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

Transcription

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

2 White paper Profit policy and business activities at Danica Pension Contents Page 1. Introduction 2 2. The Danica groups contribution to Danske Bank 3 3. Danica group overview 6 4. Danica Pension balance sheet 7 5. Assets allocated to pension obligations 8 6. When may the risk allowance be booked? If the risk allowance cannot be booked - the shadow account 8. Sensitivity analysis 9. The Danica group in the statutory accounts of Danske Bank 10. The Danica group Danicas business profile 12. Present value of expected future administrative results 13. Frequently asked questions Contact persons 27 1

3 1. Introduction The purpose of this White paper is to inform investors, analysts and other stakeholders of Danica Pensions activities and profit policy. Before moving on to a detailed description, we must clarify a couple of points: First, the purpose of this White paper 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 profit policy, the changed accounting rules and investment strategy on Danicas accounts for Subsequently, we present the Danica group as a business, focusing on premiums, distribution channels and so on. Finally, we describe the change to the accounting policies regarding the recognition of the present value of expected future administrative results. A new edition of Danicas White Paper will be issued in connection with the publication of the annual report for

4 2. The Danica groups contribution to Danske Bank Every Danish life insurer and pension fund must file a copy of its profit 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 profit 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 group Item (DKr m) Net income from insurance business 1 Result - technical provisions 265 1,128 2 Health/accident insurance, insurance result Health/accident insurance, investment result Risk alloowance, total Insurance result, Denmark - Unit Link Insurance result, Denmark - Non-life Insurance result, Norway - Unit Link Insurance result, Norway - Non-life Investment result, equity position Net funding Change in shadow account balance Net income from insurance business 198 1,647 1 Share of technical provisions etc. In 2006, the amount is calculated as 0.62% of the average technical provisions and the collective bonus potential, excluding Forenede Gruppeliv. In 2005, the percentage was 0.5 and the amount included 30% of the risk and cost result. 3

5 2 Health and accident results, insurance result Health and accident results : A large number of Danicas life insurance and pension agreements include insurance cover on 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 allocated to shareholders equity. In practice, the result of health and accident activities is calculated in the same way as the result of non-life activities. The calculation includes a computed technical rate of interest on the provisions, but not the health and accident business share of the companys remaining return on investment. 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 here, but under items 6 and 8 below. 3 Health and accident results, investment result The return on customer funds in Danica Pension is allocated to Life insurance and Accident and health insurance in proportion to the amount of technical provisions, including the part of the allocated returns not transferred to provisions as technical interest. As from 1 April 2006, the return on swaptions is not included in the investment return used in the allocation to health and accident insurance. 4 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. 5 Insurance result 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 profit policy (see figure 1 in section 3). Danske Bank includes the operating profit of that company in its income statement. These results are excluding the result of the Companys health and accident business and the investment return on equity. 6 Insurance result on personal injury business, Denmark Comprises the technical result of Forsikringsselskabet Danica, the result of the health and accident business in the Danish part of Danica Pension I and the result of Forenede Gruppeliv. 7 Insurance result on unit-linked business, Norway Comprises the technical results of Danica Pension Is Norwegian branch and of Danica Fondsforsikring. 4

6 8 Insurance result on personal injury business, Norway Comprises the technical results of Nordenfjeldske Personforsikring and of the health and accident insurance in Danica Pension Is Norwegian branch. 9 Investment result Comprises the result of assets allocated to the shareholders equity in Danica Pension and the return on investments allocated to shareholders equity in Forsikringsselskabet Danica, Danica Pension I and the two Norwegian companies. It also comprises the investment return from the health and accident business in Danica Pension I in addition to technical interest. 10 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. This largely corresponds to the solvency requirement for Danica plus the capital tied up in assets allocated to shareholders equity. For Danica, this results in the following funding transactions. Table 2: Net funding Ref. (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. 11 Change in 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 The elements from the Danica group included in Danske Banks Net income from insurance business.. 5

7 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 Danica Pension I Danica Liv III Danica Fondförsäkring 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 profit policy, and the assets and liabilities related to these activities are relevant for the profit policy. Section 3 contains more information. 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 profit 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. 6

