NOCIÓN DE CAPITAL

Accounting principles

The annual report has been prepared in accordance with the Annual Accounts Act, the Swedish Annual Accounts Act for Insurance Companies (ÅRFL) and the Swedish Financial Supervisory Authority’s regulations. In accordance with ÅRFL, If P&C Insurance Holding Ltd is regarded as a financial hold- ing company. Accordingly, the consolidated accounts are pre- pared in accordance with the Annual Accounts Act for Insur- ance Companies, while the parent company accounts are pre- pared in accordance with the Annual Accounts Act.

New recommendations from the Swedish Financial Accounting Standards Council (SFASC) that became effective in 2003 are: RR 24 Investment properties

RR 25 Reporting by segment

RR 26 Events after the accounting date

RR 27 Financial instruments: Disclosure and classification RR 28 Government subsidies.

The new recommendations did not have a material effect on the Group’s income statements and balance sheets.

ÅRFL and the SFASC recommendations contradict each other with respect to the reporting of land and buildings. According to ÅRFL, investment assets classified as land and buildings may be reported at current value without restriction regarding whether these assets are held for generating rental income/value growth or whether the premises are used for the company’s own operations. According to the SFASC recom- mendations, land and buildings are categorized depending on their use. The reporting of buildings used for the company’s own operations is governed by RR 12/IAS 16 Tangible Fixed Assets, according to which such buildings must be reported at acquisition value less accumulated depreciation and any write-downs. The reporting of land and buildings held solely to generate rental income/value growth is governed by RR 24/IAS 40 Investment properties. With respect to this asset category, IAS enables a choice between reporting at current value or at acquisition value less depreciation. In SFASC’s adap- tation to Swedish law of the international recommendation, the possibility of reporting at current value has been omitted, since ÅRL does not include such a possibility.

CONSOLIDATED ACCOUNTS

The consolidated accounts include the parent company, If P&C Insurance Holding Ltd, and all companies in which the parent company directly or indirectly owns more than 50 percent the votes for all shares or in some other manner has a controlling interest. Associated companies are reported in the consolidated accounts in accordance with the equity method. Associated companies are defined as companies in which If P&C Insurance Holding Ltd has a substantial ownership interest and a share-

holding corresponding to at least 20 percent of the voting rights for all shares in the company concerned.

The consolidated accounts have been prepared in accordance with the Swedish Accounting Standards Council’s recommen- dation RR 1:00. Acquired companies are reported in accor- dance with the purchase method, which means that assets and liabilities are entered in the acquiring company’s accounts at the acquisition values determined in accordance with an established acquisition analysis. In connection with an acquisition, assets and liabilities in the acquired company undergo a market valua- tion. If the acquisition value of shares in a subsidiary exceeds the established current value of the acquired assets and liabili- ties, the difference is entered as consolidated goodwill. The amortization period for goodwill is determined after individual assessment and may not exceed 20 years.

When foreign subsidiaries are consolidated, the locally estab- lished income statements and balance sheets are translated to take into account differences between local accounting prin- ciples and the accounting principles applied in the Group. These translations mainly comprise adjustments for unrealized value changes in investment assets and derivatives, deferred acquisition costs, the provision for risks outstanding and inter- est allocated to the technical result.

Outside Sweden, any equalization or catastrophe reserves governed by tax or business laws are reclassified as untaxed reserves on consolidation. In the consolidated accounts, these reserves are distributed among shareholders’ equity and de- ferred tax liabilities.

In 1999, Storebrand and Skandia agreed to form a joint ven- ture and transfer their portfolios of property and casualty busi- ness to If P&C Insurance Ltd. In exchange, the two owning companies received shares in the parent company, If P&C Insurance Holding Ltd. The merger is reported in the consoli- dated accounts applying joint venture accounting based on the carryover method. According to the carryover method, the joint venture unit assumes the assets and liabilities transferred from the owners at book value and then continues to operate the business that has been taken over. As a result of this account- ing procedure, no goodwill arose in the If P&C Insurance Holding Ltd Group. Goodwill based on net assets is reported in the subsidiary If P&C Insurance Ltd, since in formal terms the assets from Storebrand were transferred at a value that exceeded the previous book value. Since the subsidiary If P&C Insurance Ltd has a right to make a tax deduction for the amortization on the goodwill based on the net assets, a value has arisen in the Group, reported in the consolidated accounts at a rate of 28 percent of the nonamortized goodwill amount in the subsidiary, which represents a deferred tax asset.

