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 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 comparison year of 2008, the structure of the Suomi Mutual group was changed. The company sold its European Company which conducts its life insurance business in the Baltic States and its life insurance company in Poland to Vienna Insurance Group, an Austrian operator. The figures for the business operations in the Baltic States are included in the consolidated figures for the first two months and the figures for the Polish operations for the first four months of the comparison year.

Financial performance of the Suomi Mutual Group

The operating profit of the Suomi Mutual Group for 2009 was EUR 278 million. In 2008, the Group’s operating loss was EUR 49 million. The Suomi Mutual Group’s book profit for 2009 was EUR 119 million.

The consolidated net investment income totalled EUR 557 million, which was EUR 606 million more than in 2008. Consolidated investment income at fair value totalled EUR 716 million. The corresponding figure for 2008 was EUR -261 million.

Consolidated premiums written fell from EUR 85 million to EUR 83 million. The 2008 premium income includes EUR 10 million of premium income from the foreign subsidiaries.

On 31 December 2009, the consolidated solvency capital totalled EUR 1,267 million (EUR 997 million in 2008) and the solvency ratio in proportion to technical provisions was 24.8 per cent (19.9 per cent). The parent company’s solvency ratio was 24.8 per cent.

Insurance operations

The parent company no longer underwrites new insurance policies. The company’s insurance portfolio comprises about 260,000 policies which insured almost 300,000 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 2009 the parent company’s insurance premium income was EUR 83 million (EUR 75 million). Life assurance accounted for EUR 16.5 million of this total (16.9 million) and pension insurance for EUR 66.3 million of the total (EUR 58.4 million). An increase in group pension insurance premium income has also boosted the parent company’s insurance premium income. In a number of group pension insurance policies the benefits are increased by using an other index than the company’s own customer bonus. For example, in 2008 the Employment pension index was higher than the customer bonus paid by the company. The resulting payments were paid during the financial year.

Claims paid, including settlement costs, totalled EUR 412 million. The aggregate amount of claims paid in 2008 stood at EUR 536 million. Life assurance benefits paid were EUR 169 million in 2009 and annuities EUR 242 million. These included EUR 52 million in surrenders. The value of savings sums paid as a part of claims dropped to EUR 100 million from the previous year’s total of EUR 242 million. A decline in savings sums paid as part of capital redemption contracts has pushed down savings sums. An exceptionally large number of such contracts matured during the comparison year.

The parent company’s operating expenses totalled EUR 15 million in 2009. The expense ratio, which describes the relation between operating costs and the loading charged for managing policies, was 100 per cent in 2009 (the same as in 2008). 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 2009 without drawing on the loading income technical provisions would have been 102 per cent (103 per cent).

The aggregate risk business showed a surplus of about EUR 14 million (EUR 11 million).

The parent company’s technical provisions increased to EUR 5,138 million (EUR 5,049 million). Suomi Mutual managed 14.0 per cent of Finnish insurance savings. In the previous year, this figure was 15.2 per cent. In insurance savings tied to the technical interest rate the share was 20.5 per cent.

Investments

The fair value of the parent company’s investments at the end of 2009 was EUR 6,410 million (EUR 6,004 million). At the end of the year, 29 per cent of the parent company’s investments were in shares or in share and capital funds. In the previous year the figure was 20 per cent.

The proportion of the parent company’s investment capital residing in bonds and long-term interest bearing funds was 54 per cent at the end of 2009 (53 per cent). At the same time, 3 per cent (11 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 10 per cent (11 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 4 per cent (5 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 713 million. This corresponded to a return of 12.5 per cent. The corresponding return the previous year was -4.0 per cent. The investment return was well in excess 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 its own steering system, the company has hedged the interest-rate risk linked to provisions by using such instruments as interest-rate swap agreements. The degree of hedging has changed during the year in line with market conditions. Long-term interest rates remained fairly stable during the financial year and the hedging result was not as important for the company’s investment returns as in 2008. The hedging result helped to improve the company’s investment returns by 0.1 percentage points during the financial year. At the same time, 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. There is not yet any well-established method for market-based valuation of technical provisions and the company has not made any decision on its own system either. The matter is problematic because there is no market price for technical provisions. In a situation like this, operators try to determine the values by discounting future cash flows with the help of interest-rate trends. Selecting the interest rate for long-term liabilities (more than 15 years) is a particularly difficult problem.

