Annual report 2005 PFA Holding

(1)

(2)

THE EXECUTIVE BOARD’S ASSIGNMENTS OUTSIDE THE PFA GROUP

Henrik Heideby,

Managing Director Deputy Chairman: Forsikring & Pension Deputy Chairman of the board of directors: IC Company A/S

Member of the board of directors: Unomedical Holding A/S and Unomedical A/S

Chairman of the board of directors: Hampton Gruppen

Nina Christensen,

Group Director No board assignments

Niels Søbjerg Nielsen,

Group Director

Member of the board of directors: Fonden Forsikringsakademiet af 26/2 2003

Forsikringsakademiet A/S PensionsInfo

PROCESS OWNERS IN PFA PENSION

PFA Holding A/S Sundkrogsgade 4 DK - 2100 Copenhagen OE Telephone (+45) 39 17 50 00 Fax (+45) 39 17 59 50 www.pfa.dk [email protected] CVR: 22 43 80 18 The Annual General Meeting of shareholders is held on 20 April 2006

Design and production: Boje & Mobeck

Gorm Arildsen,

Customer Service

Vibeke de Stricker Borch,

Human Resources

Anne Broeng,

Capital & Risk

Michael Braagaard,

Business Development

Anette Damgaard,

Law and Payment Services

Søren P. Espersen,

Communication & Marketing

Hasse Jørgensen,

Investments

Dick Magnussen,

Sales

Peter Rosenlind-Nissen,

Counselling and Customer Service Centre

Finn Scheibye,

Finance & Accounts

Per Sørensen,

IT Innovation & Service

Flemming Windfeld,

Actuarial Department

Michael Willumsen,

(3)

SUMMARY

Growth in ﬁ nancial position and pension contributions

2005 was characterised by the favourable situa-tion of the Danish economy. Consumpsitua-tion grew while exports increased heavily and unemploy-ment dropped closely to the lowest level since the 1970s. The year also offered large increases in share prices, a record low interest rate and massive increases in property prices.

The considerable progress was not only used on consumption. The pension market also greatly beneﬁ ted from the healthy economy in the shape of increased premium payments. The pension companies also achieved high investment re-turns, of which a large portion will be used to secure future payments which customers have been promised.

The increased desire of the individual to se-cure a ﬁ nancially safe old-age is not solely due

to the favourable situation. It is also caused by the uncertainty surrounding the future situation of the welfare state when the relative number of seniors in society will increase heavily during years to come. This uncertainty also came to ex-pression when the Danish Welfare Commission ’Velfærdskommissionen’ questioned the durabil-ity of the current early retirement scheme at the end of 2005, and in the debate of forthcoming welfare reforms.

All value added to customers in 2005

Customers’ contributions in the PFA Group in-creased signiﬁ cantly more in 2005 than in previ-ous years. The return to customers became the highest in many years and exceeded expecta-tions at the beginning of the year.

The investment assets yielded a very favour-able return. In addition to this, value added for the entire year is passed on to the customers,

SELECTED KEY FIGURES AND FINANCIAL RATIOS

Group (DKKm) 2004 2005

Premiums, net of reinsurance 12,869 13,841

Insurance beneﬁ ts, net of reinsurance (7,953) (8,004)

Investment return 18,704 27,740

Total net operating expenses (791) (918)

Net proﬁ t/(loss) for the year 323 (6)

Total shareholders’ equity 4,602 4,597

Total assets 199,364 228,070

Capital base 12,355 12,982

Gross return on customers’ funds 10.6 % 14.9 %

Pre-tax return on customers’ funds incl. CustomerCapital after expenses 10.1 % 14.4 %

PFA Holding (DKKm) 2004 2005

Income from PFA Pension 323 0

Proﬁ t/(loss) for the year 323 (6)

Total assets 4,324 4,326

(4)

as the Supervisory Board has decided to keep shareholders’ equity unchanged in 2005, which is in line with PFA’s position as a customer-owned business. By this, gross return on customers’ funds is increased with an extra DKK 1.9 bil-lion totalling DKK 27.9 bilbil-lion corresponding to approx. 15 per cent.

A large portion of the return is put aside for fu-ture pension disbursements partly due to very low interest rate levels and partly due to an in-crease in average customer life expectancy. At the same time, the high return results in a sig-niﬁ cant increase in customers’ reserves which includes collective bonus potential and Customer-Capital.

As a result of the very low interest rate level, there are no grounds to add a higher deposit in-terest rate in pension schemes with guaranteed beneﬁ ts. However, in a great deal of PFA’s pen-sion schemes, customers who want the possi-bility of a higher return combined with a smaller guarantee, may select savings at market rate, e.g. in ’PFA DitValg’, ”PFA YourChoice”. The share ratio may be higher here and the deposit return on ’PFA sammensætter’, ”PFA selects”, with a high share ratio and long horizon exceeded 26 per cent before tax in 2005.

The Group’s companies and activities

PFA Holding is the parent company of the Group. The sole activity of the Company is to own PFA Pension with subsidiaries.

PFA Pension is without comparison the largest company within the Group with pension premi-ums totalling DKK 12.0 billion corresponding to more than 80 per cent of the Group’s total pen-sion contributions. The main activities in PFA Pension are company pension schemes and pen-sion schemes taken out through organisations. Furthermore, PFA Pension sells risk insurance on a group basis through ﬁ nancial institutions.

Lærernes Pension administers pension schemes for the teacher groups comprised by Lær-ernes Central Organisation’s ﬁ eld of negotia-tion. Pension premiums within Lærernes Pen-sion amounted to DKK 2.4 billion in 2005. In the Greenland pension company, PFA Soraarneq, pension premiums amounted to DKK 36 million in 2005.

The Group’s portfolio of Danish business and pri-vate property is comprised by the companies PFA Ejendomme and Lærernes Pension, ejendomsak-tieselskab. The Group’s property investments outside Denmark are co-ordinated in PFA Invest International. The Company is the parent com-pany of eight property companies.

Intercompany agreements have been entered into with PFA IT Service concerning investments in IT-development and IT–hardware. PFA IT Service manages the process of developing PFA’s future IT-platform.

Ownership and management

The share capital of the parent company, PFA Holding, amounts to DKK 1 million. According to

VALUE CREATION TO CUSTOMERS OF THE PFA GROUP

2004 2005

DKKbn DKKbn

Gross return on customers’ funds 17.7 10.6 % 27.9 14.9 % Net return on customers’ funds 17.0 10.1 % 27.2 14.4 %

(5)

PFA Holding Share capital: DKK 1 million

Dividend: DKK 50,000

Property companies

PFA Pension Share capital: DKK 100 million

Dividend: DKK 10 million

The companies of the Group are domiciled in Copenhagen, Denmark, with the exception of PFA Soraarneq, which is domiciled in Nuuk, Greenland.

Pension insurance

PFA Soraarneq

Administration company

Lærernes Pension (51 %)

PFA Ejendomme

PFA Invest International

PFA IT Service

GROUP STRUCTURE

the Articles of Associations, the dividend to be distributed to the shareholders cannot exceed 5 per cent, corresponding to DKK 50,000. The limitation on dividend forms part of the basis of PFA’s position as a customer-owned business and supports the objective to create as much value as possible to customers. By way of an agreement, the largest shareholders ensure that this basis is carried on, among other measures by rules ap-plying to Supervisory Board elections and by lim-iting revenue of company shares.

Up to half of the shares of PFA Holding are owned by employers’ and employees’ organisa-tions along with a few companies where the ma-jority of members and employees are customers of PFA. The PFA Fund owns approx. 49 per cent of the shares and a number of individuals own a smaller number of shares.

