3 CEO’s Review 4 2010 in Figures 6 Strategy 8 Group Structure 9 Organisation 10 Business Areas 14 Personnel 17 Corporate Responsibility 11 P&C Insurance 12 Life Insurance 13 Holding
Increased customer satisfaction can also be seen in the development of the gross written premiums in P&C insurance. The premiums written remained stable during th nancial crisis, while 2010 saw a growth in gross written premiums, which reached an all time high of EUR 4.2 billion.
The European Sovereign Debt Crisis Did Not Take Us by Surprise Our investment decisions proved to be sound: we predicted the globa nancial crisis would be followed by a European public secto scal crisis. Consequently, our investment portfolio does not contain any sovereign debt of the so called PIIGS countries. Moreover, the general weight of sovereign debt in our investment portfolio remains exceptionally low. In addition, we predicted the positive developments of the Scandinavian economies and elected to increase the Nordic equity weight in our portfolio at the right moment.
The success we achieved in 2010 clearly demonstrates that we listen to our customers' needs. To this end, I would like to extend my sincere thanks not only to our customers, but also to all of the parties in our group who have contributed to making so many successful decisions throughout the year. I would also particularly like to express my thanks to the Board and the Chairman of the Board.
If P&C Insurance - Security and Stability If's mission is to offer attractively priced insurance solutions that provide customers security and stability in their business operations, housing and daily life. The company's vision is to be the leading property and casualty insurance company in the Nordic and Baltic regions with the most satisfied customers, leading edge insurance expertise and superior profitability.
• Customer value – If will exceed customer expectations through superior insurance solutions, fast and accurate claims management and sympathetic behavior.
Mandatum Life - the leading life insurance provider in Finland and the Baltics Mandatum Life aims to be the leading life insurance provider in Finland and the Baltics. During the last few years the company has made substantial investments in the development of sales and customer service. Mandatum Life's core product areas will continue to be unitlinked policies, risk products and voluntary corporate pension schemes.
In Finland Mandatum Life relies mainly on three sales channels - in-house corporate sales teams, wealth management focusing on HNWIs and Sampo Bank's network.
The result of Mandatum Life consists of three components - investment result, risk result and expense result. The strategy in investment management is to maintain adequate solvency in relation to market risks in the balance sheet. This enables the company to strive for a return that is higher than the risk free return. In expense and risk result Mandatum Life seeks growth, even if in the short-term the expense result will suffer from the substantial investments in sales channels. Mandatum Life's financial target is to produce a RoE of at least 17.5 per cent.
Business Areas Sampo Group has two business areas - P&C insurance and life insurance. In addition the parent company Sampo plc owned in February 2011 approximately 21.3 per cent of Nordea Bank AB, the largest bank in the Nordic region. As of 31 December 2009 Nordea has been accounted for as an associated company.
If If P&C Insurance is the leading property and casualty insurer in the Nordic region, with operations in Finland, Sweden, Norway, Denmark, the Baltic countries and Russia.
If P&C Insurance Year 2010 kicked off with an intense winter in many of the countries where If does business. The year continued with a scorching summer riddled with storms and heavy downpours, and finished off with a few grim months of premature but abundant snowfall.
For If, the dramatic weather meant a flood of insurance claims and the extensive workload that comes with them. The severe cold caused, among other things, water damage to both private residences and businesses, and the extensive snowfall led to traffic accidents both minor and major. The result was a rush of phone calls and emails – and an opportunity for If to show its customers that they had indeed chosen the right insurance company. Surveys conducted among those affected returned very good results – nine out of ten responded that If's handling of their insurance claims was good or very good. To coin the phrase of the marketing campaign If launched in 2010: claims handling the way it should be.
Despite the extra burden of weather-related damages, 2010 was another solid year for If financially. Combined ratio was 92.8 per cent, exceeding the long-term goal and equaling the result in 2009. The technical result was EUR 449 million (EUR 488 million in 2009) and profit before taxes came to EUR 707 million (EUR 644 million).
Internally, If continued efforts to streamline its operations while continuing to offer customers improved service. If's increasing range of Internet-based services, which have been well received by customers, are an example of this process. In 2010, 25 per cent of insurance claims in the private market were filed over the Internet. The figure was 40 per cent for the corporate market. Another innovation introduced over the course of the year was a new technology that fully automates the processing of various simple claims. For customers, the service literally takes a mere second. For If, it frees up resources for processing more complex claims. In the corporate sector, an entirely new insurance system has been deployed in Norway and other areas. The system is expected to yield significant benefits both by appealing directly to customers and by giving If a competitive edge.
If is continuing its successful efforts towards creating a cleaner environment. If has now joined the UN's Clean Development Mechanism (CDM) program in 2010, and will become climate neutral over the course of 2011. An ambitious environmental awareness program was implemented internally in 2010, covering 100 areas in need of improvement. One of the focus points of the program is unnecessary travel, which has now dropped almost 33 per cent over the past three years. This has been accomplished through a conscious move towards video and web meetings, among other solutions. In fact, video meetings have more than doubled during this period.
Despite the good return on investment activities, the year was a very challenging one in the investment market. Recuperation from the financial crisis that started in 2007 left behind a legacy of concern about the future of the eurozone. The long-term interest rates of AAArated eurozone countries fell during the year and as a consequence Mandatum Life strengthened its balance sheet by supplementing technical provisions to adapt to the low interest rates. The profit was used to raise the company's equity, thus further strengthening its solvency. As far as investment activities are concerned, year 2011 also involves a number of uncertanties. However, the company's strong solvency position together with the increase in technical provisions made possible by the low interest rates creates a good basis for operations in 2011.
In 2010 the Baltic subsidiary changed its name from Sampo Life to Mandatum Life, a move which has further reinforced the principle of "one company, one strategy", while at the same time cooperation with the parent company has become considerably closer. This cooperation was most clearly evident during the year under review in the smooth cooperation between the wealth management service launched in the Baltic countries and the parent company's wealth management operations. Wealth management services played a key role in the growth of Baltic sales.
Sampo plc Sampo plc's A shares have been quoted on the main list of the NASDAQ OMX Helsinki since 1988. The company acts as Sampo Group's parent company with its two main subsidiaries engaged in P&C and life insurance, If P&C and Mandatum Life respectively. In addition Sampo plc held on in February 2011 approximately 21.3 per cent of the share capital of Nordea, the largest bank in the Nordic countries. Nordea is an associated company to Sampo plc.
In February 2011 Sampo plc bought additional 30 million shares in an auction organized by the Swedish state. This transaction increased Sampo plc´s holding to 21.3 per cent.
Personnel P&C insurance is Sampo Group's largest business area and in 2010 it employed approximately 92 per cent of the personnel, while life insurance had 7 per cent of the work force. Less than one per cent worked for the parent company, Sampo plc.
Initiatives'. The aim of the initiative is to forcefully influence the culture of the company to even more emphasize competence building, innovation and customer focus, the pillars of the company's value creation.
For several years, parts of the If organization have run a structured and very ambitious process for involving all employees in idea creation and innovation. The process is called ‘Business Initiatives'. As a part of the ‘Skills and Initiatives' theme, it has been decided to launch this process widely across the whole company. The launch has been started, and within a few years most If employees will be covered.
Recognizing the importance of undivided top management support to achieve success in ‘Skills and Initiatives', If has created a management training program for the 100 most senior leaders. The training program is a mandatory 2 -week course hosted by a renowned business school in which the leaders will discuss value building dynamics in a world dominated by intangible assets. The first group of leaders began the course in the latter part of 2010.
3. Increasing focus on ‘Skills and Initiatives' in all leader development activities.
Life insurance Building Mandatum Life's working culture and focusing on cooperation, customer skills and high quality leadership were the main areas for Mandatum Life's HR policy in 2010.
In ‘Great Place to Work' employee satisfaction survey the trust index indicating employee satisfaction rate improved from 70 per cent in 2009 to 73 per cent in 2010. In the latest survey 81 per cent of the employees stated that the company is a great place to work for.
Corporate Responsibility Sampo Group's companies follow the common values of ethicality, loyalty, transparency and enterprise in their business operations and contacts with all stakeholders. Insurance is a business where responsibility and trust are inherent in daily customer contacts. Social responsibility is high on the agenda in the Group. If P&C, the largest P&C insurer in the Nordic countries, represents 92 per cent of the Group's personnel and is a natural focal point for Corporate responsibility activities in Sampo Group.
As an example, If has taken an intensive interest in environmental issues over the past few years, and all the company's actions are guided by a strict environmental policy. The fundamental thought behind the policy is that If should always seek out the most environmentally viable solution for the company itself, its customers, suppliers and partners. If has joined the UN's Clean Development Mechanism (CDM) program in year 2010, and will become climate neutral over the course of 2011.
