alm. brand implementation of the rules has been postponed from 1 january 2014 to (probably) early...

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Alm. Brand A/S · Midtermolen 7 · DK-2100 Copenhagen Ø · (CVR) no. 77 33 35 17

Risk and Capital ManagementAlm. Brand

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Contents

1 INTRODUCTION 3

2 GROUP RISK ORGANISATION 4

2.1 Risk reporting to the board of directors and management 5

3 CAPITAL MANAGEMENT 6

3.1 Capital target 6

3.1.1 ORSA/ICAAP 8

3.2 Calculation of individual solvency need and aggregate capital requirement 8

4 THE ALM. BRAND INSURANCE GROUP 11

4.1 Individual solvency need 11

4.2 Insurance risk 12

4.2.1 Non-life Insurance risks 12

4.2.2 Life insurance risks 15

4.3 Credit risk 15

4.4 Market risk 16

4.5 Liquidity risk 21

5 ALM. BRAND BANK 22

5.1 Individual solvency 22

5.2 Credit risk 23

5.2.1 Direct banking activities 23

5.2.2 Derivative agreements 28

5.3 Market risks 29

5.4 Liquidity risk 33

5.5 Supervisory diamond 36

6 OTHER RISKS FACING THE GROUP 37

6.1 Operational risks and control environment 37

6.2 Other business risks 38

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1 Introduction

The aim of the Risk and Capital Management Report is to provide insight into Alm. Brand A/S’ risk and capital management. This

report identifies the principal risks Alm. Brand faces.

The report outlines the structure of the organisation with respect to risk management and then goes on to explain Alm. Brand’s

capital management. The principal risks facing the group’s individual business units and the group overall are reviewed, including

insurance, credit and market risks.

The capital target is based on expectations regarding future capital requirements according to Solvency II (insurance companies)

and Basel III (banks). The final wording of the capital requirements may cause the group’s capital target to be changed. The capital

requirement calculation is based on the methodologies laid down by the authorities and, as far as Non-life Insurance is concerned,

on the application of an internal capital model. Unless otherwise indicated, all figures in the report are stated as at 31 December

2012.

The year 2012

The financial markets were highly volatile in 2012. The growth scenario continued to have elements of both good and bad in 2012.

Leading central banks have taken entirely new approaches in their efforts to stabilise the financial markets, and they seem to be

succeeding.

Non-life insurance operations generated a pre-tax profit for the year of DKK 853 million, against DKK 460 million in 2011. The

strong profit uplift was essentially due to lower claims expenses.

Alm. Brand Liv og Pension A/S posted an aggregate pre-tax profit of DKK 90 million compared to DKK 137 million in 2011. In

2012, the full risk premium was booked to equity for all contribution groups except one, for which only a partial risk premium was

booked.

Alm. Brand Bank posted a pre-tax loss of DKK 519 million in 2012, against a loss of DKK 1,154 million in 2011. The loss for the

year remained strongly influenced by major impairment writedowns and credit-related value adjustments resulting from the dif-

ficult market conditions.

Upcoming legislation

Solvency II is the set of rules that will apply to the group’s insurance operations in future. These rules will change the calculation of

capital requirements in a number of ways, including the calculation of provisions for life insurance companies. The final wording

of the requirements for calculation of provisions under Solvency II is a key determinant of the extent of the capital requirements, as

the distribution among provisions, capital base and buffer has a major impact on this.

The implementation of the rules has been postponed from 1 January 2014 to (probably) early 2016, but until then a transition

phase may be introduced to gradually phase in Solvency II in Danish reporting practice. In recent years, Alm. Brand has been pre-

paring to meet all the requirements Solvency II is expected to comprise. The industry is in ongoing discussions with the Danish FSA

about Solvency II. Judging from the calculation assumptions presently known, it is expected that the Solvency II requirement for the

group overall will not be significantly different from the current individual solvency requirement.

The Basel III rules are expected to introduce a requirement for an equity ratio of 10.5% of risk-weighted assets, including a capital

conservation buffer. In addition, Basel III is expected to introduce a requirement for an additional 2.5% countercyclical buffer to pro-

tect the bank against future cyclical downturns. These requirements are not expected to come into force until 2019 at the earliest.

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2 Group risk organisation

The Alm. Brand Group assumes a number of risks, including the highly different risks associated with operating its various business

areas and the more uniform financial risks related to managing its liquidity and investment strategy.

Managing the Alm. Brand Group’s risk exposure is a key executive focus, because uncontrolled developments in different risks may

have a substantial impact on the group’s financial performance and solvency and hence its future business potential.

The board of directors of each individual subsidiary defines and approves the overall policy for the company’s acceptance of risks,

and the board of directors determines the overall limits for such risks and the required reporting. On this basis, the individual

management boards determine each subsidiary’s operational risk management.

The statutory audit committee supports the board of directors, among others, in the risk and capital management work. The audit

committee is composed of three members of the board of directors of the relevant group company.

The figure below shows the group’s organisation.

Alm. Brand has set up a group risk committee to ensure coordination and uniformity in the group companies with respect to

accepting, calculating and reporting risk. In addition, a group investment committee has been set up to ensure that the group’s

investments and market risks are within the limits defined by the board of directors and the policies of the individual companies.

A compliance function has been established at group level to ensure that Alm. Brand complies with applicable legislation, regula-

tions, internally defined rules and guidelines as well as ethical standards.

Board of directors

Management board

Organisation

Audit committee

Management committee

Internal audit

Risk committee

Compliance

ORSA/ICAAPRisk reports

Recommandations

Follow-upMonitoring

Businessprocesses

PoliciesGuidelines

Investment committee

Operational risk forum

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Independently of the controls defined, the internal auditors conduct regular independent reviews of the group’s control procedures

and monitor compliance with management’s guidelines.

Alm. Brand has a forum for operational risk, which collates information about operational events in Alm. Brand Forsikring and Alm.

Brand Bank. Participating in this forum are Risk Management, Compliance and Internal Audit.

Business risks are managed in the individual business areas. The management of each business area is hence responsible for identi-

fying, quantifying and monitoring all risks relevant to their business area and for defining and implementing relevant risk manage-

ment controls and strategies.

In addition, an approval committee for financial products has been set up. This committee is responsible for ensuring that business

procedures, processing routines, etc. are in place before new products or activities are implemented, thereby helping to mitigate

operational risk.

2.1 RISK REPORTING TO THE BOARD OF DIRECTORS AND MANAGEMENT

Alm. Brand has laid down processes for current reporting of risks and risk management to the management boards and boards of

directors of the group and the relevant subsidiaries. Risk reporting is an integral part of the current management reporting, keeping

the management and board of directors of Alm. Brand A/S and of each group subsidiary regularly informed about developments

in lending, premiums and claims records, market risks, risk allocation, performance, etc. The measurement is carried out in various

IT systems depending on the specific business and risk area, and the resulting data is then ready to go through one or more stages

before becoming part of the reporting.

Current identification and monitoring of market risks take place in interaction between the individual business areas and the group

risk management department, which has a coordinating responsibility for the management of market risk at group level. The risk

management department performs daily market risk calculations and verifications for the individual business areas.

Interest rate risk is calculated at different relevant aggregation levels, such as portfolio level, company level and group level, and

compared to relevant benchmarks. For departments trading in interest rate options, the maximum percentage loss in the event of a

given interest change is also measured.

A part of the equity portfolio is unlisted, meaning that these equities are not marked to market on a regular basis. Valuation of the

equities is based on the net asset value calculated on the basis of the company’s most recent financial statements. Illiquidity also

characterises the pricing of mortgage deeds, which are therefore priced using a mark-to-model approach. Where sufficient liquidity

is deemed to exist in the market, the most recent, publicly available trading price may be applied.

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The purpose of capital management is to ensure a healthy business. This section describes the capital management and capital

requirement calculation method applied by the Alm. Brand Group and shows the calculation of the individual solvency need and

the adequate capital base.

3.1 CAPITAL TARGET

The capital target reflects management’s goal that the group’s capital resources should be sufficiently robust to absorb a number

of external events or highly adverse developments in the financial markets. The capital target means that Alm. Brand aims to hold

capital at a level substantially higher than the statutory minimum capital requirements expected to be laid down in Solvency II and

Basel III.

The group’s overall capital resources and capital target

The capital target of the Alm. Brand Group is defined as the sum of the capital targets of the three subsidiaries less a diversification

effect of DKK 300 million.

The table below shows Alm. Brand A/S’ capital base and capital targets:

The difference between the aggregate capital base and the capital target of the Alm. Brand Group was DKK 886 million at 31 Decem-

ber 2012. On 26 February 2013, Alm. Brand A/S contributed DKK 700 million to Alm. Brand Bank. The capital injection is made

to ensure that the bank has adequate capital excess coverage and will be used to repay DKK 430 million of the state-funded hybrid

core capital, which currently totals DKK 856 million. The group will carefully monitor the capital excess coverage in the upcoming

periods and, when deemed prudent, the outstanding amount of the state-funded hybrid core capital will be repaid in full or in part.

The capital target basically consists of two parts: the statutory minimum capital requirement/solvency need ensuring that custo-

mers can withdraw their money and an extra capital buffer on top of the statutory requirement ensuring that the company can

continue as a going concern. At 31 December 2012, the excess relative to the statutory capital requirement amounted to around

3 Capital management

CAPITAL TARGET DKKm CAPITAL BASE DKKm

Non-life Insurance (40% of gross premiums) 1,946 Consolidated equity 4,506

Life Insurance (9% of life insurance provisions) 1,065 Intangible assets 0

Alm. Brand Bank Tax assets -665

(3% higher than individual solvency need or 13%) 1,858 Supplementary capital 1,654

Capital tied-up in minority interests 40

Diversification effect -300

Total capital target 4,609 Total capital base of the group 5,495

Statutory capital requirement of the group at end-2012 3,085

Excess relative to statutory capital requirements 2,410

Excess relative to internal capital target 2012 886

2011 160

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DKK 1.5 billion for the group overall and around DKK 1.2 billion for the insurance group, making for an aggregate capital target

of around DKK 2.7 billion including the diversification effect. At 26 February 2013, Alm. Brand Forsikring made an extraordinary

dividend distribution of DKK 500 million to the parent company Alm. Brand A/S. Alm. Brand Liv og Pension and Alm. Brand Bank

had capital excess coverage relative to the capital target of DKK 554 million and DKK 298 million, respectively, at 31 December

2012.

Capital target of the Non-life Insurance group

At year-end 2012, Alm. Brand Forsikring changed the method for calculating the individual solvency need. Until that point, the

individual solvency need was calculated on the basis of the standardised model for calculating SCR according to QIS4 with a few

adjustments. The new approach is also based on QIS4, but premium and reserve risk and natural catastrophes for all lines, except for

workers’ compensation and personal accident, are calculated using Alm. Brand’s internal capital model. The transition to the new

model means that the individual solvency need is reduced by DKK 118 million relative to the old model. The solvency requirement is

lower than the standardised model applying input from the capital model, as such input is based on Alm. Brand’s actual risk profile.

