f (376.3) (105.0) (172.3) (3.5) (12.9) Expenses g (2.6) (10.7) (12.7) (0.3) (0.9) Gross claims incurred h (48.0) (48.0) (1.0) (3.6) Reinsurers' share h Storm disasters, net of reinsurance i (75.0) (75.0) (1.5) (5.6) 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: 10% loss on CDOs with ratings lower than AA f: 10% decline in market value of properties g: 1% increase in expenditure h: 1% increase in claims i: Storms generating claims, net of reinsurance, of up to DKK 100m The scenarios above show a "here and now" effect of the events stated. In a period one year hence, a change in interest rates would cause a compensating change in the current return, implying the net effect in a year's time would be much smaller than the immediate effect. DKKm Posttax Revaluation of investment assets (493) Revaluation of claims provisions 473 Non-recurring effect of increase in interest rates (20) It is illustrated below: A 1pp parallel shift upwards in the zero-coupon rate structure would have the following overall immediate effect on the results for the investment assets and existing provisions of the Topdanmark Group: However, the higher interest rates would also result in a better return on Topdanmark's interest-bearing assets and a lower loss ratio. Page 31 of 109

34 Topdanmark's Annual Report 2011 Assuming a 1pp increase in interest rates from one day to the next and unchanged inflation, the first year's effect of the increase in interest rates is illustrated as follows: The individual solvency requirement rules calculate the capital requirement on each insurance company whereas the parent company and the Group are not covered by these rules. DKKm Posttax Excess return on interest-bearing assets percentage point decline in loss ratio 81 One year's effect of increase in interest rates 92 Non-recurring effect of increase in interest rates (20) Total effect on results 72 Solvency Danish insurance companies are subject to European and Danish solvency rules ensuring that the companies hold sufficient capital relative to the risks they accept. The most important rules which are reported to the DFSA today are: Solvency I the current European solvency rules Traffic light rule Individual solvency requirement The current European solvency rules and the traffic light rule have been used for many years while the individual solvency requirement was reported on for the first time at the beginning of The companies of the Group observed the current solvency rules in Those rules imposing the greatest requirements on the Topdanmark Group's capital are the rules on individual solvency requirement, and in reality these rules are included in Topdanmark's capital planning. New EU solvency rules called Solvency II are on their way, expected to take effect on 1 January Individual solvency requirement Individual solvency requirement is a set of Danish rules in force until the new Solvency II rules take effect. Topdanmark views the individual solvency requirement as a temporary solution for the introduction of the Solvency II rules in respect of both the solvency calculation in numerical terms and the insurance companies' risk management. The companies are to calculate a solvency requirement representing their minimum required capital based on the risks they accept. Additionally the companies are required to provide documentation for how they identify, manage, limit and calculate risks. The DFSA's guidance prescribes no specific methods to calculate individual solvency requirement, thus companies may choose their own calculation methods but are to address all significant risks. Topdanmark bases its calculation of individual solvency requirement on the expectations available for the future rules on solvency calculation under Solvency II, specifically the most recent Solvency II test calculation QIS5 from the EU which is not the final calculation model but Topdanmark considers it to be the most relevant, but with significant additions: For non-life insurance risks Topdanmark uses an internal model with a random simulation of the risk. For the life insurance companies Topdanmark follows the DFSA's supplementary recommendations for the QIS5 model. Alignment of the calculation of individual solvency requirement to expected significant changes in the final set of rules. The rules of individual solvency requirement will lapse when Solvency II takes effect. Topdanmark does not expect this to significantly change the capital requirement as already in its individual solvency requirement Topdanmark aims to meet the Solvency II capital requirement. Solvency II Solvency II is a future EU regulation for insurance companies setting requirements on solvency calculations, capital base, risk management and detailed reporting on risk management to supervisory authorities and for publication. Solvency II is expected to take effect in January The Solvency II rules have been divided into three levels. Level 1 is a directive which was adopted in 2009 and is expected to be changed in the spring of Level 2 is available as a draft regulation. Drafts are only available Page 32 of 109

35 Topdanmark's Annual Report 2011 for some of the Level 3 rules which will be available as guidelines. The process of adopting the rules of Levels 2 and 3 is awaiting the changed directive. The final rules at all three levels are not expected to be in place until mid at the earliest, creating continued significant uncertainty, in particular, on the specific formulation of the very detailed and cost-intensive reporting to the DFSA as required by Solvency II. Solvency calculation and capital requirements The EU's goal of Solvency II has been to promote good risk management. The intention has been that Solvency II will be based on market values and actual risk calculations. Solvency II will include a standard model for calculation of solvency requirements which will be common to all insurance companies in the EU. Although the model will provide the opportunity of company-specific values for some variables, the standard model will not provide a fair view of all the risk elements of all companies. Therefore Solvency II gives the companies the opportunity to fully or partially develop their own risk model (internal