PFA Holding owns all the shares in PFA Pension. PFA Pension owns all the shares, directly or indi-rectly, in the Group’s other companies, with the exception of Lærernes Pension, where the own-ership interest is 51 per cent.

PFA complies with the recommendations from the Copenhagen Stock Exchange’s Committee on Corporate Governance – the so-called Nørby Committee – which are of relevance to a company such as PFA. On only a very few points, PFA will not comply with the recommendations consider-ing its position as a customer-owned business.

PFA Holding and PFA Pension have interlocking directorates. Information concerning the Super-visory Board and the board assignments etc. may be viewed on page 42.

(6)

SALES AND CUSTOMER SERVICE

Focused growth

Premiums in the PFA Group rose DKK 1.1 billion in 2005 to DKK 14.5 billion including non-life insur-ance corresponding to a growth of 8.5 per cent. The growth is distributed with DKK 0.8 billion in current premiums and DKK 0.3 billion in single pre-miums which represents a healthy balance.

The progress has been focused on existing cus-tomers in line with the selected strategy. Growth has been partly driven by general increases in pension contributions to pension schemes and partly by individual customers who have increased their payments, typically in connection with pen-sion consultations. In 2005, PFA carried through approx. 30,000 personal customer consultations. Add to this that more than 250,000 questions are answered either by telephone or by e-mail through our customer centre.

64 per cent have CustomerCapital

In 2005, even more customers decided to let CustomerCapital form part of their pension scheme. At the end of the year, 64 per cent had selected CustomerCapital when measuring premi-ums. This is a very satisfactory upward movement from approx. 30 per cent at the beginning of the year.

Signiﬁ cant growth in PFA Health Insurance In 2005, PFA renewed the health insurance prod-uct and extended the coverage in PFA’s hospital and health insurance at the same time. Combined with a large demand in the market, the new prod-uct lead to a massive rate of growth in the number of agreements and the number of customers now covered by health insurance. 2005 also became the year where employers within the public area established this type of insurance for their em-ployees.

The number of customers covered by a PFA Health Insurance advanced to almost 64,000 in 2005 cor-responding to an increase of approx. 40 per cent.

New, simpler rules applying to health information

At the end of 2005, PFA Pension carried though a radical simpliﬁ cation of the requirements of health information. In the vast majority of cases, it is now possible to establish and select coverages in compulsory schemes without submitting health information. In the event of an individual increase of the coverages later on, customers will typically only have to submit a brief health declaration.

Large price reduction on death coverage The increased customer life expectancy involves fewer expenses for death coverage. As a result of this, PFA Pension has reduced the price of cover-age in the event of death with approx. 30 per cent as at 1 January 2006.

New account manager portal with focus on savings

PFA has developed an account manager portal to be used in customer consultations. The portal en-compasses a line of new consultations tools and focuses actively on customer’s placement of sav-ings. At the same time, the portal simpliﬁ es the case ﬂ ow as a new policy may be produced to cus-tomers during the consultation. Electronic data ex-change with the pension brokers is also subject to expansion.

A signiﬁ cant number have modernised the pension scheme

A signiﬁ cant number of pension schemes were modernised in 2005. In addition to selecting mar-ket rate products and CustomerCapital, many also decided to introduce or adjust basic coverages in the event of disablement and death. Further-more, a large number of pension agreements were changed to include a retirement age of 65 years, which is a possibility also introduced in 2005 with labour market pension schemes. In total, approx. 150,000 customers have had their pension scheme modernised in 2005.

Growth in pension schemes at market rate Even though the majority of PFA’s customers is still saving up for pension in average interest rate

(7)

schemes, almost 25,000 policies were placed in various market rate schemes at the end of 2005.

The implementation of market rate schemes has continued in 2005 and both companies and a great deal of organisations are changing their pension agreement to enable their employees to select market rate schemes.

When the customers select market rate, it is typi-cally when they enter into a scheme or in connec-tion with informaconnec-tion meetings and the subse-quent possibility of personal consultations.

In PFA Unit Linked, we offer 33 funds of which 11 funds are internally managed and 22 funds are externally managed. Customers who do not wish to manage their own savings may choose ”PFA Se-lects” with three investment proﬁ les with different retirement age horizons. In 2005, ”PFA Selects” obtained very satisfactory results compared with similar investment products. The selection of funds and fund performance are currently assessed and supplemented in order to ensure a competi-tive fund selection of high standards. In 2005, the funds obtained very satisfactory results.

The expenses in PFA Unit Linked are among the lowest on the market. For the majority of unit

DEPOSIT YIELD 2005 BEFORE TAX IN PFA DITVALG 1-4

Option Deposit yield before tax

PFA DitValg 1 5.3 %

PFA DitValg 2 9.3 %

PFA DitValg 3 12.0 %

PFA DitValg 4 15.4 %

DEPOSIT YIELD 2005 BEFORE TAX IN PFA DITVALG 5-7

Option Deposit yield before tax

PFA selects Long Medium Short

in Unit Linked (more than 15 years) (5-15 years) (less than 5 years)

PFA DitValg 5 12.3 % 10.2 % 8.2 %

PFA DitValg 6 15.7 % 12.7 % 9.6 %

PFA DitValg 7 26.2 % 20.0 % 13.9 %

linked customers, expenses have been addition-ally reduced with effect from 1 January 2006. Expenses calculated using premiums and single premiums have been completely removed, while expenses calculated using deposits have been ad-justed. As a customer-owned business, PFA also passes on commissions from external fund man-agers to customers.

In PFA DitValg 1-4, customers have the oppor-tunity of selecting a savings scheme with up to approx. 40 per cent invested in shares where the guarantee becomes gradually smaller. The table shows the deposit yield before tax for PFA DitValg 1-4. PFA DitValg 4 experienced a return of 15.4 per cent, which is almost three times as high as the return in PFA DitValg 1, which corresponds to the deposit interest rate before tax in the average in-terest rate environment.

In PFA DitValg 5-7, 33 to 100 per cent of the savings are invested on market terms in PFA Unit Linked. Here, customers may select share and bond invest-ments themselves with up to 100 per cent in shares in PFA DitValg 7. Alternatively, PFA can manage and select savings matched to life cycle with a short, medium or long horizon with a share ratio up to 90 per cent. With a long horizon, return amounted to more than 26 per cent in PFA DitValg 7.

(8)

INVESTMENT BUSINESS

Very satisfactory investment results

In 2005, investment assets in the PFA Group yielded a return of 14.2 per cent while investment assets in PFA Pension yielded a return of 14.3 per cent. This is a very satisfactory investment return which is beyond expectations and the highest for many years. Bonds and interest hedging instru-ments beneﬁ ted greatly from the drop in interest rates during the year. Danish shares yielded once again in 2005 a substantially higher return than foreign shares. A sound return on properties also contributed to the favourable return.

PFA Pension’s investment return over the past three years is close to 35 per cent. Among the large, commercial companies, this is one of the highest returns in this period.

Investment strategy

The investment strategy of a pension company must overall consider long-term pension obliga-tions and possess the ability to counter losses from ﬁ nancial markets in the short term.

The consideration of pension obligations which stretch 40 to 60 years in the future are balanced on determining the duration of bonds and ﬁ nan-cial instruments. With this, it is ensured that the value of bonds and ﬁ nancial instruments stay reasonably within the same area as the value of long-term pension obligations.

Larger share ratios provide an opportunity of larger returns, however, more shares also con-stitute a larger risk when it comes to losses. The share ratio is decided upon using the size of total reserves and an assessment of possible losses from which the market may suffer.

