Eureko Annual Report 2009

Exceptional events

During 2009, Eureko faced some exceptional events that have had a major impact on Eureko’s financial position and the 2009 Financial Statements. Below, these events are described, and an analysis is given on how these events are incorporated in the 2009 Financial Statements.

PZU settlement

On 2 October 2009 the State Treasury of the Republic of Poland and Eureko B.V. concluded an agreement (the PZU settlement), whose subject is to establish the rules for amicably ending the arbitration dispute between the Republic of Poland and Eureko B.V., Eureko’s gradual divestment from its participation in PZU S.A. and Eureko receiving payments for waiving certain earlier granted rights. The agreement contains provisions amongst others leading to the following:

• discontinuing the arbitration proceeding conducted before the Arbitration Tribunal;
• having Eureko B.V. waive all other claims raised in the past with respect to the State Treasury of the Republic of Poland or PZU S.A. and their representatives;
• having Eureko B.V. waive certain corporate governance rights in which it is vested in PZU S.A., entailing in particular the appointment of the number of PZU S.A. Supervisory Board and Management Board members;
• having Eureko B.V. contribute a 10% stake in PZU S.A. and having the State Treasury of the Republic of Poland contribute a 4.9% stake in PZU S.A. to a special-purpose vehicle organised under Polish law in the form of a joint-stock company whose sole purpose is to conduct a public offering of these shares;
• having Eureko B.V. and the State Treasury of the Republic of Poland undertake mutual obligations to conduct a public offering to sell shares in PZU S.A. in which, in addition to the shares held by the special-purpose vehicle, at least a 5% stake in PZU S.A. held by Eureko B.V. will also be offered to the public;
• having PZU S.A. disburse an amount of PLN 12.75 billion as an interim dividend by the end of November 2009;
• having the State Treasury of the Republic of Poland establish in favour of Eureko B.V. a usufruct right on 24,034,345 shares in PZU S.A., without transferring, however, any voting rights or other corporate governance rights to Eureko B.V. for a finite period up to 31 January 2010.

Furthermore, The State Treasury of the Republic of Poland has given the right to Eureko B.V. to receive PLN 1.224 billion as a fixed amount from the sale of 4.9% by the special-purpose vehicle in the Initial Public Offering (IPO). Adjusted for the time value of money this amount is recognised as a receivable and included in Other income in the Income Statement.

Recognition and measurement of Eureko’s stake in PZU S.A.
Eureko did not change the recognition and measurement principles of its 33% stake in PZU S.A. As Eureko retains all risks and rewards on the PZU shares transferred to the special-purpose vehicle, the transfer does not qualify for derecognition.

From the moment that the public offering of PZU S.A.’s shares is highly probable, Eureko will classify its stake (including the stake currently held by the special-purpose vehicle) offered to the public as ‘Held for sale’.

Eureko’s share in the PLN 12.75 billion interim dividend, that was received on 26 November 2009, is treated as a deduction on the book value of Eureko’s stake in PZU S.A.
Eureko’s share in PZU S.A.’s 2009 result is included in the Income Statement as Income from associated companies and participating interests.

Eureko has entered into a total return swap on 3,575,488 PZU S.A. shares. The total return swap is measured ‘At fair value through profit or loss’ and the value as at 31 December 2009 is €-19 million.

Income and expenses realted to the PZU settlement
The table provides an overview of income and expenses related to the PZU settlement with the State Treasury of Poland and the way these are incorporated in the Income Statement.
Impact on income tax expenses is calculated taking into account the Dutch corporation tax rate and if applicable the participation exemption.

Disputes related to the privatisation of PZU
On 2 December 2009, the International Court of Arbitration received documents that facilitated instigation of a procedure for effective completion of the arbitration proceedings. At that date, Eureko also requested that the institutions that were carrying out proceedings related to the long-lasting dispute end the proceedings. The institutions include the Polish Financial Supervision Authority, the Supreme Administrative Court, competent Regional Courts and the European Commission, which investigated the case ex officio. On 4 December 2009, the Chairman of the International Court of Arbitration ended the dispute instituted by Eureko against the Republic of Poland regarding the PZU privatisation agreement, as the terms and conditions specified in the Settlement Agreement had been met. Along with the steps taken to end the arbitration dispute, the Republic of Poland, as well as Eureko, took steps to end all other disputes related to the privatisation of PZU.

