Alm. Brand A/S · Midtermolen 7 · DK-2100 Copenhagen Ø · registration (CVR) no. 77 33 35 17 ALM. BRAND A/S a n n u a l r e p o r t 2 010 ALM. BRAND A/S ÅRSRAPPORT 2010 1 2 ALM. BRAND A/S ANNUAL REPORT 2010 anvendt regnskabspraksis CONTENTS 4 COMPANY INFORMATION 74 STATEMENT BY THE MANAGEMENT BOARD AND THE BOARD OF DIRECTORS 5 GROUP STRUCTURE 75 AUDITORS´ REPORTS 6 ACTIVITIES AND IDEA 79 FINANCIAL STATEMENTS - GROUP 7 FINANCIAL HIGHLIGHTS AND KEY RATIOS 80 Balance sheet 8 ALM. BRAND A/S 2010 81 Income statement 82 Statement of changes in equity 10 SØREN BOE MORTENSEN’S REVIEW 83 Cash flow statement 84 Segment reporting – balance sheet 12 BUSINESS 85 Segment reporting – income statement 86 Overview of notes 12 Non-life insurance 87 Notes to the financial statements 24 Banking 34 Lending portfolio 127 FINANCIAL STATEMENTS 40 Life insurance - PARENT COMPANY 48 RISK MANAGEMENT 128 Balance sheet 129 Income statement 56 CORPORATE GOVERNANCE 130 Statement of changes in equity 131 Notes to the financial statements 60 EMPLOYEES AND COMMITMENT 136 FINANCIAL RATIOS 63 SHAREHOLDER INFORMATION 138 DIRECTORSHIPS AND SPECIAL QUALIFICATIONS 68 CSR - OR JUST ORDINARY COMMON SENSE 143 GROUP COMPANIES ALM. BRAND A/S ANNUAL REPORT 2010 3 COMPANY INFORMATION BOARD OF DIRECTORS *Elected by the principal shareholder Arne Nielsen Susanne Larsen Jørgen H. Mikkelsen* Boris N. Kjeldsen* Helle Låsby Frederiksen Born 1944 Employee Chairman Deputy Chairman Employee since 2009 representative Born 1954 Born 1959 representative Born 1964 since 1994 since 2003 Born 1962 since 2006 since 2010 AUDITORS Deloitte Statsautoriseret Revisionsaktieselskab REGISTRATION Alm. Brand A/S Company reg. (CVR) no. 77333517 ADDRESS Chief Executive Alm. Brand Huset Søren Boe Mortensen Midtermolen 7, DK-2100 Copenhagen Ø Joined Alm. Brand in 1987 Phone: +45 35 47 47 47 Appointed to the Management Fax: +45 35 47 35 47 Board in 1998 Internet: www.almbrand.dk Chief Executive since E-mail: [email protected] December 2001 Born 1955 4 ALM. BRAND A/S ANNUAL REPORT 2010 company information / group structure Tage Benjaminsen Boris N. Kjeldsen* Per Frandsen* Henrik Christensen* Jan Skytte Pedersen* Henning Kaffka Born 1945 Deputy Chairman Born 1952 Born 1950 Born 1956 Employee since 2010 Born 1959 since 2009 since 2010 since 2010 representative since 2003 Born 1965 since 2010 GROUP STRUCTURE The Alm. Brand A/S Group’s principal activity is its non-life insurance operations, which are supported by the business areas life insurance and pension and banking. ALM. BRAND A/S ALM. BRAND BANK ALM. BRAND FORSIKRING ALM. BRAND LEASING ALM. BRAND FORMUE ALM. BRAND LIV OG PENSION ALM. BRAND A/S ANNUAL REPORT 2010 5 THE ALM. BRAND A/S GROUP ACTIVITIES AND IDEA ACTIVITIES Alm. Brand A/S is a Danish financial services group consisting of a listed holding company and a number of commercial subsidiaries. The group’s activities comprise non-life insurance, banking and life and pen- sion insurance. In addition, the group operates an investment business as a natural part of its ordinary operations. IDEA AND VISION Alm. Brand aims to be a one-stop-shop covering the financial needs of its customers and offering high- quality products and services. Alm. Brand’s principal activity is non-life insurance. Life and pension insu- rance and banking support the principal activity by offering attractive life insurance, pension and banking products to the group’s non-life insurance customers. Based on the vision “We take care of our customers”, the group strives to ensure a high degree of custo- mer satisfaction. Combined with significant premium savings offered to customers who consolidate all their financial business with the group, this approach ensures a high degree of customer loyalty. This is crucial to the group’s profitability. CUSTOMERS The group’s core customers within non-life insurance and life and pension insurance are private customers, agricultural customers as well as small and medium-sized businesses. The bank, on the other hand, is ex- clusively focused on private customers and Asset Management and Markets activities. SHAREHOLDERS Alm. Brand aims to create long-term value for its shareholders through the profitable development of its non-life insurance activities. The aim is supported by targeted and efficient product deliveries from the other business areas. DISTRIBUTION Alm. Brand distributes its products through a number of shared distribution channels across all business areas. This approach supports the overall service provided to customers. The group is divided into five geographical regions, each headed by a regional manager who has overall sales and service responsibility. Distribution is effected through 26 branch offices and stores across Den- mark and through other channels. Sales and service are further supported by