For that reason, the capital target is lowered relative to the level prevailing throughout 2012 from 45% of gross premiums to 40%

of gross premiums in Alm. Brand Forsikring. This equals a reduction of around DKK 215 million.

The capital target consists of a capital buffer added to the solvency capital requirement. As a result of this capital buffer of just

over DKK 1 billion. Non-life Insurance has, in addition to the prudence already comprised in the rules for calculating the solvency

capital requirement, calculated capital excess coverage sufficient to withstand a 1:200-year loss event without becoming insolvent.

The buffer is calculated based on diversification between the companies and application of input from the internal capital model in

a QIS4 standardised model.

There is uncertainty about the rules on individual solvency to be implemented in Denmark effective from end-2013. The new rules

may entail a requirement that all companies have to apply the Solvency II QIS5 standardised model in their calculation, but perhaps

it will also be possible to continue to apply an internal capital model for Non-life Insurance operations. If the Solvency II QIS5 stan-

dardised model is applied without input from the internal capital model, the defined capital target will still provide the Alm. Brand

insurance group with substantial excess.

The capital target of Alm. Brand Liv og Pension totalled 9% of life insurance provisions at 31 December 2012 but was lowered to

8.75% effective 1 January 2013. Focus is on risk in the form of the volatility of provisions rather than calculating the capital target

based on premium levels. In step with outflow on the portfolio’s high guarantees and inflow of new insurances on low guarantees,

the risk on the company’s portfolio will diminish. Alm. Brand Liv og Pension is therefore intending to adjust its capital target, lowe-

ring it to 8% in 2016 by way of a gradual reduction of 0.25 of a percentage point per year.

The capital target of Alm. Brand Liv og Pension is considerably higher than the SCR but has been fixed so as to ensure the desired

excess relative to the SCR under a number of specific stress scenarios. This means that Alm. Brand Liv og Pension will be able to

withstand interest rate fluctuations without customer returns being unduly reduced through forced sales or an unnecessary and

expensive hedging strategy.

Capital target of Alm. Brand Bank

The capital target of Alm. Brand Bank has been fixed at an excess cover corresponding to a solvency ratio of at least 13.0, always

provided that the target must be at least 3 percentage points higher than the individual solvency need. The capital structure will be

based primarily on equity after repayment of the outstanding state-funded hybrid core capital, which will take place as and when

possible. In doing so, Alm. Brand will be abreast of the future requirements of the Basel III rules in terms of capital adequacy.

The capital target of Alm. Brand Bank has been calculated based on management’s desire to consistently maintain an excess cover

relative to both the individual solvency need and the statutory minimum requirement of 8% of risk-weighted assets. Several capital

elements, e.g. equity, hybrid core capital and subordinated capital, contribute to meeting the capital target.

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3.1.1 ORSA/ICAAP

Important elements enabling the board of directors to ensure compliance with future capital requirements are the ORSA report for

Alm. Brand Forsikring and Alm. Brand Liv og Pension and the ICAAP report for Alm. Brand Bank. The reports keep the board of

directors up to date on the relevant company’s capital and risk issues.

In connection with the adoption of the budget for the upcoming year, the group’s management considers whether the current capi-

tal base is adequate to ensure the desired strategic flexibility. This is done on the basis of sensitivity and scenario analyses. The choice

of scenario is based on the areas assessed to have the greatest impact on the group. The scenarios for 2013 are outlined below:

SCENARIOS IN ALM. BRAND

1. Decline in interest rates (100 bps) and decline in equities (15%)

2. Spread widening (100 bps)

3. Decline in interest rates (100 bps), decline in equities (15%) and spread widening (100 bps)

4. Credit scenario for mortgage deeds (unemployment increases by 20%, residential housing prices decline by 9% and com-

mercial property prices decline by 20%)

5. Credit scenario for other loans and advances (gross collateral security declines by 10% and 5% of the healthy portfolios are

marked for objective evidence of impairment)

6. All scenarios (3+4+5) at the same time

The above scenarios are calculated each month and submitted to the board of directors of Alm. Brand on a quarterly basis. Each

subsidiary prepares its own scenario analyses, which are presented to that subsidiary’s board of directors at both company and

group level. These scenarios include insurance risks and operational risks. The scenarios are also used in the ongoing monitoring

of risk appetite.

3.2 CALCULATION OF INDIVIDUAL SOLVENCY NEED AND AGGREGATE CAPITAL REQUIREMENT

The boards of directors of Alm. Brand’s subsidiaries are responsible for identifying and quantifying the principal risks which the

company currently faces or may face in future. Moreover, the board of directors approves the results and methodology relative to the

calculation of the capital requirement.

The management board is responsible for ensuring that instructions from the board of directors are actually implemented in the

company and for ensuring that the board of directors is informed about significant changes in the assumptions underlying the

capital requirement or the amount thereof.

The aggregate capital requirement is calculated for all of the group’s companies subject to supervision. Responsibility for calculating

the capital need per subsidiary rests with the individual subsidiaries, while overall modelling responsibility rests with the group risk

management department. This approach ensures that risks are assessed where the relevant expertise is available. The risk manage-

ment department supports this process in all subsidiaries by calculating the market risk of the assets and subsequently by consolidat-

ing the capital need of the subsidiaries at group level.

The internal audit department is responsible for performing an independent evaluation of the calculation of the individual solvency

need.

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The table below shows how the different risks are assessed by Alm. Brand.

Calculation of the capital requirement and individual solvency need

Each individual company’s aggregate capital requirement is calculated as the higher of the minimum capital requirement, the

solvency requirement and the adequate capital base/the individual solvency need. The aggregate capital requirement of the Alm.

Brand Group is calculated as the sum of the aggregate capital requirements of all subsidiaries. The figure below shows the capital

bases and capital requirements of each subsidiary.

The aggregate capital requirement of the Alm. Brand Group is DKK 3,085 million with a corresponding capital base of DKK 5,495

million.

6,000

5,000

4,000

3,000

2,000

1,000

0

Life Insurance Non-life Insurance Insurance group Banking, parent Banking group A/S group

Capital requirement

Capital base

RISKS Insurance Banking group Alm. Brand Alm. Brand

group Methodology Group Group

QIS4 described by Internal models/ Internal

the Danish FSA methodology assessments

PILLAR 1

Insurance X X

Credit X

Market X X

Operational X X

PILLAR 2

Liquidity X

Growth in business volume X

Control environment X

Strategic X

Reputational X

Settlement X

External X

Earnings X

Concentration X X

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Composition of capital in Alm. Brand

In light of the strong insurance performance in 2012, the group’s capital base has been lifted compared with 31 December 2011.

See the table below. The composition of capital is largely unchanged, although the supplementary capital has declined by DKK 100

million due to the bond maturity effect on the amount includable.

Capital base of Alm. Brand Bank and the Alm. Brand Group

ALM. BRAND BANK ALM. BRAND GROUP

DKKm 2011 2012 2011 2012

Equity/Core capital (Tier 1) 1,093 996 4,206 4,506

Proposed dividends 0 0 0 0

Intangible assets 0 0 0 0

Deferred tax assets -459 -287 -600 -437

Core capital less primary deductions 634 709 3,606 4,069

Hybrid core capital (included in core capital) 634 709 1.030 1.030

Core capital including hybrid core 1,268 1,418 4,636 5,099

capital less primary deductions

Other deductions -15 -16 -666 -682(half of the solvency need in subsidiaries)

Core capital including hybrid core 1,252 1,402 3,970 4,417capital less deductions

Supplementary capital 721 546 575 475

Capital base (before deductions) 1,973 1,948 4,545 4,892

Deductions in capital base -15 -16 -666 -682(half of the solvency need in subsidiaries)

Capital base (after deductions) 1,958 1,932 3,879 4,210

Solvency ratio 16.8 19.4 27.6 31.9

Core capital (Tier 1) including hybrid core capital and capital base is calculated in accordance with the Executive Order on the

Calculation of Capital Base.

When including Alm. Brand A/S’ DKK 700 million capital injection into Alm. Brand Bank made on 26 February 2013 and a partial

repayment of DKK 430 million of the state-funded hybrid core capital, the solvency ratio will increase to 22.1% for the Alm. Brand

Bank parent company and drop to 28.6% for the Alm. Brand Group. The bank’s capital base less deductions will then amount to

DKK 2.2 billion.

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The organisation of Alm. Brand is structured to the effect that Alm. Brand Liv og Pension is a subsidiary of Alm. Brand Forsikring,

which is in the business of Non-life Insurance.

The Alm. Brand Group’s core business is Non-life Insurance. Alm. Brand is the fourth largest non-life insurer in the Danish market

with annual gross premium income of DKK 4.9 billion and a market share of around 10%. Non-life Insurance focuses exclusively

on the Danish market with a special segment focus on private customers, small and medium-sized businesses, property owners and

property administrators, agricultural customers and the public sector. The group has deliberately opted not to focus on major corpo-

rate and marine customers, as competition for these customers increasingly takes place at the pan-Nordic level.

The group offers Non-life Insurance products to selected segments through several different distribution channels. The private cus-

tomer portfolio comprises approximately 400,000 customers, 200,000 of whom are full-service customers who have largely all of

their insurances with the company. The commercial and agricultural customer portfolio comprises approximately 100,000 customers.

The life insurance activities of Alm. Brand Liv og Pension comprise life insurance, pension savings, pension insurance and health

and personal accident insurance. The group’s pension operations focus on individual schemes and on small and medium-sized

corporate schemes. Target groups are private individuals, owners and employees of small businesses and farmers, all of whom are

offered a pension concept tailored to their specific needs. The group has opted not to offer labour market pensions proper.

The product range comprises insurance cover and various types of savings. The principal insurance types are coverage on death,

reduced capacity for work and critical illness. Savings comprise capital pension plans, instalment pensions and annuity schemes.

4.1 INDIVIDUAL SOLVENCY NEED

The boards of directors of Alm. Brand A/S, Alm. Brand Forsikring A/S, Alm. Brand Liv og Pension A/S and Alm. Brand Bank A/S

consider the companies’ individual solvency needs on a regular basis.

Until 31 December 2012, Alm. Brand Forsikring and Alm. Brand Liv og Pension used the QIS4 standardised model for the calcu-

lation of Pillar I risks (insurance risk, market risk, biometric risk and operational risk) as well as a number of stress tests for the

quantification of the solvency need for other risks. The process implies that a diversification effect is deducted in the calculation of

the aggregate risks, as the probability of simultaneous occurrence of all risks is minimal.