model) for the solvency calculation. However, the DFSA must approve the model that is used for the calculation of Solvency II capital requirements. Today Topdanmark uses a risk model it developed inhouse to calculate the non-life risk. The inclusion of nonlife risks in Topdanmark's calculation of the individual solvency requirement has been based on this model. Topdanmark is in constant dialogue with the DFSA on the model with the intention to have it approved as a partial, internal model to calculate capital requirements under Solvency II. Topdanmark expects that its model will be approved to be used when Solvency II takes effect. The first draft application was submitted to the DFSA at the beginning of 2012 and it is expected that the final application will be submitted to the DFSA in May / June In its 2009 and 2010 Annual Reports Topdanmark reported that the necessary solvency capital to meet the Solvency II requirements would be in place in Up to now the necessary solvency capital has been forecast to be DKK 4,500m before allocation of solvency capital for growth in 2009 to Topdanmark's premium growth in that period has not caused any changes in the forecast but due to declining interest rates, provisions particularly those for outstanding claims have increased. As the solvency requirement from the primary business is dominated by the solvency requirement caused by the risk of provisions, the forecast for the necessary solvency capital is being increased from DKK 4,500m to DKK 4,700m in The necessary solvency capital is assumed to comprise shareholders' equity (DKK 4,050m), hybrid capital (DKK 400m) and subordinated loan capital (DKK 250m), see Investor Relations Capital Model. If the capital requirement is higher than expected, the difference will be covered by issuing further supplementary loan capital. In June 2010 Topdanmark Forsikring redeemed a subordinated loan of DKK 250m and issued a new subordinated loan of DKK 350m. Furthermore, Topdanmark Forsikring issued another subordinated loan of DKK 400m in June The difference of DKK 500m between the DKK 750m of subordinated loans and the DKK 250m of subordinated loan capital included in the necessary solvency capital is considered to be a safety margin to the forecast capital requirement. Under the Solvency II rules the companies may influence the solvency requirement themselves by adjusting their risk. This means that if the solvency requirement increases, Topdanmark will consider an adjustment of the risk before increasing its capital base. However, the capital base will be regularly increased in line with the natural growth in portfolios, provisions and financial investments. This adjustment will be made when excess capital is allocated to share buy-back. The solvency requirement of DKK 4,700m for the Topdanmark Group under Solvency II has been based on an expected approval of Topdanmark's internal model for non-life insurance risk. If it is not approved, the solvency requirement under Solvency II will increase by DKK m. This potential increase in the capital requirement can broadly be covered by the safety margin of DKK 500m referred to above supplemented by a marginal adjustment of the financial risk. Topdanmark's Solvency II project Topdanmark is preparing for Solvency II by having employees from claims actuarial services, life actuarial services, asset management, financial and compliance departments, IT, Group Development and others working together on a project reporting to the CFO. Page 33 of 109

36 Topdanmark's Annual Report 2011 The three most important elements of this project are to prepare new, very detailed external reports to the DFSA and for publication on the website, to adapt data processes and calculation methods in the life insurance business and to adapt Topdanmark's own risk model for non-life insurance risk to be approved as a partial, internal model under Solvency II. The RSR and QRT reporting to the DFSA and the SFCR reporting for publication on the website are the most resource-demanding part of the Solvency II project. This reporting is extensive. Topdanmark's Solvency II project regularly revises contents, resources and use of time to ensure that Topdanmark will meet the Solvency II rules when they take effect. Topdanmark has taken into account the expected numerical consequences of Solvency II in its capital model. Capital model Topdanmark wishes to pursue a policy of keeping its shareholders' equity at a relatively low level and pay out to shareholders any amounts in excess of the conservatively estimated shareholders' equity necessary to support the underlying business. However, as Topdanmark is subject to public regulation, it must meet the capital requirements of Solvency II. Initially Solvency II was intended as a risk-based regulation but due to the financial crisis, amongst other factors, a number of additional buffers and requirements have been suggested which are not proportional to the actual risk. As a result of this Topdanmark has been particularly hit by the fact that the solvency requirement is adjusted, only on a limited basis, for profitability and consequently the capital requirement on Topdanmark is not much lower than that on a similar company with significantly lower profitability and consequently higher risk. The externally imposed prudence following the financial crisis has forced Topdanmark to operate with a higher solvency capital than what is required by its risk base. Against this background Topdanmark needs to meet the regulatory requirements in the most cost efficient way through the composition of tier 1, tier 2 and tier 3 solvency capital. The immediate consequence of this is that much of the financing should be by way of tier 2 and tier 3 solvency capital but Topdanmark believes that the uncertainty of the refinancing of such supplementary capital requires some discretion. In this light Topdanmark has decided on a capital model that has a relatively high proportion of shareholders' equity. Topdanmark expects that this model provides adequate solvency capital which will meet the requirements of Solvency II when it is implemented. At the same time the amount of equity within the solvency capital will be sufficient to cover any