According to an agreement that Skandia and Storebrand jointly signed with Sampo during 2001, Sampo’s property and

casualty insurance business was transferred to If in January 2002 in return for payment in the form of shares in If P&C Insurance Holding Ltd and a small proportion of cash. In the consolidated accounts, the merger is reported in accordance with the purchase method.

TRANSLATION OF THE ACCOUNTS

OF FOREIGN SUBSIDIARIES AND BRANCHES

Foreign Group companies and branches are classified as inde- pendent operations. In accordance with SFASC’s Recommen- dation RR 8, the balance sheets of foreign Group companies and branches are translated to Swedish kronor (SEK) in accor- dance with the current method, which means that balance sheets are translated at year-end exchange rates, while income statements are translated at the average rates for the period in which the item arose. Any translation difference arising from shareholders’ equity being translated at year-end rates that differ from the rates used at the beginning of the year is entered directly in shareholders’ equity. If hedges certain investments in foreign net assets by arranging forward contracts in the curren- cies concerned. These contracts are valued at year-end exchange rates and any translation differences that arise are entered directly in shareholders’ equity.

INTANGIBLE ASSETS

Intangible assets, including goodwill, are valued at acquisition value when they are entered in the balance sheet for the first time. Acquisition value includes both the purchase price and expenses directly attributable to the acquisition. Assets are included at historical acquisition value less accumulated amorti- zation according to plan. This is based on the asset’s assessed economic life. The annual amortization rate is 20 percent for rights and similar assets. Goodwill is amortized at a rate of 5–10 percent per year.

Costs for the internal development of intangible assets are valued at acquisition value based on the direct and indirect expenses for the development (programming and testing) of computer systems, etc, that are expected to result in future eco- nomic benefits for the company. Only those costs connected to new development and major system changes that are approved in the appropriate manner by the board are capitalized. Capital- ized development costs are amortized as of the date when the asset is put into production and over its estimated period of use. The periods of use are determined individually by asset and may not exceed ten years.

TANGIBLE ASSETS

Tangible assets are valued at acquisition value. Acquisition value includes not only the purchase price but also expenses directly attributable to the acquisition. Machinery and equipment are reported at historical acquisition value, less depreciation accord- ing to plan. These deductions are based on the historical acqui- sition value and the estimated economic life of the asset con- cerned. Depreciation is applied at annual rates of 20–33 percent. In the consolidated financial statements, acquisitions of assets financed through leasing agreements but for which If is respon-

sible for the financial risks and benefits associated with owner- ship (financial leasing) are reported as tangible assets at acquisi- tion value. The financial obligation resulting from leasing agreements is reported as a liability and this liability is calculat- ed on the basis of future lease payments discounted to present value using the interest rate specified in the contracts. Machin- ery and equipment are entered at the historical acquisition value, less accumulated depreciation according to plan, based on the useful life of the assets. Current lease payments are divided among amortization and interest expense.

Depreciation period

Office equipment 3–10 years

Computer equipment 3–5 years

Vehicles 5 years

Other fixed assets 4–10 years

WRITE-DOWNS

If, at the reporting date, there is any indication that the value of a tangible asset or an intangible asset has declined, the recover- able value of the asset is calculated. The recoverable value is the higher of the asset’s net sales value or useful value. If the estab- lished recoverable value is less than the book value and this is adjudged to be a permanent change of value, the asset is written down to its value in use. If, at a later date, a higher value is established, a previous write-down may be reversed.