Moreover, the expected results are offset. For Alm. Brand Liv og Pension, only the results attributable to the unconditional shares are

offset, i.e. the company’s return on equity and the portfolio of insurances without bonus entitlement. The reason why Alm. Brand

Liv og Pension does not deduct conditional shares, i.e. the company’s risk premium, is that they will probably be forfeited in the year

in question if the solvency scenarios materialise. In particular, life insurance companies may furthermore deduct collective bonus

potential and to a certain extent bonus on paid-up policies from the individual solvency need.

The Solvency I requirement of Alm. Brand Liv og Pension is deducted from the statement of capital base of Alm. Brand Forsikring.

There is no need to reserve capital for the risk in Alm. Brand Liv og Pension in the individual solvency need of Alm. Brand Forsikring,

as this is already included through a reduction of the capital base.

Alm. Brand Forsikring has developed an internal capital model, which as from end-2012 will be used to calculate the individual

solvency need of Alm. Brand Forsikring by computing natural catastrophe risks and premium and reserve risks but not in relation to

4 The Alm. Brand insurance group

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workers’ compensation and health and personal accident insurance. The internal capital model is based on Alm. Brand’s own data

and thus tailored to Alm. Brand’s risk scenario. For Non-life Insurance, the expected results will no longer be directly offset, whereas

this will still be relevant for Alm. Brand Liv og Pension.

The individual solvency need of the Alm. Brand insurance group at 31 December 2012 is shown below.

The aggregate capital requirement of Alm. Brand Forsikring was DKK 1,295 million at 31 December 2012, against DKK 1,572 mil-

lion at 31 December 2011. This decline was due to the transition to using the internal capital model in Non-life Insurance as well

as to the development in the country spread, which is incorporated in the yield curves of the Danish FSA, having the effect that this

risk currently does not contribute to Alm. Brand Liv og Pension’s aggregate capital requirement.

The aggregate capital requirement of Alm. Brand Liv og Pension was DKK 511 million at 31 December 2012, against DKK 440 mil-

lion at 31 December 2011. The aggregate capital requirement of Alm. Brand Liv og Pension is greater than the individual solvency

need because of the higher Solvency I requirement.

4.2 INSURANCE RISK

For Alm. Brand, insurance risk comprises both Non-life Insurance risks, i.e. risks related to Non-life Insurance products, and bio-

metric risks related to life insurance and pension products.

Non-life Insurance risks are mainly reduced by way of reinsurance, efficient claims processing and acceptance and writing rules at

customer and product level.

The core business of Alm. Brand Liv og Pension are the biometric risks comprising mortality, life expectancy and disability, but these

risks are limited by health declarations, which all customers are required to provide.

4.2.1 NON-LIFE INSURANCE RISKS

Alm. Brand writes insurances for private customers, small and medium-sized business enterprises, property owners and administra-

tors as well as agricultural and public sector customers. In all significant areas, it has been considered what the desired risk profile

of Non-life Insurance is. Business procedures and controls in that respect have been designed and reports are submitted to the board

of directors and management board of Alm. Brand Forsikring on a regular basis.

RISK TYPE (DKKm) 2011 2012

Market risk 1,025 1,104

Insurance risk 1,128 672

Biometric risk 194 183

Health risk 507 471

Counterparty risk 114 74

Diversification -536 -521

Operational risk 127 130

Applied bonus potential and PAL -717 -858

Other risks -270 40

1,572 1,295

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The board of directors has defined precise guidelines for the Non-life Insurance risks that Alm. Brand Forsikring may accept. For ex-

ample, for each industry the board of directors has considered the maximum acceptable loss on a claim expressed by the company’s

maximum retention. Storms and similar natural catastrophes may hit many insurances at the same time, and the board of directors

has also approved the company’s coverage for this loss exposure.

The management of risk tolerance in connection with new business written is set out in the company’s acceptance policy. The

acceptance policy provides rules for the types and size of risks that can be written in individual contracts. The lines posing the great-

est risk to Alm. Brand from an overall point of view are workers’ compensation, properties and motor insurance.

In autumn 2012, Alm. Brand concluded an agreement with insurance company AIG on the writing of workers’ compensation

insurances. In future, AIG will write all of its workers’ compensation insurances through Alm. Brand. Accordingly, Alm. Brand will

fix prices and conditions and manage claims processing under the agreement.

Alm. Brand already has a growing portfolio in the workers’ compensation insurance market. The new agreement will give Alm.

Brand access to a customer portfolio which is expected to drive up the group’s premium income by an amount in the double-digits of

millions in 2013. The new collaboration agreement provides Alm. Brand with a new significant distribution channel. Overall, this

will result in an increase in the SCR, although at a limited effect.

The control environment is a big priority. A large number of ad hoc random tests are performed regularly in specific sub-areas and

reported to the management board. Based on the results of these random tests, it is determined whether the acceptance policy has

been observed and, on this basis, a number of proposals for improvements are prepared. This may, for example, imply updating of

business processes, additional training of employees, restructuring of competencies on a greater number of employees and more

quality measurement.

Before a new significant product is introduced, analyses of profitability and potential market, operational and credit risks need to

be performed. This ensures that the risks associated with the product have been assessed before the product is offered to customers.

The calculated risks are primarily assumed as premium risks (upon acceptance of the policy), reserve risks (risk of provisions being

too low relative to the cost of the loss) and catastrophe risks (extreme events costs).

Premium risks

Premium risk is the risk that expenses related to claims and costs exceed earned premiums. This risk is assessed for each individual

type of business and, accordingly, there are multiple premium risks. If, in any one year, the company records a high number of

large claims, or if the tariff is out of step with trends in the underlying risk, the premium may prove insufficient to cover the claims

expenses and the company’s costs.

The risk is reduced by using reinsurance and by frequently monitoring trends in tariff parameters. In addition to the ongoing

work performed by actuaries, a Pricing Forum assesses pricing and capital return in each individual segment/industry. This forum

receives a lot of its input from the sales and claims organisation but also from the internal capital model based on Alm. Brand’s

historic premium risk data.

Another way to reduce premium risk is to ensure that acceptance and writing rules are available at customer and product level.

Written risks are assessed for the possibility that several policies can be affected by the same loss event (accumulation). Moreover,

each salesperson has been given instructions as to what risks can be accepted.

Reserve risks

Reserve risk is the risk that the claims provisions made are too low relative to the ultimate cost of claims incurred. At the end of the

financial year, the company reserves funds for payment of reported but not settled claims and incurred but not reported claims. The

company’s claims provisions are estimated by actuaries. The payments and other liabilities to the policyholders may at a later stage

prove greater than assumed at the beginning of the year and, in such case, the company will incur a loss.

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Alm. Brand Forsikring has a provisioning committee in which key claims processors and product developers provide the actuaries

with input on new trends, changed legal practice and similar issues that may impact expectations for upcoming claims payments.

This provides valuable knowledge sharing and exchange of experience across the organisation, thereby ensuring that key employees

can keep fully up to date.

The amount of run-off gains and losses is also evaluated in the annual actuarial report relative to the expectations from the com-

pany’s internal capital model. This check contributes to providing a true and fair view of the risk of run-off losses.

Catastrophe risk and reinsurance

Catastrophe risk is risk related to extreme events. Catastrophe risk is covered through reinsurance. An insurer can protect itself

against losses by taking out reinsurance, often with major international reinsurers with a high credit rating. A reinsurance pro-

gramme can be designed in different ways depending on which losses, the insurance company wishes to control.

The purpose of Alm. Brand’s reinsurance programme is to ensure that a single loss event or a random accumulation of large losses

does not lead to unacceptable loss of capital and, moreover, to reduce the size of fluctuations in technical results.

The reinsurance programme is approved annually by the management board and the board of directors. The need for reinsurance is

assessed on an ongoing basis using experience from the programme’s efficiency. Market experience, the company’s capital resources

and prices of reinsurance cover are also included in the assessment. Alm. Brand’s internal capital model is also used in the risk

assessment. The structure and size of the reinsurance programme is optimised according to Alm. Brand’s exposure. The reinsurance

department is responsible for the tactical and operational handling of reinsurance.

The largest single risks in Non-life Insurance are natural catastrophes and terrorist attacks. The risk of natural catastrophes is

assessed by means of a number of scenarios based on the portfolio’s exposure and on a calculated probability. These show that the

current reinsurance programme will provide cover at least for losses resulting from a 1:200-year storm.

For 2013, Alm. Brand purchased catastrophe reinsurance up to DKK 4.1 billion with retention of DKK 75 million. The reinsurance

programme covers property losses up to DKK 500 million and personal injury on personal accident and workers’ compensation losses

up to DKK 700 million. Retention is DKK 30 million and DKK 20 million per insured event, respectively. Moreover, the company has

taken out frequency cover on major property claims covering large fire losses between DKK 5 million and DKK 30 million. However,

the cover will not take effect until Alm. Brand has incurred claims in the amount of at least DKK 150 million in this range.

Alm. Brand has also purchased reinsurance cover for “medium-size” cloudburst and snow load claims up to DKK 200 million. This

will cover losses between DKK 7.5 million and DKK 75 million after an aggregate claims payment of DKK 100 million. Motor (com-

prehensive and liability) and liability claims in general are covered together with retention of DKK 20 million.

The reinsurance programme provides extensive and broad coverage. The greatest risk in connection with the programme is whether

the upper limit for catastrophe reinsurance is adequate. If the coverage is too high, the company will pay an unnecessary reinsurance

premium, and if the coverage is too low, the company will risk having to pay large unforeseen expenses.

Alm. Brand’s risk in the event of a terrorist attack is considered to be covered by the so-called terrorism pool and the government

guarantee scheme covering nuclear, biological or chemical loss events and by the relevant parts of the reinsurance programme af-

ter retention under the relevant programmes or to be exempted in the risks insured. Alm. Brand has taken out specific coverage for

selected buildings in relation to conventional terrorist attacks.

15

4.2.2 LIFE INSURANCE RISKS

It is standard policy with Alm. Brand Liv og Pension that customers must always provide personal health information. This

means that the company has deliberately opted not to write typical labour market pensions, as such pensions may be set up

without personal health information.

Biometric risks related to life insurance and pension products

Biometric risk comprises mortality, life expectancy and disability. The risk of disability and death is restricted by guidelines

for how large a risk the company may accept. It is Alm. Brand Liv og Pension’s policy to not write risk coverage without the

customer providing individual health information. Moreover, risks are limited through a reinsurance programme which

mitigates the effects of losses incurred on large customers. The reinsurance programme also comprises catastrophe cover in

the event of several customers/lives being hit by the same event.

To cover any future fluctuations in mortality or disability rates, a risk premium is added to market value provisions, which is

calculated by increasing the risk intensities for mortality and disability by 12% or lowering the mortality intensities by 12%

for insurance types dependent on rising life expectancy. The market value parameters for use in the calculation of market

value provisions are assessed at least once a year.

