Risk and Capital Management · Introduction Contents Alm. Brand Bank 17 Individual solvency need 18...

Risk and Capital Management

Bank | Forsikring | Pension

Take good care of what ma�ers most

ALM. BRAND RISK AND CAPITAL MANAGEMENT REPORT

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CONTENTSCONTENTS

03

10 Capital management

Group risk organisation

Governance system

The insurance group

Introduction

Contents

Alm. Brand Bank

17 Individual solvency need 18 Insurance risk 22 Counterparty risk 23 Market risk 30 Other risks

10 Capital target 14 Calculation of individual solvency need and capital requirement

31 Management’s statement 32 Individual solvency 34 Credit risk 41 Market risk 45 Liquidity risk 49 Gearing ratio 50 Asset pledging in Alm. Brand Bank

51 Operational risks and control environment 52 Other business risks

Other risks facing the group43

31

17

07

06

08 Risk reporting to the board of directors and management 08 ORSA- og ICAAP reports

06 Remuneration policy

03 Regulation 05 Management’s statement


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CONTENTSINTRODUCTION

Introduction

“The principal risks facing the group’s individual business units and the group as a whole are re-viewed, including insurance, credit and market risks.

The aim of the Risk and Capital Management Report is to provide insight into Alm. Brand A/S’s risk and capital management. Accordingly, this report identifies the principal risks facing Alm. Brand. The Alm. Brand A/S Group consists of the subsidiaries Alm. Brand Forsikring and Alm. Brand Bank, each of which have a subsidiary: Alm. Brand Liv og Pension is a subsidiary of Alm. Brand Forsikring, and Alm. Brand Leasing is a subsidiary of Alm. Brand Bank. See the chart below.

Alm. Brand A/S

Alm. Brand Liv og Pension

Alm. Brand Forsikring

Alm. Brand Leasing

Alm. Brand Bank

The report outlines the structure of the organisation with respect to risk manage-ment and Alm. Brand’s capital management in practice. The principal risks fac-ing the group’s individual business units and the group as a whole are reviewed, including insurance, credit and market risks.

The report describes the calculation of the company’s capital requirements, which is based on the methods prescribed by regulation and, as regards Non-life Insur-ance, by applying a partial internal model.

The report also describes the companies’ capital targets, that is, the internal target for adequate capital. Alm. Brand’s history dates back to 1792 when the insurance company was established. In order to ensure that the company can survive the next 200 years, the internal capital target has been determined conservatively relative to the regulatory requirements.

Unless otherwise indicated, all figures in this report are stated as at 31 December 2015.

RegulationThe insurance groupThe Solvency II directive was implemented effective from 1 January 2016. In some areas, the rules have to a wide extent already been implemented in applicable legislation, e.g. the solvency calculation method.

A new yield curve will be introduced in connection with the implementation of Sol-vency II. Both Alm. Brand Forsikring and Alm. Brand Liv og Pension have obtained approval from the Danish FSA to use a volatility-adjusted yield curve (the VA curve) for the discounting of provisions. The transitioning to the new discounting


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“After the transition to Solvency II, the solvency covering capital base in both Alm. Brand Forsik-ring and Alm. Brand Liv og Pension will be increased by the profit margin and reduced by the risk margin.

curve is expected to have a positive effect on Alm. Brand Liv og Pension, resulting in higher customer buffers in all contribution groups, but with only a small, positive effect on solvency. The effect on solvency for Alm. Brand Forsikring is also limited.

The Solvency II amendments will have the largest effect on the capital require-ment of Alm. Brand Liv og Pension. To date, the company’s solvency requirement has been calculated as the higher of the Solvency I requirement and the individual solvency need, but with the transition to Solvency II, the Solvency I requirement will lapse. The individual solvency need is lower than the Solvency I requirement and will cause a decline in the company’s solvency requirement as from 1 January 2016. The solvency requirement of Alm. Brand Forsikring will largely be unchanged after the implementation of the new Solvency II rules.

After the transition to Solvency II, the solvency covering capital base in both Alm. Brand Forsikring and Alm. Brand Liv og Pension will be increased by the profit margin and reduced by the risk margin. The profit margin is the expected future earnings from the existing business, and the risk margin is a risk allowance in the form of the aggregate capital cost chargeable to a third party if the third party were to take over the insurance obligations.

The amendment will result in an increase in the capital base of both Alm. Brand Forsikring and Alm. Brand Liv og Pension. For the Alm. Brand Forsikring Group, the deduction for the solvency margin in subsidiaries will decline as a result of the above-mentioned decline in the solvency requirement of the company’s subsidiary, Alm. Brand Liv og Pension. This will result in an increase in the capital base of Alm. Brand Forsikring A/S.

Accordingly, the excess coverage relative to the solvency requirement is expected to increase in both Alm. Brand Forsikring and Alm. Brand Liv og Pension after 1 January as a result of the amended rules. However, the rules will also lead to an in-crease in solvency and capital volatility. The capital policy of Alm. Brand Forsikring and Alm. Brand Liv og Pension will be reassessed in 2016 in light of the amend-ed rules in Solvency II. The reassessment is not expected to result in significant amendments to the excess coverage relative to the target and consequently to the dividend potential.

In addition, a number of requirements will be introduced in connection with Sol-vency II with respect to reporting, reporting of data, structuring of the risk func-tions, etc., which the companies will be required to meet.

For a more detailed discussion of the consequences of the transition to Solvency II, see the 2015 financial statements of Alm. Brand A/S, Alm. Brand Forsikring and Alm. Brand Liv og Pension, respectively, which are available on Alm. Brand’s website.

Alm. Brand Bank A/S and Alm. Brand A/SIn June 2013, the European Parliament adopted a new capital requirements di-rective and a new capital requirements regulation (CRD IV/CRR). The new rules, which will be incorporated in Danish law by way of staged implementation until 2019, include tighter requirements on the size, composition and calculation of the bank’s capital. As a result of the tighter requirements, the bank’s capital require-ment will be increased up to 13% from 8% at 31 December 2015. The 5 percent-age point increase in the capital requirement is attributable to the requirement for a capital conservation buffer of 2.5% and a potential countercyclical capital buffer of 2.5%. Moreover, there will be a requirement on the capital quality to the effect that the bank’s common equity tier 1 capital must be at least 4.5% plus the amount of the capital conservation buffer and the potential countercyclical capital buffer.

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As a result of the implementation of the Basel III rules in CRD IV/CRR, financial holding companies like Alm. Brand A/S will not be able to recognise the excess rel-ative to the capital requirement of a subsidiary. This means that under these rules it will be of key importance where an excess relative to the capital requirement is placed. Moreover, positive earnings in a subsidiary will not benefit the capital resources of the parent company directly.

However, Alm. Brand A/S has applied to the Danish FSA for permission to calculate the total capital according to the applicable FICOD rules instead of the upcoming CRD IV/CRR rules, since the FICOD rules would provide a more accurate reflection of the group’s capital resources. The Danish FSA has granted permission to calcu-late the total capital of Alm. Brand A/S in accordance with the FICOD rules.

Management’s statementOn 2 March 2016, the board of directors and management board of Alm. Brand A/S approved the Risk and Capital Management Report for 2015.

The board of directors finds that the company’s risk and capital management pro-cedures are adequate and provide assurance that the risk management systems are adequate in relation to the company’s profile and strategy.

The board of directors finds that the Risk and Capital Management Report de-scribes the company’s overall risk profile in relation to the its strategy, business model, etc. The Risk and Capital Management Report provides a comprehensive view of the company’s risk management procedures, including how the company’s risk profile and risk tolerance as defined by the board of directors affect each other.

The company’s policies implement its strategy and business model in more specific terms. Guidelines issued by the board of directors to the management board and delegated authorisations implement the policies fully and adequately. Alm. Brand’s risk management system is designed so as to reflect the risk tolerance of subsidi-aries. Risks are within the risk tolerance, and detailed limits have been defined in policies and delegated authorisations. The risk tolerance is revised on an ongoing basis in the regular reporting submitted to the board of directors. The board of directors finds that there is consistency between business model, strategy, policies, guidelines and the company’s risks.


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CONTENTSGOVERNANCE SYSTEM

Governance system

The members of the management board of Alm. Brand A/S are also members of the boards of directors of Alm. Brand Forsikring and Alm. Brand Liv og Pension, respectively.

For additional information on the board members, see the 2015 annual reports of Alm. Brand Forsikring and Alm. Brand Liv og Pension, respectively, which are avail-able on Alm. Brand’s website. Information about Alm. Brand Forsikring A/S is provided in note 16 to the finan-cial statements in the annual report of Alm. Brand Forsikring A/S, and information about Alm. Brand Liv og Pension A/S is provided in note 23 to the financial state-ments in the annual report of Alm. Brand Liv og Pension A/S.

The recruitment policy, including the diversity policy, for members of the governing body, is described in corporate governance section of the annual report of Alm. Brand A/S. In addition, Form for reporting on the recommendations on corporate governance for 2015 provides detailed information on the governance system. The form is available on Alm. Brand’s website.

The Alm. Brand Group has set up an intra-group risk committee, which meets once every three months.

Remuneration policyThe Alm. Brand Group has adopted a remuneration policy for 2015, which has been approved by the boards of directors of Alm. Brand af 1792 fmba, Alm. Brand A/S, Alm. Brand Bank A/S, Alm. Brand Forsikring A/S and Alm. Brand Liv og Pen-sion A/S. The remuneration considers rules and limitations set out in the Danish Financial Business Act.

The group’s remuneration policy and a review of the remuneration policy are avail-able on Alm. Brand’s website.

Additional information about remuneration is provided in the annual reports availa-ble on Alm. Brand’s website.

For Alm. Brand A/S, the relevant information is provided in the human resources section and in note 11 to the financial statements. For Alm. Brand Bank A/S, the relevant information is provided in the human resources and corporate governance sections and in note 5 to the financial statements. Information about Alm. Brand Forsikring A/S is provided in the remuneration committee section and in note 16 to the financial statements. Information about Alm. Brand Liv og Pension A/S is provided in note 23 to the financial statements.


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CONTENTSGROUP RISK ORGANISATION

Organisation

Follow-upMonitoring

Businessprocesses

Operational risk forum

Board of directors

Management board

Audit committee

Management committee

Internal audit

Risk committee

Compliance

ORSA/ICAAPRisk reports

Recommandations

PoliciesGuidelines

Investment committee

Group risk organisation

“The purpose of the risk management function is to ensure ongoing, proactive risk management in day-to-day activities based on common sense.

As a group, Alm. Brand 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 group’s risk exposure is a key management priority because uncon-trolled developments in different risks may have a substantial impact on financial performance and solvency and, consequently, on the future business potential.

The purpose of the risk management function is to ensure ongoing, proactive risk management in day-to-day activities based on common sense. The risk manage-ment function therefore has an obligation to ensure that the necessary report-ing is available in order for the business to make sound and informed decisions. Alm. Brand has three independent business areas. This means that reporting and sparring must be aligned to the specific business areas in order to make risk management relevant for the business and, hence, for the customers. The risk management systems of the decentralised units comprise, among other things, the non-life insurance actuarial department dealing with non-life insurance risks, the life insurance actuarial department dealing with life insurance risks, the credit sec-retariat, which deals with the bank’s credit risks, a special committee which deals with IT-related risks and a group risk management function dealing with market risks and capital management. In other words, the risk management structure is decentralised with respect to principal business risks with overall risk management being monitored at group level.

The board of directors of each individual subsidiary defines and approves the over-all policy for the acceptance of risks and also determines the overall risk limits 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 board members of the relevant company. There is no statutory requirement for an audit committee in Alm. Brand Leasing, and such committee has not been set up.


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The group’s central risk forum is the group risk committee, the objective of which is to ensure coordination and uniformity in the group companies with respect to ac-cepting, calculating and reporting risk. In addition, a group investment committee ensures 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.

The group compliance function assists management in ensuring that the compa-nies’ methods and procedures are adequate to ensure compliance with the legisla-tion and rules in force from time to time. The internal audit department oversees the companies’ administrative and financial reporting procedures, the group’s control procedures and compliance with management’s policies and guidelines.

In addition to the committees mentioned above, Alm. Brand has an operational risk forum charged with the task of capturing operational events in Alm. Brand Forsikring A/S, Alm. Brand Liv og Pension and Alm. Brand Bank A/S. Risk Manage-ment, Compliance and Internal Audit as well as the company risk managers partici-pate in this forum. The forum deals with operational incidents reported across Alm. Brand.

