for government employees Annual Report

Transcription

1 1 for government employees Annual Report 2010

2 2 Contents 2010 at a glance 3 A word from the President 4 Board of Directors report 5 Five-year summary 12 Income statement 13 Balance sheet 14 Statement of changes in equity 15 Cash flow statement 16 Notes 17 Audit report 29 Council of Administration, Board of Directors and Auditors 30 Definitions 31 Presenting Kåpan Pensions Kåpan pensioner försäkringsförening (Pensions for government employees, Kåpan) manages defined contribution pensions for public sector employees. Operations are linked to the public sector pension agreements PA-91 and PA 03 where Kåpan manages a part of the occupational pension and functions as the default supplier for the part of the pension where there is a choice. Kåpan is a co-operative society where all the surplus from asset management is returned to its members. The society only offers traditional pension insurance with a guaranteed growth in value at a low cost which over time is expected to provide members with a good pension.

3 at a glance Assets under management increased by SEK 5,456m to SEK 42,703m. Paid-in premiums totalled SEK 3,650m. The total return on invested capital was positive and amounted to 8.2%. In view of the return achieved, the Board decided to set the bonus rate at 8% for The funding ratio amounted to 112% at year-end. After the bonus decided on the funding ratio amounts to 105%. The solvency ratio strengthened from 134% to 144%. This stronger ratio is mainly an affect of a positive return on assets. Administrative expenses remained at a low level and amounted to 0.11% in relation to assets under management.

4 4 A word from the President The global economy continued to stabilise during In a global perspective, growth is good and increased demand is pushing up prices for commodities among other things. There are, however, significant imbalances particularly in the developed countries. The financial and monetary policy stimuli implemented during the crisis year 2008 have resulted in many countries in major government finance deficits and inflated balance sheets at central banks. Development in Sweden during the year is a shining exception with balanced government finances, withdrawn financial policy stimuli and good growth. How the global economy develops in the years ahead depends on the speed and methods of a return to a more balanced situation. High unemployment levels and high debt mean that many countries face a long and tough road. The deficit in the US is largely financed by the central bank buying government bonds, which in practice means printing new money. In Europe, there are similar fiscal stimulants but in a less obvious manner and combined with austerity measures unlike in the US. The disadvantage of using the bank note printing press is that the risk of a rapid rise in inflation is significant but the alternative of solely implementing fast and effective fiscal austerity measures is probably even worse. At the same time the strong growth in many developing countries, with high savings and a rapid rise in disposable income, means that the underlying global long-term development is positive. This strong growth is increasing the developing countries share of the global economy and a shift of power is taking place where in particular China, India and Brazil are making rapid progress. Development of household consumption in these countries will become an increasingly important part of the global economy. Many of the developed countries, on the other hand, have for a long time consumed more than the underlying economy has supplied. How and the manner in which repayments should be made to these countries is significant for how both the fixed-income and equities markets will develop in the next few years. Another not insignificant risk factor is how the changed global balance of power can be managed given the rapid change in economic strength between the old and the new economies. Kåpan Pensioner s aim is to create a good long-term return on its members pension capital at the lowest cost in the industry. We do this by focusing on a single product, traditional pension insurance with a guaranteed rate, a balanced and effective form of saving. In order to create a good return over time we invest in several different types of assets. The bonus rate we have been able to give our members since 2003, when the current pension agreement for government employees came into force, has maintained a good level compared with the industry average. We also have a very low cost level. Kåpan Pensioner uses very limited funds for marketing. We do not participate in competition in other agreement areas. We do not use resources to create a number of different savings alternatives. What we do try to achieve is good and effective pension savings for our members. In my opinion the way we work, combined with the fact that we are a pension society, is the best way to offer an effective and stable long-term pension savings. Gunnar Balsvik President

5 5 Board of Directors report The Board of Directors and the President of Kåpan pensioner försäkringsförening, reg. no , hereby submit their report for the financial year Operations The key task of the society is to manage and pay out pension assets for employees covered by agreements concluded between the Swedish Agency for Government Employers and the government employees main unions, or between other parties who have concluded pension agreements linked to such agreements. The basic activity is the provision of pension insurance through traditional pension insurance with a guaranteed return on paid-in premiums and a distribution of the surplus from asset management via a bonus rate. The forms of insurance offered by the society are the occupational pension insurance Kåpan Tjänste, Kåpan Extra and the private pension insurance Kåpan Plus. In addition there is the individual retirement pension where Kåpan is a selectable alternative and manager for employees who have not actively chosen a manager for their pension capital. Premium breakdown Members Kåpan Pensioner is a mutual society where all savings are returned to the members. The total number of members is over 650,000. Insurance premiums Kåpan manages the premiums paid in by employers on behalf of their employees according to the current collective agreement and the money that members themselves have chosen to invest in Kåpan Plus in order to increase their pension. Extra 18% Other 4% Retirement pension 30% Tjänste 48% A total of SEK 3,650m was paid in premiums during the year, with the following breakdown Category Kåpan Tjänste 1,770 1,676 1,658 1,560 1,531 1,416 1,318 Kåpan Retirement Pension 1,084 1,041 1, Kåpan Extra ITPK-P Kåpan Plus Total 3,650 3,417 3,637 2,715 2,688 2,401 2,259 SEKm 4,000 3,500 3,000 2,500 2,000 Development of premiums and pension payments Premium Pension Pension payments A total of SEK 941m (782) was paid during the year, of which SEK 77m (96) comprised bonus payments over and above the guaranteed rate on the capital. The normal period for payments is five years from when the pension payments start at the age of 65. This applies to all categories except Kåpan Retirement Pension which is paid for life. 1,500 1,