The return on equity principles have been adjusted to the effect that 100% of the risk result is allocated to equity. As a result,

the company has reduced its dependence on the investment result but increased the risk on the core business, i.e. the bio-

metric risk, effective from 2011.

The breakdown into contribution groups means that there is no collective bonus potential in the contribution groups for

mortality, life expectancy and disability, respectively. This generally means that losses incurred in these groups will be paid

through equity. However, the overall buffers may be applied through the use of negative bonus, thereby limiting the risk to

the reaction rate of bonus rate adjustments.

Life expectancy risk has received a lot of focus recently. Alm. Brand Liv og Pension has a relatively small exposure to life expec-

tancy, as the company’s portfolio is predominantly composed of capital and instalment pensions. Alm. Brand uses the Danish

FSA’s benchmark for life expectancy assumptions for the calculation of provisions and the industry standard described by

the Danish Society of Actuaries for the assessment of life expectancy risk. In 2012, the Danish FSA introduced the concept

of realisation risk in the calculation of individual solvency. Its effect is marginal due to the scope of the annuity portfolio and

also calculated on the basis of the industry standard described by the Danish Society of Actuaries.

4.3 CREDIT RISK

Credit risk is the risk of incurring a financial loss due to counterparties’ breach of their payment obligations. For the insur-

ance group, this risk mainly arises through reinsurers or financial counterparties. Financial counterparties may be counter-

parties in a bilateral derivative agreement, a bond issuer or a trading counterparty. The credit risk on bond issues is limited by

means of guidelines for the desired ratings of the bond portfolios, while the settlement risk is reduced by the extensive use of

settlement systems ensuring that delivery takes places simultaneously with payment.

Credit risk related to reinsurance most often arises in the event that Alm. Brand’s non-life reinsurers go into insolvent liqui-

dation, resulting in a partial loss of receivables and in new coverage of the business having to be purchased. There are two

types:

• reinsurers not being able to pay

• reinsurers going bankrupt and Alm. Brand therefore having to purchase new coverage

16

In order to minimise the risk related to each reinsurer, reinsurers must be rated at least A- with Standard & Poors, Moody’s and/or

A.M. Best. Deviations from this rating must be approved by the board of directors. The reinsurance department is responsible for

following up regularly on reinsurer ratings. Moreover, Alm. Brand Forsikring limits the risk by spreading its reinsurance cover on

many reinsurers.

Counterparty risk arises when a counterparty in a financial agreement fails to meet its obligations. Alm. Brand Forsikring reduces its

exposure to counterparties by means of margin agreements and netting with the counterparties. Margin agreements ensure that a

counterparty provides collateral to another counterparty when the other counterparty’s exposure to the first counterparty exceeds

a certain defined level. This collateral reduces the potential loss arising in the event of a counterparty’s breach. The collateral man-

agement policy is described in detail in the form of an ISDA Credit Support Annex to the ISDA Master Agreements governing the

overall relationship between Alm. Brand and its counterparties. Since Alm. Brand is not rated, the collateral is not rating-dependent.

Netting is described in the ISDA Master Agreements and means that gains and losses on derivative financial instruments may be

offset if a counterparty breaches its obligations. Agreements on derivative financial instruments of a longer-term nature can only

be concluded if they also have a netting agreement with collateral provided. If deemed expedient, deviations from this general rule

may in rare circumstances be accepted subject to management consent.

4.4 MARKET RISK

The strategic market risk aim is to achieve an optimum return without putting the capital bases of Alm. Brand Forsikring and Alm.

Brand Liv og Pension at risk of significant deterioration due to financial market developments or financial difficulties of individual

counterparties.

Market risk is the risk of loss caused by fluctuations in assets and liabilities resulting from changes in market conditions. The boards

of directors of Alm. Brand Forsikring and Alm. Brand Liv og Pension annually adopt an investment policy and associated guidelines

determining benchmarks and investment limits, thereby ensuring the desired risk profile. The market risk policy aims to ensure that

risks assumed from time to time are calculated and reflect the company’s business strategy, risk profile and capital resources. The

management board delegates powers to the relevant entities of the company in question.

The Alm. Brand insurance group uses different models for the calculation and management of risk on assets and liabilities as well

as stress testing in the form of e.g. the Danish FSA’s risk and capital assessments (traffic lights and QIS risk scenarios). The company

uses derivative instruments to ensure that, for instance, the interest rate, currency and inflation exposure on assets is adequate.

The guidelines are specified by and allocated to relevant operational business areas in market risk instructions to be checked against

the risk positions and reported to management. The risk management department is responsible for an independent calculation,

verification and reporting of risks. The risk management department is organisationally separate from the operational business

areas accepting risks for the group in connection with the performance of investment activities.

COUNTERPARTY RISK ON DERIVATIVE INSTRUMENTS 31. december 2012

DKKm Non-life Insurance Life Insurance

Derivatives with a positive market value 251 598

Netting 16 2

Exposure after netting 235 595

Collateral received 234 549

Exposure after netting and collateral 1 46

17

The table below shows the market risk calculated at 31 December 2012 and the change since 31 December 2011 for Alm. Brand

Forsikring and Alm. Brand Liv og Pension, respectively, as well as the individual solvency contribution of the individual market risk

factors.

Alm. Brand Forsikring’s market risk has increased by DKK 10 million since 31 December 2011. The increase was mainly attribut-

able to a greater difference in interest rate risk on assets and liabilities, respectively. The higher credit risk was attributable to portfolio

changes and effects resulting from developments in the underlying markets.

Alm. Brand Liv og Pension’s market risk has increased by DKK 69 million since 31 December 2011. The increase was mainly attri-

butable to higher equity and credit risks, among other things, due to developments in the underlying markets in 2012. The increase

in currency risk was, among other things, attributable to a combination of developments in the markets for emerging market bonds,

which improved in 2012, and Alm. Brand Liv og Pension having exposure against these markets in local currency.

At least once each month and otherwise as needed, Alm. Brand Liv og Pension carries out sensitivity analyses on the expected profit

for the year and on the individual solvency need according to a selection of financial scenarios (combinations of a rise or fall in

interest rates, decline in equities and a widening of the credit spread (OAS)). These calculations first show the effect of the financial

scenario on provisions, collective bonus potential and equity. The individual solvency need is then calculated based on the new point

of reference (new interest rate level with resulting change of shock level, new benchmark values for provisioning and bond values,

new exposure to equities after scenario, new collective bonus potential, new amount of equity, etc.).

ALM. BRAND FORSIKRING EXCLUDING SUBSIDIARIES

Market risk (DKKm) 2011 2012

Interest rate risk 68.6 76.0

Equity risk 6.6 3.9

Property risk 4.7 3.1

Credit risk 34.4 41.5

Concentration risk on equities, bonds, etc. 0.0 0.0

Currency risk 11.9 13.5

Less diversification effect (QIS4) -33.9 -35.5

Total market risk 92.3 102.6

ALM. BRAND LIV OG PENSION GROUP



Equity risk 475.8 519.1





Less diversification effect (QIS4) -384.1 -432.1

Total market risk 931.8 1,000.8

18

In that connection sensitivity is also calculated on collective bonus potential in interest rate contribution groups, including which

combinations of interest rate movements and falling equity prices use up the collective bonus potential in the group. The scenario

effects and the development in the individual solvency need are then reported to the board of directors.

Interest rate sensitivity on assets, liabilities and buffers is calculated in the event of immediate parallel interest rate shifts of up to

+/- 2 percentage points in the Danish FSA’s discount rates after tax on pension investment returns (PAL). Limits for the company’s

risk tolerance have been defined relative to different scenarios. The interest rate sensitivity limit is set at a maximum loss of DKK 600

million after netting of bonus potentials at a given parallel shift in the yield curve.

Alm. Brand Liv og Pension’s principal market risks are related to insurances with guaranteed benefits. Until 1994, Alm. Brand Liv

og Pension wrote policies with average guaranteed benefits calculated by means of an interest rate of 4.5% after PAL. From 1994

to 1999, an interest rate of 2.5% after PAL was used, and from 1999 the rate was 1.5%. With effect from 1 April 2011, the interest

rate was lowered once again to stand at 0.5%.

Alm. Brand Liv og Pension’s insurance portfolio is divided into four interest rate groups characterised by the different guarantee

levels on which the insurances are based. There are fair-sized investment buffers on low interest rate groups, whereas the highest

interest rate group had only a very limited investment buffer at 31 December 2012. The investment strategies of the individual inter-

est rate groups are carefully designed to match the investment buffers of each individual group. This means that the highest interest

rate group has a relatively small share of higher-risk assets relative to provisions.

Alm. Brand Liv og Pension has introduced the principle that the full amount of any surplus on the policies’ interest rate, risk or ex-

pense results must be used to lower the future required rate of return on the insurances. This gradually reduces the guarantees for

the interest rate groups and has the effect that, over time, they will be moved to interest rate groups with lower guarantees.

No new business is written in the highest group, which predominantly consists of insurances under disbursement or close to retire-

ment. As a result, the portfolio dwindles automatically. The tax reform coming into force in early 2013 is expected to further accel-

erate this trend. The reform, among other things, entails a tax rebate in 2013 for policyholders withdrawing their capital pension

savings or converting them into a new retirement savings product.

Asset allocation

Alm. Brand takes a cautious approach to allocation of own and customer investment funds. and has limited exposure to equities,

credit and high-yielding bonds and no exposure to exotic products.

The asset allocation of Alm. Brand Forsikring and Alm. Brand Liv og Pension, respectively, is shown below.

Alm. Brand Forsikring Alm. Brand Liv og Pension

Asset class 2011 2012 2011 2012

Government bonds 2% 1% 15% 13%

Mortgage bonds 93% 93% 57% 57%

Credit bonds 4% 3% 2% 3%

Emerging market bonds 0% 0% 2% 3%

Mortgage deeds 0% 0% 0% 0%

Other interest-bearing 0% 2% 3% 3%

Equities 1% 1% 9% 9%

Properties 0% 0% 12% 11%

19

The asset allocation of Alm. Brand Forsikring reflects the strategic focus on stable returns and low investment risk in this part of the

group. The Non-life Insurance investment assets are predominantly placed in interest-bearing assets most of which are mortgage

bonds with a high credit rating.

The asset allocation of Alm. Brand Liv og Pension at 31 December 2012 was diversified on a number of asset classes. Alm. Brand Liv

og Pension’s general approach is that, at company level, it has a given overall risk tolerance. This risk tolerance is allocated to each

portfolio according to size. Risk tolerance can thereby be measured regardless of the guarantees issued in each interest rate group.

This has the consequence that groups with large investment buffers will have more higher-risk assets than groups with low invest-

ment buffers, as the overall risk exposure for shareholders’ equity must be identical.

Interest rate risk

Interest rate risk is the risk of incurring a loss on an interest rate exposure as a result of a rise or fall in interest rates. Interest rate

risks are closely monitored and hedged if deemed expedient.

