1 Accounting Principles

1.1 Changes to the accounting principles and comparability of information

The credit loss reserve shown in the financial statements at 31.12.2007 (EUR 1.3 million) was recognised in the profit and loss account in 2008. A change in tax legislation removed the right from insurance companies to make credit loss reserves with effect from 1.1.2009.

 

During the year, the company adopted the practice of recording depreciation corresponding to the Group’s planned depreciation in the Group’s property companies. The consolidated cumulative difference between BTA and planned depreciation from previous years, about EUR 8.9 million, has been retrospectively corrected in the retained earnings in previous years. The comparative information has been similarly corrected.

 

The foreign insurance subsidiaries were sold during the year, and their figures are included in the consolidated figures only in respect of the beginning of the year.

1.2 Consolidated accounts

Those corporations in which the parent company either directly or indirectly has a controlling interest are consolidated. The control in all the subsidiaries of Suomi Mutual is based on the majority of voting rights.

 

The consolidated accounts are combinations of the profit and loss accounts, balance sheets and notes to the financial statements of the parent company and subsidiaries. In this consolidation, inter-company receivables and debts, income and charges, profit distribution, internal gains and losses entered in the balance sheets and mutual share ownership are eliminated. Subsidiaries acquired during the year are consolidated as of the moment of acquisition, while undertakings sold during the year are consolidated up to the moment of sale. Eliminated internal gains and losses are released to income along with scheduled depreciation or reductions in value. The minority interest is shown as an item separate from profit and loss and capital and reserves.

 

The book value of shares in undertakings included in consolidation is eliminated by the acquisition method. The consolidation goodwill is entered directly against the subsidiaries’ asset items and is depreciated in accordance with their depreciation schedule. The final stages in closing down the subsidiary Suomi Life, which was put into voluntary liquidation in 2003, are in progress. The depreciation of the unallocated goodwill related to Suomi Life has continued in accordance with the earlier depreciation schedule.

 

Associated undertakings, i.e. undertakings in which the Group holds 20 per cent to 50 per cent of the voting rights, are included in the consolidated accounts by the equity method. The profit and loss account includes the Group’s share of associated undertakings’ profit or loss. In the balance sheet, the Group’s share of associated undertakings’ profit or loss which has accrued after acquisition is added to or deducted from associated undertakings’ acquisition cost and consolidated profit brought forward. Internal gains/losses entered in the balance sheets and originating from transactions between the Group and associated undertakings are eliminated in proportion to the Group’s shareholding. Consolidation goodwill and eliminated internal gains/losses are entered in the profit and loss account in accordance with the principles applied to the consolidation of subsidiaries.

 

Holdings (20 per cent to 50 per cent) in mutual housing and real estate companies are stated at cost. Since the expenses for these companies are covered by shareholders, the effect on the consolidated result and profit brought forward is insignificant.

 

Ilmarinen Mutual Pension Insurance Company is not consolidated with the Group since the Insurance Companies Act provides that a company carrying on statutory pension insurance may not be included in the consolidated financial statements of another company. There are some transactions between the Group and Ilmarinen in the ordinary course of their insurance or insurance-related activities.

1.3 Book value of investments

Buildings and constructions are shown in the balance sheet at acquisition cost reduced by scheduled depreciation or at fair value, whichever is lower. Acquisition cost includes purchase price and variable costs directly attributable to the item in question. Real estate shares as well as land and water areas are shown in the balance sheet at purchase price or at fair value, whichever is lower. The book value of certain investments in land and buildings has been written up (see section 1.5). Scheduled depreciation is deducted also from write-ups on buildings if entered as unrealised gains in the profit and loss account.

 

Other shares, fund units and debt securities classified as investments are shown in the balance sheet at purchase price or at fair value, whichever is lower. The difference between the amount repayable at maturity and purchase price of debt securities is released to interest income or charged to that income in instalments during the period remaining until repayment. The counter item is shown as an increase or a decrease in acquisition cost. Acquisition cost is calculated on the basis of the average price method. Shares subject to stock lending are valued in the same manner.

 

Private equity investments are shown in the balance sheet at purchase price or at fair value, whichever is lower. The fair value applied to investments in the funds is the fund unit value calculated in accordance with the value most recently reported by each mutual fund. The value of unquoted direct private equity investments is lowered on the basis of price data available from new financing rounds or equity offerings carried out by outsiders, or in accordance with the net asset value.