6 6 Board of Directors report Investment of the society s assets at year-end Other investments 7% Propertyrelated 10% Fixedincome 52% Equityrelated 31% Guidelines for management of invested assets The long-term guidelines set by the Board stipulate that the society s assets, including bonus funds, must be invested so that they provide a good control with a limited risk. According to the investment policy, adopted by the Board in December 2010, the market value of assets should be within the following bands: Equities or equity-related asset class minimum 25% and maximum 35%. Fixed-income securities minimum 45% and maximum 65%. Property-related assets minimum 5% and maximum 15%. Other assets maximum 10%. The Board s decision means that investment management is to be conducted with the same long-term focus as in previous years. The policy provides a benchmark for the society s total outstanding interest rate risk i.e. an aggregate of the fixed-income assets fixed-interest period and the pension payment obligations including the guaranteed rate on members savings until payment. The interest rate risk is measured as an interest rate risk coverage and amounted to 35.6%. The benchmark for interest rate risk coverage is that it should not be less than 30% and is continuously adjusted to the solvency ratio and the need to hedge outstanding obligations, see Note 2 for a more in-depth analysis. The outstanding currency risk according to the adopted policy may not exceed 10%. At year-end the outstanding currency risk was 8.2% of the value of assets. During the year in principle all assets except those in growth countries were hedged. % Total return Investment management The market value of the society s investment assets, with the addition of the book values of other assets, amounted to SEK 42,703m (37,247) at year-end. Return on the investment assets was positive and amounted to 8.2% (13.8) Investment return The total return on investment assets is broken down as follows: Market value Share, Total return, 1) Portfolio SEKm % %, Fixed-income 21, Equity-related 13, Property-related 4, Other investments 3, Other assets. cash Total investments 42, ) When calculating the return a daily aggregate is used to take the change in the capital base during the year into account.

7 7 Board of Directors report Fixed-income assets The fixed-income investments amounted to SEK 21,668m (19,553) at yearend of which mortgage bonds accounted for 45% (44), government bonds, including wholly state-owned companies, for 19% (17), and bonds and commercial paper issued by other issuers for the remaining 36% (39). At year-end the total fixed-income portfolio comprised 100% (100) nominal fixed-income securities with no real interest bonds. The return on fixed-income securities amounted to 2.1% (8.0). The interest rate rose slightly over the year on an overall assessment of outstanding government and mortgage bonds, which had a marginally negative impact on the return. The underlying interest level is relatively low which means that fixed-income investments provide a limited current return. During the year government bonds issued by some eurozone countries had a negative value development due to weak economic growth and major budget deficits. The society did not have any investments in these securities during the year. In addition to investments in fixed-income securities, in order to reduce the outstanding interest rate risk in obligations made, the society signed agreements for various forms of interest rate hedges. In principle, these agreements mean that the fixed interest in the obligations is exchanged for floating interest with a reduced risk of fluctuations in value. Market interest rates rose slightly during the year which meant that the value of insurance obligations undertaken fell by SEK 387m. Outstanding interest rate hedges comprised a total of SEK 10,800m (12,144). The change in value of interest rate hedges amounts to SEK 234m (-292). The total earnings impact and positive effect on solvency therefore amounts to SEK 621m. Normally, the value of interest rate hedges falls if the valuation of the debt shows a lower value. Active management of interest rate hedges during the year was successful, however, and helped to strengthen earnings and solvency. The total return on fixed-income investments amounted to 2.4% (6.4). Equity-related assets Development was stable for global stock markets during the year. The world s overall share prices rose by a total of approximately 10% in local currencies. All markets developed well with the exception of Japan and some parts of Europe. Development was particularly strong in the Nordic countries. Equityrelated assets at year-end amounted to SEK 13,176m (11,336) with a positive return of 18.1% (38.3). Since the start the society has chosen to currency hedge most of its equity investments which meant that the strengthening of the Swedish krona during the year did not have a negative impact on returns from areas with weakened currencies. The holding of shares listed on the Stockholm Stock Exchange had a positive return of 26.1% (52.2). Management of shares listed on the Stockholm Stock Exchange is carried out by the society and made a positive contribution compared with the benchmark index. Allocation fixed-income Corporate bonds 36% Allocation equities Emerging markets 16% OECD 42% Government/ state-owned companies 19% Mortgage bonds 45% Sweden 42%