VALUATION OF INVESTMENT ASSETS

Investment assets are reported in their original currencies and are stated at current value, accrued acquisition value or the lower of cost or current value (LCM), depending on the type of asset in question. Realized gains and losses consist of the differ- ence between acquisition cost and the selling price. Unrealized changes in value are defined as the difference between acquisi- tion value and current value. If an asset is sold, previously unre- alized changes in value are reversed. The valuation principles used for the various asset classes are described below.

Purchases and sales of securities are accounted for on the transaction date. The counterparty’s receivable/liability is reported gross between the transaction date and the settlement date under the “Other assets” or “Other liabilities” headings. Business transactions involving receivables/liabilities reported net via clearing organization are entered in the balance sheet in a net amount per counterparty.

Equities • Equities are stated at current value. Current value

refers to the sales value on the accounting date less the estimat- ed cost of selling. In the case of shares listed on an authorized stock exchange or marketplace, the sales value normally refers to the closing price paid on the accounting date. Unlisted securities are reported at current value and valued as a rule in accordance with the principles issued by EVCA (European Private Equity & Venture Capital Association), which normally mean that the investment is valued at acquisition value, unless something of material importance occurs that shows that this value is not representative. For example, new share issues or partial sales to an independent party at a changed value usually require a new valuation. Significantly weaker earnings or an

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ACCOUNTING PRINCIPLES

event that may be assumed to significantly and permanently weaken the investment value also necessitate a new valuation. The value of private equity funds is based on the fund man- ager’s valuation, which is in turn based on principles applied by EVCA, BVCA or another relevant institution. Unrealized gains reported in a manner that has a positive effect on equity are entered in a reserve for unrealized gains.

Land and buildings • Land and buildings are valued at current

value. Current value corresponds to the net sales value and is established annually by independent appraisers applying recog- nized and generally accepted valuation methods. Accepted methods are the location-price method (current prices paid for comparable properties in the same location/area) or cash flow models applying current market interest rates for establishing the present value of the particular property. Since the valuation is based on current value, properties are not depreciated. Un- realized gains credited to equity are entered in a reserve for unrealized gains.

Interest-bearing securities • Interest-bearing securities are

valued at accrued acquisition value, whereby the difference between their acquisition and redemption value is accrued in the income statement over their remaining term. Realized changes in value are entered in the income statement.

Derivatives • Equity and currency derivatives are stated at cur-

rent value, while fixed-income derivatives are stated at the lower of cost or current value (LCM) on the accounting date. All derivative transactions are valued individually. Hedge account- ing is applied for certain fixed-income derivatives and currency derivatives raised in order to adjust the duration of issued sub- ordinated loans to the weighted duration of technical liabilities and for hedging net investments in foreign operations. Unreal- ized values of derivatives used to adjust the duration of subor- dinated loans are reported off balance sheet with their effects. Currency forward contracts that hedge foreign net investments are reported directly against equity in the balance sheet, with their realized and unrealized effects.

RECEIVABLES

Receivables are reported in the amount expected to be received. Provisions for doubtful receivables are normally posted on the basis of individual valuations of the receivable. Receivables per- taining to standard products are valued on the basis of con- firmed losses during prior periods. No need for group-based reserves for sector and region-specific credit losses has been identified.

RECEIVABLES AND LIABILITIES IN FOREIGN CURRENCIES

Assets and liabilities of individual companies and branches denominated in foreign currencies are translated to SEK at year- end exchange-rates. Unrealized exchange-rate differences aris- ing are reported net in the income statement as foreign exchange gains/losses. The currency forward contracts used to hedge the exchange-rate exposure in the balance sheet are booked at current value and, according to RR 8, the effects are

reported in the income statement among exchange-rate gains/ losses and interest income/expense.

Income statements in foreign currencies are translated at the average exchange rate during the month they were reported. The exchange rates used for the Group’s principal currencies are presented in the table below:

EXCHANGE RATES (SEK)

When translating balance sheet items in foreign currencies into SEK, the following exchange rates were used at December 31:

Year-end Currency 2003 2002 US dollars 7.19 8.71 British pounds 12.88 14.03 Danish kroner 1.22 1.23 Euro 9.08 9.14 Norwegian kroner 1.08 1.26

For a more detailed description, see the section called “Trans- lation of foreign subsidiaries and branches.”

