CODAN A/S ANNUAL REPORT

(1)

CODAN A/S

ANNUAL REPORT 2011

1 Company Reg. No. 56 77 12 12

1

(2)

Codan A/S - Annual Report 2011

Codan A/S – Annual Report 2011

General information

Board of Directors and Management

Board of Directors: Simon Lee, Chairman

Anthony Latham, Deputy Chairman Andrew Burke

Lars Nørby Johansen Jørgen Lykke * Henrik Müllertz * Marianne Philip Rowan Saunders Christian Sletten * *) Elected by employees Board of Management:

Michael Holliday-Williams, CEO Vibeke Krag

Auditors Auditors elected by the general meeting:

Deloitte, Statsautoriseret Revisionspartnerselskab

Ownership RSA Insurance Group plc, One Plantation Place, London, England, owns 100 % of the shares in Codan A/S, Through the wholly-owned Dutch subsidiary RSA Overseas Hold-ing B.V., Netherland.

Adress, etc. Gammel Kongevej 60 DK – 1790 Copenhagen V Telephone: +45 33 21 21 21 Fax: +45 33 55 21 22 www.codan.dk

(4)

Codan A/S – Annual Report 2011

Management’s review

Page 4/60

Financial review

The Company’s principal activity

Codan A/S ("Codan") is a financial holding company whose principal activity is to own and manage general insurance companies in Scandinavia, primarily through the Swedish subsidiary Trygg-Hansa Försäkrings AB and the Danish sub-sidiary Codan Forsikring A/S, both of which offer general insurance products to personal and commercial customers. The Annual Report for 2011

Codan is a subsidiary of RSA Insurance Group plc, which prepares consolidated financial statements in accordance with applicable United Kingdom law. Consolidated financial statements are therefore not prepared for the Codan Group. The the financial statements for 2011 have been audited and prepared in accordance with the Danish Financial Business Act, including the Danish Financial Supervisory Authority’s Executive Order on Financial Reports for Insurance Com-panies and Lateral Pension Funds (Nationwide Occupational Pension Funds). Accounting policies are described in Note 1.

As no consolidated financial statements are published for Codan, income from activities of subsidiaries is only recog-nised as income from Group entities. In the text box below, the results of the Scandinavian subsidiaries, excluding the branch in Estonia and the Baltic subsidiaries and without taking into account the intra-group quota share reinsurance programme, are reported using the same practice as in the Annual Report for the RSA Group and in accordance with the accounting policies applied by RSA. These accounting policies deviate from those applied by Codan as acquisition costs are deferred and technical provisions are only discounted for particularly long tail lines of business. The trend in net earned premiums has been calculated at constant exchange rates.

In Scandinavia, premiums were up 2%, reflecting growth in Personal and Commercial Lines.

In Personal Lines, premiums were up 1% with good growth in Contents, Accident and Motor offsetting exposure reduc-tions in Norway where the Company focuses on improving portfolio profitability.

In Commercial Lines, premiums were up 3%. Renewable Energy, Marine and the Norwegian business saw growth, whereas a number of large Property and Workers' Compensation contracts were not renewed in the first half of 2011. The Scandinavian underwriting result was up 4% on 2010 despite the storms in July and November. The Scandinavian Combined Operating Ratio was an excellent 85.4% (2010: 85.4%), primarily driven by Personal Lines with a Combined Operating Ratio of 75% (2010: 78.5%), whereas Commercial Lines were affected by large and weather-related claims and as a result recorded a Combined Operating Ratio of 98% (2010: 93.6%).

Major events in 2011 Dividend

In the first half of 2011, Codan A/S received dividends for 2010 from its subsidiaries Trygg-Hansa Försäkrings AB of SEK 2,890 million, Lietuvos Draudimas AB of LTL 26.6 million and AAS Balta of LVL 5.2 million, corresponding to a total of DKK 2,526 million.

In the first half of 2011, Codan paid SEK 2,890 million and DKK 1,112 million in dividends to RSA Overseas Holdings B.V., Codan's Parent Company, corresponding to a total of DKK 3,530 million. Furthermore, Codan distributed interim dividends of DKK 888 million in November 2011 to its Parent Company.

Disposal of Baltic subsidiaries

With a view to streamlining the structure of the RSA Group, Codan sold the insurance subsidiaries Lietuvos Draudimas AB and AAS Balta to Royal & Sun Alliance Insurance plc in November. From the sale, Codan realised an accounting gain of DKK 238 million, which is recognised in profit for the year. The selling price was based on the arm’s length principle.

Merger between Codan Forsikring A/S and Trekroner Forsikring A/S

(5)

Codan A/S – Annual Report 2011

Management’s review

Extended reinsurance programme

As part of its overall international capital and finance management strategy, RSA established the reinsurance company, RSA Reinsurance Ireland Ltd. During the financial year, Trygg-Hansa Försäkrings AB concluded a reinsurance agree-ment with the Irish company, and Codan Forsikring A/S extended its agreeagree-ment with the Irish company.

The agreement does not affect other reinsurance contracts, but will see Codan Forsikring A/S and Trygg-Hansa Försäk-rings AB entering into a so-called quota share arrangement, thereby extending their overall reinsurance cover. The pro-gramme covers 35% of net earned premiums on Danish policies and all marine policies (25% in the second half of 2010) and 5% of Trygg-Hansa Försäkrings AB's net earned premiums in 2011. Reinsurance with RSA Reinsurance Ire-land Ltd is purchased at market price, and the companies will receive a commission covering all administrative costs and a minor overhead. In December 2011, new agreements were concluded for 2012. The agreements cover 25% of net earned premiums on Danish policies and all marine policies in Codan Forsikring and 10% of net earned premiums in Trygg-Hansa Försäkring.

New CEO

Michael Holliday-Williams took up the position as CEO as at 1 February 2011 on which date Rickard Gustafson re-signed.

Profit for the year

In Scandinavia, early indications were that there would be a strong recovery during 2011 although, as with elsewhere in Europe, that recovery would fade in the latter part of the year. For the Codan Group, 2011 was, as for many other players in the Nordic insurance market, characterised by these challenging market conditions as well as harsh weather with the storms in February and November and the cloudburst over Copenhagen in July. Despite these events, the Codan Group delivered satisfactory results.

In 2011, Codan achieved a profit of DKK 2,369 million against a profit of DKK 2,483 million for 2010. The profit was in particular affected by income from Group entities of DKK 2,455 million. The profit for the year is considered satis-factory.

Investments

The Company’s investments are made in subsidiaries and other financial assets. The total investment return was DKK 2,380 million for 2011 against DKK 2,520 million for 2010.

At the end of 2011, the Company's investment portfolio consisted of the following assets (all amounts in DKK million):

2011 2010

Investment properties 191 182

Investments in Group entities 12,544 12,886 Equity investments and units in open-ended funds 364 912

Bonds 0 256

Cash and cash equivalents 179 808

13,278 15,044

Investment properties

The Company has two properties in its investment portfolio. In the period the properties have experienced a value in-crease of DKK 10m, which includes ongoing improvements of DKK 20m and a market value write-down of DKK 10m. Investments in Group entities

Income from Group entities amounted to DKK 2,455 million for 2011 against DKK 2,426m for 2010.