Business risks are managed in the individual business areas. The management of each business area is hence responsible for identifying, quantifying and monitoring all risks relevant to their business area and for defining and implementing relevant risk management 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 rou-tines, etc. are in place before new products or activities are implemented, thereby helping to mitigate operational risk.

Risk reporting to the board of directors and management Alm. Brand has laid down processes for current reporting of risks and risk man-agement 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 informed about developments in lending, premiums and claims records, market risks, risk allocation, performance, etc. Risk is measured using different IT systems depending on the specific business and risk area.

Current identification and monitoring of market risks take place in interaction between the individual business areas and the group risk management department (Risk Management), which has a coordinating responsibility for the management of market risk at group level. Risk Management performs daily market risk calcula-tions and verifications for the individual business areas.

Risk is calculated at different relevant aggregation levels, such as portfolio level, company level and group level, and compared to relevant benchmarks.

ORSA and ICAAP reportsAmong the key risk reports submitted to the board of directors are the quarterly ORSA reports (for Alm. Brand Forsikring A/S, Alm. Brand Liv og Pension A/S, Alm. Brand A/S and Alm. Brand af 1792 fmba) and the ICAAP reports (for Alm. Brand Bank A/S). The objective of these reports is to provide the boards of directors with an overview of the companies’ capital resources and risk factors. In addition to a capitalisation projection, the reports contain a number of scenarios that may affect the company’s capitalisation. These reports also follow up on the risk tolerance determined for the companies. Moreover, the reports are used to describe current risk aspects and to present relevant analyses.


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In the companies’ annual risk assessment, the board of directors determines a risk tolerance. Follow-up on this takes place by way of a number of scenarios with vary-ing degrees of probability which the company may expect to face. The outcome is held up against the company’s capitalisation to the effect that a higher capitalisa-tion would reduce the probability of exceeding the risk tolerance and vice versa. The limits for the board of directors’ risk tolerance, that is, the frequency with which the board is prepared to accept breach of capital targets, lines of defence, etc., are defined in the risk tolerance set-up and are reconsidered on an ongoing basis and in particular in connection with the annual risk assessment.

The most recent risk assessment was carried out in the second quarter of 2015 and showed that the principal risks facing the group are market risk, credit risk and insurance risk. Market risk stresses include shocks to interest rates, equity price falls and a widening of the spread to mortgage rates.

Credit risk shocks include stress testing of the mortgage deed portfolio, the agricul-tural portfolio and a credit scenario for other loans and advances. The mortgage deed stress stresses properties and the proportion of delinquent mortgage deeds. In 2014, Non-life Insurance acquired the healthy part of the mortgage deed port-folio, but because Non-life Insurance is entitled to sell delinquent mortgage deeds back to the bank, the credit risk remains in the bank and, consequently, the stress is on the bank. The credit risk scenario for other loans and advances stresses col-lateral security and the portfolio marked for objective evidence of impairment.

The insurance risk scenarios are based on Non-life Insurance’s partial internal mod-el and comprises 10-year scenarios for higher precipitation claims, major claims and small claims, respectively. In addition, the insurance risk scenarios comprise a 1:10 year event for the run-off of provisions and a 1:200 year weather-related event.

The above scenarios are presented to the board of directors of Alm. Brand on a quarterly basis. In addition, each subsidiary prepares its own scenario tests, which are presented to that subsidiary’s board of directors at both company and group level.


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CONTENTSCAPITAL MANAGEMENT

Capital management

The company’s capital management is intended to ensure a solid foundation for Alm. Brand and hence for the customers. This is done, among other things, by ensuring appropriate development in the company’s capitalisation as well as by maintaining a healthy business. This section describes the capital management and the method used for calculating capital targets in Alm. Brand and also comprises an introductory discussion of the calculation of the individual solvency need and adequate total capital.

The overall target of Alm. Brand is to generate a pre-tax return to its sharehold-ers of the money market rate plus 10 percentage points. However, there are large differences in the returns which can be generated in the individual business areas. As a result, the return requirements may differ across segments.

Capital targetAlm. Brand has been in operation as an insurance company for more than 200 years, and the company aims to offer attractive insurance products for just as many years to come. In order to be able to fulfil this aim, Alm. Brand will have to consistently maintain a solid and adequate total capital so that Alm. Brand can always take care of its customers if they are hit by an unfortunate event.

The capital target hence 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. This means that Alm. Brand aims to hold capital at a level substantially higher than the statutory requirements for minimum capital.

The capital target basically consists of two parts: The base part ensures that customers can withdraw their money and are safeguarded through legislation on adequate total capital/solvency need, while the extra capital buffer placed on top of the statutory requirement ensures that the company can continue as a going concern even after a 1:200 year loss event.

In 2010, the bank was split up into a forward-looking bank and a winding-up bank. The forward-looking bank comprises Private Customers, Financial Markets and Leasing. The winding-up bank comprises Commercial Customers, Mortgage Deeds and Agriculture. The business volume with these customers is being wound up.

In December 2014, Alm. Brand Bank sold mortgage deeds for an amount of DKK 1.9 billion to Non-life Insurance. However, the credit risk is unchanged, as the two parties at the same time concluded an option agreement entitling Non-life Insur-ance to sell mortgage deeds that become delinquent back to Alm. Brand Bank. At 31 December 2015, the mortgage deed portfolio amounted to about DKK 1.6 billion.

In order to quantify the uncertainty in the winding-up bank, a buffer was intro-duced on top of the existing capital target with effect from the second quarter of 2014. This buffer applies only to the parent company, Alm. Brand A/S, and does not affect the bank’s target. The capital target of Alm. Brand A/S is increased by a buffer of 13% of the loans booked (including the value of the mortgage deeds for which a buy-back option has been granted) in the winding-up bank, equivalent to DKK 378 million at 31 December 2015. The buffer is thus calculated on the group’s total mortgage deed exposure including the mortgage deeds acquired by Non-life

“Alm. Brand has been in operation as an insurance company for more than 200 years, and the com-pany aims to offer attractive insurance products for just as many years to come.

Capital target

• Non-life insurance 40% of gross premiums

• Alm. Brand Liv og Pension 8% of lifeinsurance provisions

• Alm. Brand Bank Individual solvency need plus 3% but not less than 16 % of total risk exposure amount


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Insurance. Together, the buffer and the capital target will provide scope to cover the uncertainty in the winding-up bank in the same order as the statutory capital requirement for the winding-up bank.

The capital target for the group is determined as the sum of the capital target of Non-life Insurance, Alm. Brand Liv og Pension and Alm. Brand Bank, respectively, less a diversification effect of DKK 300 million to which the above-mentioned buffer is added.

Alm. Brand’s total capital relative to its capital target determines the dividend dis-tribution potential. In an ordinary year, the group’s results will lead to an accumu-lation of capital in excess of its capital target.

The capital requirement, and consequently the dividend distribution potential, is adjusted to the planned activities, including investments, special risks or a shortfall in earnings. In 2013, 2014 and 2015 this was done e.g. by repaying state-funded additional tier 1 capital and in order to comply with amended regulation.

Alm. Brand’s policy is to pay stable ordinary dividends, and beyond that the total capital will, as and when needed, be adjusted by using share buybacks.

Alm. Brand had an extraordinary capital build-up in 2015. Besides the highly sat-isfactory profit after tax of DKK 529 million, the extraordinary capital build-up was driven by a significant reduction of the capital charge related to the bank’s wind-ing-up activities and the group’s use of tax assets had a positive effect.

As a result of the extraordinary capital build-up, in late 2015 the company launched a share buyback programme of up to DKK 300 million expiring at the end of 2016. Adjusted for the share buyback programme, the group’s excess capital cover was DKK 762 million at 31 December 2015.

The board of directors recommends that an ordinary dividend of DKK 1.50 per share and an extraordinary dividend of DKK 1.50 per share be paid. If the propos-al is adopted, this corresponds to a reduction of the excess coverage of DKK 521 million. In addition, the board of directors recommends that the existing share buyback programme be increased with DKK 100 million so it is up to DKK 400 million and extended until the end of February 2017. This requires approval from the Danish FSA.

At 31 December 2015, the excess coverage relative to the internal capital target was DKK 241 million for the Alm. Brand Group as a whole after proposed dividends and the approved part of the share buyback. Alm. Brand Liv og Pension had an ex-cess coverage of approximately DKK 125 million at 31 December 2015, which will be paid to Alm. Brand Forsikring. At 31 December 2015, Alm. Brand Forsikring had an excess coverage of about DKK 1,000 million, which will be paid to Alm. Brand A/S. Alm. Brand Bank had a small, positive excess cover.


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The table below shows Alm. Brand’s capital targets and total capital after proposed dividends and share buybacks:

Capital target

DKKm

Capital targetpr. 31. december

2015

Non-life Insurance (40% of gross premiums) 2,017

Life insurance (8.25% of life insurance provisions) 911

Alm. Brand Bank (3 percentage points higher than the internal solvency need but not less than 16%) 1,294

Diversification effect -300

A/S buffer, winding-up portfolio (13% of net lendings) 378

Total capital target 4,300

Excess cover

Alm. Brand Forsikring A/SDKKm 2015

Statutory capital requirement for the group at 31 Dec 2015 2,888

Excess relative to statutory capital requirement 2,174

Excess relative to internal capital target 762

Proposed dividends 521

Recommended increase of share buyback programme 100

Total capital

DKKm

Kapitalgrundlagpr. 31. december

2015

Consolidated equity 5,232

Tax assets -401

Tier 2 capital 504

Share buyback, rest -273

Total capital of the group 5,062

At 31 December 2015, the total capital after proposed dividends and the ap-proved part of the share buyback for the group was composed of equity of DKK 4,611 million plus tier 2 capital consisting of additional tier 1 capital in Alm. Brand Bank (DKK 105 million after deductions), subordinated loan capital in Alm. Brand Forsikring (DKK 149 million) and subordinated loan capital in Alm. Brand (DKK 250 million). Tax assets amounted to DKK 401 million. In addition there are outstand-ing share buyback for DKK 273 milion in the approved share buyback programme, which is deducted from total capital.

The internal capital target calculated at 31 December 2015 was DKK 4,300 million, corresponding to excess coverage for the group of DKK 241 million after proposed dividends. If the proposed extension of the share buyback program is approved the excess coverage is reduced by DKK 100 million to DKK 141 million.

Capital target of the insurance group The capital buffer of Alm. Brand Forsikring, i.e. the additional capital added on top of the statutory requirement, amounts to approximately DKK 700 million. This reflects that Non-life Insurance has, in addition to the prudence already comprised in the rules governing the calculation of the solvency capital requirement, calculat-ed capital excess coverage sufficient to withstand a 1:200 year loss event without falling below the statutory solvency requirement. The calculation of the buffer is based on the internal model and the standard model and takes into account a cer-tain diversification between the business segments.


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Specifically, the capital target of the Non-life Insurance segment has been deter-mined at 40% of gross premiums. At 31 December 2015, the group had an excess relative to the capital target of approximately DKK 1,000 million before dividend payments.

The capital target of Life Insurance and Pension segment was 8.25% of life in-surance provisions at 31 December 2015. The target was lowered to 8.00% with effect from 1 January 2016. The risk on the company’s portfolio is reduced in step with outflow on the portfolio’s high guarantees and inflow of new insurances on lower guarantees. As a result, Alm. Brand Liv og Pension has adjusted its capital target on an ongoing basis. In 2016, the target will thus be 8%, after which it is expected to remain unchanged at 8% in the following years.

The capital target of Alm. Brand Liv og Pension is considerably higher than the solvency capital requirement but has been fixed so as to ensure the desired excess relative to the solvency capital requirement under a number of specific stress sce-narios, providing the same level of security as in Non-life Insurance.

The capital target levels are assessed on an ongoing basis in both Alm. Brand Forsikring and Alm. Brand Liv og Pension. In 2016, a decision will be made as to whether the implementation of the Solvency II rules will require a change in the capital targets of one or both companies.

Capital target of Alm. Brand Bank The bank’s capital target was changed at the beginning of 2015 to the higher of the individual solvency need plus 3 percentage points and 16% of the total risk exposure amount. This marked a tightening from previously when the target was defined as the individual solvency need plus 3 percentage points but not less than 16% of total risk exposure amount. The change was introduced to prepare the bank for the upcoming tighter capital requirements.

