White paper - Danica version III. White paper. Consolidation policy and business activities. at Danica Pension. Unaudited. Version III.

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1 White paper Consolidation policy and business activities at Danica Pension Unaudited Version III

2 White paper Consolidation policy and business activities at Danica Pension Contents 1. Introduction 2. Danske Bank's contribution from the Danica group 3. Danica group overview 4. Danica Pension - balance sheet 5. Assets allocated to pension obligations 6. When may the risk allowance be booked? 7. Treatment of the deferred risk allowance - the shadow account 8. Sensitivity analysis 9. The Danica group in the statutory accounts of Danske Bank 10. The Danica group Danica's business profile 12. Frequently asked questions 13. Contact persons Page

3 1.Introduction The purpose of this White Paper is to inform investors, analysts and other stakeholders of Danica Pensions activities and consolidation policy. Before moving on to a detailed description, we must clarify a couple of points: First, the purpose of this memorandum is to give an overview of the main factors that affect the Danica groups financial accounts and not least to describe their relation to the annual accounts of Danske Bank. The rules for calculating the net profit and balance sheet of a life insurance company are highly complex and sometimes very technical. This memorandum is therefore not intended to give a comprehensive description of every aspect of the Danica groups accounts. Second, it is important to understand which parts of the Danica group these issues concern. Section 3 gives an overview of the group and describes the parts of the Danica group that the subsequent analysis refers to. In section two, we explain how the results of the Danica group affect the accounts of the Danske Bank Group. We proceed to give a brief description of the structure of the Danica group and selected parts of its balance sheet. On the basis of the balance sheet, we describe the relations between the investment return, market value adjustment of provisions and Danica Pensions contribution to Danske Bank (the relationship between the Danica group and the company Danica Pension is shown in figure 1 in section 3). Next, we present a sensitivity analysis showing the relationship between the size of the investment return and Danske Banks possibility of booking the life insurance risk allowance in its income statement. This is followed by a description of the treatment of Danica in the statutory accounts of Danske Bank. After this, we describe the impacts of the changed consolidation policy, the changed accounting rules and investment strategy on Danicas accounts for Finally, in the last section we present the Danica group as a business, focusing on premiums, distribution channels and so on. A new edition of Danicas White Paper will be issued in connection with the publication of the accounts for the first quarter of

4 2. The Danica groups contribution to Danske Bank Every Danish life insurer and pension fund must file a copy of its profit consolidation policy with the Danish Financial Supervisory Authority. The executive order on contribution principle describes how earnings must be distributed between customers and owners. Danica prepares and reports its consolidation policy in accordance with the executive order. The table below shows the earnings elements from Danica that are included in Danske Banks annual accounts. Table 1: Danica's contribution to Danske Bank Item (DKr m) Net income from insurance business of technical provisions % of risk, cost, health and accident results Total risk allowance Risk-free return on shareholders' equity Profit on unit-linked business, Denmark Risk result, Forenede Gruppeliv Profit on health care business, etc Profit on Norwegian activities % of health and accident results Transfer from shadow account balance Net income from insurance business, excl. funding Funding of insurance Total net income from insurance business Earnings from investment portfolios 14 Return on assets allocated to shareholders' equity Risk-free return on shareholders' equity Return on shareholders' equity, excl. risk-free return Adjustment of contribution policy, etc Earnings from investment portfolios Funding of investment portfolios 9 9 Total earnings from investment portfolios Net income from insurance business Total earnings from investment portfolios Net funding Total contribution to Danske Banks profit before tax 18 Profit contribution from Danica (pre-tax) Danicas consolidation policy has been changed as from See further discussion in section % of technical provisions The amount is calculated as 0.5% of the average technical provisions and the collective bonus potential, excluding Forenede Gruppeliv. 3