8 8 Board of Directors report Allocation properties Infrastructure 27% Forrest assets 32% Allocation other assets Private equity funds 8% Financial instruments 50% Properties 41% Hedge funds 19% Property-related assets Investments in property-related assets are mainly made within three areas: properties, forest assets and infrastructure. Infrastructure means investments in various types of funds which invest in properties with stable cash flows and a long-term investment horizon. Forest properties are mainly land and standing forest owned via funds or companies. The properties area is indirect investments in various types of land and buildings. All areas showed a stable value development during the year. Capital invested in property-related assets totals SEK 4,067m (3,152) and return during the year amounted to 9.2% (1.4). Other assets Other assets total SEK 3,161m (2,734) and consist of investments in hedge funds, private equity funds and various types of financial instruments. The total return was positive at 9.6% (1.8). Hedge funds contributed overall with a negative return and a decision has been made to phase out these investments. The venture capital funds showed a positive value development during the year. Financial instruments mainly comprise long-term commitments in various credit-related securities. The value of these investments developed positively during the year. The individual investments often lack a smooth-functioning second-hand market and the intention is to keep them until they mature. This limited trading means that some securities are valued on the basis of assessed future cash flows in co-operation with external advisors. In total, these instruments had a value of SEK 404m (414) measured in this way. % Development management costs Risk and sensitivity analysis Asset management is affected by external circumstances that give rise to various types of risks. These risks can be divided into market, credit and operating risks. In addition there is a further industry-specific risk, namely insurance risk. A more in-depth analysis of outstanding risks in the operations in provided in Note 2. The uncertainty that exists in the market means that losses on investment assets cannot be ruled out. For investment assets where market prices are not published, there are sources of uncertainty, see Note 1, Note 15 and the section Key assessments and sources of uncertainty. Actuarial report The actuarial report has been performed by Ulrika Öberg Taube, actuary. The report shows that the society s technical provisions amount to SEK 29,655m (27,778). The obligations the society has comprise to a dominant extent fixed guaranteed interest on paid-in premiums. The obligations have been measured in the technical provisions, supported by the Swedish Financial Supervisory Authority s general advice, on the basis, among other things, of current market interest rates for matching maturities.

9 9 Board of Directors report Costs The society s costs stipulate the maximum size of operating expenses that may be charged to its operations. In 2010 these could amount to a maximum of SEK 63m (68). Costs in the insurance business amounted to SEK 42m (39). One measure of cost efficiency is the management expense ratio, i.e. the relationship between total operating expenses and the average market value of the assets, which amounted to 0.11% (0.12). Costs for 2010 were covered by making a deduction on paid-in and paid-out premiums of 0.75% and by a deduction on the return on the insurance capital, preliminarily 0.10%. The model for cost withdrawals will be changed for 2011 when it will take the form of a fixed charge of SEK 12 per insurance and a deduction from insurance capital, preliminarily 0.10%. Taken overall this deduction should correspond to the costs of operations and the aim is to reduce this in future years. % Collective funding ratio Collective funding Collective funding is the market value of assets minus financial liabilities in relation to the sum of technical liabilities based on paid-in premiums and the guaranteed rate as well as previously allocated bonus funds. The positive value development of assets means that the collective funding increased and amounted to SEK 4,720m (3,728) at year-end and that the funding ratio before decision on bonus rate and reversal at year-end amounted to 112%. The Board decided on a policy for collective funding and bonus in the society. The policy states that the collective funding ratio should be in the band % with a target level of 100%. Decision to allocate bonus for 2010 The good funding level at year-end meant that the Board decided, following an actuarial report performed by an actuary, to allocate a bonus to members for the 2010 financial year of 8% before policyholder tax and costs. The bonus will be added to members pension capital annually in arrears. The funding ratio at year-end after the bonus decided for 2010 amounted to 105%. Development of solvency Solvency expresses how much of technical liabilities are covered by assets. The good return during the year combined with a slight rise in market interest rates, meant that outstanding obligations fell in value which strengthened the solvency ratio compared with the situation at the start of the year. During the year the solvency ratio rose by 10 percentage points from 134% to 144%. The return contributed 8 percentage points and changes in valuation of outstanding obligations contributed with 2 percentage points. Bonus rate % Solvency ratio %

