Half-year report 2012
Tryg Forsikring A/S
(CVR-no. 24260666)Contents
Company details... 3
Management´s report ... 4
Statement by the Supervisory Board and the Executive Management... 15
Accounts Tryg Forsikring Group ... 16
Income statement and Other comprehensive income ... 16
Statement of financial position ... 17
Statement of changes in equity ... 19
Cash flow statement ... 20
Notes ... 21
Accounts Tryg Forsikring A/S (parent company)... 24
Income statement and Other comprehensive income ... 24
Statement of financial position ... 25
Notes ... 27
Financial highlights and key ratios of Tryg Forsikring A/S... 28
Company details
Supervisory Board
Mikael Olufsen, chairman Torben Nielsen, deputy chairman Paul Bergqvist
Vigdis Fossehagen Lone Hansen Jesper Hjulmand Bill-Owe Johansson Jørgen Huno Rasmussen Lene Skole
Tina Snejbjerg Jens Bjerg Sørensen Mari Thjømøe
Executive Management
Morten Hübbe Tor Magne Lønnum Lars Bonde
Internal audit
Jens Galsgaard
Independent auditors
Deloitte, Statsautoriseret Revisionsaktieselskab
Ownership
Tryg Forsikring A/S is part of the Tryg Group. The company has a share capital of DKK 1,100m and is wholly-owned by Tryg A/S, Ballerup, Denmark.
The half-year report is included in the consolidated financial statements of TryghedsGruppen smba, Kgs. Lyngby and Tryg A/S, Ballerup (www.tryghedsgruppen.dk and www.tryg.com)
Management´s report
Tryg Forsikring’s financial performance
The pre-tax result for the first half-year amounted to DKK 1,466m (DKK 887m). The improvement in the result of DKK 579m is primarily attributable to an improvement in the technical result of DKK 426m. The combined ratio improved from 93.7 in the first half of 2011 to 89.3 in the first half of 2012. The improve-ment comprises profitability improveimprove-ment measures, a higher run-off level and a smaller impact from large claims and weather claims. The run-off as a percentage amounted to 5.6 and was affected by extraordinary run-off gains from reinsurance of 1.2 percentage points. Excluding these gains the run-off would therefore be 4.4%, corresponding to a more normal run-off result.
The claims ratio for the first half-year was influenced by an upward adjustment in the first quarter of 2012 of the claims costs from the cloudburst on 2 July 2011 of approximately DKK 300m. This had a negligible effect on the results, however, since the upward adjustment was covered by reinsurance.
The lower interest rate level negatively impacted the combined ratio by 1.5 percentage points in the first half-year of 2012 compared with the same period in 2011. Likewise, the low interest rate level in the Nor-wegian part of the business led to a strengthening of the pension provisions by DKK 171m.
The first half-year of 2012 was generally as expected, with continued improvement in profitability based on measures to improve pricing, risk selection and efficiency. These measures, in conjunction with the market-economic situation, meant that premium growth was only moderate as expected. With the result for the first half-year, Tryg Forsikring is on track to achieve a combined ratio of 90 or less from the third quarter of 2013.
Premiums
Earned gross premiums amounted to DKK 10,351m in the first half-year of 2012, corresponding to an in-crease of 0.7% in local currency. The low premium growth was expected and should be seen in the context of several initiatives to improve profitability.
Growth in the first half-year of 2012 was affected by price measures from previous years and to a lesser extent by measures launched in 2012. The total effect of the price measures, which also include the usual indexation of insurance, corresponds to DKK 1bn. These actions led to a reduction in business volume, espe-cially in Commercial, and, as part of the focus on profitability, there has also been a reduction in growth in Sweden and Finland.
returns on a sideways reinsurance agreement that resulted in returns on claims from 2011 in particular.
In 2011, Tryg Forsikring signed a sideways reinsurance agreement which provides coverage for an increased frequency of weather claims. The agreement is not expected normally to contribute positively to the result, as it has been entered into in order to provide protection in years with an unusually high number of claims events, which is also reflected in modest pricing. The agreement was concluded for 1 July 2011 to 30 June 2012, which was a period with an increased frequency of weather claims, and has meant that Tryg Forsik-ring had an income in the second quarter of 2012 of over DKK 80m and a total income of about DKK 120m during the period covered by the agreement. The agreement was renewed at a slightly higher price, but is otherwise largely unchanged and, as already mentioned, is not expected to contribute positively in the next coverage period.
At the Capital Markets Day in London on 19 June 2012, Tryg Group presented claims initiatives to reduce claims costs by DKK 700m by 2015 and by DKK 100m in 2012. The initiatives proceeded as planned in the second quarter of 2012. Among other things, Tryg Group entered into an agreement with Scalepoint. The system makes it possible to buy goods at competitive prices for the claim to which a customer is entitled through self-service. The agreement is a benefit for both the customers and Tryg Group.
Costs
The expense ratio amounted to 16.8 (16.8) in the first half of 2012. The expense ratio amounted to 16.8 (17.0) in the second quarter. The reduction in the expense ratio should be seen in the context of the initia-tives listed below, which were presented at the Capital Markets Day and restraint in costs generally. The number of employees was 4,255 at the end of the first half-year of 2012, representing a reduction from the end of 2011 of 63 employees or 1.5%.
At the Capital Markets Day, Tryg Group presented initiatives to reduce the expense ratio to below 15% in 2015. This includes both a review of staff areas, where significant reductions have already been made in the finance functions, and structural changes in both distribution and administration of the business areas. The reduction in the number of employees in the first half-year should be seen in conjunction with these initia-tives.
Investment result
Tryg Forsikring discounts the insurance provisions and matches the disbursement profile of provisions with bonds. Investment assets other than those included in the match portfolio represent the free investment portfolio and are invested broadly.
The investment result was also impacted by a write-down of owner-occupied properties of DKK 150m. The write-down was made on the basis of a market valuation of owner-occupied properties and led to the afore-mentioned write-down of the head office in Denmark (but which also led to an appreciation of the head office in Bergen, Norway, of DKK 36m), which is entered directly in equity.
The pre-tax and after-tax result
The pre-tax result amounted to DKK 1,466m for the first half of 2012 (DKK 887m). Tax on continuing busi-ness represented an expense of DKK 367m, corresponding to a tax rate of 25%. The result for the period after tax and discontinued business was thus DKK 1,099m (DKK 662m).
Capital
Tryg Forsikring's shareholders' equity amounted to DKK 9,558m as at 30 June 2012. Shareholders' equity was affected in by the period's result of DKK 1,099m, paid dividends of DKK 400m and the strengthening of the Norwegian pension provision by DKK 171m after tax and a number of other smaller movements.
At the end of July, Standard & Poor's published their update of the rating on Tryg Forsikring A/S and Tryg Garantiforsikring A/S, where the 'A-' stable rating was maintained for both companies. In their assessment, Standard & Poor's especially highlight:
• Tryg Forsikring´s strong position in the market,
• Tryg Forsikring´s strong ability to execute the strategy, • Tryg Forsikring´s technical result development.
Changes to the Group Executive Management
In June 2012, Kjerstin Fyllingen resigned her position as Group Executive Vice President of Commercial and Country Manager in Norway. Tryg Forsikring is searching for a new Group Executive Vice President, and in the intervening period, Nicklas Larsen, Director of Price & product, Commercial is appointed temporarily as Group Executive Vice President, Corporate Truls Holm Olsen assumes the role as Country Manager in Nor-way.
In the same month, director Rikke Larsen was appointed Group Executive Vice President of Tryg Forsikring A/S, with responsibility for People and Reputation, which among other includes Communications, HR, Corpo-rate Identity and Law.
Private
Private Nordic sells insurances to private individuals in Denmark, Norway. Sales are achieved through call centres, the Internet, internal sales agents, franchisees (Norway), business partners, car dealers, real estate agents and Nordea’s branches. The business area represents approximately 47% of the Group’s total premium income.
The result for the first half of 2012
The result for the first half of 2012 amounted to DKK 503m (DKK 344m). The improvement in the result was achieved on the basis of the implemented measures. The result was also positively impacted by fewer weather claims and the effect of the aforementioned sideways reinsurance cover of about DKK 82m, and it was achieved despite a significantly lower interest rate level. The combined ratio amounted to 89.9 in the first half of 2012 (93.6), which represents an improvement of 3.7 percentage points.
Generally, the first half of the year has progressed as expected for Private, with a continued improvement in combined ratio as a result of measures to improve profitability and an expected moderate premium growth based on the market economic situation and the prioritisation of profitability
Commercial
Commercial sells insurance products to small and medium-sized companies in Denmark and Norway. This business area accounts for 18% of Tryg Forsikring’s total earned premiums.