5 2. 30% of risk, cost, health and accident results Risk result: The difference between the risk premiums for the year and claims for the year. The results are divided between shareholders equity (30%) and the customers (70%). Cost result: The difference between the cost contribution from the customers and the costs actually incurred with the addition of a security allowance of 0.5% of provisions. The result is divided between shareholders equity (30%) and the customers (70%). Efficient operations therefore benefit both shareholders equity (and thus Danske Bank) and customers. Health and accident result: A large number of Danicas life insurance and pension agreements include insurance cover on death and disablement. A portion of the premiums paid by the customers is set aside to pay for this cover. The amount set aside is a competitive parameter. The result is divided between shareholders equity (30%) and the customers (70%). In practice, the result of health and accident activities is calculated in the same way as the result of non-life activities. The health and accident result is specified in the notes to Danica Pensions annual accounts (note 7, page 32) The health and accident results of other companies in the Danica group are not included. 3. Total risk allowance The sum of items 1 and 2 is termed the risk allowance. Generally, Danske Bank may book the risk allowance to its income statement only if the realised result leaves room to do so. See section 6 for a description of the realised results. 4. Risk-free return on shareholders equity Danica Pensions assets are divided into two separate portfolios. One is allocated to shareholders equity, and the other to the customers. The risk-free return on the assets allocated to shareholders equity is included in Net income from insurance business. 5. Profit on unit-linked business, Denmark The unit-linked activities (Danica Link and Danica Balance) in Denmark are managed by the company Danica Pension I, which also has a branch in Norway. Danica Pension I is not covered by the consolidation policy (see figure 1 in section 3). Danske Bank includes the operating profit of that company in its income statement. The result includes the result of the companys health and accident business. 4

6 6. Risk result, Forenede Gruppeliv Shows Danica Pensions share of the technical result of Forenede Gruppeliv, which is consolidated on a pro-rata basis in Danica Pensions accounts. 7. Profit on health care business The result of the activities carried out by Forsikringsselskabet Danica. The company sells critical illness policies and health care schemes to business customers. These activities are treated as non-life activities, and the Bank may include the entire result in its accounts. 8. Profit on Norwegian activities This item consists of the results of the two Norwegian companies Nordenfjeldske Personforsikring and Danica Fondsforsikring as well as Danica Pension Is Norwegian branch. The bank includes the entire result of this activity in its accounts % of health and accident results According to the current rules, the health and accident business is not allowed to negatively affect life insurance customers over time, and the remainder of the health and accident results has therefore reduced the profit. 10. Transfer from shadow account balance The shadow account consists of risk allowances which could not be taken to income in previous periods, see section 6. Transfer from shadow account constitutes a change in the shadow account balance, which stands at zero at the end of Net income from insurance business, excl. funding The elements from the Danica group included in Danske Banks Net income from insurance business. 12. Net funding Danske Banks business area accounts are based on the principle that capital is allocated to the individual business areas in relation to their activities. For the other business areas, the required capital is fixed at 6.5% of risk-weighted assets. For Danica, the allocated capital is defined as the allocation of the Danske Bank Groups capital in relation to its ownership of Danica, i.e. the portion deducted from the Danske Bank Groups capital base. For Danica, this results in the following funding transactions: 5

7 Table 2: Net funding Item (DKr m) Net funding - Interest on Danica's shareholders' equity Interest on allocated capital, insurance Interest on allocated capital, investment Allocated supplementary capital Total net funding It is important to note that this item is not included in Danicas group accounts, but only in Danske Banks business area accounts. 13. Total net income from insurance business Total results of the Danica groups insurance operations. 14. Return on assets allocated to shareholders equity This item consists of the gross return on the assets allocated to shareholders equity. 15. Return on shareholders equity, excluding risk-free return The return on the assets allocated to shareholders equity less risk-free return. The risk-free return is included in Net income from insurance business. 17 Earnings from investment portfolios Comprises the return on assets allocated to shareholders equity and represents the contribution from Danica to Danske Banks net trading income. 18 Profit contribution from Danica (pre-tax) The total contribution from Danica to Danske Banks official accounts is the sum of the amounts included in Net income from insurance business and the amounts included in net trading income. The profit contribution is adjusted for the funding transactions in the business area accounts. 6