 

Shares and debt securities classified as fixed assets are shown in the balance sheet at acquisition cost reduced by permanent value adjustments. The acquisition cost is calculated in accordance with the FIFO method.

 

Investments classified as receivables are shown in the balance sheet at nominal value or at permanently lower likely realisable value.

 

Insofar as the fair value of investments rises, readjustments in value are entered into the profit and loss account up to the previously made downward value adjustments.

 

Derivative contracts are valued at the market-based fair value on the closing day. All derivative contracts are treated in the profit or loss account as non-hedging instruments, although a proportion of them act as operative hedges. The difference between the fair value and a higher book value of derivative contracts is entered as a charge in the profit and loss account. An unrealised gain is not entered in the books. The solvency margin calculation takes account of the difference between current and book values of derivatives not entered in the profit and loss account and of any possible maximum losses on contracts treated as non-hedging instruments.

 

Foreign subsidiaries’ investment assets, including investments acquired to cover for the technical provisions of unit-linked insurances, are valued at fair value in accordance with the local regulations.

1.4 Book value of assets other than investments

Intangible assets as well as machinery and equipment are shown in the balance sheet at acquisition cost reduced by scheduled depreciation. Acquisition cost includes purchase price and directly attributable variable costs.

 

Premium receivables are shown in the balance sheet at likely realisable value, and other receivables at nominal value or at permanently lower likely realisable value.

 

In the parent company, the depreciation of the goodwill (EUR 45 million) paid during the purchase of the insurance business of the subsidiary Suomi Life has been continued in accordance with the depreciation schedule.

1.5 Unrealised gains on and revaluation of investments

The book values of land and water areas, buildings and securities can be written up. Write-ups of items classified as investments are entered in the profit and loss account as unrealised gains, while write-ups of items classified as fixed assets are entered in the revaluation reserve. The oldest write-ups are, in accordance with the previous accounting practice, in the revaluation reserve or initial fund.

 

If a previous write-up becomes unjustified, unrealised gains are entered as unrealised losses in the profit and loss account, and the revaluation is withdrawn from the revaluation reserve or, in the event that the revaluation reserve has been used to increase the initial fund, from non-restricted reserves.

 

Unrealised gains on buildings are depreciated according to schedule.

1.6 Fair value of investments and difference between fair and book values

The notes to the financial statements show, by balance sheet item, the remaining acquisition cost, book value and fair value of investments. The difference between the two first-mentioned values consists of write-ups of book values as well as of equity-method adjustments related to associated undertakings. The difference between the two last-mentioned values indicates the difference between fair and book values not entered in the balance sheet.

 

The fair values of investments are determined by their continuity and following the principles of caution.

 

The quotes from public market information systems are primarily used in valuations.

 

The individual fair values of real estate and shares therein of Suomi Mutual are annually determined by experts of Pohjola Property Management Ltd. Fair values are determined primarily by the yield value method. A parallel assessment method applied to housing properties and sites is that based on local market price statistics, while the current technical value is applied to buildings.

 

The fair value of shares, fund units and debt securities quoted on official stock exchanges or which otherwise are subject to public trading is the last bid price in continuous trading on the balance-sheet date or, where this is not available, the corresponding trading price. If the balance-sheet date is not a trading day, the corresponding price for the latest trading day is used. The fair value of non-listed shares and debt securities is the likely realisable value, the remaining acquisition cost or the net asset value.

 

The fair value of receivables is the nominal value or the likely realisable value, whichever is lower.

1.7 Technical provisions

In principle, technical provisions are calculated separately for each insurance contract.

 

The technical interest rate of insurance contracts varies between 3.5 per cent and 4.5 per cent, depending on the insurance type and commencement of the insurance. In addition, permanent additional benefits, such as an annual additional benefit of 2.7 per cent, have previously been declared for part of the insurance portfolio.

 

The normal discount rate for insurance contracts corresponds to the technical interest rate, except for group pension insurance contracts. The discount rate for group pension insurances is, in most cases, 3.5 per cent. In this way, their calculation complies with the relevant regulations and decrees. With regard to those additional benefits that are not contractually binding but 34 have nevertheless been previously declared as permanent benefits, technical provisions are valued using the normal discount rates of the relevant insurance contracts and empirical information about the termination of the insurances (including mortality).