8 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. Figur 2: Danica Pensions aktiver og passiver Allocation of liabilities and assets at March 31, 2006 Shareholders equity Subordinated loan capital Assets allocated to shareholders equity Assets allocated to customers Customer-related assets (DKr 182bn) Equity-related assets (DKr13.5bn) Collective bonus potential Technical provisions Bonds 69 % Bonds 68 % Shares 23% Shares 21% Land and buildings Other 2 % 8 % Assets allocated to shareholders equity, as shown in table 3, are invested mainly in bonds and land and buildings, and as from 1 February 2006 also in equities. These assets provide a fairly stable return. The return is included in Earnings from investment portfolios (see section 9.2). Land and buildings 9 % Tabel 3: Asset allocation Portion of the assets allocated to the shareholders equity of Danica Pension Balance Return Return (DKr m) (%) Land and buildings 1, Equities 3, Bonds 9, Total financial investment securities 13, Danica Pension I Amounts due Total assets allocated 13, The portfolio consists mainly of short-dated bonds. At 31 March 2006 the total interest-rate risk amounted to about DKr127m. 7

9 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. 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, is used for the calculation of life insurance provisions. 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: Zero coupon yield curve 5,00 4,50 4,00 3,50 3,00 2,50 2,

10 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 derivative 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 Bonds Financial instruments Total ex. 0 fin. instr. 0 0 Provisions* Interest Market value adjustment Total ex. fin. instr. Interest Market value adjustment Total value adjustment 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. 9

11 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 at March 31, Table 5: Return and value adjustment customer funds Balance Return Return (DKr m) (%) Land and buildings 15, Equities 32,608 1, Bonds 126,597-1, Other financial investment securities 7,520-3,575 - Total 181,948-2, 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. 10

12 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 profit Item (DKr m) Return on investment securities (see table 5) -2,943 21,444 2 Average technical interest rate -1,387-5,230 3 Return on health and accident result Cost and risk result before bonuses Profit/loss on reinsurance Value adjustment of provisions 5,876-6,297 6 Realised profit 1,613 9, 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: Guaranteed benefits Life insurance provisions End-2005 End-2005 End-2004 (DKr m) (%) (%) Technical interest rate in % 0.0 1, , , , to Life insurance provisions 149, Without guarantee 21,593 Total life insurance provisions 171,111 11

13 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 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, is used. In the first quarter of 2006, the value adjustment of the provisions has been reduced by DKr5.9m as a result of the general rise in interest rates and has increased the collective bonus potential by a corresponding amount. 6 Realised result If the realised result is a profit, the Bank can book the risk allowance to its income statement to the extent that it does not exceed the realised profit. If the risk allowance cannot be booked, in whole or in part, it can be deferred and be booked in a year when the realised result permits. 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. 12

14 Table 8 shows the relation between the realised result at Danica and Danske Banks result. Table 8: Profit contribution to Danske Bank group from customer assets in Danica Pension (DKr m) Realised profit 1,613 9,723 Tax on pension returns (PAL) 398-2,744 Bonuses ,650 Return on investments allocated to shareholders' equity Health and accident result Profit before adjustment of collective bonus potential 1,648 5,501 Change in collective bonus potential -1,415-3,726 Profit to Danske Bank group from Danica Pension before tax 233 1,775 FD (health care insurance) and Norwegian companies Net funding Profit to Danske Bank group from Danica group before tax 198 1,647 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. Net income from insurance business equals the result posted in the Danske Bank groups business area accounts. 13

15 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 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. 14

16 8. Sensitivity analysis If the investment return exceeds the technical interest rate and the value adjustment of provisions, 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 for health and accident Profit on reinsurance Profit before value adjustment Value adjustment of provisions Realised profit Risk allowance may be recognised through P&L in whole or in part No Yes Yes No - Tax on pension returns (PAL) Bonuses (from technical interest rate to interest on policyholders' savings) Profit after PAL and bonuses 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 8.2% of Danica Pensions provisions at March 31, B The investment return is larger than the technical interest, there is no value adjustment of provisions 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. 15