8 3. Danica group overview Danicas contribution to Danske Bank is closely linked to the composition of the assets and liabilities underlying its life and pension activities. Before we proceed to explain this relationship, we will describe the corporate structure of the group. Figure 1: The Danica group Forsikringsselskabet Danica Parent company, whose main activities are sales of health care and critical illness policies. Nordenfjeldske Personforsikring Danica Fondsforsikring Danica Pension Sales of accident insurance, etc. to the Norwegian market. Sales of market-based products to the Norwegian market. Sales of conventional life and pension business as well as health and accident insurance. These activities are subject to the consolidation policy, and the assets and liabilities related to these activities are relevant for the consolidation policy. Section 3 contains more information. Danica Pension I Danica Liv III Danica Fondförsäkring Sales of market-based products (Danica Balance and Danica Link) to the Danish and Norwegian markets. The company also writes health and accident insurance. Covers guaranteed annuities without bonus entitlement. No new policies have been written since ) Sales of unit-linked business to the Swedish market. The company also writes health and accident insurance. 1) 1 The profits of these companies are included in the return on Danica Pensions investments. It is the activities of Danica Pension that are relevant to the consolidation policy. Section 4 describes the balance sheet, which breaks down into one portion that relates to shareholders equity and one that relates to the customers. 7

9 4. Danica Pension balance sheet The assets on Danica Pensions balance sheet consist of bonds, shares, and land and buildings. The assets are divided into two separate portfolios: one is allocated to shareholders equity and the other to the companys obligations to its customers. Figure 2: Danica Pensions balance sheet Asset distribution at December 31, 2005 Shareholders equity Collective bonus potential Assets allocated to shareholders equity Assets allocated to customers Equity-related assets (DKr14.4bn) Customer-related assets (DKr 187bn) Technical provisions Bonds 71 % Shares 16% Bonds 90 % Land and buildings 10 % Other 5 % Land and buildings 8 % Assets allocated to shareholders equity are at the end of 2005 invested mainly in bonds and land and buildings, as shown in table 3. These assets provide a fairly stable return. The risk-free portion of the return is included in Net income from insurance business (see section 2.4). The portion of the return exceeding the risk-free return is included in Earnings from investment portfolios (see section 2.17). This method applies the principles generally used in Danske Banks business area accounts. The investment strategy will be changed as from 2006, see section 9. Table 3: Asset allocation Portion of the assets allocated to the shareholders equity of Danica Pension. Balance sheet Return Return (DKr m) (%) Land and buildings 1, Bonds 13, Total financial investment securities 14, Danica Pension I Amounts due Total 16, The portfolio consists mainly of short-dated bonds. At the end of 2005, the total interest-rate risk amounted to about DKr185m. 8

10 5. Assets allocated to pension obligations The liabilities consist of the market value of Danicas life insurance obligations (the technical provisions) and the collective bonus potential. The technical provisions are calculated at market value by discounting the expected future cash flow according to a discount rate. At the end of 2005, a zero-coupon yield curve, estimated on the basis of the Euro swap market with the addition of the spread between Danish and German government bonds, was used for the calculation of life insurance provisions. In 2004, a Danish swap yield curve was used. The zero-coupon rate used is shown in figure 3. The 15% tax on pension returns and an initial security margin of 5% are deducted from the zero coupon rate. Figure 3: 9

