ceo S MeSSaGe Claims trend Quality assurance and change work 181

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1 CEO s message Claims trend Sickness-related absence continued to decline in Sweden in The total sickness rate in the national insurance system (expressed as the number of days in which sickness benefits, rehabilitation benefits, and disability- and so-called activity support were paid out per insured between 16 and 64 years of age) decreased by 4.1%. The decrease a year earlier was 3.4%. The number of insureds drawing sickness benefits at the end of October 2007 was 15% lower than in the same month a year ago. This trend is very gratifying, since the high rate of sickness-related absence in Sweden reflects a high degree of personal suffering at the same time that it has put a substantial economic strain on society. The drop in long-term disability cases in the national insurance system is particularly gratifying. In October 2007, 69,977 insureds were drawing sickness benefits for a period of longer than a year, which is a decrease of more than 13% in one year s time. The general drop in sickness-related absence is also reflected in our contractual group disability insurance. Slightly more than 111,000 new claims were filed in 2007, which is a decrease of roughly 11,000 cases compared with a year earlier. Through AFA Sickness Insurance we are also the provider of the waiver-of-premium and waiver-of-fee insurance elements that are included in various occupational pension plans. These forms of insurance protect employees contributions to their occupational pension plans during the time they are incapacitated from working. In 2007, slightly more than 76,000 waiver-of-premium claims were filed, while approximately 11,000 new waiver-of-fee claims were filed. In 2006, Försäkringskassan (the Swedish Social Insurance Agency) concentrated its processing of work injury claims to its respective county offices. In 2008 this processing will be transferred to five national insurance centres, which is expected to result in more efficient handling and more legally secure application. The number of work injury claims filed with Försäkringskassan shows a slightly declining trend, and 15,000 applications for annuities were filed in With respect to workers compensation insurance (TFA), I can certify that the number of newly reported claims in 2007 was approximately 48,000 a decrease of approximately 1,000 compared with a year earlier. Following the implementation of our MEGA business support system, we have noted shorter processing times, and we now have virtually no backlog all filed claims are currently being processed. The TFA board, which consists of representatives from the parties to collectively bargained contracts, can recommend changes in workers compensation decisions by AFA. Unfortunately, in recent years we have seen an increase in the backlog of TFA and TFA-KL claims waiting for review by the board. During 2007 the board held a large number of extra meetings, and the waiting time for reconsideration by the board has decreased dramatically. No noticeable change in the number of claims was noted for TGL insurance (occupational group life), while for our AGB insurance (severance allowance), the number of cases decreased during the year from approximately 10,300 to roughly 8,200. As previously, our processing times for these insurance plans are very short. Quality assurance and change work In 2007 we launched a project entitled AFA Insurance Parallel with efficiency improvements in our work brought about by new information technology and improved work methods, our caseload has decreased. As a result, a redundancy of approximately 15% has arisen in our workforce. During the autumn we conducted a competence mapping process of essentially all employees, which served as the basis for decisions on which employees are judged to be redundant. These redundancies have been resolved through offers for early retirement and severance packages. We have also decided on a reorganisation designed to enable us to better meet the requirements and preferences from our principals and insureds. A second phase of AFA Insurance 2010 will lead to further improvements in leadership and performance management. We will also continue work on developing our organisation, our work methods and our ability to use new technologies. This work is aimed at ensuring the AFA Insurance will continue to be the natural choice for Sweden s labour market parties. AFA Insurance has been working for many years with the business development model created by the Swedish Institute for Quality (SIQ). Through the evaluations conducted by SIQ we have gained continuous reassurance årsredovisning 181