In PFA Pension’s strategic benchmark for 2005, overall limits on asset distribution were a share ratio of 12 per cent, a bond ratio of 79 per cent while property and interest hedging instruments etc. accounted for the ﬁ nal 9 per cent. As regards ratios, there are limits to ﬂ uctuations, and for

each asset class, speciﬁ c benchmarks, against which results are measured, have been ﬁ xed.

Portfolio trends

The Group placed a large part of the investments of the year in foreign bonds, primarily long Eu-ropean government bonds that are highly sen-sitive to interest rate ﬂ uctuations. At the same time, the ratio of investment grade and emerging markets bonds were increased in the portfolio of foreign bonds.

During the year, share ratio was gradually in-creased to 15.2 per cent in the Group and 13.4 per cent in PFA Pension. The positive trend on the market resulted in a signiﬁ cant revaluation of the portfolio’s market value and an increase in share ratio.

Return above benchmark

The return on individual assets classes in the PFA Group and PFA Pension, may be viewed in the be-low table. As for PFA Pension, benchmark is also shown, and the relevant return compared with benchmark is without currency hedging.

Both return on shares and bonds in PFA Pension are above benchmark, and total return amounts to 0.6 percentage points above.

Of this, the contribution from shares amounts to 0.2 percentage points, which, among other factors, are due to the return on listed Danish shares of 45.7 per cent, which yield an additional return of 2.6 percentage points compared with benchmark.

Bonds including interest hedging provided re-sults of 11.5 per cent which is largely due to in-creases in prices as a result of the general drop in interest rates. Bond proﬁ t alone amounted to 8.1 per cent, which provided a positive contribu-tion of 0.4 percentage points compared with to-tal benchmark.

(9)

RETURN ON INVESTMENT ASSETS 2005 PFA PENSION

Market value Ratio Return Return Benchmark

Closing, DKKbn Currency hedged

Listed Danish shares 13.8 7.0 % 45.7 % 45.7 % 43.1 % Listed foreign shares 10.7 5.4 % 19.2 % 27.5 % 28.2 %

Unlisted investments 1.9 1.0 % 19.5 % 19.5 % -Total shares 26.5 13.4 % 32.9 % 36.4 % 35.6 % Danish bonds 74.9 37.9 % 6.2 % 6.2 % 6.0 % Index-linked bonds 17.2 8.7 % 9.1 % 9.1 % 8.6 % Foreign bonds 52.9 26.7 % 8.4 % 10.7 % 10.2 % Total bonds 145.0 73.3 % 7.3 % 8.1 % 7.7 %

Other ﬁ nancial investment assets 15.4 7.8 % 83.8 % 54.8 %

-Land and buildings 10.8 5.5 % 21.8 % 21.8 %

-Total investment assets 197.7 100.0 % 14.3 % 14.3 % 13.7 %

For ”Return currency hedged”, results of currency hedging is included in the share and bond return. For ”Return”, currency hedging is included under ”Other ﬁ nancial investment assets”.

Benchmark

Danish listed shares: KAX total index on the Copenhagen Stock Exchange. Listed foreign shares: MSCI World Index, capital-weighted for all countries. Total shares: 53 % Danish shares, 39 % foreign shares and 8 % unlisted shares.

Danish bonds: 60 % Nordea CM7 State Index and 40 % Nordea CM5 Mortgage Finance Index. Index-linked bonds: a basket of bonds.

Foreign bonds: a basket of JP Morgan Global Government Index, excl. Japanese bonds, long-term Euro bonds, Lehman Global Aggregate Corporate for investment grade, JP Morgan’s EMBI Global Diversiﬁ ed on emerging markets and JP Morgan USD Global on High Yield Bonds, in total: 54 % Danish bonds, 35 % foreign bonds and 11 % index-linked bonds.

RETURN ON INVESTMENT ASSETS 2005 PFA GROUP

Market value Ratio Return

Closing, DKKbn Currency hedged

Listed Danish shares 15.7 7.2 % 46.0 % Listed foreign shares 14.3 6.6 % 20.2 % Unlisted investments 3.3 1.5 % 16.6 % Total shares 33.3 15.2 % 32.4 % Danish bonds 80.9 37.0 % 6.1 % Index-linked bonds 18.4 8.4 % 9.0 % Foreign bonds 58.2 26.6 % 8.0 % Total bonds 157.6 72.1 % 7.1 %

Other ﬁ nancial investment assets 14.6 6.7 % 95.2 %

Land and buildings 13.1 6.0 % 18.5 %

Total investment assets 218.6 100.0 % 14.2 %

Other ﬁ nancial investment assets

In 2005, PFA Pension increased the holding of ﬁ -nancial instruments to hedge interest rate sen-sitivity. The derived instruments combined with bond holdings hedge the majority of provisions for insurance policies. Results of the interest

hedg-ing amounted to DKK 6.4 billion in 2005, thereby contributing positively to the year’s investment results of approx. 3.4 percentage points.

If viewed in isolation, the year’s currency risk hedging generated a loss of DKK 2.2 billion. This

(10)

should be viewed in connection with a some-what larger positive foreign currency translation adjustment of investment assets. In the return scheme, both return on asset class, where cur-rency hedging is included, and return without currency hedging may be viewed.

Properties

Return on land and buildings in the Group amounted to 18.5 per cent after translation ad-justments of DKK 1.5 billion. Because land and buildings are owned by property subsidiaries, they are stated in the return table for PFA Pen-sion at net asset value which is lower than mar-ket value of the properties.

In cooperation with a line of other Danish institu-tional investors, PFA has invested in the property fund ’Norden’, where the purpose is to develop existing industrial and commercial buildings. Fo-cus on property investments outside Denmark has also intensiﬁ ed, and in 2005, PFA decided to invest in the property fund ’Pillar Retail Europark Fund’.

Corporate Governance and ethical consid-erations in relation to investment policy PFA Pension’s overall investment policy includes a Corporate Governance policy. The purpose of this policy is to maximize long-term investment return by focusing on a number of elements con-tained in Corporate Governance and Shareholder Value during the investment process.

A code of ethics is also included in the invest-ment policy. PFA Pension attaches importance to a peaceful and democratic development of soci-ety, observing basic human rights and a respon-sible conduct in relation to natural resources and the environment. For the individual company, ethical evaluation forms part of an integrated part of the overall investment consideration.

As a general rule, PFA Pension does not publish the result of considerations on which invest-ments are made.

A list showing PFA Pension’s investments in shares at the end of 2005 may be viewed at www.pfa.dk.

(11)

FINANCIAL REVIEW

PFA Pension (DKKm) 2004 2005

Premiums, net of reinsurance 10,580 11,359

Insurance beneﬁ ts, net of reinsurance (7,780) (7,853)

Investment return 17,361 25,640

Net operating expenses, net of reinsurance (721) (781)

Net proﬁ t/(loss) for the year to shareholders’ equity 324 0

Total shareholders’ equity 4,324 4,324

Total assets 181,364 206,435

Capital base 11,706 12,212

Gross return on customers’ funds 10.7 % 15.1 %

Pre-tax return on customers’ funds incl. CustomerCapital after expenses 10.2 % 14.6 %

VALUE CREATION TO CUSTOMERS IN PFA PENSION

2004 2005

(DKKbn) (DKKbn)

Gross return on customers’ funds 16.4 10.7 % 25.9 15.1 %

- Expenses (0.7) (0.5 %) (0.7) (0.5 %)

Net return on customers’ funds 15.8 10.2 % 25.2 14.6 %

Gross return is generated by:

Investment return on customers’ funds 16.5 10.9 % 24.3 14.2 % - Entrepreneurial proﬁ t to shareholders’ equity (0.2) (0.1 %) (0.2) (0.1 %) + Transfer from shareholders’ equity to customers 0.2 0.1 % 1.9 1.1 %

+/- Other movements (0.2) (0.1 %) (0.1) (0.1 %)

Gross return on customers’ funds 16.4 10.7 % 25.9 15.1 %

The table only includes traditional pension schemes eligible for bonus.