11 The value of the bond holding rises when interest rates fall. At the same time, the market value of the technical provisions rises, but because of the higher interest-rate sensitivity of the provisions, the market value adjustment of the provisions is greater than the adjustment of the bond holding. Overall, a decline in interest rates results in a negative value adjustment for Danica Pension. Consequently, Danica has bought financial instruments in order to cover the gap between the two positions. Figure 4 shows the relationships among assets, liabilities and financial instruments. Figure 4: Market value adjustment of assets and liabilities Market value adjustment Market value adjustment Market value adjustment 0 Bonds Total ex. fin. instr. Provisions* 0 Financial instruments Total ex. fin. instr. 0 Total value adjustment Interest Interest Interest Note: This figure is included for illustrative purpose only. *The market value adjustment is seen from Danica Pensions point of view. Increasing interest rates reduce the market value of the provisions and correspond to a positive value adjustment for Danica Pension. The objective in investing assets is to maximise the investment return while taking into account the need to match any value adjustments on the liabilities side as a result of changes in interest rates. 10

12 In addition to the value adjustment of the bond portfolio and the financial instruments, the investment return includes the return on the portfolio of shares, land and buildings, and other assets. Table 5 highlights the balance sheet and return for Table 5: Return and value adjustment in customer funds Balance Return Return, (DKr m) (%) Land and buildings 14,982 1, Shares 29,000 5, Bonds 133,379 9, Other financial investment securities 9,293 4,693 - Total 186,654 21, The investment return and changes in liabilities determine whether or not the risk allowance may be booked to the income statement or must be postponed. Section 6 describes the elements included in this calculation. 11

13 6. When may the risk allowance be booked? The risk allowance may not exceed the realised result, defined below. In other words, the realised result has to be positive for Danske Bank to book part or all of the risk allowance to the income statement. Table 6 shows the calculation of the realised result. Table 6: Realised result, 2005 Item (DKr m) Return on investment securities (see table 5) 21,483 16, Average technical interest rate of 2.8% in 2005 (2.9% in 2004) 5,230 4, Return to health and accident result Cost and risk result before bonuses Profit on reinsurance Value adjustment of provisions 6,297 5,505 6 Realised result 9,762 5,695 1 Return on investment securities The total gross investment return of assets allocated to customers. 2 Technical interest rate Contracts with customers are based on a technical interest rate. The technical rate has fallen sharply in recent years owing to the general fall in interest rates. Until 1994, the technical rate was 4.5%. From 1994 to 1999, the rate was 2.5%. At present, new policies are written with a maximum rate of 1.5%. Table 7 shows the distribution of provisions according to the various technical rates at the end of 2005, compared with the distribution at the end of Table 7: Technical provisions broken down by guaranteed benefit Technical provisions End-2005 End-2005 End-2005 (DKr m) (%) (%) Technical interest rate in % 0 1, , , , til Technical provisions 149, Without guarantee 21,593 Total technical provisions 171,111 The total provisions for insurance and investment contracts, which contain outstanding claims provisions and collective bonus potential as well as technical provisions, amount to DKr188bn (see page 25 of Danica Pensions Annual Report). 12

14 As the table shows, the technical interest rates have generally become lower. The calculation of the realised result entails the deduction of interest based on the technical rate. For 2005, this corresponds to about 2.8% of technical provisions. 3 4 Health and accident, cost and risk result before bonus addition and reinsurance result Part of the total investment return is attributable to the health and accident result. In addition, the cost and risk result before bonus addition is included in the realised result. 5 Value adjustment of provisions At the end of 2005, a zero-coupon yield curve, estimated on the basis of the Euro swap market with the addition of the spread between Danish and German government bonds, was used. In 2004, a Danish swap yield curve was used. At the beginning of 2005, the transition to the new zero-coupon yield curve increased technical provisions by DKr 533m and reduced the collective bonus potential by a corresponding amount. In 2005, the market value adjustment of the provisions rose as a result of the general fall in interest rates. 6 Realised result Whether the realised result is positive or negative determines whether or not the Bank can book the risk allowance to its income statement. If the result is positive, the Bank can book part or all of it to the income statement. If the result is negative, the risk allowance must be postponed and be booked in a year when the realised result is positive. Four factors combine to determine how large a risk allowance may be booked: risk allowance for the current period (defined in note 3 to table 1) the realised result (see table 6) the shadow account (see section 7) the size of the future bonus potential The amount of the risk allowance that may be booked is subject to certain restrictions; this issue is explained in section 8. 13