further regulatory requirements solely by issuing further supplementary capital. Detailed information on, among other subjects, Topdanmark's capital structure model and model for calculation of share buy-back potential is available on Investor Relations Capital Model. Topdanmark's Board of Directors has an authorisation granted in the Articles of Association to increase the Company's share capital, to raise convertible loans and / or issue warrants. The issues may be with or without preemptive rights for the Company's shareholders. The total authorisation is restricted to 250,000 shares. The current authorisation expires on 15 April Furthermore, the Board of Directors is authorised to issue up to 100,000 employee shares. This authorisation also expires on 15 April Finally, for the period until the Annual General Meeting in 2015 the Board of Directors is authorised to acquire own shares up to 15% of the share capital for the purpose of ownership or security. The shares can be acquired at a minimum market price of DKK 10.5 per share and a maximum price of current market value plus 10%. It is a standing authorisation which, subject to the approval of the general meeting, is renewed regularly. At 31 December 2011 Topdanmark s share capital totalled DKK 148,258,960 divided into 14,825,896 shares of DKK 10 each, corresponding to 14,825,896 voting rights. As of 6 March 2012, Topdanmark holds 1,642,000 of own shares representing 11.1% of the share capital, of which 566,104 shares are earmarked to cover Management's share option scheme. Page 34 of 109

37 Topdanmark's Annual Report 2011 The process of accounts preparation The Board of Directors and the Board of Management have the overall responsibility for the risk management and the organisation of controls of the Topdanmark Group in respect of the process of accounts preparation including the observance of relevant legislation and other regulations related to the accounts preparation. Control environment The Board of Directors has adopted a working plan to ensure that at least once a year it considers the Group's: Risk profile and policies Organisation Plans and budgets Risk of fraud Existence of internal rulings and guidelines The Board of Directors and the Board of Management have adopted a number of policies, manuals, procedures etc. for significant areas of the accounts preparation. The Board of Directors has adopted, among other things, a risk management policy, a policy and guidelines for operational risks, a data quality policy and a reporting policy. The Board of Management continuously monitors the observance of relevant legislation and other rules and provisions on the accounts preparation and regularly reports on this to the Board of Directors. The Board of Directors of Topdanmark has set up an audit committee and the Board of Directors of Topdanmark Forsikring has set up a joint audit committee for those relevant companies of the Topdanmark Forsikring Group. The two audit committees have identical members. The working plans adopted for the audit committees include: Monitoring of the process of accounts preparation including regular checks and assessment of annual and interim reports, schedules for closing of interim accounts, the organisation of and abilities within the accounting function as well as material accounting policies and accounting estimates. Monitoring of the efficiency of internal risk management and control systems including the checking and assessment of systems for identification, quantification, prioritisation and prevention of financial and operational risks, checks and assessment of incentive to accounting manipulation or other fraud and management reporting intended to prevent / identify and respond to accounting manipulation. Furthermore, the Company has internal auditors who refer and report to the Board of Directors and, in accordance with an audit plan adopted by the Board of Directors, randomly select and audit certain routines and internal controls in significant and high risk areas which include the Consolidated and Annual Accounts and preparation of the accounts. Risk assessment The Board of Directors' working plan ensures that at least once a year the Board of Directors, the audit committee and the Board of Management make a general assessment of the risks relating to the accounts preparation process. In this assessment the Board of Directors specifically considers the organisation of the Topdanmark Group in respect of: Division into organisational units Division of duties or compensating procedures Procedures intended to handle and prevent conflicts of interest Routines / working procedures / emergency plans / systems / other tools Accounting and budget organisation Risk measurement and risk management Passing on of authorities including outsourcing and the authority to bind the company Control Appropriate and sufficiently diverse employee resources Appropriate IT systems and support Appropriate methods for communication across the company The Board of Directors regularly and at least quarterly takes a position on budget and forecast, capital, liquidity, material decisions and specific risks. As part of the risk assessment the Board of Directors makes annual decisions on the risk of fraud and discusses: Potential incentives or motives for manipulating the accounts or undertaking other types of fraud Management reporting in order to prevent or identify and respond to any accounting manipulation Day-to-day risk management is performed at segment level and by the administrative departments on the basis of risk limits set by the Board of Management and approved by the Board of Directors. Page 35 of 109

