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Enskilda Securities Insurance Sector Seminar Copenhagen 19 September 2002

How to stay one step ahead of competition Michael Pram Rasmussen, CEO, Topdanmark. Enskilda Securities Insurance Sector Seminar Copenhagen 19 September 2002. Competitive - towards whom?. Shareholders. Customers. Employees. Topdanmark.

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Enskilda Securities Insurance Sector Seminar Copenhagen 19 September 2002

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  1. How to stay one step ahead of competition Michael Pram Rasmussen, CEO, Topdanmark Enskilda Securities Insurance Sector Seminar Copenhagen 19 September 2002

  2. Competitive - towards whom? Shareholders Customers Employees Enskilda Securities 19-09-02

  3. Topdanmark To ensure that its shareholders achieve a long-term, competitive, stable return To concentrate on organic growth in the Danish life and non-life insurance market, but open to acquisitions and alliances, should the opportunity arise To ensure that value is created by accepting primarily insurance risks and to a lesser extent financial risks Main objectives: Strategy: To be dynamic Enskilda Securities 19-09-02

  4. Share profile • Topdanmark is an insurance share - not an investment trust • Limited investment risks • Principle: shareholders want to choose themselves their investment risks • Temporary exemption: 2% stake in Danske Bank • Calculated insurance risks • Return on insurance and investment risks not correlated - insurance risk attractive • Relatively limited top-line growth in non-life - higher in life • High cash flow • Large share buy-back programme Enskilda Securities 19-09-02

  5. Theoretical market value and value creation Theoretical market value Value creation • Topdanmark’s value creation is based on: • the net present value of the • expected cash flow from existing • activities • plus: • the net present value of new • business opportunities • The net present value depends on: • cash flow • discount rate • Topdanmark aims to create value by continuously optimising the conditions affecting both of these factors Enskilda Securities 19-09-02

  6. Estimated distribution of Topdanmark’s market value Market value = Net present value of cash flow + Net present value of cash flow for the next 5 years after 5 years (terminal value) 100% Function of long-term growth rate Analyst expectations 50% 2002 2003 2004 2005 2006 2007 Terminal value Cash flow discounted by return requirements (risk free interest rate + risk premium) Enskilda Securities 19-09-02

  7. Value creation in Topdanmark New opportunities Cash flow Discount rate Operation of existing activities Capital structure Share price Investor Relations Corporate Governance Incentive arrangements Enskilda Securities 19-09-02

  8. The Danish insurance market - trends • Needs and requirements for technical profit • Greater fluctuations in results due to: • larger retention due to hard-pressed reinsurance market • new accounting rules • Concentration trend continues • Apparently harder for new and small players to do well • Customers are price conscious and getting less loyal Enskilda Securities 19-09-02

  9. Topdanmark - Premium income DKKm Enskilda Securities 19-09-02

  10. Non-life insurance Topdanmark - premium income Market share DKKm % +7-8% 6,039 5,724 4,178 3,984 3,735 3,398 Enskilda Securities 19-09-02

  11. Combined ratio 100.7 102.7 106.8 106.2 Comparison of combined ratio (on own account) - 2002 half-year Expense ratio Loss ratio Non-life insurance Enskilda Securities 19-09-02

  12. Topdanmark - goal and criteria of success • Declining expense ratio • Distribution efficiency • Control of insurance risks and financial risks Goal: • Combined ratio of 96% Criteria of success: Enskilda Securities 19-09-02

  13. Topdanmark - trend in expense ratio % < 20 Enskilda Securities 19-09-02

  14. Quality versus costs Quality does not cost extra Quality • Examples: • data capture at source • eBusiness - self-transacting • Call centre • ScalePoint Costs Enskilda Securities 19-09-02

  15. The “good” circle Increase in earnings base Reduced expense ratio Increase in portfolio Increase in rate of conversion More competitive prices Increase in additional sales Improved image Reduced decrease in customers Enskilda Securities 19-09-02

  16. Annual sale EURm Premium per sale Hit rate Visits per week No. of weeks No. of sales repres. x x x x = 500 EUR 30% 5 40 100 3 EURm 500 EUR 30% 5 40 200 6 EURm 500 EUR 30% 10 40 100 6 EURm 500 EUR 60% 10 40 100 12 EURm 750 EUR 60% 10 40 100 18 EURm Impacts on sales efficiency Enskilda Securities 19-09-02

