Investment activities

TrygVesta’s investment activities comprise any placement of the Group’s funds in investment assets, such as bonds, equity investments, land and buildings or cash. Funds are placed pursuant to guidelines defined by legislation, regulators and our Supervisory Board.

The overall allocation of assets is made by TrygVesta based on risk and cash management considerations, while specific securities are mainly selected by external asset managers within the defined framework.

The financial turmoil started in 2007, deepening into a financial crisis in 2008. The crisis grew to dramatic proportions in the autumn with mounting problems in the liquidity markets, peaking so far with the collapse of Lehman Brothers and AIG. Equity markets dropped by an aggregate 40%–50%. The proportion of equities in the investment portfolio was reduced from DKK 5.4bn in mid-2007 to DKK 1.7bn in mid-January 2008.

Investment result in 2008
In 2008, the return on TrygVesta’s investment activities before transfer to technical interest totalled DKK 1,258m, equivalent to 3.5%. This was less than in 2007, mainly due to lower returns on the equity portfolio. Capital losses on equities would have been DKK 1.2bn higher if we had not reduced the equity portfolio during 2007 and 2008. The return on investment activities after transfer to technical interest was DKK 1,328m lower than in 2007 due to lower equity returns and an increase in the amount transferred to technical interest.

Other financial income and expenses were DKK 259m lower. The change was attributable to a number of individual items, none of them particularly dominant, and the most important being non-recurring interest income in 2007, higher currency hedging expenses, lower return due to the acquisition of the head office in Ballerup, and the net result of inflation hedging related to workers’ compensation provisions.

The return on investment activities before other financial income and expenses was DKK 1,258m, equal to a return of 3.5%. The return was 2.2% including changes in provisions for claims due to lower interest rates.

Asset allocation
The bond portfolio increased during 2008 to account for 86.1% of total investment assets against 81.2% at 1 January 2008. The higher proportion of bonds was a result of new investments and a switch-over from equities to bonds despite the head office acquisition. The proportion of equities fell from 11.9% to 3.4%, or by DKK 3,273m. The real estate proportion was 10.5% in 2008 against the previous 6.9%, primarily attributable to the acquisition of the head office at Ballerup. The head office accounted for 3.9% of total investment assets.

Net investments in the year made up at the exchange rates ruling at 31 December 2008 amounted to about DKK 156m, of which DKK 918m was invested in bonds, while net investments in equities (excluding derivative hedges) were negative at DKK 1,833m and net investments in real estate amounted to DKK 1,070m. For security and rating considerations, TrygVesta’s investment portfolio has a high proportion of highly liquid securities carrying low interest rate and credit risk. TrygVesta does not invest in structured fixed income products such as CDOs, CLOs, hedge funds or the like.

Bonds
The Group’s overall bond portfolio including cash yielded a return of DKK 1,882m in 2008, equal to 6.1% for the full year. The return in 2008 was affected by an overall drop in bond yields of around 1.2% in Denmark and 2.8% in Norway, with yields rising in the first half-year and dropping significantly in the second half-year. The mortgage spread widened drastically in Denmark during the period until 31 October when Danish regulators adopted a new yield curve for discounting insurance company liabilities, thereby stabilising demand for Danish mortgage bonds. About 75% of the bonds, or DKK 22bn, are issued by banks or mortgage credit institutions, and 23% are issued by the Danish and Norwegian governments. 92% of the portfolio is rated AAA or AA. The proportion of unrated bonds was reduced from 15% to 5% during the year. The unrated 5% 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 subprime crisis. We currently monitor the performance of credits with the financial institutions 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.

We conduct ongoing follow-up on interest rate sensitivity to optimise the match between assets and liabilities in order to reduce the impact of interest rate changes on our income statement. The duration including cash of the Group’s total bond portfolio was 1.7 years at 31 December 2008 compared to 1.9 years at 31 December 2007.

Equities
The total return on the equity portfolio was negative at DKK 887m, or minus 32.8%, for the financial year. The financial crisis and the resulting global economic recession have triggered equity market drops over the past year in line with those seen in previous severe recessions.
TrygVesta’s total equity return was 0.5% above the benchmark return. International equities generated a negative return of 36.6%, which was 2.9% above the benchmark return. Nordic equities generated a negative return of 48.1%. For comparison, the VINX Benchmark Cap Index generated a negative return of 42.4%. Currency risks relating to international equities were hedged during the year. Unlisted equities accounted for DKK 180m at 31 December 2008. Nestle SA was the largest stake, accounting for 2.9% of the portfolio of listed equities and 0.09% of total investment assets. The 25 largest equities in our portfolio accounted for 31.5% of the total listed equity portfolio. After reducing the equity proportion in June and December 2007 by a total of DKK 0.8bn, TrygVesta reduced the equity exposure by an additional DKK 2.2bn in January. At 31 December 2008 the Group’s equity portfolio had a total value of DKK 1,172m compared to DKK 4,445m at 31 December 2007.

Real estate
The investment return on real estate was DKK 263m including revaluation and sales gains of DKK 78m and 6.0% from current operations. The occupancy rate was 99.0 at 31 December 2008 compared with 97.5 at 1 January 2008. The portfolio comprises the head office properties at Ballerup and Bergen, amounting to around DKK 1.3bn at 31 December 2008, and a portfolio of investment properties of some DKK 2.3bn, consisting of well-diversified quality buildings, 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.