CEO's Review: A Year of Successful Decisions The fact that the globa nancial crisis turned into a sovereign debt crisis presented signi cant challenges to our industry in 2010. However, despite the turbulence, our results proved to be excellent.
2010 was an outstanding year for Sampo. Our P&C insurance's long-term investments in underwriting excellence paid o nd our lead over Nordic competitors grew considerably. Furthermore, we succeeded in assessing the risks properly and our combined ratio fared well despite the di cult weather conditions. And for the seventh successive year, If P&C Insurance exceeded its target of achieving a combined ratio of below 95 per cent. Overall, the company's results for the year were good.
If's customer satisfaction improved in line with expectations and especially those customers who had a claim and consequently had to use the company's claims handling organization were particularly pleased with If's service. In addition, we have correctly anticipated the wishes of our customers, who clearly prefer to settle claims on the Internet. Thanks not least to our online services, already approximately 60 per cent of our Private customers' claims are settled within just 24 hours of submitting a claim.
Nordea Lives up to Expectations The development during 2010 of Nordea Bank, our associated company, met with our expectations. The company's operating pro t increased by almost 20 per cent and credit losses decreased. In addition, the bank's customer base grew rapidly and customer satisfaction rose to its highest ever level. The company's governance was further improved due to changes in both the top management and the board. All of this was re ected in the company's share price. At the end of December, the market value of our holding in Nordea amounted to EUR 6.8 billion. The valuation di erence of Nordea's shares has already increased signi cantly from the original purchase price of EUR 5.3 billion.
Life insurance operations had major successes as well. As Finland's leading expert in corporate bene ts, Mandatum Life was able to provide enterprises with solutions for retaining employees, and largely speaking, the traditional area of life insurance sales also proceeded well. Furthermore, the Wealth Management Unit of Mandatum Life performed extremely well and experienced strong growth during 2010. Also of signi cance was Sampo Bank, our partner, producing an exceptionally good sales performance and in doing so returning to the pre nancial crisis level. This was an outstanding achievement from Sampo Bank as our main distribution channel for consumers. Thanks to these achievements, Mandatum Life's results rose and premiums written climbed to an all time high and reached a value of over EUR 1.1 billion.
Despite the good year we must be humble as we face future challenges. Our work continues and many new decisions that will need to be made lie ahead of us in 2011.
Dividend Policy Sampo plc, the listed parent company of Sampo Group, is a good dividend payer. Sampo aims to pay at least 50 per cent of its net profit as dividend. Share buy-backs can be used to complement the dividend. The Board proposes to the AGM a dividend of EUR 1.15 per share for the year 2010. The proposed dividend corresponds to a pay-out ratio of 58 per cent.
Sampo plc The parent company owns and administres the insurance subsidiaries and is the largest shareholder in the leading Nordic bank, Nordea Bank AB, with 21.3 percent of the shares in February 2011.
In addition to the dramatic weather, 2010 was characterised by a number of important deals. In many ways, 2010 was a breakthrough year for If in the health sector, with new initiatives and a series of new accounts. In Denmark, If came to an agreement that resulted in over 100,000 ihi Bupa health insurance customers in the Nordic countries receiving recommendations to transfer their business to If. In the car insurance sector, which is an important part of If's business, the joint venture with Volvo Cars that offers Volvia brand insurance in the Nordic countries was extended by another five-years. Volvia premiums are worth approximately EUR 200 million. Ford and Mazda also extended their five year branded insurance arrangements in the Nordic region. A key business focus in 2010 was the successful implementation of the 2009 partnership agreements with universities in Finland, the Volkswagen Group in Sweden, and Unionen, a Swedish union for white collar workers. It should also be noted that If established a social media presence through Facebook and Twitter accounts over the course of the year. If was the first insurance company in the Nordic countries to release its own application for mobile devices.
Mandatum Life Mandatum Life's premiums written and balance sheet reached a record high in 2010. The strong growth in premiums written was a result of investments set in motion in 2008, which aimed at strengthening the wealth management and in-house corporate sales organisations, combined with the recovery of Sampo Bank sales to the previous years' level.
In terms of wealth management, Mandatum Life's philosophy of absolute return aroused clients' interest during 2010, proving its viability. The international economy and investment market were unsettled and unpredictable and subject to rapid changes. It was therefore challenging to analyse the situations and draw definite conclusions. In this demanding market situation the investment philosophy of absolute return and active investment operations proved their worth. Coupled with increasingly active wealth management sales this created the foundation for growth in 2010 and helps to create growth expectations for 2011.
In corporate business, unit-linked premiums written continued to grow. For both corporate sales and wealth management sales, cooperation between the distribution channels is of primary importance. This cooperation was successfully set in motion during 2010, and it also explains a significant part of the growth in premiums written during the past year. During the year 2010 a record number of pension funds were transferred to life insurance companies. All these transfers are with profit policies with guaranteed interest. As the guaranteed interest rate is relatively high compared to the market interest rates Mandatum Life has not been active in this sector.
A new drive was found in the cooperation between Mandatum Life and Sampo Bank and as a result the premium income generated by the Bank grew strongly in 2010. Especially pleasing, in addition to private customers' business, was the strong recovery of private bank and corporate business. The growth in this sector is based on a common intent and confidence in strategic cooperation between Sampo Bank and Mandatum Life.
The company's growth, integration of new operations into the traditional life insurance business and improvement of the quality of customer service calls for new working methods and competencies from the personnel. For this reason a substantial investment has been made in personnel development, with the focus on internal cooperation, improving the quality of customer service and developing leadership. During the year under review, the insurance and claim services were also re-organised, motivated by the aim to improve customer service while giving attention to the needs of each customer segment.
Sampo plc employed on average 52 persons in 2010. The company coordinates investment operations, capital allocation, risk management, Group accounts, investor relations as well as legal and fiscal matters in the Group.
The average number of Sampo Group's employees in 2010 amounted to 6,914 (7,311). In geographical terms Finland had 31 per cent of the personnel, Sweden 27 per cent and Norway 22 per cent. The share of Baltic countries, Russia, Denmark and other countries was 20 per cent.
As HR activities and needs vary significantly between the two business areas, the developments in 2010 are described separately for both of them.
P&C insurance In 2010 emphasis was continuously put on creating a competence based culture focused on the customer and idea creation.
During the last few years, a constant theme in If P&C has been to strengthen the competence of its employees and to increase employee engagement and commitment. To accelerate this work even more during 2010 If P&C launched a strategic theme called ‘Skills and
To kick start the initiative, 'Skills and Initiatives' was the theme for If's annual top management conference involving If's 170 most senior leaders. In interactive workshops led by the Head of P&C insurance, and several other management team members various aspects of competence and innovation culture were discussed and action plans were formulated.
Increased emphasis on competence building, innovation and customer focus are also being introduced into the other leadership development activities offered by the in house competence centre - If Academy.
To support the efforts on boosting ‘Skills and Initiatives', If has also performed two companywide ‘bottom up' leader evaluation processes with good results.
To further strengthen ‘Skills and Initiatives' in light of If's geographical diversification, investments have increasingly been made to IT based learning. This involves eLearning, eTests, eSeminars and solutions for sharing knowledge.
Mandatum Life restructured its service development and customer service units to better serve the clients and the strategy of the company. Restructuring was done in an open way to demonstrate the culture of transparency and cooperation and to promote career opportunities within the company. All employees were invited to contribute to the company culture building and defining the Mandatum Life leadership qualities in a one-day workshop.
Four new employee development programs were launched targeted at building the core business and leadership skills. The programs continue during 2011, aiming to ensure the development of skills and talent necessary for the company's future.
If's guiding principle as a company is to contribute to a society where everyone has the opportunity to live a safe and comfortable life. The insurance company is, in fact, one of the most important contributors to our daily sense of security - together with law enforcement, emergency rescue, and other public authorities. In 2010 alone, If processed 1.4 million insurance claims ranging from individual consumers injured on the open road to companies that saw their production facilities go up in smoke. All in all, If paid out close to EUR 3 billion in claims over the past year.
As the leading insurance company in the Nordic region, If takes on a social responsibility heavier than that brought on by business alone. If uses its unique knowledge of risk management to help build a safe environment in the areas where it does business. Its goal is to always act in ways that meet, or preferably exceed, the ethical, legal, and commercial requirements placed upon the company.
The year 2010 saw a long line of concrete actions: • If introduced a selection of environmentally conscious insurance products. Among others, the coverage of damages to the environment has been increased in Finnish home insurance policies; customized insurance for electrically powered cars has been developed in several countries of business; and there is an on-going effort to increase corporate awareness of the need for environmental liability insurance.
20 Corporate Governance Statement 21 Board of Directors 26 Board-Appointed Committees 29 Group Executive Committee 34 Group CEO and President 35 Compensation 36 Internal Audit 37 Insider Administration 38 External Auditor 24 Board of Directors’ Duties 25 Election and Terms of Board Members 27 Audit Committee 28 Nomination and Compensation Committee 33 Group Executive Committee’s Duties
Acting in compliance with Recommendation 54 of the Corporate Governance Code, Sampo has published a separate Corporate Governance Statement on its website in ful llment of the requirement referred to in the Finnish Securities Markets Act, chapter 2, section 6, subsection 3.
Positions of Trust: UPM-Kymmene Corporation, Chairman of the Board; Nordea Bank AB (publ), Vice Chairman of the Board; Hanken School of Economics, Chairman of the Board; Finnish Business and Policy Forum EVA, Member of the Board; Matti Vuoria (born 1951)
Positions of Trust: Wärtsilä Corporation, Vice Chairman of the Board; Stora Enso Oyj, Member of the Board; Securities Market Association, Chairman of the Association's Board; Federation of Finnish Financial Services,
The Research Institute of the Finnish Economy ETLA, Member of the Board
• Wahlroos holds 11,856,737 Sampo plc shares directly or through a controlled company.
• Brunila holds 6,306 Sampo plc shares directly or through a controlled company.
• Mattila holds 2,250 Sampo plc shares directly or through a controlled company.
Positions of Trust: Economic Council of Finland, Secretary General; Advisory Board to the Government Institute for Economic Research, Chairman
• Taxell holds 7,006 Sampo plc shares directly or through a controlled company.
Following Board members are independent of the company and its major shareholders: Tom Berglund, Veli-Matti Mattila, Eira PalinLehtinen, Jukka Pekkarinen and Christo er Taxell.
Information as on 31 December 2010. The entire CVs of members of the Board of Directors can be viewed at www.sampo.com/board.
The Board elects the Group CEO and President, the members of the Group Executive Committee and the Group Chief Audit Executive, and releases them from their duties. The Board also decides on the terms and conditions of their employment and on other compensation. In addition, the Board confirms the Group's staff planning targets and monitors their fulfillment, determines the grounds for the Group's compensation system and decides on other far-reaching matters concerning the staff.
In order to secure the proper running of operations, Sampo's Board of Directors has approved internal rules concerning corporate governance, risk management, internal control and reporting in Sampo Group.
The Annual General Meeting of 2010 decided that the Board would consist of eight members until the close of the Annual General Meeting to be held in 2011. The term of office of the Board members ends at the close of the Annual General Meeting that first follows their election. The members of the Board elect a Chairman and Vice Chairman from among their members at their first meeting following the Annual General Meeting.
Audit Committee The main duties of the Audit Committee have been defined in the Committee's Rules of Procedure approved by the Board of Directors.
The Audit Committee convened four times in 2010, with no absentees.
Furthermore, the Committee prepares a proposal for the Board on the appointment, employment conditions and other compensation of Sampo Group's Chief Audit Executive, and on the principles by which Sampo Group's staff are to be compensated. In addition, the Committee is responsible for preparing proposals for the Board on issues relating to the development of good corporate governance and confirming the criteria and processes used for the Board's self-evaluation.
The Board of Directors has appointed the Sampo Group Executive Committee and a Group MD Committee to the Group Executive Committee, which supports the Group CEO in preparing matters to be handled by the Group Executive Committee.
