The Annual Report of PFA Pension and the Group is presented in accordance with the provisions of the Act on Insur- ance Business and related executive or- ders and standards concerning the finan- cial reporting of life insurance companies and insurance groups.
The Group’s accounting policies are consistent with those applied in 2002.
As a result of amendments to the Dan- ish Financial Supervisory Authority’s execu- tive order on the financial presentation of life insurance companies, the key figures and financial ratios have been changed and extended both in the Group’s and in PFA Pension’s 5-year summary. Comparative figures have been restated accordingly.
Net profit for the year
The Act on Insurance Business and the rules laid down by the Danish Financial Supervisory Authority by virtue of the Act provide that realised profits must be split on a fair basis between, on the one side, the insurance portfolio eligible for bonus and, on the other side, shareholders’ eq- uity and customer capital, which cover the Company’s risks pari passu with shareholders’ equity.
Independently of the realised results of operations in the year, shareholders’ eq- uity and the customer capital and any en- trepreneurial profit receivable (see below) will carry the interest of the investment income before pension yield tax. For this purpose, the investment income is made up exclusive of income from the portfolio of unit-linked insurance policies.
Furthermore, income from non-life in- surance activities and income from the portfolio of unit-linked insurance policies is transferred to shareholders’ equity.
Within the limits of a positive realised profit for the customers, an entrepre- neurial profit is transferred to sharehold- ers’ equity and the customer capital. The entrepreneurial profit represents a share of the life insurance provisions relating to policies under which the policyholders are entitled to bonus. The entrepreneu- rial profit is part of the technical basis.
If the customers’ share of the realised profit is not sufficient for the desired en- trepreneurial profit to be added to share- holders’ equity and the customer capital, the deficit is recorded as a receivable outside the financial statements. Any entrepreneurial profit receivable is dis- closed in the note to shareholders’ equi- ty and in the note to CustomerCapital™. The breakdown of the realised results of operations in the year concerned is detailed in the note to the net profit for the year and in the ‘Operating and fi- nancial review’.
Group structure
All subsidiaries are wholly owned with the exception of Lærernes Pension in which PFA Pension holds 51 per cent of both the share capital and the voting rights.
The group enterprises have entered in- to administration agreements with PFA Pension, according to which PFA Pension handles, wholly or in part, the adminis- tration of the subsidiaries on a cost re- imbursement basis.
Intra-group transactions falling within the companies’ natural area of business are conducted on the basis of written agreements and on an arm’s-length basis. Interest on intra-group transactions is charged on an arm’s-length basis.
Consolidation
The consolidated financial statements in- clude enterprises in which the parent
company or group enterprises, directly or indirectly, hold(s) more than 50 per cent of the voting shares or otherwise has/ have a controlling interest.
The group structure appears from p. 5. The activities of the Group include al- most exclusively life and pension insur- ance and related health and accident in- surance. Therefore, the consolidated fi- nancial statements are presented ac- cording to the provisions which apply to life insurance companies.
The consolidated financial statements are prepared on the basis of the audited financial statements of all those sub- sidiaries whose financial year-end coin- cides with that of the parent company. The financial statements included in the consolidation are presented in accordance with PFA Pension’s accounting policies.
For consolidation purposes, the indi- vidual items in the income statements and balance sheets of subsidiaries are added up on a line-by-line basis, less in- tra-group transactions, balances and shareholdings.
Associates managed by the Group to- gether with one or more other enter- prises are included in the individual items of the consolidated financial statements on a pro rata basis in proportion to the percentage interest held.
Intra-group transactions conducted on an arm's-length basis are not eliminated. Gains or losses arising on intra-group trading in securities, which could just as well have taken place in the market, are thus not eliminated.
Income statement
Income and expenses are cut off at the balance sheet date in accordance with generally accepted accounting principles.
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Booked gains and losses as well as re- statements are recognised in the income statement, whether realised or not.
Premiums
Premiums and single premiums are recognised in the income statement at the recorded due date. The accrual of premiums is adjusted in the life insurance provisions. Labour market contributions are not part of premiums.
Reinsurance
Ceded premiums and ceded claims are set off in the respective items in the in- come statement. The total profit or loss on reinsurance is shown in a note to the income statement.
Income from investments
Income from group enterprises includes PFA Pension’s share of the profit or loss of subsidiaries, including restatements.
Income from land and buildings in- cludes the profit from property opera- tions, less property management expen- ses. The item includes market rent for the use of the Group’s own properties. The rent is recognised as an expense un- der net operating expenses.
Interest, dividends, etc. include inter- est on securities, loans and cash as well as current income from derivative finan- cial instruments. For the parent compa- ny, the item also includes interest on re- ceivables from group enterprises. Fur- thermore, the item includes dividends on shares and indexation of bonds. Finally, gains on repayment and redemption of bonds and loans are included.
Realised and unrealised capital gains and losses on investments are calculated by reference to the opening balance plus the cost in the year.