10 10 Board of Directors report Capital contribution in the form of a subordinated loan The state pension agreement PA 03 stipulates that the employer pays premiums for the Kåpan Tjänste insurance for all employees but that employees below the age of 28 are not provided with a premium. According to the terms of its statutes, Kåpan Pensioner must issue a perpetual interest-free subordinated loan to the parties in the government agreement sphere at an amount corresponding to the funds provided. During the year such funds provided totalled SEK 14m. The issued subordinated loan may only be repaid following a decision by the Council of Administration and approval by the Swedish Financial Supervisory Authority. The subordinated loan thus comprises part of available risk capital in the society. Policyholder tax The society pays policyholder tax on behalf of its members. The basis for tax assessment is the market value of the society s assets after deduction for financial liabilities on 1 January in the assessment year. The return on these funds is calculated using a standardised method using an interest rate that is the same as the average government lending rate in the year prior to the assessment year. The standard income thus calculated is then taxed at 15%. For the society this meant that the policyholder tax paid for the year 2010 amounted to SEK 174m (178). Management functions and audits Kåpan Pensioner s highest decision-making body is the Council of Administration. The members of the Council of Administration are appointed by the labour market parties within the public sector. Half of the members are appointed by the Swedish Agency for Government Employers and the other half by the trade unions. The total number of ordinary members amounts to 30 with an equal number of personal deputies. The society s operational activities are managed by a Board, which consists of six members with an equal number of personal deputies. The Board like the Council of Administration is composed on a parity basis. The Board appoints the society s president. The Board held seven meeting during the year, one in the form of a twoday seminar. Key questions were the future long-term investment focus and management of risks in investment management. During the year the Board decided on a new remuneration policy and performed a review of most of the other policies. The Board also examined and analysed implemented regulatory changes and performed consequence analyses of probable future changes. Göran Ekström has been chairman of the Board since 23 February Administration In addition to the President, the society had nine employees at year-end. The average number of employees during the year was 9 (7) with the key task of conducting investment management and risk control. The National Government Employee Pensions Board (SPV) in Sundsvall is engaged to administer

11 11 Board of Directors report the insurance operations. This assignment includes development and maintenance of the society s insurance administration system, checking premium payments, performing actuarial calculations, issuing pension statements, providing a smooth-running customer service unit and handling pension payments. For remuneration to senior executives, see Note 7. Capital expenditure Capital expenditure during the year amounted to SEK 10m (13). Investments were mainly attributable to the insurance administration system. The system will be depreciated over a ten-year period. Looking to the future Kåpan Pensioner started its operations in 1991 and since 2003 has been the default alternative for individual retirement pension. The society s operations thus increase in scope all the time which places major demands on the organisation but also provides economies of scale and opportunities to improve efficiency. With the present development a balance between payments made and payments received will be reached in around 2050 which means that the organisation must be continuously developed and adjusted. During 2010, extensive work was completed to modernise and improve the efficiency of the insurance administration system which has been in operation since Modernisation of the insurance administration system and upgrading the other systems are part of the society s preparations for possible introduction new rules for the society s operations and other regulatory changes. The strategic direction for the society s operations remains unchanged and the aim is to reduce the already low costs still further while it is important to improve information and awareness of the state occupational pension. The society will therefore, starting in 2011, start a deeper cooperation with the National Government Employee Pension Board (SPV) relating to a co-ordinated pension statement, co-ordinated websites and a joint customer service unit. Disposition of profit for the year The profit for the year, SEK 3,782m (7,236) will be transferred to other reserves. The society s equity thus amounted to SEK 13,024m (9,305) at 31 December 2010.

12 12 Five-year summary Results, SEKm Premiums written 3,650 3,417 3,637 2,715 2,688 Investment income, net 3,161 4,283-5, ,087 Claims paid Bonus paid 1) Balance on the technical account, life insurance business 3,956 7,414-9,597 2,254 3,302 Profit for the year 3,782 7,236-9,802 2,094 3,179 1) Payments are recognised as a deduction under Equity, Financial report. Financial position, SEKm Total assets 1) 42,703 37,247 30,748 33,280 29,463 Investment assets 1) 41,451 36,225 29,386 32,387 28,699 Technical provisions 2) 29,673 27,800 28,335 20,980 19,742 Capital base together with funding capital 13,024 9,305 2,154 12,113 9,716 Required solvency margin 1,187 1,112 1, ) Investment assets at fair value and other assets at book value. 2) Provisions have been measured at market value with current market interest rate since Key ratios, % Management expense ratio 1) Total return Bonus rate Funding ratio Solvency ratio ) In relation to average assets. Total return by asset class 1) Market value Market value T total 2) 31 Dec Dec 2009 return, % sekm % sekm % 2010 Equity-related 13, % 11, Fixed-income 21, % 19, ) Property-related 4, % 3, Other investments 3, % 2, Other assets % Total assets 42, % 37, ) Defined in relation to the underlying asset class that generates the return. 2) Daily aggregate of investments in relation to changes in value, interest income and dividends. 3) Return on derivative instruments taken out to reduce interest rate risk in outstanding insurance obligations is included in the return for fixed-income investments.