SOLVENCY CAPITAL

Solvency capital comprises shareholders’ equity, untaxed reserves, subordinated loans and surplus/deficit values in investment assets not reported in the balance sheet. Deferred tax liabilities and assets that affect equity in the accounts are reversed when calcu- lating solvency capital.

Since equities and real estate are reported at current value, shareholders’ equity includes the difference between the cur- rent value of the assets and their acquisition value, i.e. the sur- plus value of these assets. Surplus value is reported as a reserve for unrealized gains, after deduction of deferred tax, and is included in restricted equity.

Finally, solvency capital includes non-booked surplus value attributable to interest-bearing securities and fixed-income derivatives. The surplus value comprises the difference between the assets’ current value and accrued acquisition value.

VALUATION OF TECHNICAL PROVISIONS AND RECOGNITION OF PREMIUMS

Technical provisions consist of the provision for unearned pre- miums and unexpired risks, together with the provision for claims outstanding, and correspond to the liabilities under insurance contracts.

Premiums written • For property and casualty insurance and

reinsurance, written premiums are reported according to the maturity principle. This entails that written premiums are reported in the income statement when premiums fall due for payment.

Provision for unearned premiums and unexpired risk • The pro-

vision for unearned premiums is intended to cover anticipated claims costs and operating expenses during the remaining term of insurance contracts in force.

In property and casualty insurance and reinsurance, the pro- vision for unearned premiums is normally calculated on a strict- ly proportional basis over time, i.e. is calculated on a pro rata temporis basis.

In the event that premiums are judged to be insufficient to cover anticipated claims costs and operating expenses, the pro- vision for unearned premiums is required to be augmented by a provision for unexpired risks. Calculation of the provision for unexpired risks must also take into account installment premi- ums not yet due.

Provision for claims outstanding • The provision for claims out-

standing is intended to cover the anticipated future payments of all claims incurred, including claims not yet reported to the company (the “IBNR” provision). The provision for claims outstanding includes claim payments plus all costs of claim settlements.

The provision for claims outstanding in direct property and casualty insurance and reinsurance may be calculated with the aid of statistical methods or through individual assessments of individual claims. Often a combination of the two methods is used, meaning large claims are assessed individually while small claims and claims incurred but not reported (the IBNR provi- sion) are calculated using statistical methods. The provision for claims outstanding is not discounted, with the exception of pro- visions for vested annuities, which are discounted to present value using standard actuarial methods, taking anticipated infla- tion and mortality into account.

DEFERRED ACQUISITION COSTS

Costs of sales that have a clear connection with the writing of insurance contracts are reported as an asset, namely as deferred acquisition costs. Costs of sales pertain, for example, to operat- ing expenses such as commission, marketing costs, salaries and overheads for sales personnel, which vary according to, and are directly or indirectly related to, the acquisition or renewal of insurance contracts. The capitalized cost is deferred in a manner that corresponds to the amortization of unearned premiums. The amortization period ordinarily does not exceed 12 months.

PENSION COSTS AND PENSION COMMITMENTS

Pension obligations in the If Group comprise pension plans in several national systems governed by local collective bargaining agreements and social insurance legislation. The reporting of pension costs and obligations within If complies with the princi- ples applied locally in each country. The reporting principles for pensions in Sweden, Denmark and Finland resemble each other, in that the pension cost consists of the premium paid for secur- ing pension obligations via insurance in a life insurance compa- ny. In Norway, however, the method for reporting pensions complies with local principles formulated on the basis of rules established for American companies (US GAAP). This entails that the booked cost of defined-benefit pensions is calculated on the basis of assumptions regarding pensionable income at the retirement age and also taking into account the financial conse- quences arising from the pension plan’s assets and obligations.

REPORTING OF RESULTS

Pretax result • The pretax result consists of the technical result