• Member of Sampo Group Executive Committee and Secretary of the Board of Directors of Sampo plc since 2001.
• Ervasti-Vaintola holds 283,151 Sampo plc shares directly or through controlled companies.
• Hestvik holds 19,844 Sampo plc shares directly or through controlled companies.
Positions of Trust: If P&C Insurance Holding Ltd, Sweden, Member of the Board; Mandatum Life Insurance Company Limited, Vice Chairman of the Board
• Johansson holds 50,388 Sampo plc shares directly or through controlled companies.
Positions of Trust: If P&C Insurance Holding Ltd, Sweden, Member of the Board; Mandatum Life Insurance Company Limited, Member of the Board
• Magnusson holds 30,167 Sampo plc shares directly or through controlled companies.
If P&C Insurance Holding Ltd (publ), Sweden, Chairman of the Board; Mandatum Life Insurance Company Limited, Chairman of the Board; Kaleva Mutual Insurance Company, Chairman of the Board
• Stadigh holds 244,589 Sampo plc shares directly or through controlled companies.
• Martinsen holds 18,563 Sampo plc shares directly or through controlled companies.
Positions of Trust: Forsikring & Pension, Denmark, Member of the Board; CJSC If Insurance, Russia, Member of the Board; IPSC Region, Russia, Member of the Board
• Thorsrud holds 15,525 Sampo plc shares directly or through controlled companies.
IPSC Region, Russia, Member of the Board; SOS International a/s, Denmark, Member of the Board
• Wennerklint holds 18,362 Sampo plc shares directly or through controlled companies.
Head of Business Area Baltic and Russia, If P&C Insurance; Managing Director of If P&C Insurance Company Ltd
Positions of Trust: If P&C Insurance Company Ltd, Finland, Member of the Board; If P&C Insurance AS, Estonia, Member of the Board; CJSC If Insurance, Russia, Member of the Board; Corporate Governance Group Executive Committee
Salary and Remuneration Report Sampo has published a Salary and remuneration report on its website in accordance with section 7 (Remuneration) of the Corporate Governance Code at www.sampo.com/compensation.
Principles of the Compensation System In addition to receiving monthly salaries, executives who are members of the Group Executive Committee are participants in the Group's short-term variable compensation system which is decided upon separately each year. The short-term variable compensation is determined on the basis of the Group result, the business area result and individual performance. The maximum amount that can be paid for 2010 to members of the Executive Committee is an amount corresponding to nine month xed salary.
Internal Audit Sampo's Internal Audit is a function independent of business operations which evaluates the sufficiency and effectiveness of the internal control system and the quality with which tasks are performed in Sampo Group. The Internal Audit reports to the Group CEO. The Internal Audit has been organised to correspond with the business organisation.
Sampo Group's Guidelines for Insiders are stricter than the above-mentioned norms on matters that concern the Group Executive Committee, other corporate executives and other speci cally named persons, as these persons must obtain a separate written permission in advance for each share related securities transaction they make.
If P&C, Sampo Group's P&C insurance operation, sustained a high insurance technical pro tability in 2010 despite the di cult winter. Combined ratio was 92.8 per cent for the full year 2010 (92.1). Pro t before taxes rose to EUR 707 million (644). Return on equity was 39.8 per cent (53.2) and fair value reserve increased to EUR 315 million (105).
Sampo's share of Nordea's net pro t amounted to EUR 523 million. Year 2010 was th rst year when Nordea was accounted for as an associated company. In segment reporting the share of Nordea's pro t is included in the segment ‘Holding'.
Sampo Group's total investment assets at the end of 2010 amounted to EUR 18.3 billion (16), of which 78 per cent was invested i xed income instruments (82), 18 per cent in equities (14) and 4 per cent in other assets (3). Reported investment income amounted to EUR 1,183 million (1,155).
The Group's equity as at 31 December 2010 amounted to EUR 8,886 million (7,613). Equity was strengthened mainly by the pro t for the year of EUR 1,104 million and change in the fair value reserve of EUR 447 million. The largest reduction was the dividends of EUR 561 million.
Sampo Group's own funds exceeded the minimum solvency requirements at the end of 2010 by EUR 3,038 million (2,315) and solvency ratio stood at 167.1 per cent (158.3).
Business Areas in 2010 If P&C is the leading property and casualty insurance company in the Nordic region, with insurance operations that also encompass the Baltic countries and Russia.
Sampo plc controls its subsidiaries engaged in P&C and life insurance.
Another exceptional development in 2010 reflected in consolidated P&C insurance result is the significant strengthening of Swedish krona.
Technical result was EUR 449 million (488), of which the Private business area accounted for 53 per cent, Commercial 28 per cent, Industrial 15 per cent and Baltic and Russia 3 per cent.
In business area Industrial combined ratio improved to 90.6 per cent (90.7) helped by the favorable development in nominal costs. Risk ratio was at previous year's level at 71.9 percent (71.6). In Baltic and Russia both risk ratio and combined ratio increased compared to previous year, and were 56.4 per cent (55.7) and 93.4 per cent (91.7), respectively.
Risk ratio weakened due to extraordinary weather conditions during year 2010 in all countries excluding Sweden, where despite the severe winter both risk ratio and combined ratio improved to 70.2 per cent (72.4) and 93.3 per cent (95.2), respectively. In Norway risk ratio increased to 69.6 per cent (68.8) but due to improved cost ratio in all business areas, combined ratio was at previous year's level at 92.1 per cent (92.0). Also in Finland cost ratio improved in all business areas, but the increase in risk ratio to 67.0 per cent (64.0) lead to a higher combined ratio of 90.4 per cent (88.5). In Denmark risk ratio increased to 72.8 per cent (66.1) and combined ratio to 101.4 per cent (93.7).
Other operating expenses increased EUR 25 million due to dissolving the collective guarantee provision in the Finnish workers' compensation insurance.
As at 31 December 2010 If P&C had a solvency ratio (solvency capital in relation to net premiums written) of 79 per cent (77). Despite the EUR 540 million paid to Sampo plc in dividends during 2010, solvency capital amounted to EUR 3,373 million (2,943) in comparison to the regulatory minimum capital requirement of EUR 735 million.
Life Insurance in 2010 Mandatum Life Group consists of Mandatum Life, a wholly-owned subsidiary of Sampo plc, operating in Finland, and its subsidiary Mandatum Life Insurance Baltic SE, which has the form of a European company and is headquartered in Estonia. It operates in the other Baltic countries through branches.
Change in liabilities for inv. and ins. contracts -678 -600 13
In the Finnish operations, the total return for policyholders on with-profit technical provisions in 2010 was 3.0-4.5 per cent, depending on the class of insurance. This means that in addition to the guaranteed interest customer bonuses varying from 0 to 1.1 per cent, depending on the guaranteed interest on policies, were paid.
Majority of Mandatum Life's traditional policies carry a guaranteed interest of 3.5 per cent. Individual policies sold in Finland before 1999 carry a guaranteed interest of 4.5 per cent. The discount rate for these policies has been lowered to 3.5 per cent and subsequently technical reserves have been supplemented with EUR 86 million (95). In addition, EUR 61 million has been reserved to lower the interest rate of all with-profit liabilities to 2.5 per cent in 2011 and to 3.0 per cent in 2012. This supplement decreases the minimum requirement for
Life operation's expense ratio remained on previous year's level and was 112.1 per cent (111.0). This ratio does not take into account all fees intended to cover the operating expenses. Assuming all fees were to be taken into account, Mandatum Life Group's expense ratio would have been 90.1 per cent (91.8). Mandatum Life does not defer acquisition costs.
Tax treatment of private persons' savings for old age changed in Finland as of 1 January 2010 with the introduction of a new Act extending the tax deductibility previously enjoyed only by individual pension premiums to a new set of savings products. Mandatum Life decided a year ago to cease actively offering new individual pension products to private persons as the main distributor Sampo Bank focused its efforts on selling the PS accounts created under the new Act. The influence to Mandatum Life's result is minor.
The following text is based on Nordea's full-year 2010 result release published on 2 February 2011.
2010 showed record-high total income, up 3 per cent compared to last year. Operating profit increased 18 per cent, due to higher income and lower net loan losses. Risk-adjusted profit decreased by 6 per cent compared to the same period last year.
Net interest income decreased 2 per cent compared to last year as a result of lower deposit income and higher funding costs. The combined negative effect is more than EUR 400 million. This income drop was successfully compensated through strong growth in both lending and deposits as well as higher lending margins. Lending increased 11 per cent and deposit volumes 15 per cent. Corporate lending margins were higher, while deposit margins were largely unchanged compared to last year.
Net fee and commission income has recovered strongly and increased 27 per cent. Asset management commission income is up 42 per cent driven by assets under management, which are up 21 per cent in the last 12 months and a more attractive product mix.
Net result from items at fair value decreased by 6 per cent compared to very high levels last year. The customer driven capital markets operations continued to be strong with increasing volumes. The income drop in Group Treasury and Capital Markets unallocated income was approximately EUR 450 million and almost compensated by higher income in the customer areas. Premium income in Life &Pensions was at an all-time-high. Income under equity method was EUR 66 million and other income was EUR 116 million.
Total expenses increased 7 per cent compared to last year. Staff costs increased 2 per cent. In local currencies, total expenses increased 2 per cent and staff costs decreased 2 per cent. Excluding the adjustment of pension plans in Norway, total expenses increased 3 per cent and staff costs were down 1 per cent in local currencies.
Risk-adjusted profit decreased 6 per cent compared to last year to EUR 2,622 million, mainly due to the exceptionally strong results in Treasury and Markets in 2009.
Activities related to the Group initiatives launched in early 2010 are on track in all areas. In 2010, the initiatives have generated more than EUR 300 million in additional income, i.e. above the target for the year. The efficiency gains amounted to approximately EUR 70 million, in line with earlier expectations. During the fourth quarter, total investments amounted to EUR 77 million, of which EUR 22 million were accounted for as expenses in the income statement. In the full year 2010, total investments amounted to approximately EUR 200 million, of which EUR 74 million were accounted for as expenses in the income statement. The investments are expected to be somewhat higher in 2011.
Holding in 2010 Sampo plc controls its subsidiaries engaged in P&C and life insurance. In addition Sampo plc held on 31 December 2010 approximately 20.5 per cent of the share capital of Nordea, the largest bank in the Nordic countries. Nordea is an associated company to Sampo plc.
Sampo plc's holding in Nordea Bank was booked in the consolidated balance sheet at EUR 5.7 billion. The market value of the holding was EUR 6.8 billion at 31 December 2010. In addition the assets on Sampo plc's balance sheet included holdings in subsidiaries for EUR 2.4 billion (2.4).
The following members were re-elected to the Board of Directors: Tom Berglund, Anne Brunila, Veli-Matti Mattila, Eira Palin-Lehtinen, Jukka Pekkarinen, Christoffer Taxell, Matti Vuoria and Björn Wahlroos. At its organisational meeting, the Board elected Björn Wahlroos as Chairman and Matti Vuoria as Vice Chairman. The following members were elected to the Nomination and Compensation Committee: VeliMatti Mattila, Eira Palin-Lehtinen, Christoffer Taxell, Matti Vuoria and Björn Wahlroos. Tom Berglund, Jukka Pekkarinen and Christoffer Taxell were elected to the Audit Committee.
The Annual General Meeting resolved to amend section 12 of the Articles of Association as a result of the amendments to Chapter 5, section 19 of the Finnish Limited Liability Companies Act that entered into force on 3 August 2009 and 31 December 2009.
The annual Corporate Governance Statement will be published in connection to the Annual Report 2010 in March and will be available at www.sampo.com/cg. The Annual Report 2010 also contains a more detailed description of the Group's governance systems.
Sampo Group will also publish a Salary and Remuneration Report in March 2011. The report has been drawn up in accordance with section 7 ("Remuneration") of the Corporate Governance Code. The report is available at www.sampo.com/compensation.