Al value added to customers in 2005

In line with PFA’s business model as a customer-owned business, all value added is passed on to customers in 2005.

In 2005, the Supervisory Board decided to keep shareholders’ equity unchanged on the same level as at the end of 2004. All value added will accordingly go to the customers. Shareholders’ equity, including entrepreneurial proﬁ t, waives a total of DKK 1.9 billion for the beneﬁ t of custom-ers, corresponding to a negative entrepreneurial

proﬁ t of 0.99 per cent. Gross return on custom-ers’ funds thereby rises to as much as DKK 25.9 billion, corresponding to 15.1 per cent in PFA Pension.

Net return for customers, after operating ex-penses of DKK 0.7 billion, amounted to DKK 25.2 billion as shown in the table below. This gener-ates a return on customers’ funds including Cus-tomerCapital after expenses of 14.6 per cent be-fore tax. This return is among the highest in the sector, also when measured over ﬁ ve years.

(12)

25 per cent addition of interest after tax to individual CustomerCapital

Return on CustomerCapital in PFA Pension for the year amounted to DKK 1.3 billion corresponding to 17.6 per cent before tax or 15.0 per cent after tax. A preliminary interest of 10.6 per cent before tax and 9.0 per cent after tax has been added to the customers’ CustomerCapital which they have accumulated themselves. After the Annual Gen-eral Meeting of shareholders in April, the yield will be adjusted upward to 29.4 per cent before tax and 25.0 per cent after tax. This additional distribution to individual CustomerCapital from 15.0 to 25.0 per cent after tax takes place in the light of the fair results in 2005.

Customer advantages of DKK 3.6 billion Compared with the competitors, PFA Pension has a very low entrepreneurial profi t where only one third is taken to shareholders’ equity while two thirds are allocated to CustomerCapital. Even if the customers’ own accumulation of Custom-erCapital is added to the total entrepreneurial profi t, in 2005 the sum of this was below the entrepreneurial profi t which customers paid to shareholders’ equity at the largest competitors. The accumulated CustomerCapital including in-terest rate is expected to be brought home to PFA’s customers concurrently with other pension disbursements.

If PFA Pension did not use CustomerCapital, the return on CustomerCapital, all things being equal, would have been taken to shareholders’ equity instead of to the customers. Customers’ extra

advantages in PFA Pension as a result of Custom-erCapital and the lower entrepreneurial proﬁ t, which was DKK 1.4 billion in 2004, amounts to DKK 1.7 billion in 2005. With the extra transfer from shareholders’ equity of DKK 1.9 billion, ad-vantages from customer ownership amount to a total of DKK 3.6 billion before tax in 2005.

Low interest rate results in larger provisions The high investment return in 2005 is among other factors attributable to the drop in interest rates and resulting capital gains on bonds and interest hedging instruments. At the same time, the low interest level poses a challenge to the sector in that companies, according to account-ing provisions in force, have to make additional, very large provisions in order to live up to the guaranteed beneﬁ ts which they have promised customers.

The necessary, extra provisions take place through an increased restatement at market value, which is part of the life insurance provi-sions. The increase of restatements at market value, which amounted to DKK 9.4 billion in PFA Pension in 2005, is, in addition to the drop in in-terest rates, also attributable to the increased PFA customer life expectancy.

During the year, a deposit interest of DKK 7.0 bil-lion has been added to customers. The deposit interest rate amounts to 5.3 per cent before tax and 4.5 per cent after tax. This is a very advanta-geous interest compared with market rate. The 10-year interest rate was almost 3.5 per cent

be-DISTRIBUTION OF NET RETURN BEFORE TAX IN PFA PENSION

(DKKbn) 2004 2005

Return on CustomerCapital 1.1 1.3

Deposit interest rate 6.6 7.0

Expense loading and risk results (0.3) (0.9)

Restatement at market value 4.8 9.4

Change in collective bonus potential before tax 3.6 8.4

Total 15.8 25.2

(13)

fore tax at the end of 2005 and that is approx. 0.5 percentage points lower than at the beginning of the year. In spite of expectations of a continued, positive development in shares, very low market rates do not give sufﬁ cient grounds to raise the deposit interest rate.

The high return for the year combined with the unchanged shareholders’ equity, in excess of the restatement at market value, results in a massive increase of collective bonus potential, which is the customers’ distributable reserves, with DKK 8.4 billion before pension yield tax.

Increased customer life expectancy

PFA Pension has taken the increased customer life expectancy into consideration with an in-crease in provisions of DKK 3.2 billion in the 2005 ﬁ nancial statements.

The life insurance provisions are determined at market value and the principles of determina-tion are currently reﬁ ned and made more precise. In 2005, we have placed particular focus on the decline in mortality and the principles of the so-called market value margin which forms part of life insurance provisions.

An analysis of PFA customer life expectancy has shown that generations live longer. As a way of

example, life expectancy of 60-year old male PFA customers has improved 4 years since 1989. The result is that our death coverage expenses have decreased, however, our current retirement pen-sion expenses have increased. Therefore, we have to make larger provisions in order to secure life conditional disbursements. In order to se-cure future pension disbursements as a result of the increased customer life expectancy, DKK 3.2 billion, seen in isolation, of the annual return is used to increase restatements at market value.

On determination of life insurance provisions at market value, companies must include an addi-tional market value margin. From 2005, PFA Pen-sion determines market value margin using a new model, which is based on insurance risks – prima-rily mortality and disablement. Earlier, the mar-ket value margin was determined by a reduction in the discount interest rate.

As a result of the new market value determina-tion, provisions are net increased by DKK 1.3 bil-lion. Lærernes Pension has in a similar manner provided for increased customer life expectancy. In total, life insurance provisions in PFA Pension rose by DKK 18.4 billion to DKK 174.3 billion in 2005. In the Group, life insurance provisions rose by DKK 21.3 billion to DKK 190.8 billion.

CAPITAL STRENGTH

PFA Group PFA Holding

31 December 31 December 31 December 31 December

(DKKbn) 2004 2005 2004 2005

Shareholders’ equity 4.6 4.6 4.3 4.3

CustomerCapital 7.8 9.4

Subordinate loan 1.8 1.8

Tax assets etc. (1.8) (2.8)

Capital base 12.4 13.0 4.3 4.3

Solvency requirement (8.0) (8.8) (0.3) (0.3)

Excess capital base 4.4 4.2 4.0 4.0

Collective bonus potential 7.1 11.8

(14)

Large growth in customer reserves

The customers’ undistributed reserves, which include collective bonus potential and collective CustomerCapital, rose by DKK 5.0 billion to DKK 18.1 billion in PFA Pension. Customers’ reserves hereby amount to 11.5 per cent of the provisions of which bonus ratio amounts to 6.2 per cent. This is an increase of 2.7 percentage points com-pared with the previous year.

In the Group, customers’ reserves rose by DKK 6.1 billion to DKK 20.9 billion.

The capital base of DKK 12.2 billion in PFA Pen-sion provides a capital adequacy of 154 per cent. Capital adequacy in the Group is 147 per cent.

