BULLETIN
24 August 2010

Suomi Mutual's first-half return on investments 4.1%

Suomi Mutual's net investment return at current values was 4.1% in the first half of the year, but without the interest rate derivatives purchased it would have been 3.5%. Despite the relatively high net investment return, Suomi Mutual's solvency capital remained more or less unaltered thanks to fallen market rates.

"Net investment return for the first half was in itself good, but with regard to our own targets it can only be regarded as satisfactory. We raised our first-half targets much higher because the interest rates had sunk so low. It will be more and more difficult for us in the future to guarantee high returns on our customers' insurance savings," says President and CEO Markku Vesterinen.

Suomi Mutual manages the existing insurance policies and related investments of its almost 250,000 clients,  but does not sell any new insurance policies. The company's core operations lie in investments which, when managed successfully, ensure the company's high solvency capital, keep the customers' insurance savings safe and give them the high profit promised. On 30 June, the market value of the investment portfolio was about EUR 6.3 billion.

During the first half, Suomi Mutual's solvency margin increased by EUR 204 million to EUR 1,440 million while the solvency ratio stood at 29.6% (24.8% on 31 December 2009). Although the company's solvency capital increased, the solvency position did not improve, when the change in technical provisions at market interest rates is taken into account.

As a result of the financial crisis, insurance companies' solvency requirements will become very strict in the EU. Suomi Mutual is already preparing for the new solvency regulations that will become effective in a few years' time (Solvency II Directive) by reducing its risk levels, and has already reduced the equity weighting of its investments, for example. A mutual company cannot increase its solvency by increasing its capital base for fear of the investments risks being realised; prudent solvency maintenance is of prime importance.

“Any requirement for us to increase our solvency translates to a need to lower our investment risk exposure. As a consequence, this as a rule leads to lower returns and reduces our customers’ overall returns,” explains Mr Vesterinen.

Suomi Mutual has the responsibility of maintaining long-term technical provisions in excess of EUR 5 billion. The majority of its customers receive a 4.5% technical interest plus a Suomi Mutual special benefit of 2.7%

In recent years Suomi Mutual has distributed its solvency to the policyholders in the form of considerable customer bonuses. Between 2005 and 2010, the company has distributed almost EUR 1.2 billion in various additional benefits to its customers. The decision on special benefits for the current year will be made in November as usual. The condition for such special benefit payments is that the company’s solvency is on a healthy basis. 

Investment market making no progress

“The investment market is lacking the optimism it was enjoying a year ago, says Chief Investment Officer Timo Hukka. He calls 2010 a year of slow economic growth and, compared with the past years, of low returns. 

“The markets are sluggish and no investment sector seems to rise clearly above any other. There are no extra points to be snatched by taking risks,” explains Mr Hukka.

Suomi Mutual's net investment return at current values was 4.1% in the first half, compared with 3.3% year on year. These figures include the interest rate derivatives obtained for hedging purposes. Without them, this years first-half figure would be 3.5%.

The best return in the first half was 8.5% from equity instruments. Fixed-income investments (excl. interest rate derivatives that protect the technical provisions) gave a return of 2.6%, which includes the money market instruments.

Returns from direct property investments were 4.4%, good by any standard. The slower rate of recovery of real estate funds following the financial crisis diminished the overall property investment returns to 1.8%. In alternative investments, hedge fund returns came to 2.2%.

On 30 June, the market value of the company's investment portfolio was approximately EUR 6.3 billion. Of the investments, various fixed-income instruments accounted for 62%. Equities accounted for 24%, of which about a quarter had been hedged at the end of June. In this figure, capital investments are included in equity investments. Real estate investments, including real estate funds, totalled 10% of all investments. Various alternative investments also accounted for 4% of the investments.

Insurance operations continued on stable path

Suomi Mutual’s consolidated premiums written for January–June totalled EUR 25 million (26).

The indemnities paid out, EUR 203 million (205), were as expected, most of the claims being scheduled repayments of insurance savings.
 
Suomi Mutual has outsourced the management of most of its insurance and investment portfolios to OP-Pohjola Group. The company has a staff of 10. Its outsourcing contracts are mainly concluded on a long-term basis. Therefore, the costs incurred from these contracts are easily predictable. Operating expenses for the first half totalled EUR 7.2 million (7.4).

For further information, please contact:
Markku Vesterinen, President and CEO, tel. +358 (0)10 253 2844 or +358 (0)40 348 3502
Timo Hukka, Chief Investment Officer, tel. +358 (0)10 253 2002 or +358 (0)40 519 0510
Kai Niemi, CFO, tel.  +358 (0)10 253 2803 or +358 (0)40 820 5927