Financial outlook for 2009

The financial crisis and economic downturn have caused greater uncertainty in a number of areas. TrygVesta is committed to providing profit guidance that is as precise as possible. However, with respect to 2009, the outlook is subject to much greater uncertainty.

The Outlook for 2009 does not include the impact from the acquisition of Moderna Försäkringar Sak, as these activities only will be included once the transaction is closed and this is expected in first half of 2009. For further information please refer to separate company announcement dated 2 March 2009.

Since the end of the third quarter of 2008, the credit and financial crisis has, among other things, resulted in significant changes in interest rates and exchange rates, and such changes impact TrygVesta’s profit outlook for 2009. Due to the exceptional circumstances, TrygVesta has elected to update the outlook to include interest rate and exchange rate levels at mid-February 2009. Other assumptions remain unchanged.

Due to the greater uncertainty and large fluctuations in the financial markets we have elected to present a more detailed picture of our expectations, also adding a number of sensitivity calculations. This is intended to illustrate the impact of falling interest rates and the substantial depreciation of NOK against DKK.

Lower premium growth expected for 2009
Earned premiums are expected to increase by some 4% in local currency terms, assuming no major changes in competitive conditions relative to 31 December 2008. Earned premium growth is expected to originate from organic growth and measures already implemented with respect to premiums. Finland and Sweden together are expected to contribute 1.8%, while Denmark and Norway will contribute 2.2%.

Expectations for expected growth in earned premiums in 2009 have been lowered relative to the 4.9% gross increase achieved in 2008. This is a consequence of the economic downturn which is expected to affect our business in several areas; lower sales of new cars, fewer new single-family houses being built and rising unemployment, reducing the requirement for workers’ compensation insurance. An overall assessment of the various factors has caused us to reduce to the original growth forecast for 2009 from 5% to 4%.

TrygVesta retains the strategy of generating profitable growth.  

Combined ratio affected by declining interest rates
Our third quarter 2008 interim report released in November 2008 set out a combined ratio forecast for 2009 at the level prevailing in 2008. This was based on interest rate and other assumptions as prevailing at 30 September 2008.

The interest rate used to discount provisions for claims fell by 1.2 percentage points in the period from the fourth quarter of 2008 until mid-February 2009 (including the effect of a changed discount curve) with a significant adverse effect on the combined ratio. Seen in isolation, a 1 percentage point drop in interest rates would increase the combined ratio by around 1 percentage point due to an increase in the discounted technical provisions.

Based on the interest rate level prevailing at mid February 2009, the combined ratio for 2009 before run-off is estimated to be at the level of 91-93 with an expectation of 92. The past three years had run-offs of 1.8–4.6% of the combined ratio, for example, with a combined ratio in 2008 of 89.1 after run-off and 93.7 before run-off. The increase of the outlook in the combined ratio from the forecast in the autumn of 2008 thus only reflects the lower interest rate level.

Downward trend in expenses
Costs in 2008 were affected by rising wage inflation and substantial investments in “The Living House”. When adjusted for these factors the expense ratio was 16.7 equal to 2007. The expense ratio for 2009 is expected to be on a level with 2007. This expectation includes continued expansion in Finland and Sweden. The expense ratio would be first over 15 for the Danish and Norwegien activities.

Technical result
The technical result is expected to be DKK 1.5bn for the full-year 2009 relative to DKK 1,591m in 2008 and before run-off. The interest rate used for discounting has risen and fallen considerably again since the summer of 2008.The outlook for the technical result for 2009 is therefore subject to uncertainty due to uncertainty with respect to interest rates. See also the sensitivity analysis in the section Risk management.

Assumptions for insurance activities
The outlook for the financial results for 2009 is based on assumptions with respect to gross earned premiums, gross claims incurred, gross expenses, result of business ceded and technical interest. Our outlook for gross earned premiums is based on the Group’s portfolio at 31 December 2008 and assumptions with respect to sales and loss of policies and price adjustments of existing policies.

Assumptions for sales and loss of policies are based on historical levels, planned initiatives and the market situation. Assumptions for price adjustments are primarily based on agreements relating to adjustments of individual insurance policies. The outlook is expressed in local currency terms.

We generally base our expectations for claims incurred on assumptions for the various products in the individual business areas. Expectations regarding claims ratios are based on historical performance in the form of average claims ratios for the past five years, with recent years’ trends generally being weighted stronger than those of prior years. Trends in the pricing of our insurance premiums, claims frequencies and the discount rate applied are the most important factors that may affect our overall performance. Assumptions for storm events and large claims are based on historical experience for not less than ten years, with recent years’ trends being weighted stronger than those of prior years. In addition, we incorporate the effect of profitability initiatives and the effect of any legislative measures in the anticipated claims level.

The outlook for 2009 assumes weather related claims of around DKK 250m and large claims of around DKK 500m gross. The outlook assumes no run-off losses or gains in 2009 on the provisions for claims established.

The outlook regarding gross expenses reflects the projected number of employees during 2009 and the related costs. The projected number of employees incorporates the effect of measures launched to improve efficiency. The outlook further includes other expenses such as those relating to IT, operations and our owner-occupied properties, which are predominantly based on agreements that are known to us.

The result of business ceded is based on contracts made with reinsurers to cover claims events and events such as storms and large claims. The expected result of business ceded is calculated on the basis of such contracts and historical data.

Assumptions for investment activities
Due to the volatile and unusual conditions prevailing in the financial markets the assumptions for investment return are subject to considerable uncertainty. See the section on Risk management for a sensitivity analysis.

The outlook for the return on investments for 2009 is based on the following assumptions with respect to investment assets. An equity proportion of 3.6% and a return of 7% including dividend are assumed. Bonds are expected to account for around 86% of total investment assets and to yield a return of 3.93% based on interest rates mid-February 2009. Finally, the real estate portfolio, which accounts for 10% of assets including owner-occupied properties, is expected to yield a return of 6.1% exclusive of any value adjustments. In 2008, bonds, equities and real estate yielded returns of 6.1%, minus 32.8% and 8.4%, respectively. The investment result after transfer of technical interest for 2009 is expected to be a profit of DKK 300m against a loss of 988m in 2008.

Currency risk
Currency exchange rates, which have a major impact on the results of the insurance operations, were very volatile in 2008. TrygVesta’s insurance operations are directly exposed to fluctuations in NOK, SEK and EUR. Based on the expectation of a positive profit contribution from, for example, the Norwegian part of the business, a depreciation of NOK against DKK would adversely impact the total profit of the Group which presents its financial statements in DKK. The currency risk on the part of equity tied up in NOK is hedged.

Assumptions for tax

The effective tax rate is affected by the corporate tax rate of 25% in Denmark and 28% in Norway, and by the fact that tax loss carry-forwards are not utilised in Sweden and Finland. We expect an effective tax rate of 27 for 2009. Whether this is achieved depends on the amount of gains or losses on equities which are tax-exempt or non-deductible.

The return on equity for 2009 is expected to be 14-16% after tax.