Moreover, the bank aims for its capital structure to be based primarily on share-holders’ equity. In spring 2014, the last outstanding state-funded additional tier 1 capital issued under Bank Package II was repaid. At 31 December 2015, the total capital in addition to equity only consisted of additional tier 1 capital in the amount of DKK 105 million. The additional tier 1 capital is a DKK 175 million bond issue, of which a scaled-down part may be used as a component of the total capital in the period until October 2016. Alm. Brand Bank has made a preliminary solvency reservation of DKK 105 million to cover this risk in the period until October 2016.

Management intends with the capital target to ensure that the bank from time to time maintains an adequate excess coverage relative to the statutory requirements and that the bank has sufficient capital resources to withstand adverse events which can be expected to impact the bank’s capitalisation.

Maintaining a capital target of at least 16%, Alm. Brand Bank will also be prepared for the tighter capital requirements being phased in during the period until 2019.

Capital buffers In the years after the financial crisis, the banking sector has experienced a tight-ening of capitalisation requirements. A combined capital buffer requirement will be introduced in 2016. The requirement is generally introduced to ensure that banks have adequate capitalisation. In addition, the capital requirement rules make greater requirements on the composition of capital, stipulating a greater proportion of common equity tier 1 (CET 1) capital in total capital.

As from 31 December 2015 and over the projection period, Alm. Brand Bank has a very high proportion of CET 1 capital. The bank is not comprised by the systemic buffer requirements. At 31 December 2015, the countercyclical capital buffer was 0%, but the requirement may be up to 2.5% when the buffer has been phased in. Currently, the bank is only affected by the capital conservation buffer, which is being phased in at a rate of 0.625 of a percentage point per year until the buffer is 2.5%.


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The conclusion is that the new capital rules will not affect the bank to any signifi-cant extent. With the introduction of the new rules, the banking sector in general will be required to submit a capital conservation plan to the Danish FSA more quickly and earlier than previously if they experience a reduction in their CET1 capital. The bank has assessed that, on the basis of the combined capital buffer requirement, there is no need to adjust the internal capital target.

Capital target of Alm. Brand LeasingIn 2015, a capital target was defined for Alm. Brand Leasing, a subsidiary of Alm. Brand Bank. The company is not a financial business and thus not subject to capital requirements, but the board of directors of Alm. Brand Leasing wanted to define a capital target in line with the targets defined for the other companies of the group. The board of directors set the capital target of Alm. Brand Leasing to 16% of its total risk exposure amount (TREA).

The company’s equity was approximately DKK 135 million at 31 December 2015, and the TREA was DKK 707 million. Accordingly, the capital target of Alm. Brand Leasing was DKK 113 million, and the excess coverage was DKK 22 million, or 19 %.

Calculation of individual solvency need and capital requirementThe aggregate capital requirement for the Alm. Brand Group is calculated as the sum of the aggregate capital requirements of Alm. Brand Forsikring, Alm. Brand Liv og Pension and the Alm. Brand Bank group.

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. In terms of solvency, the statutory requirement prescribes that com-panies must be sufficiently capitalised to absorb adverse events over the next 12 months without compromising outstanding customer accounts. It is also the boards of directors that approve the method of calculation applied in 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 under-lying 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 requirement rests with the individual subsidiaries, while overall modelling responsibility rests with the group Risk Management department. This approach ensures that risks are assessed by the department in which the relevant expertise is available. Risk Management supports this process in all subsidiaries and consolidates the capital requirements of the subsidiaries.

The internal audit department is responsible for performing an independent evalu-ation of the calculation of the aggregate capital requirement for all subsidiaries and for preparing the consolidated solvency calculation of Alm. Brand A/S.

The specific approach to calculating the aggregate capital requirement is described in more detail in section 4 (insurance group) and section 5 (bank) hereof.

The table on next page shows how the different risks are assessed by Alm. Brand.

The aggregate capital requirement of each individual company is calculated as the higher of the minimum capital requirement, the solvency requirement and the ad-equate total capital/the individual solvency need. The figure below shows the total capital and capital requirements of each subsidiary.


15


Capital requirement Capital target Capital base/Total capital

RisksInsurance

groupStandardised

model

Insurance group

Internal model

Banking groupMethods

described by the Danish FSA

Alm. Brandgroup

Internal assessments

Pillar 1

Insurance X X

Credit X

Market X X

Counterparty 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

At 31 December 2015, the aggregate capital requirement of the Alm. Brand Group was DKK 2,888 million and the total capital was DKK 5,062 million.

5,000

4,000

3,000

2,000

1,000

Liv og Pension Forsikring A/S Insurance group Bank parent Banking group A/S group0

Note: The total capital of Alm. Brand Forsikring A/S includes the excess coverage of Alm. Brand Liv og Pension. The capital base/total capital in the table is calculated without any dividends.

Total capital and capital requirements of each subsisiary


16


Total capital of the Alm. Brand GroupTier 1 capital including additional tier 1 capital and total capital is calculated in accordance with the Executive Order on the calculation of total capital.

The equity of the Alm. Brand Group has increased as a result of current earnings, which has allowed an increased dividend and share buyback programme. The total capital ratio of the Alm. Brand Group fell from 31.0% in 2014 to 28,3% in 2015.

Total capital Alm. Brand Bank Alm. Brand group

DKKm 2015 2014 2015 2014

Equity/Tier 1 capital 1,495 1,744 5,232 4,847

Proposed dividends and approved share buyback programme* 0 0 -794 -85

Intangible assets 0 0 0 0

Other primary deductions** -10 -9 0 0

Deferred tax assets -202 -214 -263 -315

Other deductions (solvency need in subsidiaries) 0 0 -654 -284

Tier 1 capital after primary deductions 1,283 1,520 3,521 4,163

Additional tier 1 capital etc. 105 123 105 123

Deductions, non-material financial sector investments -10 -6 0 0

Tier 1 capital including additional tier 1 capital after primary deductions 1,378 1,637 3,626 4,286

Other deductions (solvency need in subsidiaries) 0 0 -490 -570

Tier 1 capital including additional tier 1 capital after deductions 1,378 1,637 3,136 3,716

Tier 2 capital 0 0 250 250

Total capital (before deductions) 1,378 1,637 3,386 3,966

Deductions in total capital (solvency need in subsidiaries) 0 0 -490 -570

Total capital (after deductions) 1,378 1,637 2,896 3,396

Total capital ratio 18.6 19.3 28.3 31.0

* Contains proposed dividend of 521 DKKm and remaining part of the approved share buyback programme of 273 DKKm** Other primary deductions cover the sum of “Prudent valuation” and “Deductions, non-material financial sector investments”.


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CONTENTSTHE INSURANCE GROUP

The insurance group

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.

Alm. Brand’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 ap-proximately DKK 5 billion and a market share of just over 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 deliber-ately opted not to focus on major corporate and marine customers, as competition for these customers largely takes place at the pan-Nordic level.

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. Labour market pensions proper are not a focus area.

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 retirement pension (in Danish “alderspension”), instalment pensions and annuity schemes.

Individual solvency needFor other risks, Alm. Brand Forsikring A/S uses a partial internal model in combi-nation with a standard formula for solvency calculation, as specified in the Danish FSA’s Executive Order on solvency and operating plans for insurance companies of 12 December 2014.

Since end-2012, the partial internal model has been used to calculate the individ-ual solvency need through input for the calculations of “premium and reserve risk” and “natural catastrophe risk”. The partial internal model is designed to reflect the business structure and reinsurance cover and is based on the company’s own data. The model covers all lines except workers’ compensation and personal acci-dent, and it is designed to most accurately reflect the risk exposure. Alm. Brand Forsikring has obtained approval from the Danish FSA to use the partial internal model to calculate the company’s solvency need after the entry into force of the Solvency II rules on 1 January 2016.

In connection with the calculation of the solvency need of Alm. Brand Liv og Pen-sion A/S, surrender and paid-up policy intensities equivalent to the requirements under the Solvency II principles are recognised in provisions. The intention is to ensure that investment buffers in provisions provide a correct reflection so that e.g. customers with bonus potential who expect to surrender their schemes or convert their policy into a paid-up policy do not give rise to the same investment buffers. And conversely that in relation to the high guarantees, no provisions are made for liabilities that lapse because they are surrendered or converted into paid-up policies.

The solvency requirement of Alm. Brand Liv og Pension is deducted from the statement of capital base of Alm. Brand Forsikring. As a result, there is no need to

Gross premium income 2015

DKKb

5

Partial internal model

• For other risks, Alm. Brand Forsikring A/S uses a partial internal model in combination with a standard formula for solvency calculation

• The partial internal model is designed to reflect the busi-ness structure and reinsurance cover

• The model covers all lines except workers’ compensation and personal accident

• Alm. Brand Forsikring has obtained approval from the Danish FSA to use the partial internal model to calculate the company’s solvency need after the entry into force of the Solvency II rules on 1 January 2016.


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Individual solvency need of the in-surance group 2015

DKKm

1,559

reserve capital for the risk in Alm. Brand Liv og Pension in the individual solvency need of Alm. Brand Forsikring. The aggregate capital requirement of Alm. Brand Liv og Pension was DKK 464 million at 31 December 2015, against DKK 472 million at 31 December 2014. The aggregate capital requirement of Alm. Brand Liv og Pension is greater than the individual solvency need as the Solvency I calculation produces the highest capital requirement. The Solvency I requirement will lapse after the entry into force of Solvency II, and the binding solvency requirement for Alm. Brand Liv og Pension will be the individual solvency need. The difference between the Solvency I requirement and the individual solvency need was DKK 267 million at 31 December 2015, and the transition to Solvency II will thus entail a considerable decline in the capital requirement and consequently a corresponding increase in the capital base of Alm. Brand Forsikring.

The individual solvency need of the insurance group at 31 December 2015 is shown below.

Individual solvency

DKKm 2015 2014

Market risc 1,920 2,189

Insurance risk 562 722

Biometric risk 449 414

Health risk 791 600

Counterparty risk 144 168

Diversification -938 –910

Operational risk 258 183

Applied bonus potential and PAL -1,665 –1,800

Other risks 39 49

1,559 1,615

The total individual solvency need of the insurance group was DKK 1,559 million at 31 December 2015, against DKK 1,615 million at 31 December 2014. The individ-ual solvency need of Alm. Brand Forsikring accounted for DKK 1,362 million of this amount, while the individual solvency need of Alm. Brand Liv og Pension accounted for the remaining DKK 197 million.

The total individual solvency need was thus more or less unchanged from 2014 to 2015. The market risk declined mainly as a result of the change in the calculation method for interest rate risk as from 1 January 2015, when the requirement that the interest rate stress had to be at least 1 percentage point downwards was lifted. This lowered the solvency need of Alm. Brand Liv og Pension in particular. At the same time, however, Alm. Brand Liv og Pension can use less of the bonus potentials.

Insurance risks will be lower as a result of increased coverage in Alm. Brand Forsikring’s reinsurance programme. On the other hand, health risks will increase due to a restructuring of provisions in workers’ compensation insurance.

There were only relatively minor movements in biometric risks, counterparty risks and other risks, while operational risk increased compared with 2014.

Insurance risk Alm. Brand’s insurance risks are related to non-life insurance, health insurance and life insurance risks, which are discussed in more detail in the respective sections below.


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Non-life insurance risksIn all significant areas, Alm. Brand has 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 an ongoing basis.

The board of directors has defined precise guidelines for the Non-life Insurance risks that the company may accept. For example, for each industry the board of directors considers the maximum acceptable loss on a claim expressed by the company’s maximum retention. Storms and similar natural disasters 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 contains rules as to what type and size of risks may be written on a contract. The lines posing the greatest risk to Alm. Brand from an overall point of view are workers’ compensa-tion, properties and motor insurance.

The control environment is a major priority. A large number of ad hoc random tests are performed on a regular basis in specific sub-areas, which are 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 procedures, additional training of employees and more quality meas-urement. Moreover, a follow-up on developments in non-life insurance risks is con-ducted at monthly meetings attended by the company’s management and selected key employees.

Before a new significant product is introduced, analyses of profitability and poten-tial 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, claims provision risks and catastrophe risks.

Premium risksPremium risk is the risk that costs and claims expenses exceed premium income. 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.

Rules governing acceptance and writing of new business at customer and prod-uct level reduce premium risks. Written risks are assessed for the possibility that several policies can be affected by the same loss event (accumulation). Moreover, each insurance agent has been given instructions as to what risks can be accepted.