centralised customer service centres and through the group’s website. The overall sales force counts some 370 employees, including 275 insurance agents. The group’s sales are supported by new sales and IT systems, which are expected to give the group a competitive edge in the future. The group markets its products and services for each individual business area and for the group as a whole, thereby achieving economies of scale and increased brand awareness. INVESTMENTS The Alm. Brand Group pursues a conservative investment strategy in all three business areas. Accordingly, the group has placed the majority of its investments in Danish government and mortgage bonds with ma- turities adjusted to the liabilities. The group has concluded an asset management agreement with Alm. Brand Bank A/S. 6 ALM. BRAND A/S ANNUAL REPORT 2010 activities and idea / financial highlights and key ratios FINANCIAL HIGHLIGHTS AND KEY RATIOS FOR ALM. BRAND A/S DKKm 2010 2009 2008 2007 2006 GROUP Income Non-life insurance 4,762 4,714 4,769 4,578 4,279 Banking 1,132 1,254 1,718 1,444 980 Life insurance 719 710 747 750 736 Other activites – 10 14 17 11 Investments etc. 728 883 928 932 849 Total income 7,341 7,571 8,176 7,721 6,855 Profit/loss excluding minority interests Non-life insurance 207 287 262 647 724 Banking – 869 – 1,758 – 532 196 167 Life insurance 181 139 43 104 81 Other activites – – 11 286 71 60 Other activities – 55 7 – 15 – 32 – 26 Profit before tax – 536 – 1,336 44 986 1,006 Tax 135 336 – 73 – 281 – 195 Profit/loss after tax – 401 – 1,000 – 29 705 811 Consolidated profit/loss Consolidated profit/loss before tax – 539 – 1,416 – 164 980 1,037 Tax 135 336 – 53 – 266 – 190 Consolidated profit/loss after tax – 404 – 1,080 – 217 714 847 Total provisions for insurance contracts 18,413 17,894 17,714 18,331 18,718 Consolidated shareholders’ equity 4,758 3,694 4,800 5,446 5,432 Share attributable to minority interests 160 199 282 504 520 Total assets 48,149 47,498 45,777 47,886 42,992 Average no. of employees 1,725 1,859 1,898 1,862 1,718 Return on equity before tax – 16.4% – 33.4% 0.9% 18.0% 20.0% Return on equity after tax – 12.3% – 25.2% – 0.6% 13.1% 16.3% PARENT COMPANY Profit/loss before tax – 414 – 1,000 – 36 694 783 Tax 14 – 1 9 12 24 Profit/loss after tax – 400 – 1,001 – 27 706 807 Total assets 4,984 4,401 4,776 5,065 5,531 Total investment assets 4,919 4,337 4,701 4,991 5,459 Share capital 1,735 1,388 1,476 1,668 1,788 Shareholders’ equity 4,590 3,486 4,510 4,932 4,901 Payables 98 620 220 87 579 Return on equity before tax* – 16.4% – 33.5% 1.0% 20.1% 21.5% Return on equity after tax* – 12.3% – 25.2% – 0.6% 14.3% 17.3% KEY RATIOS Earnings per share – 24 – 59 – 2 35 37 Diluted earnings per share – 24 – 59 – 2 35 37 Net asset value per share 27 207 264 260 234 Share price at 31 December 14.2 91 69 286 400 Price/NAV 0.53 0.44 0.26 1.10 1.71 No. of shares at year-end (in thousands) 173,079 16,835 17,073 18,966 20,929 Average no. of shares (in thousands) 16,882 16,828 17,971 20,182 21,644 No. of shares bought back (in thousands)** 2,133 1,981 1,452 Average price of shares bought back, DKK** 186 328 344 Total pay-out ratio** 30% 14% 6% * Return on equity in the parent company is calculated before tax in subsidiaries. ** Measured at the expiry date of the share buyback programme at 31 January. Alm. Brand A/S completed a capital increase on 30 December 2010. Key ratios for 2006 to 2009 have not been restated. ALM. BRAND A/S ANNUAL REPORT 2010 7 ALM. BRAND A/S 2010 PERFORMANCE positive investment return had the effect that the full amount The Alm. Brand Group incurred a loss of DKK 536 million of the shadow account could be taken to income. before tax in 2010. The group continued to cut costs in all business areas in Excluding losses and writedowns in the bank, the group 2010. As a result, the group’s overall costs fell by DKK 117 posted a profit of DKK 372 million, slightly more than DKK million, or 7.6%, from 2009 to 2010. 70 million ahead of the most recent profit guidance released in November 2010. CAPITAL AND LIQUIDITY The improved performance before losses and writedowns In 2010, Alm. Brand A/S completed a rights issue, whereby was attributable to a strong claims experience, lower costs the number of shares was increased tenfold. Following the and a stronger than expected investment return. On the rights issue, the company had a total of 173,500,000 shares, other hand, rising short term interest rates resulted in capital corresponding to a share capital of DKK 1,735 million. The losses on the bank’s bond portfolio. rights issue was fully underwritten. The rights issue was suc- cessfully completed in an oversubscribed offering. The highly unsatisfactory performance after losses and wri- tedowns was the result of significant impairment writedowns At 30 June 2010, Alm. Brand