13 13 Income statement SEKm note Technical account, life insurance business Premiums written 3 3,650 3,417 Investment income 4 2,377 2,166 Unrealised gains on investment assets 5 1,142 3,082 Claims paid Change in other technical provisions -1, Operating expenses Investment charges Unrealised losses on investments Balance on the technical account, life insurance business 3,956 7,414 Non-technical account Balance on the technical account, life insurance business 3,956 7,414 Tax on profit for the year Profit for the year 3,782 7,236 Statement of comprehensive income SEKm Profit for the year 3,782 7,236 Other comprehensive income 0 0 Total comprehensive income 3,782 7,236

14 14 Balance sheet SEKm note 31 Dec Dec 2009 ASSETS Intangible assets Other intangible assets Investment assets Other financial investments Shares and participations 12 18,948 16,098 Bonds and other fixed-income securities 13 22,324 20,127 Derivatives ,451 36,225 Receivables Other receivables Other assets Property, plant and equipment Cash and bank balances Prepayments and accrued income Accrued interest Other prepayments and accrued income Total assets 42,703 37,247 Equity, provisions and liabilities Equity 25 Other reserves Other reserves 8,897 1,738 Perpetual subordinated loan Profit and comprehensive income for the year 3,782 7,236 13,024 9,305 Technical provisions Life insurance provisions 18, 19 29,655 27,778 Provision for unsettled claims ,673 27,800 Provisions for other risks and costs Policyholder tax 0 14 Liabilities Derivatives Other liabilities Accruals and deferred income 1 2 Total equity, provisions and liabilities 42,703 37,247 Memorandum items Pledged assets 0 20 Contingent liabilities None None Other commitments 14 20,629 7,974

15 15 Statement of changes in equity 2010 Comprehensive other Perpetual income for SEKm reserves subordinated loan the year Equity Opening equity previous financial year 1, ,236 9,305 Disposition of earnings ,236-7,236 0 Bonus paid during the financial year Funds transferred according to statutes Profit and comprehensive income for ,782 3,782 Closing equity for the financial year 8, ,782 13, Comprehensive other Perpetual income for SEKm reserves subordinated loan the year Equity Opening equity previous financial year 11, ,802 2,154 Disposition of earnings ,802 9,802 0 Funds provided by the parties Bonus paid during the financial year Funds transferred according to statutes Profit and comprehensive income for ,236 7,236 Closing equity for the financial year 1, ,236 9,305

16 16 Cash flow statement SEKm 1 Jan 31 Dec Jan 31 Dec ) Operating activities Profit before tax 1) 3,956 7,414 Adjustment for non-cash items 2) 1,068-2,684 Policyholder tax paid Bonus paid 3) Change in other operating receivables Change in other operating liabilities Cash flow from operating activities 4,908 4,570 Investing activities Investments in non-current assets Sale of financial investment assets 24,099 12,055 Purchase of financial investment assets -28,638-16,806 Cash flow from investing activities -4,548-4,764 Financing activities Paid-in equalisation charges Cash flow from financing activities Cash flow for the year Change in cash and cash equivalents SEKm Cash and cash equivalents at beginning of the year Cash flow for the year Cash and cash equivalents at the end of the year 4) ) Of which 1 Jan 31 Dec Jan 31 Dec 2009 Interest received 1,187 1,349 Interest paid dividends received ) Of which 1 Jan 31 Dec Jan 31 Dec 2009 Depreciation 4 1 Unrealised gains -1,142-3,046 Unrealised losses change in technical provisions 1, ) Bonus paid is taken directly from Other reserves 4) Cash and cash equivalents consists of cash and bank balances. 5) Figures for Jan-Dec 2009 adjusted compared with previous year s annual report.