Corporate Responsibility in 2010 As a listed company, Sampo plc has the responsibility of acting in the best interests of its shareholders, in compliance with legislation and in accordance with sound business practices. Sampo Group shares the values of ethicality, loyalty, transparency and entrepreneurship and aims at following these values in all of its business operations and with all of its stakeholders.
During 2010, approximately 92 per cent of the staff worked in P&C insurance, 7 per cent in life insurance and 1 per cent in the parent company Sampo plc.
Geographically, 31 per cent worked in Finland, 27 per cent in Sweden, 22 per cent in Norway and 20 per cent in the Baltic countries, Russia, Denmark and other countries. The average number of employees during 2010 was 6,914, which compares to an average of 7,311 during 2009.
During the last few years, a constant theme in If P&C has been to strengthen the competence of its employees and to increase employee engagement and commitment. To accelerate this work even more If P&C launched during 2010 a strategic theme called ‘Skills and Initiatives'. The aim of the initiative is to influence the culture of the company to even more emphasize competence building, innovation and customer focus, the pillars of the company´s value creation.
The outcome of the long-term management incentive schemes is determined by Sampo's share-price development over a period of approximately three years starting from the issue of the respective program. The programs are subject to thresholds on share price development and company profitability, as well as ceilings for maximum bonuses. Furthermore, the programs are subject to rules requiring part of the paid bonus to be used to acquire Sampo shares, which must in turn be held for a specified period of time.
In 2010 EUR 10 million (0) was paid out based on the long-term management incentive schemes and EUR 4 million (2) was paid out based on the share-based incentive scheme.
The terms of all incentive schemes are available on Sampo's website at www.sampo.com/compensation.
A more detailed description of Sampo Group's risk management organization and activities is available in the Risk Management section.
Shares, Share Capital and Shareholders As at 31 December 2010, Sampo plc had 561,282,390 shares, which were divided into 560,082,390 A shares and 1,200,000 B shares.
Sampo A shares have been quoted on the main list of the NASDAQ OMX Helsinki since 1988 and all of the B shares are held by Kaleva Mutual Insurance Company. B shares can be converted into A shares at the request of the holder.
Shares can be repurchased in other proportion than the shareholders' proportional shareholdings (private repurchase). The share price will be no higher than the highest price paid for Sampo shares in public trading at the time of purchase. The authorisation will be valid until the close of the next Annual General Meeting, nevertheless not more than 18 months after AGM's decision. The shares were to be acquired through public trading on the NASDAQ OMX Helsinki at the market price prevailing at the time of repurchase.
Sampo plc made no repurchases during 2010. On 8 June 2010 the Sampo Board decided to cancel the 90,000 Sampo A shares purchased during 2009. The shares corresponded to 0.02 per cent of the total number of shares and voting rights. The average purchase price was EUR 16.53 per share and the total amount paid EUR 1.5 million. The cancellation, which was entered into the trade register on 13 July 2010, reduced the number of Sampo A shares with the corresponding amount but had no effect on the share capital.
Shareholders As at 31 December 2010, Sampo plc had 86,294 shareholders, representing an increase of more than 9 per cent from the previous year. 1.3 per cent of shares had not been transferred to the book-entry system. The holdings of nominee-registered and foreign shareholders decreased to 48.5 per cent (49.0) of the shares and 48.1 per cent of the votes (48.6).
During 2010, Sampo received the following noti cation of change in holdings pursuant to Chapter 2, Section 9 of the Securities Markets Act: On 13 October 2010, Sampo plc received a disclosure according to which Capital Research and Management Company's holding in Sampo plc had on 11 October 2010 fallen below one twentieth (1/20) of Sampo plc's entire stock and voting rights. According to the noti cation Capital Research held 4.95 per cent of Sampo's total share capital and 4.91 per cent of related votes.
Shareholders by number of shares owned, Sampo plc, 31 December 2010
Nominee registered total 265,440,880 47.29 46.89 * 4,927,855 A shares and 1,200,000 B shares.
Financial Standing The Group's solvency ratio (own funds in relation to minimum requirements for own funds) was 167.1 per cent (158.3) as at 31 December 2010. The part of Nordea's capital requirement corresponding to Sampo's holding in Nordea is taken into account in the Group's capital requirement.
In addition the associated company Nordea Bank AB paid on 8 April 2010 Sampo plc a dividend amounting to EUR 204 million.
Ratings All the main ratings for Sampo Group companies remained unchanged in 2010.
In Sampo Group solvency is assessed internally by comparing the capital required to the capital available. Capital requirement assessment is based on an economic capital framework, in which Group companies quantify the amount of capital required for measurable risks over a one year time horizon at 99.5 per cent´s confidence level. In addition to economic capital companies are assessing their capital need related to non-measurable risks like risks in business environment.
As at 31 December 2010 financial liabilities in Sampo plc's balance sheet consisted of issued senior bonds and notes of EUR 1,026 million, EUR 576 million of outstanding CPs issued and a TYEL-pension loan of EUR 130 million. The average interest on Sampo plc's debt as of 31.12.2010 was 3.36 per cent.
Events after the End of the Reporting Year Sampo plc increased its stake in Nordea Bank AB (publ) with 0.7 percentage points by buying 30 million shares in an auction organized by the Swedish state on 4 February 2011. SEK 2,235 million was paid for the shares. After the purchase, Sampo holds 860,440,497 Nordea shares corresponding to 21.3 per cent of all shares in Nordea.
Outlook for 2011 Growth in the global economy is expected to pick up momentum and deleveraging to continue as markets prove their resilience and adaptiveness. The European debt crisis, if properly managed, is expected to abate gradually. All in all the economic landscape in 2011 is expected to be fairly benign.
Sampo Group is expected to report a good result for 2011. P&C and life insurance operations are expected to report good and stable results and the contribution to profit of associated company Nordea Bank is anticipated to remain strong. The continuing rise of short term interest rates will also further strengthen Sampo Group's profits.
If P&C is expected to reach its long-term combined ratio target of below 95 per cent in 2011. Profit is expected to remain very good.
The Most Significant Risks to Operations As a diverse financial institution, Sampo Group is exposed to a variety of different risks, both financial and non-financial. The major risks associated with Sampo Group's activities during 2010 were insurance risks arising from P&C and Life insurance business areas, as well as market and credit risks emanating from the Group's investment portfolios and the debt financing of Sampo plc.
Currency risk is the risk that Sampo Group will incur losses due to changes in foreign currency exchange rates. If P&C and Mandatum Life are mainly exposed to currency risk via their net currency exposures stemming from business activities. In Sampo plc transaction risk relates mainly to dividends paid by If P&C. At Group level changes in foreign currency exchange rates can change group equity.
The Board proposes to the Annual General Meeting a dividend of EUR 1.15 per share to company's 561,282,390 shares. The dividends to be paid are EUR 645,474,748.50 in total. Rest of funds are left in the equity capital.
No significant changes have taken place in the company's financial position since the end of the financial year. The company's liquidity position is good and in the view of the Board, the proposed distribution does not jeopardize the company's ability to fulfill its obligations.
Return on equity (at fair values) % 21,8 55,7 -32,4 52,6 22.6
Premiums written before reinsurers' share EURm 4,189 3,888 4,057 4,085 4,019
Combined ratio excl. unwinding of discount % 92,8 92,1 91,8 90,6 89.9 *) Based on th nancial statements of If Group.
Earnings per share, continuing operations EUR - - - 1.25 1.27
Net asset value per share EUR 17.79 14.63 8,28 13,49 9,21
Average adjusted number of shares 6) 1,000 561,321 561,370 569,442 577,802 563,092
Return on equity (at fair values) % 36,2 97,6 -68,8 9,1 30,0
3) Ke gures for P&C Insurance are based on activity based costs and cannot, therefore, be calculated directly from the consolidated income statement.
4) The comparison average numbers of sta or the year 2006 include the sta f Primaso y, then consolidated as a subsidiary.
Adjusted number of shares at 31 Dec. 6) 1,000 560,082 560,082 560,172 573,009 561,591
Average adjusted number of shares 6) 1,000 560,121 560,170 568,242 576,602 561,892
+ total equity + valuation differences on investments less deferred tax (average of values on 1 Jan. and 31 Dec.)
+ operating profit + other comprehensive income before taxes + interest and other financial expense + calculated interest on technical provisions + change in valuation differences on investments
+ equity after proposed profit distribution ± valuation differences on investment - intangible assets + subordinated loans - deferred tax liability probably realised in near future + other required items (Ministry of Finance decree)
+ equity after proposed profit distribution ± valuation differences on investment - intangible assets + subordinated loans - deferred tax liability probably realised in near future (incl. deferred tax from fair value reserve and profit) + other required items (Ministry of Finance decree)
+ liabilities for insurance and investment contracts - reinsurers' share of insurance liabilities - 75 % x technical provisions relating to unit-linked insurance
Per Share Key Figures Earnings per share profit for the financial period attributable to the parent company's equity holders _________________________________________________________________________________________ adjusted average number of shares
+ equity attributable to the parent company's equity holders + valuation differences on listed associate in the Group + valuation differences on investments less deferred tax _________________________________________________________________________________________ adjusted number of shares at balance sheet date
Price/earnings ratio adjusted closing share price at 31 Dec. earnings per share
85 Earnings Logic and Risks 89 Risk Management Process 95 P&C Insurance Risks 90 Risk Governance Framework 96 Premium and Catastrophe Risks 102 Biometric Risks 103 Discount Rate Risk in Technical Provisions 110 ALM risks 123 Credit Risk Management 128 Risk Management in Sampo Group 129 Risk Management in P&C Insurance 137 Internal Capital Measures 141 Sensitivity Analysis 93 Capital Management Process 98 Reserve Risk 107 Other Life Insurance Risks 108 Life Insurance Risk Management 112 Investment Portfolio Risks 124 Credit Risks Related to Reinsurance Counterparties 130 Risk Management in Life Insurance 142 Regulatory Criteria 144 Rating Agency Criteria 101 Life Insurance Risks 109 Market Risks 122 Credit Risks 125 Liquidity Risks 127 Operational Risks 131 Group Level Risks 145 Risk Management Outlook
Earnings Logic and Risks Sampo Group has three business areas: P&C insurance (If P&C) and life insurance (Mandatum Life) are wholly owned by the holding company (Sampo plc) and in addition to the insurance subsidiaries, Sampo plc also holds 20,54 per cent in Nordea AB (publ) at December 31, 2010. Nordea is an associated company affecting Sampo Group´s profits and risks substantially. Nordea is an independent company whose risk management is not covered in Sampo Group´s annual report.
Sampo plc as a parent company does not have any own business operations. Sampo plc guides the activities of subsidiaries by setting financial and capitalisation targets for the subsidiaries and defining the group level risk management principles. The subsidiaries independently organize their operations and risk management according to these principles, taking into account the special characteristics that arise from the company specific earnings logic and risks.
Biometric risks in life insurance refer to the risk that the company has to pay larger mortality, disability or morbidity benefits than expected or the company has to keep paying pension payments to the pension policy holder for a longer time (longevity risk) than expected when pricing the policies. The uncertainty in the amount of the future benefit payments relates also to the adequacy of technical provisions. The discount rate risk, however, is a more significant factor for the adequacy of technical provisions than the risk described above.
Operational risk refers to the risk of loss resulting from inadequate or failed processes or systems, from personnel and systems or from external events. This definition includes legal risk but excludes risks resulting from strategic decisions.
Reputational risk, which is not categorized as an operational or a compliance risk, is the risk of reputational damage due to an action or event.
Concentration risk arises when the company´s risks are not diversified enough and as a result of this an individual claim or market event could threaten the solvency or the financial position of the company.