The result for the first half of 2012
The result for the first half-year amounted to DKK 255m (DKK 108m). The improvement in the result was due to measures affecting pricing, claims reduction and segmentation, as well as a high level of run-off gains, and despite a significantly lower interest rate level. The combined ratio amounted to 86.6 in the first half of 2012 (95.1), which represents an improvement of 8.5 percentage points, of which about 8 percent-age points can be attributed to run-off gains.
Generally, the first half of 2012 has progressed as expected, with a small improvement in combined ratio as a result of measures to improve profitability and an expected moderate reduction in the volume of business based on pricing measures and the market economic situation.
Corporate Nordic
Corporate sells insurance products to corporate customers through own sales force and through insur-ance brokers under the brand ‘Tryg’ in Denmark and Norway and ‘Moderna’ in Sweden. Tryg Garanti-forsikring is included in the financiel results of corporate. This business area accounts for 25% of Tryg Forsikring’s gross premiums earned
The result for the first half of 2012
The result for the first half of 2012 amounted to DKK 434m (DKK 317m). The improvement can be attrib-uted to improved pricing, a lower level of large claims and weather claims, which corresponds to lower run-off gains and the impact of a lower interest rate level. The combined ratio amounted to 83.8 for the first half of the year (88.7).
Overall the result is satisfactory and shows that the price measures have had a positive impact on profitabil-ity. However, it is still necessary to focus on the established profitability and customer strategy for the busi-ness area, in order both to compensate for the lower interest rate level and to ensure a satisfactory return from the high level of capital that is attributable to Corporate.
Sweden and Finland
Sweden and Finland sells insurance products to private individuals and small and medium-sized com-panies under the brand ‘Tryg’ in Finland and ‘Moderna’ in Sweden. Sales take place through tied agents, call centres, the Internet and Nordea. This business area accounts for 10% of Tryg Forsikring’s total premiums earnedK
The result for the first half of 2012
The result for the first half of 2012 amounted to DKK 9m (DKK 6m). The combined ratio amounted to 100.6 for the first half of the year (102.0). The improvement is attributable to the profitability measures and new initiatives with the development of new tariffs and cost initiatives, which are expected to continue to im-prove the result for Sweden and Finland.
Investment activities
Investment assets DKKm Total Match Free Total Match Free 30.06.2012
Bonds, cash deposits, etc. 424 340 84 507 425 82 39,992
Equities * -29 -29 -99 -99 1,858
Investment property 35 35 70 70 2,187
Total 430 340 90 478 425 53 44,037
Value adjustment, changed discount rate -130 -130 -242 -242
Transferred to technical interest -236 -236 -142 -142
Total return on investment activities before other financial items 64 -26 90 94 41 53
Other financial income and expenses, investment** -14 -19
Total return on investment activities 50 75
Other financial income and expenses, non-investment ** -54 -180
Return on investment activities -4 -105
*) DKK 51m bought on futures contracts is an additional exposure to the equity portfolio.
***) The item comprises interest on operating assets and bank debt, exchange rate adjustment of insurance items, writedown of owner occupied property and costs of investment activities.
DKKm Total Match Free Total Match Free 31.12.2011 30.06.2012
Bonds, cash deposits, etc. 429 312 117 850 536 314 37,232 39,992
Equities * 70 70 58 58 1,816 1,858
Investment property 65 65 131 131 2,199 2,187
Total 564 312 252 1,039 536 503 41,247 44,037
Value adjustment, changed discount rate 140 140 -180 -180
Transferred to technical interest -474 -474 -308 -308
Total return on investment activities before other financial items 230 -22 252 551 48 503
Other financial income and expenses, investment** -33 -34
Total return on investment activities 197 517
Other financial income and expenses, non-investment ** -88 -255
Return on investment activities 109 262
*) DKK 51m bought on futures contracts is an additional exposure to the equity portfolio.
***) The item comprises interest on operating assets and bank debt, exchange rate adjustment of insurance items, writedown of owner occupied property and costs of investment activities. Investment assets Return Q1-Q2 2011 Return Q2 2012 Return Q1-Q2 2012 Return Q2 2011
Tryg Forsikring's total investment portfolio of DKK 44bn yielded a gross return of DKK 1,039m in the first half of 2012. After transfer to insurance the net return on investment was DKK 551m. With a write-down of DKK 150m on Tryg Forsikring's owner-occupied property in Denmark, for example, other financial income and expenses amounted to DKK -289m, yielding a total result of DKK 262m in the first half.