Results and dividend for the year

PFA Holding’s only activity is to own PFA Pen-sion. Results for the year in PFA Pension are DKK 0 after tax owing to the decision to keep share-holders’ equity unchanged. Results for the year in PFA Holding, which consists of the company’s expenses, are DKK -6 million after tax.

The Supervisory Board recommends that the Annual General Meeting of shareholders adopt a distribution of the maximum dividend, as stipu-lated in the Articles of Association, of DKK 50,000.

(15)

CAPITAL AND RISKS

Value creation and security

PFA has great focus on risk management to en-sure customers the best possible combination of value creation and security. The aim is to secure customers the highest yield possible, combined with sufﬁ ciently strong reserves.

The development in ﬁ nancial markets is tracked daily and PFA performs current simulations and analyses of different scenarios and conse-quences of the development over time in the to-tal reserves. This ensures that PFA is able, at all times, to match investment risks with the obliga-tions PFA has towards customers.

Financial risks are analysed in different types of models, including traditional discreet models, where the trafﬁ c light models of the Danish Fi-nancial Supervisory Authority belong. They are characterised by only determining reserves from one scenario at the time. Furthermore, chance models, which show the probable distribution of reserves in a line of return scenarios, are used. It is the future goal of PFA to develop an internal model which may be used in the upcoming Sol-vency II-protocol.

PFA in green light

Throughout 2005, PFA Pension has been in the green light of the Danish Financial Supervisory Authority’s trafﬁ c light scenario. At the beginning

of 2006, excess solvency was 4.6 times the risk adjusted requirement for the red light. The de-termination method corresponds to the Danish Financial Supervisory Authority’s guidelines on determining risk adjusted solvency requirements. For reasons of comparisons, excess solvency was approx. 3.4 times the previous year. Positioning of shareholders’ equity and CustomerCapital in separate asset classes from the turn of the year has contributed to this improvement.

Excess capital base in PFA Pension can stand a drop in interest rates of more than 1 percentage point combined with a drop in share prices of 30 per cent. Seen in isolation, reserves can stand a drop in share prices up to approx. 70 per cent, or a drop in interest rates of more than 2 percent-age points without encountering any problems meeting the statutory solvency requirement.

In 2005, PFA Pension increased the use of deri-ative ﬁ nancial instruments to hedge interest sen-sitivity to the insurance provisions of insurance policies. Hedging instruments provided ﬁ ne cover when the interest rate fell in 2005. The fall in the interest rate in 2005 was approx. 50 basis points for the Danish Financial Supervisory Authority 10-year discount rate.

As the table below will show, value change of bonds and interest rate hedging etc. of DKK

RETURN, ADDITION OF INTEREST AND RESERVES 2005 PFA PENSION

Change of Interest/

(DKKbn) value dividend Total

Total reserves, opening 10.4

Return on bonds and interest hedging etc. 9.2 8.5 Restatement at market value of liabilities (9.4)

Return on shares 7.3 0.7

Pension yield tax (2.3) (1.3)

Accumulated deposit interest incl. unit linked (7.5)

Other changes, net (1.8)

Total 3.2 0.5 3.7

(16)

9.2 billion largely corresponds to the increase of restatements at market value of DKK 9.4 bil-lion. Signiﬁ cant capital gains on shares result in a total positive value change of DKK 3.2 billion. Current interest rates and return were DKK 0.5 billion larger than the addition of interest on the deposit. Total reserves – excess capital base and collective bonus potential – are with this in-creased by DKK 3.7 billion to DKK 14.1 billion.

Insurance risks

The sensitivity statement of the Danish Financial Supervisory Authority’s risk scheme shows that a drop in mortality intensity of 10 per cent in PFA Pension will result in a maximum effect on col-lective bonus potential of minus DKK 2.0 billion. An increase in disablement intensity of 10 per cent will result in a maximum effect on collective bonus potential of minus DKK 0.1 billion. Under

both circumstances, there will be no effect on the capital base.

The risk scheme can be found in the back of the ﬁ nancial statements.

In the section ”Increased customer life expect-ancy” on page 13, there is a detailed description as to how increased customer life expectancy has been taken into consideration in the 2005 ﬁ nancial statements.

At the end of 2005, PFA Pension has revised its reinsurance programme. Considering the size of PFA Pension, it is estimated that it is no longer necessary to reinsure individual risks. Contin-gency coverage has, however, been extended in that it now covers in the range from DKK 50 mil-lion to DKK 800 milmil-lion.

(17)

IT-RENEWAL

The renewal of PFA’s IT-technology proceeds ac-cording to plan. The majority of PFA’s systems has been renewed within the last couple of years and new ones have arrived. Renewal of the cen-tral insurance system has also commenced.

New systems and infrastructure

In 2003, PFA’s new unit linked product was de-veloped and processes surrounding ﬁ nances, HR, salary and management information was supported by new SAP-systems. In 2004 and 2005, new solutions for payments, handling of customer master data and new portal solutions etc. were implemented with an improved online service for customers, administrators, brokers, and own counsellors. At the same time, a new future-oriented IT-service infrastructure was im-plemented. The service infrastructure ensures among other things an effective and secure in-ternal communication between PFA’s systems and externally in relation to the outside world.

New insurance system

In 2005, the ﬁ rst, major step was taken towards renewing the central insurance system. A proto-type of the future insurance system was devel-oped on the basis of the insurance framework system AIA, which is also used for PFA’s unit linked product. The developed prototype lives up to expectations and is able to handle PFA’s most common pension product. In 2006 and at the be-ginning of 2007, we will carry on with the sys-tem using the prototype so that in 2007, all proc-esses which support the pension product can be handled in daily operations.

Furthermore, we will work on deﬁ ning and testing a new pension product on the market in 2006, which will be implemented in the AIA framework system subsequently.

(18)

COOPERATIVE PARTNERS

PFA is a specialist within the pension area and externally, we have an open and very broad co-operation surface. We place emphasis on profes-sionalism and competency of our cooperation partners and we are not dependent on single suppliers.

Sales via partners and international pooling PFA cooperates with a line of pension brokers, who manage customer contact and service for a large number of customers. The three large brokerage houses AON, Willis, and Mercer ac-count for the majority of the portfolio serviced by brokers. Lokale Pengeinstitutter, Jyske Bank, Sydbank and more sell group insurance policies from PFA.

PFA also cooperates with the largest interna-tional insurance networks, Swiss Life in Zürich and IGP in Boston. International risk diversiﬁ ca-tion, also known as pooling, and risk hedging through these networks also provide opportu-nity for increased value creation to customers.

Investments

In connection with investments, PFA Pension has a large number of cooperative partners. Trans-actions with securities and currency take place through a number of Danish and foreign invest-ment banks. JP Morgan is the deposit bank of PFA Pension.

PFA Pension manages by far the majority of its own investment portfolio, however, within se-lected areas, the management has been out-sourced to among others T. R. Price, Capital In-ternational, Jyske Invest, and Nordea Investment Management. Within PFA Unit Linked, 22 funds are also externally managed.

IT

Siemens Business Service (SBS) manages PFA’s IT-operation, which among other things include the operation of PFA’s central business systems. CSC Danmark is an important cooperative part-ner in connection with the implementation of PFA’s technological renewal.

(19)

EXPECTATIONS FOR 2006

Continued large growth in premiums

PFA expects a continued large growth in pension contributions in 2006 in line with the growth in 2005.