The calculation of provisions is using a mark-to-market principle that applies an expected cash flow discounted by the yield curve

published by the Danish FSA at the relevant date.

The interest-bearing assets of Non-life Insurance have a weighted duration of just over two years. Most of the interest rate exposure

on assets is aligned to the interest rate exposure on provisions by means of interest rate swaps. However, over the past few years, the

group has chosen to not fully align its investment portfolio with the declining yield level. In Non-life Insurance, the net return in the

event of a 100 bps interest rate decline was DKK 50 million at 31 December 2012.

Interest rate risk in Non-life Insurance in the event of parallel shifts in interest rates, 31 Dec 2011

The interest-bearing assets of Alm. Brand Liv og Pension are divided into bond portfolios and fixed-income derivatives used to adjust

the interest rate risk in the individual contribution groups. The interest rate risk is then measured specifically for each interest rate

contribution group to achieve the desired risk profile that matches the liabilities.

The net interest rate risk in the event of different parallel interest rate shifts is shown in the figure below. It is obvious that Alm. Brand

Liv og Pension’s greatest risk is a sharp decline in interest rates.

Interest rate sensitivity, assets Interest rate risk, liabilities

DK

Km

-1.000

-800

-600

-400

-200

0

200

400

600

800

-300 -200 -100 0 100 200 300Mill

ione

r

Forsikring, i alt pr. 2012-12-31.

Renterisiko -netto Rentefølsom hed -aktiver Renterisiko -passiverInterest rate risk, net

20

Interest rate risk in Alm. Brand Liv og Pension’s policyholders’ funds in the event of parallel shifts in interest rates, 31 Dec 2012

Currency risk

The Alm. Brand insurance group has only limited currency risk exposure. For Non-life Insurance, the currency risk consists in par-

ticular of derivative fixed-income instruments but most of the assets are placed in Danish bonds. Life and Pension pursues an active

currency strategy, which means that it does not hedge foreign currency positions unless deemed expedient.

Equity risk

The insurance group only has limited equity risk exposure. Non-life Insurance has no exposure to investment equities and less than

one per cent of the market value is placed in unlisted equities, primarily in the form of strategic sector equities. These equities are

held for the purpose of supporting the insurance activities.

Life and Pension’s equity exposure is based on the policyholders’ risk profile and capital base in relation to being able to withstand

losses. Equity exposure is only accepted on investment equities for policyholders’ funds, and the exposure is accepted on the basis of

a global investment universe.

In addition, Life and Pension holds a limited number of unlisted equities, primarily in the form of strategic sector equities. These

equities are held for the purpose of supporting the business activities.

Inflation risk

Alm. Brand Forsikring determines payments for future workers’ compensation claims on the basis of wage developments. Provisions

for workers’ compensation claims are calculated by applying expected future wage index developments. This produces exposure

to inflation risk as stronger inflation will lead to higher wages, translating into higher claims. To mitigate this risk, Alm. Brand

Forsikring enters into inflation swaps that hedge most of the inflation risk on workers’ compensation provisions, assuming a stable

development in real wages.

Other market risks

The group is also exposed to real property prices through property investments, primarily in Alm. Brand Liv og Pension and the

subsidiary Alm. Brand Ejendomsinvest, such exposure relating to policyholders’ funds. Most of the property investments are in

owner-occupied properties, but the group also makes direct property investments, mainly in office property, and invests in property

sector equities. The risk profile when buying and selling property is focused on obtaining a high degree of security and stable returns

on a long-term horizon. The risk management of property investments is rooted in guidelines for the overall property investments

and guidelines for exposure to individual properties.

-3.000

-2.500

-2.000

-1.500

-1.000

-500

0

500

1.000

1.500

Mio

.kr.

(+ =

indt

ægt

, -=

udgi

ft)

Finanstilsynets rentekurve efter PAL (på aksen er vist det 10-årige punkt)

I alt inkl. modregning af bonuspotentialer Renterisiko aktiver Renterisiko passiver

DK

Km

(+ =

in

com

e, -

= e

xpen

se)

Danish FSA's yield curve after PAL (the 10-yr intersection is shown in the axis)

Total including netting of bonus potentials Interest rate risk, assets Interest rate risk, liabilities

1,500

1,000

500

0

-500

-1,000

-1,500

-2,000

-2,500

-3,000

21

Certain bonds are priced with a risk premium relative to the benchmark yield curve. Spread risk is hence the risk that the value of

such credit bonds declines due to higher risk premiums arising, for instance, in the event of greater risk aversion in the market. Alm.

Brand Forsikring and Alm. Brand Liv og Pension have substantial holdings of Danish mortgage bonds, but the resulting spread risk

on assets is used to hedge the spread risk arising on liabilities because of the composition of the Danish FSA’s discount curves, which

are used for the discounting of liabilities. Accordingly, the aggregate spread risk for assets and liabilities is limited.

Alm. Brand Forsikring and Alm. Brand Liv og Pension limit the spread risk by means of rating-defined limits for investments in credit

and emerging market bonds. The Alm. Brand Group makes very limited investments in corporate bonds, the majority of which are

investment grade (AAA to BBB).

Concentration risk is the risk arising when the company’s exposures are concentrated, for instance, on few lines or on few large in-

dividual exposures. Alm. Brand Forsikring and Alm. Brand Liv og Pension comply with the regulatory requirement for an adequate

spread on issuers in its portfolio of assets but has additionally defined limits for exposure to relevant individual securities, issuers,

counterparties and region so as to minimise accumulation of risk in the portfolio.

4.5 LIQUIDITY RISK

Liquidity risk is the risk of timing differences between cash inflows and cash outflows. Such differences may give rise to losses as a

result of:

• differences between payments and disbursements (e.g. premiums and claims)

• the ultimate inability of the company to honour its commitments due to a lack of funding

The purpose of liquidity risk management is to ensure that the individual companies of the group have sufficient capital resources

to support operations and comply with statutory requirements. Limits have been defined for liquidity excess cover, which have been

adapted to the conditions under which the companies operate.

The Alm. Brand insurance group has limited liquidity risk. Major weather-related events put Alm. Brand Forsikring’s liquidity the

most under pressure. However, liquidity risk is limited because the companies’ premiums are pre-paid. Moreover, liquidity can be

raised fairly easily by selling assets from the company’s substantial portfolios of marketable government and mortgage bonds.

The greatest liquidity risk for Alm. Brand Liv og Pension is the risk of a large number of customers wanting to move their pension

savings at the same time. Like in Alm. Brand Forsikring, the possibility of sourcing liquidity by selling assets is very good as a result

of the company’s substantial portfolios of marketable government and mortgage bonds. Any loss incurred by Alm. Brand Liv og

Pension due to a liquidity squeeze will be passed on to the customers.

22

5 Alm. Brand Bank

Alm. Brand is a nation-wide bank with some 58,000 customers measured in terms of households. The bank’s activities comprise

continuing operations and activities that are being wound up.

The bank’s continuing operations include an offering of products that meet private customer financial needs. Moreover, the bank

has activities within lease operations, bond, equity and currency trading as well as research (Markets) and asset management ser-

vices (Asset Management).

5.1 INDIVIDUAL SOLVENCY

At 31 December 2012, Alm. Brand Bank had an individual solvency need of 15.7%, which was largely unchanged from 31 Decem-

ber 2011. The adequate capital base declined by just over DKK 200 million, which should be seen in the light of the reduction of

total loans and advances over the year. The table below shows the adequate capital base and the individual solvency need of Alm.

Brand Bank per risk type.

The individual solvency need of the bank is calculated on the basis of a stress test based on the probability method. The bank calcu-

lates a conservative risk of loss on the following customer segments:

• customers with slightly impaired credit quality (certain indications of weakness)

• customers with substantial weaknesses but without impairment and/or provisioning

• customers marked for objective evidence of impairment with or without impairment/provisioning

• mortgage deeds and mortgage financing

According to the Danish FSA’s Guidelines on Adequate Capital Base and Solvency Needs for Credit Institutions, an additional pre-

mium is calculated for concentration risks. It should be noted that impairment and provisions are deducted from the calculation of

the individual solvency in order to prevent a double impact on the bank.

The calculation of the individual solvency need on positions with market risk is also based on the Danish FSA’s Guidelines on Ade-

quate Capital Base and Solvency Needs for Credit Institutions. Risks related to properties are calculated in Alm. Brand Bank under

the credit risk area, whereas other risks are calculated under the market risk area.

The calculation of operational risk is based on the basic indicator method, which calculates the operational risk as 15% of the ave-

rage net interest income and non-interest-related net income for the past three years.

RISK TYPE Adequate Adequate Individual solvency Individual solvency

DKKm capital base 2011 capital base 2012 need 2011 need 2012

Credit risk 1,443 1,213 12.3% 12,3%

Market risk 259 261 2.2% 2,6%

Operational risk 45 34 0.4% 0,3%

Other risks 56 51 0.5% 0,5%

Total 1,803 1,559 15.4% 15,7%

23

Alm. Brand Bank will begin using the Danish FSA’s ”8% +” approach effective 31 March 2013, but the impact from the transition

is expected to be negligible.

5.2 CREDIT RISK

Credit risk is the risk of incurring a financial loss due to counterparties’ breach of their payment obligations. Credit risk includes

losses/impairment writedowns on loans, guarantees, derivatives, etc., concentration risk on customer types, exposure types, collate-

ral types, etc., a general change in credit quality due to changes in legislation, economic conditions, market practices and conditions,

etc.

5.2.1 DIRECT BANKING ACTIVITIES

The figure below shows the development in losses and writedowns including value adjustments of mortgage deeds in Alm. Brand

Bank measured pro rata in the period 2007–2012.

The financial crisis is readily reflected in overall losses and writedowns, which are calculated inclusive of value adjustments of

mortgage deeds. In 2009, Alm. Brand Bank’s aggregate losses and writedowns were slightly less than DKK 1.7 billion, shrinking to

DKK 481 million in 2012. Over the past year, this figure has been reduced by 50%.

DKKm 2009 2010 2011 2012

Loans and advances 17,767 13,299 10,003 8,735

Provisions account 1,818 1,402 1,609 1,552

Provisions in % 10% 11% 16% 18%

1,800

1,600

1,400

1,200

1,000

800

600

400

200

-

(200)2007

Loss

es a

nd

wri

tedo

wn

s, D

KK

m

2008 2009 2010 2011 2012

Year

24

Credit policy

The bank’s future lending strategy is directed at private customers, but the bank still has credit exposures with commercial and

agricultural counterparties. The commercial and agricultural customer portfolios will be phased out over the coming years. As a

result, Alm. Brand Bank mainly grants loans to private customers and, to a limited extent, for leasing operations and for investment

credits in Alm. Brand Markets.

