Key issues in 2012
The discussions within the Supervisory Board were based mostly on documents and presentations prepared by the Executive Board, but the Supervisory Board also drew on external sources of information. The Supervisory Board has four committees: the Audit Committee, the Risk Committee, the Nomination Committee and the Remuneration Committee. Wherever necessary, subjects are discussed in advance in one of the committees in preparation for the meetings of the Supervisory Board, and the committee chairmen report on the outcomes to the plenary meeting
All customary subjects were also addressed at the Supervisory Board meetings. Particular attention was devoted to the company’s financial results. In this context, we not only gave lengthy consideration to the various performance indicators but also to the proper provision of information to the investment community and other stakeholders. All these discussions were prepared in detail by the Audit Committee. In addition to non-financial risk management, the Risk Committee’s core duty is the company’s management of risks in relation to future returns. The Supervisory Board noted that the Executive Board responded appropriately to the sharp falls in interest rates through strong risk-reducing measures, efficiency enhancements and solid asset management.
The Supervisory Board devoted special attention to the following subjects:
A) Achieving business objectives
The Supervisory Board held intensive discussions with the Executive Board on developments in the financial markets and the best way to respond to these developments, concentrating on risk mitigation, margin improvement and an intensive cost-saving programme. The continued fall in interest rates in particular affected the results, meaning that the growth target for the operational result was not achieved. Delta Lloyd’s decision, which is still unusual in the Netherlands, to measure almost all its assets and liabilities at market value had significant adverse consequences for the IFRS results. The Supervisory Board believes it is important to give clear information about the effect of applying this method rather than the more conventional measurement used in the market. Under that method, shareholders’ funds would have been approximately € 3.7 billion instead of the reported € 2.3 billion.
The Supervisory Board notes that despite falling interest rates, the quality of Delta Lloyd’s capital base remains solid. The Supervisory Board supports the Executive Board’s policy to prioritise margin over volume, to focus strongly on solvency and to adhere to the long-term strategic position as a beacon even in nervous markets.
Looking back on 2012, the Supervisory Board believes that Delta Lloyd showed resilience in its response to the prevailing circumstances and the associated pressure on results. This makes us convinced that the long-term corporate objectives of business performance, operational profitability and capital and risk management will be achieved.
B) Risk management
Risks are an inextricable part of doing business. They are intrinsic to the insurance industry, so Delta Lloyd Group is not exempt. Its revenue model is based on taking on and managing a broad spectrum of risks in relation to the return to be achieved in the future. Risk management is therefore not an isolated activity but an integral part of the core business and, as such, is embedded throughout the organisation and in the company’s operational processes. The Supervisory Board performs its duties along the same lines. This means that the Supervisory Board must form a clear overall view and understanding of the main risks so that it can assess how the Executive Board manages them and monitor the consequences of decisions for the risk profile.
The most important risk documents are now placed on the agenda of plenary meetings of the Supervisory Board. The Risk Committee holds preparatory discussions on risk management and the accompanying documents, including the design and effectiveness of internal risk control systems.
The Group Risk Appetite Statement (GRAS) is an important part of the risk management framework at Group level. It is reviewed in detail once a year in the Risk Committee and subsequently placed on the agenda of the plenary Supervisory Board meeting for discussion and approval. The GRAS is not confined to financial risks but includes non-financial risks, too. It defines the overall risk appetite and gives a detailed indication of acceptable levels for the identified risks. The GRAS limits for financial and non-financial risks were reduced in 2012.
Every quarter, the Supervisory Board similarly discusses the Own Risk and Solvency Assessment Report (ORSA) and the Financial Risk Report. A control framework validates the functioning of the various risk management systems. Section 3.2. of the annual report describes risk management at Delta Lloyd Group in detail.
The Supervisory Board carefully considered the increased risks in Delta Lloyd’s markets and their implications for the business in 2012. Risk appetite and management therefore received even more of the Supervisory Board’s attention than in previous years. The Supervisory Board critically monitored and examined the Executive Board’s policy on these points. The Risk Committee played a significant proactive role in this respect, questioning the Executive Board on the dilemmas it faced and the subsequent considerations it made with respect to the risk/return policy. The duties of the Risk Committee also specifically encompass non-financial risks (operational, IT, reputation, etc.) and these were also discussed. On some occasions, the Risk Committee requested further analysis (for example, on the capital position). A more detailed report of the Risk Committee is included in section 2.5.
The Supervisory Board gave most attention in 2012 to the effects of trends in the financial markets and measures to mitigate them.
During the year, Delta Lloyd implemented a series of measures that considerably reduced its risk profile. These included reducing its equity exposure, diminishing its interest rate sensitivity and running down further its exposure to Southern Europe.
Scenarios on the implications of a euro zone break-up were examined and discussed. The conclusion was that Delta Lloyd Group is well-prepared for contingencies but that ongoing vigilance remains vital in view of rapidly-changing circumstances with potentially major consequences. The Supervisory Board was informed of the preparatory measures the company has in place.