Gradually larger share ratio

The investment strategy of PFA Pension is cur-rently estimated in connection with market de-velopment and dede-velopment in reserves. In the investment strategy for 2006, share ratio in the strategic benchmark is gradually increased and bond ratio is in return reduced. This refl ects PFA’s increased capital strength and expectations for the market development. Share ratio is increased by purchasing foreign shares in that we increase the portfolio’s cash fl ow and diversifi cation at the same time. We will also diversify the bond port-folio additionally by investing in foreign bonds, including lower rated debentures with expected additional return.

Separate investment fund for shareholders’ equity and CustomerCapital

As at 1 January 2006, PFA Pension has estab-lished a separate investment fund for sharehold-ers’ equity and CustomerCapital.

Other circumstances

PFA Pension has launched an examination of the possibility of selling the portfolio of private prop-erty in order to estimate if a more favourable re-turn may be achieved by placing the funds else-where. Lærernes Pension is considering to enter into a new administrative cooperation with two other labour market pension companies. The ﬁ -nal decision is expected to be made in May 2006, and transition to a new company can at the earli-est take place from 1 January 2008.

Events after the end of the fi nancial year In the time after the end of the fi nancial year, there have not been any circumstances which, in the opinion of the management, have had signifi -cant infl uence on the Company’s and the Group’s fi nancial position.

(20)

ACCOUNTING POLICIES

General

PFA Holding presents its annual report in accord-ance with the rules and regulations of the Dan-ish Financial Business Act and related executive order concerning ﬁ nancial reporting of insurance companies and interdisciplinary pension funds issued by the Danish Financial Supervisory Au-thority (the Danish Executive Order on the Pres-entation of Financial Statements ’the executive order’).

The executive order has been changed consider-ably with effect from 2005. The purpose of the change is to ensure that the executive order is in accordance with a number of IFRS recognition and measurement provisions. Accounting policies, accounting estimates and preparation of ﬁ nan-cial statements have therefore been changed in order to comply with this. Furthermore, changes in accounting estimates have been made concer-ning measurement of life insurance provisions, among other things as a result of the changed estimate of life expectancy and changed calcula-tion techniques concerning measurement of un-listed shares.

A more detailed description of the changes in accounting policies and accounting estimates which have been carried through can be found in separate sections below.

All amounts listed in the income statement, the balance sheet and notes are presented in whole Danish kroner million, DKKm. Each ﬁ gure is rounded separately. Therefore, there may be dif-ferences between the listed totals and the sum of the below ﬁ gures.

Change in accounting policies and accounting estimates

The executive order does not provide opportu-nity to measure deferred tax assets at estimated fair value by discounting anymore. The tax asset has therefore been recognised at current tax rate of temporary differences between account-ing and tax values without discountaccount-ing.

Comparative ﬁ gures have been changed in accordance with changes in accounting policies.

The change in accounting policies implies a gain at the beginning of 2004 of DKK 1.3 billion which has been contributed to collective bonus poten-tial within the frames of the Company’s notiﬁ ed contribution. In 2004, the change in accounting policies involves an increased tax expense of DKK 0.1 billion and a reduced collective bonus poten-tial of a corresponding amount. Collective bonus potential and deferred tax assets at the end of 2004 are increased by a total of DKK 1.2 billion. The change in accounting policies does not in-volve any changes in 2005.

The new executive order implies that unit linked policies must be divided into insurance and in-vestment policies. Inin-vestment policies are poli-cies with insignifi cant insurance risks. Investment policies are processed as fi nancial policies which imply that premiums and benefi ts are not part of the income statement, but are recorded directly in the balance sheet.

In connection with the implementation of the new executive order, a number of changes have been carried through in accounting estimates.

The method of measuring life insurance provi-sions has been changed in 2005 on the basis of changes in life expectancy, disablement intensity etc. The effect of the transition to a new mea-surement of life insurance provisions involves a net increase of provisions by DKK 1.3 billion at the end of 2005.

Provisions for claims concerning non-life insur-ance include provisions for administrative ex-penses in connection with settlement of claims. Provisions have to be discounted with the same yield curve as mentioned above. The changed rec-ognition methods do not imply any net changes in 2005.

(21)

Danish securities have in 2005 been measured at closing rate instead of the last quoted, daily av-erage rate. The fair value of unlisted investments is measured according to recognised methods, including standards determined by the European Private Equity and Venture Capital Association (EVCA), whereas earlier, on the basis of equity value according to the latest available ﬁ nancial statement/ﬁ nancial statement data. The new methods for measurement of investment assets imply a total annual gain of approx. DKK 0.2 bil-lion.

Corporation tax was reduced from 30 per cent to 28 per cent with effect for the income year 2005. The tax cut effect is stated in the notes which partly accounts for the connection between pre-tax results and recognised cooperation pre-tax.

Net proﬁ t for the year

The Group’s life insurance companies have noti-ﬁ ed their policies on distribution of the annual realised results to the Danish Financial Supervi-sory Authority in accordance with the Executive Order on the Contribution Principle.

The part of annual realised results before tax at-tributable to equity consists of the investment return on equity, an entrepreneurial profi t and results of other activities, including results of non-life insurance. Equity and CustomerCapital have investment cooperation with the insurance portfolio eligible for bonus. Expenses in connec-tion with maintaining customers or writing of new customers where the consolidated compa-nies make the necessary arrangements beyond the notifi ed technical basis, fl ow from the return on shareholders’ equity. The rest of the year’s realised results falls to the policyholders.

The notiﬁ ed policy on equity’s part of the results for the year may in the individual years be de-viated to the beneﬁ t of CustomerCapital and/or collective bonus potential.

Group composition, consolidation policies and related parties

The consolidated ﬁ nancial statements include companies where the parent company directly or indirectly owns more than 50 per cent of the votes or has control in another manner. The group structure may be viewed on the company survey on page 5.

The Group’s activities include life and pension in-surance as far as the majority is concerned. The consolidated ﬁ nancial statements have therefore been prepared in accordance with the regulations which apply to life insurance companies.

The group enterprises have entered into ad-ministrative agreements with PFA Pension, who manages the entire or part of the Company’s ad-ministration on a cost reimbursement basis.

Other intercompany trades, which are within the Company’s natural area of business, are made on a written basis and are entered into on market based terms. The intercompany balance carries an interest with the money market interest rate rounded up to the nearest whole percentage.

Intercompany transactions conducted on an arm’s length basis are not eliminated.

Associates where the Group is part of the board of directors in one or more companies are in-cluded in the individual item of the consolidated ﬁ nancial statements on a rata basis in pro-portion to the percentage interest held.

Foreign currency translation

Both the Group’s functional currency and the presentation currency are in Danish kroner, DKK. Transactions in foreign currencies are translated using the exchange rate prevailing at the date of the transaction. Balance sheet items in foreign currencies are translated using the exchange rate prevailing at the balance sheet day. The

(22)

of-ﬁ cial exchange rate of Danmarks Nationalbank is used at the translation. The fair value of currency forward transactions is calculated by discount-ing the value to the balance sheet date with rele-vant money market interest rates.

Income statement

In the income statement, revenue is recognised as it is earned, and expenses – including insur-ance beneﬁ ts, changes in provisions and changes in bonus – as they are settled.

Under items administrative expenses in connec-tion with investment business, net operating expenses and balance on the technical account, non-life insurance, a part of the total operating expenses on the basis of direct and estimated resource consumption is recognised.

The dominant majority of the balance sheet items are measured at fair value. Translation ad-justments and changes in values form part of the income statement under item translation adjust-ments.

Premiums and single premiums are recognised in the income statement at the recorded due date. Transfers between individual companies’ differ-ent insurance portfolios are not recognised in the premium revenue, unless the transfer is tax-corrected according to the Danish Pension Taxa-tion Act.

