Balance sheet

Intangible assets - software
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful life (four years).

Costs that are directly associated with the production of identifiable and unique software products, for which there is sufficient certainty that future earnings will exceed costs for more than one year, are recognised as intangible assets. Direct costs include the software development team’s employee costs and an appropriate portion of relevant overheads. All other costs associated with developing or maintaining software are recognised as an expense as incurred.

After completion of the development the asset is depreciated on a straight-line basis over the expected useful life, however with a maximum period of 4 years. The basis of amortisation is reduced by any impairment writedowns.

Owner-occupied property and operating equipment
Owner-occupied properties are measured in the balance sheet at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment writedowns. Revaluations are performed regularly to avoid the carrying amount differing materially from the owner-occupied property’s fair value at the balance sheet date. The fair value is calculated on the basis of market-specific rental income per property and typical operating expenses for the upcoming year. The resulting operating income is divided by the percentage return requirement of the property, which has been adjusted to reflect market interest rates and property characteristics, corresponding to the present value of a perpetual annuity.

Increases in the revalued carrying amount of owner-occupied properties are credited to the properties’ revaluation reserve in equity. Decreases that offset previous increases of the same asset are charged against the properties’ revaluation reserves directly in equity; all other
decreases are charged to the income statement.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, when it is probable that future economic benefits associated with the item will flow to the group, and the cost of the item can be reliably measured. Ordinary repair
and maintenance costs are charged to the income statement during the financial period in which they are incurred.

Fixtures and operating equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. Cost encompasses the purchase price and costs directly attributable to the acquisition of the relevant assets until the time when the asset is ready
to be brought into use.

Depreciation on property, plant and equipment is calculated using the straight-line method over their estimated useful lives, as follows:

• Owner-occupied properties, 50 years
• Vehicles, 3-5 years
• Furniture, fittings and equipment, 3-5 years

Land is not depreciated.

The assets’ residual values and useful lives are reviewed at each balance sheet date and adjusted if appropriate.

Gains and losses on disposals and retirements are determined by comparing proceeds with carrying amount. Gains and losses are recognised in the income statement. When revalued assets are sold, the amounts included in the revaluation reserves are transferred to retained
earnings.

Investment property
Properties held for renting yields that are not occupied by the group are classified as investment properties.

Investment property is carried at fair value. Fair value is based on market prices, adjusted for any difference in the nature, location or condition of the specific asset. If this information is not available, the group uses alternative valuation methods such as discounted cash flow projections and recent prices on less active markets.

The fair value is calculated on the basis of market-specific rental income per property and typical operating expenses for the upcoming year. The resulting operating income is divided by the percentage return requirement of the property, which has been adjusted to reflect
market interest rates and property characteristics, corresponding to the present value of a perpetual annuity. The value is subsequently adjusted with the value in use of the return on prepayments and deposits and adjustment for specific property issues such as vacant premises or special tenant terms and conditions.

Changes in fair values are recorded in the income statement.

Impairment of intangible assets, equipment, owner-occupied property and investment property
The carrying amount of intangible assets, operating equipment, owner-occupied property and investment property are tested at least once a year for impairment in the cash-generating unit to which the asset belongs, and the asset is written down to the recoverable amount through the income statement if the carrying amount is higher. The recoverable amount is generally calculated as the present value of the future cash flows expected to be derived from the activity to which the asset belongs.

Investments in subsidiaries
The parent company’s investments in subsidiaries are recognised and measured under the equity method. The parent company’s share of the enterprises’ profits or losses after elimination of unrealised intragroup profits and losses is recognised in the income statement. In the balance sheet, investments are measured at the pro rata share of the enterprises’ equity.

Subsidiaries with a negative net asset value are measured at zero value. Any receivables from these enterprises are written down by the parent company’s share of such negative net asset value where the receivables are deemed irrecoverable. If the negative net asset value exceeds
the amount receivable, the remaining amount is recognised under provisions if the parent company has a legal or constructive obligation to cover the liabilities of the relevant enterprise.

Net revaluation of investments in subsidiaries is taken to reserve for net revaluation under the equity method if the carrying amount exceeds cost.

The results of foreign subsidiaries are based on translation of the items in the income statement at average exchange rates for the period. Income and expenses in domestic enterprises denominated in foreign currency are translated at the exchange rate ruling on the date of the transaction.

Investments in associates
Associates are enterprises over which the group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are measured according to the equity method of accounting so that
the carrying amount of the investment represents the group’s proportionate share of the enterprises’ net assets.