• An ambitious, company-internal awareness program was implemented. The program contains 100 areas in need of improved environmental awareness. One of these focus points is unnecessary travel, which has now dropped almost 33 per cent over the past three years. This has been accomplished, among other solutions, through a conscious move towards video and web meetings. Video meetings have, in fact, more than doubled during this timeframe.
• Since If handles over 300,000 damaged motor vehicles annually, and outsources reparations to housing and commercial facilities to the degree of several million Swedish krona per year, the company is in the position to continue to place climate-friendly demands on its suppliers and their selections of transport, materials, work methods, and emission and waste level control. In 2010, for example, the total amount saved by If's multi-year investment into developing new work methods passed EUR 10 million - auto-repair shops can now fix damaged plastic parts instead of replacing them with new ones.
If has an extensive program for supporting a wide range of safety advances. In Sweden, If is an avid supporter of the Rädda Barnen (Save the Children) organization's work against Internet bullying, and cooperates with both the national Directorate for Civil Protection and Emergency Planning (Direktoratet for samfunnssikkerhet og beredskap) and the Fire Protection Association in Norway (Norsk Brannvernforening). In Finland, the company keeps first graders safe with fluorescent yellow caps that ensure the children stand out in traffic on their way to school.
Naturally, If also tries to convince politicians and other decision makers to come to sensible and far-sighted decisions. In Sweden, for example, If has alerted zoning officials to the risks of raised water levels in hopes that they will weigh the risks before taking a stand on any new waterfront housing. If's researchers also analyze the company's extensive statistics on motor vehicle accidents with the aim that the information will be used to improve road safety. One of many results of this work is a report on which traffic situations are most dangerous for pedestrians.
Corporate Governance Statement Sampo complies in full with the Finnish Corporate Governance Code issued by the Securities Market Association, e ective from 1 October 2010, replacing the earlier Code from 2008.
Sampo plc's Board of Directors, elected annually by the AGM of Sampo plc, uses the highest decision making power in Sampo Group between the AGMs. Sampo's Board of Directors is responsible for the management of the company in compliance with the law, the regulations of the authorities, Sampo's Articles of Association and the decisions of Shareholders Meetings.
Following persons served on Sampo plc's Board of Directors in 2010: Björn Wahlroos (born 1952)
• Vuoria holds 32,698 Sampo plc shares directly or through a controlled company.
• Member of the Board of Directors of Sampo plc since 25 May 2000.
Positions of Trust: Kone Corporation, Member of the Board; The Research Institute of the Finnish Economy ETLA, Member of the Board; Finnish Business and Policy Forum EVA, Member of the Board; Aalto University Foundation, Member of the Board; Aalto-yliopistokiinteistöt Oy, Member of the Board; International Chamber of Commerce, Finland, Member of the Board; Finnish Energy Industries, Member of the Board
Positions of Trust: Elisa Corporation, Member of the Board; Sigrid Juselius Foundation, Deputy Board Member and Member of Finance Committee; Nordea Funds (Nordea Alternative Investment, Nordea Funds of Funds, Nordea I Sicav), Luxembourg, Member of the Board; Svenska konstsamfundet, Member of Investment Committee
• Palin-Lehtinen holds 4,363 Sampo plc shares directly or through a controlled company.
Positions of Trust: Sti elsen för Åbo Akademi, Chairman of the Board; Finnair plc, Chairman of the Board; Stockmann plc, Chairman of the Board; Föreningen Konstsamfundet, Chairman of the Board; Society of Swedish Literature in Finland, Member of Investment Committee; Nordkalk Oy Ab, Member of the Board; Luvata Oy, Member of the Board
The Board of Directors decides on Sampo Group's business strategy, approves the budget and the principles governing the Group's risk management and internal control, takes responsibility for the proper organisation of the Group's operations, and decides, within the framework of the company's business area, on other exceptional and far-reaching matters with respect to the scope and nature of Sampo Group.
The Board convened 10 times in 2010. The average attendance of Board members at meetings was 98.8 per cent.
Board-Appointed Committees The Board may appoint committees, executive committees and other permanent or fixedterm bodies for duties assigned by the Board. The Board confirms the Charter of Sampo's committees and Group Executive Committee, and also the guidelines and authorisations given to other bodies appointed by the Board.