The match portfolio
Tryg Forsikring matches the provisions for insurance contracts with the assets in the match portfolio so that changes in interest rate levels affect Tryg Forsikring’s result as little as possible. Generally, this leads to lower variation in the result and will under Solvency II give rise to a smaller capital requirement to accom-modate fluctuations.
The match portfolio rose slightly in the period and amounted to just over DKK 35bn at the end of the first half of 2012. The return on the portfolio should cover both the price adjustments on the claims provisions
Intervention in Denmark to help the pension sector change the match significantly
The extraordinarily large downward pressure on interest rates throughout the Euro area led the Ministry of Business and Growth in June 2012 to implement parts of the expected future structure for determining the long-term interest rates when the sector makes the transition to the new capital control rules, called Sol-vency II, in 2014. This means that Tryg Forsikring has to value the claims provisions with higher interest rates from one day to the next, whereby the value will be reduced. Since this has no effect on the assets, it means that the investment result after transfer to insurance will immediately increase by DKK 150m, such that the total mismatch for the half year will be positive by DKK 48m.
In the last seven months there have been three adjustments to the methodology used to calculate the value of insurance provisions. These measures will inevitably lead to an adjustment of the planned risk manage-ment, and it cannot be ruled out that there may be additional adjustments by the beginning of 2014, when the new solvency rules are expected to take effect. The changes at that time are uncertain, but in a worst case scenario it could lead to equally large and opposing effects.
Tryg Forsikring has matched its liabilities since 2010. The goal has been to achieve a long-term return match. The accumulated mismatch in the period from 2010 to the first half of 2012 amounted to DKK -12m without the latest changes in the Danish FSA discounting curve and therefore shows a good match between assets and liabilities.
The free investment portfolio
The free investment portfolio consists primarily of equities, properties and bonds and in the first half of 2012 it produced a total gross return of DKK 503m. The free portfolio amounted to approximately DKK 9bn at the end of the first half of 2012.
The equity portfolio, which is globally diversified, decreased by 5% and resulted in a loss of DKK 99m in the second quarter of 2012. For comparison, the world index resulted in a negative return of 4.3% in the second quarter. Overall, for the first half-year, the shares earned DKK 58m.
The property portfolio, consisting of Danish and Norwegian investment properties, yielded a return of DKK 70m in the second quarter, which was better than expected. Overall, for the first half-year, the property portfolio yielded a total return of DKK 131m.
The bond portfolio yielded a return of DKK 82m in the second quarter of 2012. Overall, performance from the first quarter was maintained, which means that the first half as a whole maintained the very satisfactory result
ties respectively. The assumed rent level for the far more diversified portfolio of investment properties contin-ues to conform to the actual rent level based on contracts with many tenants, and there is generally a good correlation between the valuation and the current transaction flows in the property portfolio.
Financial outlook
In 2010, Tryg Forsikring Group announced a target of achieving a medium-term return on equity of 20% after tax, corresponding to a combined ratio of 90 or less. The target is to be achieved from 2013.
The result for the first half of 2012 shows the impact of the implemented profitability measures and, to-gether with further planned measures, indicates that Tryg Forsikring is well on track to achieving the target.
Tryg Forsikring expects a somewhat lower premium growth in 2012 than in the previous years. The growth will mainly come from the implemented pricing measures.
At a well-attended Capital Markets Day in June 2012, Tryg A/S presented specific initiatives to reduce the cost level and reduce claims through improved claims procurement. In connection with the Capital Markets Day, Tryg Group presented a target of an expense ratio of less than 15 in 2015.
Statement by the Supervisory Board and the Executive Management
The Supervisory Board and the Executive Management have today considered and adopted the interim report for the first half-year of 2012 of Tryg Forsikring A/S and the Tryg Forsikring Group.
The interim report, which is unaudited and has not been reviewed by the company’s auditors, is pre-sented in accordance with IAS 34 Interim Financial Reporting and the Danish Financial Business Act. The interim report of the parent company has been prepared in accordance with the executive order issued by the Danish FSA on the presentation of financial reports by insurance companies and profes-sion-specific pension funds.
In our opinion, the accounting policies applied are appropriate, and the interim report gives a true and fair view of the Group’s and the parent company’s assets, liabilities and financial position at 30 June 2012 and of the results of the Group’s and the parent company’s operations and the cash flows of the Group for the half-year.