2 CEO s message that we are on the right path. In 2005 we were recognised for Excellence in Europe, and in 2007 our operations were judged to have such a high standard of quality that we were awarded a Swedish Quality distinction. This is clearly an important milestone in AFA Insurance s history, but it does not in any way mean that we will be reducing our ongoing work on improving our operations. In 2005 and 2006 we took first place in a national ranking of telephone & customer service for companies with 500 1,000 extensions. Evaluations are made of how customers are greeted as well as of the service representatives interest, attitude and response times. We participated in this competition also in 2007 and won a respectable second place. Review of decisions In 2007 Sweden s private sector and municipal/county council parties reached agreement entailing that decisions made by an AFA company shall be reconsidered by the insurer if requested by the party that the decision pertains to. As a result of this agreement, a change will be made in the work of the so-called product boards. Previously, if an insured wanted to appeal a decision to the Labour Market Insurance Arbitration Board, it was required that the case first be reviewed by a product board. These reviews will now instead be conducted by AFA Insurance s Review Department, which is organisationally part of the CEO s Legal Affairs staff and is independent from claims settlement. The product boards will remain intact, but their duties will be refined into a more advisory role vis-à-vis insurers regarding interpretations of the parties collective agreements. Research report In summer 2007 a research report entitled A tough puzzle supplementary benefits for loss of income (ESS 2007:01) was submitted to the government s Expert Panel for socioeconomic studies. A startling finding of the report is that 15% 40% of people entitled to supplementary, collectively bargained benefits for disability or so-called activity support do not receive it. According to the authors, a likely explanation for why many insureds do not receive these supplementary benefits is that they are not aware they exist and therefore do not file claims and receive such benefits. The report attracted considerable mass media attention. From what I ve seen, the researchers studied many cases of people who were granted disability benefits or activity support in 2004, and who also received monthly benefits from AFA Sickness Insurance in that same year. This method is riddled with errors. Persons who are granted benefits from Försäkringskassan in the final months of a year rarely get around to filing a claim with us at the same time, and their initial payments normally are not made until in the following year. We estimate that about 20% of insureds who are granted disability benefits and activity support receive their first payments in the year after Försäkringskassan has made its decision. We will be further analysing the researchers conclusions in order to draw our own conclusions about the size of any lost benefits. One should also keep in mind in this context the ambitious investments in education and information about AFA insurance that are made by the labour market parties. The parties efforts in this area are very important for ensuring that our insureds do no lose out on the benefits they are entitled to. Asset management Essentially every year since 1998 I have been able to report that our asset management has succeeded in delivering excess returns compared with the benchmark portfolios set by the Board of Directors. However, in 2007 we were not as successful, when the AFA companies fell short of the benchmark returns by 1.1 percentage point. This weak result is attributable to poorer performance for our investments in equities. The total return for the AFA companies in 2007 was 3.2%. Viewed over time, however, I can still say that we beat our index in eight out of the last ten years and that the result of this in monetary terms was approximately SEK 10 billion. Regulatory changes In autumn 2006 the Ministry of Finance issued a memo containing a proposal outlining a reform of the national solvency system for insurance companies. The national solvency system was planned to take effect in January 2008 and was thought to serve as a transitional solution pending the establishment of a joint-european system (Solvency II). However, in spring 2007, work on this project was discontinued. This has given rise to a financial market in which financial players cannot invest on equal terms. AFA Insurance therefore feels that it is of utmost importance 182 årsredovisning