In Sampo Group, the key objectives for risk management are: • to ensure that all the risks a ecting the pro tability and other material risks are identi ed, assessed and analyzed; • to ensure that capitalization - in the form of capital and foreseeable pro tability of businesses - is adequate in terms of current risks inherent in business activities and existing business environment; • to ensure that risk bearing capacity is allocated into di erent business areas according to chosen strategies and that risks are properly priced; • to limit and mitigat uctuations in the economic values of group companies; and
Risk Governance Framework This section describes Sampo Group's governance framework regarding risk control. The reporting segments of Sampo Group are P&C insurance, Life insurance and Holding. These segments correspond to the legal entities of If P&C, Mandatum Life and Sampo plc respectively.
The Audit Committee (AC) is responsible, on behalf of the Board of Directors, for the preparation of Sampo Group's risk management principles and other related guidelines. The AC shall ensure that the operations are in compliance with these, control Sampo Group's risks and risk concentrations as well as control the quality and scope of risk management in each company. The committee shall also monitor the implementation of risk policies, capitalization and the development of risks and profit. At least three members of the AC must be elected from those members of the Board, who do not hold management positions in Sampo Group and are independent of the company. The AC meets on a quarterly basis.
Risk Governance in If P&C If's Risk Control Committee (IRCC) assists the CEO and the Board of Directors of If P&C in fulfilling their responsibilities relating to the risk management process. IRCC monitors reports from the relevant committees and functions as well as the risk position of If P&C in relation to restrictions and limits given by the Board and in comparison to the capital position. The Risk Management department is the responsible function for coordinating the risk management work on behalf of the IRCC.
The Risk Management Committee (RMC) coordinates and monitors all risks in Mandatum Life. The committee is chaired by the Managing Director. Risks are divided into main groups which are insurance risks, market risks, operational risks, legal and compliance as well as business and reputation risks. Risks related to the Baltic subsidiary are also included. Each risk area has a responsible person in the committee.
Mandatum Life's Asset and Liability Committee (ALCO) controls that the investment activities are conducted within the limits defined in the Investment Policy approved by the Board and monitors the adequacy of capital in relation to the market risks in the balance sheet. ALCO reports to the Board and meets at a minimum on a monthly basis.
The Insurance Risk Committee is responsible for maintaining the Underwriting Policy and monitoring the functioning of the risk selection and claims processes. The committee also reports all deviations from the Underwriting Policy to RMC. The Insurance Risk Committee is chaired by the Chief Actuary who is responsible for ensuring that the principles for pricing policies and for the calculation of technical provisions are adequate and in line with the risk selection and claims processes. The Board approves the tariffs and prices and the central principles for the calculation of technical provisions. In addition, the Board defines the maximum amount of risk to be retained on the company's own account and approves the Reinsurance Policy annually.
Capital Management Process In Sampo Group, capital management is about ensuring the adequacy of the available capital in relation to risks arising from the company's activities and business environment.
Capital management activities are conducted continuously in various parts of the organization. Figure "Capital management process in Sampo Group" depicts the capital management actions in Sampo Group on a general level.
Capital Adequacy Assessment In addition to the statutory financial statements and solvency figures, Sampo Group also uses internal performance, risk and capital measures which are based on fair values of assets and liabilities. Also the methods used by rating agencies are followed closely. All methods - regulatory, rating agency and internal ones - include the assessment of capital required to cover different risks and the amount of capital available.
Sampo Group considers that there is a need for internal assessments of capitalization because regulatory and rating agency models cannot take the specific features of different companies accurately enough into account.
Sampo Group uses economic capital as an internal measure of capital required for risks the Group is exposed to. Sampo Group defines economic capital as the amount of capital required to protect the solvency over a one year time horizon with a probability of 99.5 per cent.
Economic capital accounts for market, credit, insurance and operational risks, as well as the diversification effect between these risks. Economic capital is calculated using a set of calculation methods, which have been developed for the specific needs of each business area. When assessing the economic capital need arising from Nordea, Sampo plc uses the economic capital calculated by Nordea multiplied by the proportion of Sampo plc's share in Nordea (20.54 per cent at year end).
Different stakeholders have different views when assessing the available capital. Regulators have defined which items can be included into the solvency capital and rating agencies have their own definitions for capital. As an internal measure of available capital, Sampo Group uses adjusted solvency capital. The basis for adjusted solvency capital is capital items included in regulatory solvency capital. On top of those, other risk absorbing items such as the difference between the book value and market value (including a risk margin) of technical provisions are added.
• Catastrophe risk is the risk of low frequency, high severity events, such as natural catastrophes, that are not captured adequately by the premium risk or reserve risk.
This section presents the development of P&C insurance risks during 2010. In addition, the P&C insurance risk management principles are presented.
Premium and Catastrophe Risks P&C insurance undertakes the obligation to indemnify the insured in case of claims, and in exchange, the insured pays a premium. A crucial factor contributing to the profitability of P&C insurance operations is the ability to accurately estimate claims and administrative costs and thereby correctly price the insurance contracts correspondingly.
Given the inherent uncertainty of P&C insurance there is a risk that the future claims are unexpectedly frequent and/or high. Examples include large fires, natural catastrophes such as severe windstorms and unforeseen increases in the frequency or the average size of small and medium-sized claims. Such deviations can be purely random, i.e. an effect of the inherent uncertainty of the claims cost. The deviations can also be the result of more systematic and permanent changes in e.g. inflation, legislation or exposures. Random deviations are significant in the Industrial insurance business, where claims could potentially be very large, e.g. a fire in a large factory. Systematic deviations to a larger degree affect the Private business line, which is characterised by a large number of small claims and consequently a lower degree of random variation.
Premium and Catastrophe Risk Management The Underwriting Committee is responsible for the monitoring of compliance of the underwriting principles as defined by the Underwriting Policy (UW Policy). The UW Policy is the principal document for underwriting activities. It sets general principles, restrictions, limits and directions for the underwriting activities. The Board of Directors of If P&C approves the UW Policy at least annually.
The business units manage underwriting risk on a day-to-day basis. Separate underwriting and pricing units are responsible for the tariffs and pricing of products related to the business area Private and smaller risks in the business area Commercial. In the business area Industrial and for more complex risks in the business area Commercial, the underwriting is based more on general principles and individual underwriting than strict tariffs. In general, pricing is based on statistical analyses of historical claims data and assessments of future developments of for instance claims inflation and claims frequency.
Given the large number of customers in P&C insurance and the fact that business is underwritten in different geographical areas and across several classes of insurance, the portfolio is well diversified. The degree of diversification is shown in the figure "Breakdown of gross premiums by business area and country, If P&C, 31 Dec 2010" and in the table "Technical provisions per product and country, If P&C, 31 Dec 2010".
The uncertainty of technical provisions is normally larger for new portfolios for which complete run-off statistics are not yet available and for portfolios that include long-tailed business. Examples of portfolios that include long-tailed business are Workers' Compensation (WC), Motor Third Part Liability (MTPL), Personal Accident, and Liability insurance.
Technical provisions are divided into provisions for unearned premiums and provisions for claims outstanding in the company's balance sheet. Provisions for unearned premiums are recognised in the balance sheet at the time contracts are incepting. These are intended to cover anticipated claims costs and operating expenses during the remaining time of insurance contracts in force. Provisions for claims outstanding on the other hand, are intended to cover the anticipated future payments of all claims incurred, including claims not yet reported to the company.
The book value of technical provisions and the duration broken down by product and country is shown in table "Technical provisions per product and country, If P&C, 31 Dec 2010".
The sensitivity of If´s technical provisions to an increase in inflation, an increase in life expectancy and a decrease in the discount rate is presented in the table "Sensitivities of technical provisions, If P&C, 2010".
Technical provision item Risk factor Change in risk parameter Country E ect EURm
If P&C's technical provisions are further analysed by claims year before and a er reinsurance in the claims cost trend tables. These are disclosed in the Note 27 to the Financial Statements.
Analyses of the adequacy of technical provisions are made by If P&C's actuaries. The actuaries monitor the levels of technical provisions on a continuous basis in order to ensure that they comply with the established guidelines. The actuaries also develop methods and systems to support these processes.
Sensitivity of underwriting result and hence underwriting risk is presented by changes in certain ke gures in the table "Sensitivity test of underwriting result, If P&C, 31 Dec 2010 and 31 Dec 2009".
Biometric Risks Biometric risks in life insurance refer mainly to the risk that the company has to pay larger mortality, disability or morbidity bene ts to insured or that the company is obliged to pay pensions to the policyholder for a longer time (longevity risk) than the company has anticipated when pricing the policies.
Because Mandatum Life's right to increase tari s or change terms and conditions is restricted, longer maturities of policies increase the biometric risks. If the premiums turn out to be inaccurate and pricing cannot be changed a erwards, technical provisions have to be supplemented with an amount corresponding to the expected losses.
Table "Claim ratios a er reinsurance, Mandatum Life, 2010 and 2009" shows the insurance risk result in Mandatum Life's Finnish life insurance policies. The ratio of the actual claims costs to the assumed was 78 per cent in 2010 (87 per cent in 2009). Year 2010 risk result includes a one-o tem of EUR 4.7 million which is due to a change in technical basis of claims reserve.
Sensitivity of the insurance risk result can also be assessed on the basis of the information in the table. For instance an increase of mortality by 100 per cent would increase the amount of bene t payments from EUR 14 million to EUR 28 million.
Longevity risk is the most critical biometric risk in Mandatum Life. Most of the longevity risk arises from the Group pension portfolio. The main mortality uncertainties in the Group pension portfolio are related to the socio-economic structure of the insured and the future mortality trend among the relatively old insured. In the individual pension portfolio the longevity risk is less signi cant because most individual pension policies ar xed term annuities including death cover compensating the longevity risk.
The provisions related to each product type and guaranteed interest rates are shown in table "Analysis of the change in provisions before reinsurance, Mandatum Life, 2010". The table also shows the change in each category during 2010.
Analysis of the change in provisions before reinsurance, Mandatum Life, 2010
With-pro t and others total 4,413 271 -436 -36 158 1 21 4,391 58%
Technical provisions related to with-pro t policies still constitute a larger part of the total technical provisions compared to unit-linked policies. However, the amount of unit-linked technical provisions has been increasing whereas the amount of technical provisions related to with-pro t policies has remained stable during the past years. Thus, the proportion of unit-linked technical provisions of total technical provisions is increasing. The development of the structure and amount of Mandatum Life's technical provisions is shown in th gure "Development of with-pro t and unit-linked technical provisions, Mandatum Life, 2002-2010".
Mandatum Life parent company total 8.4 1,684 1292 2,444 1,678 1,208 839 1,309
Other Life Insurance Risks The most significant other insurance risks arise from the uncertainty related to the behaviour of the policyholders.
The policyholders have the right to cease paying premiums (lapse risk) and the possibility to interrupt their policies (surrender risk). Being able to keep lapse and surrender rates in a low level are crucial success factors especially for the expense result of unit-linked business. From ALM point of view surrender and lapse risks are immaterial because in Mandatum Life, approximately 90 per cent of with-profit policies are pension policies in which surrender is possible only in exceptional cases. For ALM risk, surrender risk is therefore only relevant in individual life and capital redemption policies. In these policies, the risk is reduced by the relatively short maturity of the contracts. Furthermore, the supplements to liabilities are not paid out at surrender which also reduces the surrender risk related to the with-profit policies.
Risk selection is part of the day-to-day business routines in Mandatum Life. Mandatum Life's Underwriting Policy sets principles for risk selection and limits for sums insured. Compliance with the principles and limits set in the Underwriting Policy is monitored continuously.
The risk result is followed actively and analysed thoroughly annually. Mandatum Life measures the efficiency of risk selection and adequacy of tariffs by collecting information about the actual claims expenditure for each product line and each type of risk and comparing it to the claims expenditure assumed in insurance premiums of every risk cover. Also administration and acquisition expenses are monitored annually.
Market Risks Market risks refer to fluctuations in the financial results and capital caused by changes in market values of financial assets and liabilities as well as technical provisions.
In Sampo Group, market risks are examined both from an ALM and an investment portfolio risks perspective and both angles are taken into account when risks are managed within the investment portfolio management framework.
ALM Risks The company is exposed to ALM risk when changes in different market risk variables (e.g. interest rates, inflation, foreign exchange rates, equity prices) cause a change in the value of investment assets that is of different size than the respective change in the economic value of technical provisions. In addition, the cash flows of technical provisions are modelled estimates and therefore uncertain in relation to both their timing and amount. ALM risk also includes this component of uncertainty.
In Sampo Group, ALM risks are managed as a part of managing the investment portfolios. ALM risks are analyzed regularly and these analyses together with actual capitalization, regulatory requirements and rating targets are taken into account when defining the Group companies' investment policies.
If P&C and Mandatum Life may apply slightly different approaches which are based on the specific characteristics of their businesses.
Asset and Liability Management in If P&C If P&C´s approach in asset and liability management is defined in accordance with the above described group wide principles.
Most of the technical provisions in If P&C are stated in the balance sheet in nominal terms. The provisions for annuities are discounted, and potential changes in the discount rates will affect the level of technical provisions in the company's balance sheet. The discount rates vary between countries mainly due to differences in legislation but they are at least indirectly impacted by the prevailing market interest rate
In order to enhance returns with acceptable risks, the portfolio may also contain equities in addition to fixed income investments. Within the limits set in the Investment Policy, investments are managed actively by utilising market views.
The most significant interest rate risk in the life insurance business is that fixed income investments will not over a long period of time generate a return at least equal to the guaranteed interest rate of technical provisions. This risk is managed through constant monitoring of the duration gap between technical provisions and fixed income investments, and the adequacy of capital is managed by the use of internal models in different market situations.
Sampo plc's investment organization makes the day-to-day investment decisions based on principles set in Mandatum Life's Investment Policy. However, the most significant investment decisions are made by the Board. The ALCO regularly controls that limits and principles defined in the Investment Policy are followed.
Investment Portfolio Risks Investments are managed according to the subsidiaries' investment policies. The most significant risks are equity risk, interest rate risk, credit spread risk and currency risks. Market risks also arise from real estate, private equity and hedge fund investments.
Sampo Group has a thorough understanding of Nordic markets and issuers and consequently Sampo Group's direct investments are mainly made into Nordic securities. When investing in non-Nordic securities, fund investments are mainly used. These funds are primarily used as a tool in tactical asset allocation when seeking return and secondarily in order to increase diversification.
Asset Allocations and Investment Returns The total amount of Sampo Group´s investment assets in 2010 was EUR 18,301 million (16,593 million in 2009). The composition of the investment portfolios in If P&C, Mandatum Life and Sampo plc at year end and in comparison to year end 2009 is shown in figure "Development of investment portfolios, If P&C, Mandatum Life and Sampo plc, 31 Dec 2010 and 31 December 2009".
At year-end, the strong solvency position of If P&C and Mandatum Life allowed the companies to aim for higher expected returns by deviating from the portfolio replicating the cash flows of technical provisions.
Mandatum Life, 31 Dec 2010" and "Investment allocation according to asset classes, sectors an xed income investments according to rating, Sampo Group, 31 Dec 2010". Due to di erences in the treatment of derivatives, th gures in these tables are not fully comparable with other tables in this annual report.
Investment allocation according to asset classes, sectors an xed income investment according to rating, Mandatum Life, 31 Dec 2010
The weights of covered bonds, non-rated bonds and fund investments in the portfolio were actively increased, whereas the weights of indexlinked bonds and government bonds were reduced. The total exposure and especially the equity investments increased in value.
During 2010, the proportion of money market securities and cash decreased from 14 per cent to 13 per cent. The proportion of high yield bonds increased to 15 per cent (14 per cent in 2009).
Equity Investments The equity investments of Sampo Group totalled EUR 3,353 million at year end 2010 (2,389 million in 2009). The equity portfolios of both If P&C and Mandatum Life have long-term investment horizons. During 2010, the increase in the proportion of equity investments was due to the rise in equity prices as well as net purchases in both companies.
At year end 2010 the exposure of If P&C was EUR 1,648 million (1,136 million in 2009). The proportion of equities in If P&C's investment portfolio was 14.1 per cent at year-end. The equity portfolio consists of listed shares of Nordic companies as well as a global fund portfolio. Mandates for investments are given in the Investment Policy.
At year end 2010 the exposure of Mandatum Life was EUR 1,686 million (1,235 million in 2009). The Nordic equity portfolio is managed by Sampo Group's Investment Management unit while the equity investments outside the Nordic area are mainly managed through funds or external asset managers.
The breakdown of the equity exposures of Sampo Group by geographical regions are shown i gures "Breakdown of equity investments by geographical regions, Sampo Group, 31 Dec 2010", "Breakdown of equity investments by geographical regions, If P&C, 31 Dec 2010" and "Breakdown of equity investments by geographical regions, Mandatum Life, 31 Dec 2010".
Fixed income investments by type of instrument excluding derivatives, If P&C, Mandatum Life and Sampo Group, 31 Dec 2010
The geographical emphasis in Sampo Group's equity investments is in Nordic companies. The proportion of Nordic companies' equities corresponds to 57 per cent of the total equity portfolio. This is in line with Sampo Group's Nordic focus and the fact that technical provisions relate to the Nordic currencies.
The currency transaction risk positions of If P&C and Mandatum Life against their home currency are shown in tables "Transaction risk position, If P&C, 31 Dec 2010" and "Transaction risk position, Mandatum Life, 31 Dec 2010". The tables show the net transaction risk exposures and the changes in the value of positions given a 10 % decrease in the value of the home currency.
In addition to transaction risk, Sampo Group and its insurance subsidiaries are also exposed to translation risk. Sampo Group´s consolidated financial statements are denominated in euro. Translation risk arises when entities with another base currency are consolidated into the Group financial statements. The effect of changes in foreign exchange rates result in translation differences which are recognised in the consolidated comprehensive income statement. Translation risks arise also within If P&C and to a lesser extent within Mandatum Life from their subsidiaries whose base currency is different from that of the respective parent company.
This chapter describes the principles of credit risk management in general and the credit risk exposures related to reinsurance counterparties. Credit risk exposures related to the investments are presented in tables "Investment allocation according to asset classes, sectors and fixed income investments according to rating, If P&C, 31 Dec 2010", "Investment allocation according to asset classes, sectors and fixed income investments according to rating, Mandatum Life, 31 Dec 2010", "Investment allocation according to asset classes, sectors and fixed income investments according to rating, Sampo Group, 31 Dec 2010", and "Fixed income investments by type of instrument excluding derivatives, If P&C, Mandatum Life and Sampo Group, 31 Dec 2010" in the Market risks section.
Credit risk is managed by specific limits given in the Investment Policies of If P&C and Mandatum Life. Limits and restrictions are assigned to maximum exposures towards single issuers and derivative counterparties that are mainly based on rating class and an internal assessment.
If P&C uses for example ISDA agreements to manage the counterparty risk of derivatives. Also Mandatum Life uses these agreements in addition to Credit Support Annexes.
Credit Risks Related to Reinsurance Counterparties The distribution of reinsurance receivables and reinsurers' portion of outstanding claims in If P&C on 31 December, 2010 per rating category is presented in table "Reinsurance receivables and reinsurers' portion of outstanding claims per rating category, If P&C, 31 Dec 2010 and 31 Dec 2009". In the table, EUR 120 million (EUR 120 million in 2009) are excluded, which mainly relates to captives and statutory pool solutions.
In P&C insurance, liquidity risk is limited because premiums are collected in advance and large claims payments are usually known a long time before they fall due. In P&C insurance some pressure on the liquidity situation could arise from a large scale of policies not being renewed. It is however highly unlikely that the number of non-renewals could reach such a magnitude that the readily marketable assets will not be su cient to prevent any illiquidity issues. In life insurance, a large change in surrender rates could in uence the liquidity situation. However, only a relatively small part of insurance policies can be surrendered and it is therefore possible to forecast short-term cas ows related to claims payments with a very high accuracy.
Sampo Group companies have business relationships with several creditworthy counterparties which mitigates the risk that Sampo Group will not be able to enter into reinsurance or derivative transactions when needed.
In the tabl nancial assets and liabilities are divided into contracts that have an exact contractual maturity pro le, and other contracts. Only the carrying amount is shown for the other contracts. In addition, the table shows expected cas ows for net technical provisions, which by nature, are associated with a certain degree of uncertainty.
P&C insurance of which interest rate swaps of which interest rate swaps
Operational risk may materialize as additional expenses, compensations for caused damages, loss of reputation, false information on risk position and consecutive losses, and interruption of business activities.
Each company is responsible for arranging its operational risk management to align with the goals above, taking also into account the specific features of its business activities.
The central tools in operational risk management are (i) the identification of risks and (ii) proper preventive actions at all levels of operations. To ensure the use of these tools, responsibilities in the following areas are set clearly: • drafting and enforcement of adequate operational risk policies and continuity plans; • legal and financial compliance of operations; • continuous development of human resources (knowledge and skills) and work processes; • day-to-day management; and
The business areas have the ultimate responsibility for identifying, assessing, monitoring and managing operational risks within different units.
If P&C identifies operational risks through several different processes. The main processes are the environmental and macro analysis, the operational risk assessment process and incident reporting.
• Operational risk assessment (ORA) is a quarterly process where operational risks are identified and assessed in the different business units through interviews and workshops. After quarterly ORA follow-up meetings, the operational risks are reported to ORC. In addition, legal risks and some business risks are captured in the ORA process. The quarterly reporting is used as a basis for an overall risk assessment of an annual cycle, where the identified risks are analyzed and prioritized in all of If P&C's business areas and corporate functions as a part of the annual business planning process.
• Incident reporting and analysis is arranged in different ways depending on the type of the incident. Some incidents are collected through a separate incident database and others are collected through controls and investigations.
In order to manage operational risks, If P&C has approved a number of policies including Contingency Plans, Security Policies, Outsourcing Policy, Complaints Handling Policy, Claims Handling Policy and other policies related to different aspects of the business. The different policies are reviewed regularly and updated as needed. In addition, If P&C has thorough processes and guidelines to handle external and internal fraud cases should they arise. Furthermore, much effort is put into internal education regarding ethic rules.
Operational Risk Management in Life Insurance The objective of operational risk management in Mandatum Life is to enhance the efficiency of internal processes and decrease negative impact on Mandatum Life. The aim is to minimize operational risks subject to cost-benefit considerations.
Business units are responsible for the identification, assessment and management of own operational risks, including organizing adequate internal control. Operational Risk Committee (ORC) monitors and coordinates risk management issues regarding operational risks within Mandatum Life, such as policies and recommendations concerning operational risk management. The committee ensures that risks are identified and business units have organized internal control and risk management in a proper way. The committee also analyzes deviations from operational risk management policies and monitors operational risks identified in the self-assessments as well as the occurred incidents. The committee meets at least four times a year. Reports on operational risks are submitted to the Risk Management Committee and Board of Directors on a quarterly basis.
Identification and Management Operational risks are identified through several different sources and methods: • Macro analysis is conducted prior to the annual strategy process where the key trends in Mandatum Life's business environment are identified, including a macro level business analysis of operational risks. External events are monitored continuously and the company reacts to those as soon as possible.
• Analysis of incidents. Realised operational risks and near misses reported by the business units are collected and analyzed by ORC. Each business unit is responsible for ensuring that the occurred incidents and near misses are reported to the ORC.