17 17 Notes All amounts in the following notes are expressed in SEK million unless otherwise specified. NotE 1 Accounting principles General Information The annual accounts relate to the year ended 31 December 2010 and pertain to Kåpan pensioner försäkringsförening (Kåpan Pensioner) which is a benevolent society with registered office in Stockholm. The address of the head office is Kungsgatan 4 B, Stockholm and the registered number is The annual accounts were approved for publication by the Board on 8 March The income statement and balance sheet will be presented for adoption at the annual general meeting on 6 April Kåpan Pensioner s annual accounts are prepared in accordance with the Swedish Annual Accounts Act for Insurance Companies as well as the Swedish Financial Supervisory Authority s instructions and general advice on Annual Accounts in Insurance Companies ( FFFS 2009:12) and the Swedish Financial Reporting Board s recommendation RFR 2. Kåpan Pensioner applies so-called legally limited IFRS. This means that all IFRS are applied provided this is possible within the framework of Swedish accounting law. Prerequisites for preparation of the financial statements. Kåpan Pensioner s functional currency is Swedish kronor and the financial statements are presented in Swedish kronor. Financial assets and liabilities are measured at fair value. Other assets and liabilities are measured at cost. Estimations and assessments in the financial statements Preparing financial statements in accordance with legally limited IFRS requires the insurance company s management to make estimations and assessments as well as assumptions that affect application of the accounting principles and the carrying amounts of assets, liabilities, income and expenses. Assessments and assumptions are based on historical experience and a number of other factors that appear reasonable under the prevailing conditions. The result of these assessments and assumptions is then used to assess the carrying amounts of assets and liabilities that would otherwise be clear from other sources. Actual results can deviate from these assessments and estimations. One source for estimations and uncertainties is the value of the obligations inherent in the insurance contracts taken out by the society. Another source of estimations and uncertainty is the valuation of financial assets for which there is no observable market price. Objective external valuations are used for these instruments or a value based on an assessment of anticipated future cash flows. When required these valuations are complemented with additional estimations depending on the uncertainty in the market situation. Assessments and assumptions are reviewed on a regular basis. Changes in assessments are reported in the period in which the change is made if the change only affected that period, or in the period the change is made and future periods if the change affects both the current period and future periods. Foreign currency Assets and liabilities in foreign currency are translated into Swedish kronor at the closing exchange rate. Exchange rate differences are reported in the income statement net within the line Investment income or Investment charges. Forward contracts in foreign currency are mainly used to eliminate the exchange rate risk in foreign equities and participations. Recognition of insurance contracts Insurance contracts are recognised and measured in the income statement and balance sheet in accordance with their economic reality. All contracts are recognised as insurance contracts. Classification is based on the society guaranteeing a specific interest on paid-in premiums and a number of other commitments which means that the society assumes a significant insurance risk in relation to the policyholder. Premiums written Premiums written for the year consist of premiums received. Premiums written for Kåpan Tjänste during the year relate to both paidin premiums minus the net amount of so-called equalisation charges in accordance with the society s statutes. For Kåpan Plus, Kåpan Extra, Kåpan retirement pension and ITPK-P premiums written correspond to the amounts paid in during the year. Life insurance provisions All life insurance provisions relate to occupational pensions and are measured in accordance with the principles in the EU occupational pensions directive. This means that the company s obligations are measured according to the so-called prudent person rule. Life insurance provisions are calculated according to the Swedish Financial Supervisory Authority s instructions and general advice on choice of interest rate for calculating life insurance provisions (FFFS 2008:23). This means that provisions are market valued on the basis of current market interest rates for corresponding maturities as the obligations entered into. Life insurance provisions correspond to the estimated capital value of the society s obligations. The assumptions on future mortality, interest, operating expenses and tax are taken into account. All mortality assumptions are gender differentiated. Pensions in payment, however, are calculated on the basis of gender neutral assumptions. The operating expense assumption made is expected to correspond to future actual costs for administration. Provision for claims outstanding Provisions comprise disability annuities for employees within the PA- 91 agreement who at year-end 2010 were incapacitated reduced by any final payment premiums for them in The society s actuary calculates this provision. Change in provision for claims outstanding is shown in Note 20. Reporting of return on capital Investment income This income pertains to return on investment assets in the form of dividends on shares and participations, interest income, exchange gains (net), reversed impairment losses and capital gains (net). Investment charges Charges for investment assets relate to investment management costs, interest expenses, exchange losses (net), depreciation and impairment as well as capital losses (net). Realised and unrealised changes in value All investment assets are measured at fair value. The difference between this value and cost is an unrealised gain or loss that is recognised net per class of asset. Changes that are explained by exchange rate fluctuations are recognised as an exchange gain or exchange loss. Realised gains or losses are the difference between the sales price and cost. For fixed-income securities cost is amortised cost and for other investment assets historical cost. At a sale of investment assets earlier unrealised changes in value are entered as an adjustment item under Unrealised gains on investment assets and Unrealised losses on investment assets respectively. Capital gains on assets other than investment assets are recognised as Other income. cont. next page