17 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 Assumptions as in C, but with a 3% value adjustment of provisions as a result of a reduction of interest rates. The realised profit is 0 and, consequently, no risk allowance can be booked in the income statement. 16

18 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 the first quarter of 2006, 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 assets allocated to shareholders equity are consolidated on a line-by-line basis with the groups other assets. The assets relate to Bonds, Investment properties and Equities. In the financial highlights, Danica is still presented in a single line under Net income from insurance activities. 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. 17

19 10. The Danica group 2006 Danica Pension announced a change to its profit policy and defined an investment 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 profit 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 profit policy. Effective from 1, Danica Pension has notified the Danish Financial Supervisory Authority of a change in its profit policy. Accordingly, swaptions will no longer be included in the health and accident investment return. 18

20 11. Danicas business profile The Danica group operates within life and pension insurance. In addition to its activities in Denmark, which is the primary market, the Danica group has activities in Sweden and Norway. In 2005, the Danica group realised gross premium income of DKr16.9bn, of which the Danish market accounted for 89%. Since 2001, the Danica group has seen annual growth in business volume of 10%. The growth is primarily organic and mainly in the corporate market. In the Danish business, 2/3 of gross premium income is payments received on company pension plans. Table 11: Premiums, including investment contracts (DKr bn) Danica Traditionel Danica Balance and Danica Link Internal transfers Health and accident International Total premiums Its financial strength of DKr19.0bn and an excess capital base of DKr7.6bn make Danica one of the financially strongest groups in the industry. This provides customers with a high degree of security in their savings. Danica has an AA insurer financial strength rating with Standard & Poors. Danica is very committed to providing high-quality customer service based on accessibility, short processing times and professional customer care. Therefore, Danica also places great emphasis on maintaining a competent and committed staff. Danica regularly conducts customer satisfaction surveys and is the only Danish company to publish its processing times on the Internet. Danica keeps a tight reign on expenses, and in 2005 the expense ratio was down for the fifth consecutive year to 7.1%. Danica decided that its Danish insurance system will be the model for the further development of its international activities. This project was initiated at the end of With this one-group-one system philosophy, Danica is well prepared for future international expansion. 19

21 Danish business In the Danish market, the Danica group provides 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 including lifecycle products. Danicas business volume has risen sharply in recent years, making it Denmarks leading pension provider on the basis of gross premiums with a market share of more than 30% in the market where Danica competes. Figure 5: Premiums (DKr bn) Premiums - groups Danica Pension PFA Nordea Pension SEB Pension Topdanmark AP 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. In the Danish market, most sales take place through Danske Banks and BG Banks extensive branch networks. Danica Traditionel In Danica Traditionel, the customers are not required to make any decisions themselves as to how their money is to be invested as the money is invested collectively. In return, pension savings in Danica Traditionel have guaranteed benefits, calculated on the basis of basic interest rates of 4.5%, 2.5% or 1.5%, respectively (new business is written on the basis of 1.5% only). 20

22 Market products (DKr bn) Premiums market-based products Danish business Danicas unit-linked insurance products Danica Link 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. 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%. If the investment decisions are left to Danica, one of the customers choices are Danica Balance, a new lifecyle product launched in May 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. Danica Balance was very well received by new as well as existing customers, and the Group is seing strong demand for the product. At the end of 2005, approximately 48,000 of Danicas customers have already opted for market-based products against some 34,000 at the beginning of the year. The product has particularly advanced in the corporate area, where the number of customers has risen from just under 25,000 to almost 36,000. Insurance cover Customers choosing Danica Traditionel as well as those choosing market products are able to take out insurance cover against disability and death; these covers are mainly requested under corporate schemes. In addition, Danica offers cover against critical illness and healthcare insurance. 21