Insurance
Benefits paid and changes in provisions for claims represent the expenses ac- crued in the year.
Net operating expenses
Net operating expenses are the expenses incurred in the year on acquisition, renew- al and administration of the insurance portfolio, including expenses related to the disbursement of insurance benefits.
Investment management charges are the portion of the administrative expenses that relates to trading in and management of investments on the basis of direct and estimated resource requirements.
Expenses related to activities other than life insurance business, which are primarily expenses related to property operation and expenses related to non-life insurance business, are transferred to other items in the income statement in accordance with the executive order on the financial pres- entation of life insurance companies and the Group’s consolidation policy.
Other income statement items Changes in life insurance provisions are specified in the note to the balance sheet item.
The change in the collective bonus po- tential is the portion of the realised prof- it accruing to the insurance portfolio be- sides the bonus already allocated. In years where the insurance portfolio’s re- alised result is negative, net of bonus al- ready allocated, the item includes the use of collective bonus potential for which a provision has been made in prior years.
Changes in CustomerCapital™ partly include interest on provisions made in prior years and partly the net amount contributed by the customers during the year. To this should be added amounts which the Company may decide to allo-
cate for this purpose instead of transfer- ring them to shareholders’ equity.
Exchange rate adjustments are a net item, which includes those value adjust- ments and gains/losses on sales that result from exchange rate differences arising on currency retranslation into Danish kroner.
Income and expenses in foreign cur- rency are translated into Danish kroner at the exchange rate ruling at the date of the transaction. Balance sheet items in foreign currency are translated at the ex- change rates at the balance sheet date.
Pension yield tax includes tax on in- vestment income and changes in the provision for deferred pension yield tax.
Investment income transferred is de- ducted from the balance on the technical account to reflect the portion of the in- vestment income that relates to sharehold- ers’ equity and non-life insurance business. The transferred amount is calculated on the basis of the opening and closing balance sheets, allowance being made for atypical circumstances.
The balance on the technical account, non-life insurance, is recorded in the fi- nancial statements on one line. The bal- ance is made up in accordance with the rules applicable to non-life insurance business and includes the above-men- tioned portion of the investment income transferred. The balance is specified in the note to the income statement.
Other ordinary income includes reve- nue and expenses related to accessory business in accordance with the Act on Insurance Business.
Tax
PFA Pension is taxed on a consolidated basis with the Group’s wholly owned Danish subsidiaries and PFA Holding. The tax charge for the year is recognised in the income statement regardless of
whether part of the profit for the year is not taxed until in subsequent financial reporting periods.
The taxable income in the Group’s prop- erty companies is taxed in PFA Pension in years in which at least 90 per cent of the individual company’s assets and liabilities consist of real property. In that case, a provision is made for both the current and the deferred tax charge in PFA Pension. If the 90 per cent requirement is not met in some years, the property company con- cerned will be subject to tax on its income. In that case, a provision is made for both the current and the deferred tax charge in the property company.
The current tax charge is allocated be- tween the tax-consolidated companies in proportion to their taxable income (proportional allocation).
Assets
Land and buildings
Land and buildings are measured at mar- ket value.
The market value is fixed in accordance with the relevant principles laid down by the Danish Financial Supervisory Author- ity, based on the operating income of the individual property and a yield re- quirement related to the property.
The operating income is based on the yield expected for the coming year, ad- justed for atypical circumstances.
The note to the balance sheet item discloses the weighted average of the yield requirements used for measure- ment purposes. Furthermore, the note discloses the highest and the lowest of the yield requirements used for meas- urement purposes.
Undeveloped land and properties un- der construction and forests are meas- ured at their estimated market value.
Shares in group enterprises and associates
Shares in group enterprises are meas- ured at the parent company's propor- tionate interest in the enterprises (net asset value), calculated in accordance with the accounting policies applied by PFA Pension.
Shares in associates owned through subsidiaries are measured at their net asset value in accordance with the most recent financial statements.
Securities
Listed securities are measured at market value. The market value is calculated on the basis of the most recently quoted official price at the balance sheet date. The most recently quoted daily average price is applied to Danish listed securities.
Unlisted shares are measured at their estimated market value based on the most recently published financial state- ments. The estimate is also based on the most recently published quarterly finan- cial statements or report.
Loans are measured at market value on the basis of conservatively fixed in- terest rates depending on the remaining terms of the loans.
Unit trust certificates are measured at market value of the assets and are recognised in the balance sheet, corre- sponding to the underlying assets.
Forward contracts, call-and-put op- tions and other derivatives are measured at the market value of the contracts at the balance sheet date. Unlisted deriva- tive financial instruments are measured at their estimated market value.
Investments related to unit-linked in- surance policies are the assets which correspond to the insurance policies where the policyholders determine the investment mix and bear the related risk, wholly or in part. The assets are meas- ured at market value.
