4. CAPITULO CUARTO
4.1 CRITERIOS DE REFLEXIVIDAD DENTRO DEL PERIODISMO
MSEK 2003 2002
Premium flows, direct insurance 39,117 36,721
Claim payments, direct –28,245 –28,391
Reinsurance flows –757 118
Costs of operations –5,833 –6,897
From insurance operations 4,282 1,551
Current income/return, direct 2,482 3,405
From investment operations 2,482 3,405
From financing operations –849 1,636
Cash flow for the year 5,915 6,592
Changes
Net change in cash and bank balances –254 90
Increase in investment assets 6,169 6,502
5,915 6,592
P A R E N T C O M P A N Y
MSEK 2003 2002
Net profit for year 10 128
Depreciation 67 67
Write-downs 123 –
Capital gains in Group companies –102 –
Unrealized result, currency forward contracts –14 –35
Change in current business assets and liabilities –1,217 –1,455
Investments
Investments in Group companies 1,391 –2,230
Change in intangible assets – –201
Financing
Group contributions –188 –149
New share issue – 3,727
Cash flow for the year 70 –148
Change in cash and bank balances 70 –148
G R O U P
In the income statement of a property and casualty insurance company, premiums written are accrued over the contractual period. Claims provisions are posted con- tinually using statistical models for anticipated claims, and the actual claims reserves are made when the claims occur. The claim is finally settled through payment to the policyholder. The cash flow arising from an insurance contract and a claim thus differs considerably from how reporting for income is conducted. The link between the income statement and cash flow is reported in the insurance business’s balance sheet, where accrual items are reported in technical provisions (premium and claims provi- sions) and in the receivables and liabilities that comprise outstanding items attribut- able to insurance contracts. In insurance companies with extensive operations, the law of large numbers means that the effects of the underlying differences between accounting and real cash flow are reduced considerably.
The cash flow statement shows how cash flow arises and how it affects the Group’s bank balances and investment assets. Cash flow is generated primarily in insurance operations (technical operations) and in the form of the yield from invest- ment assets. In technical operations, the flows encompass premiums written, claims payments and operating costs, which are reported in gross flows. Premium and claims
payments in reinsurance operations, which are primarily settled through periodic settlements, are reported in the above compilation in the form of their net flows.
Cash flow can also derive from financing operations in the form of share issues, dividends, subordinated loans and interest payments, as well as flows generated from currency hedging throughout the entire operation.
The cash flow statement is based on the income-statement items that are direct- ly linked with external flows. These items are then adjusted in the cash flow statement in line with the period’s changes in the balance sheet (counterparty receivables/liabil- ities) that are directly linked to the profit/loss item in question. The balance-sheet items reported in the Group consist mainly of receivables/liabilities in foreign currency and are thus the subject of continual revaluation at the exchange rate prevailing at each closing date. In the cash flow statement, the effect of this translation is elimi- nated through the revaluation of balance-sheet items using the same exchange rate at the beginning and end of the period. Consequently, the comments on the cash flow statement are not directly visible as differences in the balance sheet and notes presented in other parts of the annual report.
COMMENTS ON THE CASH FLOW STATEMENT
Cash flow from insurance operations rose to MSEK 4,282 (1,551), while cash flow from asset management declined by slightly more than MSEK 900 to MSEK 2,482. Overall, con- solidated cash flow decreased by almost MSEK 700 compared with 2002. The difference is primarily attributable to the SEK 1.6 billion contributed as a capital infusion in 2002.
Cash flow from insurance operations
Cash flow from premiums increased sharply to MSEK 39,117 (36,721) during the year.
Adjusted for changes in premium receivables of MSEK 213, reported gross premiums written corresponded to the gross premiums written of MSEK 38,904 reported in the income statement. The premium increases conducted gradually during 2002 and 2003 strengthened cash flow considerably. Premium increases in 2002 resulted in higher unpaid premium receiv- ables at the end of that year. During 2003, premium receivables stabilized and actually fell slightly.
Claims payments
Claims payments during 2003 of MSEK 28,245 (28,391) include the flow effects of payments of MSEK 565 expensed in previous years.
Gross claims payments of MSEK 27,680 are reported in the income statement. The percentage of large claims declined sharply compared with 2002. For other claims, the trend shown for the entire portfolio of average claims and frequencies had offsetting and neutralizing effects in terms of cash flow. Under- lying price inflation in the claims trend was evened out by the declining exchange rates used in translation to SEK.
Reinsurance flow
The reinsurance flow was a negative MSEK 757 (positive: 118) after adjustments for an increase in premium liabilities by MSEK 37 and the increase in claims receivables by MSEK 173. Net reinsurance flows are reported in the income statement for 2003 in a negative amount of MSEK 621 (that is, the net result of a negative flow of MSEK 3,397 in premiums for reinsurance ceded and a positive flow of MSEK 2,776 from the reinsurers’ share of paid claims settlements).