3 CEO s message that initiatives are taken on a legal change or, alternatively, that the opportunity is created to receive a dispensation in order to harmonise the conditions for earnings capacity until the time that Solvency II is implemented. In 2007 all of AFA s insurance companies received a green light in the Financial Supervisory Authority s traffic light test. This is a confirmation that AFA s companies have a financial position in which the assets cover the companies obligations to their insureds with an adequate degree of certainty. During the year, AFA Insurance worked on its responses to the Quantitative Impact Study (QIS) that the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) circulated to insurance companies in the EU. This is an important step in designing and calibrating a future, joint-european solvency system (Solvency II). AFA Insurance has a positive view of the proposed method, but finds it difficult to classify companies into homogenous groups, which leads to a situation whereby the proposed calibrations of insurance risks do not describe the actual risk situation. This results in unreasonably large estimates of solvency capital requirements. AFA Insurance has pointed this out in the consultative process and will be actively working on this issue internally as well as responding to it again in spring 2008 in the planned fourth Quantitative Impact Study (QIS4). Parallel with this, AFA Insurance is participating in a reference group for the Ministry of Finance as support in the EU negotiations for a framework directive for Solvency II. Starting in 2007, the companies belonging to AFA Insurance are reporting in accordance with so-called legally limited IFRS. This is part of an initial phase of developing and harmonising the accounting of insurance companies internationally. Development is now moving into a second phase with preliminary conclusion scheduled for AFA Insurance is actively monitoring IFRS developments and believes that it is of utmost importance that developments in this area are made in step with the Solvency II project. Claims prevention in the workplace The claims prevention strategies that have been jointly adopted by the labour market parties are the backbone of our activities in this area. Background work on decisions is conducted by two drafting organisations, one for the private sector and one for municipal and county council activities. In order to develop decision-making support for the drafting bodies, a development project called AFA Analysis was conducted in The aim of the project is to develop business intelligence analyses, forecasting and measurement of the effects of preventive measures. The project has come up with various methods and models for conducting such work, which will continue in dialogue with AFA Insurance s clients. As regards financial support to research, development and knowledge-sharing about work environments, health and lifestyles, we continue to be one of Sweden s largest provider of grants. At present nearly 150 projects are being conducted with financial support from AFA Insurance. In addition to the ordinary invitations for grants made during the financial year, two special programme initiatives were made surrounding women s work environments in industry and noise at the workplace. Sweden s municipal and county council parties have decided on a focus for their claims prevention work for the next two years. The overall objective is to create conditions for a low level of sickness-related absence, reduce occupational injuries and contribute to well-being and healthy work environments while giving all employees an opportunity to exert influence and participate in and develop the process. Sickness-related absence at AFA Insurance A high rate of sickness-related absence is a problem for any company or organisation. Naturally, an organisation like AFA Insurance should be a model in this respect. Our work on achieving and maintaining a low level of sicknessrelated absenteeism continues, and we are now beginning to see the results of our efforts. Despite this, we failed to reach our goal of lowering sickness-related absence to below 4.5%, and during the year it was 5.4%. I am pleased to note, however, that our greatest success was in reducing long-term absences due to sickness. Work environments and rehabilitation will continue to be priority focuses at AFA Insurance in Our initiative in a project called AFA a healthy workplace will be focused on direct measures as well as on more long-term initiatives in this area. Torgny Wännström Managing Director årsredovisning 183

4 AFA Sickness Insurance RESULT (SEK million) Premiums earned Investment income, insurance business Claims incurred Operating expenses Other technical charges Technical result, insurance business Net investment income plus unrealized changes in the value of investments Result before appropriation and tax NET PROFIT FOR THE YEAR FINANCIAL POSITION (SEK million) Investment, current value Technical provisions Net asset value of which deferred tax Capital base Requisite solvency margin KEY RATIOS (%) Claims ratio 176,7 111,6 173,2 174,0 176,1 Expense ratio 1,7 1,3 1,3 1,2 1,2 Combined ratio 178,4 112,8 174,5 175,2 177,3 Direct yield 4,0 3,2 3,6 4,1 4,4 Total return 3,3 6,3 12,6 8,6 9,0 Solvency margin 430,3 375,8 301,5 230,1 209,5 184 årsredovisning

5 AFA Work Injury Insurance RESULT (SEK million) Premiums earned Investment income, insurance business Claims incurred Operating expenses Other technical charges Technical result, insurance business Net investment income plus unrealized changes in the value of investments Result before appropriation and tax NET PROFIT FOR THE YEAR FINANCIAL POSITION (SEK million) Investment, current value Technical provisions Net asset value of which deferred tax Capital base Requisite solvency margin KEY RATIOS (%) Claims ratio 133,4 219,4 275,0 380, ,4 Expense ratio 13,7 10,5 12,0 9,6 74,1 Combined ratio 147,1 229,9 287,0 389, ,5 Direct yield 3,7 3,6 3,9 4,1 4,2 Total return 2,7 8,0 16,2 9,1 10,8 Solvency margin** 2 063, , , , ,4 ** The solvency margin is calculated as net asset value in relation to premiums earned, expressed as a percentage. årsredovisning 185