On the other hand, both subsidiaries have signi cant investment portfolios and, thus, are potentially threatened with investment related concentration risks (i.e. large combined exposures). On the group level, eventual large exposures are monitored and managed in several ways. Firstly, concentration risk is mitigated through e ective di erentiation in asset allocation. Mandatum Life's direct investments are mainly denominated in euro and in companies geographically located in Finland, whereas If P&C has the majority of its direct investments in Scandinavian currencies and in the respective countries. Fund investments, on their behalf, are selected for both companies by the same investment team. Consequently, the risk of unidenti ed or unwanted concentrations is relatively easy to negotiate by appropriate limit setting and by applying su cient level of control over the activity itself. Secondly, concentrations are actively monitored and, if deemed necessary, further managed by deploying group level exposure restrictions for instance by industries or individual issuers.
The structure of Sampo' nancial conglomerate, both legal and reporting structure - parent company, two subsidiaries and one associated company - is simple, straightforward and transparent. The structure as such e ectively mitigates any risks related to complex structures. Structural simplicity and transparency together with a limited amount of exposures within the conglomerate (i.e. direct and/or indirect claims between di erent companies excluding normal course of business transactions with Nordea) and diligently managed capitalization of subsidiaries also e ectively protect group companies from contagion risks.
Capitalization This section presents the capitalization of Sampo Group in 2010 and the changes that took place during the year.
The solvency of Sampo Group's insurance subsidiaries improved during the year due to good results. The development of capitalization in Sampo Group within the internal and regulatory perspectives during the year 2010 is shown in the figures "Development of capitalization, If P&C, 31 Dec 2009 - 31 Dec 2010", "Development of capitalization, Mandatum Life, 31 Dec 2009 - 31 Dec 2010" and "Development of capitalization, Sampo Group, 31 Dec 2009 - 31 Dec 2010".
Capitalization by Internal Measures Figure "Breakdown of economic capital by business areas and adjusted solvency capital, Sampo Group, 31 Dec 2010" shows the contributions of the different business areas to Sampo Group´s total economic capital as well as the diversification effect included in the calculation of Group´s economic capital. The figure also shows the amount of adjusted solvency capital on Group level.
Sampo Group´s economic capital increased during the year and amounted to EUR 4,281 million in the end of 2010 (EUR 3,783 million in 2009). The increase is mainly due to an increase in market risk driven by a higher equity exposure.
The most significant risk areas for Sampo Group in terms of economic capital in 2010 were credit risk and market risk. The largest change has taken place in the proportion of market risk of the total economic capital. The increase is mainly the result of an increased equity exposure. Another reason is that If P&C have done changes in the risk classification where interest rate risk related to the insurance operations has been moved from insurance risk to market risk, and spread risk has been moved from credit risk to market risk.
The split of economic capital by risk type and the adjusted solvency capital in If P&C and Mandatum Life is depicted in the figures "Breakdown of economic capital by risk type and adjusted solvency capital, If P&C, 31 Dec 2010" and "Breakdown of economic capital by risk type and adjusted solvency capital, Mandatum Life, 31 Dec 2010".
In If P&C, economic capital increased to EUR 1,381million (EUR 1,185 million in the end of 2009) meanwhile in Mandatum Life, economic capital increased to EUR 1,119 million (EUR 930 million at the end of 2009). The main reason for the increases is increased market risk due to increased equity exposures. For If P&C the increase in market risk is also due to the move of spread risk from credit risk to market risk. Market risk is now the most significant risk for both If P&C and Mandatum Life. Another change for If P&C is that the interest rate risk
The amount of adjusted solvency capital exceeded the economic capital in both If P&C and Mandatum Life. During the year, the amount of adjusted solvency capital in If P&C increased to EUR 3,670 million (EUR 2,861 million in the end of 2009), whereas in Mandatum Life, adjusted solvency capital increased to EUR 1,589 million (EUR 1,294 million in the end of 2009).
Sensitivity Analysis of the Capital Position The total sensitivity of equity is shown in table "Sensitivity analysis of capitalization to market risks, P&C insurance, Life insurance and Holding, 31 Dec 2010" separately for the insurance subsidiaries together with the corresponding effect on the discounted value of liabilities and adjusted solvency capital. For example a rise in interest rates would reduce the values of financial instruments causing a fall in the Sampo Group's equity. On the other hand, the effect on adjusted solvency capital would be positive due to the fact that value of technical provisions would fall as a result of applying a higher discount rate.
Sensitivity analysis of capitalization to market risks, P&C insurance, Life insurance and Holding, 31 Dec 2010
EURm 1% parallel shift down 1% parallel shift up 20% fall in prices 20% fall in prices
The effects represent the instantaneous effects of an one-off change in the underlying market variable on the fair values as of 31 December 2010. The sensitivity analysis includes the effects of derivative positions. All sensitivities are calculated before taxes. The debt issued by Sampo Group companies is not included.
Capitalization by Regulatory Criteria Sampo Group reports its group solvency quarterly to the Finnish supervisory authorities monitoring Sampo Group. Subsidiaries' solvency is reported to the local supervisors.
Regulatory solvency capital of If P&C increased to EUR 2,956 million (EUR 2,427 million) while the regulatory capital requirement was EUR 735 million (EUR 634 million). Regulatory solvency capital in Mandatum Life Group increased to EUR 1,324 million (EUR 926 million) while the regulatory capital requirement was EUR 231 million (EUR 226 million). Also Sampo Group's consolidated capital position was very strong. The Group solvency ratio was 167 per cent (158 per cent).
The calculation of group solvency according to the Act on the Supervision of Financial and Insurance Conglomerates (1193/2004) is broken down in table "Group solvency, 31 Dec 2010 and 31 Dec 2009". The group solvency ratio on 31 December 2010 was 167 per cent (158 per cent).
During 2010 If P&C has developed and started to use both a new internal model for the calculation of economic capital as well as a supplementary model to generate economic scenarios for the internal model. During 2011 and 2012 the model will be further developed with the goal of having the internal model approved for calculating the capital requirement under Solvency II. Early in 2011, If P&C entered the internal model pre-application process. Also Mandatum Life further develops its corresponding models.
Technical preparedness for Solvency II has been built in the Group during the last few years and the anticipated Solvency II requirements for risk management practices have been taken into account in the risk management development activities of Group companies. These actions have been initiated to secure full compliance with Solvency II by the end of 2012.
147 Group’s IFRS Financial Statements 276 Sampo plc Financial Statements 147 Consolidated Comprehensive Income Statement 148 Consolidated Balance Sheet 150 Statement of Changes in Equity 152 Statement of Cash Flows 276 Parent Company Income Statement 277 Parent Company Balance Sheet 279 Parent Company Statement of Cash Flows 154 Notes to the Accounts 155 Summary of Accounting Policies 170 Segment Information 176 Notes to the Income Statement 199 Notes to the Balance Sheet 281 Notes to the Financial Statements 291 Approval 292 Auditor’s Report
Other comprehensive income for the period, net of tax 703 2,782
**) The amount recognised in equity from available-for-sal nancial assets for the period totalled EURm 615 (2,626). The amount transferred to p/l amounted to EURm -168 (35).
***) The amount recognised in equity from cas ow hedges for the period totalled EURm -6 (-2) .
Cash and cash equivalents include cash at bank and in hand and short-term deposits (max. 3 months).
176 1 Insurance premiums written 178 2 Net income from investments 183 3 Claims incurred 188 4 Change in liabilities for insurance and investment contracts 199 11 Property, plant and equipment 201 12 Investment property 205 13 Intangible assets 209 14 Investments in associates 211 15 Financial assets 220 16 Fair values 221 17 Determination and hierarchy of fair values 225 18 Movements in level 3 instruments measured at fair value 228 19 Sensitivity analysis of level 3 instruments measured at fair value 229 20 Investments related to unit-linked insurance contracts 230 21 Deferred tax assets and liabilities 233 23 Components of other comprehensive income 234 24 Tax relating to components of other comprehensive income 191 6 Other operating expenses 193 7 Result analysis of P&C insurance 194 8 Performance analysis per class of P&C insurance 196 9 Eearnings per share 197 10 Financial assets and liabilities 235 25 Other assets 237 26 Cash and cash equivalents 238 27 Liabilities from insurance and investment contracts 244 28 Liabilities from unit-linked insurance and investment contracts 245 29 Financial liabilities 254 33 Contingent liabilities and commitments 258 34 Equity and reserves 260 35 Related party disclosures 261 36 Incentive schemes 264 37 Auditors’ fees 265 38 Legal proceeding 266 39 Investments in subsidiaries 267 40 Investments in shares and participations other than subsidiaries and associates 275 41 Events the balance sheet date
Notes to the Accounts 155 Summary of Accounting Policies 170 Segment Information 176 Notes to the Income Statement 199 Notes to the Balance Sheet
The revised IFRS 3 Business combinations includes significant changes regarding the accounting treatment of business combinations. The revised standard allows the entity to measure non-controlling interest, in accordance with the prevailing principle, at its proportionate interest in the acquiree's net assets or at its fair value. The choice is acquisition-specific and affects the amounts of recognised goodwill and non-controlling interest. During the financial year, Sampo made no such acquisitions where the standard should have been applied, so the adoption of the revised standard did not have an effect on Sampo's financial statements reporting.
The revised IAS 27 Consolidated and Separate Financial Statements requires, e.g. that changes in the ownership interest of subsidiary are accounted for as equity transactions, if the control of a subsidiary is not lost. On loss of control, any retained interest will be measured at fair value through p/l. The adoption of the revised standard had no effect on Sampo's financial statements.
IAS 39 Financial Instruments: Recognition and Measurement clarified the hedging of one-sided risk of hedged items and inflation, in the case of financial assets or liabilities. The change had no significant effect on Sampo's financial statements reporting.
Improvements to IFRSs 2009 - various minor changes made to different standards at the same time. The changes were not material to Sampo's financial statements reporting.
The Board of Directors of Sampo plc accepted the financial statements for issue on 9 February 2011.
Associates are entities in which the Group has significant influence, but no control over the financial management and operating policy decisions. Unless otherwise demonstrated, this is generally presumed when the Group holds in excess of 20 per cent, but no more than 50 per cent, of the voting rights of an entity. Investments in associates are treated by the equity method of accounting, in which the investment is initially recorded at cost and increased (or decreased) each year by the Group's share of the post-acquisition net income (or loss), or other movements reflected directly in the equity of the associate. If the Group's share of the associate's loss exceeds the carrying amount of the investment, the investment is carried at zero value, and the loss in excess is consolidated only if the Group is committed to fulfilling the obligations of the associate. Goodwill arising on the acquisition is included in the cost of the investment. Unrealised gains (losses) on transactions are eliminated to the extent of the Group's interest in the entity.
The share of associates' profit or loss, equivalent to the Group's holding, is presented as a separate line in the income statement.
If there is any indication that the value of the investment may be impaired, the carrying amount is tested by comparing it with its recoverable amount. The recoverable amount is the higher of its value in use or its fair value less costs to sell. If the recoverable amount is less than its carrying amount, the carrying amount is reduced to its recoverable amount by recognizing an impairment loss in the profit/ loss. If the recoverable amount later increases and is greater than the carrying amount, the impairment loss is reversed through profit and loss.
Foreign currency translation The consolidated financial statements are presented in euro, which is the functional and reporting currency of the Group and the parent company. Items included in the financial statements of each of the Group entities are measured using their functional currency, being the currency of the primary economic environment in which the entity operates. Foreign currency transactions are translated into the appropriate functional currency using the exchange rates prevailing at the dates of transactions or the average rate for a month. Monetary balance sheet items denominated in foreign currencies are translated into the functional currency at the rate prevailing at the balance sheet date. Non-monetary balance sheet items measured at historical cost are presented in the balance sheet using the historical rate existing at the date of the transaction.
The income statements of Group entities whose functional currency is other than euro are translated into euro at the average rate for the period, and the balance sheets at the rates prevailing at the balance sheet date. The resulting exchange differences are included in equity, and their change in other comprehensive income. When a subsidiary is divested entirely or partially, the cumulative exchange differences are included in the income statement under sales gains or losses.
Geographical information has been given on income from external customers and non-current assets.. The reported segments are Finland, Sweden, Norway, Denmark, the Baltic countries and other countries.