Cost of operations
Operating expenses in insurance operations declined sharply and amounted to MSEK 5,833 (6,897) in the cash flow state- ment. Operating expenses in insurance operations reported in the income statement amounted MSEK 6,741. The adjust- ments of cash flow statement amounts derive primarily from costs of MSEK 470 for depreciation and write-downs, as well as costs attributable to restructuring reserves and the Group’s bonus and incentive program.
Cash flow from investment operations
The current return of MSEK 2,482 (3,405) from investment operations comprises the yield received during the year in the form of MSEK 102 from dividends on shares, MSEK 2,245
from coupon interest and MSEK 135 from the yield on prop- erties.
Cash flow from financing operations
Cash flow from financing operations was a negative MSEK 849 (positive: 1,636), of which taxes accounted for MSEK 401, acquisitions of machinery and equipment for MSEK 201, inter- est expense on debenture loans for MSEK 181 and negative cash effects from currency futures for MSEK 286.
Receivables
The cash surplus generated by operations and which is not required to maintain short-term access to funds is transferred to securities management. Within investment assets, redisposition also occurs based on on ALM decisions or market assessments. Cash flow per asset class during the year was as follows: – Property sales in Finnish operations resulted in a cash flow of
MSEK 514 (783).
– Net investments in shares amounted to MSEK 142 (net divestment: 3,591). Following the sharp reduction during the preceding year, a certain increase occurred during the year.
– Net investments in interest-bearing securities totaled MSEK 6,541 (10,875). Interest-bearing securities represent the pri- mary investment focus for the management of cash surpluses generated in the Group.
47
Notes
48
NOTES GROUP
NOTES TO THE TECHNICAL ACCOUNTS – PROPERTY AND CASUALTY INSURANCE OPERATIONS (MSEK)
Note 1 PREMIUMS WRITTEN 2003 2002
Gross Ceded Net Gross Ceded Net
Premiums paid and credited1) 38,904 –3,397 35,507 38,136 –4,591 33,545
Portfolio premiums 0 0 0 – –44 –44
Premiums written 38,904 –3,397 35,507 38,136 –4,635 33,501
1) Of which insurance agreements for direct property and casualty insurance written in:
Sweden 12,449 10,374
Rest of EEA 24,897 25,621
Other countries 1,556 1,611
38,902 37,606
Note 2 ALLOCATED INVESTMENT RETURN TRANSFERRED FROM THE NON-TECHNICAL ACCOUNT
The estimated return on the assets that correspond to the technical provisions is transferred from the finance operations (non-technical account) to the technical result. The return is estimated on the basis of the net of average technical provisions, excluding deferred acquisition costs, the technical result before the investment return has been added and average balances outstanding. The interest rates used in the calculation for each currency match the interest rate for government bonds with a maturity that approximates with the technical provisions. The transferred investment return is divided into two parts, one part that adds the annuity result by means of a reduction of paid claims and one part that is reported separately as the allocated investment return.
The following calculated interest rates have been used for the most important currencies: 2003 2002 Swedish kronor 4.8 5.0 US dollars 3.8 4.2 British pounds 4.9 5.2 Norwegian kroner 6.3 6.7 Danish kroner 4.4 4.7 Euro 4.1 4.4 Note 3 CLAIMS 2003 2002
Gross Ceded Net Gross Ceded Net
Claims costs attributable to current-year operations
Claims paid –11,502 405 –11,097 –16,156 2,055 –14,101
Operating expenses for claims adjustment –2,392 – –2,392 –2,486 – –2,486
Change in claims reserve for incurred and reported losses –6,306 491 –5,815 –7,776 437 –7,339
Change in claims reserve for incurred but not reported losses (IBNR) –7,118 469 –6,649 –4,208 569 –3,639
Claims-adjustment costs –71 – –71 –148 – –148
Claims costs attributable to prior-year operations
Claims paid –14,221 2,717 –11,504 –9,925 1,558 –8,367
Annuities –507 – –507 219 – 219
Claims portfolio 46 –346 –300 –50 60 10
Change in claims reserve for incurred and reported losses 8,118 –1,444 6,674 6,282 –1,076 5,206 Change in claims reserve for incurred but not reported losses (IBNR) 4,363 –663 3,700 3,259 –599 2,660
–29,591 1,629 –27,962 –30,989 3,004 –27,985
Paid insurance claims
Claims paid –25,723 3,122 –22,601 –26,081 3,613 –22,468
Annuities paid 389 – 389 493 – 493
Claims portfolio 46 –346 –300 –50 60 10
Operating expenses for claims adjustment –2,392 – –2,392 –2,486 – –2,486
–27,680 2,776 –24,904 –28,124 3,673 –24,451 Change in provision for claims outstanding
Change in claims reserve for incurred and reported losses 1,812 –952 859 –1,494 –639 –2,133
Change in claims reserve for incurred but not reported losses (IBNR) –2,755 –194 –2,949 –949 –30 –979
Change in claims provision for annuities –896 – –896 –274 – –274
Claims-adjustment costs –71 – –71 –148 – –148
–1,911 –1,147 –3,058 –2,865 –669 –3,534
49
NOTES GROUP
Note 3 CLAIMS, CONT. Technical provisions
There have been no changes in the valuation general principles for technical provisions.