38 Topdanmark's Annual Report 2011 Risk management is coordinated by a risk committee comprising those responsible of the primary risk areas. The risk committee reports to the Board of Management who reports to the Board of Directors. Control activities The control activities are based on the risk assessment. They are intended to ensure that the policies, manuals, procedures etc. decided by the Boards of Directors and Management are observed and errors and faults are prevented or found and corrected in time. The accounting department is responsible for the preparation of interim and annual reports. Key contributors are: Non-life and life actuarial services (technical provisions) Asset management (financial assets and liabilities) Finance functions (calculation and distribution of costs etc.) The Group's two finance functions, Life Finance and Group Finance, prepare internal account reporting, profit forecasts etc. and are responsible for controlling the accounts, including reconciliation of internal accounts and reporting of deviations from forecasts. The Board of Management and Group Finance hold quarterly forecast meetings with each segment and business sector to review changes in their portfolios, the results of the past period and the forecast for the year. The Management's Review is prepared by the Investor Relations department (IR) on the basis of information provided by a number of departments such as the accounting and finance functions, Asset Management and business segments. As a consequence of its regular work to keep up with changes in the rules for accounts presentation (primarily IFRS and the Danish Accounting Order) the accounting department plans and takes initiatives for its future annual reports and regularly updates accounting policies and the presentation of the accounts and notes (by using, for example, detailed check lists). Monitoring The Group's internal control and risk management systems are regularly updated and have been established in order to eliminate misstatement and omissions in the accounts. However, the internal control and risk management systems do not absolutely ensure that all material misstatement and omissions are found and corrected. Internal and external auditors review the book keeping, the presentation of the accounts and the Annual Report in general by focusing particularly on the most significant risk elements. The regular audit reviews made by internal auditors are documented in audit reports, management letters and an audit database to ensure that the recommendations given are regularly acted upon. Corporate Governance Topdanmark's practical approach to Corporate Governance means that it is not sufficient for the Board of Directors and Board of Management to just observe a set of academic rules. Corporate Governance envelops the concept of supporting the trinity between shareholders, customers and employees. Prior to each annual and quarterly report being published the report is discussed at a meeting between the Board of Management and the auditors, also attended by the IR and accounting departments. Information and communication The risk management and internal controls surrounding the preparation of the accounts are intended to present an annual report which meets International Financial Reporting Standards as adopted by the EU and the additional Danish disclosure requirements of NASDAQ OMX, Copenhagen and the Danish Financial Business Act on annual reports prepared by listed financial services companies. Page 36 of 109

39 Topdanmark's Annual Report 2011 This is done by, among other things, incorporating and maintaining a responsible company culture with good management throughout the organisation. Topdanmark has a decentralised organisational structure based on framework control. In the day-to-day activities homogenous behaviour is supported by a set of management and customer-oriented values, see (in Danish not available in English) Job og karriere Vores arbejdsplads Ledelsesprincipper. The Board of Directors has been focusing on Corporate Governance for a number of years and has regularly aligned the Company's Articles of Association etc. with the principles of Corporate Governance. Danish Companies Act with a notice period of between three and five weeks. All shareholders are entitled to attend and vote at general meetings. Shareholders who are not able to attend general meetings can vote by proxy or letter on each item of the agenda, however their proxy is only valid for one general meeting. Shareholders can, by or postal letter, send questions to be answered at general meetings. Topdanmark has only one class of shares and each share entitles the holder to one vote. Decisions at general meetings are made by a simple majority of votes unless a special majority or representation is required by the Danish Companies Act or the Articles of Association. The Articles of Association provide that decisions on the alteration of the Articles of Association are only valid if adopted by an affirmative vote of not less than two thirds of the votes cast as well as of the capital represented at the general meeting. The Articles of Association provide no restrictions on voting rights. The AGM is transmitted live via a webcast. Board of Directors The Board of Directors, which is elected by the general meeting and the Topdanmark Group's employees, is the Company's top threshold of management formulating the Company's objectives, goals and strategies and making decisions on matters that are of significant importance or unusual in nature to the Company. The Board of Directors supervises the Company ensuring that it is managed in a proper way in accordance with legislation and the Articles of Association. It does not participate in day-to-day management of the Company. General meetings The general meeting is Topdanmark's supreme decisionmaking vehicle. About four weeks before the Annual General Meeting those shareholders who are registered by name and have requested an invitation, are invited by letter to attend the meeting. The Annual General Meeting is convened in accordance with the provisions of the The Board holds six or seven ordinary Board meetings a year plus an annual Board seminar dealing with strategic issues and other forward-looking topics. Topdanmark's Board of Directors comprises nine members, six of them elected by shareholders in general meeting and three by Topdanmark's employees in accordance with the Danish Companies Act. Page 37 of 109