Other fees and commissions paid for investment activities are included in ‘Net income from investments'.
P&C insurance contracts are primarily of short duration (1 year), so that premiums written are recognised as earned on a pro rata basis, adjusting them by a change in the provision for unearned premiums i.e. by the proportion of the insurance premium income that, based on the period covered by the insurance contract, belongs to the following financial year,.
Recognition and derecognition Purchases and sales of financial assets at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets are recognised and derecognised on the trade date, which is the date on which the Group commits to purchase or sell the asset. Loans and receivables are recognised when cash is advanced.
Available-for-sale financial assets are initially recognised fair value, including direct and incremental transaction costs. They are subsequently remeasured at fair value, and the changes in fair value are recorded in other comprehensive income and presented in the fair
The decision on whether the impairment is significant or prolonged requires an assessment of the management. The assessment is done case by case and with consideration paid not only to qualitative criteria but also historical changes in the value of an equity as well as time period during which the fair value of an equity security has been lower than the acquisition cost. In Sampo Group, the impairment is
Cash flow hedging is used to hedge the interest cash flows of individual floating rate debt securities or other floating rate assets or liabilities. The hedging instruments used include interest rate swaps, interest rate and cross currency swaps and interest rate options. Derivative instruments which are designated as hedges and are effective as such are measured at fair value. The effective part of the change in fair value is recognised in other comprehensive income. The remaining ineffective part is recognised in profit or loss.
Assets in which the lessor retains substantially all the risks and rewards of ownership are classified as operating leases and they are included in the lessor's balance sheet. Payments made on operating leases are recognised on a straight-line basis over the lease term as rental expenses in profit or loss.
Goodwill represents the excess of the cost of an acquisition (made after 1 January 2004) over the fair value of the Group's share of the net identifiable assets, liabilities and contingent liabilities of the acquired entity at the date of acquisition. Goodwill on acquisitions before 1 January 2004 is accounted for in accordance with the previous accounting standards and the carrying amount is used as the deemed cost in accordance with the IFRS.
IT software and other intangible assets, whether procured externally or internally generated, are recognised in the balance sheet as intangible assets with finite useful lives, if it is probable that the expected future economic benefits that are attributable to the assets will flow to the Group and the cost of the assets can be measured reliably. The cost of internally generated intangible assets is determined as the sum of all costs directly attributable to the assets. Research costs are recognised as expenses in profit or loss as they are incurred. Costs arising from development of new IT software or from significant improvement of existing software are recognised only to the extent they meet the above-mentioned requirements for being recognised as assets in the balance sheet.
Intangible assets with finite useful lives are measured at historical cost less accumulated amortisation and impairment losses. Intangible assets are amortised on a straight-line basis over the estimated useful life of the asset. The estimated useful lives by asset class are as follows: IT software 4 - 10 years
Items of property, plant and equipment are depreciated on a straight-line basis over their estimated useful life. In most cases, the residual value is estimated at zero. Land is not depreciated. Estimates of useful life are reviewed at financial year-ends and the useful life is adjusted if the estimates change significantly. The estimated useful lives by asset class are as follows: Residential, business premises and offices 20 - 60 years
The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use. The value in use is calculated by estimating future net cash flows expected to be derived from an asset or a cash-generating unit, and by discounting them to their present value using a pre-tax discount rate. If the carrying amount of an asset is higher than its recoverable amount, an impairment loss is recognised in profit or loss. In conjunction with this, the impaired asset's useful life will be re-determined.
The valuation takes into account the characteristics of the property with respect to location, condition, lease situation and comparable market information regarding rents, yield requirements and unit prices. During the financial year, the valuations were conducted by the Group's internal resources.
Insurance and investment contracts Insurance contracts are treated, in accordance with IFRS 4, either as insurance or investment contracts. Under the standard, insurance contracts are classified as insurance contracts if significant insurance risk is transferred between the policyholder and the insurer. If the risk transferred on the basis of the contract is essentially financial risk rather than significant insurance risk, the contract is classified as an investment contract. Classification of a contract as an insurance contract or investment contract determines the measurement principle applied to it.
The risks involved in insurance and investment contracts are widely elaborated in the Group's financial statements' Risk Management section.
A reinsurance contract is a contract which meets the IFRS 4 requirements for insurance contracts and on the basis of which the Sampo Group (the cedant) may receive compensation from another insurer (the reinsurer), if it becomes liable for paying compensation based on other insurance contracts it has issued. Such compensation received on the basis of reinsurance contracts is included in the balance sheet under 'Reinsurers' share of insurance liabilities' and 'Other assets'. The former item includes the reinsurers' share of the provisions for unearned premiums and claims outstanding in the Group's reinsured insurance contracts, while the latter includes short-term receivables from reinsurers.
Pensions and compensation for healthcare or medical rehabilitation paid on the basis of Finland's statutory P&C insurance (accident, motor third party liability and patient insurance) are raised annually by the TEL (Employee Pensions Act) index in order to maintain the real value of the pensions. The index raises are not the responsibility of the insurance companies, but are funded by the so-called pay-as-you-go principle, i.e. each year premiums written include index raises to the same amount that is paid out in that year. In practice, the P&C insurance companies collect a so-called expense loading along with their premiums written, which is then forwarded to the central organisation for the particular insurance line. The central organisation distributes the pay-as-you-go contributions collected so that the company undertaking the type of insurance in question receives an amount equal to the compensation falling under the pay-as-you-go system it has paid that year. The insurer's participation in the payment is proportional to the insurer's market share in the insurance line in question.
Changes in the liabilities of reinsurance have been calculated at variable rates of exchange. In direct insurance, the insurance liability is calculated by policy, while in reinsurance it is calculated on the basis of the reports of the ceding company or the company's own bases of calculation.
The interest rate used in discounting liabilities is, at most, the maximum rate accepted by the authorities in each country. The guaranteed interest used in the direct insurance premium basis varies on the basis of the starting date of the insurance from zero to 4.5 per cent. The interest rate used in discounting liabilities is the same or lower than that used in premium calculation. Most of the liabilities of the accrued benefits of pension business with DPF are discounted by an interest rate of 3.5 per cent, also being the highest discount rate used. The highest discount rate used for accrued benefits is 3.5 per cent. In addition, Mandatum Life has for the year 2011 lowered the maximum rate to 2.5 % and for the year 2011 to 3.0 %.
Due to the difference in the discount rate of liabilities and the guaranteed interest of 4.5 %, supplementary provisions for guaranteed interest have been added to technical provisions. In the subsidiary, Mandatum Life Insurance Baltic, the discount rate varies by country between 2.5 - 4.0 per cent and the average guaranteed interest rate between 2.5 - 4.0 per cent.
The provision for claims outstanding is intended to cover the anticipated future payments of all claims incurred, including claims not yet reported to the company (the "IBNR" provision). The provision for claims outstanding includes claim payments plus all costs of claim settlements.
The amounts of short- and long-term liabilities in technical provisions are determined annually. The Group's financial statements' Risk Management section elaborates on the change of technical provisions and their forecast annual maturities.
According to Chapter 13, Section 2 of the Finnish Insurance Companies' Act, the Principle of Fairness must be observed in life insurance and investment contracts with a discretionary participation feature. If the solvency requirements do not prevent it, a reasonable part of the surplus has to be returned to these policies as bonuses.
Defined benefit plans are both funded and unfunded. The amounts reported as pension costs during a financial year consist of 1) the actuarially calculated earnings of old-age pensions during the year, calculated straight-line, based on pensionable income at the time of retirement, and 2) calculated effects in the form of interest expense for crediting/appreciating the preceding years' established pension obligations less 3) revenues from the assets covered by the plan. The calculation of pension costs during the financial year starts at the beginning of the year and is based on assumptions about such factors as salary growth and price inflation throughout the duration of the obligation and on the anticipated/expected return on the plan's assets and the market interest rate on the obligation during the financial year.
When reporting defined benefit plans in the balance sheet, the so-called corridor method is used. According to this model, accrued actuarial gains and losses resulting from differences between calculated assumptions and the actual outcome are not reported in the income statement unless the accumulated difference exceeds 10 per cent of the present value of the future obligations or the fair value of the plan's assets, whichever is higher. Accumulated differences that exceed the 10 per cent limit are accrued in the income statement as pension costs throughout the duration of the obligation. The accumulated accrued actuarial gains and losses calculated in this way that are not reported in the income statement are reported in the balance sheet as a net asset/net liability.
Share-based payments During the financial year, Sampo had valid share-based incentive schemes settled either in cash (the long-term incentive schemes 2006 II, 2008 I, 2008 II and 2009 I for executives and specialists) or cash or equity instruments (Sampo 2006). Schemes have been measured at fair value at the grant date and those settled in cash also at every reporting date thereafter.
In the schemes settled in cash, the valuation is recognised as a liability and changes recognised through profit or loss. In the schemes with equity instrument payments, valuation is recognised as an expense and as an increase in equity on a straight-line basis during the vesting period.
The fair value of schemes has been determined using the Black-Scholes-pricing model. The fair value of the market-based part of the incentive takes into consideration the model's forecast concerning the number of shares to be paid as an incentive. The effects of nonmarket based terms are not included in the fair value of the incentive; instead, they are taken into account in the number of those share options that are expected to be exercised during the vesting period. In this respect, the Group will update the assumption on the estimated final number of shares at every interim or annual balance sheet date.
A substantial part of the Group's P&C insurance liabilities concerns statutory accident and traffic insurance. The most significant uncertainties related to the evaluation of these liabilities are assumptions about inflation, mortality, discount rates and the effects of legislative revisions and legal practices.
The amendment to IAS 32 Financial Instruments: Presentation - Classification of Rights Issues (effective for annual periods beginning on 1 Feb. 2010 or after) addresses the accounting for rights, options or warrants that are denominated in a currency other than the functional currency of the issuer. The Group estimates that the change will have no influence on the Group's financial statements reporting.
Amended IFRIC 14 Prepayments of a Minimum Funding Requirement (effective for annual periods beginning on 1 Jan. 2011 or after) permits an entity to treat the benefit of certain early payments as assets. The Group estimates that the interpretation will have no influence on the Group's financial statements reporting.
Segment information has been produced in accordance with the accounting policies adopted for preparing and presenting the consolidated nancial statements.The segment revenue, expense, assets and liabilities, either directly attributable or reasonably allocable, have been allocated to the segments. Inter-segment pricing is based on market prices. The transactions, assets and liabilities between the segments are eliminated in the consolidated nancial statements on a line-by-line basis.
Consolidated income statement by business segment for year ended 31 December 2009
Included in gains/losses from financial assets available-for-sale is a net gain of EURm 86 (-21) transferred from the fair value reserve.
Included in gains/losses fro nancial assets available-for-sale is a net gain of EURm 1 (23) transferred from the fair value reserve.
Change in provision for claims outstanding (incurred but not reported losses, IBNR) -605 17 -588 -631 18 -613
Change in provision for claims outstanding (incurred but not reported losses, IBNR) -13 -16 -29 -109 -13 -122
Total change in provision for claims outstanding -62 -9 -71 -103 18 -85
Change in liabilities for insurance and investment contracts in total, gross -678 -600
Change in liabilities for insurance and investment contracts in total, net -678 -600
Technical result before investment return 1) Activity-based operating costs EURm 253 (239) have been allocated to claims incurred.
Pro t or loss attributable to the equity holders of the parent company 1,104 641
Financial assets and liabilities have been categorised in accordance with IAS 39.9. In the table are also included interest income and expenses, realised and unrealised gains and losses recognised in P/L, impairment losses and dividend income arising from those assets and liabilities. Th nancial assets in the table include balance sheet items Financial assets, Investments related to unit-linked contracts and Cash and cash equivalents.