Once a year, the bank’s board of directors reviews and approves the credit policy and the associated guidelines describing the rules

governing the bank’s loan granting, provision of guarantees and other credit risks. The credit policy and the guidelines are defined

with a view to ensuring that they are adapted to the bank’s strategy. The guidelines contain specific limits for the individual products

offered by the bank and the customer segments buying the bank’s credit products.

Alm. Brand Bank’s credit secretariat has overall responsibility for assessing and following up on credit risks, both on individual

customers and on portfolios.

The bank’s lending to private customers is based on the application of credit scoring models and budget and disposable income

calculations. The credit scoring models have been developed over a number of years. The models are still being developed and im-

proved on the basis of recent experience and changes in market conditions. Credit scoring models are applied to secured as well as

unsecured loans.

Alm. Brand Bank uses an automated authorisation control system for private customers. In combination with the bank’s credit ap-

plication and approval system, this system ensures that the approvals made by individual managers and employees are consistent

with their lines. The system also supports collection of information on individual customers. This information is included in the

overall decision-making basis for credit segmentation of the customer and determination of the maximum exposures and risks,

including already established facilities.

In the winding-up portfolio, loans are granted only for credit-defence purposes when this is deemed to reduce the bank’s risk of loss.

As part of the control environment, an independent credit control function has been established, which has been charged with the

task of making spot checks to identify any potential process shortcomings.

As a result of recent years’ substantial impairment writedowns and discontinuance of business areas, the lending terms have been

tightened significantly, and the business areas which the bank intends to pursue in the future have similarly been narrowed down.

Calculation of credit exposures on individual customers

In the day-to-day credit management, the existing credit exposures on individual customers are calculated as the sum of all:

• loans

• credit maximums, including unutilised parts of committed facilities

• any overdrafts

• guarantees provided

• the bank’s own portfolio of securities issued by the customer

• calculated counterparty risk of derivatives

• other contingent liabilities, including effective recourse guarantees

Composition of exposure and remaining term

Alm. Brand Bank recorded a decline in the overall exposure of almost DKK 2.8 billion relative to 31 December 2011. The profile

of the remaining term of the overall portfolio with more than one year to maturity has been more or less constant, whereas slight

deviations were seen in maturities of up to one year.

25

The table below also shows that Alm. Brand Bank’s largest exposures are to business entities and private customers. Almost all of

these are Danish.

Basis of calculation of risk-weighted items before downgrading but after writedowns distributed on remaining term per exposure

category for the Alm. Brand banking group.

It should be noted that the exposures shown in the table have been calculated inclusive of unutilised credit facilities and counterparty

risk but less any impairment writedowns. The exposure category ”Exposure secured by mortgage on real property” is defined based on

the exposure being within 80% of the value of private properties and 50% of the value of commercial properties.

Alm. Brand Bank uses financial collateral and mortgages on real property to hedge credit risk. In addition, Alm. Brand Bank has

granted loans to Alm. Brand Leasing and Alm. Brand Formue, which are also backed by collateral.

Risk mitigation approaches used to calculate risk-weighted items

Alm. Brand Bank uses the standardised approach in the calculation of risk-weighted items. Credit risk mitigation approaches include

the effect of guarantees, credit derivatives and collateral. In this context, collateral is calculated according to special rules. As a result,

the collateral measured for the calculation of risk-weighted items and the overall collateral underlying the business of Alm. Brand

Bank are not fully consistent. The difference is mainly due to mortgages on real property.

3 months Between 3 Between 1 More than Total Avg. value

DKKm or less mths and 1year and 5 years 5 years during year

Exposures against central governments or central banks 294 0 0 0 294 410

Exposures to institutions, cf. section 4(1) 744 2 0 179 924 970

Exposures to business entities, etc. 1,667 2,397 444 884 5,392 6,063

Exposure to private customers 871 108 212 2,297 3,487 3,755

Exposures secured by mortgage on real property 125 67 159 2,746 3,208 3,430

Exposures subject to accounts overdrawn or in arrears 189 74 91 421 775 788

Other exposures 405 0 0 0 405 439

Exposures to public entities 0 0 0 0 0 0

Exposures to multilateral development banks 0 0 0 0 0 0

Exposures to international organisations 0 0 0 0 0 0

Covered bonds 0 0 0 0 0 0

Securitisation positions 0 0 0 0 0 0

Exposures to business entities etc. with a short-term credit rating 0 0 0 0 0 0

Exposures to collective investment schemes 0 0 0 0 0 0

I alt 2012 4,295 2,758 906 6,527 14,485 15,856

I alt 2011 7,707 1,491 710 7,318 17,226

26

Credit risk mitigation in the calculation of risk-weighted assets by industry at 31 December 2012

Alm. Brand Bank has guidelines and instructions for the provision of different types of collateral and guarantees. Credit derivatives

are generally not used. The principles for the valuation of such collateral and guarantees depend on both asset type and business

area.

Risk concentration

Alm. Brand Bank’s identification of risk concentrations in the credit portfolio serves as a credit risk management parameter. The risk

concentration may be based on the volume of credit exposures, single assets or type of exposure.

Alm. Brand Bank’s current exposure primarily relates to guarantees and loans and advances for private homes, commercial and

investment properties as well as mortgage deeds. The bank’s future focus on private customers will reduce concentration risk both

in relation to large exposures and property market exposures.

Number of exposures exceeding 10% of the capital base of Alm. Brand Bank in the period 2009–2012

The sum of large exposures, calculated in accordance with the Danish FSA’s requirements for quarterly reporting, was approx-

imately 60% of the bank’s capital base at 31 December 2012, distributed on four exposures. The exposures are characterised by the

credit risks in fact being distributed on financing of a number of properties.

Default

A receivable is deemed to be in default when it is considered unlikely that the customer will fully meet all obligations to Alm. Brand

Bank or its subsidiaries. For each loan segment, Alm. Brand Bank has defined a number of criteria that determine when exposu-

res are deemed to be in default. The definition of default used by the bank is consistent with the requirements of the EU Capital

Requirements Directive (CRD). The criteria assess actual default as well as whether there is a significant probability of default which

is expected to lead to default proper.

Year-end 2009 2010 2011 2012

No. of large exposures 8 5 5 4

DKKm Collateral Guarantees and

credit derivatives

Exposure to business entities etc. 694 0

Exposure to private customers 25 1

Exposure secured by mortgage on real property 5

Exposure subject to accounts overdrawn or in arrears 2

Total 2012 725 1

27

Specification of defaulted and impaired loans, value adjustments and impairment writedowns and expensed amounts in 2012 for

the Alm. Brand Bank parent company. The specification covers loans at amortised cost.

As can be seen in the table above, impaired loans consist of loans and guarantees for which an impairment writedown or provision

has been made. The table shows that in 2012 commercial customers, especially agriculture and real property, accounted for most

of the impaired loans calculated as loans and guarantees before impairment writedown or provisioning. It is therefore no surprise

that the same pattern is seen in impairment writedowns, calculated here as the provisions account excluding collective impairment

charges. The amounts expensed in the table correspond to amounts taken to the income statement excluding mortgage deeds and

collective impairment charges.

Receivables written down for impairment

The indication of impairment is assessed on an ongoing basis by Alm. Brand Bank’s credit secretariat.

For the calculation of collective impairment charges, Alm. Brand Bank uses an adapted model based on a model developed by the

Association of Local Banks in Denmark.

Exposure and provisions account in the Alm. Brand banking group. The specification covers loans at amortised cost.

DKKm 2011 2012

Total value of exposures before writedowns 18,834 16,037

Writedowns 1,609 1,552

Total value of exposures after writedowns 17,226 14,485

Defaulted and Value adjustments Expensed

DKKm impaired loans and writedowns amounts

Public authorities 0 0 0

Commercial, including

Agriculture, hunting, forestry and fisheries 859 479 113

Manufacturing and extraction of raw materials 0 0 0

Utilities 8 5 5

Building and construction 0 0 0

Trade 20 15 0

Transport, hotels and restaurants 3 3 0

Information and communication 0 0 0

Financing and insurance 167 128 9

Real property 537 257 -26

Other sectors 316 245 89

Total commercial 1,912 1,132 190

Private 436 292 47

Total 2012 2,348 1,424 238

Total 2011 2,266 1,563 816

28

The above table shows the overall exposure before and after impairment writedowns in the Alm. Brand banking group. The

exposure declined relative to 2011, but this decline is not reflected nearly to the same extent in the provisions account, which is an

accumulation of prior-year impairment writedowns including collective impairment charges adjusted to reflect actual losses.

Losses and writedowns excluding collective impairment charges in the period 2009–2012. The specification covers loans at

amortised cost.

As shown in the table above, total impairment writedowns and provisions amounted to just over DKK 1.5 billion at 31 December

2012, which marked a slight decline relative to 2011.

5.2.2 DERIVATIVE INSTRUMENTS

Counterparty risk arises when a counterparty in a financial agreement fails to meet its obligations. Alm. Brand Bank reduces its

exposure to counterparties by means of margin agreements and netting with the counterparties. Margin agreements ensure that a

counterparty provides collateral to another counterparty when the other counterparty’s exposure to the first counterparty exceeds

a certain defined level. This collateral reduces the potential loss arising in the event of a counterparty’s breach. The way in which

this collateral is managed is described in detail in a framework agreement or in the form of an ISDA Credit Support Annex to an ISDA

Master Agreement. Since Alm. Brand is not rated, the collateral is not rating-dependent.

Netting is also described in the framework agreements or in the ISDA Master Agreements and means that gains and losses on

derivative financial instruments may be offset if the counterparty breaches its obligations. Agreements on derivative financial

instruments of a longer-term nature can only be concluded if they also have a netting agreement with collateral provided. If deemed

expedient, deviations from this general rule may in rare circumstances be accepted subject to management consent.

DKKm 2009 2010 2011 2012

Impairment writedowns and provisions at beginning

of year including collective 416 1,818 1,402 1,609

New impairment writedowns and provisions

including collective 1,428 727 794 539

Reversed impairment writedowns and provisions

including collective 20 164 142 259

Loss of amounts previously written down or provided for 6 979 444 337

Impairment writedowns and provisions at end of year

including collective 1,818 1,402 1,609 1,552

Loss of amounts not previously written down or provided for 30 141 143 48

Settlements made on debt previously written off 28 25 28 18

COUNTERPARTY RISK ON DERIVATIVE INSTRUMENTS 31 december 2012

DKKm Alm. Brand banking group

Derivatives with a positive market value 230

Netting 345

Exposure after netting -115

Collateral received -335

Exposure after netting and collateral 220

29

5.3 MARKET RISKS

The board of directors of Alm. Brand Bank lays down the banking group’s overall risk policy and associated guidelines for the types

of market risk the bank will accept as part of its operations as well as the extent of the different risk types. The market risk policy

is laid down in accordance with sections 70-71 of the Danish Financial Business Act and taking into account the Danish FSA’s

Guidelines on Adequate Capital Base. A separate policy has been prepared containing associated guidelines for market risk.