40 Topdanmark's Annual Report 2011 In accordance with this Act the number of Board members elected by employees should be equivalent to no fewer than half the number of those elected by shareholders in general meeting. The rights, duties and responsibility of the Board members elected by employees are the same as those of the Board members elected by shareholders in general meeting. Shareholders who are not associated with the Company by their employment or who are not employed by a competing company are eligible for election to the Board of Directors by shareholders in general meeting. The age limit for Board members is 70 and the term of office for members elected by shareholders in general meeting is one year, while in accordance with legislation, it is four years for members elected by employees. Board members are elected individually, and no Board member may be appointed by any individual shareholder. More than half of the Board members elected by the shareholders in general meeting meet the definition of independence set out by the Committee on Corporate Governance. Topdanmark has no fixed general selection criteria. It believes that by imposing very specific requirements on the Board of Directors it may prevent the election of an obviously qualified Board candidate who does not fully meet the requirements. Instead an individual decision will be made on each Board candidate based upon an overall consideration of their qualifications, the Company's present needs and the composition of the rest of the Board of Directors. Topdanmark believes that in a company like Topdanmark, between them its Board members ought to possess skills within accounting, finance, financing, insurance operations, reinsurance and marketing and sales in the personal and professional markets. With its current composition Topdanmark's Board of Directors possesses all these skills. Topdanmark s current Board of Directors reflects diversity in many areas including professional background and education, sex and age. Its members have experience from both the financial, industrial and agricultural sectors, nationally and internationally. The Board of Directors believes that this composition enables it to consider a given problem from many different angles which is confirmed by experience from the day-to-day Board work. Read more about each Board member s background and competence on About Topdanmark Board of Management and Board of Directors and Board of Directors and Board of Management in this Annual Report. Topdanmark has joined "Operation Chain Reaction" initiated by the Danish Ministry of Gender Equality. The aim is to increase the diversity of boards of directors of businesses without imposing real quotas for female managers. Correspondingly Topdanmark has signed up to the UN Global Compact intended to ensure, among other things, the prevention of discrimination in businesses. Topdanmark believes that diversity provides business value and that it is important that the greatest management talents, irrespective of gender, nationality, religion or other characteristic achieve the highest executive positions at all levels. Topdanmark has no wish to favour women over men and therefore it has not imposed real quotas. Instead it has defined initiatives and policies for diversity which it aims to meet. In 2011 Topdanmark focused on, among other things, women in management. A number of specific initiatives have been planned for 2011/2012 including a questionnaire survey among Topdanmark's executives, for example whether specific initiatives are necessary in order to motivate women to apply for top executive positions. Topdanmark has also held a meeting after hours for employees intended to inspire women to apply for executive positions and established an internal website allowing employees to discuss gender questions and get helpful advice from female executives. Furthermore, it is Topdanmark's ambition to invite at least one female candidate for a job interview when an executive vacancy is to be filled. This goal has been met in all situations except for one executive position where there were no female applicants. Four of the nine Board members are women, one of them elected by the general meeting and three by Topdanmark's employees. The proportion of female Board members elected by the AGM has been stable since In 2011 the number of female Board members elected by employees increased from one to three. The Board of Directors evaluates its work and its cooperation with the Board of Management as required, without the participation of the Board of Management. Taking this evaluation into account, the Board of Directors Page 38 of 109

41 Topdanmark's Annual Report 2011 assesses itself during the annual Board seminar. Selfassessment is included in the rules of procedure and the working plan of the Board of Directors. The Board of Directors also evaluates the co-operation between the Board of Management and itself at the annual Board seminar. Audit committee According to Section 31 of the Danish Audit Act the Board of Directors of Topdanmark has set up an audit committee. According to Sections 6(1) and 2(4) of the executive order on audit committees in companies and groups that are subject to supervision by the Danish Financial Supervisory Authority, the Board of Directors of Topdanmark Forsikring has set up a joint audit committee for those relevant companies of the Topdanmark Forsikring Group. The two audit committees have identical members. The Board of Directors has elected Michael Pram Rasmussen, Chairman of the Board, Annette Sadolin, Board member, and Søren Thorup Sørensen, Board member, to be members of the audit committee. The Board of Directors has elected Søren Thorup Sørensen to be chairman of the audit committee. All members of the audit committee meet all the criteria of independence set out in the "Recommendations for Corporate Governance" of August 2011 by the Committee on Corporate Governance. The details of the background, qualifications and occupation of the members of the audit committee are available in Board of Directors and Board of Management in this report. The Board of Directors believes that due to their many years' managerial positions in listed and financial services companies, and in respect of Søren Thorup Sørensen also his educational qualifications as a state authorised public accountant, all three members possess the necessary accounting qualifications to perform the tasks required of the audit committee. Therefore the Board of Directors firmly