- direct operating expenses arising from investment property generating rental income during the period -2 -2 - direct operating expenses arising from investment property not generating rental income during the
Non-cancellable minimum rental - not later than one year 8 5 - later than one year and not later tha ve years 9 7
Expenses arising from investment property - later tha ve years 7 7
Total rental recognised as income during the nancial period 0 0
Expenses arising from investment property - direct operating expenses arising from investment property generating rental income during the period -7 -7 - direct operating expenses arising from investment property not generating rental income during the
The intangible asset allocated to customer relations arose from the acquisition of If in 2004, as a part of the acquisition cost allocated to the insurance contracts of the If Group. The item was amortised on a straight-line basis in 6 years.
For the purpose of testing goodwill for impairment, Sampo determines the recoverable amount of its cashgenerating units, to which goodwill has been allocated, on the basis of value in use. Sampo has defined these cashgenerating units as If Group and Mandatum Life.
The recoverable amounts for If have been determined by using a discounted cash flow model. The model is based on Sampo’s management’s best estimates of both historical evidence and economic conditions such as volumes, margins, income and cost development. The value in use model for Mandatum Life has been fundamentally based on the embedded value model where the cash flow estimates for existing policies are based on budgets approved by the management and on historical evidence in terms of policy surrendering, death and accident frequencies etc. The derived cash flows for If were discounted at the pre-tax rates of 11.2 per cent. For Mandatum Life, the weighted average cost of capital of 10.4 per cent has been used for the discounting.
Forecasts for If, approved by the management, cover years 2011 – 2013. The cash flows beyond that have been extrapolated using a 2 % growth rate. A 2 % growth rate for years beyond 2010 has been used for the markets where Mandatum Life operates.
Management believes that any reasonably possible change in any of these key assumptions would not cause the aggregate carrying amount to exceed the aggregate recoverable amount.
Associates that have been accounted for by the equity method at 31 Dec. 2010
Associates not accounted for by the equity method at 31 Dec. 2010 **)
Associates that have been accounted for by the equity method at 31 Dec. 2009
Associates not accounted for by the equity method at 31 Dec. 2009 **)
Financial Statements 14 Investments in associates **) Excluded from accounting for by the equity method because of their immaterial e ect on consolidate gures.
Sampo´s share of Nordea's loss/pro t consists of the following as of 31 Dec. 2010: EURm 2010
The Group uses derivative instruments for trading and for hedging purposes. The derivatives used are foreign exchange, interest rate and equity derivatives. In P&C insurance business, fair value hedging has been applied during th nancial year. In Life insurance, both fair value and cas ow hedging have been applied.
Financial assets designated as at fair value through p/l 90 163
Financial assets designated as at fair value through p/l 61 50
Total financial assets designated as at fair value through p/l 90 161
Net gains from interest rate swaps designated as fair value hedges amounted to EURm 1 (-) milj. euroa. Net losses from hedged risks in fair value hedges of available for sale financial assets amounted to EURm -1 (-).
Cash flow hedges have been used to hedge future interest payments resulting from floating rate interest-bearing assets. The hedged items designated are interest payments from EUR denominated bonds.The effectiveness of the hedging relationships is assessed prospectively using the critical terms match method. An effectiveness test is carried out retrospectively using the hypothetical swap method.
Financial assets available for sale / debt securities: Debt securities available for sale include EURm 2,709 (2,500) investments in bonds and EURm 533 (789) investments in money market instruments.
Tota nancial assests measured *) Mutual funds di er from those disclosed in the Annual Report 2009 due to the de ned classi cations.
The sensitivity analysis of the Group's fair values o nancial assets and liabilities in di erenct market risk scenarios is presented below. The e ects represent the instantaneous e ects of a one-o hange in the underlying market variable on the fair values on 31 Dec. 2010.
The sensitivity analysis includes the e ects of derivative positions. All sensitivities are calculated before taxes. The debt issued by is not included.Sampo plc
18 Movements in Level 3 Financial Instruments Measured at Fair Value
Total gains or losses included in profit and loss for assets held at the end of the
Financial Statements 19 Sensitivity analysis of leve nancial instruments measured at fair value
Tax losses for which no deferred tax asset has been recognised -1 -1
Income tax relating to components of other comprehensive income -156 -326
More information on P&C Insurance's insurance liabilities in the Risk Management section of the Annual accounts.
Exemption allowed in IFRS 4 Insurance contracts has been applied to investment contracts with DPF or contracts with a right to trade-o or an investment contract with DPF. These investment contracts have been valued like insurance contracts.
Mandatum Life issued in 2002 EURm 100 Capital Notes. The loan is perpetual and pay oating rate interest. The interest is payable only from distributable capital. The loan is repayable only with the consent of the Insurance Supervisory Authority and at the earliest on 2012 or any interest payment date a er that. The loans is wholly subscribed by Sampo Plc.
Sampo has de ned bene t plans in P&C insurance business in Sweden and Norway.
The following actuarial assumptions have been used for the calculation of de ned bene t pension plans in Sweden and Norway: Sweden Sweden Norway Norway
Expected rate of return on plan assets at the begninning of the year -14 -13
Reconciliation of plan assets: At the beginning of the year 272 220
Minimum lease payments not later than one year 32 32 later than one year and not later than ve years 78 82 later tha ve years 101 106
If P&C Holding Ltd has issued a guarantee to the benefit of TietoEnator Corporation whereby If Holdings guarantees the commitments incurred by the If Group company If It Services A/S with TietoEnator based on an agreement covering ITservices. The guarantee will indemnify TietoEnator if If IT Services A/S is declared bankrupt, suspends payments in general, seeks a composition of creditors or in any other way is deemed to be insolvent.
If P&C Insurance Company Ltd has outstanding commitments to private equity funds totalling EURm 43, which is the maximum amount that the company has committed to invest in the funds. Capital will be called to these funds over several years as the funds make investments.
Minimum lease payments not later than one year 2 2 later than one year and not later than ve years 6 7 later tha ve years - 1
Total of sublease payments expected to be received under non-cancellable operating sub-leases at 31 Dec. 0 0
Lease and sublease payments recognised as an expense in the period minimum lease payments -3 -2 sublease payments 0 0
Minimum lease payments not later than one year 1 1 later than one year and not later than ve years 3 3 later tha ve years 1 2
There was no change in the company's share capital of EURm 98 during th nancial year. The 90,000 treasury shares acquired during 2009 were cancelled on 8 June, 2010 a er which the number of shares is 561,282,390.
At the end of th nancial year 2010, the mother company or other Group companies held no shares in the parent company.
The legal reserve comprises the amounts to be transferred from the distributable equity according to the articles of association or on the basis of the decision of the AGM. During th nancial year 2009, EURm 366 was transferred to the reserve for invested unrestricted equity from the legal reserve.
The reserve includes other investments of equity nature, as well as issue price of shares to an extent it is not recorded in share capital by an express decision. During th nancial year 2009, EURm 1,161 was transferred to this reserve from the share premium reserve and EURm 366 from the legal reserve.
The number of Sampo plc’s shares at 31 Dec. 2010 was 561,282,390, of which 560,082,390 were A-shares and 1,200,000 B-shares. Each A share has 1 vote and each B-share has 5 votes at General Meetings. All the B-shares are owned by the Kaleva Mutual Insurance Company. B-shares can be converted into A-shares at the request of the holder of B-shares. Sampo's A-shares are quoted on the Helsinki Stock Exchange (currently NASDAQ OMX Helsinki).
Other long-term bene ts consist of the bene ts under long-term incentive schemes accounted for for the year (see Note 36).
The Board of Directors for Sampo plc has decided on the long-term incentive schemes 2006 II - 2009 I for the management and experts of the Sampo Group. The Board has authorised the Nomination and Compensation Committee of the Board, or the CEO, to decide who will be included in the scheme, as well as the number of calculated bonus units granted for each individual used in determining the amount of the performance-related bonus. In the schemes, the number of calculated bonus units granted for the members of the Group's Executive Committee is decided by the Board of Directors. Over 100 persons were included in the schemes at the end of year 2010.
Total cost for the financial period, meur (incl. social costs) 13 *) Grant dates vary **) Trade-weighted average for ten trading days from the approval of terms
In accordance with the programme, the reward was paid in three installments. The last installment (EUR 3,571,863) was paid in December 2010. The reward was paid in cash so that the employee was obliged to buy Sampo's A-shares at Helsinki Stock Exchange at the least with 50 percent of the amount of the bonus a er taxes and other comparable charges.
40 Investments in Shares and Participations Other Than Subsidiaries and Associates
PMI Venture Fund L.P. (CIM Venture Fund for Creative Industries L.P.) Finland 6,000 0
EQT III UK No 1 L.P. (EQT Northern Europe UK No. I
Aberdeen Global Asia Paci c Equity Fund Great Britain 1,689,572 87
BOF III CV Investors LP (Gilde Buyout Fund III) Guernsey 8
Goldman Sachs Loan Partners I, L.P. Debt EUR Cayman islands 27
Goldman Sachs Loan Partners I, L.P. Debt USD Cayman islands 86
Proceeds from the sale of group and associated undertakings 0 0
Additional information to the statement of cas ows: Interest income received 78 17
The presentation of Sampo Plc' nancial statements together with the notes has been prepared in accordance with the Finnish Accounting Act and Ordinance. The accounting principles applied to the separat nancial statements of Sampo plc do not materially di er from those of the Group, prepared in accordance with the International Financial Reporting Standards (IFRSs). Th nancial assets are measured at fair value derived from the markets. The accounting principles for the Group are described in section Notes to the Accounts, Summary of Signi�cant Accounting Policies.
Income from property occupied for own activities 1 2 2 Depreciation and impairment
Accumulated depreciation at beginning of year -1 -1 -1 0 of which related to disposals - 0 0 -
Depreciation according to plan during th nancial year 0 0 0 0
Carrying amount at end of year 1 3 1 3 8 Shares in group companies
Notes on the Parent Company Liabilities 15 Movements in the parent company's equity
Information on share capital is disclosed in Note 29 in the consolidate nancial statements.
The basic and suplementary pension insurance of Sampo plc's sta s handled through insurances in Varma Mutual Insurance Company and in Mandatum Life Insurance Company Limited.
Temporary sta 1 1 25 Management's remuneration and post-employment bene ts
Financial Statements Notes to the Financial Statements 23 O -balance sheet items
Auditor's report To the Annual General Meeting of Sampo plc We have audited the accounting records, th nancial statements, the report of the Board of Directors, and the administration of Sampo plc for th nancial period 1.1. - 31.12.2010. Th nancial statements comprise the consolidated statement o nancial position, statement of comprehensive income, statement of changes in equity and statement of cas ows, and notes to the consolidate nancial statements, as well as the parent company's balance sheet, income statement, cas ow statement and notes to th nancial statements.
Auditor's Responsibility Our responsibility is to express an opinion on th nancial statements, on the consolidate nancial statements and on the report of the Board of Directors based on our audit. The Auditing Act requires that we comply with the requirements of professional ethics. We conducted our audit in accordance with good auditing practice in Finland. Good auditing practice requires that we plan and perform the audit to obtain reasonable assurance about whether th nancial statements and the report of the Board of Directors are free from material misstatement, and whether the members of the Board of Directors of the parent company and the Managing Director are guilty of an act or negligence which may result in liability in damages towards the company or violated the Limited Liability Companies Act or the articles of association of the company.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in th nancial statements and the report of the Board of Directors. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation o nancial statements and report of the Board of Directors that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the e ectiveness of the company's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of th nancial statements and the report of the Board of Directors.
We believe that the audit evidence we have obtained is su cient and appropriate to provide a basis for our audit opinion.
Opinions based on the assignment of the Audit Committee We support that th nancial statements should be adopted. The proposal by the Board of Directors regarding the use of the pro t shown in the balance sheet is in compliance with the Limited Liability Companies Act. We support that the members of the Board of Directors of the parent company and the Managing Director should be discharged from liability for th nancial period audited by us.
If the buyer of a share makes a purchase to get dividend. Dividend goes with the seller.
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