23 International activities (DKr bn) 2 1 Premiums market-based products International activities Danica set up its activities in Sweden in In the Swedish market, Danica offers pension products to employers as well as to private individuals. Only unit-linked products are provided. In Sweden, Danicas gross premium income in 2005 was DKr1,284m and its market share based on new business in the unit-linked market was 5%. From the subsidiarys head office in Stockholm, Danica collaborates closely with Danske Bank Sweden and a number of the largest brokers in Sweden. In 2005, Danica developed a new corporate concept based on an electronic administrative process between employer and insurance company. In 2001, Danica established itself in the Norwegian market. With the acquisition of the companies Nordenfjeldske Personforsikring and Gjensidige NOR Fondsforsikring in 2004, Danica consolidated its position. In 2005, the companies moved to a common address in Trondheim. In the Norwegian market, Danica offers insurance and pension products to employers as well as to private individuals. Only unit-linked products are provided. In 2006, corporate pension schemes will become mandatory in Norway. In Norway, Danicas gross premium income in 2005 was DKr561m and its market share based on new business in the unit-linked market was 8%. In addition to Danicas own corporate sales force, the Company collaborates closely with Danske Bank Norway from its headquarters in Trondheim. 22

24 12. Present value of expected future administrative results Since 2002, the provisions for unit-linked contracts in Danica Pension I (DPI) have been reduced by the present value of expected future administrative results, and the change in the calculated present value has been included in the profit for the year before tax. In 2005, when the group made the transition to financial reporting under IFRS, unit-linked contracts were divided into insurance contracts and investment contracts. Subsequently, only the present value of insurance contracts could be recognised, and investment contracts were therefore no longer included in the calculations. In 2006, the Executive Order on financial reporting was changed, to the effect that provisions for insurance contracts in certain cases should correspond at least to the surrender value of the policies. This further diminished the possibilities of recognising the expected value of future administrative results. Consequently, the accounting policies have been changed effective from 2006, so that the present value of expected future administrative results of unit-linked contracts is no longer recognised in the statutory financial statements. As a supplement to the statutory financial statements, the company will in future provide information on the expected future earnings for the entire unit-linked business of Danica Pension I (market products), in line with the accounting policy applied before the transition to IFRS. The unit-linked business of Danica Fondsförsäkring (Sweden) is not included in the calculations, as the result of this business is included in the investment return on Danica Pensions customer funds, and therefore does not impact the results of the Danica group. The present values are calculated solely for the savings portion of the existing business. Accordingly, the value of the risk business and the value of expected future sales are not included. This applies to the present values previously recognised in the statutory financial statements as well as to the supplementary information. The calculations apply a ten-year discount period and a discount rate, which for the Danish business equals the Danish Financial Supervisory Authoritys ten-year discount rate before tax. The assumptions applied in respect of income, expenses, disposals etc. are reviewed annually and are considered prudent. The discounted cash flow is calculated before tax. The calculation method is not directly comparable with the method applied in an embedded value calculation for various reasons, including that no costs of capital are recognised. The group is currently developing EV calculations based on common market standards. These will be included in the supplementary information to the groups external reporting at a later stage. 23

25 The following table reflects the development in the calculated present values from end-2002 to end The annual changes are primarily explained by a rising business volume, but are also affected by changed assumptions, including changes to the discount rate applied. Present value of expected future administrative results (DKr m) End 2002 End 2003 End 2004 Adjustment at beginning of year Beginning 2005 End 2005 Total financial statements for DP I Investment contracts Total present value The following table shows the quarterly development of the total present value of existing business for both investment and insurance contracts. The change in present value from the end of 2005 to March 31, 2006 is positively affected by a highly favourable business development and negatively affected by the rising discount rate as well as by a reassessment of the assumptions underlying the calculations following an agreed price reduction in respect of the Danish business. Present value of expected future administrative results mio. kr Danica Link Danica Balance Danish business in DP I Norwegian business in DP I Total present value Total present value in % of reserves 6.2% 6.3% 6.2% 5.9% 5.7% Discount rate - Danish business 3.8% 3.2% 3.2% 3.5% 4.1% - Norwegian business 4.3% 4.1% 4.2% 4.2% 4.4% The following table shows the quarterly development, the change in the Danish business being divided into the development attributable to business growth, change in discount rate and changed assumptions, respectively. Present value of expected future administrative results (DKr m) 1. kvt kvt kvt kvt kvt. 06 Present value, beginning Danish business in DP I Business growth Change in discount rate Changed assumptions Total Danish business Norwegian business in DP I Present value, end

26 13. 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. 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. 25

27 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 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. 26

28 14. 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. 27