Bank A/S issued state-guaran- on the bank’s portfolio of loans and advances. Loans for teed bonds in total amount of DKK 6 billion. The issue was mortgage deeds, particularly commercial mortgage deeds, successfully completed. were the main cause of the impairment writedowns. Accor- dingly, the bank reported aggregate credit impairments of DKK 908 million in 2010. BUSINESS Non-life insurance operations generated a profit of DKK 207 In 2010, the bank’s strategy was further sharpened to the million. The performance should be seen in the context of effect that, in the future, the bank will focus exclusively on weather-related expenses, including expenses for snow load increasing its private customer, leasing and Asset Manage- and water damage claims, of almost DKK 400 million in ag- ment and Markets activities, all areas in which the bank has gregate, against expected annual weather-related expenses not incurred any significant losses. Other activities are being of DKK 180 million. Accordingly, the nevertheless satisfac- wound up. tory performance was driven mainly by the positive trend in the underlying business and fewer major claims. Moreover, The non-life insurance business continues to develop posi- the expense ratio declined substantially. The claims mitiga- tively with respect to the underlying business and major tion measures, premium increases, cost cuts and efficiency claims and, moreover, costs have declined significantly. improvements implemented over the past couple of years are This is proof that the claims mitigation measures, premium clearly beginning to have a positive impact on the company’s increases and cost cuts implemented by the group over the performance. past couple of years are beginning to take effect. The per- formance was adversely affected by high expenses for water The bank incurred a loss of DKK 869 million, which was damage and, especially, snow load claims. highly unsatisfactory. The performance was the result of sig- nificant impairment writedowns on loans and credit losses on Life insurance activities developed very favourably in 2010. mortgage deeds in the amount of DKK 908 million. The per- The bonus potential thus rose to DKK 517 million and the formance was favourably affected by an increasing customer return on policyholders’ investment portfolios was 8.1%. The interest margin but adversely affected by rising interest rates 8 ALM. BRAND A/S ANNUAL REPORT 2010 alm. brand A/S 2010 and resulting capital losses on interest-bearing assets. Total and credit losses on mortgage deeds remains subject to loans and advances declined by DKK 2.3 billion to DKK 12.7 significant uncertainty. The guidance for the bank’s financial billion in 2010. Taking into account developments in losses results in 2011 is therefore only provided before losses and and writedowns, lending dropped by DKK 1.4 billion. writedowns. As a result of Amagerbanken’s bankruptcy, the forecast includes a contribution into the Danish Depositors’ The group’s life insurance operations generated a highly sa- Guarantee Scheme of DKK 25 million. The amount is not yet tisfactory profit of DKK 181 million. Moreover, the company known, but Alm. Brand Bank is required to contribute 1% of strengthened the collective bonus potential to a total of DKK the overall amount. 517 million. The performance was attributable to the satis- factory investment return, which had the effect that the full Life insurance operations are expected to generate a profit amount of the shadow account of DKK 57 million could be of DKK 70 million. taken to income. Although premium income developed posi- tively, recording growth at the rate of 3.3%, the performance Other activities are expected to record an overall loss of DKK was somewhat short of expectations as a result of the eco- 40 million. nomic recession in Denmark. The group’s total income is expected to reach DKK 7 billion. The group’s other activities, including corporate expenses, posted a loss of DKK 55 million. No material events have occurred during the period from 1 January 2011 until the date the financial statements were signed which would be of material importance for the finan- GROUP cial statements. The return on equity was minus 16% before tax. Earnings per share were negative at DKK 24, and the share price was DKK 14 at 31 December 2010, corresponding to 53% of the net asset value of 27. Dkkm Outlook 2011*) The group’s total income amounted to DKK 7.3 billion. Non-life insurance 300 Banking 45 Life insurance 70 OUTLOOK The group expects to generate an overall profit before Other activities – 40 losses, writedowns and tax of DKK 375 million in 2011. After Profit before tax 375 losses and writedowns in the bank, the group expects to generate a small profit. *) Before tax and excluding minority interests and before