In addition, premium risks are reduced through the use of 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 partial internal model based on Alm. Brand’s historical premium risk data.

Claims provision risksClaims provision risk is the risk that the claims provisions made are too low to cover the ultimate cost of claims incurred. In connection with the preparation of the financial statements, the company reserves funds for payment of reported


20


but not settled claims and incurred but not reported claims. Claims provisions are estimated by the company’s actuaries. The payments and other liabilities to the policyholders may ultimately prove greater or smaller than estimated. If so, the company will incur a loss or recognise a gain. The most important reasons for this are calculation uncertainty and claims inflation.

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.

The amount of run-off gains and losses is also evaluated in the annual actuarial report and held up against the expectations derived from the company’s partial internal model. This check contributes to providing a true and fair view of the risk of run-off losses.

Catastrophe risk and reinsuranceCatastrophe risk is risk related to extreme events. Catastrophe risk is covered through reinsurance. An insurance company can protect itself against losses by taking out reinsurance, often with major international reinsurers that have a high credit rating. Reinsurance cover 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 also to reduce the amount 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 based on the company’s current risk profile and the price of reinsurance cover. The overall significance of these two factors is quantified in the partial internal model. The assessment also includes experience from the programme’s efficiency, market experience and the company’s capital resources. 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 disasters and terrorism events. The risk of natural disasters is assessed using the partial internal model and a number of scenarios based on portfolio exposure and on a calculated prob-ability. Both show that the current reinsurance programme will provide cover at least for losses resulting from a 1:200 year weather-related loss event.

For 2016, Alm. Brand purchased catastrophe reinsurance cover up to DKK 4.3 billion with retention of DKK 75 million. Reinsurance retention for fire losses is DKK 30 million, and the retention for personal injury on personal accident and work-ers’ compensation losses is DKK 20 million. In addition, Alm. Brand has taken out frequency cover for major fire losses and accumulation of minor weather-related losses.

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 and hence to hold additional solvency capital.

The risk of a terrorism event is not always comprised by the insured risks. In cases in which Alm. Brand covers this type of event, the company’s risk is covered by one of the following two options:


21


First of all, the so-called terrorism pool covers up to 1:200 year events involv-ing nuclear, biological, chemical or radioactive loss events. The Danish Terrorism Insurance Council has raised the limit for activation of the government guarantee in the terrorism insurance scheme from DKK 5.5 billion to DKK 13.7 billion for 2016. The government provides a guarantee of DKK 15 billion beyond this limit. As the reinsurance for 2016 is unchanged, this results in a significant increase in the insurance companies’ retention from DKK 575 million in 2015 to DKK 8.8 billion in 2016 for claims up to DKK 20.5 billion. In addition, the companies cover claims exceeding DKK 28.7 billion. Alm. Brand Forsikring’s share of the risk is 11.5%, and the company thus has considerable exposure to terrorism events of this type, although the probability of major loss events is assessed to be very small. As such events are assessed to go beyond the 1:200 year loss event, no capital is reserved to cover the increased risk.

Secondly, Alm. Brand has coverage through own programmes directed at claims in connection with terrorism events due to other “conventional” causes and any spill-over from the terrorism pool. In addition, Alm. Brand has taken out specific coverage on selected buildings relative to conventional terrorism events.

Health insurance risksHealth insurance risk arises as a result of coverage provided by the insurance group under workers’ compensation, health and personal accident policies. These policies all give rise to both premium, claims provision and catastrophe risks, as described in the section on non-life insurance risks.

Moreover, all insurances are affected by legislative amendments and changed legal practice as well as by social inflation. This applies especially to workers’ compensa-tion insurance. Examples of changed legal practice could be the recognition of new types of personal injury or a change of the meaning of “sudden event” in connec-tion with workers’ compensation and personal accident insurance. Social inflation means that claims expenses increase due to developments in social and economic factors. As the standard of living increases, public expectations of what is required in order for the injured person to maintain a reasonable quality of life after an ac-cident also increase. Such factors have a tendency to drive up both the number of insurance-covered claims and average claims expenses. These external risk factors arise due to trends in society and are difficult to predict, thereby making it difficult to price health insurance risks correctly.

Payments for future workers’ compen¬sation claims depend on wage develop-ments. The risk of claims inflation is mitigated by way of inflation swaps, assuming that there is a correlation between consumer price inflation and wage develop-ments.

Compared with workers’ compensation insurance, the potential impact of the risk factors on the results of the group’s health and personal accident insurances is minor. This is due to the shorter run-off time and the simpler legislative frame-work. For example, new health and personal accident business in Alm. Brand Liv og Pension is written outside the framework of guaranteed interest, ensuring that the customers receive a sharper price, but also gives the company more flexibility in pricing the insurance.

Life insurance risksIt is currently standard policy with Alm. Brand Liv og Pension that customers generally cannot take out an insurance without providing personal health informa-tion. In 2015, Alm. Brand Liv og Pension launched a corporate concept offering company pension schemes against provision of limited personal health information. This product has been developed on the basis of a wish to offer better and more complete cover for customers who are already existing customers of the Alm. Brand Group.

Biometric risks include mortality, longevity and disability. The risk of disability and death is restricted by guidelines for how large a risk the company may accept. Moreover, risks are limited through a reinsurance programme which mitigates the

In 2015, Alm. Brand Liv og Pension launched a corporate concept offering com-pany pension schemes against provision of limited personal health information.

“


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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 allowance 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 increased longevity. 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 capital. As a result, the company has reduced its dependency on the investment result but increased the dependency on the core business, i.e. the biometric risks, since 2011.

The breakdown into contribution groups means that generally there is no collective bonus potential in the contribution groups for mortality, longevity and disability, respectively. This generally implies 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 adjust-ments.

Longevity risk has received a lot of focus recently. Alm. Brand Liv og Pension has a relatively small exposure to longevity, as the company’s portfolio is predominantly composed of capital, retirement and instalment pensions. Alm. Brand in 2015 used the Danish FSA’s benchmark for longevity assumptions for the calculation of pro-visions and the industry standard described by the Danish Society of Actuaries for the assessment of longevity 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 indus-try standard described by the Danish Society of Actuaries.

Counterparty risk Counterparty risk is the risk of incurring a financial loss because a counterparty defaults on receivables and guarantees due to Alm. Brand Forsikring. Counterparty risk is broken down into two types in the solvency calculation. Type 1 counterparty risk covers exposure to large financial enterprises, for instance due to reinsurance agreements or financial contracts. Type 2 counterparty risk covers the risk that ordinary insurance customers fail to pay what they owe to Alm. Brand Forsikring.

Type 1 counterparty risk related to reinsurance most often arises in the event that Alm. Brand’s non-life reinsurers go into insolvent liquidation, resulting in a full or partial loss of receivables and covers and in new coverage of the business having to be purchased. In order to minimise the risk related to each reinsurer, reinsurers must be rated at least A- with Standard & Poor’s and A.M. Best. Deviations from this rating must be approved by the board of directors.

The reinsurance department receives regular information on changes in the rating and financial data of reinsurers. This provides a general overview of the reinsur-ance market and of whether any of the companies with which the group collabo-rates are in financial difficulty. In addition, Alm. Brand receives specific information about critical issues at a reinsurer from Alm. Brand’s reinsurance brokers who, via their Security Committees, assess whether they would still recommend collabora-tion.

If the rating of a reinsurer is lowered to below the rating the reinsurer had when the contract was signed, Alm. Brand is entitled by contract to terminate the collab-oration. Alm. Brand Forsikring also mitigates the risk by spreading its reinsurance


23


programme on many reinsurers and, as a result, Alm. Brand does not consider itself to be subject to significant concentrations of counterparty risk on individual reinsurers.

Financial counterparties are most often financial institutions in which case the receivable arises in a bilateral derivative agreement or, for instance, by depositing cash funds in a bank account, which creates a type 1 counterparty risk. Placement limits contain restrictions as to the companies’ maximum receivable from specific credit institutions.

Counterparty risk on derivativesAlm. Brand Forsikring A/S Alm. Brand Liv og Pension

DKKm 2015 2015

Derivatives with a positive market value 203 474

Netting 306 162

Exposure after netting -103 312

Collateral received -108 327

Exposure after netting and collateral -7 -15

Alm. Brand Forsikring limits counterparty risks in connection with derivative agree-ments by entering into margin agreements and netting with the counterparties. Margin agreements ensure that a counterparty provides collateral to Alm. Brand Forsikring when the other counterparty’s exposure to Alm. Brand Forsikring ex-ceeds a certain defined level. The collateral reduces the potential loss arising in the event of a counterparty’s breach. This collateral management 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 implies 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 collat-eral provided. If deemed expedient, deviations from this general rule may in rare circumstances be accepted subject to management consent.

In addition, Alm. Brand Forsikring has type 1 counterparty risk on Alm. Brand Bank. This is due to Alm. Brand Forsikring’s option to sell back delinquent mort-gage deeds to Alm. Brand Bank. The capital strength of Alm. Brand Bank is moni-tored on an ongoing basis to ensure that Alm. Brand Bank can honour any claims from Alm. Brand Forsikring arising due to delinquent mortgage deeds.

Receivables from policyholders in Non-life Insurance arise on an ongoing basis and an allowance is made in that respect in the solvency requirement as type 2 counterparty risk. Receivables are to be broken down into receivables having been delinquent for over three months and receivables having been delinquent for under three months. Receivables over three months are stressed to 90%, while receiva-bles under three months are stressed to 15%. This reflects that the probability of receiving the amount owed decreases with time.

Market risk When accepting market risk, the aim is to achieve an optimum return without put-ting the total capital of Alm. Brand Forsikring and Alm. Brand Liv og Pension at risk of significant deterioration due to financial market developments.


24


Market risk is the risk of loss caused by fluctuations in assets and liabilities re-sulting from changes in market conditions. The boards of directors of Alm. Brand Forsikring and Alm. Brand Liv og Pension annually adopt investment limits and associated guidelines. The investment limits set out the framework governing investment activities and rules of reporting for investment activities and define benchmarks. The adopted investment limits are determined to reflect 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 of the company in question delegates powers to the relevant entities and to the fund manager.

Within the investment limits and guidelines of the board of directors, the investment strategy is specified in the asset management instructions, which are to be checked against the risk positions and reported to management. Risk Management is respon-sible for an independent calculation, verification and reporting of risks. Risk Manage-ment is organisationally separate from the operational business areas accepting risks for the group in connection with the performance of investment activities.

The insurance group uses different models for the calculation and management of risks on assets and liabilities as well as stress testing, for instance in the form of the Danish FSA’s risk and capital assessments. The company uses derivative in-struments to ensure that, for instance, the interest rate, currency and inflation risk on assets and liabilities are in accordance with the desired risk profile.

The table below shows the market risk at 31 December 2014 and 31 December 2015 for Alm. Brand Forsikring and Alm. Brand Liv og Pension, respectively, calcu-lated as the individual solvency contribution of the individual market risk factors. In December 2014, the Danish FSA issued an updated version of the Executive Order on solvency and operating plans for insurance companies. The only significant change in the calculation of the solvency need was a changed stress of interest rate risk, which led to a minor decline in Alm. Brand Forsikring’s interest rate risk and a major decline in Alm. Brand Liv og Pension’s interest rate risk.

The new calculation method used effective from 1 January 2015 resulted in a decline in Alm. Brand Forsikring’s interest rate risk, but the relatively low level of interest rate risk was also attributable to an active hedging policy. The increase in equity risk was due to the increase in equity mandates in 2015, while the increase in credit risk was due to increased exposure to Danish mortgage bonds, which also resulted in a higher concentration of bonds from a single mortgage bond issuer and hence in a greater concentration risk. Overall, Alm. Brand Forsikring’s market risk increased by DKK 42 million.

Market risk

Alm. Brand Forsikring A/SDKKm 2015 2014

Interest rate risk 34 95

Equity risk 95 47

Property risk 25 32

Credit risk 194 151

Concentration risk on equities, bonds, etc. 130 45

Currency risk 2 3

Less diversification effect -161 –96

Market risk 320 278

Market risk

Alm. Brand Liv og PensionDKKm 2015 2014


Equity risk 795 889

Property risk 359 354

Credit risk 325 272

Concentration risk on equities, bonds, etc. 101 100

Currency risk 284 307

Less diversification effect -511 –623

Market risk 1,601 1,911


25


The market risk of Alm. Brand Liv og Pension declined by just over DKK 300 million in 2015. The relatively large decline was due to the transition to a new calculation method for interest rate risk. Interest rate risk thus declined by DKK 364 million. Moreover, equity risk declined, while credit risk increased slightly. The other risk classes under market risk were largely unchanged compared with the previous year.