believes that all three members of the audit committee possess the qualifications and experience which enable them to make an independent assessment of whether the Topdanmark Group's accounts, internal control, risk management and statutory audit have been prepared and performed in an appropriate way considering its size and complexity. The Board of Directors therefore considers all three members of the audit committee to be independent members with appropriate accounting qualifications. The audit committee holds at least four meetings a year. On Investor Relations Corporate Governance Internal controls, Auditors Audit committee The rules of procedure for the audit committee of Topdanmark A/S and the joint audit committee for Topdanmark Forsikring Group are available. Remuneration committee Pursuant to Section 77(c) of the Danish Financial Business Act, the Board of Directors of Topdanmark A/S and Topdanmark Forsikring A/S has set up a remuneration committee for Topdanmark A/S and a joint remuneration committee for the Topdanmark Forsikring Group. The two committees have identical members. The Board of Directors has elected Michael Pram Rasmussen, Chairman of the Board, and Anders Knutsen, Deputy Chairman of the Board, to be members of the remuneration committee. The Board of Directors has elected Michael Pram Rasmussen to be chairman of the remuneration committee. The Board of Directors believes that due to their many years' managerial positions in listed and financial services companies both members possess the necessary qualifications to make a qualified and independent assessment of whether remuneration in Topdanmark is in accordance with the remuneration policy adopted by the AGM and relevant legislation. The details of the background, qualifications and occupation of the members of the remuneration committee are available in Board of Directors and Board of Management in this report. The remuneration committee holds two ordinary meetings a year. The objective of the work of the remuneration committee is to make an independent evaluation of whether Topdanmark's remuneration policy and other remuneration matters are appropriate and observed in respect of the Company's and Group's size and complexity and in accordance with relevant legislation. Furthermore, the remuneration committee is in charge of the preparatory work for the decisions to be made by the Board of Directors on remuneration, including the policy on salaries, the relevant rules of procedure and other decisions in this respect which may influence the Page 39 of 109

42 Topdanmark's Annual Report 2011 Company's risk management. The rules of procedure for the remuneration committee of Topdanmark A/S and Topdanmark Forsikring A/S are available on Investor Relations Corporate Governance Remuneration structure Read more about the Remuneration Committee of the Topdanmark Group. The Committee on Corporate Governance's Recommendations for Corporate Governance At the end of 2001 the Nørby Committee published its first report on Corporate Governance in Denmark. Since then the Board of Directors has made a precise response to each item of the Nørby Committee's recommendations and Topdanmark has met all significant recommendations included in that report. In August 2011 the Committee on Corporate Governance published its latest version of recommendations for Corporate Governance in Denmark. They are available to the public on the Committee's website In accordance with Section 131 of the executive order on financial reporting for insurance companies and lateral pension funds, Topdanmark is liable to outline in its annual report its approach to the recommendations. The outline should follow the "comply or explain" principle which has been decided at EU level and follows from Provision 4.3 of Rules for issuers of shares issued by NASDAQ OMX Copenhagen. The Board of Directors believes that Topdanmark meets all the recommendations which are important and relevant to a company like Topdanmark. However, Topdanmark does not fully meet the following recommendations: bullet 3: The Committee recommends that the annual report contain the following information about the members of the supreme governing body: " The number of shares, options, warrants, etc. that the member holds in the company and its consolidated companies and any changes in such holdings during the financial year" On its website Topdanmark discloses information on holding of shares, options etc. at a group level, for the entire Board of Directors and the entire Board of Management etc., see note. Furthermore, in accordance with the rules of the Danish Securities Trading Act, Topdanmark regularly discloses information on transactions in Topdanmark's shares, options etc. made by members of the Board of Directors and the Board of Management. The trading reports published on such transactions are saved and available on Topdanmark's website. The Board of Directors believes there is no further need of separate disclosure in the Annual Report of each Board member's holding of and trade in shares, options etc. The Board believes that the market will receive no new relevant information by disclosing this information at an individual level in the Annual Report : The Committee recommends that the supreme governing body establish a nomination committee with at least the following preparatory tasks: Describe the qualifications required in the two governing bodies and for a given position, state the expected time commitment for a position and evaluate the balance of skills, knowledge and experience available in the two governing bodies. Annually evaluate the structure, size, composition and performance of the governing bodies and make recommendations to the supreme governing body with regard to any changes. Annually evaluate the skills, knowledge and experience of the individual members of the governing bodies and report such details to the supreme governing body. Consider proposals submitted by relevant persons, including shareholders and members of the governing bodies, for candidates for executive positions. Identify and recommend to the supreme governing body candidates for the governing bodies. Topdanmark has chosen to have a small and active Board of Directors. As one of the consequences of this decision Topdanmark has chosen not to set up an independent nomination committee but instead the entire Board of Directors performs those tasks Page 40 of 109