15 Table 8 shows the relation between the realised result at Danica and Danske Banksresult. Table 8: Profit contribution to Danske Bank from customer assets at Danica Pension (DKr m) 2005 Realised result 9,762 Tax on pension returns (PAL) -2,744 Bonuses -1,650 Return on investments allocated to shareholders' equity 601 Health and accident result -247 Profit before adjustment of collective bonus potential 5,722 Change in collective bonus potential -3,765 Profit to Danske Bank before tax from Danica Pension 1,957 FD (health care insurance) and Norwegian companies 66 Profit to Danske Bank before tax from Danica Group 2,023 The tax on pension returns (15%) is deducted from the realised result. The difference between the technical interest rate and the interest rate on the savings accounts (the bonus) is likewise deducted. The return from reinsurance and the health and accident result is added. The change in the collective bonus potential is based on the actual investment return and the bonus policy. Changes in the collective bonus potential have a one-to-one effect on Danske Banks return (with positive and negative amounts reversed). This adds up to Danske Banks result from Danica Pension before tax. The addition of the result from FD and the two Norwegian companies (see notes 6 and 7 to table 1) gives the total result before tax that Danica contributes to Danske Bank. The result from Danica (pre-tax) equals the result that appears in the Danica groups external accounts. It also equals the result distributed between net income from insurance business and earnings from investment portfolios in table 1 after adjustment for the funding transactions made in relation to the business area accounts. 14

16 7. If the risk allowance cannot be booked the shadow account Any risk allowance that cannot be booked for the current year may be booked at a later time when the realised result permits. The balance of postponed risk allowances is carried forward in a shadow account and earns interest at the risk-free rate of interest. The table below shows a history of the shadow account since Danicas adoption of market value accounting. Table 9: The shadow account Beginning Increase Decrease End (DKr m) of year Risk allowance Interest of year , , The remaining shadow account was booked as income in Section 8 describes the sensitivity in relation to the investment return and the possibility of booking the risk allowance to the income statement. 15

17 8. Sensitivity analysis If the investment return exceeds the technical interest rate, the Bank may (other things being equal) book part or all of the risk allowance to the income statement as shown in the table below. Table 10: Sensitivity analysis of the relationship between return on investment and risk allowance Scenario (in % of provisions) A B C D Return on investment securities Technical interest rate Cost and risk result and return to health and accident Profit on reinsurance Profit before value adjustment Value adjustment of provisions Realised profit Risk allowance may be rocognised through P&L in whole or in part No Yes Yes Yes - Tax on pension returns (PAL) Bonuses (diff. between guaranteed benefit and interest on policyholders' savings) Profit after PAL and bonus Risk allowance of 0.5 % of provisions Reduction of bonus potential to book full allowance In principle, the realised result can be used to cover the whole or part of the risk allowance for the period and the potential balance on the shadow account, since the PAL and bonuses are covered by the collective bonus potential. This opportunity should, however, be seen in conjunction with the trend in the bonus potential. The assumption in the scenarios below is that the realised result covers the PAL and bonuses, if possible. A Since the investment return is not large enough to cover the technical interest, the risk allowance cannot be booked. The bonus reserves are reduced by 1.5% of the provisions to cover obligations towards customers. The collective bonus potential accounted for 7.3% of the provisions at the end of