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 policyholders and future yields by distributing additional benefits. For a description of the qualitative and quantitative aspects of Suomi Mutual’s risk position at the end of the financial year, see the notes section on the company’s risk management.

The Euro value of the parent company’s customer bonuses totalled EUR 161 million during the financial year, compared with EUR 9 million in 2008. The rise was primarily a result of a substantial improvement in investment returns compared with the previous year. The year 2008 did, however, still have an impact on additional benefits paid for the financial year, as part of the result was used for restoring the company’s risk-bearing capacity.

The savings of valid individual insurance policies issued by Suomi Mutual before 1 July 1997 were credited with a 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 limited to the premiums paid in accordance with the payment schedule and to the pension period defined in the pension plan. In 2009, it was decided to credit all policies of the old insurance portfolio defined above with a special additional benefit of 4.5 per cent. The special additional bonus in 2008 was 0 per cent.

For many years, the company’s solvency has substantially exceeded the unpaid portion of the conditionally declared special additional benefits for the insurance portfolio defined in the section above. For this reason, the Board decided in 2006 to extend the solvency capital refunds to cover the entire insurance portfolio. All savings-based individual insurance policies with a contractual technical interest of 4.5 per cent will receive a customer bonus of 0.5 per cent for 2009. Other savings-based insurance policies will be credited with a customer bonus of 1.0 per cent. The additional interest rate on capital redemption contracts for 2010 has been confirmed at 0.5 or 1.0 per cent, depending on the technical interest rate in the contracts.

Of the conditionally declared special additional benefits of EUR 840 million, about EUR 100 million remain outstanding after the distribution of the special additional benefits decided after 2004. 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, consideration will be given to the type, duration and size of the insurances.

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

At the end of 2009, the Suomi Mutual Group had 11 (11) employees who all worked for the parent company.

Corporate management

Suomi Mutual’s Board of Directors includes Jukka Tuori (Chair), Arja Alho (Deputy Chair), Kari Kaunismaa, Timo P. Nieminen and Helena Pesola as its members. 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

Suomi Mutual ceased to underwrite new insurance policies at the beginning of 2005, which means that the company is in a run-off state. In this connection, no decision was made on how long Suomi Mutual should operate as a company whose sole task is to manage existing insurance policies. However, it is clear that Suomi Mutual should not or cannot continue as an independent company until the day the last insurance policy matures. The company is planning to carry out a study during 2010 on whether it would be in the interest of the policyholders to speed up the shutdown of the company by, for example, merging its operations with an existing insurance institution.

Outlook

The economic outlook remains hazy. The situation has nevertheless significantly improved during the past 12 months and for many months there have been signs of recovery in some regions. There are still uncertainties in the economic outlook of developed nations. These include budget deficits and the timing of the liquidity-tightening measures introduced by central banks. This will definitely mean volatility for the financial markets, even though there will probably not be any repetition of the events of 2008 and 2009. Confidence in the sustainability of economic growth will also be a factor determining the trend in the coming years. Suomi Mutual has been and will continue to be an active player in the financial markets and, if necessary, will react to market changes. By doing this, the company aims to safeguard its operating prerequisites.

Planned changes in solvency provisions will provide challenges to those responsible for the life insurance companies’ balance-sheet management. It seems that the solvency requirements will be much higher than what was believed a year or two ago. This will also have an impact on the operations of Suomi Mutual, as the company will probably have to cut its investment risk slightly. In the long run, this is expected to decrease returns, but at the same time it should also mean that existing benefits will be more secure.

Proposal by the Board of Directors for the handling of profit

The distributable funds of Suomi Mutual total EUR 695,370,371.97 and those of the Group EUR 729,245,792.60.

The Board of Directors proposes that the profit for the financial year be handled as follows: