TrygVesta’s financial performance in 2007

Our technical result for 2007 was a clear improvement by 12.3% over 2006. The increase was attributable to the great efforts which our almost 3,900 employees put in every day. Their efforts make a difference to our customers, and they serve to benefit all our stakeholders. Equity markets took a negative turn in the second half of 2007, affecting our profit adversely. However, the insurance business continued recent years’ positive trend.

Financial results in 2007

In 2007, TrygVesta’s technical result improved by 12.3% to DKK 2,820m. The DKK 308m increase over 2006 was achieved despite the fact that 2007 saw the biggest number of large claims ever, exceeding a gross amount of DKK 1bn. Outperforming the forecast announced in our third-quarter 2007 interim report by DKK 120m primarily due to run-off gains from previous years’ claims, our technical result was significantly better than expected. The pre-tax profit of DKK 3,109m was in line with our expectations for the full year. Due to a reduced return on investments, the pre-tax profit was DKK 600m lower relative to 2006.

The profit after tax at DKK 2,266m was DKK 945m lower due to the lower investment result and higher taxes. The high proportion of tax-free gains on shares we had in 2006 was not repeated in 2007 due to the unstable equity markets.

Premium growth driven by Corporate and New Markets

Gross earned premiums were DKK 16,606m, an improvement of 3.8% in local currency (3.7% in DKK terms) and in line with our expectations for the full year. Gross earned premiums continued the upward trend during 2007 and the fourth quarter 2007 recorded a growth in local currency of 5.1% (7.1% in DKK terms) at Group level. The performance in 2007was favourably affected by an increase in the number of new customers and higher renewal rates among existing customers in all business areas. Corporate was a major growth driver, recording premium growth of 7.4%, or DKK 364m. In addition to more new customers and high renewal rates, the strong growth recorded by Corporate was attributable to price increases for workers’ compensation insurance in Denmark.

As the only major insurer in Norway we increased our market share in 2007 (in terms of earned premiums), by 0.7 percentage point, to 18.2%. The improvement was driven by our Norwegian commercial business and the Norwegian part of the Corporate business.

Finland and Sweden likewise contributed strong premium growth totalling 68.8%, continuing to perform in line with our targets and growth strategies. Focused efforts within Health Care triggered portfolio growth of more than 80%. We began selling health care insurance in Norway at the end of 2007, and we intend to continue to focus on growth and on introducing new health care services over the coming year.

Continuing decline in combined ratio

The combined ratio fell by 0.3 percentage point to 86.1 in 2007. Large claims and weather-related claims had an negative impact of 3.8 and 2.0 percentage points, respectively, on the combined ratio compared with 2.1 and 1.3 percentage points, respectively in 2006. Run-off gains improved the combined ratio by 4.5 percentage points while in 2006 run-off gains had an impact of 3.5 percentage points on the combined ratio. Finally, a higher discount rate had a favourable effect of 1.7 percentage points on the combined ratio.

Claims experience

The overall claims ratio, net of ceded business, for 2007 was 69.4, which was an improvement relative to 2006 despite many large claims. Large claims amounted to DKK 1,042m in 2007, more than double the amount of 2006. However, the net expense for large claims was reduced to DKK 637m in 2007 due to the large number of Marine claims, an area with a high proportion of reinsurance cover. Weather-related claims were up by DKK 130m in 2007 to DKK 332m, which was also higher than expected. In a normal year, weather-related claims are expected to total DKK 225m.

Run-off gains were a gross amount of DKK 744m (DKK 743m net) with a positive impact of 4.5 percentage points on the claims ratio. Gross run-off gains in 2006 were DKK 618m (DKK 555m net), which had an impact of 3.5 percentage points on the claims ratio. The run-off gains mainly related to motor, accident and liability insurance, while increased provisions were still required for workers’ compensation in 2007.

Expenses

The gross expense ratio improved by 0.1 percentage point to 16.7 in 2007. We reduced the expense ratio by 0.7 percentage point to 15.4 in the established markets in Denmark and Norway, while the investments in Finland and Sweden continued to have a negative impact of 1.3 percentage points on the expense ratio.

Investment return

The return on investment activities was DKK 1,740m before transfer to technical interest, but after other financial income and expenses. The return was DKK 519m lower than in 2006, mainly due to unstable equity markets.

The return on investment activities after transfer to technical interest was DKK 888m lower than in 2006. Besides the lower return on equities, the performance was negatively affected by a larger transfer to technical interest.

Tax

The tax charge was DKK 842m in 2007 against DKK 624m in 2006. The effective tax rate was exceptionally low in 2006 due to the reversal of a provision for deferred tax. The tax charge in 2007 was adversely affected by lower tax-free gains on shares, and favourably affected by the reduction of the Danish corporate tax rate from 28% to 25% with effect from 1 January 2007. In 2007, TrygVesta’s effective tax rate was 27.
 

Balance sheet and cash flow

Total assets increased by DKK 1,047m to DKK 43,830m in 2007. Liabilities comprised mainly shareholders’ equity of DKK 10,010m and technical provisions of DKK 26,916m.

Provisions for insurance contracts were increased by a total of DKK 959m relative to 2006. The ratio of provisions for claims, net of reinsurance to earned premiums, net of reinsurance was unchanged at 124 from with 2006, which equals an increase in provisions for insurance contracts of 3.7%.

TrygVesta generated a cash inflow from operating activities of DKK 2.7bn in 2007 compared with DKK 3.2bn in 2006. Investments amounted to DKK 0.4bn in 2007, and there was a cash outflow from financing activities of DKK 2.4bn mainly relating to dividends.

Shareholders’ equity

Shareholders’ equity stood at DKK 10,010m at 31 December 2007. Shareholders’ equity increased by DKK 59m, made up of the profit for the year less dividends paid in respect of the 2006 financial year, and including adjustments mainly for actuarial gains and losses on the pension provision under IAS 19 and other minor adjustments.
 

Events after the balance sheet date

On 21 January 2008 we announced that TrygVesta had reduced the proportion of equities in its investment portfolio to around 4% or some DKK 1.8bn. The proportion of equities was DKK 5.0bn at 30 September 2007 and DKK 4.4bn at 31 December 2007. During 2007, we sold equities worth some DKK 0.7bn as a result of Management’s assessment of the size of the equity portfolio and its impact on the Group’s overall performance. Management assessed that an equity proportion of 8-10% of the investment portfolio would provide a good long-term balance between return and volatility in our overall performance. The equity proportion was reduced to around 4% giving equities a lower weighting than is normal. The decision to have a lower proportion of equities was based on expected continued strong instability, uncertainty and high equity risk premiums in the first six months of 2008. The very unstable equity market in January and until 18 February 2008 resulted in a loss of around DKK 400m less equity return than expected.