Furthermore, the Audit Committee is responsible for evaluating the auditors' and auditing firm's professional competence and independence and particularly their provision of related services to Sampo Group, and for preparing proposals to the Annual General Meeting concerning the auditors' election and their fees. The Committee also oversees the actions of the auditors under the laws of Finland, monitors the auditors' invoicing for audit and non-audit services as deemed appropriate, monitors the efficiency of the Group's internal control, internal audit and risk management systems, and monitors the Group's risks and the quality and scope of risk management. In addition, the Committee approves the internal audit action plan, monitors the internal audit's reporting, monitors the fulfillment of risk policies, the use of limits and the development of profit in various business areas, oversees the preparation of and compliance with risk management policies and other related guidelines, and reviews the description of the main features of the internal control and risk management systems pertaining to the financial reporting process, which is included in the company's Corporate Governance Statement. The Committee also evaluates the compliance with laws and regulations in Sampo Group and executes any other duties that may be bestowed upon it by the Board.
In 2010, the Chairman of the Audit Committee was Christoffer Taxell, and the other members were Tom Berglund and Jukka Pekkarinen. Also participating in the meetings were the Auditor's representative, Group CEO, Group CFO, Group Chief Risk Officer, Group Chief Audit Executive, and the Group Chief Counsel, who also served as secretary to the Committee.
Nomination and Compensation Committee The main duties of the Nomination and Compensation Committee have been defined in the Committee's Rules of Procedure approved by the Board of Directors.
The Nomination and Compensation Committee is entrusted to prepare proposals for Sampo's Annual General Meeting on the composition of the Board, the compensation of Board members and the principles on which this compensation is determined. The Committee consults the largest shareholders in these matters.
The Committee is also responsible for preparing proposals for Sampo's Board on the composition and chairmen of the Board's committees, on the appointment of Sampo Group CEO and President and the composition of Sampo Group's Executive Committee, the composition of the Group MD Committee, and on the principles by which the members of the Group Executive Committee are to be compensated and their compensation. As authorised by the Board of Directors, the Committee also decides on the compensation of the members of the Group Executive Committee, excluding the Group CEO and Deputy CEO.
In 2010, the Nomination and Compensation Committee comprised the Chairman of the Board (who acted as the Committee's Chairman), the Vice Chairman of the Board and three members elected from among the members of the Board.
The Chairman of the Nomination and Compensation Committee is Björn Wahlroos, and the other members are Veli-Matti Mattila, Eira PalinLehtinen, Matti Vuoria and Christoffer Taxell.
The following persons served on the Group Executive Committee in 2010: Kari Stadigh (born 1955)
Positions of Trust: Fortum Corporation, Member of the Board; Fiskars Corporation, Member of the Board (2004-2010); Central Chamber of Commerce of Finland, Legal Committee, Chairman (2005-2010), Member (2002-2005); Finnish Literature Society, Board Member
Positions of Trust: FNH (the organisation for the Financial Sector in Norway), Member of the Board
Nordea Bank AB (publ), Member of the Board; Alma Media Corporation, Chairman of the Board (2005–2011), Vice Chairman (2001–2005); Confederation of Finnish Industries EK, Vice Chairman (2011–); The Federation of Finnish Financial Services, Member of the Board; Varma Mutual Pension Insurance Company, Member of the Board;
Positions of Trust: If P&C Insurance Ltd, Sweden, Chairman of the Board; If P&C Insurance Company Ltd, Finland, Chairman of the Board; Swedish Insurance Federation, Member; Swedish Insurance Employer Association, Member
Positions of Trust: Amanda Capital Plc, Member of the Board; Federation of Finnish Financial Services, Life Insurance Executive Committee, Chairman (2007-2010), Member (2011-); Silta Oy, Member of the Board; BenCo Insurance Holding B.V., Netherlands, Member of the Board; Euroben Life and Pension Limited, Ireland, Member of the Board
• Niemisvirta holds 43,455 Sampo plc shares directly or through controlled companies.
CJSC If Insurance, Russia, Chairman of the Board; IPSC Region, Russia, Chairman of the Board
• Vuorinen holds 7,176 Sampo plc shares directly or through controlled companies or persons closely associated with the Insider.
Personal information as on 31 December 2010. The entire CVs of the members of Sampo Group Executive Committee can be viewed at www.sampo.com/management.