18 B The investment return is larger than the technical interest, and the realised result is positive. This means that the risk allowance may be booked in whole or in part. However, the realised result cannot cover expenses for the tax on pension returns and the mark-up from the technical interest rate to the rate on policyholders savings. To cover these payments, 0.2% of the provisions will be deducted from the bonus reserves. For the risk allowance to be booked in the income statement, additional use of the bonus reserves at a one-for-one ratio is required. C The realised result covers all customer obligations and leaves 3.0% of the provisions for additional profit allocation. This return also covers the PAL, bonuses and the risk allowance for the period with no major reduction in the collective bonus potential. In both scenarios B and C, it is possible to book the risk allowance from the period. In scenario B, booking the risk allowance reduces the bonus potential by a further 0.5% of the technical provisions. In both scenarios it is also possible to book from the shadow account; this will, however, cause a (further) reduction of the bonus potential at a one-to-one ratio. D In this scenario, the return covers tax, bonuses and the risk allowance for the current year. In addition, it is possible to book risk allowances from earlier periods totalling 1.9% of the provisions to the income statement without reducing the bonus potential. 17

19 9. The Danica group in the statutory accounts of Danske Bank Following the implementation of IFRS, the Danica group is consolidated fully in Danske Banks statutory accounts. The accounts of the Danica group are consolidated in the statutory accounts as follows: Danicas assets can be divided into assets related to insurance contracts (contracts subject to significant insurance risk or entitling the policyholder to a bonus), investment contracts (contracts subject to insignificant risk) and assets allocated to shareholders equity. In 2005, 91% of Danicas assets consisted of insurance contracts, 2% of investment contracts and 7% of assets allocated to shareholders equity. Assets relating to insurance contracts are consolidated under Assets under insurance contracts. These assets consist of financial assets, investment properties, other tangible assets etc. Liabilities relating to insurance contracts are consolidated under Liabilities under insurance contracts. The liabilities consist of technical provisions, provisions for unit-linked contracts, collective bonus potential, other insurance provisions and other liabilities. Payments received on insurance contracts are recognised under Net premiums, while benefits and changes in provisions are recognised under Net insurance benefits. The return on the allocated assets is recognised under the respective income statement items. The return is allocated to policy holders under Net insurance benefits. Investment contracts are recognised as financial instruments. Savings relating to unit-linked investment contracts are included under Assets under pooled schemes and unit-linked investment contracts. Deposits are included in the balance sheet under Deposits under pooled schemes and unit-linked investment contracts. Deposits/payments under investment contracts are recognised directly as a change to the liability in the balance sheet. The return on the assets and its accrual to the customers accounts is recognised under Net trading income. The allocated portfolio of assets, corresponding to the size of shareholders equity, is consolidated with the groups other assets. The assets relate to Bonds, Investment properties and, from 2006, Equities. In the financial highlights, Danica is still presented in a single line under Net income from insurance business. In the segment note, Danica is presented according to the above principles in the statutory format. The differences between the presentation of Danica in the Groups income statement and the financial highlights are included as part of Reclassification in the segment note. 18

20 10. The Danica group 2006 Danica Pension announced a change to its consolidation policy effective for Also, it will in 2006 introduce new rules on the recognition of future administrative results for unit-linked insurance contracts. As a result of these changes, the presentation of Danica in Danske Banks segment reporting, Fact book etc. will be changed. The presentation will take effect as from the quarterly report for the first quarter of The changes are briefly presented in the following. Changed consolidation policy The calculation of risk allowance in Danica Pension has been changed in the following ways: The direct percentage of provisions is increased from 0.50% in 2005 to a maximum 0.62% in 2006; The health and accident results will be recognised at 100% against at 30% previously; The cost and risk results will not be recognised in 2006 against at 30% previously. Based on this, Danica Pension expects a risk allowance in 2006 of approximately 0.5% against 0.61% in Comparative figures are not adjusted for the changed consolidation policy. Changed accounting rules unit-linked contracts The rules on the accounting treatment of changes in the present value of future administrative results have been changed effective from 2006, to the effect that provisions in certain cases should at least correspond to the surrender value of the policies. As a result of the changed accounting policy, Danicas provisions for unit-linked policies at the beginning of 2006 will be increased by up to DKr0.6bn, deferred tax will be reduced by up to DKr0.2bn, and shareholders equity will be reduced by up to DKr0.4bn. If the accounts for 2005 had been presented according to the new policy, the pre-tax profit would be DKr182m lower and the net profit would be up to DKr131m lower. The comparative statements will be adjusted for this change. Changed investment strategy It has been resolved to gradually increase investment in equities in 2006, both in respect of customer funds and shareholders equity. As a result of the long-term investment strategy, the allocated assets will in future more closely reflect the asset composition of customer funds, resulting in a greater proportion of equities. As a consequence, the return will be more dependent on the performance of the financial markets. Change in the presentation of investment results Going forward, the total investment return on shareholders equity will be recognised fully in the Danica segment. Previously, only the risk-free return was included in Danica Pension and the return in excess of the risk-free return in the Danske Markets segment. Comparative figures will be adjusted.

21 11. Danicas business profile Introduction The Danica group offers insurance-based pension schemes, life insurance and health care products to employers and private individuals. These include both conventional policies based on the payment of interest on savings and unit-linked schemes in which the customers select the risk profile themselves. Danicas primary market is Denmark, which accounted for 89% of the groups gross premiums in Some 8% of gross premiums came from its subsidiary in Sweden, and 3% came from activities in Norway. Danica has been assigned an AA- rating in the category of insurer financial strength by Standard & Poors. Conventional life and pension premiums Danicas business volume has risen sharply in recent years, making it Denmarks leading pension provider on the basis of premiums. Table 11: Premiums, including investment contracts (DKr bn) Danica Traditionel Danica Balance and Danica Link Internal transfers Health and accident International Total premiums Danicas share of the Danish market, where Danica competes, is more than 30% based on premiums. Figure 5: Premiums (DKr bn) 18 Premiums groups Danica Pension PFA Nordea Pension Codan Topdanmark AP 19

22 Distribution Danica uses several distribution channels. It has a large number of salespersons and advisers who address the corporate segment primarily. They are associated with a number of regional offices around Denmark. In addition, Danica works with many insurance agents who also operate in the market for corporate schemes. Most sales of policies to private individuals take place through the Danske Banks and BG Banks extensive branch networks. Outside Denmark, the company works closely with Danske Bank Sverige in Sweden and Fokus Bank in Norway. Unit-linked policies Danicas unit-linked insurance products also known as Danica Link and Danica Balance products give customers the opportunity to influence the way in which their pension savings are invested. This means that the returns accruing to the pension account are a direct reflection of the investments chosen. Customers can choose either to be active investors or to leave the investment decisions to Danica. Table 12: Premiums on Danish unit-linked policies (DKr m) Total Total Current premiums 1,403 1,022 Single premiums 1, Investment contracts Total premiums on Danish unit-linked business 3,212 1,872 In 2005, the number of Danica Link customers rose from around 34,000 to 48,500. Growth was especially strong in the corporate segment, where the number of customers increased from around 25,000 to 36,000. In May, Danica introduced a new lifecycle product, Danica Balance. Its reception among existing as well as new customers was very positive, and the group is seeing strong demand for the product. Danica Balance combines the advantages of collective investment with individual adjustment of investments. The result is a simple product, allowing the customer to choose a larger equity share than normally available in conventional products. In Denmark, Danica Link customers can invest their pension savings in securities and at the same time insure themselves against capital loss, as Danica Link is available both with and without a guarantee. Customers can choose from two payment guarantees. Payment Guarantee I guarantees customers benefits equal to at least 95% of their contributions, while Payment Guarantee II guarantees an average annual return of at least 1.25%. Customers can also take out insurance cover against critical illness, disablement and death; these covers are requested mainly under corporate schemes. 20