 

Because of the high normal discount rate, Suomi Mutual increased its technical provisions at the time the 2005 financial statements were prepared. In accordance with the decision made at that time, an amount equivalent to the difference between the normal discount rate expense and the interest rate payable, calculated at 3.25%, will be covered from the additional provisions for the financial year.

 

In the first half of 2008, the company made a change to the basis of calculation whereby the discount rate for provisions was altered to 0 per cent for the period 1.2–31.12. 2008. The resulting need to increase the technical provisions was covered from the additional provisions referred to above in accordance with the changed basis of calculation.

 

The technical provisions include a provision for additional benefits. In accordance with the regulations of the Insurance Supervisory Authority, additional benefits comprise all benefits which are not included in the insurance company’s liability on the basis of insurance contracts, such as premium rebates, additional sums insured, customer bonuses (the amount above the guaranteed interest) and the provision for future additional benefits for customer bonuses. The impact that the additional benefits declared during the financial year have on the technical account is determined by calculating the amount of technical provisions required by the decisions relating to these additional benefits.

 

The technical provisions also include the present value of the difference between an estimated amount for future expenses for the management of the insurance portfolio and of the future expense loadings accrued from the insurance portfolio. Correspondingly there is clearly a shortfall in risk business for some kinds of insurance and the provisions for these kinds of insurance have been increased through separate provisions.

1.8 Assets covering technical provisions

The company’s provisions are covered in the manner stipulated in the Insurance Companies Act.

1.9 Book value of other liabilities

Liabilities other than technical provisions are entered in the balance sheet at nominal value or, if the liability concerned is tied to an index or another basis of reference, at a higher value as per the changed reference basis.

1.10 Taxes and deferred tax liabilities and assets

In the profit and loss account, the tax paid or refunded as well as the tax to be paid or to be refunded on the taxable profit is entered under tax for the financial year and tax for previous financial years.

 

Under Finnish accounting and tax legislation, untaxed reserves (voluntary provisions and depreciation in excess of schedule) can be included in the annual financial statements. These items are tax-deductible only if deducted also in the books. In the consolidated accounts, untaxed reserves are included partly in the result for the financial year and reserves and partly in deferred tax charge and deferred tax liability.

 

For the parent company, deferred tax assets or liabilities are not entered in the balance sheet since they are not likely to become payable. Because of the bonuses declared for customers, no major taxable income is expected to accumulate in future years. Therefore, deferred tax liabilities or assets will not become payable. The realisation of the deferred taxes related to the difference between current and book values of investments and revaluation entered in the revaluation reserve is not deemed probable in the parent company or in the Group.

 

No tax liability is included in unrealised gains on investments entered in the profit and loss account because these are accounted for as taxable profit for the write-up year and the depreciation and value adjustment made on them are correspondingly deducted from the taxable profit. Nor is any deferred tax liability computed on allocated consolidation goodwill. In the Group, the most important items originate from timing differences, confirmed losses, value adjustments of equity investments and investments in land and buildings. A deferred tax liability is deducted from the solvency margin and solvency capital only if such liability is deemed likely to become payable in the near future, and no corrections related to deferred taxes are made in calculating the key figures. The deferred tax liability is shown in accordance with the tax rate (26%) confirmed at the time of drawing up the financial statements.

1.11 Solvency margin

The Financial Supervisory Authority monitors the solvency of insurance companies. The main indicator used is solvency margin, which refers to the difference between assets and liabilities assessed at fair value applying the principle of prudence. The solvency margin has to meet the minimum requirements set out in the Insurance Companies Act. The solvency margin is shown in the notes to the financial statements.

 

The new Insurance Companies Act also includes a section on predicitive monitoring. According to this section, the calculated solvency limits depend on the risks the company takes in its operations whereas according to the Solvency I regulations in force, the requirement is calculated by graphs mainly from premium income and provisions. Suomi Mutual meets the predictive monitoring solvency requirements.

1.12 Items in foreign currencies

Transactions in foreign currencies are entered at the rate quoted on the date of the transaction. Receivables and liabilities unsettled at the end of the financial year and fair values of investments denominated in foreign currencies are translated into Euros at the rates quoted on the balance sheet date. Exchange gains and losses arising during the financial year and at year-end are entered in the profit and loss account as adjustments to the income and charges concerned or as investment income or charges, provided that the exchange gains/losses pertain to financing transactions.