18 18 NotEs Note 1 cont. Policyholder tax Policyholder tax is not a tax on the society s profit, it is paid by the society on behalf of policyholders. The value of the net assets managed on behalf of policyholders is charged with policyholder tax which is calculated and paid each year. The cost is recognised as a tax expense. Intangible assets Intangible assets acquired by Kåpan Pensioner are recognised at cost minus accumulated amortisation (see below) and any impairment. Intangible assets are amortised over three to five years from the date they are available for use. The insurance administration system is amortised over a 10-year period. Financial instruments Financial instruments recognised in the balance sheet are equities and other equity instruments, fixed-income securities, debenture loans and other derivatives. Acquisition and divestment of financial instruments is reported on the transaction date which is the day the society undertakes to acquire or sell the instrument. Kåpan Pensioner s principle is to measure all investment assets at fair value through profit or loss (fair value option) partly because the society continuously evaluates its investment management operations on the basis of fair values, and partly because for fixed-income assets this reduces some of the accounting inconsistency and volatility that otherwise arises when technical provisions are continuously remeasured by discounting with current interest. The following paragraphs summarise the methods and assumptions that are mainly used to determine the fair value of financial instruments in the accounts. Financial instruments quoted in an active market. For financial instruments quoted in an active market fair value is determined on the basis of the asset s listed purchase price on the balance sheet date. A financial instrument is regarded as quoted in an active market if listed prices are easily available on a stock exchange, at a stockbroker s, dealer, industry organisation, company that provides current price information or supervisory authority and such prices represent actual and regularly occurring market transactions on commercial terms. Any future transaction costs in the event of a sale are not taken into account. Most of the society s financial instruments have a fair value based on prices quoted in an active market. Financial instruments not quoted in an active market. If the market for a financial instrument is not active, an estimation of fair value is obtained by applying a model-based measurement technique as set out below: For unlisted shares the external portfolio manager concerned produces a valuation based on available price information. Normally there is a time shift in the valuation of 1 3 months. This means that valuations at 31 December 2010 are typically based on a value statement from the managers produced during the period 30 September November For some financial instruments information about fair value is obtained by as assessment of the value. The valuation is usually performed on the basis of an estimation of anticipated future cash flow. Kåpan Pensioner evaluates these measurements at regular intervals and tests their validity by assessing their reasonableness and using parameters and seeing that the parameters and forecasts used coincide with actual development. For some fixed-income investments a model-based cash flow valuation of the underlying corporate loan portfolio in the investment concerned has formed the basis of the valuation. Derivative instruments Derivative instruments are taken up at fair value on the basis of the value received from a counterparty where fair value is calculated according to a valuation model that is established in the market for valuations of the type of derivative instrument concerned. Key assessments and sources of uncertainty As shown in the above section, Financial instruments not quoted in an active market, measurement of fair value is based on valuation models. Such a valuation is based partly on observable market data and partly, when no such data is available, on assumptions on future conditions. Valuations not based on published price quotations are inherently uncertain. The level of uncertainty varies and is greatest when assumptions about the future must be made that are not based on observable market conditions. For some of these assumptions minor adjustments can have a significant effect on the estimated value. When the time comes to sell the investments in the future the actual selling price reached may deviate from earlier estimations, which can have a significantly positive or negative impact on earnings. As also shown in the section with regard to unlisted shares there is a time delay regarding valuation dates. In a market with falling prices this means that the estimated fair values are overestimated and vice versa. Financial liabilities Borrowing and other financial liabilities, such as trade payables, are measured at amortised cost. Property, plant and equipment Property, plant and equipment items are recognised as an asset in the balance sheet if it is probable that future economic benefits will accrue to the society and the cost of the asset can be calculated in a reliable manner. Property, plant and equipment is recognised at cost with deduction for accumulated depreciation and any impairment with the addition of any revaluations. Depreciation is straight-line over the estimated useful life of the asset. Personal computer equipment is expensed at acquisition. Art used for decorative purposes is measured at cost. Pensions The company has individual-based pension plans for occupational pension based on the pension agreement for bank and insurance employees. The pension is secured through an insurance contract. Perpetual debenture The Council of Administration decided in 2008 to change the statutes and discontinue the special settlement of the part of the society s equity that constituted the premium adjustment reserve. According to the statutes, the premium adjustment reserve could be used by the parties to the agreements for special pension promoting purposes. The funds in the reserve following final settlement of some accepted insurance obligations were transferred to an unrestricted part of equity. The funds previously provided to the society via the reserve will in future be provided through a subordinated loan.

