Suomi-yhtiö

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 has several property companies and one property 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 year under review, the structure of the Suomi Mutual group was changed. The company sold its European Company that carried out life insurance business in the Baltic States and its life insurance company in Poland to the Austrian Vienna Insurance Group. As a result, at the end of 2008, the Group no longer had any life insurance business outside Finland. The figures for the Baltic operations for the first two months of the year are included in the Group’s figures and the Polish operation’s figures for the first four months of the year are included.

Financial performance of the Suomi Mutual Group

The operating loss of the Suomi Mutual Group for 2008 was EUR 49 million. In 2007, the Group’s operating profit was EUR 262 million. The Suomi Mutual Group’s book loss was EUR 57 million in 2008.

The consolidated net investment income totalled EUR -49 million, which was EUR 462 million less than in 2007. Consolidated investment income at fair value totalled EUR -261 million. The corresponding figure in 2007 was EUR 344 million.

Consolidated premiums written fell from EUR 117 million to EUR 85 million. A significant part of the fall is explained by the sale of the foreign subsidiaries during the year. The 2008 premium income still includes EUR 10 million of premium income from the foreign subsidiaries. In 2007, the premium income from the foreign subsidiaries was EUR 34 million.

On 31 December 2008, the consolidated solvency capital totalled EUR 997 million (EUR 1,214 million the previous year) and the solvency ratio in proportion to technical provisions was 19.9 per cent (21.9 per cent). The parent company’s solvency ratio was 19.9 per cent.

Insurance operations

The parent company no longer underwrites new insurance policies. The company’s insurance portfolio comprised about 280,000 policies which insured almost 330,000 people. The company has outsourced the day to day management of its insurance operations through a long-term contract with the OP-Pohjola Group’s OP Life Assurance Company Ltd. One of the main roles of the staff of Suomi Mutual is to monitor and check that the insurance portfolio is being managed to the customers’ advantage.

In 2008 the parent company’s insurance premium income was EUR 75 million (EUR 82 million). Life assurance accounted for EUR 16.9 million of this (17.4 million) and pension insurance EUR 58.4 million (EUR 64.4 million). The reduction in premium income will continue in future years as well.

The parent company’s insurance portfolio developed as expected during the year under review. Claims paid, including settlement costs, totalled EUR 536 million. The aggregate amount of claims paid in 2007 stood at EUR 413 million. Life assurance benefits paid were EUR 313 million in 2008 and annuities EUR 223 million. These included EUR 49 million in surrenders. The value of savings sums paid as part of claims grew to EUR 242 million from the previous year’s figure of EUR 146 million. Most of the savings sums i.e. EUR 183 million, was from the expiry of capital redemption agreements (EUR 77 million in 2007).

The parent company’s operating costs were EUR 15 million in 2008. The expense ratio which describes the relation between operating costs and the loading charged for managing policies, was 100 per cent in 2008. The corresponding figure for 2007 was 104 per cent. The loading structure of the company’s insurance policies is based to a significant degree on the loading charged to premium income and as premium income reduces, the operating costs do not fall at the same rate. The company has prepared for this deficit in loading income by increasing its provisions in 2005 with a separate loading income technical provision. The expense ratio in 2008 without drawing on the loading income technical provisions would have been 103 per cent.

The aggregate risk business showed a surplus of about EUR 11 million.

Technical provisions fell to EUR 5,049 million (EUR 5,520 million). Suomi Mutual managed 15.2% of Finnish insurance savings. In the previous year, this figure was 14.7 per cent. Insurance savings tied to the technical interest rate accounted for 20.0 per cent.The durability of the company’s insurance portfolio is shown in the increase in the company’s market share even though the company does not sell any new policies at all.

Investment operations

The fair value of the parent company’s investments at the end of 2008 was EUR 6,004 million (EUR 6,801 million). At the end of the year, 20 per cent of the parent company’s investments were in shares or in various share and capital funds. The corresponding proportion the previous year was 28 per cent. However, at the end of the year almost half of the equity investments were hedged using derivatives.

The proportion of the parent company’s investment capital in debentures and long term interest bearing funds was 53 per cent at the end of 2008 (50 per cent). At the same time 11 per cent (7 per cent) of the parent company’s investment capital was in money market instruments, deposits and short term interest bearing funds.

Real estate investments accounted for 11per cent (8 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 5 per cent (7 per cent).

As before, fixed assets have mainly been valued at the remaining acquisition cost in the balance sheet.

The fair value of the return on the parent company’s investment activity during the year was EUR -267 million. This corresponded to a return of -4.0 per cent. The corresponding return the previous year was 5.6 per cent. The investment return fell clearly short of the return target, which is derived from the targets set for the company’s technical provisions and the return on capital.

