Investment activities

TrygVesta’s investment activities comprise any placement of the Group’s funds in investment assets, bonds, equity investments, land and buildings or cash. Funds are placed pursuant to guidelines defined by legislation, regulators and the Supervisory Board. The overall allocation of assets is made by us based on risk and cash management considerations, while specific securities are mainly selected by external asset managers within the defined framework.

Financial markets became increasingly unstable during 2007 as a result of the sub-prime crisis, becoming more and more impacted by developments in the US housing market and borrowers’ inability to service and repay their mortgages towards the end of 2007. Equities were reassessed in 2007 with increasing risk premiums relative to the risk-free interest. TrygVesta reduced the Group’s equity portfolio in June as well as in December 2007. The equity portfolio was further reduced in January 2008.

Investment result in 2007

In 2007 the return on TrygVesta’s investment activities before transfer to technical interest, but after other financial income and expenses totalled DKK 1,740m. This was DKK 519m less than in 2006, mainly due to lower returns on the equity portfolio. The return on investment activities after transfer to technical interest was DKK 888m lower than in 2006 due to lower equity returns and higher transfer to technical interest. Higher bond yields of 3.7% against 2.8% in 2006 lifted the investment performance.

Other financial income and expenses were DKK 29m higher. The improvement was attributable to an increase in other items including interest income on operating assets. This was, however, partly offset by capital gains being reduced from DKK 368m in 2006 to DKK 298m in 2007 as a result of a changed discount rate because interest rates increased less in 2007. The return on  investment activities before other financial income and expenses was DKK 1,523m, equal to a return of 4.1%. The return was 4.9% including changes in provisions for claims due to higher interest rates. This performance was better than had been expected at the beginning of 2007 despite the unstable financial markets but lower than the guidance provided in our Q3 2007 interim report.

Asset allocation

Our bond portfolio increased during 2007 to account for 81.2% of total assets against 78.5% at 1 January 2007. The higher proportion of bonds was a result of new investments and a switch-over from equities to bonds. The proportion of equities fell from 14.8% to  11.9%, or by DKK 939m. The value of the portfolio of real property increased by some DKK 116m in 2007, lifting its proportion to 6.9% from 6.7%.

Net investments amounted to about DKK 613m in 2007, of which DKK 1,461m was invested in bonds, while equities and real property were reduced by DKK 839m and DKK 9m, respectively.

For security and rating considerations, our investment portfolio has a high proportion of highly liquid securities carrying low interest rate and credit risk. We do not invest in structured fixed income products such as CDOs, CLOs and hedge funds, nor does our portfolio include US mortgages.

Bonds

The overall bond portfolio including cash yielded a return of DKK 1,103m in 2007, equal to 3.7% for the full year.

The return was impacted by an increase in the general level of interest rates of 0.3-0.5 percentage point and a widening yield spread between swap and government yields of around 0.1-0.3 percentage point during the year, causing an adverse impact on value  adjustments, but higher current returns.

About 75% of the bonds, or DKK 23bn, are issued by banks or mortgage credit institutions, and 23% are issued by Western European and North American governments or regional authorities. 82% of the portfolio is rated AAA or AA. The unrated 15% of the portfolio comprises mainly short-term Norwegian money market certificates issued by banks. We have diversified exposure to banks, mainly Nordic banks with little or no involvement in the financial products that triggered the sub-prime crisis. We currently monitor the performance of credits with the banks to which our bonds portfolio is exposed.

Interest rate sensitivity measures changes in the value of the bond portfolio and the provisions for claims, respectively, at a parallel yield increase, of 1 percentage point. The sensitivity gap was DKK 21m at 31 December 2007. We monitor interest rate sensitivity on an ongoing basis to match asset and liabilities as far as possible in order to minimise the impact of changing interest rates on our income statement. The duration including cash of the Group’s total bond portfolio was 1.9 years at 31 December 2007 compared to 1.3 years at 31 December 2006. The duration increase occurred because TrygVesta’s Danish business has begun using a variable rate for discounting provisions for workers’ compensation  insurance, thereby increasing the opposing interest rate risk on liabilities to maintain the Group’s net interest rate risk at a fairly unchanged level.

Equities

The total return on the equity portfolio was DKK 180m, or 2.0%, for the financial year. The return level for 2007 was lower than in previous years with reported returns of more than 20%. Equity markets were impacted by the sub-prime crisis referred to earlier and indications of declining economic activity in the Western world.

Danish equities generated a negative return of 4.5%, while Norwegian equities generated a return of 13% compared with 8.0% for OMXC Capped and 11.5% for OSBX. The return on international equities was 1.0%, which was 0.5% below the benchmark return. Currency risks relating to international equities were hedged during the year. Unlisted shares accounted for DKK 237m at 31 December 2007. Royal Dutch Shell was the largest stake, accounting for 2.8% of the portfolio of listed equities and 0.3% of total investment assets. The 25 largest equities in our portfolio accounted for 31% of the total listed equity portfolio.

We reduced our equity exposure during 2007, cutting back the equity portfolio by around  DKK 0.6bn in June 2007 and by 0.2bn in December. The Group’s equity portfolio had a total value of DKK 4,445m at 31 December 2007 compared with DKK 5,384m at 31 December 2006. We reduced our equity exposure further in January 2008 to stand at DKK 1.7bn at 31 January 2008.

Real property

The investment return on real property was DKK 240m, including revaluation of DKK 103m and 6.1% from operations. The occupancy rate was 97.5 at 31 December 2007 compared with 94.9 at 1 January 2007.

The portfolio is well-diversified and consists of quality property, typically in prime locations in major cities in Denmark and Norway. The portfolio mainly comprises office premises, but also includes a small proportion of other commercial property and residential property.