Income from Group entities can be broken down as follows: The profit for Trygg-Hansa Försäkrings AB amounted to DKK 2,131 million and the profit for Codan Forsikring A/S amounted to DKK 61 million. Realised gains from the sale of the Baltic subsidiaries amounted to DKK 238 million. The profit for other subsidiaries amounted to DKK 25 million.

Trygg-Hansa Försäkrings AB

Trygg-Hansa Försäkrings AB primarily carries on general insurance business in Sweden within the Personal and Com-mercial segments. Trygg-Hansa offers a comprehensive range of general insurance products, and the company's market share in Sweden is approx. 16%.

(6)

Codan A/S – Annual Report 2011

Management’s review

Page 6/60 Calculated on the basis of Danish accounting policies, the profit for 2011 amounted to DKK 2,131 million against DKK 2,226 million for 2010. The balance on the technical account showed a profit of DKK 1,170 million for 2011 against DKK 2,086 million for 2010. The investment result was DKK 1,679 million compared to DKK 775 million for 2010. In 2011, Trygg-Hansa Försäkrings AB recorded an increase in gross earned premiums of approx. 1.1% to SEK 9,901 million against SEK 9,790 million in 2010. Personal Lines saw increased premium volume, particularly in Sickness and Accident insurance, while Commercial Lines in particular saw an increase in the Motor and Care segments. The Com-pany continued to show good profitability and stable results.

Gross claims incurred amounted to SEK 6,512 million in 2011 against SEK 5,402 million in 2010, corresponding to an increase of SEK 1,110 million, or 20.5%. The increase in gross claims incurred can be ascribed to an increase in the number of large claims in 2011.

The net expense ratio was 15.3% in 2011 as compared with 14.7% in 2010.

Codan Forsikring A/S

Codan Forsikring A/S offers almost all types of general insurance products to private individuals and companies in the Nordic countries. Being the third largest player in both the personal and commercial markets and the largest marine in-surer, Codan Forsikring A/S holds a leading position in the general insurance market in Denmark. The Company has branches in Sweden, Norway, Finland and Estonia.

The profit for Codan Forsikring A/S for 2011 was DKK 61 million against a profit of DKK 127 million for 2010. In 2011, gross earned premiums in Codan Forsikring A/S decreased slightly by approx. 0.4% to DKK 7,364 million from DKK 7,392 million in 2010. This decrease is the result of 1.1% growth in Personal Lines, whereas gross earned premiums in Commercial Lines decreased by 1.3%.

Gross claims incurred amounted to DKK 6,289 million in 2011 against DKK 5,810 million in 2010, corresponding to an increase of DKK 479 million, or 8.2%. The increase was primarily attributable to the weather-related events which oc-curred during 2011, such as the cloudburst in Copenhagen in July and the storms in February and November.

The gross expense ratio was 21.5% in 2011 as compared with 19.9% in 2010. The increase can primarily be ascribed to increased IT investments.

Equity investments and units in open-ended funds

The Company continued to have an exposure to shares. The Company's equity investments and units in open-ended funds amounted to DKK 364 million at 31 December 2011, equal to 2.7% of the total investment portfolio (6.1% in 2010).

The Company's equity investments and units in open-ended funds generated a negative return of DKK 54 million in 2011 (a positive return of DKK 78 million in 2010).

Bonds

The Company had no bonds in its investment portfolio at 31 December 2011.

The total return on the bond portfolio was a negative DKK 1 million (a positive return of DKK 4 million for 2010), equal to a negative approx. 1.1% (1.6% for 2010).

Balance sheet

Total assets for Codan decreased by DKK 2,012 million, from DKK 16,447 million in 2010 to DKK 14,435 million in 2011. This is mainly the result of a decrease in financial assets and cash and cash equivalents in connection with the distribution of dividends.

Equity decreased by DKK 1,958 million to DKK 13,307 million. Apart from profit for the year, equity is particularly affected by dividend payments of DKK 4,418 million.

(7)

Codan A/S – Annual Report 2011

Management’s review

Business initiatives

In 2011, the Codan Group launched a customer-oriented strategy. A key element of the strategy is the Brilliant Service programme where customer surveys and feedback from partners and sales staff have been used to better understand cus-tomer needs. The programme resulted in the development of procedures for cuscus-tomer-oriented follow-up on cuscus-tomer value propositions and initiatives with a view to improving the customer experience. Codan already reaps the fruits of the programme with improved customer satisfaction and an increased number of renewals. The Group objective is to have clearer definitions of the sales and claims services Codan deliver to our customers, thereby delivering consistent service at all times. The Group will continue to focus on renewal of existing customers and on improving Codan’s value proposition to new customers.

• In

2011, Trygg-Hansa Försäkrings AB strengthened its bank distribution e.g. by building on the agreements between Sveland and local savings banks. The Company also concluded a number of new and important partnership agreements.

•

In 2011,

Codan Forsikring A/S concluded new agreements and recorded solid growth in the Affinity Division. A number of existing agreements were renegotiated and the Renewable Energy Division gained shares of new markets.

In accordance with Group strategy, the Codan Group continued to focus on sustainable and profitable growth throughout 2011 by:

• Driving profitable growth through Commercial and Affinity partnerships • Enhancing Codan’s technical expertise in underwriting and claims • Delivering continuous operational efficiencies

• Investing in people, focusing on improving engagement levels and embedding performance management. Variable remuneration

With effect from 1 January 2011, new rules entered into force on the obligation of financial undertakings to draw up a remuneration policy for the undertaking, including rules on the payment of variable remuneration to the board of direc-tors, the board of management and material risk takers. Codan implemented the new rules and observe the special re-strictions applicable to the remuneration of the Board of Directors, the Board of Management and material risk takers. Consequently, the Company complies with the provisions of sections 71 and 77a-d of the Danish Financial Business Act. In accordance with section 77d of the Danish Financial Business Act, information about the total remuneration for members of the Board of Directors and Board of Management is provided in this Annual Report, and the information to be published in accordance with the remuneration rules is also available on Codan's website under "Løn i Codan" (re-muneration in Codan).

Audit Committee

The Board of Directors of Codan has set up a Group Audit Committee, "the Codan Group Audit Committee".

The Committee consists of five members of the Board of Directors. As the independent member with special qualifica-tions in accounting, the Company's Board of Directors has appointed Lars Nørby Johansen. Lars Nørby Johansen is a member of the Boards of Directors of Codan and Codan Forsikring A/S.

The tasks of the Committee are set out in the Terms of Reference based on Executive Order No. 1393 of 19 December 2011 on Audit Committees in Companies and Groups which are subject to supervision of the Danish Financial Supervi-sory Authority. The tasks of the Committee include monitoring of both the financial reporting process, including calcu-lation of the individual solvency requirements, and the companies' internal control system and risk management systems. The Committee also monitors both the statutory audit of the statutory accounts, which include controlling of the audi-tor’s independence and the effectiveness of the internal audit function.