Another significant theme in 2012 was the way in which the risk management function is anchored in corporate governance and how this can be strengthened. The Risk Committee and then the plenary Supervisory Board held intensive consultations on this issue with the Executive Board.
One of the pillars underpinning Delta Lloyd Group’s revenue model is an investment policy that responds quickly and adequately to market changes. Investing is a vital source of returns and is therefore an intrinsic element of insurance. The policy sets out clear limits within which investment risks are managed and hedged.
The Supervisory Board came to the overall conclusion that the Executive Board has correctly assessed and balanced the various risk and return factors in its risk management policy and has established a sound risk management system.
The Supervisory Board devoted special attention to Sustainability, and in particular to the following aspects:
In 2012, the Supervisory Board held a separate strategy day to explore whether the strategy required adjustment. There were three main themes:
- the lessons of 2012 for our strategy;
- the future revenue model; and
- strategic options for mergers and acquisitions.
The conclusion was that the key lines of the strategy set for 2010-2015 have not changed.
The discussion led to a number of additional emphases:
- efficiency in operating processes;
- improvement in underwriting results;
- investing in Delta Lloyd as a knowledge business with a stronger focus on innovation policy; and
- investing in data intelligence and social media.
In 2012, the Supervisory Board again held intensive discussions with the Executive Board with a view to strengthening society’s trust in the insurance sector in general and in Delta Lloyd Group in particular. One example of this was the discussion of ‘Customer Focus’. Each meeting of the Supervisory Board was given an update. The Supervisory Board monitored the progress of the Product Approval and Product Review processes against the agreements on this (including the target that all products had to be reviewed by the end of 2012). This means that existing products have been tested against the customer’s interest. Major new products, including the risk profile for the customer and for the company, will be presented to the Supervisory Board. The Supervisory Board monitored the results of the assessment by the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten/AFM) and comparisons with competitors on this point. Based on the findings, the Supervisory Board notes with satisfaction that the measures have given Delta Lloyd a distinct, favourable profile in recent years.
The importance the Supervisory Board attaches to customer confidence and satisfaction is also evident from the fact they have been included in the criteria for management incentives since 2011.
The Supervisory Board took the initiative to put this item on the agenda and drew up a memorandum that contained 20 questions for the Executive Board to answer. The Supervisory Board is encouraged by the many activities on diversity that are already in place and will be started at Delta Lloyd. The business unit boards at Delta Lloyd have been given diversity targets for the appointment of women.
One conclusion from the discussion was that it is important to get the best possible view of the underlying social and organisation-related factors that determine the career choices made by women (and men). The Supervisory Board and the Executive Board will conduct this in-depth review in 2013.
D) Other specific issues
The Supervisory Board examined whether the payment of the final dividend for 2011 was responsible, and established from a sensitivity analysis by the Executive Board that it was within the agreed GRAS limits and the solvency criteria. There was, therefore, no reason to depart from the approved dividend policy.
The Audit and Risk Committees and then the Supervisory Board discussed the declaration of the interim dividend for 2012. The conclusion in this case, too, was that the payment was within the limits and in line with the dividend policy. However, the default option for the dividend payment was changed from cash to stock, with a premium of 4% on the stock dividend.
Exit of Delta Lloyd Germany
Delta Lloyd announced the proposed sale of the German activities to Nomura in 2011. After a lengthy process, Delta Lloyd withdrew from the negotiations with Nomura and the sale has been suspended. Strategic opportunities in Germany are now being explored further. This is dealt with in more detail in the Report of the Executive Board and the Financial Statements.
In line with its previously-announced intention, Aviva reduced its stake in Delta Lloyd further to 19.4% at the end of 2012 and it sold its remaining shares in January 2013. Heavy demand for the shares offered on the market was a sign of confidence in Delta Lloyd. The almost complete free float and the cross-listing on the Brussels stock exchange in January 2013 have increased the relative attractiveness of the shares.
International marine insurance
In 2010, Delta Lloyd started underwriting international marine business. This proved to be loss-making because of the excessive risk profile and so it was decided to discontinue this activity in 2012. The Supervisory Board discussed this disappointing development with the Executive Board, partly on the basis of a specific audit. The resulting recommendations were adopted by the Executive Board.
Dutch partial disability insurance market (WGA-ER)
The Supervisory Board discussed the need for a provision as a result of rising claims in the WGA-ER portfolio (return to work of partially disabled persons-own risk). Although the government’s policy on this makes it an industry-wide issue, it has had a material effect on our results. For more information, please see the Executive Board report.
Two members of the Nomination Committee (the chairman of the Remuneration Committee and the vice-chairman of the Supervisory Board) joined an external adviser to conduct individual interviews with the 15 most senior executives of Delta Lloyd Group who report directly to the Executive Board. The intention was to enable the Supervisory Board to form a better picture of this level of management and of the executives’ perceptions of Delta Lloyd Group, both now and in the future, as these executives play a key role in the continuity of the company.
These frank interviews were summarised in a report that was discussed in 2012 with the Executive Board, the Nomination Committee and the plenary Supervisory Board. This is the second time that such interviews have been held. This process is repeated once every two years.