The investment assets of the life group are divided into policyholders’ investment assets and shareholders’ equity investment assets. Policyholders’ investment assets consist primarily of bonds, properties and shares. Shareholders’ equity investment assets were placed in a separate account and invested in short-duration bonds.
Shares
Shares accounted for 15% of the life group’s total investment assets at 31 December 2007. This includes the portfolio of unlisted shares, which makes up 2% of investment assets. The share portfolio consists of shares and share-based options and futures. The calculation of the proportion of shares includes recognition of derivative financial instruments at their market exposure to shares which differs from the market value of the instruments.
Listed shares yielded a negative return of 9%, while the return on unlisted shares was 35%. The return on listed shares was adversely affected by losses on unit trusts comprising listed European property companies. The return on other listed shares was in line with the benchmark return, which at year- end 2007 was comprised of 30% OMX Copenhagen Capped index and 70% MSCI World (local currency). The return on listed shares was not satisfactory, while the return on unlisted shares was satisfactory.
Bonds
The bond portfolio of the life group comprises mostly Danish government bonds and mortgage bonds. We aim for the duration of the bond portfolio to largely correspond with the duration of the liabilities. Over the course of the year, the group held a significant proportion of mortgage bonds, using options to hedge part of the prepayment risk on mortgage bonds in connection with falling interest rates. The life group furthermore adapted the interest rate exposure of its assets by using other financial instruments to achieve a satisfactory asset/liability match.
The return on interest-bearing assets, including financial instruments, in the life group was 0% in 2007. The weak return was due to the rise in interest rates during the year, which resulted in negative value adjustments on the bond portfolio. The return fell just short of the benchmark return and, accordingly, was not entirely satisfactory. The negative value adjustments were largely offset by adjustments of the life insurance provisions, as the interest rate risk on assets and liabilities was more or less identical.
Properties
Property investments accounted for 12% of the life group’s overall investment assets at 31 December 2007. The return on properties amounted to 8% in 2007. The return was positively affected by a strong commercial letting market, driving up rental income, and was satisfactory.
The overall return on the life group’s investment assets was 0.8% in 2007. The return excluded discounting of life insurance provisions.
Alm. Brand Pantebreve A/S
The objects of Alm. Brand Pantebreve are to invest in
mortgage deeds secured against real property in Denmark with a view to generating attractive returns for shareholders. In 2007, the company completed a private placement to facilitate a substantial increase in business volume. At year-end 2007, Alm. Brand Pantebreve had an equity gearing of 5.8. The company’s performance was favourably impacted by a proactive funding strategy involving the raising of loans in foreign currency through the forward currency markets. As part of the efforts to optimise its financing structure, the company sold CHF currency options on an ongoing basis. The
performance was negatively affected by growing funding costs as a result of the interest rate increases in the financial markets and was satisfactory.
Alm. Brand Formue A/S
Alm. Brand Formue mainly invests in bonds and shares. Since the company’s inception in 2003, the philosophy has been to place funds in mortgage credit bonds with long maturities. On average, the company expects to place 75% of its funds in bonds and 25% of its funds in shares. At year-end 2007, Alm. Brand Formue had an equity gearing of 3.8.
The company’s performance was adversely affected by rising interest rates and bond market trends. Conversely, the company’s performance was favourably impacted by the financing strategy involving the raising of loans in foreign currency through the forward currency markets. Seen in isolation, the performance was not satisfactory. The rest of the Alm. Brand Group
A vast majority of investments by other parts of the group are placed in interest-bearing assets, mostly AAArated. The duration on the assets is relatively short and balanced against liabilities in order to limit the risk of value fluctuations. Non-life assets and liabilities were not, however, fully covered in the first half of 2007, as the assets had a shorter duration than the liabilities. Due to the rising level of interest rates during the first half of 2007, this lifted the investment return. The duration of the assets was increased during the third quarter, and from August to December 2007, duration was virtually the same for non-life assets and liabilities.
In addition, the investment return was favourably affected by the fact that the short-term discount rate used to discount provisions rose more than the interest rate on short-term government bonds in which a substantial part of the assets are placed.
The majority of Alm. Brand Bank’s funds are placed in bonds with low interest rate risk. In addition, Alm. Brand Bank has a portfolio of mortgage deeds and a minor portfolio of shares. Shares in the subsidiary Alm. Brand Formue A/S are to a significant extent hedged.
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