The provision for annuities is valued in accordance with normal actuarial principles taking inflation and mortality into consideration, and discounted to take the antici- pated future investment return into account. To cover costs for the upward adjust- ment of annuity provisions required for the gradual reversal of such discounting, an anticipated return is added to annuity results. Claims reserves for incurred but not reported losses pertaining to annuities in Finland are discounted. The reserve amounts to MSEK 1,200. The non-discounted value is MSEK 2,000. See Note 2.
Note 4 OPERATING EXPENSES
2003 2002
Internal acquisition costs –2,695 –2,376
External acquisition costs1) –1,697 –1,657
Change in deferred acquisition costs, gross 33 –121 Administrative expenses, insurance –2,718 –2,580 Reinsurance commission and profit participation 256 393 Change in deferred acquisition costs, ceded 16 –17
Other technical income and expense 64 –457
Total –6,741 –6,815
Claims-adjustment costs –2,392 –2,486
Total cost of operations –9,133 –9,301
1)Of which, commissions in direct insurance –1,544 –1,493
Total operating expenses are allocated in the income statement as follows:
Asset-management costs –140 –68
Claims-adjustment costs –2,392 –2,486
Internal acquisition costs –2,695 –2,376
Administration costs, insurance –2,718 –2,580
Total –7,945 –7,510
Total operating expenses
Salaries and remuneration –2,812 –2,717
Social costs –611 –721
Pension costs –474 –317
Other personnel costs –299 –272
Total personnel costs –4,196 –4,027
Premises costs –536 –590
Depreciation –470 –323
Other costs –2,743 –2,570
Total –7,945 –7,510
Note 6 UNREALIZED GAINS ON INVESTMENT ASSETS
2003 2002
Shares and participations 1,383 221
Total 1,383 221
Note 7 INVESTMENT CHARGES
2003 2002
Asset management costs –140 –68
Other financial costs –51 –202
Interest costs, etc.
Other interest costs –4 –2
Exchange-rate losses, net – –31
Capital losses, net
Land and buildings –35 –12
Shares and participations –694 –2,864
Total –924 –3,179
Note 8 UNREALIZED LOSSES ON INVESTMENT ASSETS
2003 2002
Land and buildings –234 –162
Total –234 –162 Note 9 TAXES 2003 2002 Current tax –200 –461 Deferred tax –667 860 Total –867 399
Specification of current taxes
Non-Swedish units –193 –450
Current taxes pertaining to prior years –7 –3
Coupon tax – –8
Total –200 –461
Specification of deferred tax
Goodwill eliminated in Group –87 –202
Tax losses carry forward –807 484
Temporary differences 90 –46
Effects of non-Swedish companies’ reporting
in accordance with Swedish accounting principles 111 685
Untaxed reserves 26 –61
Total –667 860
Difference between reported tax and tax based on current Swedish tax rate:
Loss before taxes 2,702 –2,080
Tax according to current tax rate, 28 % –757 583
Current tax –87 –53
Permanent differences, net –6 21
Deferred tax pertaining to temporary
difference attributable to eliminated goodwill – –110 Losses in subsidiaries for which
deferred tax has not been booked – –17
Other –17 –25
Reported tax –867 399
Entered directly to shareholders’ equity – –
Entered directly to balance sheet – –5
Effective tax –867 394
The item deferred tax pertaining to eliminated goodwill has been booked against shareholders’ equity for 2003. The “current tax” item pertains to taxes expensed in branches. No corresponding current tax asset was booked for offsetting against non-Swedish tax in 2002 or 2003. However, the deduction for taxes attributable to 2002 or 2003 is expected to become utilizable in the future.
NOTES TO THE NON-TECHNICAL ACCOUNTS (MSEK) Note 5 INVESTMENT INCOME
2003 2002
Operating surplus, land and buildings
Rental income 229 236
Operating expenses – 90 –107
Dividend on shares and participations 99 467
Other financial income 50 73
Interest income, etc. Bonds and other
interest-bearing securities 2,056 2,380
Other interest income 475 417
Exchange-rate gains, net 79 –
Capital gains, net Bonds and other
interest-bearing securities 627 344