When performing its tasks, the Audit Committee ensures that due regard is given to matters important to the individual companies, regardless of whether such matters are important for the Group.

The work of the Audit Committee is based on supervision of historical events and does therefore not include future events, expectations or forecasts.

In 2011, the Audit Committee held four meetings in connection with the quarterly reporting to the Company's Board of Directors and the Danish Financial Supervisory Authority.

(8)

Codan A/S – Annual Report 2011

Management’s review

Page 8/60 Events subsequent to 31 December 2011

Dividend for 2011

The Board of Directors proposes a dividend payment of DKK 2,452 million. The dividend is made up of DKK 200 mil-lion and SEK 2,700 milmil-lion, which, at the exchange rate ruling on 31 December 2011, amounts to a total of DKK 2,452 million. The SEK 2,700 million corresponds to the dividend Codan A/S will receive from its subsidiary Trygg-Hansa Försäkrings AB

.

The proposed dividend, which will be considered by the Annual General Meeting on 25 April 2012, is based on the rules on solvency as set out in the legislation governing insurance companies. The Company’s solvency ratio after the proposed dividend is 232%

Based on its financial position, the Company is expected to meet its obligations, both in the short and in the long term. The Board of Directors finds that the Company’s equity is sufficient seen in relation to the size and risks of the Com-pany.

Codan expects to receive dividends from its subsidiary Trygg-Hansa Försäkrings AB of SEK 2,700 million at the end of April 2012. This will increase the solvency ratio from 232% to 544%.

No events of material importance to the Company's financial position or business affairs have occurred subsequent to 31 December 2011.

Outlook for 2012

In 2012, Codan expects to maintain the satisfactory insurance operating profit in subsidiaries.

Codan’s insurance subsidiaries continue to focus on delivering long-term profitable growth in their insurance operations with strict management control of underwriting. Diversified portfolios of the subsidiaries, reasoned insurance pro-grammes and conservative reserving ensure stable insurance operating profits. The subsidiaries are expected to deliver satisfactory insurance operating profits, provided that weather-related claims will be at a more normal level in 2012. Based on the guidelines and investment policy laid down by the Codan Group, no major changes are expected in the allocation of the companies' assets in 2012.

The Management of Codan does not consider it appropriate to make any statements as to the expected developments in the interest rate and stock markets or the expected value adjustments for 2012.

(9)

Codan A/S – Annual Report 2011

Management’s review

Employees, corporate responsibility and competence development

The cornerstone of the Codan Group's performance and success is the Group's ability to attract, retain and develop the best talents. Codan wants to be one of the best workplaces in the insurance market, which also contributes towards at-tracting employees to work in the insurance industry in general. By focusing on the development of the individual em-ployee and leader, the Group provides the framework for a dynamic, informative and stimulating environment based on respect.

Codan wants to be a responsible employer. By focusing on all aspects of diversity and equal opportunities for all em-ployees, Codan wants to be a workplace where differences are considered a strength and source of inspiration.

Corporate responsibility efforts

The Codan Group has decided to work strategically with corporate social responsibility as it is a prerequisite for attract-ing the best employees, customers, suppliers and business partners – and thus for buildattract-ing a profitable and sustainable business. The Group has published a CSR report which is publicly available on the website

In 2011, the Codan Group launched a new, revised CSR strategy towards 2013, focusing on three strategic themes, i.e. climate, safety and health. With the new strategy, Codan will continue to engage employees in the CSR agenda inter-nally (e.g. by means of an internal climate week, a health week and volunteering activities). Furthermore, the new strat-egy is to integrate CSR even further in Codan's core business for the benefit of customers.

In 2011, the Codan Group focused on volunteering activities. About 600 employees in Denmark, Sweden and Norway participated in volunteering activities. In Norway, volunteering employees supported the work of the Red Cross, and in Sweden, Myrorna benefited from volunteers in their second-hand shops. In Denmark, employees participated in "Årets Refleksdag" (the annual day of the reflector) organised by Codan and the Child Accident Prevention Foundation. On this day, the volunteering employees distributed some 40,000 reflectors to the Danes.

In Sweden, the Group has about 80,000 life buoys at harbours and beaches. However, some of the life buoys are now so old and worn that they can no longer be used to save lives. In the summer of 2011, a Facebook campaign was therefore launched, encouraging the Swedish people to use their smartphones to take photos of the life buoys and share them on Facebook. After an intensive two-month hunt, photos of nearly 11,000 life buoys were shared on Facebook and of them, 300 were registered as destroyed and will be replaced.

Climate is a high-priority area for the Codan Group. In recent years, Codan has seen a major increase in weather-related claims. In the short term, Codan would like to raise awareness of damage caused by extreme weather, and in the long term, Codan would like to contribute to turning the negative climate trend. As an example, Codan hosted and spoke at a climate adaptation conference organised by the City of Copenhagen. Furthermore, Codan's in-house Green Team launched a new, climate-friendly solution to personal customers who suffer window glass damage. This means that Co-dan will not only replace the window with a new energy-efficient window. Customers also receive an energy report free of charge showing how much money and how much CO2 they can save by replacing the remaining windows with

en-ergy-efficient windows.

I addition, the Group has a partnership agreement with WWF in Denmark and Sweden, which involves sponsorship of the annual Earth Hour campaign. In the WWF partnership, Codan has committed to an objective of cutting CO2

emis-sions by 40% by the end of 2020 as compared with the 2006 level. Focus on employees

Codan participates in the global career development programmes offered by its Parent Company RSA. Some examples are Technical Academy, Leadership Development Programme, Fast Track for potential leaders and Global Graduate aimed at new graduates.

Codan invests many resources in developing the right competences for the future market through internal and external training opportunities. With our Global Capability Framework, which was launched in February 2011, we wish to focus on personal development and identification of the individual employee's skills and capabilities.

Job roles and capabilities are defined for each business area and all employees review their own capabilities against the respective roles and requirements. In this connection, we have launched an online Learning Zone, giving each individual employee an overview of various training and learning opportunities. Learning Zone offers a number of compulsory and voluntary training opportunities, e.g. through e-learning.

(10)

Codan A/S – Annual Report 2011

Management’s review

Page 10/60 Based on last year's strong Engagement Survey results, Codan continues to focus on employee retention and engagement initiatives. The development programme "Unlocking Your Full Potential" for leaders and employees was very well re-ceived, and the tools and techniques from this programme are used every day to provide coaching and feedback. We will continue to develop this programme.

Future initiatives

Codan will to continue investing in its people. A mix of local and global initiatives concerning employer branding, en-gagement, reward and recognition will support the Codan Group's future ambition to become one of the best workplaces in the insurance market.

(11)

Codan A/S – Annual Report 2011

Management’s review

Risk management

The most significant risks of Codan concern the risks relating to its insurance subsidiaries. The following description of risks includes both the risks of Codan and of its insurance subsidiaries.