43 Topdanmark's Annual Report 2011 which would be performed by a nomination committee in other companies. This is not contrary to the Recommendations on Corporate Governance which point out that the functions of a board committee may be performed by the entire Board of Directors. Topdanmark believes that a wide use of board committees could contribute to diluting the Board work in spite of the Recommendations pointing out that the entire Board of Directors should not be deprived of responsibility and insight. The use of board committees removes insight and knowledge from the Board of Directors without depriving it of responsibility. An increased use of board committees could result in increased bureaucracy and much of the work of the Board and particularly its Chairman will be receiving reports from various committees instead of considering and addressing the Board relevant tasks and problems themselves. The recommendation does not seem well-founded, particularly considering that the Recommendations say that the tasks of the nomination committee may be performed by the entire supreme governing body. Topdanmark's Board of Directors regularly addresses the following recommendations, at least once a year when assessing itself and the co-operation between it and the Board of Management: The qualifications required to be a member of Topdanmark's governing bodies, to hold a given position, the estimated time commitment for a position and skills, knowledge and experience available in Topdanmark's governing bodies. The structure, size, composition and results of the governing bodies. The skills, knowledge and experience held by each member of the governing bodies. Any proposal for candidates for Topdanmark's governing bodies. Detailed information on Topdanmark's initiatives on Corporate Governance, including a review of its response to each item of the Committee on Corporate Governance's "Recommendations for Corporate Governance, August 2011" is available on Investor Relations Corporate Governance Recommendations. This information is regularly updated. Remuneration structure Topdanmark's remuneration policy is intended to optimise long-term value creation at a group level. In accordance with Section 77(d) of the Danish Financial Business Act and Section 139 of the Danish Companies Act, the AGM has adopted "Remuneration policy of the Topdanmark Group including general guidelines for performancerelated pay." Besides salary policy, the remuneration policy also includes Topdanmark's general guidelines for performance-related pay, its pension policy and its guidelines for the granting of severance pay. The remuneration policy covers Topdanmark's Board of Directors, Board of Management, significant risk takers and, as provided by legislation, employees involved in control functions and audit work. If specifically stated, Topdanmark's remuneration policy also covers its executive team, comprising a number of the heads of business sectors and administrative departments ("the Friday Team") and certain other employees at the discretion of the Board of Directors. The remuneration policy etc., as adopted by the AGM, is available on Investor Relations Corporate Governance Remuneration structure. The share price reflects expected value creation potential at group level. This is one of the reasons why Topdanmark believes that share options rather than the receipt of individual bonuses encourage the executives to be more holistic in their approach to value creation. The remuneration package of the Board of Management, the Friday Team and significant risk takers is based upon a fixed basic salary, 10% of which is paid as share options. Individual bonuses or other types of variable salary are not paid. The fixing of the fixed basic salary paid to the Board of Management and the Friday Team is based on a specific assessment of the employee. In its assessment Topdanmark includes, among other factors, their position, characteristics and performance. Besides options, which in accordance with the revolving option scheme are paid to the Board of Management, significant risk takers and the Friday Team as part of their fixed salaries, the Board of Management may grant a total of up to 20,000 options to employees who are expected to Page 41 of 109

44 Topdanmark's Annual Report 2011 make a special effort or otherwise contribute extraordinarily to value creation in the Company in that year of granting. No special pension contribution is paid to the Board of Management, and therefore they are paid a personal allowance of 25% of their cash salary. Consequently Topdanmark has no pension commitments towards the Board of Management and no type of pension compensation on retirement is granted. The Friday Team and significant risk takers receive a pension contribution of up to 25% of their cash salary. The amount is paid to the chosen pension provider and consequently all pension obligations are fully covered by them. Employee shares Topdanmark issued employee shares in The allocation was effected simultaneous with a reduction in the recipient's cash salary. Employee shares are not issued in accordance with an on-going published plan for allocation but each issue is specifically decided upon and managed by the Board of Directors at the time. In 2011 Topdanmark allocated 38,402 free employee shares and sold 30,099 employee shares at an advantageous price. The cost of the issue of employee shares was DKK 46m in 2011 compensated by a corresponding reduction in salaries. The cost has been calculated at fair value according to the IFRS 2 on share-based payments. Options For 2012 Topdanmark has granted 40,261 share options to its Board of Management and a number of executives. The strike price of DKK 988 was fixed at 110% of the market price of Topdanmark's shares on 30 December 2011 (average of all trades). Besides the revolving scheme above a further 19,900 share options have been granted for 2012 to a number of other executives who are expected to make a special effort