Investment property revenue includes the net results before preferred interest rates concern-ing operation of investment properties. In the parent company, market rent for PFA Pension’s use of subsidiaries’ investment properties is in-cluded. In the Group, the property in question is considered owner-occupied property. Intercom-pany rent is eliminated and operating expenses, with the addition of depreciations on the Group’s owner-occupied property, form part of operating expenses, which are distributed among relevant

items on the basis of direct and estimated re-source consumption.

Change in the collective bonus potential is the portion of the realised results accruing to the in-surance portfolio in excess of the bonus already allocated. Any transfers from shareholders’ eq-uity are added to this. In years where insurance portfolio’s realised results are negative with the deduction of bonus already allocated, the item includes the use of collective bonus potential for which a provision has been made in prior years.

Change in CustomerCapital partly includes return and partly the net amount contributed by cus-tomers during the year along with any transfers from shareholders’ equity.

Transferred investment return includes the part of investment return related to shareholders’ equity and non-life insurance. The investment return on shareholders’ equity constitutes the return on investment assets recognised in equity at the beginning of the year. Return concerning non-life insurance is calculated on the basis of the average recognition in the balance sheet at the beginning and at the end of the year.

PFA Pension is taxed jointly with the Group’s Dan-ish subsidiaries and PFA Holding in accordance with the applicable tax rules. PFA has declined to have the joint taxation include the companies’ foreign property and PFA Soraarneq. Tax charge for the year is recognised in the income state-ment regardless of whether part of the proﬁ t for the year is not taxed until in subsequent ﬁ nancial reporting periods.

The Danish taxable income of the Group’s prop-erty companies forms part of the owned life insurance company’s taxable income provided that at least 90 per cent of the individual prop-erty company’s assets consist of real propprop-erty. In that case, both current and deferred taxes in the owning company are removed.

(23)

Current tax is distributed among proﬁ t yielding jointly taxed companies, which also refunds the tax base of loss to the loss-making companies.

Balance sheet

Investment property is measured at fair value. Fair value is calculated after the return method in accordance with the principles in the execu-tive order. The method is based on the individual property’s operating income and a required turn related to the property (required rate of re-turn). Operating income is based on the future year’s expected return adjusted for exceptional circumstances.

Property which is only or primarily used by the Group is considered owner-occupied property. Owner-occupied property is measured currently at re-valued value corresponding to fair value with the deduction of accumulated deprecia-tions. Revaluation takes place so frequently that the accounting value in practice does not deviate from the fair value at the balance sheet date.

Undeveloped land and forests are measured at estimated market value. Properties under con-struction are stated at cost price and are esti-mated to be equal to fair value.

Investments in group enterprises and associ-ates are measured at the accounting equity value in accordance with the latest present ﬁ nancial statements.

Financial instruments are measured in the bal-ance sheet at cost price exclusive expenses in connection with the purchase and are measured after the ﬁ rst recognition at fair value. Unit trust certiﬁ cates are included in the individual items of the balance sheet corresponding to the underly-ing assets.

The fair value of listed ﬁ nancial instruments is calculated on the basis of the closing rate at the balance sheet date. In the event that there is no

closing rate at the balance sheet date, the most recently quoted closing rate is used. In the event that there is no fair, offi cial closing rate, the fair value is estimated based on the offi cial rates of comparable fi nancial instruments at the balance sheet day.

Listed bonds that have been drawn are meas-ured at present value of the drawing amount on discounting with a money market rate.

Unlisted unit trust certifi cates are measured at fair value of the underlying net assets. Fair value of unlisted derivative fi nancial instruments is cal-culated on the basis of the expected, future cash fl ow.

Fair value of other unlisted securities is meas-ured according to recognised methods, including standards determined by the European Private Equity and Venture Capital Association (EVCA).

Traded fi nancial instruments are recognised in/ deducted from the balance sheet on the set-tlement date. Notional value of the traded, but not yet settled, fi nancial instruments is part of the balance sheet as an addition to or deduction from the value of corresponding fi nancial instru-ments.

Intangible assets which include acquired and self-generated software with a positive value for future operations. Intangible assets and equip-ment are recognised in the balance sheet at cost price with the deduction of accumulated amorti-sation and accumulated loss at impairment. Cost price at self-generated assets includes direct in-ternal project development expenses. Intangible assets worth less than DKK 1 million and total acquired equipment worth less than DKK 50,000 are amortised immediately. Amortisation is made according to the straight-line method over the expected useful life which is between 3 and 8 years. Owner-occupied property is depreciated over 100 years. Loss due to impairment is esti-mated on the basis of an impairment test.

(24)

Fair value of receivables is determined in consid-eration of expected losses.

Life insurance provisions are measured on every insurance policy by determining the market value of expected, future cash ﬂ ows. Market value is calculated by discounting the individual payments with an interest rate based on the Danish yield curve reduced by pension yield tax for relevant policy parts published by the Danish Financial Su-pervisory Authority. Expected, future cash ﬂ ows are calculated on the basis of life expectancy and disablement intensity on the basis of own analy-ses of the Group’s insurance portfolio.

Life insurance provisions include market value margin as there is a drop in mortality for all ages dependent on the estimated future development in mortality included in the life expectancy in the assumptions company for company. If the life insurance provisions exceed the deposit on the policy, the provision is reduced in excess of the deposit in consideration of an age-conditional likelihood that the individual insured will surren-der the policy. On calculation of the provisions, it is assumed that administrative expenses for administering the Company’s insurance portfo-lio are covered by the expense loading, which is charged to the policies.

Guaranteed benefi ts represent the market value of benefi ts guaranteed to the individual insured with the addition of expected future administra-tive expenses, less the deductions of the agreed future premiums. Guaranteed benefi ts include an estimated amount to cover future insurance benefi ts pertaining to insurance events that have occurred during the fi nancial year, but which had not been reported at the balance sheet date.

Bonus potential related to future premiums in-cludes commitments to pay bonus on agreed, not yet overdue, premiums.

Bonus potential related to beneﬁ ts on paid-up policies includes the value of commitments to pay bonus concerning premiums, etc. already paid.

Provisions for claims are unpaid insurance ben-efi ts due on the balance sheet date and include an estimate of insurance benefi ts which had not been reported at the end of the fi nancial year. Provisions for claims concerning non-life insur-ance include provisions for administrative ex-penses in connection with settlement of claims. Collective bonus potential is the insurance port-folio’s share of the realised results, for which col-lective provisions have been made for insurance policies eligible for bonus, besides life insurance provisions and provisions for claims.

CustomerCapital is part of the capital base on equal terms with shareholders’ equity, but since it accrues, in due course, to the insured, it is part of the insurance provisions.

Provisions made for unit linked insurance poli-cies basically represent the market value of cor-responding assets. If the policies concerned in-clude a commitment that at the time of maturity, beneﬁ ts will be calculated on the basis of a value that is higher than the current market value of the assets, then provisions will be measured with due regard to this.

Deferred tax is recognised by the temporary dif-ferences between accounting and tax values of the assets and liabilities at the balance sheet date.

New accounting rules for 2006

As at 2006, accounting rules on calculation of the present value of future administration re-sults have been changed so that provisions as a minimum must correspond to the surrender value of the insurance policies. The change does not affect the life insurance provision statement in PFA.

(25)

Key ﬁ gures

The PFA Group prepares key ﬁ gures in accordance with the provisions in the Danish Executive Order on the Presentation of Financial Statements.

Return ratios in the 5-year summary are calcu-lated for all assets and liabilities according to a money-weighted method, whereas return bro-ken down by asset type in the return table is calculated for investment assets (i.e. excl. paya-bles and various assets) after a time-weighted method. Hedging of currency risk is broken down by the nature of investment assets in the return table.