 

The balance-sheet items of foreign subsidiaries are translated into euros at the rate quoted at the balance-sheet date and the profit and loss account items at the average rate for the financial year. The difference resulting from applying the average rate to the profit and loss account is entered in the consolidated non-restricted reserves. The translation differences pertaining to capital and reserves are stated partly under restricted and partly under non-restricted capital and reserves.

1.13 Pension arrangements

The statutory pension cover for staff employed by the Parent Company has been arranged through pension schemes taken out from Ilmarinen Mutual Pension Insurance Company. Supplementary pension cover has, in general, been arranged by group pension insurance issued by Suomi Mutual. The cost of pension arrangements has been entered in the profit and loss account, also as regards the part of pension cover that is left for the company’s own account without insurance.

1.14 Activity-based profit and loss account layout

Insurance undertakings’ profit and loss account layout requires activity-based cost accounting. Operating expenses and depreciation on intangible assets and on machinery and equipment are included, by activity, in the profit and loss account items. Claims management expenses are included in claims paid; investment management expenses in investment charges. Only expenses for policy acquisition and portfolio administration as well as general administrative expenses are shown under operating expenses. Commissions received in ceded reinsurance are deducted from operating expenses. Expenses corresponding to services sold to other companies are included in other charges. Scheduled depreciation on buildings is shown as investment charges.

1.15 Definition of key figures

The key figures are based on the parent company’s data and, where applicable, on consolidated data and they comply with the regulations issued by the Financial Supervisory Authority for insurance companies.

 

Premiums written =
Premiums written before reinsurers’ share

 

Turnover =
+ Premiums written before reinsurers’ share
± Net investment income in profit and loss account
+ Other income

 

Operating profit or loss =
± Profit or loss before change in equalisation provision, additional benefits (customer benefits),
   extraordinary items, appropriations and tax

 

Total earnings =
± Operating profit/loss
+ Change in off-balance-sheet difference between fair and book values of investments, fair value
   reserve and revaluation reserve

 

Expense ratio of expense loading (%) =
+ Operating expenses before change in deferred acquisitions costs
+ Claims settlement expenses                                                                  x 100
   Expense loading
Expense loading is an allowance covering expenses as per the bases of calculation.

 

Expense ratio of balance sheet total (%) =
+ Total operating expenses before change in deferred acquisition costs
+ Claims settlement expenses                                                                  x 100
   Balance sheet total

 

Net return on investments at fair values for capital employed (%) =
 Investment income at fair values in proportion to capital employed is calculated using the so-called modified Dietz method, under which capital employed is calculated by adding to the opening fair value the cash flows in the period, weighted by the relative share of the length of the whole period that remains from the transaction date or from the middle of the transaction month to the end of the period.

 

Analysis of net investment income =
± Direct net investment income at book values
± Changes in book value
± Change in difference between fair and book values

 

Return on assets excl. unit-linked insurance % (at fair values) =
± Operating profit or loss
+ Interest and other financing expenses
+ Guaranteed interest credited
± Revaluation entered in/withdrawn from revaluation reserve/unrealised gains/losses recognised in
   fair value reserve and their reversals
± Change in difference between fair and book values of investments            x 100
+ Balance sheet total
- Technical provisions for unit-linked contracts
+ Difference between fair and book values of investments
(average of financial period and previous financial period)
Technical interest paid refers to the guaranteed technical interest credited on policies during the financial period increased/decreased by any changes in additional technical provisions related to guaranteed technical interest.

 

Solvency margin =
+ Capital and reserves after deduction of proposed distribution of profit
+ Accrual of untaxed reserves
± Difference between current and book values of investments
± Deferred tax liabilities
+ Subordinated loans (with the permission of the Financial Supervisory Authority)
- Intangible assets
± Other items required by law

 

Solvency capital =
 Solvency margin + equalisation provision + minority interest

 

Solvency capital as a percentage of technical provisions (solvency ratio) =
   Solvency capital                                                                                    x 100
+ Technical provisions
- Equalisation provision
- 75% of technical provisions for unit-linked insurance

 

Average number of employees =
 Average of number of employees at the end of each month. The figure is adjusted by the number of employees working on a part-time basis only. The staff is considered to include those employees who were paid a salary during the financial period.