Other asset items
Intangible assets, which include acquired and self-generated software and pro- cesses having a positive value for the fu- ture operations, are amortised on a straight-line basis over the expected useful life, however maximum eight years. Self-generated assets consist of direct internal project development costs. Project development costs not exceeding DKK 1,000,000 are written off imme- diately.
Receivables are measured at nominal value less provisions for bad debts.
Operating equipment is measured at cost less amortisation made. Amortisa- tion is provided according to the straight-line method over the expected useful life of the assets. Total acquisi- tions at a cost not exceeding DKK 50,000 are written off immediately.
Liabilities
Insurance provisions
Life insurance provisions are calculated by the actuaries appointed by the compa- nies by reference to the technical basis reported to the Danish Financial Supervi- sory Authority. The provisions consist of guaranteed insurance benefits, the bonus potential related to future premi- ums and the bonus potential related to benefits on paid-up policies.
Guaranteed benefits represent the net present value of the benefits guaranteed under the policy as well as the net pres- ent value of the expected future expenses related to the administration of the in- surance policy, less the net present value of the agreed future premiums.
Guaranteed benefits include an esti- mated amount to cover future insurance benefits pertaining to insurance events that have occurred during the financial
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year, but which had not been reported at the end of the financial year.
Bonus potential related to future pre- miums includes the net present value of commitments to pay bonus on agreed, not yet overdue, premiums.
Bonus potential related to benefits on paid-up policies includes the net present value of commitments to pay bonus con- cerning premiums, etc. already paid.
The net present value of the three ele- ments of life insurance provisions is cal- culated by reference to an interest rate applicable to each time of payment, using a zero coupon interest rate structure in the Euro, as the difference in relation to the similar Danish interest rate structure represents the necessary safety margin. As regards policy elements not exempt from pension yield tax, the interest rate thus calculated is reduced by 15 per cent in pension yield tax. When making up the time of payment for life insurance provi- sions, no allowance is made for future surrender cases.
When calculating the size of the provi- sions, it is presumed that the expenses incurred to administer the Company’s in- surance portfolio will be covered by the expense loading on the policies.
Provisions for claims comprise unpaid insurance benefits due for payment. The amount includes an estimate of insur- ance benefits due for payment, which pertain to insurance events that have oc- curred during the financial year, but which had not been reported at the end of the financial year.
Collective bonus potential is the policy- holders' share of the realised results of operations, for which collective provisions have been made for insurance policies eligible for bonus, besides life insurance provisions and provisions for claims.
CustomerCapital™ is part of the capital base on equal terms with shareholders’ equity, but since it accrues, in due course,
to the policyholders, it is part of the in- surance provisions.
Provisions for unit-linked insurance poli- cies basically represent the market value of the corresponding assets. If the poli- cies concerned comprise a commitment to the effect that, at the time of maturi- ty, the benefits will be calculated on the basis of a value that is higher than the current market value of the assets, then the provisions will be measured with due regard to the probability that the loss may be recovered before maturity.
The actuarial methods used to calcu- late insurance provisions are based on a number of assumptions which are fixed as the best possible estimates of, among other factors, mortality, disability and other insurance risks. The most recent claims experience is taken into consider- ation for purposes of such estimates.
Other liability items
Deferred pension yield tax is calculated by discounting the anticipated future pension yield tax on prior gains that are subject to pension yield tax. If the de- ferred net tax assets exceed the calculat- ed amount, the deferred pension yield tax is set off against the deferred tax assets.
Deferred tax is measured according to the balance sheet-oriented liability method of all temporary differences be- tween the carrying amount and the tax value of assets and liabilities at the bal- ance sheet date.
Deferred tax assets, including the tax- able value of tax loss carry-forwards, are recognised in the balance sheet at the value at which the tax assets are ex- pected to be realised – either through offsetting against deferred tax liabilities or as net tax assets.
Deferred taxes and deferred tax assets are discounted in consideration of the expected realisation pattern. The dis-
count rate is set at a conservatively esti- mated reinvestment rate.
Other provisions cover losses, commit- ments or expenses which are probable, but uncertain as regards their size or the time of payment. Other provisions are measured at nominal value.
Payables are measured at nominal value.
Capital base
PFA Pension and the Group’s capital base is calculated in accordance with the Dan- ish Financial Supervisory Authority’s ex- ecutive order concerning insurance com- panies’ capital base. It appears from the executive order that the capital base must be reduced by booked tax assets. Tax assets that can be disbursed in an administration situation are added.
Tax assets that can be disbursed in an administration situation are calculated by way of a full statement of liquidation of the Group’s tax situation at the balance sheet date.
Key figures and financial ratios PFA Pension prepares key figures and fi- nancial ratios in accordance with the provisions of the executive order on the financial presentation of life insurance companies.
The key figures and financial ratios re- flected in the 5-year summary are com- puted on the basis of the items in the fi-