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%. The interest rate was lowered again on 1 April 2011 to 0.5% and has remained unchanged since then.

Alm. Brand Liv og Pension’s insurance portfolio is divided into four interest rate contribution groups characterised by the different guarantee levels on which the insurances are based. The interest rate level is currently relatively low, making it more difficult to continually achieve a satisfactory investment return relative to the guarantee levels. The investment strategies of the individual interest rate contribution groups are carefully designed to match the investment buffers of each individual group. This means that the highest interest rate contribution 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 expense 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. This is done without affecting the customers’ guaranteed benefits.

New business is only written in the lowest interest rate group. Accordingly, no new business is written in the highest group, which predominantly consists of insuranc-es under disbursement or close to retirement. As a result, the portfolio is gradually reduced. At 31 December 2015, liabilities for the highest interest rate contribution group amounted to just over DKK 4 billion.

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 indi-vidual 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.).

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 typically calculated in the event of immediate parallel interest rate shifts of up to +/- 2 percentage points in the Danish FSA’s discount rates. Limits for Alm. Brand Liv og Pension’s risk tol-erance have been defined relative to different scenarios. The interest rate risk limit is set at a maximum loss of DKK 600 million at a given parallel shift in the yield curve, which depends on the current level of interest rates.


26


Asset allocationAlm. Brand takes a cautious approach to allocation of own and customer invest-ment funds and has a small 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, re-spectively, is shown below.

Asset allocationAlm. Brand Forsikring A/S Alm. Brand Liv og Pension

Asset class 2015 2014 2015 2014

Government bonds 0% 0% 19% 16%

Mortgage bonds 81% 79% 43% 49%

Credit bonds 1% 0% 3% 2%

Emerging market bonds 0% 0% 4% 4%

Mortgage deeds 16% 19% 0% 0%

Other interest-bearing instruments 0% 0% 3% 1%

Equities 2% 2% 16% 15%

Property 0% 0% 12% 12%

The asset allocation of Alm. Brand Forsikring at 31 December 2015 reflects the strategic focus on stable returns and low investment risk in this part of the group. The investment assets of Alm. Brand Forsikring are predominantly placed in inter-est-bearing assets, most of which are Danish mortgage bonds with a high credit rating.

In 2015, Alm. Brand Forsikring introduced two new initiatives to ensure greater diversification its assets with expectations of achieving a greater return in the long term: Firstly, a small part of the mortgage bond portfolio was refinanced at the beginning of the year in order to reduce the yield dependency and instead increase the exposure to spread risk. Secondly, Alm. Brand Forsikring increased the alloca-tion in a small global equity mandate in the third quarter of 2015. The reason why the equity proportion is unchanged in the table above is that another small equity exposure expired and that the figures have been rounded.

These initiatives produce an expected return which is higher than that of ordinary Danish bonds. Alm. Brand Forsikring is protected against future credit losses on its portfolio of mortgage deeds as a result of an option agreement made with Alm. Brand Bank in connection with the acquisition in autumn 2014. This means that the non-life insurance company can deliver back mortgage deeds to Alm. Brand Bank if the mortgage deed debtors breach their payment obligations. This means that Alm. Brand Bank has retained the credit risk, whereas Alm. Brand Forsikring has only assumed the market risk associated with investing in the mortgage deeds.

The asset allocation of Alm. Brand Liv og Pension at 31 December 2015 was widely diversified across a number of asset classes. The company’s risk tolerance is cal-culated relative to its total assets. This risk tolerance is allocated to each portfolio according to size. Risk tolerance can thereby be measured regardless of the guar-antees 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 investment buffers, as the overall risk exposure for shareholders’ equity must be identical.


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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 necessary in relation to the prevailing risk tolerance.

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 Alm. Brand Forsikring are primarily placed in Danish mortgage bonds with a weighted duration of between two and three years. Interest rate swaps are used to adjust the interest rate risk on assets in order to limit the company’s interest rate risk. In 2015, Alm. Brand Forsikring increased its exposure to long-term mortgage bonds, but the interest rate risk on these is hedged so that the exposure is limited to movements in the spread between mortgage bonds and swap rates. However, in the event of major interest rate fluctuations, the hedging and the mortgage bonds will not move in parallel, which is the main reason why the black curve in the figure below bends in connection with major interest rate de-clines and the overall effect (bars) increases. Alm. Brand Forsikring manages this risk through day-to-day monitoring, and the hedging arrangements are adjusted on an ongoing basis in case of movements in the interest rate level. In Alm. Brand Forsikring, the average net interest rate risk in the event of a 100 bps decline amounted to DKK 35.7 million at 31 December 2015.

The net interest rate risk in the event of different parallel interest rate shifts is shown in the figure below.

Interest rate risk of Alm. Brand Forsikring 2015

400

300

200

100

0

-100

-200

-300

-400

-500-200 -100 0 100 200

DKKm

Net interest rate risk Interest rate risk, assets Interest rate risk, liabilities

Interest rate risk of Alm. Brand Forsikring in the event of parallel shifts in interest rates, 31 Dec 2015


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ALM limitInterest rate risk, liabilities

Net interest rate risk Interest rate risk, assets

Alm. Brand Liv og Pension uses derivatives to adjust the interest rate risk of the individual contribution groups in order to achieve the desired risk profile between assets and liabilities for each interest rate contribution group. The net interest rate risk in the event of different parallel interest rate shifts is shown in the figure below. The figure shows that the greatest interest risk to Alm. Brand Liv og Pension arises in the event of a sudden and severe interest rate fall, giving the company no time to adjust its hedging activities. The duration of provi-sions increases with the decline in interest rates.

Interest rate risk of Alm. Brand Liv og Pension’s policyholders’ funds

2,000

1,500

1,000

500

0

-500

-1,000

-1,500

-2,000

-2,500

-0.68% -0.18% 0.32% 0.82% 1.32% 1.82% 2.32% 2.82% 3.32%

DKKm

Interest rate risk of Alm. Brand Liv og Pension’s policyholders’ funds in the event of parallel shifts in interest rates, 31 Dec 2015

Equity risk The Alm. Brand insurance group only has limited equity risk exposure. However, Alm. Brand Forsikring increased the allocation in investment equities in 2015. This was done to diversify the portfolio on more asset classes. This move is expected to strengthen the overall return in the long term. The total portfolio of equities repre-sents about 2% of total assets.

Equity exposure in Alm. Brand Liv og Pension is accepted on the basis of the com-pany’s risk tolerance. Only policyholders’ funds in Alm. Brand Liv og Pension have exposure to investment equities. The exposure is chosen on the basis of a global investment universe.

In addition, Alm. Brand Forsikring and Alm. Brand Liv og Pension both hold a lim-ited number of unlisted equities, primarily in the form of strategic sector equities. These equities are held for the purpose of supporting the business activities. There is no current pricing in the market for unlisted shares. Consequently, the valuation


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is based on an estimate which builds on information from the companies’ financial statements, experience from transactions involving shares in the companies in question as well as input from qualified third parties.

Property riskAlm. Brand Forsikring, including Alm. Brand Liv og Pension, is exposed to changes in real property prices and matters related to letting through property investments, primarily in Alm. Brand Liv og Pension and the subsidiary Alm. Brand Ejendomsin-vest A/S. In Alm. Brand Liv og Pension, this property exposure is related to policy-holders’ funds. Most of the property investments are in owner-occupied properties, but the group also makes direct property investments, mainly in office property. The risk profile when buying and selling property is focused on obtaining a high de-gree 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.

Inflation riskAlm. 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. 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.

The inflation risk in Alm. Brand Liv og Pension is limited, as the size of future payments is not dependent on inflation. However, Alm. Brand Liv og Pension has placed a part of its assets in properties, index-linked bonds and equities which to a greater extent generate inflation-proof return over time, thereby providing policy-holders with a certain measure of protection against inflation risk.

Other market risksThe Alm. Brand insurance group has only limited currency risk exposure. The cur-rency risk of Alm. Brand Forsikring is related partly to a limited exposure to bonds denominated in foreign currency and partly to positive market values of derivative fixed-income instruments denominated in foreign currency. Alm. Brand Liv og Pen-sion pursues a more proactive currency strategy, which means that foreign equity and bond positions are not currency hedged unless deemed expedient.

Some bonds held by the insurance group are valued with a risk allowance relative to the benchmark yield curve. Spread risk is hence the risk that the value of such bonds declines due to higher risk allowances arising, for instance, in the event of greater risk aversion in the market. Among other things, credit bonds, government bonds from countries outside the European Economic Area (EEA) and mortgage bonds are subject to spread risk. Spread risk also covers the risk of prepayment of callable mortgage bonds.

Alm. Brand Forsikring and Alm. Brand Liv og Pension hold a quite substantial port-folio of Danish mortgage bonds, exposing them to rising mortgage yields relative to the general yield curve. The liabilities side is also affected by the same yield spread by way of the composition of the discount curve of the Danish FSA, which is used for the discounting of liabilities. However, the effect on the liabilities side is more moderate, as it only applies to a part of the discount curve, reducing the effect to just 50%. Alm. Brand Forsikring increased its exposure to spread risk in 2015 in order to achieve a higher expected return in the low-interest-rate setting that characterised the financial markets in 2015.

Alm. Brand Forsikring and Alm. Brand Liv og Pension limit the spread risk due to rating-defined limits for investments in credit and emerging market bonds. The Alm. Brand Group makes very limited investments in credit bonds, the majority of which are investment grade (AAA to BBB).


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Concentration risk is the risk arising when the company’s exposures are concen-trated, for instance, on few lines or on few large individual 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 also defined limits for exposure to relevant individual securities, issuers, counterparties and regions so as to minimise accumulation of risk in the portfolio.

Other risksThe insurance group has limited liquidity risk. Major weather-related events put Alm. Brand Forsikring’s liquidity the most under pressure. 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 holdings of market-able bonds. However, Alm. Brand Forsikring’s acquisition of the mortgage deed portfolio from Alm. Brand Bank has reduced liquidity in the investment portfolio.

The greatest liquidity risk for Alm. Brand Liv og Pension is the risk of a large num-ber of customers wanting to move their pension savings at the same time. Like in Alm. Brand Forsikring, the possibility of procuring liquidity by selling assets is very good due to 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 and therefore does not give rise to an actual liquidity risk impact on equity.


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CONTENTSALM. BRAND BANK

Alm. Brand Bank

Alm. Brand Bank has nationwide coverage. The bank’s activities comprise for-ward-looking activities and winding-up activities. The bank’s forward-looking activ-ities offer products that meet private customer financial needs. Moreover, the bank has activities within leasing, bond, equity and currency trading as well as research (Markets) and asset management (Asset Management).

Management’s statementOn 2 March 2016, the board of directors and management board of Alm. Brand Bank approved the Risk and Capital Management Report for 2015.

The board of directors finds that the bank’s risk and capital management proce-dures are adequate and provide assurance that the risk management systems are adequate in relation to the bank’s profile and strategy.

The board of directors finds that the Risk and Capital Management Report de-scribes the bank’s overall risk profile in relation to its strategy, business model, etc. The Risk and Capital Management Report provides a comprehensive view of the bank’s risk management procedures, including how the bank’s risk profile and risk tolerance as defined by the board of directors affect each other.

The bank’s policies implement its strategy and business model in more specific terms. Guidelines issued by the board of directors to the management board and delegated authorisations implement the policies fully and adequately. Alm. Brand’s risk management system is designed so as to reflect the risk tolerance of subsidi-aries. Risks are within the risk tolerance, and detailed limits have been defined in policies and delegated authorisations. The risk tolerance is revised on an ongoing basis in the reporting submitted to the board of directors. The board of directors finds that there is consistency between business model, strategy, policies, guide-lines and the bank’s risks.

Alm. Brand Bank’s vision is that we want to take care of our customers. The vision is reflected in the business strategy which is focused on the segments private cus-tomers, financial markets and leasing. The bank wants to be the primary banker of customers who own their own homes or live in cooperative housing and customers with a major requirement for investment and pension advisory services.

“The board of directors finds that the bank’s risk and capital management procedures are ade-quate and provide assurance that the risk management systems are adequ-ate in relation to the bank’s profile and strategy.