writedowns in the bank. Non-life operations are expected to generate a pre-tax profit of DKK 300 million. The combined ratio is expected to be 95. Banking operations are expected to generate a profit of DKK 45 million before losses and writedowns. As a result of the general economic conditions in Denmark and international- ly, the forecast level of impairment writedowns on loans ALM. BRAND A/S ANNUAL REPORT 2010 9 SUSTAINABLE FOUNDATION FOR VALUE CREATION Challenges sharpened our strategy and improved business procedures, but also through redun- 2010 was a year marked by business challenges and strate- dancies. For several years, we have invested in strengthen- gic initiatives, affecting Alm. Brand’s development and results ing our IT platform and improving our processes, and we are in a number of different ways. In the early months of the year, now beginning to feel the effects of these investments. We the severe winter weather impacted our non-life insurance have also raised our prices, adjusted our pricing structure business, and we emerged from the first quarter with a com- and adapted our insurance terms based on an objective that bined ratio of 125. In other words, our claims expenses were all products must be profitable. Moreover, we can see that significantly higher than our premium income. We had to our average claims expenses have stabilised. work hard to make up for this during the remainder of the year. Concurrently, the bank continued to record severe loss- Overall, this contributed to improving our underlying business es and writedowns on the part of the portfolio being wound quarter by quarter and helped us emerge from 2010 in signi- up. ficantly better shape than we had anticipated in terms of our non-life insurance business. This promises well for the future As a result of these and other events, we decided in the and strengthens our confidence that we are on the right spring of 2010 to sharpen our strategic framework and to track. implement a number of wide-ranging initiatives to establish a sustainable foundation for Alm. Brand’s creation of long-term Strong pension business shareholder value. Our pension business has emerged strongly from the years of economic crisis, and our conservative investment policy Strong core business performance has secured steady returns. We generated high returns in Our core business, non-life insurance, is a well-functioning 2010 due to favourable capital markets. As a result, we and competitive business. Over the years, we have docu- were able to take the full amount of the shadow account mented this by generating strong earnings. However, during to income and significantly strengthen our reserves, i.e. the the last two years our operations have been characterised collective bonus potential. In our strategy for the future, we by rising claims payments due, among other things, to higher aim to continue our activities and to retain our focus on low repair and labour costs and many weather-related and bur- costs, effective risk management and steady returns on the glary claims. customer investment portfolio. Our primary challenge in recent years has therefore been to Trimming of our banking business balance our premium income and the risks involved in the The greatest challenge for Alm. Brand in terms of business individual portfolios. In addition, we have made dedicated ef- is the negative performance of our banking operations over forts to lower our expense ratio in order to rank it alongside the past few years. The exposure to the property and mort- the most competitive in the industry. We therefore defined gage deed markets in particular has taken a heavy toll on the three primary goals: to lower our expense ratio through ef- bank in the form of very large losses and writedowns – also ficiency enhancements and improved business procedures; in 2010. It is obviously unacceptable that the positive results to reduce insurance risks and to ensure that they are to a generated by the group as a whole are eliminated because greater extent reflected in the prices we offer our customers; we have underestimated the risk and effect of a financial and finally to adjust our pricing structure in order to align it crisis. We have therefore fundamentally changed the strategy with recent developments in claims payments. for the bank and have begun to wind up the loss-making ac tivities. Going forward, the bank will focus primarily on We have made a dedicated effort to achieve these goals. For serving our non-life insurance customers in the private cus- example, we continued to implement significant cost reduc- tomer segment. In addition, the bank will focus on its leasing tions in 2010 through a number of efficiency enhancements and Asset Management and Markets activities, which hold a 10 ALM. BRAND A/S ANNUAL REPORT 2010