The overall market risk profile is determined in the risk policy and the guidelines for market risk. The overall guidelines are specified

by and allocated to the relevant operational business areas in market risk instructions to be checked against the risk positions and

reported to management on a daily basis.

The banking group’s credit secretariat and the risk management department, respectively, are responsible for preparing policies and

instructions and for calculating, managing and reporting risks. The two departments are also responsible for independent monitoring

and verification of risks with a view to compliance with policies and guidelines. In order to ensure independent calculation and risk

reporting, the credit secretariat and the risk management department are organisationally separate from the operational business

areas accepting risks for the group in connection with its operations.

The banking group regularly takes positions in the financial markets for the account of its customers as well as for its own account.

The financial positions may involve different types of market risk. Active risk management is applied across the banking group in

order to balance out financial risks on assets and liabilities with the aim of achieving a satisfactory return that matches the banking

group’s risks and applied capital. The bank’s risk management uses derivative financial instruments to adjust the market risk.

The adequate capital base of Alm. Brand Bank derived from the contributions of the individual market risk factors is shown below.

Alm. Brand Bank’s market risk is almost unchanged relative to 31 December 2011 but covers a number of offsetting changes.

Interest rate risk rose relative to 2011 due to higher interest rate risk on liabilities. This increase in liability interest rate risk was

driven by a higher interest rate risk on deposits and a lower interest rate risk on funding. On the asset side, higher interest rate risk

in the trading portfolio contributed to lowering the requirement for an adequate capital base. Credit risk increased relative to 31

December 2011, particularly due to a change in the composition of the trading portfolio towards an increase in assets overall and in

credit-sensitive assets. The contribution from equity risk was mainly reduced due to intra-group dividends.

Alm. Brand Bank’s exposure to the individual risk factors is described in detail below.

ALM. BRAND BANK PARENT



Equity risk 114.9 85.5





Less diversification effect 0.0 0.0

Total market risk 259.2 261.4

30

Asset allocation

Alm. Brand Bank’s direct exposure to mortgage deeds has grown considerably in connection with the bank taking over assets from

non-performing exposures, but the rate of growth levelled off in 2012. The mortgage deed portfolio will be reduced over time in step

with run-off and winding up of the portfolio.

The asset allocation of Alm. Brand Bank (pro rata) is shown below.

Interest rate risk in the bank

Interest rate risk expresses the risk of a loss in the event of a general one percentage point parallel increase in market rates. Day-

to-day interest rate risk is calculated and managed using modified option-adjusted durations calculated in the RIO system. RIO is

updated and operated by Alm. Brand Bank.

Alm. Brand Bank’s interest rate risk is managed on the basis of both accounting interest rate risk and total interest rate risk.

Accounting interest rate risk is the risk on assets and liabilities adjusted over the bank’s income statement as a result of an interest

rate change. Accounting interest rate risk predominantly occurs on floating-rate instruments, on reinvestment of fixed-rate

instruments and on fixed-rate instruments. Management of accounting interest rate risk seeks to appropriately match future cash

inflows and outflows.

Total interest rate risk is the change in the market value of all assets and liabilities, irrespective of whether there is a value

adjustment over the income statement as a result of an interest rate change. Total interest rate risk predominantly occurs on fixed-

rate interest-bearing financial instruments. Management of the banking group’s total interest rate risk seeks to appropriately match

the development in the value of assets and liabilities.

The board of directors of Alm. Brand Bank has defined limits for the total interest rate risk. At 31 December 2012, the bank’s

total interest rate risk was negative at DKK 48 million, equivalent to -4.8% of equity, against a negative interest rate risk of DKK

44 million at 31 December 2011, equivalent to -4.0% of equity. The accounting interest rate risk according to the Danish FSA’s

calculation methodology was DKK 75 million at 31 December 2012, against DKK 57 million at 31 December 2011.

Much of the bank’s interest rate risk derives from the mortgage deed portfolio, which constitutes the portfolio outside the trading

portfolio. Almost all of these mortgage deeds are Danish. The bank uses an internal model to calculate and manage interest rate risk

related to the mortgage deed portfolio, which takes into account expected prepayments and losses on mortgage deeds. As part of

the bank’s strategy, interest rate risk derived from mortgage deeds is hedged with a view to minimising the interest rate risk on the

mortgage deed portfolio after hedging.

The group regularly uses financial instruments in managing interest rate risk to reduce its exposure. The risk management

department reports interest rate risk on a daily basis.

ASSET ALLOCATION Alm. Brand Bank

Asset class 2011 2012

Government bonds 4% 1%

Mortgage bonds 69% 66%

Credit bonds 0% 0%

Emerging market bonds 0% 0%

Mortgage deeds 23% 24%

Other interest-bearing 0% 4%

Equities 4% 4%

Properties 0% 0%

31

At 31 December 2012, the combined interest rate risk of Alm. Brand Bank (parent) was negative at 52 million, equivalent to -5.2%

of equity. Interest rate risk outside the trading portfolio accounted for DKK 8 million of this amount, whereas interest rate risk in the

trading portfolio accounted for DKK 65 million. Moreover, the bank had interest rate risk in its balance sheet deriving from loans and

advances, deposits and funding in a total negative amount of DKK 125 million.

The bank’s interest rate risk in the trading portfolio is primarily derived from trading on behalf of customers. The bank only engages

in own-account trading to a limited extent.

Most of the bank’s interest rate exposure is to Danish kroner. Alm. Brand Bank seeks to minimise interest rate risk in currencies

other than DKK and EUR.

Currency risk

The banking group’s daily currency risk is calculated and managed on the basis of a weighted exchange rate indicator 1 exposure.

The risk weights used by the bank are calculated on the basis of the day-to-day fluctuations between the respective currencies over

the previous 500-day period. Currency risk is measured in Danish kroner and calculated and reported by the risk management

department on a daily basis.

At 31 December 2012, the bank’s currency risk calculated according to the weighted exchange rate indicator 1 approach was DKK

2 million, equivalent to 0.2% of equity, against a currency risk of DKK 8 million at 31 December 2011, equivalent to 0.8% of equity.

The bank’s loans are primarily denominated in Danish kroner and are therefore not subject to currency risk to any significant ex-

tent. The bank’s investment strategy is to have only limited net positions in foreign currency. Derivative financial instruments are

used to hedge currency risk.

At 31 December 2012, the Alm. Brand banking group’s currency risk was DKK 6 million, against DKK 5 million at 31 December

2011, which is a very low amount.

Calculated according to the Danish FSA’s exchange rate indicator 2, the bank’s currency risk amounted to DKK 2 million at 31

December 2012, equivalent to 0.2% of equity, against DKK 7 million at 31 December 2011, equivalent to 0.6% of equity. The

Danish FSA’s exchange rate indicator 2 is based on a Value-at-Risk approach which expresses the maximum loss that may be in-

curred within a period of 12 months at a probability of 99%.

CURRENCY RISK 2012 Alm. Brand Bank Alm. Brand Bank Alm. Brand Bank

Parent (pro rata) Group

Unweighted exchange rate indicator 1 23,1 19,4 69,7

Weighted exchange rate indicator 1 2,1 2,3 5,5

Exchange rate indicator 2 (99% VaR) 1,9 3,7 8,1

INTEREST RATE RISK 2012 Alm. Brand Bank Alm. Brand Bank Alm. Brand Bank

DKKm Parent (pro rata) Group

Accounting interest rate risk 72 75 78

Total interest rate risk -52 -48 -45

32

Equity risk

In its calculation of equity risk, Alm. Brand Bank distinguishes between positions in the trading portfolio and positions outside the

trading portfolio (investment portfolio). Equities in the trading portfolio are held with a view to trading on behalf of customers or as

part of the bank’s investment portfolio. In its investment portfolio, the bank has equity exposure in strategic equity investments in

the form of sector equities, which the bank has no intention of trading and the objective of which is to support the banking group’s

primary business activities and strategy.

Some of these equities are unlisted. As the equities are unlisted, there is no current pricing in the market. The equities are measured

by their net asset value calculated on the basis of the company’s most recent financial statements. Where sufficient liquidity is

deemed to exist in the market, the most recent, publicly available trading price may be used.

The banking group’s equity risk is calculated and managed daily based on exposure to counterparties, sectors and geographical seg-

ments. The risk management department reports interest rate risk on a daily basis.

Alm. Brand Bank uses derivative financial instruments to manage its equity risk exposure.

Exposures in the trading portfolio

The bank’s trading portfolio consists of positions in listed Nordic equities and unit trust certificates held with a view to supporting

the bank’s markets and asset management functions. In addition, the bank holds a number of equities taken over for credit-defence

purposes. The bank intends to reduce this portfolio.

Exposures outside the trading portfolio

Alm. Brand Bank holds equities in a number of sector companies in cooperation with several other banks. The purpose of these

sector companies is to support the banks’ activities in mortgage financing, payment services, IT, investment associations, etc. Alm.

Brand Bank does not plan to sell these equities, as an ownership interest in these sector companies is considered necessary in order

to operate Alm. Brand Bank. The equities are therefore considered to be held outside the trading portfolio and are categorised as

strategic sector equities. Most of the strategic sector equities are unlisted.

At 31 December 2012, Alm. Brand Bank’s portfolio of sector equities held in the investment portfolio amounted to DKK 185 million,

against DKK 172 million at 31 December 2011. Unrealised capital gains on sector equities in the investment portfolio amounted to

approximately DKK 11 million at 31 December 2012, against a loss of DKK 24 million at 31 December 2011. No capital gains were

realised on sector equities in 2012. Most of the sector equities give exposure to the financial sector.

In addition to equity positions in and outside the trading portfolio, the bank holds positions in the subsidiaries Alm. Brand Formue

and Alm. Brand Leasing A/S. Alm. Brand Bank seeks to hedge its equity exposure through Alm. Brand Formue. The Alm. Brand

banking group’s equity exposure is higher than that of Alm. Brand Bank (pro rata) because the equity exposure of the other share-

holders of Alm. Brand Formue is included in the banking group’s portfolio.

EQUITY RISK 2012 Alm. Brand Bank Alm. Brand Bank Alm. Brand Bank

DKKm Parent (pro rata) Group

Own portfolio of sector equities 185 185 185

Equity exposure in the trading portfolio 107 107 248

Equity exposure in subsidiaries 234 0 0

Total equity exposure (excluding subsidiaries) 526 292 433

33

At 31 December 2012, the bank had a total equity exposure in its investment portfolio of DKK 433 million, against DKK 463 million

at 31 December 2011.

Other market risks

Spread risk is the risk associated with mortgage bonds and other credit bonds due to their being priced at a risk premium relative to

the benchmark yield curve. Spread risk is hence the risk that the value of bonds with a built-in credit element declines due to wide-

ning yield spreads caused, for instance, by higher risk aversion in the market. Alm. Brand Bank limits the spread risk by means of

rating-defined limits for investments in credit and emerging market bonds.