Income after taxes from investments in associates is included as a separate line in the income statement.

Associates with a negative net asset value are measured at zero value. If the group has a legal or constructive obligation to cover the associate’s negative balance, such obligation is recognised under liabilities.

Investments
Investments include financial assets at fair value through the income statement. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments on initial recognition and re-evaluates this at every reporting date.

Financial assets measured at fair value with recognition of value changes in the income statement comprise assets that form part of a trading portfolio and financial assets designated at fair value with value adjustment through profit and loss.

Financial assets at fair value through income
Financial assets are classified as financial assets available for sale at inception if acquired principally for the purpose of selling in the short term, or if they form part of a portfolio of financial assets in which there is evidence of short-term profit-taking. Derivatives are also classified as financial assets available for trading unless they are designated as hedges.

Financial assets are derecognised when the rights to receive cash flows from the financial asset have expired, or if they have been transferred, and the group has also transferred substantially all risks and rewards of ownership. Financial assets are recognised and derecognised on a trade date basis – the date on which the group commits to purchase or sell the asset. Financial assets are recognised at fair value at the transaction date.

Realised and unrealised gains and losses arising from changes in the fair value of the financial assets at fair value through income are included in the income statement in the period in which they arise.

The fair values of quoted investments are based on stock exchange prices at the balance sheet date. For securities that are not listed on a stock exchange, or for which no stock exchange price is quoted that reflects the fair value of the instrument, the fair value is determined using valuation techniques. These include the use of similar recent arm’s length transactions, reference to other instruments that are substantially the same and a discounted cash flow analysis.

Derivative financial instruments and hedge accounting
The group’s activities expose it to financial risks, including changes in share prices, foreign currency exchange rates, interest rates and inflation. Forward exchange contracts and currency swaps are used for currency hedging of portfolios of shares, bonds, hedging of foreign entities and insurance balance sheet items. Interest rate derivatives in the form of futures, forward contracts, repos, swaps and FRAs are used to manage cash flows and interest rate risks related to the portfolio of bonds and technical provisions. Equity derivates are used from time to time to adjust equity exposures.

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently measured at their fair value. The valuation is performed in securities systems with data usually provided by Nordea, and the valuation is verified using
own valuation methods. Derivatives which include expected future cash flows are discounted on the basis of market interest rates.

Derivatives are recognised from the trade date and measured at fair value in the balance sheet. Positive fair values of derivatives are recognised as bonds and shares or other receivables if they cannot unambiguously be attributed to the former. Negative fair values of derivatives are recognised under other payables. Positive and negative values are only offset when the company is entitled or intends to make net settlement of more financial instruments.

Recognition of the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The group designates certain derivatives as hedges of investments in foreign operations. Changes in the fair value
of derivatives that are designated and qualify as net investment hedges in foreign entities and which provide effective currency hedging of the net investment are recognised directly in equity. The net asset value of the foreign entities is estimated in an ongoing process and is hedged 90-100% by entering into short-term forward exchange contracts. Changes in the fair value relating to the ineffective portion are recognised in the income statement. Gains and losses accumulated in equity are included in the income statement on disposal of the foreign
operation.

Reinsurers’ share of provisions for insurance contracts
Contracts entered into by the group with reinsurers under which the group is compensated for losses on one or more contracts issued by the group and that meet the classification requirements for insurance contracts are classified as reinsurers’ share of provisions for insurance contracts. Contracts that do not meet these classification requirements
are classified as financial assets.

The benefits to which the group is entitled under its reinsurance contracts held are recognised as assets and reported as reinsurers’ share of provisions for insurance contracts.

Amounts recoverable from reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in accordance with the terms of each reinsurance contract.

Changes due to unwinding are recognised in technical interest. Changes due to changes in the yield curve or foreign currency exchange rates are recognised as value adjustments.

The group assesses continuously its reinsurance assets for impairment. If there is objective evidence that the reinsurance asset is impaired, the group reduces the carrying amount of the reinsurance asset to its recoverable amount and recognises that impairment loss in the income
statement. Impairment write-downs are recognised in the income statement.

Receivables
Receivables are non-derivative financial instruments with fixed or determinable payments that are not quoted in an active market other than receivables that the group intends to sell in the short term. Receivables arising from insurance contracts are classified in this category
and are reviewed for impairment as part of the impairment review of receivables.

On initial recognition, receivables are measured at fair value, and they are subsequently measured at amortised cost. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement when there is objective evidence that the asset is impaired. The allowance recognised is measured at the difference between the asset’s carrying amount and the present value of estimated future cash flows.