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Alm. Brand Bank’s values in the Supervisory Diamond are far from the thresh-old values in all five categories. Growth in lending remains negative, which was expected considering the bank’s lending strategy being focused exclusively on the private customer segment. The change in the liquidity excess coverage is mainly attributable to the sale of the mortgage deed portfolio to Alm. Brand Forsikring, which has lowered the liquidity requirement.

Individual solvencyThe adequate total capital of Alm. Brand Bank was DKK 1,034 million at 31 De-cember 2015, corresponding to an individual solvency need of 14.0%. Since 31 December 2014, the adequate total capital has decreased by DKK 186 million, primarily due to lower credit risk. The table below shows the adequate total capital and the individual solvency need of Alm. Brand Bank per risk type.

Calculation of the bank’s adequate total capitalThe bank calculates the adequate total capital (previously called adequate capital base) on the basis of the 8+ method described in the Danish FSA’s “Guidelines on adequate total capital and solvency needs for credit institutions”. The calculation according to the 8+ method is based on 8% of the total risk exposure amount plus a Pillar 2 margin for risks not assessed to be covered by the Pillar 1 requirement.

The bank’s individual solvency need was calculated at 14%, and with a capital ratio of 18.6%, the bank had an excess coverage of 4.6 percentage points. The bank has an internal target stipulating that the capital ratio should be the individual sol-vency need + 3 percentage points of the total risk exposure amount, but not less than 16% of total risk exposure amount.

The maximum risk tolerance defined by the board of directors is managed by way of the limits determined in the individual policies. In addition, the board of direc-tors considers the limits defined in the Supervisory Diamond, see the table below, which shows both the maximum permissible threshold values of the Supervisory Diamond and the bank’s actual figures for these threshold values.

At 31 December 2015, Alm. Brand Bank was in compliance with all five threshold values of the Danish FSA’s Supervisory Diamond as shown in the figure below.

Large exposuresThreshold value ‹ 125% 2015 28% 2014 31%

Growth in lendingThreshold value ‹ 20% 2015 –9% 2014 –35%

Funding ratio Threshold value ‹ 1 2015 0.52 2014 0.40

Property exposure Threshold value ‹ 25% 2015 14% 2014 19%

Excess liquidity coverageThreshold value › 50% 2015 272% 2014 323%


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8+ method

Alm. Brand Bank parentDKKm TREA Adequate total

capital 2015ISB

contribution %

Credit risk

Pillar 1 risk, total 6,168 6.6

Pillar 2 risk, add-on 4.2

Credit risk, total 6,168 799 10.8

Market risk

Pillar 1 risk, total 828 66 0.9

Pillar 2 risk, add-on 32 0.4

Market risk, total 828 98 1.3

Other risks

Operational risk 406 32 0.4

Earnings risk 0 0.0

Add-on, AT1 capital 105 1.4

Other risks, total 137 1.9

Total 7,402 1,034 14.0

In the credit area, the guidelines specify methods for calculating Pillar 2 margins for exposures representing more than 2% of the total capital and for credit risk concentration on industries and individual exposures, respectively. Moreover, there is a requirement that a Pillar 2 margin is calculated according to a non-specified method on weak exposures representing less than 2% of the total capital.

In addition to the specified margins in the credit area, the bank reserves a Pillar 2 margin on agricultural and commercial exposures, on mortgage deeds as well as on the private customer portfolio.

The calculation of adequate total capital in the market risk area is in line with the Danish FSA’s 8+ method as described in the guidelines. The bank reserves ade-quate total capital for interest rate, equity and currency risk but does not reserve any capital for concentration risks on financial assets. Risks related to properties are calculated in the bank under the credit risk area.

Under additional risks, the bank reserves capital for operational risks and earnings risks. The calculation of operational risk is based on the basic indicator method , which calculates the operational risk as 15% of the average net interest income and non-interest-related net income for the past three years. The earnings risk is calculated according to the 8+ method, which requires that capital is reserved if core earnings divided by lending is less than 1%.


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Losses and writedowns DKKm

1,200

2011 2012 2013 2014 2015

1,000

800

600

400

200

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, expo-sure types, collateral types, etc., a general change in credit quality due to changes in legislation, economic conditions, market practices and conditions, etc.

The sale of most of the mortgage deed portfolio (DKK 1.9 billion) to Non-life Insur-ance effective 11 December 2014 did not reduce the credit risk. This is due to Non-life Insurance’s option to sell delinquent mortgage deeds back to Alm. Brand Bank. Unless otherwise indicated, the data below are calculated inclusive of the mortgage deed portfolio.

Credit risk derived from lendingThe figure below shows the development in losses and writedowns including cred-it-related value adjustments of mortgage deeds in Alm. Brand Bank measured pro rata in the period 2011–2015.

The financial crisis impacted the level of losses and writedowns, which are calculat-ed inclusive of credit-related value adjustments of mortgage deeds. In 2011, Alm. Brand Bank’s losses and writedowns were just over DKK 994 million, shrinking to DKK 327 million in 2015. The increase in losses and writedowns from 2014 to 2015 was due in particular to agricultural exposures, as the agricultural sector was hit hard by low settlement prices on its products.

The figure below shows the development in loans and advances at amortised cost and accumulated writedowns (previously the allowance account) of Alm. Brand Bank. Loans and advances declined from about DKK 10 billion in 2011 to just under DKK 7 billion in 2015 as a result of Alm. Brand Bank’s strategy of winding up unwanted customer segments. Impairment writedowns also declined in the period, but not at the same rate as loans and advances. This resulted in an increase in the share of loans and advances for which provisions have been made.


35


The decline in loans and advances was due to the winding-up of the discontinued business areas. Loans and advances in the bank’s forward-looking activities amounted to about DKK 4 billion at 31 December 2015, while loans and advances in the winding-up bank accounted for the remaining DKK 3 billion.

Credit policyThe 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 ag-ricultural customer portfolios will be phased out over the coming years. As a result, Alm. Brand Bank mainly grants new loans to private customers and for leasing operations and investment credits in Financial 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.

The Credit Secretariat has overall responsibility for assessing and following up on credit risks, both on individual customers and on portfolios.

The bank performs a credit rating of private customers seeking loans by reviewing the customers’ overall financial situation, including disposable amount, assets and level of debt. As a supplement, the bank uses a credit scoring model. The credit scoring models have been developed over a number of years. The models are still being developed and improved on the basis of recent experience and changes in market conditions. Credit scor-ing models are applied to secured as well as unsecured loans.

Alm. Brand Bank uses an automated authorisation control system for private customers. Together with the bank’s credit application 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 informa-tion is included in the overall decision-making basis for credit segmentation of the custom-er 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 minimise 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.

Accumulated writedowns

DKKm 2015 2014 2013 2012 2011

Loans and advances 6,979 7,123 7,708 8,735 10,003

Accumulated writedowns 1,439 1,456 1,451 1,552 1,609

Provisions in % 20 20 19 18 16


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Calculation of credit exposures on individual customersIn 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 guarantees

Composition of exposure and remaining termThe table below also shows that Alm. Brand Bank’s largest exposures are to businesses and private customers. Almost all of these are Danish.

Basis of calculation of total risk exposure amount before downgrading but after writedowns distributed on remaining term per exposure category for the Alm. Brand Bank group.

Total risk exposure

Alm. Brand Bank A/SDKKm

3 months or less

Between 3 months

and 1 year

Between 1 year and 5

years

More than 5 years Total Average

year

Exposures to central governments or central banks 350 0 0 0 350 307

Exposures to institutions, cf. section 4(1) 859 0 0 0 859 982

Exposures to business entities etc. 746 402 631 355 2,135 2,376

Exposures to private customers 983 109 561 3,057 4,711 4,969

Exposures secured by mortgage on real property 172 10 33 695 910 735

Exposures subject to accounts overdrawn or in arrears 725 354 111 1,111 2,302 2,331

Exposures subject to particularly high risk 16 0 0 0 16 8

Other exposures 102 0 0 0 102 140

Equity exposures 363 0 0 0 363 345

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

Total 4,317 876 1,337 5,218 11,747 12,192

Total 2014 5,190 724 1,130 5,593 12,638 12,961

Alm. Brand Bank recorded a decline in the overall exposure of more than DKK 890 million relative to 31 December 2014.


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It should be noted that the exposures shown in the table above have been cal-culated inclusive of unutilised credit facilities and counterparty risk but less any impairment writedowns. The exposure category “Exposures 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.

The difference between the total risk exposure amount of DKK 11.7 billion and to-tal loans and advances of DKK 7 billion is due in particular to exposures to central banks and institutions, the mortgage deed portfolio, undrawn credit facilities and other exposures which are not included in the calculation of loans and advances.

Risk mitigation approaches used to calculate the total risk exposure amountAlm. Brand Bank uses the standardised approach in the calculation of the total risk exposure amount. Credit risk mitigation approaches include the effect of guaran-tees, credit derivatives and security in the form of financial collateral. As a result, the collateral measured for the calculation of the total risk exposure amount and the overall collateral underlying the business of Alm. Brand Bank are not fully con-sistent. The difference is mainly due to mortgages on real property.

Credit risk mitigation in the calculation of the total risk exposure amount by indus-try at 31 December 2015

Collateral Guarantees and credit derivatives

DKKmSikkerheds-

stillelseGarantier og

kreditderivater

Institutions 269 0

Business entities etc. 182 0

Private customers 14 0

Real property 6 0

Exposures subject to accounts overdrawn or in arrears 4 0

Total 2015 475 0

The volume of collateral security provided in 2015 increased significantly relative to 2014, mainly due to the increased use of repo transactions.

Alm. Brand Bank has guidelines and instructions for the provision of different types of collateral and guarantees. Credit derivatives are generally not used. The princi-ples for the valuation of such collateral and guarantees depend on both asset type and business area.

Risk concentrationAlm. 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.

The bank’s continued 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 total capital of Alm. Brand Bank in the period 2011–2015:


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The sum of large exposures, calculated in accordance with the Danish FSA’s re-quirements for quarterly reporting, represented approximately 30% of the bank’s total capital at 31 December 2015, distributed on two exposures. One of the remaining exposures is related to the winding-up portfolio, the other to intra-group lending.

Geographical distributionAlm. Brand Bank predominantly has exposures to Danish customers. However, the bank has a few exposures to German properties and Swedish mortgage deeds. Alm. Brand Bank is focused on Danish exposures, and exposures to other countries are not expected to increase in the years ahead.

Geographical distribution

98.8% Denmark

0.5% Germany

0.7% Sweden

Large exposures

Year-end 2015 2014 2013 2012 2011

No. of large exposures 2 2 4 4 5


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DefaultA receivable is deemed to be in default when it is considered unlikely that the cus-tomer 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 exposures are deemed to be in default. The criteria which the bank uses to determine default are in accordance with section 52 of the Executive Order on financial reporting. The criteria assess actual default as well as whether there is a significant probability of default which is expected to lead to default proper.

Specification of defaulted and impaired loans, value adjustments, impairment writedowns and expensed amounts in 2015 for Alm. Brand Bank. The specification covers loans at amortised cost.

Defaulted and impaired loans, value adjustments, writedowns and expensed amounts

Alm. Brand Bank A/SDKK

Defaulted and impaired loans

Value adjustments and writedowns Expensed amounts

Commercial customers, including Financing and insurance 0 0 0

agriculture, hunting, forestry and fisheries 936 650 244

Private customers 0 0 0

Manufacturing and extraction of raw materials 0 0 0

Utilities 7 7 5

Building and construction 2 1 0

Trade 1 1 9

Transport, hotels and restaurants 0 0 -3

Information and communication 0 0 0

Financing and insurance 35 28 9

Real property 574 168 -32

Other sectors 81 57 -9

Total, commercial customers 1,637 912 222

Private customers 492 342 40

Total 2015 2,129 1,254 262

Total 2014 2,133 1,304 144

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 2015 commercial customers, especially within agriculture and real proper-ty, 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 accumulated writedowns 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.

Defaulted and impaired loans were largely unchanged from 2014 to 2015, covering an increase in agricultural exposures and a decline in exposures to real property and other sectors.


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Receivables written down for impairmentThe indication of impairment is assessed on an ongoing basis by Alm. Brand Bank’s credit secretariat. Receivables are written down for impairment if the development in individual exposures or objective evidence is deemed to give cause therefor. The valuation of collateral provided as security for loans is based on the realisation principle, which means that the value corresponds to the expected actual market value.

