Tryg Forsikring adopt IFRS for the first time in the annual financial statements for the year ended December 31, 2005, which will include comparative financial statements for the year ended December 31, 2004. IFRS requires that Tryg Forsikring have developed accounting policies based on the standards and related interpretations that are effective on December 31, 2005. IFRS 1 also requires that those policies be applied to the opening IFRS balance sheets as of January 1, 2004 and the annual IFRS financial statements for the two years ended December 31, 2005 and 2004.
IFRS 4
In March 2004 the International Accounting Standards Board (“IASB”) issued IFRS 4 - phase I “Insurance Contracts (“IFRS 4”), which is a temporary standard until phase II is completed. This standard applies to all insurance contracts that an entity issues and to reinsurance contracts that it holds. Under IFRS 4 – phase I, an insurer is temporarily exempt from some requirements of other IFRS rules, including the requirement to consider the IFRS framework in selecting accounting policies for insurance contracts. IFRS 4 does not apply to all other (non-insurance contract-related) assets and liabilities of an insurer. All non-insurance items are recognized in accordance with the applicable IFRS guideline. Under IFRS 4 insurers may continue to use their local GAAP for their insurance contracts, subject to the following adjustments.
• prohibition of provisions for possible claims under contracts that are not in existence as of the reporting date, such as equalization provisions for future claims;
• gross presentation of insurance liabilities without offsetting them against related reinsurance assets;
• the requirement for a test for the adequacy of recognized insurance liabilities; • the requirement for an impairment test for reinsurance assets; and
• prohibition to de-recognize insurance liabilities in its balance sheet until they are discharged, cancelled or expire.
In addition, an insurer is permitted to change its accounting policies for insurance contracts only if, as a result, that Tryg Forsikrings financial statements present information that is more relevant and no less reliable, or more reliable and no less relevant.
New Danish FSA Accounting Rules
The Danish FSA has issued new accounting rules, that apply from January 1, 2005. These new Danish FSA rules attempt to convert the old Danish statutory rules to an accounting system for insurers that is more in line with the recognition and measurement regulations inherent in the IFRS Framework. The new rules are applicable to all insurance companies and include approximated fair value measurements for insurance contracts but do not include the recognition and measurement options available in IFRS. The new Danish FSA accounting rules regarding approximated fair value measurement are supported by changed regulations for insurance contracts, such as the requirement to discount reserves if discounting constitutes a material amount.
When Tryg Forsikring refers to Danish GAAP in the annual financial statements, Tryg Forsikring is referring to the rules in effect at the time, and not the new Danish GAAP effective as of January 1, 2005. Tryg Forsikring have adopted the new Danish FSA rules as local GAAP for the recognition and measurement of insurance contracts as required by IFRS 4 which had the following effects:
• eliminated equalization provisions; and
• presented the insurance provisions as gross liabilities and the related reinsurers’share as assets.
In addition, Tryg Forsikring have changed accounting policies to discount all provisions for claims and claims handling costs and the related reinsurers’ share of these liabilities to reflect the economic reality of the business and so provide more-relevant information as permitted by IFRS 4. For all provisions except for annuity provisions in Denmark, Tryg Forsikring also use a yield curve rather than a fixed rate to reflect a more relevant market interest rate.
Consolidated Financial Information as of December 31, 2004
The IFRS consolidated financial information as of December 31, 2004 has been prepared in accordance with the recognition and measurement provisions of those standards and interpretations issued and effective, or issued and early adopted, as of December 31, 2005.
The following discussion describes certain of Tryg Forsikrings income statement items and balance sheet line items under both Danish GAAP and IFRS. The following discussion will also describe the principle differences between Danish GAAP and IFRS, and provides a set of comparative IFRS data and information, including explanation of the main differences and reclassifications that arise.
Impact on Profit and Shareholders’ Equity Resulting from the IFRS Implementation
The implementation of IFRS has resulted in certain reclassifications as well as adjustments to amounts recognized under Danish GAAP. The table below presents the effect on profit for the year ended December 31, 2004 as a result of implementation of IFRS. In the section “Tryg Forsikring 2004 comparative IFRS figures” Tryg Forsikring have included a detailed discussion of the reclassifications and adjustments affecting the income statement and balance sheet.