Merger pension funds

The pension schemes of the majority of Eureko’s Dutch employees were executed by two pension funds: Stichting Pensioenfonds Achmea Personeel (SPAP) and Stichting Pensioenfonds Interpolis (SPI). Both funds merged on 1 July 2009 into Stichting Pensioenfonds Achmea (SPA).

Pension fund SPAP had reinsured its pension liabilities with Achmea Pensioen & Levensverzekeringen N.V. (AP&L) a Dutch life insurance company and a subsidiary of Eureko. Premiums paid by pension fund SPAP to AP&L were included in Eureko’s Income Statement as Gross written premiums. Pension Fund SPI on the other hand had not reinsured its pension liabilities. Plan assets of both funds were included in Eureko’s Employee benefits calculations under IAS19.

The merged pension fund SPA entered into a new reinsurance agreement, guarantee contract, with AP&L combined with a segregated investment contract. The risks (i.e. investment risk, mortality risk) are born by pension fund SPA. The reinsured liabilities of pension fund SPA amount to €2 billion by the end of 2009.

The new situation impacts the accounting of Investments, Insurance liabilities and Gross written premiums in Eureko’s Consolidated Financial Statements. Employee benefits and Pension expenses included in Operating expenses are not materially impacted by the merger of the pension funds.

Investments
Before the merger the investment risks of pension fund SPAP were born by AP&L and consequently the related investments were recognised as Investments in Eureko’s Statement of Financial Position. As the merged pension fund SPA bears the investment risks itself a reclassification of €1.1 billion from Investments to Investments backing linked liabilities has been accounted for. Furthermore, the Investments backing linked liabilities increased by approximately €1.0 billion as a consequence of the inclusion of the Investments of the former pension fund SPI in the segregated investment contract.

Insurance liabilities
Within insurance liabilities a reclassification of €1.2 billion from Insurance liabilities to Insurance liabilities for policyholders has been processed related to the liabilities of the former pension fund SPAP. The inclusion of the pension fund SPI have the Insurance liabilities for policyholders increased by €1.0 billion.

Gross written premiums
Gross written premiums (single premiums) in the Life segment are positively impacted by €1.1 billion due the inclusion of pension fund SPI.

Unit-linked policies
With respect to Dutch individual unit-linked life insurances, Eureko established a financial compensation arrangement that was approved by the Financial Services Ombudsman in May 2009. Eureko has proposed to compensate policyholders in the Netherlands for costs in excess of the cost level stated by the Ombudsman. The maturity value of the total estimated amount of compensation, €315 million was partly accounted for as an insurance liability at the end of 2009 for an amount of €80 million (2008: €70 million), and partly seen as a charge against future profits.

Eureko also reviewed other products in the Life business, especially industry and sector pension plans, aimed to detect issues regarding the level of charged costs and information provided at the sale. Eureko intends to compensate policyholders in line with the compensation provided to the individual unit-linked policyholders. The maturity value of the estimated amount of compensation is accounted for as an Insurance liability, and partly as a charge against future profits.

The current and future financial consequences of both the individual life policies and the industry and sector pension plan products are fully included in Eureko’s liability adequacy test on the insurance liabilities at 31 December 2009.

Guaranteed debt investments
On 27 October 2009 Achmea Hypotheek N.V., a subsidiary of Eureko, successfully issued $3.25 billion in medium term notes. As capital markets in 2009 were still weak this issue was placed under the Credit Guarantee Scheme of the Dutch Government. The notes are rated by Standard & Poors (AAA), Moodys (Aaa) and Fitch (AAA) and are placed among a variety of financial institutions in Europe, the United States of America, the Middle East and Asia. The proceeds received by Achmea Hypotheekbank N.V. were used to refinance its funding for residential mortgage portfolio.
The medium term notes can be split into two tranches:

• A fixed rate tranche of $2.75 billion with a fixed coupon of 3.2%, being 35 basis points over mid-swap;
• A floating rate tranche of $0.5 billion with a variable coupon at 3-month USD LIBOR plus 35 basis points.

The foreign exchange rate risk has been fully hedged and furthermore both tranches have been swapped to six-month EURIBOR plus 11 basis point to limit interest rate risk.

The medium term notes will mature in October 2014.

Eureko B.V. has provided the Dutch government with indemnity for amounts, due to the above mentioned participation of Achmea Hypotheekbank N.V. in the Credit Guarantee Scheme of the Dutch Government.