(26)

PFA Holding Group

Key ﬁ gures (DKKm) 2001 2002 2003 2004 2005

Income statement

Premiums, net of reinsurance 11,307 11,757 12,345 12,869 13,841 Insurance beneﬁ ts, net of reinsurance (6,220) (7,189) (8,554) (7,953) (8,004) Investment return (7,158) 8,253 10,381 18,704 27,740 Total net operating expenses (705) (728) (860) (791) (918) Proﬁ t/(loss) of reinsurance (28) (47) (5) (56) 70 Balance on the technical account 1) _{(4,185) (198) 129 162 (407)}

Balance on the technical account, non-life insurance (96) 47 (35) (76) (76) Net proﬁ t/(loss) for the year (3,649) 1,047 277 323 (6) Investment return after deduction of change in

restatements at market value before bonus (6,081) 5,819 10,812 13,856 18,200

Balance sheet

Total provisions for insurance and investment policies 147,589 157,702 169,528 189,460 217,629 Total equity 2,976 4,002 4,279 4,602 4,597 Total assets 155,532 168,809 179,625 199,364 228,071 Capital base 7,258 11,064 11,188 12,355 12,982

Deposit interest rate in PFA Pension

after pension yield tax (p.a.) 8.5 % 4.5 % 4.5 % 4.5 % 4.5 % 1) The ﬁ gures for 2001 have not been restated in accordance with

the accounting policy changes made in 2002.

Consolidated key ﬁ gures 2001 2002 2003 2004 2005

Yield ratio

Yield before pension yield tax (4.6 %) 5.7 % 6.3 % 10.8 % 14.1 % Yield after pension yield tax (3.9 %) 5.1 % 5.5 % 9.3 % 12.2 %

Cost ratio

Expense ratio on premiums 6.2 % 6.1 % 6.8 % 6.2 % 6.6 % Expense ratio on provisions 0.5 % 0.5 % 0.6 % 0.5 % 0.5 % Expenses per insured DKK 1,116 DKK 1,094 DKK 1,265 DKK 1,169 DKK 1,321 Balance on the cost account (0.10 %) (0.09 %) (0.14 %) (0.13 %) (0.19 %) Claims experience ratio 0.40 % 0.09 % 0.17 % (0.05 %) 0.24 %

Consolidation ratios

Bonus ratio 4.3 % 2.3 % 3.4 % 4.4 % 6.8 % CustomerCapital ratio 3.6 % 4.2 % 4.4 % 4.9 % 5.4 % Equity ratio 2.2 % 4.1 % 4.0 % 4.0 % 3.7 % Excess solvency ratio 0.5 % 2.8 % 2.5 % 2.7 % 2.4 % Solvency ratio 111 % 155 % 150 % 155 % 147 %

Return ratios

Return on equity before tax (93.0 %) 0.5 % 8.8 % 11.4 % 4.3 % Return on equity after tax (76.4 %) 30.0 % 6.7 % 7.3 % (0.1 %) Pre-tax return on customers’ funds

excl. CustomerCapital after expenses *) _{(2.7 %)} _{4.7 %} _{5.4 %} _{9.8 %} _{14.2 %}

Return on loan capital before tax 4.9 % 7.9 % 6.8 % 6.4 % 6.4 % Return on CustomerCapital before tax - 23.6 % 11.8 % 18.1 % 18.7 % Pre-tax return on customers’ funds

incl. CustomerCapital after expenses *) _{(2.7 %)} _{5.3 %} _{5.6 %} _{10.1 %} _{14.4 %}

Ratios relating to non-life insurance

Gross claims ratio 96.2 % 75.9 % 101.1 % 121.4 % 128.4 % Gross expense ratio 20.4 % 16.5 % 17.3 % 17.7 % 17.3 % Combined ratio, net of reinsurance 123.1 % 93.7 % 119.1 % 139.3 % 145.9 % Operating ratio 148.1 % 88.2 % 110.7 % 118.7 % 115.6 % *) Change in accounting policies is included in the return on

customers’ funds in the transaction year.

(27)

PFA Holding

(DKKm) Group PFA Holding

Note 2005 2004 2005 2004

INCOME STATEMENT

Premiums

1 Gross premiums 14,052 12,959

Ceeded premiums (211) (90)

Total premiums, net of reinsurance 13,841 12,869

Investment return

Income from group enterprises - - 0 323

Income from associates 0 0

Income from investment property 669 679

2 Interest income, dividends etc. 8,256 7,864 0 0 3 Translation adjustments 19,262 10,574

Interest expenses (237) (249)

4 Administrative expenses in connection with investment business (210) (165) 0 0

Total investment return 27,740 18,704 0 323

5 Pension yield tax (3,807) (2,461)

Investment return after pension yield tax 23,933 16,243 0 323

Insurance beneﬁ ts

6 Beneﬁ ts disbursed (8,347) (7,946)

Reinsurers’ share 281 34

Change in the provisions for claims 63 (42)

Total insurance beneﬁ ts, net of reinsurance (8,004) (7,953)

Change in life insurance provisions

Change in life insurance provisions (21,336) (16,002)

Total change in life insurance provisions, net of reinsurance (21,336) (16,002)

Bonus

Change in collective bonus potential (4,737) (2,090) Change in CustomerCapital (1,565) (1,239)

Total bonus (6,301) (3,329)

Change in provisions for unit linked policies (792) (365)

Net operating expenses

7 Acquisition costs (379) (341)

7 Administrative expenses (539) (450) (8) 0

Total net operating expenses, net of reinsurance (918) (791) (8) 0

8 Investment income transferred (831) (509)

Balance on the technical account (407) 162 (8) 323

9 Balance on the technical account, non-life insurance (76) (76) 8 Investment return on equity 682 420

Other income 0 1

10 Pre-tax proﬁ t/(loss) 198 507 (8) 323

11 Tax (204) (184) 2 0

Net proﬁ t/(loss) before minority interests (6) 323 (6) 323

Minority interests 0 0

Net proﬁ t/(loss) for the year (6) 323 (6) 323

(28)

PFA Holding

(DKKm) Group PFA Holding

Note 2005 2004 2005 2004

BALANCE SHEET – ASSETS

Intangible assets 300 275

12 Equipment 59 115

Owner-occupied property 347 318

Total property, plant and equipment 407 433

Investment assets

13 Investment property 12,789 11,424

14 Investments in group enterprises - - 4,324 4,323 15 Investments in associates - -

Total investments in group enterprises and associates - - 4,324 4,323

Other ﬁ nancial investment assets

Investments 33,302 24,354

Bonds 157,550 147,019

16 Loans 396 459

Cash and demand deposits 882 666

Other 13,286 5,405

Total other ﬁ nancial investment assets 205,416 177,902

17 Total investment assets 218,205 189,326 4,323 4,323

18 Investment assets related to unit linked policies 3,746 3,390

Reinsurers’ share of provisions for claims 2 4

Total reinsurers’ share of provisions for insurance policies 2 4

Receivables

Receivables from policyholders 668 455 Receivables from insurance companies 57 2

Receivables from group enterprises - - 0 0

Other receivables 48 511 0 0

Total receivables 773 968 0 0

Other assets

Current tax assets 42 60 0 0

19 Deferred tax assets 2,528 2,684 2 0

Total other assets 2,570 2,744 2 0

Prepayments

Interest receivable and accumulated rent 1,729 2,044

Other prepayments 337 180

Total prepayments 2,067 2,225