Suomi Mutual makes poor result in the first half of 2008 – but solvency remains excellent

20 Aug, 2008

Suomi Mutual's net investment return at current values was –3.0 per cent in the first half of the year. It is not comparable to previous figures because the hedging of technical provisions has shrunk return on investment. The company's solvency was nevertheless excellent.

Suomi Mutual will no longer sell any new insurance policies. Instead, it focuses on managing the existing insurance policies and related investments of its 300,000 clients. The company's key task is to succeed in its investment operations. In this way the company can ensure solid financial standing and be able to provide as high a return as possible on the customers' insurance savings.

Company preparing for changes in solvency requirements

Suomi-Mutual has applied a new control system since the beginning of 2008, and under the new system technical reserves are valued in management accounting according to the existing interest rate level. This way the company is preparing for forthcoming solvency changes (Solvency II will probably enter into force in the EU in 2012). With this change, the company believes it is best prepared to ensure equal treatment of policies regardless of their expiry date.

The main change is the way in which interest rate risk is calculated:  previously it was purely from investment assets, but since the beginning of 2008 the entire balance sheet is included, that is, also the interest rate risk related to technical provisions. In practice this means that investment operations must also be carried out for the purpose of hedging technical provisions. In bookkeeping, technical provisions are for the time being valued on a fixed interest, and therefore official key ratios do not describe the company's success accurately.

In the first half of 2008, Suomi Mutual's official solvency margin fell by EUR 245 million to EUR 955 million. Solvency ratio was 18.5 per cent (22.4 per cent in December 2007). The company measures success in accordance with internal reporting by the change in risk-bearing capacity before decisions on special benefits. This change was EUR –235 million in the first half of 2008. The company's risk-bearing capacity is the sum of the solvency margin and the change in technical provisions due to the interest rate level. The company's risk exposure is still excellent.

Challenging six months in terms of investments

Suomi Mutual's insurance portfolio includes mainly long-term liabilities. Therefore, the company is investing assets – which cover technical provisions and solvency capital – in equities, various fixed-income instruments and real estate properties with the aim of generating as high a return as possible on the company's solvency capital and customers' savings while managing the investment risk.

The first half of 2008 was difficult for Suomi Mutual in terms of investment operations, and challenging in terms of fixed-income instruments. Difficulties in the interest rate market were exacerbated by global banking problems, a major decline in liquidity and a broadening of credit risk premiums that followed. What made the situation even more challenging was the company's newly adopted control system whereby the risk of change in value of the technical provisions is protected partly with a fixed-income portfolio and partly with a separate interest rate swap portfolio.

Equity markets developed negatively in the first half of 2008, but the company's profit from stock investment was clearly above the benchmark index, thanks to successful hedging in the first half of the year.

Real estate investment income, including real estate funds' income, was above the target and in the end in fact good.

As to the alternative investments, hedge funds fell clearly short of their target, ending in a loss. Profit from raw materials turned out to be excellent, although they represented a small percentage of the overall allocation.

Net investment return at current values was –3.0 per cent in the first half of the year. This is not directly proportional to the profit made is 2007 (6.5%), because hedging the technical provisions cut investment income during the report period owing to the rise in interest rates. In the company's internal reporting, this hedging loss was compensated by a change in the difference between the fair value and carrying amount of technical provisions. The comparable profit for the period was –1.9 per cent.

At the end of June, the market value of the company's investment portfolio was over EUR 6.4 billion. Of the investments, various fixed-income instruments accounted for 56 per cent. Equities accounted for 26 per cent, of which about a quarter had been hedged at the end of June. In this figure, private equity investments are included in equity investments. Real estate investments, including real estate funds, totalled 10 per cent of all investments. Various alternative investments also accounted for 8 per cent of the investments.

Amount of claims paid less than a year earlier

The amount of claims paid by the company developed according to expectation, falling by EUR 41 million year-on-year, totalling EUR 207 million during the report period. In fact, most of the claims are scheduled repayments of insurance savings, which is why there is no significant effect on the result.
 
Suomi Mutual has outsourced the management of most of its insurance and investment portfolios to OP-Pohjola Group. The company has a staff of 11. Its outsourcing contracts are mainly concluded on a long-term basis. Therefore, the costs incurred from these contracts are easily predictable. Consolidated operating expenses totalled EUR 7.6 million.

Decisions on special benefits to be made in the latter half of 2008

Suomi Mutual's business strategy is prepared for abrupt changes in the markets, which explains why its risk exposure remained excellent despite the poor investment income.

But the current prospects are not as good, and the special benefits to customers will be down considerably from the exceptionally high level in previous years. The decision on special benefits will be made in November as usual.

FOR MORE INFORMATION, PLEASE CALL

Mr Markku Vesterinen, President and CEO, tel. +358 (0)10 253 2844 or +358 (0)50 348 3502
Mr Timo Hukka, Chief Investment Officer, tel. +358 (0)10 253 2002 or +358 (0)40 519 0510