The subsidiaries of Codan are exposed to various types of risks, of which insurance risks, financial risks and operational risks are the most prominent. Insurance risks pertain primarily to underwriting risk and reserving risk. Financial risks primarily consist of market risks and the effect of changes in interest rates, particularly in the bond portfolio and technical provisions. Operational risks include defects stemming from insufficient or incorrectly handled processes, and human or systematic errors. Codan's management of these risks is described below and further detailed in Note 2. Risk management in Codan

The overall risk policy and limits for Codan are laid down by the Company’s Board of Directors. The connection between strategic considerations regarding risk acceptance and day-to-day decisions on whether to enter into agreements with customers, partners, suppliers and others has been strengthened through continuous evaluation of the current risk profiles of Codan's subsidiaries by the Risk Management Forum, which serves as an advisory body to the managers in charge. The risk profiles are reported to the respective Boards of Directors quarterly. For further information about risk management, see Note 2.

Codan's subsidiaries have implemented necessary and relevant monitoring systems, business processes and controls in order to minimise risks. The most essential elements of the risk profiles of Codan's subsidiaries are managed by the Underwriting & Risk function, focusing on insurance, financial and operational risks.

Insurance risks

The Codan Group's insurance risks comprise: • Underwriting risk and premium rating risk

• Counterparty risk, also referred to as credit risk or default risk (see Credit Risk section below) • Reserving risk.

Underwriting risk is the risk that the premium charged is not sufficient to cover future expenses. Codan's exposure to underwriting risk is primarily indirect via the Company’s subsidiaries.

Reserving risk is the risk that technical provisions will not be sufficient to settle incurred claims. Codan's exposure to reserving risk is primarily indirect via the Company’s subsidiaries.

For a risk description of underwriting and reserving risks of subsidiaries, please refer to the Annual Reports for 2011 of Codan Forsikring A/S and Trygg-Hansa Försäkrings AB.

Financial risks

Financial risks consist of Market risk, Credit risk and Liquidity risk. Market risk is the most important of these for Codan since a significant part of the Company’s activities consist of investment activities. Market risk is the risk that movements in the financial markets affect the value of assets and liabilities, and thereby the Company’s capital base and return. Note that Codan's exposure to financial risk is primarily indirect via the Company’s subsidiaries. The financial risks described below are considered on an aggregated level, i.e. including subsidiaries.

Codan's investment portfolio is exposed mainly (nearly 50%) to equities through a Collective Investment Vehicle (CIV) and a few unlisted shareholdings for strategic reasons. The remaining part of the investment portfolio is evenly divided between properties and cash deposits.

However, Codan's subsidiaries have the majority of their investments in Danish and Swedish government and mortgage bonds. The vast majority of the bonds is considered liquid and can be sold at short notice close to market price.

(12)

Codan A/S – Annual Report 2011

Management’s review

Page 12/60 Market risks

Interest rate risk

Changes in interest rates are one of the main financial risks that Codan is exposed to through its subsidiaries. If interest rates fall, the value of bond portfolios held by the Codan's subsidiaries will rise. At the same time, technical provisions rise in connection with downwards changes in the discount rate. Changes in interest rates thus have an opposite P&L effect on assets and liabilities. One of the investment policy aims is to ensure risk-matching of assets and liabilities. Equity risk

The value of the equity portfolio fluctuates in line with movements in stock markets. Codan manages this risk by setting investment limits for total exposure and for individual holdings. The equity portfolios held by subsidiaries consist primarily of direct investments in listed European equities, whereas the equities held directly by Codan are focused on a single listed CIV and a few unlisted shareholdings.

Spread risk

Spread risk is the risk that the value of bonds with an inherent credit element declines due to spread increases caused e.g. by an increase in risk aversion in the market. Codan is not exposed to spread risk directly, but is exposed to spread risk via investments in mortgage bonds and corporate bonds through its subsidiaries. However, the spread risk is considered limited as only triple-A rated mortgage bonds and investment grade corporate bonds are held.

Real estate risk

Codan has only few direct investments in properties. In addition to direct investments in properties, Codan has a minor exposure to properties via exchange traded property trusts through the investment portfolios held by subsidiaries. The overall real estate risk is considered low.

Currency risk

Currency risk arises as a result of a mismatch in the value of assets and liabilities in the same foreign currency. Codan has limited currency risk as the technical provisions in subsidiaries are generally matched by investments in the same currency. In Codan's financial statements, results and equity of subsidiaries are translated into DKK. Consequently, significant changes in foreign exchange rates may affect Codan's results and equity.

Inflation risk

A significant part of the technical provisions in Codan's subsidiaries is index-linked, and Codan is consequently exposed to inflation through its subsidiaries. The inflation exposure is to some extent reduced by investments in inflation linked bonds. Furthermore, investments in short-dated nominal bonds, cash products, equity and property (where rent is in-dexed with inflation) also provide some protection against inflation.

Liquidity risk

Most of Codan's investments held in Codan's subsidiaries are in liquid, listed bonds that can be liquidated at short no-tice. Furthermore, a credit facility can easily be obtained from the Company’s primary banks given the Group’s A+ rat-ing.

Credit risk

Credit risk (default risk) is the risk of incurring a loss if a counterparty cannot meet its obligations. Codan's investment portfolio in its subsidiaries consists primarily of triple-A rated Danish and Swedish government and mortgage bonds. Codan's credit and counterparty risks are primarily tied to holdings of cash and deposits in banks and exposure on rein-surance counterparties – all through its subsidiaries. For European corporate bonds, issuers must have a credit rating of at least triple B.

Operational risks

Operational risk may arise as a result of errors or defects in administrative routines or as a result of external circumstances, leading to unexpected economic or reputational losses.

(13)

Codan A/S – Annual Report 2011

Management’s review

Capital structure

Codan is subject to the rules governing financial holding companies and bases its capital management approach on these rules. The rules governing financial holding companies stipulate that capital requirements of directly or indirectly owned insurance subsidiaries are fully deductible from Codan's capital. Calculation of the capital requirement of financial hold-ing companies includes risk-weighthold-ing of the Company's assets. The Company's solvency ratio, which must be at least 8%, is calculated by comparing the risk-weighted assets with the Company's capital base. Codan's solvency ratio is 18.6% against 15.4% at the end of 2010.

In its capital management of insurance subsidiaries, the Codan Group uses an internal capital model to assess and calcu-late capital requirements and scenarios. The model is used to calcucalcu-late the internal capital requirement and is further used for performance reviews based on internal capital allocation and impact analyses used for assessing major strategic decisions. Developed in cooperation with the RSA Group, the model is adapted to the individual companies and is main-tained and further developed on a regular basis, which e.g. involves annual reparametrisation. The model is a cash flow-based stochastic model which models reserving risk, claims performance risk, catastrophe risk, counterparty risk, in-vestment risk and operational risk. Within this model framework, with run-off on existing obligations and new business for one year, the capital requirement is calculated as the capital required at all times to resist a worst-case scenario, de-fined as a once in every 200-year occurrence. The calculation of the Danish individual solvency requirement is affected by the budget for the coming year and changes in interest rates. This means that, all other things being equal, lower in-terest rates will result in increased capital requirements due to the expectation of a lower return on investments for a number of years, which was just the case when comparing the end of year figures for 2011 with the end of year figures for 2010.