6 AFA Life Insurance OVERVIEW OF TECHNICAL ACCOUNT (SEK million) Property & casualty insurance business Premiums earned 2,2 2,5 1,8 1,7 21,3 Other technical income ,9 280,8 479,5 Claims incurred 251,4 233,2 300,4 271,3 149,3 Operating expenses 32,5 31,5 31,3 29,1 27,2 Allocated investment return transferred from the non-technical account 49,2 422,5 836,5 408,4 463,5 Technical result, property & casualty insurance business 232,5 160,3 651,5 390,5 787,8 Life assurance business Premium written 476,3 201,1 535,5 292,0 593,6 Claims incurred 536,1 545,6 576,4 536,2 548,5 Life assurance provisions 68,9 137,5 182,1 87,0 109,5 Operating expenses 41,0 39,2 37,4 34,3 35,3 Other expenses 12,3 12,1 23,7-23,4 Net investment income plus unrealized changes in the value of investments 104,2 276,7 449,0 281,8 267,4 Technical result, life assurance business 60,0 18,4 164,9 90,3 144,3 OVERVIEW OF NON-TECHNICAL ACCOUNT Technical result, property & casualty insurance business 232,5 160,3 651,5 390,5 787,8 Investment income, net 60,0 18,4 164,9 90,3 144,3 Result before appropriations and tax 172,5 178,7 816,4 480,8 932,1 Appropriations 90,4 4,9 368,0 139,7 707,4 Pre-tax result 262,9 183,6 448,4 341,1 224,7 Tax on result of life assurance business 20,3 20,5 44,2 18,4 1,0 NET PROFIT/LOSS FOR THE YEAR 283,2 163,1 404,2 322,7 223,7 Background To Key Ratios AFA Life Insurance s insurance operations consist exclusively of risk insurance without any savings element. The applicable key ratios for life assurance business do not make any distinction between life assurance with savings and without savings, and thus cannot be used for comparisons between these types of insurance. AGB insurance is a special type of property & casualty insurance distinguished by, among other things, the fact that the extent of claims shifts in pace with changes in the situation in the labour market. Therefore, it is difficult to make comparisons of the key ratios for ordinary property & casualty insurance and AGB insurance. 186 årsredovisning

7 AFA Life Insurance FINANCIAL POSITION (SEK million) Property & casualty insurance business Investments 4 852, , , , ,9 Technical provisions 104,7 134,5 287,8 337,1 319,4 Net asset value 4 814, , , , ,6 Capital base 4 814, , , , ,6 Requisite solvency margin 72,3 66,9 57,3 49,9 42,0 Life assurance business Investments 3 346, , , , ,2 Technical provisions 2 464, , , , ,9 Net asset value 983,0 923,7 906,1 742,2 647,2 of which deferred tax 105,5 86,0 66,3 23,1 - Capital base 983,0 923,7 906,1 742,2 647,2 Requisite solvency margin 338,6 334,9 349,1 324,5 343,8 AFA Life Insurance total Investments 8 198, , , , ,1 Technical provisions 2 569, , , , ,3 Net asset value 5 797, , , , ,8 of which deferred tax 105,5 86,0 66,3 23,1 - Capital base 5 797, , , , ,8 Requisite solvency margin 412,1 401,8 406,4 374,4 385,8 KEY RATIO (%) Property & casualty insurance business Claims ratio , , , ,8 700,9 Expense ratio 1 477, , , ,8 127,7 Combined ratio , , , ,6 828,6 Direct yield 2,5 2,6 4,6 3,5 3,9 Total return 0,9 8,8 18,5 9,3 11,1 Net asset value , , , , ,6 Life assurance business Management expense ratio 1,2 1,2 1,1 1,1 1,2 Direct yield 3,6 2,8 3,7 3,9 4,6 Total return 3,4 8,0 14,5 8,7 9,1 Net asset value 181,5 459,3 156,8 254,2 109,0 AFA Life Insurance total Direct yield 3,2 2,7 4,2 3,7 4,2 Total return 1,9 8,4 16,9 9,0 10,2 Net asset value 1 263, , , ,2 727,4 årsredovisning 187