Prepayments and accrued income
Prepayments include expenses paid in respect of subsequent financial years and interest receivable.

Share capital
Shares are classified as equity when there is no obligation to transfer cash or other assets. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the proceeds, net of tax.

Exchange adjustment reserve
Assets and liabilities of foreign entities are recognised at the exchange rate at the balance sheet date. Income and expense items are recognised at the average exchange rates for the period. Any resulting exchange rate differences are taken to equity. When an entity is wound
up, the balance is transferred to the income statement.

Contingency fund reserves
Contingency fund reserves are recognised as part of retained earnings under equity. The funds may only be used when so permitted by the Danish FSA and when it is to the benefit of the policyholders.

Dividend distribution
Proposed dividend is recognised as a liability at the time of adoption by the shareholders at the annual general meeting (the date of declaration). Dividends expected to be paid in respect of the year are stated as a separate line item under equity.

Treasury shares
The purchase and sale sums of treasury shares and dividends thereon are taken directly to retained earnings under equity. Proceeds from the sale of treasury shares in connection with the exercise of share options or employee shares are taken directly to equity.

Subordinate loan capital
Subordinate loan capital is recognised initially at fair value, net of transaction costs incurred. Subordinate loan capital is subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income
statement over the period of the borrowings using the effective interest method.

Provisions for insurance contracts
Premiums are recognised in the income statement (premium income) proportionally over the period of coverage and, where necessary, adjusted to reflect any time variation of the risk. The portion of premium received on in-force contracts that relates to unexpired risks at the balance sheet date is reported as unearned premium provisions. Unearned premium provisions are generally calculated according to a best estimate of expected payments throughout the agreed risk period. However, as a minimum to the part of the premium calculated using the pro rata temporis principle until the next payment date. Adjustments
are made to reflect any variations in the risk. This applies to gross as well as ceded business.

Claims and claims handling costs are charged to income as incurred based on the estimated liability for compensation owed to contract holders or third parties damaged by the contract holders. They include direct and indirect claims handling costs and arise from events that
have occurred up to the balance sheet date even if they have not yet been reported to the group. Provisions for claims are estimated using the input of assessments for individual cases reported to the group and statistical analyses for the claims incurred but not reported and
the expected ultimate cost of more complex claims that may be affected by external factors (such as court decisions). The provisions include claims handling costs.

Provisions for claims are discounted. Discounting is based on a yield curve reflecting duration applied to the expected future payments from the provision. Discounting affects the motor liability, professional liability, workers’ compensation and personal accident classes, in particular.

Provisions for bonus and premium rebates represent amounts expected to be paid to policyholders in view of the claims experience during the financial year.

Provisions for claims are determined for each product line based on actuarial methods. In cases where product lines encompass more than one business unit, the claims provisions are distributed, as a main rule, based on reported number of claims in Denmark and individual claims in Norway. The models currently used are Chain-Ladder, Bornhuetter- Ferguson, the Loss Ratio method, De Vylder’s credibility method and a proprietary collective reserve model for use in private business lines in Denmark. Chain-Ladder techniques are used for business lines with a stable run-off pattern. The Bornhuetter-Ferguson method, and sometimes the Loss Ratio method, are used for claims years in which the previous run-off provides insufficient information about the future runoff performance. De Vylder’s credibility method is used for areas that are somewhere in between the Chain-Ladder and Bornhuetter-Ferguson/ Loss Ratio methods, and may also be used in situations that call for the use of exposure targets other than premium volume, for example the number of insured.

The proprietary collective model is based exclusively on actual payments and is therefore only used for provisions for small claims, below DKK 200,000 for motor, or DKK 100,000 for other. The model is so dynamic that, to the greatest extent possible, it captures changes in the run-off pattern. It consists of two modules, with the first module estimating on a daily basis with due consideration to days off and special high-frequency days such as New Year’s Eve or days with slippery roads. The model also takes the season into consideration, both in
terms of claims performance and in claims handling intensity. In the second module, estimates are on a more aggregate level, and the calculations are based on a generalised hierarchic De Vylder model.

The provision for annuities in workers’ compensation insurance is calculated on the basis of a mortality corresponding to the G82 calculation basis (official mortality table).

In some instances, the historic data used in the actuarial models is not necessarily predictive of the future development of claims. Specifically, this is the case with legislative changes where in each specific case an estimate used for premium increases related to the relevant risk increase is derived. For legislative changes this estimate is used also in determining the level of claims – and hence reserves. Subsequently, this estimate is updated when new loss history materialises.