A restated model is used for the calculation of collective impairment charges, which is based on a model developed by the Association of Local Banks in Denmark.

Exposure and accumulated writedowns in the banking group. The specification covers loans at amortised cost.

Exposure

DKKm 2015 2014

Total value of exposures before writedowns 13,186 14,093

Impairment writedowns 1,439 1,456

Total value of exposures after writedowns 11,747 12,638

Losses and writedowns DKKm

Ultimo 2015 2014 2013 2012 2011

Impairment writedowns and provisions at beginning of year including collective 1,456 1,451 1,552 1,609 1,402

New impairment writedowns and provisions including collective 431 448 383 539 794

Reversed impairment writedowns and provisions including collective 157 287 182 259 142

Loss of amounts previously written down or provided for 290 157 302 337 444

Impairment writedowns and provisions at end of year including collective 1,439 1,456 1,451 1,552 1,609

Loss of amounts not previously written down or provided for 24 24 35 48 143

Settlements made on debt previously written off 44 45 40 18 28

The above table shows the overall exposure before and after impairment write-downs in the banking group. The exposure declined relative to 2014. The decline is reflected in the accumulated writedowns, which accumulate prior-year impair-ment writedowns including collective impairment charges adjusted to reflect actual losses.

Losses and writedowns including collective impairment charges in the period 2011–2015 are set out in the table below. The specification covers loans at amor-tised cost.

As shown in the table above, total impairment writedowns and provisions amount-ed to just under DKK 1,439 million at 31 December 2015, marking a slight decline relative to the year-earlier date.


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Counterparty riskThe bank’s financial counterparties arise mainly through placement of cash funds with other banks and bilateral derivative agreements. Based on an individual as-sessment, exposure limits are defined for each counterparty.

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 Alm. Brand Bank when its exposure to Alm. Brand Bank 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 derivati-ve 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 manage-ment consent.

Counterparty risk on derivative instruments

DKKmAlm. Brand Bank

2015

Derivatives with a positive market value 35

Netting -10

Exposure after netting 25

Collateral received -5

Exposure after netting and collateral 20

Market riskThe board of directors of Alm. Brand Bank annually adopts the bank’s risk policy and related guidelines for market risk. The market risk policy and guidelines are 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 total capital. The market risk policy aims to ensure that risks assumed from time to time are calcu-lated and reflect the company’s business strategy, risk profile and capital resourc-es. The guidelines set out quantitative limits for market risks in accordance with the defined risk profile, including which types of market risk the bank will accept as part of its operations as well as the extent of the different risk types.

The overall guidelines are specified and delegated from the management board to the relevant operational business areas in market risk instructions, which are com-pared with the risk positions and reported to management on a daily basis.

Alm. Brand Bank’s Credit Secretariat and Risk Management departments are re-sponsible for preparing policies and instructions and for calculating, managing and reporting risks. The two departments are also responsible for independent moni-toring and verification of risks with a view to compliance with policies, guidelines and instructions. In order to ensure independent calculation and risk reporting, the


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Credit Secretariat and Risk Management departments are organisationally separate from the operational business areas accepting risks for the group in connection with its operations.

Alm. Brand Bank regularly takes positions in the financial markets for the account of 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 bank in order to balance out financial risks on assets and liabilities with the aim of achieving a satisfactory return that matches the bank’s risks and applied capital. The bank’s risk management uses derivative financial instruments to adjust the market risk.

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

Market risk

Alm. Brand Bank A/SDKKm 2015 2014


Equity risk 3 9

Currency risk 18 25

Total market risk 98 154

The adequate total capital derived from market risk in Alm. Brand Bank was re-duced by DKK 56 million relative to 31 December 2014. The lower currency risk was mainly due to reduced limits. Alm. Brand Bank continues to have very limited exposure to equities. The decline in interest rate risk was due to a change in expo-sure and a decline in the portfolio of bonds.

Asset allocationThe asset allocation of Alm. Brand Bank is shown below. The proportion of credit bonds, government bonds and equities increased slightly in 2015 at the expense of other interest-bearing instruments. The mortgage deed portfolio is considered to be a part of the credit exposures and is therefore not included in the table below.

Asset allocation

Alm. Brand Bank A/S% of total assets

31 Dec 2015

31 Dec2014

Government bonds 1% 0%

Mortgage bonds 88% 88%

Credit bonds 3% 2%

Other interest-bearing instruments 2% 5%

Equities 6% 5%

Total 100% 100%


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Interest rate riskThe interest rate risk of the bank is defined as the accounting loss resulting from changes in the fair value of an interest rate exposure because of changes in market rates. Interest rate risk is calculated on the basis of option-adjusted durations cal-culated in the RIO system. RIO is updated and operated by Alm. Brand Bank. For interest rate exposures without a conversion option, interest rate risk is calculated using Simcorp Dimension.

The board of directors of Alm. Brand Bank has defined limits for interest rate risk within and outside the trading portfolio. The bank’s interest rate risk in the trading portfolio is derived from the portfolio of bonds and other financial instruments and from trading on behalf of customers. 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.

The bank’s interest rate risk outside the trading portfolio is derived exclusively from the portfolio of mortgage deeds. In December 2014, the bank sold all non-delin-quent mortgage deeds to Alm. Brand Forsikring. Most of the remaining non-delin-quent mortgage deeds are Swedish, but there is also a very small share of Danish mortgage deeds. The fair value and interest rate risk on the portfolio of non-delin-quent mortgage deeds is calculated by means of an internal mortgage deed model which makes adjustments for expected early redemptions and credit losses on the mortgage deeds. In addition, there is a portfolio of delinquent mortgage deeds for which no market value adjustment is performed.

At 31 December 2015, the bank’s interest rate risk in the trading portfolio was cal-culated at DKK 8 million, against DKK 52 million at 31 December 2014. The decline was due to a change in the hedging of interest rate risk. The bank’s interest rate risk outside the trading portfolio was calculated at DKK -7 million after hedging at 31 December 2015, against DKK 5 million at 31 December 2014. The interest rate risk of the bank is calculated on the basis of modified option-adjusted durations (MOAD).

The interest rate risk of Alm. Brand Bank at 31 December 2015 is shown below.

Interest rate risk

DKKm Alm. Brand Bank A/S

Trading portfolio 15

Outside trading portfolio -7

Total interest rate risk 8

Currency risk The banking group’s daily currency risk is calculated and managed on the basis of an unweighted exchange rate indicator 1 exposure. Currency risk is measured in Danish kroner and calculated and reported on a daily basis by Risk Management.

The bank’s loans are primarily denominated in Danish kroner and are therefore not subject to currency risk to any significant extent. The investment strategy stipulates that the bank may hold active positions in foreign currency within given limits. An active position means that it is possible to purchase foreign currency without having any obligation to do so and may sell foreign currencies which are not part of the portfolio. Derivative financial instruments are used to manage cur-rency risk.


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At 31 December 2015, the bank’s currency risk calculated according to the un-weighted exchange rate indicator 1 approach was DKK 182.4 million, against DKK 56 million at 31 December 2014. The exposure was mainly to euro where volatility is low. The currency risk of Alm. Brand Bank at 31 December 2015 is shown below.

Currency risk


Unweighted exchange rate indicator 1 182.4

Exchange rate indicator 2 (99% VaR) 1.0

Equity riskAlm. Brand Bank’s portfolio of equities consists of equities in the trading portfolio and equities outside the trading portfolio.

Equities in the trading portfolio are held with a view to trading on behalf of custom-ers or as part of the bank’s investment portfolio. The bank’s trading portfolio con-sists 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, and the plan is to reduce these holdings. At 31 December 2015, the bank’s portfolio of equities in the trading portfolio totalled DKK 22 million.

The bank’s portfolio of equities outside the trading portfolio consists of shares in the bank’s subsidiaries, Alm. Brand Leasing and sector equities for the purpose of supporting the bank’s operations. Participation in sector companies is deemed necessary, and the bank does not plan to sell the shares, which are therefore recognised outside the trading portfolio. As most of the sector equities are unlisted, there is no current pricing in the market. The valuation is therefore based on an estimate and is described in detail in note 40 to the financial statements of Alm. Brand Bank. The risk and the adequate total capital on equities outside the trading portfolio are calculated within the credit area.

Alm. Brand Bank’s equity exposure outside the trading portfolio amounted to DKK 367 million at 31 December 2015, of which sector equities represented DKK 130 million. The most significant change from 2014 was an increase from DKK 65 million to DKK 135 million in the equity exposure in subsidiaries. The increase was mainly due to a DKK 50 million contribution from Alm. Brand Bank to the subsidi-ary Alm. Brand Leasing.

Equity risk


Own portfolio of sector equities 130

Equity exposure in trading portfolio 22

Equity exposure in winding-up portfolio 68

Investments in associates 12

Equity exposure in subsidiaries 135

Total 367


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Risk Management reports interest rate risk on a daily basis. Alm. Brand Bank uses derivative financial instruments to manage its equity risk exposure.

In the calculation of the banking group’s equity exposure, the bank’s own equity portfolio is consolidated with equity positions in Alm. Brand Leasing. As a result, the equity risk of Alm. Brand Bank is higher than that of the banking group.

Other market risksSpread risk is the risk associated with mortgage bonds and other credit bonds due to their being priced at a risk allowance 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 widening yield spreads caused, for instance, by higher risk aversion in the market.

Alm. Brand Bank increased its exposure to spread risk in early spring and lowered the yield dependency instead. This resulted in a substantial increase in spread risk, currently making it one of the company’s most significant financial risks.

Alm. Brand Bank manages the spread risk by means of rating-defined limits for investments in credit and mortgage bonds.

Liquidity riskLiquidity risk is the risk that an institution is not able to meet its obligations when they fall due in the short to medium term. 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 man-agement are defined in the liquidity policy and guidelines for the management board. The banking group aims to ensure that liquidity is at all times sufficient to support its future operations and comply with the statutory requirements and 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.

New legislation entered into force in the liquidity area in 2015. The Liquidity Cov-erage Ratio (LCR) is the new liquidity requirement from the Danish FSA. The phas-ing-in of the LCR began in October 2015. The LCR is a minimum requirement for Alm. Brand’s holdings of liquid assets relative to a 30-day stress period. The LCR is thus a short-term liquidity requirement. A longer-term liquidity requirement, the Net Stable Funding Ratio (NSFR), will be introduced as from 2018 to ensure that the bank has a sufficiently stable liquidity profile on a one-year horizon.

During the phase-in period, Alm. Brand must satisfy the stricter of the current section 152 liquidity requirement and the LCR requirement phased in from time to time. Longer term, the LCR will replace the section 152 ratio, as the section 152 ratio will be discontinued with effect from 1 January 2017. The LCR requirement is as follows:


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Phase-in of LCR requirement

Schedule1 Oct 2015

1 Jan 2016

1 Jan2017

1 Jan2018

LCR coverage requirement 60% 70% 80% 100%

The LCR requirement is more focused on the liquidity risks of various products and on the quality of the liquid assets than the section 152 requirement. Also, the LCR is more volatile than section 152.

Alm. Brand Bank has a substantial deposit surplus and relatively stable deposits consisting of deposits from many small customers. The company has considerably more liquid assets than necessary in an LCR context and may even relatively easily generate LCR liquidity by restructuring liquid assets. Alm. Brand Bank is assessed to have a low liquidity and funding risk.

Compliance with the bank’s liquidity target is ensured through the 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. On an annual basis, Alm. Brand Bank prepares a risk report for the funding and liquidity area (ILAAP) to the board of directors. The ILAAP comprises a presentation of Alm. Brand Bank’s liquidity and funding situation and an assessment of the risk situation in the liquidity and funding area.

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 by neutralis-ing imminent liquidity effects, thereby maintaining liquidity within the limits defined by the board of directors. At the same time, it is ensured that Alm. Brand Bank has the financial resources to absorb unexpected liquidity effects. The financial resourc-es may be in the form of certificates of deposit and undrawn money market lines with major market players. Moreover, the bank has also established a set-up for repo transactions and the possibility of selling the liquid asset portfolio or restruc-turing assets.

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. Alm. Brand Bank has gradually reduced its dependency on external funding in the form of fixed-rate deposits, and the bank has significant excess liquidity coverage, which is also expected to be adequate in future. At the same time, it is noted that historically the bank has been successful in attracting fixed-rate deposits.

The refinancing requirement depends on developments in deposits and lending in 2016. The bank’s strategy is to continue to reduce total assets related to wind-ing-up activities but also to increase the business volume with existing and new customers in the bank’s forward-looking activities.