Concentration risk is the risk arising when the company’s exposures are concentrated, for instance, on few lines or on few large

individual exposures. Alm. Brand Bank complies with the regulatory requirement for an adequate spread on issuers in its portfolio

of assets but has additionally defined limits for exposure to relevant individual securities, issuers, counterparties and regions so as to

minimise accumulation of risk in the portfolio.

5.4 LIQUIDITY RISK

Liquidity risk is the risk of timing differences between cash inflows and cash outflows. Such differences may give rise to losses as a

result of:

• a disproportionate increase in the company’s funding costs

• the inability of the company to grant new loans due to a lack of funding

• the ultimate inability of the company to honour its commitments due to a lack of funding

The banking group’s liquidity strategy and the overall guidelines for liquidity management are defined in the liquidity policy and

guidelines for the management board. The banking group aims to have liquidity at all times that is sufficient to support its fu-

ture operations and comply with the statutory requirements, including the guideposts of the Danish FSA’s Supervisory Diamond.

Accordingly, Alm. Brand Bank has determined limits for:

• the amount of the bank’s liquidity reserve

• the composition of the bank’s funding sources

Compliance with the bank’s liquidity target is ensured through the above-mentioned internally defined limits for the composition of

funding, including funding sources and their repayment structure as well as requirements for the size of the bank’s liquidity reserve.

These requirements are tested by extrapolating the bank’s total assets in a normal scenario and in various stress scenarios.

The bank determines its liquidity management on the basis of a prudent risk profile. The bank manages and monitors liquidity on a

day-to-day basis based on short-term and long-term liquidity requirements.

The short-term liquidity management is intended to ensure that Alm. Brand Bank complies with the statutory requirements at all

times. This is achieved partly by neutralising imminent liquidity effects, thereby maintaining liquidity within the limits defined by

the board of directors, and partly by securing financial resources in the form of certificates of deposit and undrawn money market

lines with major market players.

The long-term liquidity management is intended to ensure that Alm. Brand Bank does not find itself in a situation where the cost of

funding the bank’s operations becomes disproportionately high. A significant proportion of the bank’s external funding falls due for

repayment at end-June 2013, but due to a fixed-rate campaign which successfully attracted new deposits the excess liquidity cover-

age is expected to remain sound after the repayment as well. The extent of the bank’s refinancing need will depend on developments

in deposits and lending.

34

Alm. Brand Bank has a contingency plan for liquidity risks, which is intended to ensure that the bank is sufficiently prepared to take

remedial action if an unfavourable liquidity situation should arise. The bank’s liquidity contingency plan contains guidelines for the

timing of its implementation, the tools that can be used to procure the desired liquidity and an expected prioritisation of these tools.

The bank’s liquidity reserve in 2012

Alm. Brand Bank aims to have excess liquidity coverage of at least 75% relative to section 152 of the Danish Financial Business Act.

The bank’s excess liquidity coverage is measured on a day-to-day basis, and throughout 2012 it was in the range of 253–506%, as

shown in the figure below.

Alm. Brand Bank – Liquidity in 2012

In 2012, the bank repaid funding of DKK 3.8 billion and prepaid bonds in an amount of DKK 4 billion, thereby significantly reducing

the funding base. As shown in the above figure, the bank still has reasonable excess liquidity coverage. The figure below shows that

the deposit deficit was turned into a deposit surplus in 2012.

4

5

6

7

8

9

10

11

02-01-2012 02-02-2012 02-03-2012 02-04-2012 02-05-2012 02-06-2012 02-07-2012 02-08-2012 02-09-2012 02-10-2012 02-11-2012 02-12-2012

Mill

iard

er

200%

250%

300%

350%

400%

450%

500%

550%

Likviditet Dækning i % (højre akse)

550%

500%

450%

400%

350%

300%

250%

200%

DK

Kbn

Liquidity Dækning i % (højre akse)

35

Deposits and lending and deposit deficit/surplus

Composition of the bank’s funding sources in 2012

The funding composition is based on high equity and capital base ratios, ensuring a solid capital base with a high solvency ratio.

Moreover, the bank aims to have a funding base founded on deposits with interbank funding being used to the extent necessary.

Other funding sources may be used if the price of funding makes it attractive.

In 2012, deposits were the largest funding source by far. Syndications were repaid in 2012, and bond issues under the Bank Package

II guarantee were reduced by DKK 4 billion to stand at DKK 2 billion at 31 December 2012. In September 2012, the bank made use

of the three-year credit facility made available by Danmarks Nationalbank by borrowing DKK 1 billion secured against bonds. In

December, the bank replaced DKK 530 million worth of bonds by loans.

01-10-2012

2008 2011 2012

Fun

din

g so

urc

es in

% o

f to

tal

100%

75%

50%

25%

0%

Deposits

Bank Package II bonds

Shareholders’ equity

Syndications

Hybrid and subordinated loans

Danmarks Nationalbank (loan provided against lending)

42%

19%

29%

14%

4%

6%7%

8%

9%

7%

46% 38%

65%

11,500

11,000

10,500

10,000

9,500

9,000

8,500

8,000

01-01-2012 01-04-2012 01-07-2012

DK

Km

Deposits

Lending

36

The bank had total liquidity of DKK 14.2 billion in 2012, marking a substantial decline from DKK 20.3 billion in 2011 (and DKK

19.1 billion in 2008) as a result of a strategic reduction of the bank’s total assets.

5.5 SUPERVISORY DIAMOND

At 31 December 2012, Alm. Brand Bank was in compliance with all five threshold values of the Danish FSA’s supervisory diamond

as shown in the figure below:

Calculation of the Danish FSA’s supervisory diamond for Alm. Brand Bank (parent)

The changes in Alm. Brand Bank’s supervisory diamond indicators reflect that the winding-up portfolio is developing according to

plan and that the bank’s risk measured in terms of the supervisory diamond benchmarks has declined. Growth in lending remains

negative, which had been expected considering the bank’s lending strategy being focused exclusively on the private customer

segment. The fall in the bank’s excess liquidity coverage and funding ratio was due to the repayment of syndicated loans and loans

raised through bonds issued under Bank Package II.

Category Threshold value 31 December 2011 31 December 2012

Large exposures < 125% 69% 62%

Growth in lending (y/y) < 20% -17% -13%

Property exposure < 25% 22% 17%

Excess liquidity coverage < 50% 327% 137%

Funding ratio < 1 0.75 0.62

37

Other types of risk the Alm. Brand Group also includes in its aggregate risk assessment comprise:

• Operational risks and control environment

• Other business risks, including

• External risks

• Reputational risks

• Strategic risks

• Other matters

6.1 OPERATIONAL RISKS AND CONTROL ENVIRONMENT

The Alm. Brand Group’s operational risks, i.e. costs associated with operational errors, are assessed on an ongoing basis. The board

of directors has defined the overall risk tolerance in relation to operational risk in the bank’s policy and guidelines for operational

risk.

The Alm. Brand Group has a number of control procedures in the form of work routines, business procedures and reconciliation

processes, performed locally and centrally throughout the organisation. These procedures, the organisational segregation of func-

tions between the executing and controlling departments and training of staff help minimise operational risks.

The control environment is adjusted as the business develops so as to ensure that the contingency measures, controls and resources

are in place. The extent of these measures is balanced against the expenses they involve. Contingency measures are thus assessed

for each individual threat, taking into account the potential business implications should the threat materialise as well as the prob-

ability of the threat materialising.

A number of areas are also subject to IT support with a view to further reducing the risk of human error. For instance, all accept-

ance policies in Alm. Brand Liv og Pension are to the extent possible sought integrated in the applied systems, including in the sales

tool used. Accordingly, a number of risk mitigation measures, such as validations, cross-check rules and similar system checks, have

been incorporated in these systems.

IT

The Alm. Brand Group works continually on enhancing its IT security, which is based on a policy adopted by the board of directors.

The policy defines general IT security requirements to ensure that the Alm. Brand Group’s overall use of IT is secure and controlled.

The policy has been made operational, for instance, by means of IT security guidelines, directions for users and in the form of meas-

ures and business processes.

The key banking systems are developed and operated by Bankdata. The group’s other IT systems are developed in-house and oper-

ated mainly by in-house staff. In the event a contingency situation involving a long-term physical or IT breakdown, Alm. Brand

has prepared plans to ensure that operations may continue and that the group’s key business functions are restored. These efforts

are based on a number of contingency objectives defined for the group and approved by the board of directors. The objectives have

been implemented in the form of a centrally managed contingency organisation, evacuation plans, contingency manuals in the

individual departments, a robust basic technical IT setup as well as a focus on standardisation of processes as well as IT.

6 Other risks facing the group

38

As part of its duties, the internal audit department performs an audit to ensure that defined work routines, business procedures and

controls have been satisfactorily prepared, implemented and observed. As a supplement to the internal audit, an external IT audit is

performed on the group’s IT systems, and in that connection audit statements are obtained from Bankdata.

Key employees

The importance of key employees is addressed in a key employee policy which includes a number of additional requirements for

specific job descriptions. Key employees are also subject to special severance clauses.

6.2 OTHER BUSINESS RISKS

In addition to credit risks and insurance risks, business risks comprise the risk of losses due to changes in external circumstances or

events that damage the group’s image or earnings. Business risks also include risks relating to a decline in earnings, risks arising as

a result of strategic decisions and risks related to settlement.

External risks

External risks comprise risks of external factors affecting the individual solvency need. These may be risks that arise as a result of

changes in legislation or financial and business conditions.

Legislation has a direct consequence on the risk a company is exposed to. In recent years, several cases of occupational disability

have been settled by the Danish Supreme Court, resulting in increased compensation. The courts’ interpretation of new legislation

may trigger latent claims that have previously escaped focus. In the event of such claims, the company will have the possibility of

letting price developments reflect the legal practice, for instance, by making a subsequent adjustment of premiums, but only with

prospective effect.

Economic conditions in society in general affect Alm. Brand’s earnings and the calculation of the individual solvency need, as eco-

nomic developments will have an impact on credit portfolio quality and bonus potential in Life and Pension. Also, there is a tendency

to see a higher claims frequency during economic downturns.

Reputational risks

Reputational risks are costs associated with having a poor reputation. Alm. Brand makes an active effort to reduce reputational risk

through controls and business procedures. For instance, the group has established press media alert procedures to handle any events

that may lead to unfavourable media coverage.

Strategic risks

Strategic risks are costs associated with the group’s strategic decisions.

The Alm. Brand Group’s strategy has been prepared by the group management on the basis of a structured process and in coopera-

tion with each group subsidiary’s board of directors, management board and managerial groups. The group also has a process for

scheduled follow-ups on the implementation of the individual strategies.

alm. brand implementation of the rules has been postponed from 1 january 2014 to (probably) early...

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