  17. Topdanmark - declining expense ratio Other examples: • Promoting cross-selling to life insurance business • Using efficient marketing systems • Restraining IT-expenses and being conscious about • those projects to be encouraged • Reducing claims handling costs - for instance by efficient use of resources and technology Examples: • use of photo assessment • electronic booking of claims assessors Enskilda Securities 19-09-02

  18. Topdanmark’s challenges in life insurance • New model for definition of profit in life as from 1 January 2002 • Increase in value creation in life dependent on premium growth and investment return • Achieving premium growth higher than market for traditional pension products • Achieving premium growth for unit-linked schemes • Achieving investment return higher than market • Achieving growth for related products • Critical illness and Health insurance • The return on life insurance exceeds the return on the Topdanmark share required by investors • Goodwill in life insurance estimated at > DKK 20 per share Enskilda Securities 19-09-02

  19. Investment return in life insurance % Topdanmark Codan Danica Nordea Pension PFA 2000 2001 1H 2002 Enskilda Securities 19-09-02

  20. Trend in premiums 3) 1) 2) 2001 2) 1H 2002 1) Excl. BG Pension 2) Excl. take-over of NESA’s og IFV’s pension fund 3) Incl. BG Pension Enskilda Securities 19-09-02

  21. Acquisitions / Mergers Danske Forsikring / Danica Forsikring Industriens Arbejdsskade New distribution channels Danske Bank DLG ”home” New services eBusiness ScalePoint Product development Top Industrial Rescue Top Agricultural Rescue Topdanmark Welfare New opportunities - examples from recent years Enskilda Securities 19-09-02

  22. Value creation in Topdanmark New opportunities Cash flow Discount rate Operation of existing activities Capital structure Share price Investor Relations Corporate Governance Incentive arrangements Enskilda Securities 19-09-02

  23. Capital structure Capital • Topdanmark is an insurance company • Not an investment trust • Topdanmark intends to avoid unnecessary excess capital • Share buy-back Enskilda Securities 19-09-02

  24. Share buy-back • Since 1998, 37% reduction in share capital due to share buy-back programme • Last 3 years’ average pay-out ratio  100 • Last 3 years’ “yield” > 10% • Expected share buy-back of DKK 600 - 700m in 2002 • 12% of market cap • Continued high level of share buy-back expected for 2003 Enskilda Securities 19-09-02

  25. Return on equity - ROE Example Business ROE Premiums 100 Technical interest 4 Total income 104 Combined ratio 96 Profit from business 8 Premiums = 2 x equity Profit from equity 6% Profit from business (2x8) 16% ROE 22% Enskilda Securities 19-09-02

  26. Corporate Governance • Has removed all relevant limitations set out in the Articles of Association • Lives up to the principles of good Corporate Governance • No shareholder holds more than 10% • A high share price is the only protection against uninvited take-over bids • Revolving stock option scheme for management Enskilda Securities 19-09-02

  27. Corporate Governance - advantages and disadvantages Advantages • Narrowing gap between fair • value and market value • Regulating behaviour of: • Board of Directors • Board of Management • Senior Management • Key selling point Disadvantages • Focus on take-over in the press • only at the beginning Enskilda Securities 19-09-02

  28. Incentive arrangements Management (Board of Management, Board of Directors, Senior Management) • Revolving share option scheme • Payment represents about 2-3 months’ post-tax salary Employees • Employee shares • Seniority model • Salary model • Additional shares by tender • Payment represents up to 4 months’ post-tax salary Enskilda Securities 19-09-02

  29. Investor Relations Ensuring that Topdanmark’s value creating activities are known by the share market and consequently reflected in its share price Working at for example ... • Increasing foreign stake • Increase from 5% in 1999 to 32% today • Increasing the liquidity of the share • Showing the importance of life insurance for the value creation Enskilda Securities 19-09-02

  30. Simple model for value creation Premium growth Cash flow Loss ratio Expense ratio Share price Tax Corporate Governance Discount rate Capital structure Incentive arrangements Investor relations Enskilda Securities 19-09-02

  31. Results from share price simulation model Annual premium growth (%) Combined ratio Discount rate Share price 4 4 4 4 5 4 5 98 97 96 95 98 98 95 12.5 12.5 12.5 12.5 12.5 11.5 11.5 257 273 289 305 266 282 346 16 16 16 9 25 Enskilda Securities 19-09-02

  32. Conclusion • Focused strategy • Simple business model • High cash flow • Adapted capital structure • Large share buy-back • Working to reduce discount rate Enskilda Securities 19-09-02

  33. www.topfacts.dk Enskilda Securities 19-09-02

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