or otherwise contribute extraordinarily to value creation in the Company. Breakdown of share options / warrants granted since 2008 Board of Year Management Executives Total , , ,000 Market value of those options granted (DKKm) , , ,000 Market value of those options granted (DKKm) , , ,000 Market value of those options granted (DKKm) ,222 49,549 62,771 Market value of those options granted (DKKm) ,669 47,492 60,161 Market value of those options granted (DKKm) The options granted for 2012 may not be exercised any earlier than subsequent to the publication of the 2014 Annual Report in 2015 and no later than subsequent to the publication of the 2016 Annual Report in In the intervening period the options can only be exercised up to three banking days subsequent to Topdanmark's publication of annual and interim reports. The market value of the options for 2012 has been calculated to be DKK 7m at the time of granting. The value was calculated using the Black and Scholes model based on a share price of DKK , an interest rate corresponding to the zero coupon rate based on the swap curve on 30 December 2011, future annual volatility Page 42 of 109

45 Topdanmark's Annual Report 2011 of 22%, corporation tax rate of 25% and a pattern of exercise similar to Topdanmark's previous granting of share options, see IFRS 2 on share-based payments. At the end of 2011 the exposure of the options held by the Board of Management represented 1.0% of the number of outstanding shares. Detailed information on Topdanmark's option scheme is available on Investor Relations Corporate Governance Remuneration structure Severance pay In order to ensure full loyalty, focus and performance for Topdanmark during the period until a potential take-over is finalised, Topdanmark has agreed with the Board of Management and four other members of the Friday Team that under certain circumstances they will receive compensation in the form of an extended period of notice and an increased severance pay if they resign or are dismissed, or if their position is made redundant because Topdanmark is taken over by or merges with a company outside of the Group or if one or more owners take control of Topdanmark. The maximum amount of compensation will represent two years' salary. CSR Topdanmark's "Statutory report on Corporate Social Responsibility, see Section 132 of Executive Order on Financial Reports for insurance Companies and Lateral Pension Funds" is available on Investor Relations Reports and presentations CSR reports ( Investor Relations Topdanmark wishes to openly and sufficiently inform investors, analysts and other stakeholders on the Group's matters in order to ensure that as far as possible: Value creating activities are reflected in a fair price for Topdanmark's shares The liquidity of its shares is high enough in order that they are not traded at a discount due to lack of liquidity There is a high level of knowledge of and confidence in Topdanmark's shares. There is low price volatility in Topdanmark's shares secured through the provision of uniform and consistent information, thereby helping to reduce the cost of capital. Topdanmark endeavours to proactively reach out to investors in Denmark and abroad by using information channels such as: Investor meetings Telephone meetings Conference calls Web casts Investment and insurance conferences Topdanmark's shares are listed on NASDAQ OMX Copenhagen and included in a number of share indices, one of them being the OMX Copenhagen 20 index (OMXC20). Page 43 of 109

46 Topdanmark's Annual Report 2011 Distribution policy It is Topdanmark's policy to pay out to shareholders all surplus capital by way of share buy-backs. Since the buy-back programme was initiated in 1998, Topdanmark has cancelled DKK 9.5bn of own shares representing a 64.1% write-down of the share capital. In the years the annual average buy-back yield has been 9%. Trading in Topdanmark's shares Daily share trading on all trading platforms was DKK 49m in 2011 (2010: DKK 52m). At NASDAQ OMX Copenhagen daily trading was DKK 43m (2010: DKK 47m). New trading platforms such as Chi-X, BATS Europe, Turquoise and Burgundy represented 12% of the trading in Topdanmark's shares in Breakdown of those brokers with the highest trading activity in Topdanmark's shares at NASDAQ OMX Copenhagen: Most active brokers at NASDAQ OMX Copenhagen in 2011 % Danske Bank 21 Svenska Handelsbanken 12 Credit Suisse 7 Deutsche Bank 6 Morgan Stanley 5 Carnegie 5 Nomura 5 SEB Enskilda 4 Nordea 4 Citadel 3 Topdanmark is followed by 21 analysts. Share analysts' recommendations of Topdanmark's shares are available on Topdanmark's investor site Investor Relations Share profile Analysts. Page 44 of 109

47 Topdanmark's Annual Report 2011 Shareholders At the end of February 2012 Topdanmark had 50,826 shareholders registered by name. Accounting award In 2011 Topdanmark received PwC's C20 Accounting Award for its 2010 Annual Report in the category of "Business performance and follow-up on the expectations announced". Annual General Meeting The AGM will be held on Thursday 19 April 2012, 15:00 (CET) at: Tivoli Hotel & Congress Center Arni Magnussons Gade Copenhagen V All of Topdanmark's Board members elected by the AGM are up for election. Knud J. Vest does not offer himself for re-election. The Board of Directors proposes that Anders Colding Friis is elected as a new member of the Board; all other members of the Board are to be re-elected. The Board of Directors proposes the election of: Anders Knutsen Jens Maaløe Michael Pram Rasmussen Annette Sadolin Søren Thorup Sørensen Anders Colding Friis The following shareholders own more that 5% of the share capital: Proposals to be transacted at the AGM must be received by Topdanmark no later than 7 March Holding (%) Shareholder 31 Dec 2011 If P&C Insurance Holding Ltd (publ) Barks Väg, Solna Stockholm Sweden If P&C Insurance Company Ltd Barks Väg, Solna Stockholm Sweden ATP, AES Kongens Vænge Hillerød Denmark The agenda for the AGM will be published in mid-march Financial calendar Deadline for submitting items for AGM agenda 07 Mar 2012 AGM 19 Apr 2012 Q Interim Report 22 May Half-year Report 21 Aug 2012 Q1-Q Interim Report 13 Nov Annual Report 05 Mar 2013 Page 45 of 109