The Group's financial performance in 2008

TrygVesta’s focus on profitable growth in the insurance operations was once again the foundation that sustained the company throughout 2008, which was otherwise a challenging year for the insurance industry.

Gross earned premiums were 4.9% higher in local currency terms (4.3% in DKK terms), the result of a great effort by our employees, high customer retention rates and a large inflow of new customers, with the new markets in Sweden and Finland once again contributing high growth rates. In 2008 we succeeded in reversing the previous negative growth in Private & Commercial Norway to positive growth of 4.8% in local currency terms, driven by higher customer retention and premium increases.

However, 2008 was challenging for our insurance operations. Claims expenses increased due to higher average claims within building insurance, triggered in part by rising claims inflation (higher prices of labour and materials) and a changed claims mix. However, claims inflation subsided in the second half-year of 2008 due to the economic slowdown. Premium increases and other measures were introduced in both Denmark and Norway in 2008 to strike a profitable balance between price and claims expenses during 2009 and 2010.

Financial results in 2008
The technical result amounted to a profit of DKK 2,384m in 2008 compared with DKK 2,820m in 2007. Outperforming the forecast announced in our third quarter interim report in November 2008 by DKK 184m, the profit was primarily driven by run-off gains on prior-year provisions of DKK 191m in the fourth quarter of 2008. Although lower than in 2007, the performance was still good in a historic perspective. Higher claims and wage inflation combined with investments in “The Living House” were the primary causes of the technical result for 2008 being DKK 436m lower than in 2007. Claims expenses also increased within personal insurance, including health care insurance, in 2008. The growing use of health care insurance has triggered higher claims expenses, and premium increases have been implemented to offset this effect.

Investment activities generated a profit of DKK 440m before transfer of technical interest in 2008 compared with DKK 1,740m in 2007. The reduction was primarily attributable to capital losses on equities amounting to DKK 887m in 2008. TrygVesta recognises all investment assets at market value, and value changes have a direct impact on the income statement. The proportion of equities in the investment portfolio was reduced from DKK 5.4bn in mid-2007 to DKK 1.7bn in January 2008. Capital losses on equities would have been approximately DKK 1.2bn higher if the lower allocation to equity investments had not been implemented.

The pre-tax profit amounted to DKK 1,347m against DKK 3,109m in 2007. This was DKK 247m more than the full-year forecast announced in the third quarter 2008 interim report.

The profit after tax fell by DKK 1,420m to 846m due to the lower investment return and a slightly lower technical result. Capital losses on equities are non-deductible, and therefore the tax rate was above normal.
 
New Markets lifting growth
TrygVesta recorded gross earned premiums of DKK 17,323m in 2008, which was DKK 717m, or 4.9% in local currency terms (4.3% in DKK terms), more than in 2007. Premium growth was in line with expectations. It should be noted, in particular, that Sweden and Finland recorded aggregate growth of 69%, contributing DKK 234m of the DKK 717m. The total portfolio in the two countries was DKK 691m at 31 December 2008. Growth was attributable to a sustained high inflow of customers. In Finland, it was a direct result of the sales organisation being enhanced and enlarged. Sweden and Finland accounted for 1.4 percentage points and Denmark and Norway accounted for 3.5 percentage points of the Group’s total premium growth of 4.9% in local currency terms.

Private & Commercial Denmark reported 1.8% growth in gross earned premiums over 2007. This was less than expected, and was affected in 2008 by relatively fierce competition from smaller companies. More existing customers chose to stay on with TrygVesta in Norway. The combined effect of this, a fair inflow of new customers and a large number of premium increases was to lift premium growth in Private & Commercial Norway to an annualised 4.8% in local currency terms, thereby exceeding expectations.

Gross earned premiums in the Corporate business increased by 4.3% over 2007. Gross earned premiums grew rapidly at the beginning of the year due to the large inflow of new customers in the second half of 2007, while the growth rate was somewhat slower in the second half of 2008. During the period from mid-2007 to 2008, the Corporate business outperformed the estimated market growth by a considerable margin, and a more natural growth level was therefore expected in the second half of 2008.

TrygVesta expanded its position within health care in 2008. The heavy demand for health care insurance combined with good market timing of the launch of new product initiatives produced portfolio growth of more than 70% in Denmark.

Combined ratio under pressure from rising claims inflation
The combined ratio was up from 86.1 in 2007 to 89.1 in 2008. The adverse performance was triggered by higher claims expenses for building and personal insurances. Increasing average claims and high wage increases were the primary cause of the higher combined ratio, although in a historic and, in particular, European perspective 89.1 reflected a continued good and sound insurance operations performance.

Large claims were higher than expected in 2008, while weather related claims were lower than expected. Run-off gains had a favourable impact of 4.6 percentage points on the combined ratio in 2008, on a level with 2007.

Claims experience
Gross claims at DKK 11,766m were 5.3% higher, bringing the claims ratio, net of ceded business, to 71.8 in 2008 compared with 69.4 in 2007. The DKK 591m increase in gross claims incurred was primarily attributable to higher claims expenses in relation to building and personal insurance. Large claims – defined as claims of more than DKK 10m – were a gross amount of DKK 586m in 2008 against a gross amount of DKK 1,042m in 2007. After reinsurer contributions, large claims amounted to DKK 490m net against DKK 637m in 2007. The most widely covered large claim in 2008 related to a fire on Bryggen in Bergen, Norway in September, which destroyed several of that city’s historic timber built houses. The level of fires in single-family houses in Norway amounted to NOK 264m in 2008, significantly above 2007, which amounted to NOK 209m.