Positions of Trust: The Finnish Center for Salvaged Vehicles, Member of the Board; If P&C Insurance AS, Estonia, Chairman of the Board; Ricard Wennerklint (born 1969)
The Group MD Committee comprised Kari Stadigh (Chairman), Ilona Ervasti-Vaintola, Peter Johansson, Patrick Lapveteläinen, Torbjörn Magnusson, Petri Niemisvirta and Ricard Wennerklint.
In 2010, the Group Executive Committee convened five times at the request of Group CEO and President. The Group MD Committee, which assists the Group Executive Committee, met 13 times.
The Board of Directors elects and releases the Group CEO, and decides on the terms of employment and other compensation. The Managing Director of the company and the Group CEO and President of Sampo Group is Mr. Kari Stadigh, M.Sc. (Eng.), BBA (Econ.).
The Group CEO is in charge of the daily management of Sampo, subject to the instructions and control of the Board of Directors. The Group CEO is empowered to take extraordinary and broad-ranging actions, taking into account the scope and nature of Sampo's operations, only upon authorisation by the Board of Directors. The Group CEO ensures the legal compliance of Sampo's accounting and the trustworthy organisation of asset management.
Compensation Sampo aims to o er a competitive compensation package both for the management and other employees. Compensation is also a signi cant factor when Sampo competes on competent employees. Sampo's compensation strategy is responsible both towards the employees and the shareholders and, consequently, long-ter nancial stability together with Sampo Group's value development guides the design of compensation schemes.
Compensation of the Members of the Board of Directors According to Sampo's Articles of Association, the Annual General Meeting decides on the compensation of the members of the Board of Directors.
In accordance with the decision of the Annual General Meeting in 2010, the following annual fees will be paid to the members of the Board of Directors for their Board and committee work up to the close of the Annual General Meeting in 2011: EUR 160,000 to the Chairman, EUR 100,000 to the Vice Chairman, and EUR 80,000 to the other members of the Board, with 50 per cent of each Board member's fee being paid, a er taxes and corresponding charges, in Sampo A shares and the rest in cash. Board members employed by the company will not receive separate compensation for Board work during the validity of the employment or service relationship.
Members of the Board of Directors have not received any other bene ts, nor do they participate in Sampo's incentive systems.
Compensation of the Managing Director and Other Executives The Board of Directors decides on the terms of employment and compensation of the Group CEO and other executives on the Sampo Group Executive Committee, on the basis of a proposal by the Nomination and Compensation Committee. However, the Nomination and Compensation Committee can decide, upon authorisation by the Board of Directors, on the salaries of the members of the Group Executive Committee, excluding the Group CEO and Deputy CEO.
The members of the Group Executive Committee are also participants in the long-term incentive systems 2008 II and 2009 I for Sampo's management and in the long-term share-based incentive scheme ‘Sampo 2006' for the Group's key management (scheme 'Sampo 2006' expired during 2010). The terms of the incentive systems are available on Sampo's website at www.sampo.com/compensation.
Mr. Kari Stadigh is Sampo Group's CEO. For year 2010 the Group CEO was paid EUR 667,412 i xed salary and EUR 400,000 in short term variable compensation and EUR 1,295,863 in long-term variable compensation, together totalling EUR 2,363,275.
More detailed information on compensation in Sampo Group during 2010 is available at the Salary and remuneration report published by Sampo.
The Audit Committee of Sampo's Board of Directors annually approves the Internal Audit's operating plan. The Internal Audit reports on the audits performed to the Group CEO and the Audit Committee. Company-specific audit observations are reported to the respective companies' governing bodies and management.
The total fees paid to the auditor for services rendered and invoiced were EUR 2,206,734. In addition, Ernst & Young Oy were paid fees for non-audit services rendered and invoiced totalling EUR 196,862.
40 Sampo Group in 2010 42 Business Areas in 2010 49 Changes in Group Structure 50 Administration 57 Shares, Share Capital and Shareholders 64 Financial Standing 51 Annual General Meeting 52 Governance in 2010 53 Corporate Responsibility in 2010 43 P&C Insurance in 2010 45 Life Insurance in 2010 58 Shares and Share Capital 59 Authorizations Granted to the Board 65 Internal Dividends 66 Ratings 77 Group Key Figures 79 P&C Insurance Key Figures 54 Personnel in 2010 55 Management Incentive Schemes 56 Risk Management in 2010 47 Associated Company Nordea Bank Ab 48 Holding in 2010 60 Shareholders 67 Group Solvency 68 Debt Financing 81 Life Insurance Key Figures 82 Per Share Key Figures 69 Events the End of the Reporting Year 70 Outlook for 2011 71 The Most Risks to Operations 72 Dividend Proposal 73 Key Figures 2010 76 Calculation of the Key Figures
Sampo Group in 2010 Sampo Group's pro t before taxes for 2010 grew strongly and amounted to EUR 1,320 million (825). Total comprehensive income for the period, taking changes in the market value of assets into account, was EUR 1,807 million (3,423).
