Report by the Board of Directors

Suomi Mutual Group

The parent company of the Suomi Mutual Group is Suomi Mutual Life Assurance Company (Suomi Mutual). The Group consists of subsidiaries which underwrite life insurance in Poland and the Baltic States, several real estate companies and one real estate investment company. The Group’s parent company no longer underwrites new insurances. It now concentrates on managing its insurance and investment portfolios for the benefit of its existing customers.

During the financial year the Group structure of Suomi Mutual changed. The foreign subsidiaries engaged in life assurance in the Baltic States were merged into a European Company domiciled in Tallinn. As part of the process, Suomi Mutual sold its subsidiaries operating in Latvia and Lithuania at the beginning of 2007 to the Estonian-based subsidiary. In October 2007 the Estonian subsidiary became a European Company (Seesam Life Insurance SE) and at the same time the subsidiaries in Latvia and Lithuania were merged with it. In Latvia and Lithuania the European Company operates through branch offices.

In December 2007 the company signed a preliminary agreement concerning the sale of its foreign life assurance companies to the Austrian Vienna Insurance Group. The transaction requires official permits that the company is expecting to receive by the end of April 2008.

Financial performance of the Suomi Mutual Group

In 2007, the consolidated operating profit of Suomi Mutual was EUR 262 million and the consolidated operating profit for 2006 was EUR 287 million. The Suomi Mutual Group’s book loss was EUR 151 million in 2007. The company’s bookkeeping result is normally a loss, due to solvency capital refunds to policyholders in the form of additional benefits. Providing additional benefits has a detrimental effect on the company’s financial performance. The majority of the solvency capital is capital and reserves. Where additional benefits are financed from equity, the company’s bookkeeping result will be negative. A better picture of the company’s operational result is provided by looking at the combined total of the change in the company’s solvency capital and the additional benefits granted. This total was EUR 165 million for the Group in 2007.

The consolidated net investment income totalled EUR 413 million, which was EUR 91 million more than in 2006. Consolidated investment income at fair value totalled EUR 344 million. The corresponding figure in 2006 was EUR 423 million.

Consolidated premiums written in 2007 fell from EUR 124 million to EUR 117 million, a figure that included EUR 34 million from foreign subsidiaries, the same amount as in 2006.

Suomi Mutual managed 14.7 per cent of Finnish insurance savings. In the previous year, this figure was 14.4 per cent. Insurance savings tied to the technical interest rate accounted for 20.8 per cent.

On 31 December 2007, the consolidated solvency capital totalled EUR 1,214 million (EUR 1,460 million in 2006) and the solvency ratio in proportion to technical provisions was 21.9 per cent (27.4 per cent). The parent company’s solvency ratio was 22.4 per cent.

As a result of the sale of Pohjola shares in 2005, the cooperation between Pohjola and savings banks ended. In connection with this, the savings banks submitted a claim for damages to both Pohjola and Suomi Mutual that was settled by a court of arbitration, which obligated Suomi Mutual to pay to the savings banks a contractual penalty of EUR 1.8 million, plus interest and expenses. This accumulated overall into a cost of about EUR 2 million.

Insurance operations

Consolidated premiums written fell to EUR 117 million (EUR 124 million). Life insurance premiums written stood at EUR 44 million (EUR 46 million), thereby falling slightly in both the Group and the parent company. Premiums written in pension insurance were EUR 72 million (EUR 78 million). In Finland, premiums written in pension insurance fell by EUR 7 million, whereas in the subsidiaries, they increased by EUR 1 million. Closures of payment times for insurances and the transfer of contracts to the stage where pensions are paid contributed to the reduction at the parent company. This will continue to be the trend in years to come.

Consolidated technical provisions went up to EUR 5,582 million (EUR 5,372 million). They were increased by customer bonuses and special additional benefits declared for part of the company’s insurance portfolio to the amount of EUR 411 million.

In the year under review, the Group’s insurance portfolio remained largely the same, as expected. Claims paid, including settlement costs, totalled EUR 424 million. The aggregate amount of claims paid in 2006 stood at EUR 410 million. Life assurance benefits paid were EUR 229 million in 2007and pension insurances EUR 194 million. These included EUR 55 million in surrenders. The savings paid as part of the claims amounted to EUR 148 million, i.e. EUR 20 million less than in 2006.