Furthermore, in our opinion the Management’s report gives a true and fair view of developments in the activities and financial position of the Group and the parent company, the results for the period and of the Group’s and the parent company’s financial position in general and describes significant risk and uncertainty factors that may affect the Group and the parent company.
Ballerup, 14 August 2012
Executive Management:
Morten Hübbe Tor Magne Lønnum Lars Bonde
CEO CFO Group Executive Vice President
Supervisory Board:
Mikael Olufsen Torben Nielsen Poul Bergqvist
Accounts Tryg Forsikring Group
Notes
H1 H1 FY
DKKm 2011 2012 2011
6 Profit/loss on discontinued and divested business
Earned premiums, net of reinsurance 7 0 4
Claims incurred, net of reinsurance -6 0 29
Insurance operating expenses, net of reinsurance -1 0 0
Technical result 0 0 33
Profit/loss before tax 0 0 33
Tax 0 0 -8
Profit/loss on discontinued and divested business 0 0 25
7 Related parties
In the first half-year of 2012 Tryg Forsikring A/S paid Tryg A/S a total amount of DKK 400m in dividends (in H1 2011 DKK 256m) Tryg Ejendomme A/S and Vesta Ejendomme AS payed dividends in first half-year of 2012 of
DKK 200m and DKK 178m. (in H1 2011 DKK 39m and DKK 111m ) There have been no other material transactions with related parties.
8 Accounting policies
Tryg Forsikring’s half-year 2012 report is presented in accordance with IAS 34 Interim Financial Reporting and the financial reporting Financial Business Act.
The interim report of the parent company has been prepared in accordance with the executive order
issued by the Danish FSA on the presentation of financial reports by insurance companies and profession-specific pension funds. The application of IAS 34 means that the report is limited relative to the presentation of a full annual report and that the valuation principles are in accordance with International Financial Reporting Standards (IFRS).
From 1 January 2012 the Group implemented the following standards:
• Amendments to IFRS 7 ’Financial Instruments: Disclosure - Transfers of financial Assets’ • Amendments to IAS 12 ’Deferred Tax - Recovery of underlying Assets’
The implementation of the new standards has not affected recognition and measurement in 2012.
From 1 January 2012 the operating business segments are the Private segment, the Commercial segment, the Corporate segment and the Sweden and Finland segment.
A new cost allocation setup which reflects the use of resources in connection with the new organisation has been implemented.
Hedges of the risk of changes in future wage and price figures for provisions for workers' compensation
have been changed so the mismatch is included in claims incurred. Previously it was included in return of investment activities.
The comparative figures related to the changes are restated accordingly.
Apart from this, the accounting policies are unchanged from the annual report 2011. The annual report 2011 contains the full description of the accounting policies.
In june 2012 the Danish FSA has changed the discount curve for discounting of provisions. The effect of the change to the new yield curve is:
Changes in accounting estimates DKKm
Impact 30.06.2012
Total return on investment activities after technical interest 150
Profit/loss before tax 150
Provisions for claims -150
Accounts Tryg Forsikring A/S (parent company)
Income statement and Other comprehensive income
Disclaimer
Certain statements in this half-year report are based on the beliefs of our management as well as assump-tions made by and information currently available to the management. Such statements may constitute for-ward-looking statements. These forfor-ward-looking statements (other than statements of historical fact) re-garding our future results of operations, financial condition, cash flows, business strategy, plans and future objectives can generally be identified by terminology such as “targets,” “believes,” “expects,” “aims,” “in-tends,” “plans,” “seeks,” “will,” “may,” “anticipates,” “would,” “could,” “continues” or similar expressions.
A number of different factors may cause the actual performance to deviate significantly from the forward-looking statements in this annual report, including but not limited to general economic developments, changes in the competitive environment, developments in the financial markets, extraordinary events such as natural disasters or terrorist attacks, changes in legislation or case law and reinsurance.
Tryg Forsikring urges readers to refer to the section on risk management available on the Group’s website for a description of some of the factors that could affect the company’s future performance and the industry in which it operates.
Should one or more of these risks or uncertainties materialise or should any underlying assumptions prove to be incorrect, the Tryg Forsikring Group’s actual financial condition or results of operations could materially differ from that described herein as anticipated, believed, estimated or expected. Tryg Forsikring Group is not under any duty to update any of the forward-looking statements or to conform such statements to actual results, except as may be required by law.