19 19 NotEs Note 2 Disclosures about significant risks and uncertainties Kåpan Pensioner s net profit depends both on the insurance business and the insurance risks that are managed and on investment management operations and financial risks. Risk and risk management are therefore part of the operations of the insurance company. The purpose of the society s risk management organisation is to identify, measure and control the biggest risks to which the company is exposed. The key purpose is to ensure that the insurance company has an adequate solvency in relation to the risks to which the company is exposed. Financial risks can in principle be managed in two ways. Firstly, measures can be taken to reduce the effect of financial risks, within the framework of the risk management process. Secondly, capital can be allocated to a buffer to cover losses which the financial risks might generate. The main responsibility for the risks to which the society is exposed rests with the Board, which is responsible for ensuring that the company s risk management and follow-up of risks (risk control) are satisfactory and that a collective function exists in the company for independent risk control and rule compliance. The Board adopts the guidelines that must apply to risk management, risk reporting, internal control and monitoring. The Board has in special instruments within certain frameworks delegated responsibility for risk management to the President and Risk Manager. These instructions are regularly revised by the Board in order to ensure that they accurately reflect the operations. Risks in the insurance business The society s obligations comprise defined contribution retirement pension insurance with a guaranteed return. The risk that exists relating to these insurance contracts is that the society cannot meet its commitments. In order to limit the risk of this occurring the assumptions that provide the basis for calculation of the guaranteed insurance amount are made with safety margins. Insurance risk is analysed continuously by the society s actuary. The insurance risk consists of several different components where the level of members guaranteed return is by far the largest. Another risk is the mortality assumption or the mortality risk that is affected by the return on the assets in relation to length of life. For the society, which has a payment period for most of its pensions capital of less than 5 years, when its members are aged 65-70, the mortality risk is relatively small compared with pensions paid for life. Insurance risk includes both the risk that the insurance result in the next year will be unusually unfavourable (random risk, provision for unearned premium and residual risks) and that the settlement of claims outstanding will be more expensive than estimated (parameter error). Calculations of best estimates, random errors, parameter errors and cancellation risks are based on actual portfolio on the closing date. With the PA 03 pension agreement, Kåpan Pensioner acquired a steadily increasing proportion of life-long pensions in the form of the individual retirement pension. This means that over time the mortality risk in the society s operations will increase. The following sensitivities exist for the most important risks in the insurance operations. The PA 03 pension agreement means that Kåpan s responsibility for final payment of remaining pensions due to factors such as illness will cease in time. Change in Change in Assumption assumption provision, SEKm Mortality 20% 314 Cost inflation 20% 115 Discount rate 1% point 3,114 Management of interest rate risks in outstanding insurance obligations The society s commitments consist to a dominant extent of fixed guaranteed interest on paid-in premiums. These commitments are valued in the technical provisions, supported by instructions and general advice from the Swedish Financial Supervisory Authority, on the basis of current market interest rates for corresponding maturities. Market interest rates rose slightly during the year, which meant that the value of obligations made fell in value by SEK 387m. In order to reduce the outstanding interest rate risk in obligations made, agreements for various types of interest rate hedges were concluded. Under these agreements fixed interest in the obligations is exchanged for a floating rate with less risk of change in value. Outstanding interest rate hedge agreements totalled SEK 10,800m (12,144). The change in value for interest rate hedges amounts to SEK 234m (-292). The total earnings impact and positive effect on solvency thus amounted to SEK 621m. Normally, the value of interest rate hedges falls if the valuation of the liability reveals a lower value. Active management of interest rate hedges during the year was successful, however, and contributed to a strengthening of earnings and solvency. Management of matching risk The society s total outstanding interest rate risk (matching risk) is a weighting of fixed-income assets fixed-interest period and the promised pension payments including the guaranteed rate on members savings until they are paid. Matching risk is defined as the interest rate risk that can be calculated as the difference between the duration of all assets including interest rate derivatives and the duration of the pension liabilities. Outstanding matching risk is measured as interest rate risk cover. Interest rate risk cover should not be less than 30% and be continuously adjusted to development of the solvency ratio and the need for interest rate risk hedging of issued commitments. The total outstanding interest rate risk calculated according to the Swedish Financial Supervisory Authority s traffic light model amounts to SEK 2,371m (2,166), corresponding to an interest rate risk cover of 35.6%. Targets, principles and methods for managing financial risks The society s business activities give rise to various types of financial risk such as credit risks, market risks, liquidity risks and operational risks. In order to limit and control risk in the operations, the insurance company s Board has adopted an investment policy with guidelines and instructions for financial activities. General objectives for risk management The society s assets must be invested in the manner that best benefits members interests. Exaggerated risk concentration should be avoided through appropriate diversification between and within different asset classes. The assets shall, taking the society s insurance commitments and changes in future value and return into account, be invested so that the society s payment ability is satisfactory and a sufficient anticipated return is achieved within the framework of prudent management. General principles for risk management The taking of risks in the society must be reasonable in relation to obligations undertaken, i.e. it must be prudent. This is complied with through limited risk taking within the requirements made on matching, diversification and risk taking. The taking of risks must also at all times be in reasonable proportion to the society s long-term targets for returns expressed as the level of the guaranteed obligations and anticipated bonus rate. cont. next page