Several assumptions and estimates underlying the calculation of the provisions for claims are mutually dependent. Most importantly, this can be expected to be the case for interest rate and inflation assumptions.

Workers’ compensation is an area in which explicit inflation assumptions are used, with annuities for the insured being indexed with the workers’ compensation index. An inflation curve that reflects the market’s inflation expectations plus a real wage spread is used as an approximation to the workers’ compensation index.

For other lines of business, the inflation assumptions, because present only implicitly in the actuarial models, will cause a certain lag in predicting the level of future losses when a shift in inflation occurs. On the other hand, the effect of discounting will show immediately as a
consequence of inflation changes to the extent that this change affects the interest rate.

Other correlations are not significant.

Liability adequacy test
Tests are continuously performed to ensure the adequacy of the technical provisions. In performing these tests, current best estimates of future cash flows of claims, gains and direct and indirect claims handling costs are used. Any deficiency is charged to the income statement by raising the relevant provision. Any positive deviations are also recognised in the income statement.

Employee benefits

Pension obligations
The group operates various pension schemes. The schemes are funded through payments to insurance companies or trustee-administered funds. In Norway, the group operates a defined benefit plan. A defined benefit plan is a pension plan that defines an amount of pension benefit
that an employee will receive on retirement, dependent on age, years of service and compensation. In Denmark, the group operates a defined contribution plan. A defined contribution plan is a pension plan under which the group pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further
contributions.

The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past
service costs. The defined benefit obligation is calculated annually by actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows by a duration that matches the conditions
of the underlying pension obligation.

The actuarial gains and losses arising from experience adjustments and changes in actuarial estimates is charged or credited to equity.

Other employee benefits
Employees of the group are entitled to a fixed payment when they reach retirement and when they have been employed with the group for 25 and for 40 years. The group recognises this liability as soon as the employment begins.

In special instances the employee can enter a contract with the group to receive compensation for loss in pension benefits caused by reduced working hours. The group recognises this liability based on statistical models.

Income tax and deferred tax
The group provides current tax expense according to the tax law of each jurisdiction in which it operates. Current tax liabilities and current tax receivables are recognised in the balance sheet as estimated tax on the taxable income for the year, adjusted for change in tax on prior
years’ taxable income and for tax paid under the on-account tax scheme.

Deferred tax is measured according to the balance sheet liability method on all timing differences between the tax and accounting value of assets and liabilities. Deferred income tax is measured using tax rules and tax rates that apply in the relevant countries by the balance
sheet date when the deferred tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets, including the tax value of tax losses carried forward, are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences concerning investments, except where TrygVesta Group controls when the temporary difference will be realised, and it is probable that the temporary difference will not be realised in the foreseeable future.

Provisions
Provisions are recognised when, as a consequence of an event that has occurred before or on the balance sheet date, the group has a legal or constructive obligation, and it is likely that an outflow of resources will be required to settle the obligation. Provisions are measured
as the management’s best estimate of the amount with which the liability is expected to be settled.

Financial liabilities
Bond loans, debt to credit institutions, etc. are recognised at the raising of the loan as the proceeds received less transaction costs. In the subsequent periods, financial liabilities are measured at amortised cost, applying the ‘effective interest rate method’, to the effect that
the difference between the proceeds and the nominal value is recognised in the income statement under financial expenses over the term of the loan. Transaction costs in connection with floating-rate loans or floating-rate credit facilities are amortised over the loan period using straight-line amortisation.

Other liabilities are measured at net realisable value.

Cash flow statement
The cash flow statement of the group is presented using the direct method and shows cash flows from operating, investing and financing activities as well as the group’s cash and cash equivalents at the beginning and the end of the financial year. No separate cash flow statement has been prepared for the parent company because it is included in the consolidated cash flow statement.

Cash flows from acquisition and divestment of enterprises are shown separately under cash flows from investing activities. Cash flows from acquired enterprises are recognised in the cash flow statement from the time of their acquisition, and cash flows from divested enterprises are recognised up to the time of sale.

Cash flows from operating activities are calculated whereby major classes of gross cash receipts and gross cash payments are disclosed.

Cash flows from investing activities comprise payments in connection with acquisition and divestment of enterprises and activities as well as purchase and sale of intangible assets, property, plant and equipment as well as fixed asset investments.

Cash flows from financing activities comprise changes in the size or composition of TrygVesta’s share capital and related costs as well as the raising of loans, instalments on interest-bearing debt, and payment of dividends.

Cash and cash equivalents comprise cash and demand deposits.