INCOME STATEMENT Premiums

Earned premiums represent gross premiums earned during the year, net of outward reinsurance premiums and adjusted for changes in the provision for unearned premiums, corresponding to an accrual of pre- miums to the risk period of the policies, and in the reinsurers’ share of the provision for unearned premiums.

Premiums are recognised as earned premiums according to the expo- sure of risk over the period of coverage, computed separately for each insurance contract using the pro rata method, and adjusted if neces- sary to reflect any variation in the incidence of risk during the period covered by the contract.

The portion of premiums received on contracts that relates to unex- pired risks at the balance sheet date is reported under provisions for unearned premiums.

The portion of premiums paid to reinsurers that relate to unexpired risks at the balance sheet date is reported as the reinsurers’ share of provisions for unearned premiums.

Technical interest

According to the Danish FSA’s executive order, technical interest is pre- sented as a calculated return on the year’s average insurance liability provisions, net of reinsurance. The calculated interest return for grouped classes of risks is calculated as the monthly average provision plus a co-weighted interest from the present yield curve for each indi- vidual group of risks. The interest is weighted according to the ex- pected run-off pattern of the provisions.

TrygVesta Annual Report 2007 l Notes l107 of 152 Technical interest is reduced by the portion of the increase in net pro-

visions that relates to unwinding.

Claims incurred

Claims incurred represent claims paid during the year and adjusted for changes in provisions for unpaid claims less the reinsurers’ share. In addition, the item includes run-off results regarding previous years. The portion of the increase in provisions which can be ascribed to un- winding is transferred to technical interest.

Claims are shown inclusive of direct and indirect claims handling costs, including costs of inspecting and assessing claims, costs to combat and contain claims incurred and other direct and indirect costs associ- ated with the handling of claims incurred.

Changes in claims incurred due to changes in the yield curve and exchange rates are recognised as a market value adjustment. TrygVesta Group hedges the risk of changes in future wage and price figures for provisions for workers’ compensation and annuities for accident and health insurance. For 90-100% of this risk, TrygVesta Group uses swaps specifically acquired with a view to hedging the inflation risk. Value adjustment of these swaps are included in claims incurred, thereby reducing the effect of changes to inflation expecta- tions under claims incurred.

Bonus and premium rebates

Bonus and premium rebates represent anticipated and reimbursed premiums where the amount reimbursed depends on the claims record, and for which the criteria for payment have been defined prior to the financial year or when the business was written.

Insurance operating expenses

Insurance operating expenses represent acquisition costs and adminis- trative expenses less reinsurance commissions received. Expenses re- lating to acquiring and renewing the insurance portfolio are recognised at the time of writing the business. Administrative expenses are ac- crued to match the financial year.

Share-based payment

The TrygVesta Group’s incentive programmes comprise a share option programme and employee shares.

Share option programme

The value of services received as consideration for options granted is measured at the fair value of the options.

Equity-settled share options are measured at the fair value at the grant date and recognised under staff costs over the period from the grant date until vesting. The balancing item is recognised directly in equity.

The options are issued at an exercise price that corresponds to the market price of the company’s shares at the time of allocation plus 10 %. No other vesting conditions apply. Special provisions are in place concerning sickness and death and in case of change to the compa- ny’s capital position, etc.

The share option agreement entitles the employee to the options un- less the employee resigns his position or is dismissed due to breach of the employment relationship. In case of termination due to restructur- ing or retirement, the employee is still entitled to the options. The share options are exercisable exclusively during a two-week period following the publication of full-year or half-year reports and in ac- cordance with TrygVesta Group’s in-house rules on trading in the com- pany’s shares. The options are settled in shares. A part of the compa- ny’s holding of treasury shares is reserved for settlement of the options allocated.

On initial recognition of the share options, the number of options expected to vest is estimated. Subsequently, adjustment is made for changes in the estimated number of vested options to the effect that the total amount recognised is based on the actual number of vested options.

The fair value of the options granted is estimated using the Black & Scholes option model. The calculation takes into account the terms and conditions of the share options granted.

Employee shares

When employees are given the opportunity to subscribe shares at a price below the market price, the discount is recognised as an expense in staff costs. The balancing item is recognised directly in equity. The discount is calculated at the grant date as the difference between fair value and the subscription price of the subscribed shares.

In accordance with Danish law, the shares are held in restricted ac- counts until expiry of the seventh calendar year after they were sub- scribed. Employees cannot sell or otherwise dispose of the shares dur- ing the period they are subject to selling restrictions, but the shares will be released in case of the employee shareholder’s death or disability.

Investment activities

Income from associates includes the group’s share of the associates’ net profit.

Income from investment properties before fair value adjustment repre- sents the profit from property operations less property management expenses.

Interest, dividends, etc. represent interest earned, dividends received, etc. during the financial year. In addition, the item includes gains and losses on bonds drawn for redemption.

Realised and unrealised investment gains and losses, including gains and losses on derivative financial instruments, value adjustment of land and buildings, exchange rate adjustments and the effect of move- ments in the yield curve used for discounting, are recognised as value adjustments.

Investment management charges represent expenses relating to the management of investments.

l Notes l TrygVesta Annual Report 2007 108 of 152

Other income and expenses

Other income and expenses includes income and expenses which can- not be ascribed to TrygVesta Group’s insurance portfolio or investment assets, including the sale of products for Nordea Liv og Pension.

Discontinued and divested business

Discontinued and divested activities are consolidated in one line item in the income statement and supplemented with disclosure of the dis- continued and divested activities in a note to the financial statements. Recognition of the balance sheet items in respect of the discontinued activities remains unchanged in the respective items whereas assets and liabilities from divested activities are consolidated in one line as “assets concerning divested business” and “liabilities concerning di- vested business”, respectively.

The comparative figures, including financial highlights and key ratios, have been restated to reflect discontinued business. Discontinued and divested activities in the income statement include the post-tax profit of TrygVesta Group’s business in run-off as well as divested enterprises. Business in run-off comprises the results of the business in run-off in TrygVesta Forsikring A/S. Divested subsidiaries comprise the activities in Chevanstell Ltd. UK, Poland, Estonia and Tryg Baltica International A/S.