In accordance with the company’s own steering system, the company has hedged the interest rate risk linked to provisions a.o. through interest rate swap agreements. The degree of hedging has changed during the year in line with market conditions. Hedging activity improved the yield on the company’s investment activities by EUR 313 million, i.e. 4.7 percentage points. On the other hand the value of market-based provisions has grown. The change in market-based provision does not however show in the financial statements because the provisions are valued using a fixed interest rate in the financial statements. As a result of the interest rate swap agreements, the modified duration of the company’s debenture loans was about 11.4 at the end of the year under review.

Customer benefits

The company has published its objectives relating to the distribution of additional benefits on its web pages and in the notes to the financial statements. The central principle is that the company does not keep excess capital without reason, but tries to distribute the surplus as additional benefits to customers. On the other hand there is no intention to endanger the interests of long-term policy holders and future yields by distributing additional benefits. The risk management section of the notes describes both quantitatively and qualitatively the company’s risk position at the end of the financial year.

The Euro value of the parent company’s customer bonuses fell during the year to EUR 9 million from the previous year’s EUR 411 million. The significant fall in bonuses was because the company did not return any solvency capital to policy holders as special additional benefits in 2008. The reason for this was the weak result from investment activities in 2008 and the general fall in interest rates. In addition, the company wanted to keep its level of solvency sufficiently high while the economic outlook remains extremely hard to predict.

The savings of valid individual insurance policies issued by Suomi Mutual before 1 July 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 bonus was originally restricted to those premiums paid in accordance with the payment schedule and to the pension period defined in the pension plan. No special additional bonuses were paid at all to this group during the year under review. The special additional bonus in 2007 was 11 per cent.

For many years, the company’s solvency has clearly exceeded the unpaid portion of the conditionally declared special additional benefits on the insurance portfolio defined in the previous paragraph. For this reason, the Board decided in 2006 to extend the solvency capital refunds to cover the entire insurance portfolio. However, in 2008 only the insurance policies where the contractual technical interest is less than 4.5 per cent received the 0.7 per cent customer bonus.

Of the conditionally declared EUR 840 million special additional benefits, about EUR 220 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 solvency capital refunds will be credited to the entire portfolio. 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 carrying 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 11 (244) employees at the end of 2008, of whom 11 (11) worked for the parent company. The reduction in the Group’s number of employees was a consequence of the sale of the foreign insurance companies.

Corporate management

Suomi Mutual’s Board of Directors comprises Jukka Tuori (Chair), Arja Alho (Deputy Chair), Kari Kaunismaa, Timo P. Nieminen and Helena Pesola. The term of office of the Board of Directors lasts from one Annual General Meeting to the next.

Markku Vesterinen is the President and CEO of the company. Timo Hukka, the company’s Chief Investment Officer, is the Deputy President and CEO.

Post-balance-sheet events

At the beginning of February 2009, Pohjola Bank plc published its plan for a EUR 300 million rights issue. Suomi Mutual is committed to subscribing to the rights issue in proportion to its shareholding (about EUR 30 million).

Since the end of the financial year the company has decided to carry out an evaluation of the functioning of its own steering system mainly with regard to the discounting of its provisions. The year 2008 showed that the ultra-long interest particularly in the interest swap markets fluctuated surprisingly strongly. In a crisis situation, the Solvency II related risk calculation models compel companies to close down long interest risks and the liquidity in this market is insufficient to cover the increased demand. As a result of this, on days when there was a significant fall in share markets for example, 50 year interest rates approached 2 per cent annualised levels. If an investment were made in such an interest rate agreement the 2 per cent yield would be locked in for the following 50 years. The company wants to avoid such a situation and thus will re-evaluate its steering system in this regard.

Outlook

In part, 2009 had started in the same manner that 2008 ended. Economic development continues with a negative tinge and the volatility of the financial markets remains high, if slightly less than at its peak. Now, at the start of 2009, it seems that the massive measures taken by governments have helped. It seems that the worst of the banking crisis itself is over. In the equity markets, too, the expectation seems to be that 2009 will be much better than 2008. However, the risk is that as the downturn drags on, the markets will again be disappointed.

Difficulties in the capital funds and indirect property funds are also expected in the financial year now beginning. Values in these funds follow the values of liquid investments with a delay and in its risk management the company has prepared for possible future writedowns. On the other hand, whereas 2008 was the worst year in history for corporate lending markets, 2009 is expected to be good i.e. the margins on corporate loans are expected to normalise to a degree even if they do not return to the levels seen before the financial crisis.

Considering the circumstances, the company’s solvency remains good. The company has reduced the neutral and maximum weights of shares from the previous year, but the company is still well placed to increase its risk in a controlled manner and thus has good opportunities to aim at increasing yields.

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

The distributable funds of Suomi Mutual total EUR 567,806,679.96 and those of the Group EUR 609,252,661.12.

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