23 12. Frequently asked questions 1. What assets has Danica Pension invested in? At the end of 2005, 75% of the assets were invested in bonds, 16% were invested in Danish and foreign equities, and 9% were invested in real property. In 2006, the equity share will be increased to 20-25%. 2. How much shareholders equity does Danica Pension have, and how much capital do the authorities require? At the end of 2005, Danicas equity stood at DKr16.2bn, and the minimum capital requirement/solvency margin is DKr7.5bn. 3. What is interest on policyholders savings, and who determines the interest rate? Interest on policyholders savings is the return that is added to the individual policyholders account for a given year. If the actual investment return is lower than the rate of interest on policyholders savings, the difference is taken from the collective bonus potential. Danica normally announces the rate of interest on policyholders savings for one year at a time. Danica reserves the right to adjust this interest rate if the economic situation on which the interest rate is based should change significantly. 4. Why is there a difference between the interest on policyholders savings and the average technical interest rate? Contracts with customers are based on a technical interest rate. Since the investment return might exceed the technical interest rate, however, it is possible to add additional interest to the account during certain periods. The rate of interest on policyholders savings is of course a competitive parameter. The other side of the issue is consideration for the companys reserves. 5. What is PAL tax? PAL tax is a tax on pension returns charged at a fixed rate of 15% to life insurance companies and pension funds and others in Denmark on their investment returns. 21

24 6. Why does Danica buy financial instruments? Danicas benefit guarantees for life insurance policyholders pose a risk if the general level of interest rates declines. This is because the calculation rate and thus the market value of life insurance obligations rise. Danica has therefore bought a portfolio of financial instruments that provide protection against a decline in interest rates. Danica also buys financial instruments that provide protection against an increase in interest rates. 7. Who owns Danica? Danica is 100% owned by Danske Bank. 8. Does Danica sell non-life insurance? Danica has divested virtually all of its non-life insurance activities. Today Danica sells health care insurance as a supplement to conventional life and pension products. The Danske Bank Group has an agreement with Topdanmark to sell that companys non-life insurance products through the Groups sales channels. 9. Where can I find information about Danica Pensions financial accounts? Danica publishes annual and semi-annual accounts. They are (in summary) available at Where can I find information about the Danske Bank Group? Our Web site, and the Investor Relations section in particular provide comprehensive information about the Group. 11. Why has the EU approved a change in accounting standards for unit-linked business? For a number of years, the European Union has wanted to harmonise accounting standards to facilitate comparisons across borders and industries. This is an ongoing process. In 2005, the EU approved the International Financial Reporting Standards for insurance companies. In Denmark, insurance companies present accounts in accordance with rules (executive order) prepared by the Danish Financial Supervisory Authority. In 2005, these rules have been changed to more accurately match the EU rules. 12. Why has the contribution model been changed with effect from 2006? In 2005, Danica Pension notified the Danish Financial Supervisory Authority of the change in its contribution model. The change in the model will reduce the risk allowance from 0.61% of technical provisions in 2005 to about 0.5% in The reduction in the risk allowance is designed to increase the competitive strength of Danica Pension. The reduced risk allowance will, together with other measures to be taken in 2006, benefit Danicas customers. 22

25 13. Contact persons Danske Banks Investor Relations department is responsible for all IR matters for the Groups subsidiaries. If you have any questions, please contact us. You can also find more information about the entire Danske Bank Group at Disclaimer This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offers to purchase or sell any securities, currency or financial instrument. Whilst reasonable care has been taken to ensure that the contents of this publication are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff may perform business services or hold, establish, change or cease to hold positions in any securities, currency or financial instrument mentioned in this publication. The Danske Bank Groups research analysts are not permitted to invest in securities under coverage in their individual research sectors. This publication is not intended for private customers in the UK or any person in the US. Danske Bank is regulated by the FSA for the conduct of investment business in the UK and is a member of the London Stock Exchange. Copyright 2006 Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission. 23

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