For the benefit of the customers

Suomi Mutual’s mission is to manage insurance and the related investments for its existing customers. As a mutual company our primary goal is to act for the benefit of our customers. In our investment operations we aim to obtain the best possible return permitted by our risk-bearing capacity, while ensuring that our operational efficiency is maintained.

We distribute our annual operating profit and the solvency capital released through maturing insurance policies to our customers in the form of additional benefits to the degree permitted by our risk-bearing capacity. These additional benefits include customer bonuses for all policyholders, as well as the Suomi Mutual special benefits and additional special benefits attached to all insurance policies that were taken out before July 1, 1997 and remain in force. We endeavour to reconcile our additional benefits and solvency so that insurances of different length are treated as even-handedly as possible.

Result for 2007 satisfactory

In terms of investment operations, 2007 was a more challenging year than some of those that preceded it. Equity markets were more volatile and the return on equity investments was lower. The return on fixed-income investments was low, as in the previous year. We set a targeted return of 5.7 per cent for our investment operations for 2007 based on the return demand of our technical provisions and the targeted return for our solvency capital. Naturally, we compare the returns for all investment classes with the return shown by the benchmarks set for them.

The net return for our investment operations for the whole year was 5.6 per cent. In most of the investment classes the return that we achieved exceeded the benchmarks. In our insurance business the annual fluctuation in our result was small and in that respect our result showed a slight surplus. Our overall financial performance was more or less in line with expectations and I consider it to be satisfactory.

Preparations for changes to authorities’ requirements

At the EU level changes to the solvency requirements applying to insurance companies are under preparation (Solvency II project). The effect of the new requirements on the life assurance business operations will be big. The principles for defining technical provisions will change. In the future they will be market-based. One of the things that this will mean is that the cash flows generated by insurance business will be discounted at current market interest rates. Up till now the discount rate used has been fixed and its dependence on market rates has been small. As a result of the change, the fluctuation in technical provisions will increase and the predictability of the changes in it will be reduced. The solvency requirement in the new regulations will take each company’s own risks into greater account.

In Finland a revised Insurance Companies Act will probably come into force in the late spring of 2008, making it possible to change monitoring gradually so that it comes into line with Solvency II before the new EU regulations become operative in 2012. Basically, the idea is a good one but there will also be problems. In official financial statements the technical provisions will be calculated for the time being using the existing principles, and testing of the solvency will be based on existing requirements. At the same time the monitoring of the solvency will be changed to correspond better to the new requirements. For example, in the case of big changes in the interest rates the new and old regulations will operate in contradictory directions. Should very big changes take place, there may be a dramatic difference in the solvency levels that are measured by two different operating methods. I feel that insufficient attention has been paid to this problem in the preparation of the regulations. There should be a flexible transition to new improved monitoring procedures without causing needless points of discontinuity to companies and their clients. I hope that these problems in applying differing regulations will be treated with all seriousness.

Suomi Mutual started preparing for a new monitoring framework before 2007. We first examined the development of our responsibilities and created the capabilities for assessing the cash flows generated by our insurance portfolio. In 2007 we examined the risk management and control system that we have developed for our investment operations and the need to change it in the transition to the new official requirements. We had our system assessed by a top-level European expert. On the basis of the assessment we were given, we prepared the necessary changes to our system. From the beginning of 2008 we will be controlling our operations in a way that is close to the new requirements. We have aimed at a solution in which the control system takes into account our most significant risks as well as possible. Development of the system continues and we will use our own experiences and the development of Solvency II to make it more precise.

The different principles for the financial statements and revised solvency monitoring will create problems for Suomi Mutual too. It is even likely that the new method for measuring the solvency will show that the company is in a good state while at the same time measuring the solvency using the existing principles in the official financial statements will show that the company is in a bad state or vice versa. Communicating this in a way that is both believable and comprehensible will be a challenge, to say the least. In some situations this may lead to the company having to hold back on giving additional benefits to its customers even though there is no genuine reason based on risks that have been measured correctly by the company. The revised regulations will make it more difficult to draw comparisons with competitors’ returns on investment operations. Different companies will transfer at different times to controlling their operations in accordance with the new way of measuring risk and will choose different methods for managing the overall risk in their balance sheet.

Level of additional benefits remains high

Suomi Mutual is a mutual insurance company, i.e. it is owned by the policyholders. No policyholder has invested equity-related assets in Suomi Mutual. The company’s net assets have been created through profits made on the insurance policies of current and former policyholders and the related investments. The company’s need for solvency capital falls as the insurance portfolio is reduced.

As a mutual company, Suomi Mutual refunds to its policyholders the part of its net assets that the company no longer needs as risk buffer for its business operations. In 2007 we were able again to decide about making significant new additional special benefits. All policyholders were given a customer bonus of at least 2.5 per cent (higher than this for those whose technical interest rate is below 4.5 per cent) on insurance savings. Continuing insurances that have been in effect at Suomi Mutual since July 1, 1997 were also given an 11 per cent additional special benefit. Other special benefits continued to be given in accordance with previous decisions.

Basis for 2008 challenging

Investment markets changed track in the second half of 2007. The return on equity investments in particular is more difficult to predict than previously. As we are changing the control of our operations at the same time to the direction defined by Solvency II, we are fully justified in describing the new year as challenging. However, we are setting off with confidence. Our solvency at the beginning of the year, whether measured by the new way or the old one, is good. We have created a model that we will use should equity prices fall. Our new control system will help us to understand our overall risk better than before, and we have also created a method for managing the interest rate risk in the technical provisions. It is to our customers’ benefit if we take controlled risks in the investment operations. In doing so, there is nothing we can do to completely avoid fluctuations in our financial performance as fluctuations in the market increase. However, our ability to control this fluctuation and its consequences is good.

Our personnel, though limited in number, have performed well in this financial year. Likewise our partners who handle our insurance and investment portfolios have been efficient and the spirit of cooperation has been good. I would like to express my thanks to my own personnel and to our partners as well.

Cooperation with the administrative bodies has continued to be good. I would like to thank the members of the Board of Directors, the Supervisory Board, which ceased to operate in the spring, and the Policyholders’ Representative Assembly. During 2007 two people who have had a considerable impact on developing Suomi Mutual during the past few years brought their active participation in the company to an end. Oiva Savela, who was Chairman of the Board of Directors since 1999, left the company’s Board in April. He has played a considerable part in all the decisions concerning Suomi Mutual during the past ten years. Eino Halonen, the first person in Finland to receive the honorary award of rahoitusneuvos (financial counsellor), brought his term of office as President and CEO to a conclusion at the end of the year. Halonen was in charge of restarting of Suomi Mutual’s operations and setting the company on its run-off course. His contribution was vital during the different stages of Suomi Mutual’s ownership of Pohjola. Although decisions that were taken took Suomi Mutual sometimes in opposite directions, the final outcome was a good one for the company’s present customers. Both have now terminated their active career at Suomi Mutual and they deserve the deepest gratitude for the work they have done on behalf of the company.

I would also like to thank our customers for their confidence in our company. For them the future at our company looks good. According to present information, the return that will be paid on insurance savings will continue to be good in the future.

Markku Vesterinen