Review by the President and CEO

The mission of Suomi Mutual is to manage the insurance and related investments of its existing customers. As a mutual company, our sole purpose is to act for the benefit of our customers. In investment operations, our aim is to obtain the best possible return permitted by our risk-bearing capacity, while at the same time maintaining operational efficiency.

We distribute our annual operating profit and the solvency capital released through maturing insurance policies to our customers as additional benefits to the degree permitted by our risk-bearing capacity. We endeavour to reconcile our additional benefits and risk-taking so that insurance policies of different lengths are treated as even-handedly as possible.

Result for 2009 excellent

There was a great deal of uncertainty in our operating environment at the start of 2009. The world was still in the grip of the financial crisis that had come to a head during the previous autumn and it was impossible to make any predictions about the future. The decline in equity prices continued and the markets remained highly volatile. At the start of the year, our equity risk was extremely low. We had achieved this by hedging our equity investments in accordance with a plan drawn up in advance.

The atmosphere of the investment markets changed at the end of the first quarter. Equity prices made a robust recovery and the rise continued until early autumn. Risk premiums for corporate loans also began to fall. As a result, our corporate loan portfolio, which had shrunk during 2008, was again gaining in value. The values of hedge funds also increased. Due to their nature, private equity and real estate funds recover more slowly than other investments and posted losses in 2009.

The aim of Suomi Mutual is to keep its investment risk under control at all times. As the markets turn, we increase the risk, doing it gradually in several stages. Once a crisis has passed, it is easy to say that if risks had been increased more quickly the end result would have been better. This was also the case in 2009. However, I believe that, from the point of view of policyholders, it is better to increase the risk gradually rather than at one go. If we had chosen that path, an incorrect assessment of market trends would have negatively affected our solvency position and led to a more permanent weakening of our risk-taking capacity. The fact that a mutual company does not have any capital management mechanisms also justifies a more cautious approach.

In 2009, the return on our investments at fair value was 12.5 per cent. The high returns allowed Suomi Mutual to exceed its result targets by a wide margin. We are extremely satisfied with the result. Calculated at fair values, the annual return for the period from 1 January 2008 – 31 December 2009 was about 4 per cent. Considering the market trends and the prevailing circumstances, this is also an extremely good result. However, better results are required if we are to meet our long-term result targets. In this respect, our performance is unsatisfactory.

Changes in solvency provisions will make guidance of operations more difficult

The EU is preparing changes in insurance companies’ solvency requirements (Solvency II). Compared with the existing legislation, the new solvency requirements give more consideration to each company’s own risks. Finland introduced a revised Insurance Companies Act in 2008, which means that Finland can already begin harmonising its supervisory practices with the Solvency II requirements before the new EU legislation takes effect.

Even though, in principle, the new provisions are a step forward, they also involve problems. In the previous annual report, I explained some of the problems connected with the market-based value of the technical provisions. I also described the practical experiences in using the new method of calculating technical provisions. We noticed that, for the types of situations that we had faced in 2008, it will lead to substantial fluctuations in technical provisions.

When interest rates were at very low levels, we decided to partially give up extensive hedging of the interest rate risk of technical provisions. In our view, low interest rates justified such risks.

In 2009, we changed the method of calculating the market-based value of long-term technical provisions so that instead of applying market rates we decided to use a fixed rate. It has also been proposed that, under Solvency II, discount rates should be calculated in a similar manner. This is a positive development that, in my view, would make the new solvency system much more workable and would remove an inbuilt factor that unnecessarily intensifies market fluctuations.

In 2009, European supervisory authorities published their proposal for the risk parameters that should be used in the calculation of the solvency requirement. If the proposals are adopted, the new solvency requirements will be much higher than previously estimated. The recent period of financial instability and the strong fluctuations in the values of different investments during the crisis are probably the main reasons for the proposed parameters. The purpose of the high solvency requirements is probably to give insurance consumers more security, which in itself is a reasonable aim. However, in my view the approach is wrong. A substantially smaller increase has already had a significant impact on the operations of life assurance companies. For many years, companies have mainly offered their customers investment-linked insurance policies in which the entire risk is transferred to the customers. Thus, they do not require the companies concerned to have a high level of solvency capital. In such situations, the realisation of the company’s risks rarely causes any losses to the customers. The customers may still suffer losses. They are, however, then a result of their own choices.

Suomi Mutual’s investment portfolio does not contain any investment-linked insurances, as all its insurances are traditional policies based on technical interest. They guarantee the customers a minimum return. Whenever the solvency requirement is increased, Suomi Mutual must lower its investment risk. This will in turn lead to lower returns and decrease the overall return of the customers.

I am not against new solvency requirements. Changes are needed. What I am saying is that higher requirements will generate additional costs that will, in the end, be shouldered by the customers. In my opinion, an insurance policy based on technical interest suits many customers better than an investment-linked policy. It should not be made too expensive by attaching too much security to it. Solvency requirements should not be aimed at minimising the bankruptcy risk of insurance companies but, rather, at ensuring that the losses that the customers suffer as a result are manageable. Even though the existing requirements are insufficient, they have not resulted in bankruptcies causing substantial losses to customers.

Additional benefits distributed again

Suomi Mutual distributed about one billion euros in additional benefits to its customers for the years 2005−2008. In 2008, the company posted a poor result and for this reason the year only accounted for a fraction of this total. The positive result for 2009 allowed us to again distribute more generous additional benefits. They totalled EUR 160 million. Most of the sum was given as special additional benefits to such policyholders whose insurances were already in effect on 1 July 1997. The special additional benefits are based on a conditional promise given to these policyholders. About EUR 100 million remains to be distributed.

Suomi Mutual also increased its technical provisions in 2009. This was considered necessary because our technical provisions were and, despite the increase, still are lower than the market-based technical provisions calculated in accordance with present interest rates.

Suomi Mutual examining how to manage its run-off portfolio

When Suomi Mutual ceased selling new insurance policies at the start of 2005, the company decided to continue its operations in a run-off state. No decisions were made on how long the company should be run as a separate entity. In 2009, Suomi Mutual started to examine whether the company could be closed down and its run-off portfolio transferred to a fully operational life assurance company. The interests of its customers will be the sole consideration for Suomi Mutual during this process. Thus, our customers have no reason to worry. Naturally, any solution would also have to be in the interest of our partners. The benefits and values generated by any feasible solution must be acceptable to both parties.

Cooperation with the administrative bodies has continued to be good. I hope that their members would have an open mind concerning the examination of the company’s future.

Our personnel is small in number and have performed well during this financial year. Likewise, our partners managing our insurance and investment portfolios have been efficient in their work and the spirit of cooperation has been good. Even though we are extremely satisfied with the performance of our present partners, the examination concerning our future referred to above also involves other potential partners. The aim is to ensure that we can find a solution that is in the best interest of our customers.

Markku Vesterinen
President and CEO