In 2009, the Codan Group formally initiated a Solvency II project. The project is managed by a Scandinavian project organisation which reflects the structure of the RSA Group’s Solvency II activities. For Codan, the project involves on-going adjustments to and development of the internal model and a system for risk management. The design of the risk management system is based on the strong existing risk management procedures, and focus of the project is on areas requiring further documentation and control mechanisms. The design builds on the British Individual Capital Assess-ment process and the Danish individual solvency process. The Scandinavian project organisation includes a Steering Committee, which meets every month, a Managing Committee, which meets every week, and a Central Team, which is in charge of project management. Ten working groups are involved in the project, all of which cooperate with corre-sponding working groups in the RSA Group to facilitate efficient resource use and ensure a consistent approach in the RSA Group. This also allows knowledge sharing, which ultimately ensures that more competent employees of the RSA Group contribute to a consistent high-quality risk management environment in Codan. The Board of Directors is ensured influence on the project through the CFO of Codan, who is a member of the management team of the Solvency II project and regularly reports on the progress of the work to the Board of Directors.

Apart from interaction via the various working groups, Codan and the RSA Group interact at several other levels. The CFO is a member of the Steering Committee of the RSA Group, and representatives from the Central Team participate in teams responsible for the coordination of companies in countries in which RSA has a presence. The RSA Group seeks an open and positive dialogue with all supervisory authorities.

(14)

Codan A/S – Annual Report 2011

Management’s review

Page 14/60

Directorships and executive positions

Board of Directors

At the time of adoption of the Annual Report, the members of the Company’s Board of Directors held the following directorships and executive positions in other enterprises.

Board of Directors Directorships and executive positions in other enterprises

Simon Lee, Chairman Codan A/S (Chairman), RSA Insurance Ireland Limited (Chairman), Royal & Sun Alliance Insurance plc, RSA Insurance Group plc (Group Chief Executive) Anthony Latham, Deputy Chairman Codan Forsikring A/S (Deputy Chairman), Pool Reinsurance Ltd (Chairman),

Flagstone Reinsurance Holdings S.A., Ecclesiastical Insurance Group plc. Andrew Burke Codan A/S, IDIP Direct Insurance B.V (Executive Officer), Intouch Insurance

Group B.V. (Executive Officer), L4C Sp. Z.o.o., AAS Balta, DIRECT Pojis-tovna, a.s., Intouch Insurance, Lietvuvos Draudimas AB, Direct Insurance Ser-vices Center Spolka z Organiczona Odpowiedzialnocia, Link4 life Towarzystwo Ubezpieczen na Zycie Spolka Akcyjna, Link4 Towarzystwo Ubezpieczen Spolka Akcyjna

Lars Nørby Johansen Falck A/S (Chairman), Georg Jensen A/S (Chairman), Codan A/S, William De-mant Holding A/S (Chairman), Index Award A/S, Falck Holding A/S (Chair-man), Falck Danmark A/S (Chair(Chair-man), Dong Energy A/S (Deputy Chair(Chair-man), Arp-Hansen Hotel Group A/S, Dansk Vækstkapital K/S (Chairman), Fonden for Entreprenørskab, Institut for Selskabsledelse ApS, Fonden Oluf Høst Museet, Dansk Vækstkapital Komplementar ApS (Chairman), Board Assure A/S, Univer-sity of Southern Denmark, SDU (Chairman), Danmarks Vækstråd (Chairman)

Jørgen Lykke * Codan Forsikring A/S

Henrik Müllertz * Codan Forsikring A/S

(15)

Codan A/S – Annual Report 2011

Management’s review

Directorships and executive positions

Board of Directors (continued)

Marianne Philip Brenntag Nordic A/S, Specialforeningen Nordea Invest Engros, Advokatfirmaet Kromann Reumert International A/S (Chairman), Holdingselskabet af 17 august 2011 ApS (Deputy Chairman), Aktieselskabet af 1. januar 1987, Investeringsfor-eningen Nordea Invest Bolig, Scan Office ApS (Deputy Chairman), Indretning og Design ApS (Deputy Chairman), Fåmandsforeningen Nordea Invest Valg, Investeringsinstitutforeningen Nordea Invest Portefølje, Stiholt Holding A/S, Investeringsforeningen Nordea Invest Special, Gerda og Victor B. Strands Fond/Toms Gruppens Fond (Chairman), Investeringsforeningen Nordea Invest Portefølje, Placeringsforeningen Nordea Invest, Investeringsforeningen Nordea Invest, U.D. Group A/S (Chairman), Den professionelle forening NM, A.J. Aa-mund A/S (Chairman), Hedgeforeningen Nordea Invest Engros, ningen Nordea Link, Investeringsinstitutforeningen Nordea Invest, Fåmandsfore-ningen Nordea Invest, InvesteringsforeFåmandsfore-ningen Nordea Invest Kommune, Codan Forsikring A/S, Hedgeforeningen Nordea Invest Portefølje

Mac Elle Holding ApS in bankruptcy (Liquidator), Euroconsultants af 2004 ApS in liquidation (Liquidator), Glostrup Bowling Center ApS in bakruptcy (Liquida-tor), Ally Group ApS in bankruptcy (Liquida(Liquida-tor), Frank Errebo Supermarkeder ApS in bankruptcy (Liquidator), Høje Gladsaxe Supermarked ApS in bankruptcy (Liquidator), Humlebæk Golf & Country Club ApS in bankruptcy (Liquidator), Sommervilla.dk ApS in bankruptcy (Liquidator), Frank Errebo Holding ApS in bankruptcy (Liquidator), Investeringsforeningen Nordea Invest Engros, Zulueta ApS in bankruptcy (Liquidator), Techno Vision Development A/S in bankruptcy (Liquidator), Isefjorden Holding ApS in bankruptcy (Liquidator), Christian Bahl Holding ApS in compulsory dissolution (Liquidator), DTS A/S in bankruptcy (Liquidator), Mick Poulsen Holding ApS in Bankruptcy (Liquidator), Frida Danielsen ApS in liquidation (Liquidator), A Post Euro Express A/S in liquida-tion (Liquidator), Brenntag Ltd. A/S in liquidaliquida-tion (Liquidator), PBH 25.366 ApS in bankruptcy (Liquidator), Afsluttet Projektselskab 79 ApS in compulsory dissolution (Liquidator), Nora I ApS in compulsory dissolution (Liquidator), M-J Entreprise ApS in bankruptcy (Liquidator), Simpel Solution ApS in bankruptcy (Liquidator), Simpel Solution Holding ApS in bankruptcy (Liquidator), Four Two Nr 1 SMBA in bankruptcy (Liquidator), Nordic Industrial Park – Europe ApS in bankruptcy (Liquidator), Four Two Nr 5 SMBA in bankruptcy (Liquida-tor), Four Two Nr 8 SMBA in bankruptcy (Liquida(Liquida-tor), Nordjysk P-kontrol S.M.B.A. in compulsory dissolution (Liquidator), Sigma DK ApS in bankruptcy (Liquidator), Glostrup Byg ApS in bankruptcy (Liquidator)

Rowan Saunders Codan A/S, 7872569 Canada Inc. (Chairman), Aldis Underwriting Managers Inc., Ascentus Insurance Ltd. (Chairman and Executive Officer), Canadian Northern Shield Insurance Company (Chairman and Executive Officer), Johnson Inc. (Executive Officer), Noraxis Capital Corporation (Chairman and Executive Officer), Quebec Assurance Company (Chairman and Executive Officer), Roins Financial Services Limited (Chairman and Executive Officer), Roins Holding Limited (Chairman and Executive Officer), Royal & Sun Alliance Insurance Company of Canada (Chairman and Executive Officer), RSA Canada Holdings Limited (Chairman and Executive Officer), RSA Travel Insurance Inc. (Chair-man and Executive Officer), The Johnson Corporation (Executive Officer), Uni-fund Assurance Company (Executive Officer), Western Assurance Company (Chairman and Executive Officer), 1723538 Ontario Inc. (Chairman and Execu-tive Officer), 3342484 Canada Limited (Chairman and ExecuExecu-tive Officer) Christian Sletten * Codan Forsikring A/S

(16)

Codan A/S – Annual Report 2011

Management’s review

Page 16/60

Directorships and executive positions

Board of Management

Pursuant to section 80 of the Danish Financial Business Act, the Board of Directors of Codan Forsikring A/S has ap-proved that the members of the Board of Management of the Company, who were registered during 2011, held or hold the following directorships and executive positions.

Board of Management Directorships and executive positions Michael Holliday-Williams

CEO

Directorship in: Trygg-Hansa Försäkrings AB (CEO).

Vibeke Krag Directorships in: Forsikringsakademiet A/S, Codan Ejendomme II A/S (Deputy Chairman), Besigtelses Kontoret af 1914 A/S, Trekroner Forsikring A/S*, Forsik-ringsselskabet Privatsikring A/S,

Codan A/S (Executive Officer)

Rickard Gustafson * Directorship in: Trygg-Hansa Försäkrings AB (CEO)**. * Resigned during the financial year.

(17)

Codan A/S - Annual Report 2011

Statement by Management on the Annual Report

The Board of Directors and the Executive Board have today considered and approved the annual report of Codan A/S for the financial year 1 January to 31 December 2011.

The annual report is presented in accordance with the Danish Financial Business Act.

In our opinion, the financial statements give a true and fair view of the Company’s financial position at 31 December 2011 and of its financial performance for the financial year 1 January to 31 December 2011.

We believe that the management commentary contains a fair review of the affairs and conditions referred to therein. We recommend the annual report for adoption at the Annual General Meeting.

Copenhagen, 25 April 2012

Board of Management

Michael Holliday-Williams Vibeke Krag

CEO

Board of Directors

Simon Lee Anthony Latham Andrew Burke

Chairman Deputy Chairman

Lars Nørby Johansen Jørgen Lykke Henrik Müllertz

(18)

Codan A/S - Annual Report 2011

Independant auditor’s report

Page 18/60 To the shareholder of Codan A/S

Report on the financial statements

We have audited the financial statements of Codan A/S for the financial year 1 January to 31 December 2011, which comprise the, income statement, statement of comprehensive income, balance sheet, statement ‘of changes in equity and notes, including the accounting policies. The financial statements are prepared in accordance with the Danish Financial Business Act.

Management's responsibility for the financial statements

Management is responsible for the preparation of financial statements that give a true and fair view in accordance with the Danish Financial Statements Act and for such internal control as Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's responsibility

Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing and additional requirements under Danish audit regulation. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatements of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation of financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Management, as well as the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Our audit has not resulted in any qualification. Opinion

In our opinion, the financial statements give a true and fair view of the Company’s financial position at 31 December 2011 and of the results of its operations for the financial year 1 January to 31 December 2011 in accordance with the Danish Financial Business Act.

Statement on the management commentary

Pursuant to the Danish Financial Business Act, we have read the management commentary. We have not performed any further procedures in addition to the audit of the financial statements.

On this basis, it is our opinion that the information provided in the management commentary is consistent with the fi-nancial statements.

Copenhagen, 25 April 2012

Deloitte

Statsautoriseret Revisionspartnerselskab

Henrik Priskorn Per Rolf Larssen State Authorised State Authorised Public Accountant Public Accountant

(19)

Codan A/S - Annual Report 2011

Income statement

Note DKK '000 2011 2010

Investment return

Income from Group entities 2,454,871 2,426,387

4 Income from investment properties 13,516 41,000

5 Interest income and dividends, etc. 41,120 76,798

6 Value adjustments -89,418 26,674

7 Interest expenses -32,218 -47,570

Investment management expenses -7,758 -3,051

Total investment return 2,380,113 2,520,238

8 Other income - 3,662

9 Other expenses -54,988 -31,606

Profit before tax 2,325,125 2,492,294

10 Tax 43,414 -9,112

Profit for the year 2,368,539 2,483,182

Proposal for the distribution of profit:

Transfer to reserve for net revaluation according to the equity method 2,216,390 2,426,387

Value adjustment of dividend from 2010 27,774 175,850

Interim dividend paid in 2011 887,594

-Proposed dividend 2,452,340 3,502,030

Transferred to retained earnings -3,215,559 -3,621,085

2,368,539 2,483,182

Statement of comprehensive income

Revaluation of Group occupied properties in subsidiaries 21,509

-Currency translation adjustment,

foreign subsidiaries and branches 91,657 958,146

Currency translation adjustment, goodwill relating to foreign subsidiaries 377 17,681

35 -32

Currency translation adjustment, disposal of foreign subsidiaries 6,902

-Actuarial gains/losses on pension obligations -2,300 1,316

Tax on actuarial gains/losses on pension obligations 575 -329

Actuarial gains/losses on pension obligations in subsidiaries -30,216

-Minority interests' share of tax on intra-group contribution 2,086

-Impairment in connection with acquisition of goodwill

after obtaining a controlling interest - -13,494

Other comprehensive income -52 -2,452

Other comprehensive income 90,573 960,836

Profit for the year 2,368,539 2,483,182

Total comprehensive income 2,459,112 3,444,018

Currency translation adjustment, inter-company balances relating to foreign subsidiaries

(20)

Codan A/S - Annual Report 2011

Balance sheet at 31 December

Page 20/60

Note DKK '000 2011 2010

Assets

11 Intangible assets 1,146,945 1,180,927

12 Investment properties 191,500 182,000

13 Investments in Group entities 12,544,046 12,886,506

Total investments in Group entities 12,544,046 12,886,506

14 Equity investments 169,709 172,809

14 Units in open-ended funds 194,293 738,953

14 Bonds - 256,364

Total other financial assets 364,002 1,168,126

Total investments 13,099,548 14,236,632

14 Receivables from Group entities - 3,814

14 Other receivables 2,314 202,956

15 Total receivables 2,314 206,770

16 Current tax assets 7,729 10,566

14 Cash and cash equivalents 178,514 807,689

15 Total other assets 186,243 818,255

Accrued interest and rent 182 4,488

Total accrued income 182 4,488

(21)

Codan A/S - Annual Report 2011

Balance sheet at 31 December

Note DKK '000 2011 2010

Equity and liabilities

18 Share capital 859,970 859,970

Reserve for net revaluation according to the equity method 4,865,474 5,107,385

Total revaluation reserve 4,865,474 5,107,385

Translation reserve 215,166 14,943 Total reserves 215,166 14,943 Retained earnings 4,914,124 5,781,032 Proposed dividend 2,452,340 3,502,030 17 Total equity 13,307,074 15,265,360 19 Pension obligations 24,208 23,537

20 Deferred tax liabilities 4,211 63,859

21 Other provisions 5,925 5,892

22 Total provisions 34,344 93,288

Amounts owed to Group entities 1,084,554 1,055,188

Other payables 9,260 33,236

23 Total payables 1,093,814 1,088,424

Total equity and liabilities 14,435,232 16,447,072 Notes without reference

1 Accounting policies 2 Risk information

3 Key figures and financial ratios 24 Related parties

25 Security

26 Contingent assets, contingent liabilities and financial liabilities 27 Incentive schemes

(22)

Codan A/S - Annual Report 2011

Page 22/60

Statement of changes in equity

DKK '000 Net

revaluation according to

Share the equity Translation Retained Proposed Total

capital method reserve earnings dividend equity

2010

Equity, beginnning of the year 859,970 5,363,818 -960,819 6,734,223 2,800,000 14,797,192 Changes in equity for 2010:

- 65 958,081 - - 958,146 - - 17,681 - - 17,681 -32 -32 - - - 987 - 987 - -34 32 2 - - - - - -13,494 - -13,494

Other comprehensive income - - - -2,452 - -2,452

- 31 975,762 -14,957 - 960,836

Profit for the year - 2,426,387 56,795 2,483,182

Total income for the year 2,426,418 975,762 41,838 - 3,444,018

- 336,081 - -336,081 - -

Dividend paid - - - - -2,800,000 -2,800,000

- - - -176,200 - -176,200

- - - 350 - 350

Proposed dividend - - - -3,502,030 3,502,030 -

Dividend received from subsidiaries - -3,018,932 - 3,018,932 - -

Changes in equity for the year - -256,433 975,762 -953,191 702,030 468,168

Equity, end of the year 859,970 5,107,385 14,943 5,781,032 3,502,030 15,265,360 Impairment in connection with

acquisition of goodwill after obtaining a controlling interest

Disposals relating to restructuring Value adjustment of dividends at time of declaration

Value adjustment of dividends at time of payment

Currency translation adjustment, foreign subsidiaries

Currency translation adjustment, goodwill relating to foreign subsidiaries

Actuarial gains/losses on pension obligations, after tax

Actuarial gains/losses on pension obligations in subsidiaries

(23)

Codan A/S - Annual Report 2011

Statement of changes in equity

DKK '000 Net

revaluation according to

Share the equity Translation Retained Proposed Total

capital method reserve earnings dividend equity

2011

Equity, beginnning of the year 859,970 5,107,385 14,943 5,781,032 3,502,030 15,265,360 Changes in equity for 2011:

Revaluation of Group occupied properties

in subsidiaries - 21,509 - - - 21,509 - -7,257 98,914 - - 91,657 - - 377 - - 377 35 35 - - 6,902 - - 6,902 - - - -1,725 - -1,725 - -30,216 - - - -30,216 - 2,086 - - - 2,086

Other total income - - - -52 - -52

- -13,878 106,228 -1,777 - 90,573

Profit for the year - 2,216,390 - 152,149 - 2,368,539

Total income for the year - 2,202,512 106,228 150,372 - 2,459,112

-Reclassification - -93,107 93,995 -888 -

-- 174,879 - -174,879 -

-Dividend paid - - - - -3,502,030 -3,502,030

- - - -27,774 - -27,774

Distributed interim dividend - - - -887,594 - -887,594

Proposed dividend - - - -2,452,340 2,452,340

-Dividends received from subsidiaries - -2,526,195 - 2,526,195 -

-Changes in equity for the year - -241,911 200,223 -866,908 -1,049,690 -1,958,286

Equity, end of the year 859,970 4,865,474 215,166 4,914,124 2,452,340 13,307,074 Value adjustment of dividends at

time of declaration

Currency translation adjustment, goodwill relating to foreign subsidiaries

Currency translation adjustment, disposal of foreign subsidiaries

Minority interests' share of tax on intra-group contribution

Actuarial gains/losses on pension obligations, after tax

Actuarial gains/losses on pension obligations in subsidiaries

Release of net revaluation reserve according to the equity method on disposal of subsidiaries

Currency translation adjustment, foreign subsidiaries

(24)

Codan A/S - Annual Report 2011

Notes to the financial statements

Page 24/60 Note

1 Accounting policies

The Annual Report of Codan has been prepared in accordance with the Danish Financial Business Act and the Danish Financial Supervisory Authority’s Executive Order No. 16 of 11 January 2011 on Financial Reports for In-surance Companies and Lateral Pension Funds (Nationwide Occupational Pension Funds).

Codan is a subsidiary of RSA Insurance Group plc, which prepares consolidated financial statements in accordance with applicable United Kingdom law. Consolidated financial statements have therefore not been prepared for the Codan Group.

The accounting policies remain unchanged from the Annual Report for 2010. General information

The Annual Report is presented in DKK, rounded to the nearest thousand. The business of Codan consists mainly of holding investments in general insurance companies conducting transactions in a number of different currencies, but primarily in DKK and SEK. The functional currency is the currency of the primary economic environment in which each individual company operates. Codan has adopted DKK as its presentation currency.

Recognition and measurement

On initial recognition, assets and liabilities are measured at fair value. However, intangible assets and property and equipment are measured at cost on initial recognition. Subsequent measurements are made as described for each individual item below. Measurement at amortised cost involves recognition of a constant effective interest rate over the life of the asset or liability. Amortised cost is calculated as the original cost less repayments and with addi-tion/deduction of the accumulated amortisation of the difference between cost and the nominal amount. In this way, capital gains and losses are allocated over the life of the asset or liability.

Assets are recognised in the balance sheet when, due to an event occurring before or on the balance sheet date, it is probable that future economic benefits will flow to the Company and the value of the asset can be measured relia-bly. Financial instruments are recognised in accordance with this principle, and the trade date is thus used as the date of recognition.

Liabilities are recognised in the balance sheet when, due to an event occurring before or on the balance sheet date, the Company has a legal obligation, and when it is probable that future economic benefits will flow from the Com-pany and the value of the liability can be measured reliably.

The recognition and measurement of assets and liabilities take into account information received after the balance sheet date but before the presentation of the Annual Report if such information proves or disproves circumstances prevailing on the balance sheet date.

Income is recognised in the income statement as earned. Expenses incurred to achieve the earnings for the year, in-cluding depreciation, amortisation, impairment losses and provisions, are recognised in the income statement. Ad-justments resulting from changes in accounting estimates of items previously recognised in the income statement are also recognised in the income statement. Value adjustments of financial assets and liabilities which are meas-ured at fair value are also recognised in the income statement, unless otherwise stated below.

Key assumptions and estimates

Determination of the carrying amount of assets and liabilities requires an estimate of how future events will affect the value at the balance sheet date. In Codan and in Codan’s subsidiaries, estimates having a material impact on the financial reporting are e.g. made in connection with the determination of technical provisions, depreciation, amor-tisation and impairment losses, properties, pension obligations as well as contingent assets and liabilities. The as-sumptions and estimates used are reviewed on a continuous basis and are, among other things, based on historical experience and expectations of future events.

The estimates used are based on assumptions which the Management believes to be reasonable, but which are in-herently uncertain and unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Codan is furthermore subject to risks and uncertainties that could cause actual results to differ from the estimates used.

(25)

Codan A/S - Annual Report 2011

Notes to the financial statements

Note

Risk management is described in Note 2.

The following accounting assumptions and estimates are considered material to the Annual Report: Insurance contract liabilities in subsidiaries carrying on general insurance business

The provision for outstanding claims is generally affected by key actuarial assumptions and estimates, including expectations of the number and size of claims incurred but not reported as well as inflation developments. In some cases, the historical data forming part of the actuarial methods does not necessarily reflect the expected future level of claims, for instance in connection with amended legislation, legal practice or the practice of awarding compen-sation where an a priori estimate of the effect is prepared. This estimate is communicated to the business and forms the basis of premium changes necessitated by an expected change in the level of claims.

Deferred tax

The tax liability arising on a temporary difference between the carrying amount and the tax value is generally rec-ognised as deferred tax. If the temporary difference is negative, and it is considered likely that it can be used to re-duce future tax liabilities, a deferred tax asset will be recognised.

Provisions have not been made for deferred tax on contingency funds in Codan's subsidiaries. The reason for this is that in the opinion of the Management, taxation will only take place if the insurance portfolio is transferred or if the Company ceases to carry on insurance business.

Contingent liabilities

Contingent liabilities, including the outcome of pending legal proceedings, are inherently uncertain. The Manage-ment has estimated these on the basis of legal assessManage-ments of the specific cases.

Changes in assumptions and estimates

As part of the agreement on financial stability in the pensions area, the interest structure applied to calculate the technical provisions was changed in October 2008. The changes resulted in the use of an adjusted term dependent yield curve. The adjusted term dependent yield curve is based on the redemption yield on mortgage bonds whereas the original term dependent yield curve was based on zero-coupon rates for liquid interest rate instruments in Euro plus the spread between zero-coupon rates for Danish and German government bonds. The Danish Financial Su-pervisory Authority has extended the period for use of the adjusted term dependent yield curve, and consequently it is also used in the Annual Report for 2011.

Business combinations

Newly acquired or established entities are included in the financial statements from the date of acquisition or foun-dation. Entities sold or terminated are included in the income statement up to the date of disposal. Comparative figures are not restated for entities recently acquired, sold or terminated.

Identifiable assets, liabilities and contingent liabilities of newly acquired entities are measured at fair value at the date of acquisition.

The cost of business combinations is measured as the total fair value at the date of acquisition of transferred assets, known or predicted liabilities, and all costs directly attributable to the business combination.

Positive balances (goodwill) between the cost of business combinations and the fair value of identifiable assets, li-abilities and contingent lili-abilities acquired are recognised as goodwill under intangible assets.

Goodwill is not amortised, but tested at least annually for impairment and written down to the recoverable amount through the income statement if the carrying amount is higher. Negative balances (negative goodwill) are recog-nised in the income statement at the date of acquisition.

In connection with intra-group business combinations or portfolio transfers, the aggregation method is used whereby the difference between the purchase consideration and the net assets acquired is recognised directly in eq-uity and comparative figures are restated.

(26)

Codan A/S - Annual Report 2011

Notes to the financial statements

Page 26/60 Note

When the initial accounting for a business combination can be determined only provisionally, any adjustments to goodwill and the fair values of assets, liabilities and contingent liabilities are recognised within 12 months of the date of acquisition. Subsequently, goodwill will only be adjusted as a result of changes in estimates of contingent purchase considerations. If, 12 months after the acquisition, it is ascertained that the fair value of assets or liabili-ties at the date of acquisition differs from the values initially recognised, the adjustments are recognised in the in-come statement.

Any additional price paid in connection with the purchase of minority interests is written down directly against eq-uity.

Intra-group transactions

Business transactions between consolidated companies are conducted on an arm’s length basis or on a cost-covering basis.

Foreign currency translation

The Company’s functional currency is DKK.

On initial recognition, foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of transaction. Exchange differences resulting from translation at the exchange rate pre-vailing at the date of transaction and the exchange rate prepre-vailing at the date of payment are recognised in the in-come statement as value adjustments.

Receivables, payables, other monetary items as well as non-monetary items recognised on the basis of the fair value in foreign currency are translated at the exchange rate prevailing at the balance sheet date. The difference be-tween the exchange rate prevailing at the balance sheet date and the exchange rate prevailing at the time when such receivables or payables arose or were recognised in the latest annual report is recognised in the income statement as value adjustments.

Results of foreign entities are translated into the presentation currency (DKK) at the exchange rate prevailing at the date of transaction. An average exchange rate for the period is used as the exchange rate at the date of transaction to the extent that this does not significantly distort the presentation. The value of foreign entities is translated at the exchange rates prevailing at the balance sheet date. Currency translation differences are recognised directly in eq-uity as part of the translation reserve. If the foreign entity is disposed of, any currency translation differences will be recognised in the income statement in connection with the disposal.

Goodwill and other fair value adjustments of assets and liabilities arising on the acquisition of foreign entities are treated as belonging to the foreign entity and are translated at the exchange rate ruling at the balance sheet date. Individual areas in the Annual Report

Expenses

Expenses are recognised in the income statement as other expenses and as investment management expenses. As a general rule, expenses that are not attributable to a function will be distributed proportionally on the basis of the amount of the directly attributable expenses.

Financial instruments

In connection with the acquisition and disposal of financial instruments under normal market conditions, the trade date is used as the date of recognition or the date where the asset/liability is no longer recognised in the balance sheet. When the financial instrument is recognised, an asset/liability equal to the agreed price is also recognised. On the disposal of a financial instrument, an asset/liability equal to the agreed price is similarly recognised. The li-ability or the asset will no longer be recognised in the balance sheet on the settlement date.

In connection with sale and leaseback transactions (sale of an asset and leaseback of the same asset) resulting in operating leases, the sale price and lease payments will be assessed relative to the fair value. If the transaction has been agreed at fair value, any profit or loss relative to the carrying amount will be recognised immediately.