Weather related claims were DKK 112m in 2008 compared with DKK 332m in 2007. The reduction was due partly to the mild winter and partly to fewer cloudbursts in the summer of 2008 compared with the summer of 2007. Claims in 2008 were positively impacted by gains on prior year claims. The favourable run-off performance contributed a net amount of DKK 793m (gross amount of DKK 868m) compared with a net amount of DKK 743m (gross amount of DKK 744m) in 2007. The motor and personal accident lines were the major contributors of run-off gains, while building generated run-off losses in 2008, mainly attributable to an upgrade in relation to cloudburst claims from 2007.

The underlying claims ratio increased when adjusted for the effect of large claims, weather related claims, run-off results and interest rates. The underlying increase in claims expenses was attributable to higher claims expenses in several areas. The average building claim in Denmark was around 21 percentage points higher, driven by higher prices of labour and materials and by a changed claims mix towards a larger number of more expensive piping claims and reserve strengthening. To counter the effect of these factors on the Group’s financial results, TrygVesta has already launched a number of initiatives and additional measures have been scheduled to maintain and improve the earnings level.

Costs impacted by investments in New Markets and the workplace of the future
As disclosed in the third quarter 2008 interim report, costs in the fourth quarter of 2008 would be adversely impacted by costs in connection with “The Living House” project to create the workplace of the future. The project will change the physical working environment at Ballerup and Bergen with a view enhancing innovation, development and knowledge sharing. Previously, all or part of such costs would have been capitalised as appreciation of the values of the properties, but the item has been recognised in current costs due to the current uncertain situation.

Expenses relating to “The Living House” totalled DKK 133m. Excluding “The Living House”, the expense ratio was 16.7, in line with 2007. Including costs of this project, the expense ratio was 17.3 in 2008. In light of high wage inflation of around 5-8%, high initial costs in New Markets, and high growth with derived commission expenses, the expense performance is considered satisfactory. Costs of expansion in the new markets had an impact of 1.5 percentage points in 2008 against 1.3 percentage points in 2007 and are financed through ongoing process improvements in Denmark and Norway.

Investment return
The investment portfolio amounted to a total of DKK 34.2bn at 31 December 2008 compared with DKK 37.3bn at 1 January 2008. The gross return on investment assets totalled DKK 1,258m in 2008 against DKK 1,523m in 2007, corresponding to a gross return of 3.5% in 2008 compared with 4.1% in 2007. Investment activities generated a loss of DKK 988m after transfer of technical interest compared with a profit of DKK 340m in 2007.

The performance fell considerably short of expectations and was mainly attributable to capital losses on equities of DKK 887m incurred in 2008. The proportion of equities in the investment portfolio was reduced from DKK 5.4bn in 2007 to DKK 1.7bn in January 2008. Capital losses on equities would have been approximately DKK 1.2bn higher if the lower allocation to equity investments had not been implemented.

TrygVesta acquired its head office in Ballerup at a price of DKK 1,085m in the spring of 2008. The acquisition replaced the existing lease with Danica from 1995, which would have expired in 2025. The purchase provides TrygVesta with certain immediate financial benefits as the annual rent exceeded the yield on bonds sold to fund the acquisition. Acquiring the head office also facilitates “The Living House” refurbishment project described in the preface to this annual report.

Tax
The tax expense was DKK 501m in 2008 compared with DKK 842m in 2007, equalling an increase in the effective tax rate from 27% to 37%. The effective tax rate in 2007 was favourably affected by the reduction of the Danish corporate tax rate from 28% to 25%, which reduced the deferred tax. The effective tax rate in 2008 was adversely affected by non-deductible equity losses, which were partly offset by a favourable impact from closed tax cases.

Balance sheet and cash flow
Total assets decreased from DKK 43,830m to DKK 38,453m in 2008, primarily due to the depreciation of NOK against DKK.

Liabilities mainly comprised shareholders’ equity of DKK 8,244m and technical provisions of DKK 25,193m.

Technical provisions decreased from DKK 26,916m to DKK 25,193m in 2007, equal to 6.4%. The ratio of provisions for claims, net of reinsurance, to earned premiums, was 112 against 124 in 2007.

TrygVesta generated a cash inflow from operating activities of DKK 1.8m 2008 compared with DKK 2.7bn in 2007.

Investments amounted to a total of DKK 0.5bn in 2008, and there was a cash outflow for financing activities of DKK 2.2bn, primarily relating to cash dividend of DKK 1.6bn and share buy back of own shares of DKK 1.2bn.

Equity
Equity stood at DKK 8,244m at 31 December 2008, a reduction of DKK 1,766m.

The change was attributable to cash dividends paid out in the amount of DKK 1,156m, purchases of own shares in the amount of DKK 1,197m, profit for the year and other adjustments.

Events after the balance sheet date
On 2 March 2009 TrygVesta agreed to acquire Moderna Försäkringar Sak in Sweden for DKK 427m in transaction goodwill and a total amount of SEK 1,256m (DKK 810m). For further information please refer to separate company announcement dated 2 March 2009.