Alm. Brand Bank has a contingency plan for liquidity risks, which is intended to ensure that the bank is prepared and has taken adequate measures should an un-favourable liquidity situation arise. The bank’s liquidity contingency plan describes guidelines for the timing of its implementation, which tools that may come into use in order to procure the desired liquidity and whether the individual tool has a direct negative capital effect.


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Excess liquidity coverage, last 24 months

Dec

201

3

Jan

2014

Jan

2015

Feb

2014

Feb

2015

Mar

201

4

Mar

201

5

Apr

201

4

Apr

201

5

May

201

4

May

201

5

Jun

2014

Jun

2015

Jul

2014

Jul 2

015

Aug

2014

Aug

201

5

Sep

201

4

Sep

201

5

Oct

201

4

Oct

201

5

Nov

201

4

Nov

201

5

Dec

201

4

Dec

201

5

1,0

0,0

2,0

3,0

4,0

5,0

6,0

DKK

bn

Excess rel. to s. 152 requirement Excess rel. to Supervisory Diamond

The bank’s liquidity reserves in 2015Alm. Brand Bank aims to have excess liquidity coverage of at least 100% relative to the section 152 requirement and since 1 October 2015 of the LCR requirement as well. The bank’s excess liquidity coverage is measured on a day-to-day basis by Risk Management, and throughout 2015 the excess liquidity coverage relative to the section 152 requirement was in excess of 200%.

As appears from the figure “Excess liquidity coverage, last 24 months” below, the bank has had considerable excess liquidity coverage relative to the section 152 requirement and the Supervisory Diamond requirement for a long time. Seen over the past two years, the low point was the summer of 2014 when the excess liquidi-ty coverage was approximately DKK 1.8 billion relative to the Supervisory Diamond requirement.

In 2015, the trend was a decline in nominal excess coverage, which was in line with expectations. The relative excess coverage, on the other hand, increased. The substantial increase in December 2014 was attributable to the mortgage deed transaction through which the bank freed up a large amount of liquidity by selling most of the mortgage deed portfolio to Alm. Brand Forsikring. However, the credit risk attaching to the mortgage deeds has remained in Alm. Brand Bank, as Alm. Brand Forsikring has an option to sell back delinquent mortgage deeds to Alm. Brand Bank.

Since the entry into force of the LCR effective 1 October 2015, the bank’s LCR has fluctuated between 190% and 503% calculated at the end of the month. See the table below. This means that the LCR was significantly higher than the fully phased-in LCR requirement of 100 %.

End of month, 2015September October November December

LCR 190% 347% 503% 382%


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Lending Deposits

Deposits and lending

Jan

2015

Feb

2015

Mar

201

5

Apr

201

5

May

201

5

Jun

2015

Jul

2015

Aug

201

5

Sep

201

5

Oct

201

4

Oct

201

5

Nov

201

4

Nov

201

5

Dec

201

4

Dec

201

5

2,0

0,0

4,0

6,0

8,0

10,0

12,0

DKK

bn

As can be seen from the table and figure above, Alm. Brand Bank has had a strong excess liquidity coverage measured in terms of both the LCR requirement and the section 152 requirement. The liquidity situation has been strengthened by a substantial deposit surplus. Alm. Brand Bank obtains most of its funding from the market for deposits, and the company has extensive experience in running deposit campaigns. Developments in deposits and lending are shown in the figure below.

Lending fluctuated between DKK 5 and 6 billion in 2015 after a decline of about DKK 2 billion in connection with the mortgage deed transaction in December 2014. However, deposits declined by just under DKK 3 billion in 2015. This means that there was a significant reduction in deposits, but this reduction was both expected and in line with the bank’s strategy. The bank’s funding requirements declined after the mortgage deed transaction, but it will take some time to adjust the deposits. However, as clearly shown in the chart, the bank still had a very substantial deposit surplus at the beginning of 2016, which has also historically been the case. In addition, Alm. Brand Bank has transitioned from having many fixed-rate deposits to primarily having floating-rate deposits today, which are considered to be more stable.

The bank expects its deposit surplus to decrease throughout 2016 as depositors withdraw funds from expiring fixed-rate agreements. However, the bank also ex-pects to have a substantial deposit surplus at 31 December 2016.

Composition of the bank’s funding sources in 2015The funding composition is based on a high equity ratio, ensuring solid capital strength with a high total capital ratio. Moreover, the bank aims to have a funding base founded on deposits from Danish depositors. Interbank funding is used only to a limited extent, and in 2015 interbank funding was only necessary to offset short-term liquidity fluctuations. Other funding sources may be used if the price of funding makes it attractive.

In 2015, deposits remained the largest funding source by far. This trend is expect-ed to continue in 2016. In 2014, Alm. Brand Bank used the credit facility made available by Danmarks Nationalbank, but this was not a viable option in 2015. The bank instead increased its use of repo deposits.


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Funding composition2015

81% Deposits

2% AT1 capital and subordinated loans

15% Equity

3% Repo deposits

Funding composition2014

79% Deposits

1% AT1 capital and subordinated loans

12% Equity

1% Repo deposits 7% Danmarks Nationalbank

Additional tier 1 capital amounted to just under 2% of the company’s funding at 31 December 2015. Alm. Brand expects equity and deposits to constitute the vast majority of funding in the years ahead.

Gearing ratioThe gearing ratio is a measure of Alm. Brand Bank’s exposure relative to its tier 1 capital and consequently a risk measure. The lower the ratio, the smaller the amount of the bank’s capital relative to its exposure, and the higher the risk for the bank, all other things being equal.

Alm. Brand Bank has defined a minimum limit for the gearing ratio of 5%, but the actual gearing ratio was significantly higher. At 31 December 2015, the gearing ratio was 10.1%, compared with 7.9% at 31 December 2014. The increase in the gearing ratio was attributable to a major reduction in the bank’s exposure – pri-marily due to the winding-up strategy for the discontinued business areas. The capital also decreased in the period, but the decline was relatively smaller, which explains the improvement of the gearing ratio.

The gearing ratio is a conservative figure as it is calculated exclusive of additional tier 1 capital. Expectations are that Alm. Brand Bank’s gearing ratio will remain at a high level, as lending is monitored on an ongoing basis, discontinued exposures are wound up, and the capital target has been determined conservatively.

The statutory requirement prescribes that the gearing ratio may not be less than 3%, which means that Alm. Brand Bank has substantial excess coverage relative to the statutory requirement.


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Asset pledging in Alm. Brand BankThe bank provides and receives assets as collateral security on an ongoing basis as part of its primary business activities. Collateral security is provided for margin po-sitions on derivatives, clearing, repo financing and Danmarks Nationalbank in order to maintain its drawing rights. Moreover, collateral security is received from margin positions on derivatives and reverse repo transactions.

The table below provides an overview of Alm. Brand Bank’s asset pledging.

Form A - Assets

Carrying amount of assets pledged

Fair value of assets pledged

Carrying amount of assets not pledged

Fair value of assets not pledged

010 040 060 090

010 Assets of reporting institution 0 10,128,998

030 Equity instruments 0 0 226,845 226,845

040 Debt instruments 310,966 306,237 3,673,919 3,673,919

120 Other assets 0 1,627,077 0

Form B - Collateral security received

Fair value of pledged collateral security received or own debt instruments issued

Fair value of collateral security received or own debt instruments issued and available for pledging

010 040

030 Collateral security received by the reporting institution 0 270,801

150 Equity instruments 0 0

160 Debt instruments 0 267,966

230 Other collateral security received 0 2,836

240Own debt instruments issued, except for own covered bonds or asset-backed securities (ABS)

0 0

Form C - Plegded assets/collateral security received and related liabilities

Corresponding liabilities, contingent liabilities or securities lent

Assets, collateral security received and own debt instruments issued, except for pledged covered bonds and asset-backed securities

(ABS)

010 030

010 Carrying amount of selected financial liabilities 236,498 306,001

Alm. Brand Bank’s risk in connection with asset pledging is assessed to be low as the transaction type is not complex and the transactions form part of the bank’s operating activities. The bank carefully selects its counterparties and actively manages the maturity structure of outstanding repos in order to avoid any adverse effect on the liquidity requirements.

Alm. Brand Bank’s treasury function monitors the level of asset pledging and the relevant counterparties on an ongoing basis and assesses the level relative to the limits defined for the bank’s excess liquidity coverage and gearing on an ongoing basis.


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CONTENTSOTHER RISKS FACING THE GROUP

Other risks facing the groupOther types of risk are also included in the group’s aggregate risk assessment:• Operational risks and control environment• Other business risks

Operational risks and control environmentAlm. Brand’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 oper-ational risk. Operational losses exceeding the limits defined are collected, and the events are reported to the respective boards of directors.

The 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 functions 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 probability of the threat materialising.

In a number of areas, the risk of human error is mitigated by the use of IT sup-port. For instance, all acceptance 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.

ITAlm. Brand 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 group’s overall use of IT is secure and controlled. The policy has been made operational, among other things in IT security guidelines, directions to users and through measures and business processes.

The key banking systems are developed and operated by Bankdata. The group’s other IT systems are developed in-house and operated mainly by in-house staff. In the event a contingency situation involving a long-term physical or IT break-down, 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 central-ly managed contingency organisation, evacuation plans, contingency manuals in the individual departments, a robust basic technical IT set-up as well as a focus on standardisation of processes as well as IT.

As part of its duties, the Internal Audit department performs an audit to ensure that defined work routines, business procedures and controls have been satisfac-torily 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.


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CONTENTSOTHER RISKS FACING THE GROUP

Key employeesThe 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.

Other business risksExternal risksExternal 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.

Economic conditions in society in general affect Alm. Brand’s earnings and the calculation of the individual solvency need, as economic developments will have an impact on credit portfolio quality and bonus potential in Alm. Brand Liv og Pen-sion. Also, there is a tendency to see a higher claims frequency during economic downturns.

Reputational risksReputational risks cover costs associated with having a poor public reputation. Reputational risks affect the group’s ability to maintain and develop its business volume. Reputation arises through press coverage of the group or incidents in re-lation to the group, for instance in news media and/or on social media. The group has drawn up media contingency plans to handle any incidents that could lead to unfavourable media coverage. Alm. Brand makes an active effort to reduce reputa-tional risk through controls and business procedures.

The group is making a proactive effort to reduce the number of potential events that could give rise to poor reputation. For example, a customer ambassador has been appointed in Non-life Insurance. The group wishes to reduce the number of complaints filed with the Insurance Complaints Board, and even though the insur-ance company has a track record of winning most of the complaints filed, every complaint is one too many because it means that the group has a dissatisfied cus-tomer. The customer ambassador looks at a case from the customer’s point of view and is responsible for ensuring that the customers’ views are heard. This is done to promote a good dialogue between the group and its customers. Often a disagree-ment arises because the customer does not understand why his or her claim is not covered. The complaints are subsequently analysed, enabling the group to develop its insurance products and to become better at explaining its insurance terms.

Strategic risksStrategic risks have an adverse effect on earnings or capital requirements and arise due to inexpedient business decisions, insufficient implementation of business initiatives or slow response to the challenges facing the group.

An example of a strategic risk which the group faces on an ongoing basis is the decision concerning the structure of the insurance group’s reinsurance programme. A wrong decision will impact adversely on earnings and the capital requirement, and it could potentially threaten the company’s existence if the coverage taken out proves completely insufficient, for instance in connection with natural disasters. See section 5.2 for additional information on this specific risk.

Strategic risks cannot be avoided but they can be limited by maintaining high professional standards, openness and willingness to change in the organisation. Alm. Brand’s strategy has been prepared by the group management on the basis of a structured process and in cooperation with each group subsidiary’s board of di-rectors, management board and managerial groups. The intention is to ensure that the overall strategy reflects the actual challenges facing the group and that the business initiatives developed in that respect are adequate. By adequate business initiatives is meant initiatives that are correctly designed, expedient with respect to timing and efficiently implemented. The group has set up a process for scheduled follow-ups on the implementation of the individual strategies, which may provide new input on the risk scenario as well as input on the planning process.

Alm. Brand A/SMidtermolen 7DK-2100 Copenhagen ØCVR no. 77 33 33 17 almbrand.dk

Since 1792

http://www.almbrand.dk/abdk/English/index.htm

Risk and Capital Management · Introduction Contents Alm. Brand Bank 17 Individual solvency need 18...

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