Consolidated operating expenses stood at EUR 39 million in 2007. The consolidated expense ratio was 111 per cent (111 per cent in 2006). As regards the parent company, the expense ratio was 104 per cent in 2007. In 2006, the corresponding figure was 103 per cent

The aggregate risk business continued to show a slight surplus.

Investment operations

The investment portfolio of the Suomi Mutual Group at fair value totalled EUR 6,989 million at the end of 2007. The investment portfolio went up by EUR 93 million during the year. In addition to these investments, the Group had a total of EUR 16 million (EUR 12 million in 2006) in investments related to unit-linked insurance at the end of 2007. The income from unit-linked insurance premiums is generated entirely by foreign subsidiaries, as the parent company is no longer responsible for underwriting unit-linked insurance business in Finland.

At the end of 2007, 28 per cent of the parent company’s investment portfolio was in equity holdings and different equity and private equity funds, compared with 32 per cent a year earlier.

The proportion of fixed-income securities and long-term bond funds in the parent company’s investments was 50 per cent (42 per cent) at the end of 2007. At the same time, money-market instruments, deposits and money-market funds accounted for 7 per cent (13 per cent) of the parent company’s investments.

Real estate investments accounted for 8 per cent (7 per cent). This also includes various indirect real estate investments, such as units in mutual funds investing in real estate properties and real estate companies, and investments in joint investment companies making such investments.

The aggregate proportion of absolute return funds and investments in commodities in the parent company’s investments was 7 per cent (6 per cent).

As before, fixed assets have mainly been valued at the remaining acquisition cost in the balance sheet. In accordance with the principles of bookkeeping prudence, foreign subsidiaries underwriting insurances have been valued at the net asset value used in solvency calculations, or, where justified, lower.

In the financial year, the parent company’s return on investments at fair value totalled EUR 366 million, which represented a 5.6 per cent return. A year earlier the corresponding figure was 6.5 per cent. The investment return fell slightly short of the return target, which was derived from the company’s technical provisions and the targets set for the return on capital plus reserves. However, the company’s return on investments also exceeded the benchmark.

Customer benefits

The amount spent on the parent company’s customer bonuses in the financial year rose to EUR 411 million from EUR 314 million in the previous year, the increase coming from a reduction in the need for solvency capital and the good solvency situation overall. The solvency capital requirement in the future will be determined to a great extent in accordance with the capital required by the risks in the operations that are shown in greater detail in the risk management plan. The solvency capital surplus to this is distributed on the insurances as additional benefits.

The savings of valid individual insurance policies issued by Suomi Mutual before July 1, 1997 were credited with technical interest of 4.5 per cent and with a special annual bonus of 2.7 per cent financed from an additional benefit provision set up in 1997 and 2000. The latter bonus was originally restricted to those premiums paid in accordance with the payment schedule and to the pension period defined in the pension plan. Of the technical provisions in the old insurance portfolio, EUR 230 million no longer receive this 2.7 per cent bonus. It was decided to credit these insurances with a special additional benefit of 11 per cent in 2007 compared with 9 per cent in 2006.

The company’s solvency clearly exceeds the unpaid proportion of the previously conditionally declared special additional benefits on the insurance portfolio as defined in the previous paragraph. For this reason, in 2006 the Board extended the solvency capital refunds to the entire insurance portfolio. The same procedure was continued in 2007. In accordance with this decision, all savings-based individual insurances with a technical interest rate of 4.5 per cent will receive a 2.5 per cent customer bonus in 2007. Other savings-based insurances will be credited with a customer bonus of 3.2 per cent. The additional interest rate on capital redemption contracts for 2008 has been confirmed at 2.5 or 3.4 per cent, according to the technical interest rate in the contracts. Special additional benefits for pure risk insurances were already determined in 2005. Based on that decision, the deduction in insurance premiums for these insurances will rise from 20 per cent to 30 per cent in 2007.