DKKm 2004
Profit for the year ended December 31 - Danish GAAP 1,471
A) Current-year effect of elimination of equalization provision 92 B) Change in provision for defined benefit pension plan in Vesta 47
C) Increase in claim handling costs -52
D) Net effect of discounting 9
E ) Tax on IFRS changes, including contingency funds -76
F ) Other, net -6
Profit for the year ended December 31 - IFRS 1,485
Shareholders’ equity December 31 - Danish GAAP 6,750
A) Equalization provision 1,411
B) Defined benefit pension plan in Vesta -347
C) Claims handling costs -502
D) Discounting 708
E) Tax on IFRS changes, including contingency funds -1,043 F) Other items, including employee benefits, etc -192
G) Dividend 650
Shareholders’ equity December 31 – IFRS 6,735
Shareholders’ equity January 1 – IFRS 6,078
Profit for the year ended December 31, 2004 in accordance with IFRS 1,485 B) Actuarial gains and losses on pension obligation -111
E) Tax on equity entries 33
G) Dividend paid -50
Shareholders’ equity December 31 - IFRS 7,435
A) Equalization provision represents amounts reserved to equalize fluctuations in future profits for areas which historically have been subject to substantial random fluctuations. For the majority of these provisions, their use to offset claims can only occur if the relevant losses exceed a predetermined size. In periods where such claims occur, the reserves are utilized as claims are made. Under Danish GAAP this provision was accounted for under change in the equalization provisions. Under IFRS equalization provisions are not permitted and are therefore adjusted to shareholders’ equity as of January 1, 2004. The amount reflected in the reconciliation of profit is the change in equalization provisions from January 1, 2004 to December 31, 2004 under Danish GAAP.
B) The measurement of Tryg Forsikrings defined benefit pension plan in Vesta under Danish GAAP was based on an actuarial calculation of the value of future benefits payable under the scheme using assumptions related to long-term economic developments. According to IFRS, the benefit plan liabilities are measured based on current discount rate assumptions relevant on the balance sheet date. According to IAS 19, Tryg Forsikring has retrospectively from January 1, 2004 applied the new option to recognize the actuarial gains and losses in full in the period in which they occur in shareholders’equity. Under Danish GAAP these were recognized in the income statement.
C) Under Danish GAAP, claims handling costs were expensed as incurred and no provision for handling the claims related to the claims reserves were made. Under IFRS, the provision for claims include a provision to cover direct and indirect claims handling costs in connection with servicing claims outstanding at the balance sheet date.
D) Under Danish GAAP, Tryg Forsikring discounted provisions related to workers’ compensation. Tryg Forsikring has elected to also discount all other claims provisions as allowed under IFRS. As a result, initial changes in claims provisions, changes in discount rates or changes in duration of claims provisions could have positive or negative effects on earnings.
E) The change in tax is due to the adoption of IAS 12 “Income Taxes” (“IAS 12”) regarding the recognition of deferred tax provisions for contingency funds, the tax effect of all IFRS adjustments and the tax effect of including in shareholders’ equity actuarial gains and losses on the defined benefit pension plan.
F) Under Danish GAAP, employee benefits and bonus and premium rebates to certain affinity groups are expensed as incurred. Under IFRS, these amounts are recognized as liabilities.
G) Under Danish GAAP, proposed dividends were recognized as a liability. Under IFRS, dividends are not recognized as a liability until approved by the Company´s shareholders.
Because Tryg Forsikring under Danish GAAP measured all investment assets at fair value, no differences in 2004 profits or shareholders’ equity were recognized when implementing IFRS.
Tryg Forsikring 2004 Comparative IFRS Figures
The following is a reconciliation of the significant differences on a line item basis in Tryg Forsikrings consolidated financial statements between Danish GAAP and IFRS as of and for the year ended December 31, 2004.
Notes DKKm IFRS
Income Statement
1 Gross earned premiums 15,273 -7 15,266
2 Earned premiums, net of reinsurance 13,777 5 13,782
3 Technical interest, net of reinsurance 495 -160 335
4 Claims incurred, net of reinsurance -9,645 -215 -9,860
5 Change in other insurance provisions, net of reinsurance -25 25 -
6 Bonus and premium rebates -151 -11 -162
7 Total insurance operating expenses, net of reinsurance -2,894 499 -2,395
8 Change in the equalization provisions -92 92 0
Technical result 1,465 235 1,700
Investment Activities
9 Income from investment assets 1,041 -25 1,016
10 Unrealized gains or losses on investment assets 235 -108 127
Charges relating to investment assets -94 - -94
Exchange rate adjustments -7 3 -4
1,175 -130 1,045
Technical interest transferred to insurance activities -634 -4 -638
Other ordinary expenses -6 - -6
Profit before tax 2,012 101 2,113
11 Tax -477 -76 -553
Profit on continued business 1,535 25 1,560
Loss on discontinued and divested business -64 -11 -75
Profit for the period 1,471 14 1,485
Return on investment activities before transfer to insurance activities
Year Ended December 31.2004 Danish
GAAP(1)
IFRS