Of the conditionally declared EUR 840 million in special additional benefits, about EUR 200 million remain after the distribution of the special additional benefits decided for 2005, 2006 and 2007. Once this promise has been completely fulfilled, all additional benefits based on the financial performance and on solvency capital refunds will be credited to the entire portfolio as customer bonuses. When these bonuses are determined in the future, the type, duration and size of the insurances will be taken into consideration.

Risk management

The Group’s risk management is based on a risk management plan approved annually by Suomi Mutual’s Board of Directors, and an assessment of the status of risk management. Investment operations are based on an investment plan approved by the Board of Directors, which determines, among other things, investment allocations and the responsibilities and authorisations of those engaged in practical investment operations. The company’s risk-bearing capacity is taken into account when determining the investment allocation.

The company’s risk management principles are described in more detail in the notes to the financial statements.

Staff

The Suomi Mutual Group had 244 (221) employees at the end of 2007, of whom 11 (14) worked for the parent company and 233 (207) employees for foreign subsidiaries. The large proportion of foreign employees in the Group staff is explained by the fact that many services which are outsourced in the Finnish companies are handled by the staff in the foreign subsidiaries. In the year under review, the average number of the Group staff was 236 (222).

Corporate management

Suomi Mutual’s Board of Directors comprises Jukka Tuori (Chair), Jarmo Rantanen (Deputy Chair), Kari Kaunismaa, Timo P. Nieminen and Helena Pesola. Starting from the 2007 Annual General Meeting, the term of office for the Board of Directors will be from one Annual General Meeting to the next.

The company’s Supervisory Board was abolished at the 2007 Annual General Meeting.

Eino Halonen, the President and CEO of Suomi Mutual, went into retirement on 1 January 2008. The company’s Board of Directors appointed Markku Vesterinen, the company’s Senior Executive Vice President, as his replacement from the start of 2008 and Timo Hukka, the Chief Investment Officer, as the Deputy President and CEO.

Post-balance-sheet events

At the beginning of 2008 the company changed the control system it applies to the risk management, the most significant change being the principle for valuing the technical provisions. In the future, measurement of the company’s risks will also take into account the risk in changing the present value calculated by future cash flows of the technical provisions. This will have a significant effect on the interest rate risk in the company’s investment operations. Further details about the change to the control system can be found in the notes to the financial statements.

In February the company received the official permits required for the sale of the European Company engaging in life assurance in the Baltic States. The company expects to receive the permit for Poland in April 2008.

Outlook

The negative trend on the investment markets that began in the second half of 2007 continued after the turn of the year. The risks of an unfavourable economic trend in the near future have increased, and the outlook for 2008 is worse than it has been for several years. The most significant factor for the company’s financial performance is succeeding with its investment operations and, this being so, 2008 will be a challenge in the prevailing environment, to say the least. In the case of equity investments, the company has prepared itself for the future by maintaining a dynamic hedging strategy, and at the turn of the year the equity weighting in the company’s risk position was much lower because of the derivative hedges than the proportion calculated directly from the assets. The company’s solvency level at the end of the financial year was better than the target level determined for it by the company. This will create a good buffer to withstand unfavourable trends on the investment markets and create the capacity for increasing the risks if expectations about the economic trend become encouraging.

Since the beginning of the year the company’s control system has controlled the interest rate risk in the technical provisions like the interest rate risk in the interest rate instruments. This has been done to a great extent in accordance with the principles for proactive monitoring in the new forthcoming Insurance Companies Act, and it differs appreciably from the method in the present Solvency I Directive. Under the present monitoring the technical provisions are valued at book value calculated with a fixed interest rate, and their value does not change in line with fluctuations in the interest rate. According to the principles of proactive monitoring and the Solvency II Directive, the technical provisions are valued as present value discounted by the interest rate curve for future cash flows. These two differing methods may reduce additional benefits in the next few years.

Proposal by the Board of Directors for the handling of loss and distribution of profit

The distributable funds of Suomi Mutual total EUR 609,049,343.31 and those of the Group EUR 653,985,148.18.

The Board of Directors proposes that the loss for the financial year and distributable funds be handled as follows:

Interest of 6% on guarantee capital 30,273.83
   
From contingency reserve -145,933,556.53
To donations for worthy causes 30,000.00
   
Loss for the financial year -145,873,282.76