Earnings per share rose to EUR 1.97 (1.14). Mark-to-market earnings per share were EUR 3.22 (5.88) and return on equity for the Group was 21.8 per cent for 2010 (55.7).
The Board proposes to the Annual General Meeting to be held on 14 April 2011 a dividend of EUR 1.15 per share (1.00) and an authorization to repurchase a maximum of 50 million Sampo A shares.
Net asset value per share increased by more than EUR 3 during 2010 and on 31 December 2010 amounted to EUR 17.79 (14.63). Fair value reserve on the Group level increased to EUR 736 million (296).
Pro t before taxes for Mandatum Life, Sampo Group's life insurance operation, increased to EUR 142 million (121). Fair value reserve increased to EUR 436 million as at 31 December 2010 (210). Return on equity was 36.2 per cent (97.6). Premiums grew almost 40 per cent and exceeded one billion euro for th rst time ever.
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.
In addition, on 31 December 2010 Sampo plc held 830,440,497 Nordea shares corresponding to a holding of 20.5 per cent.
P&C Insurance 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. The P&C insurance group's parent company, If P&C Insurance Holding Ltd, is domiciled in Sweden, and the If subsidiaries provide insurance solutions and services in Finland, Sweden, Norway, Denmark, the Baltic countries and Russia. If's operations are divided into four business areas: Private, Commercial, Industrial and Baltic & Russia.
Year 2010 was characterized by exceptional weather conditions in most of the countries where If operates: extreme winter, scorching summer riddled with storms and heavy downpours, and in the fourth quarter weeks of premature but abundant snowfall.
Despite the challenging weather conditions, profit before taxes for P&C insurance for the year 2010 rose 10 per cent to EUR 707 million (644) and combined ratio was again on a stable level in 2010 at 92.8 per cent (92.1) being clearly better than the long-term target of below 95 per cent.
Insurance margin (technical result in relation to net premiums earned) decreased from the previous year to 11.5 per cent (13.4). Return on equity (RoE) remained good and was 39.8 per cent (53.2) while the fair value reserve increased to EUR 315 million (105).
In business area Private risk ratio increased to 68.9 per cent (68.0) affected by the exceptional weather conditions. Helped by the improved cost ratio, combined ratio increased slightly to 93.0 (92.5). Also in Commercial cost ratio improved compared to last year but the weakened risk ratio of 69.8 per cent (68.3) drove the combined ratio slightly up to 93.5 per cent (92.6).
Gross written premiums increased 8 per cent to EUR 4,189 million (3,888). Adjusted for currency, premiums increased 1.3 per cent.
Cost ratio improved by 0.4 percentage points to 23.7 per cent compared to a year earlier as a result of continuous efforts put on streamlining the operations. The amount of total costs increased to EUR 1,009 million (939), mainly due to the strengthening of the Swedish krona.
Claims incurred increased to EUR 2,689 million (2,477) and risk ratio deteriorated to 69.1 per cent (68.0), affected by the weather. EUR 113 million (87) was released from technical reserves, which related to prior year claims. Reserve ratio was 173 per cent (172) of net premiums written and 236 per cent (240) of claims paid.
Investment market remained positive during the year and net income from investments increased to EUR 487 million (394). As at 31 December 2010, total investment assets amounted to EUR 11.7 billion (10.7) of which 85 per cent (89) was invested in fixed income instruments and 14 per cent (11) in equities. Investment return for 2010 mark-to-market was 7.4 per cent (12.4). Duration for interest bearing assets was 1.7 years (2.5).
On 1 January 2011 a new five-year cooperation agreement was announced between If P&C and Volvo Cars regarding Volvia brand insurance. The agreement offers Volvo owners a brand profiled insurance and a 3-year car warranty period. If has more than 443,000 Volviainsurances in its portfolio, of which 400,000 in Sweden, which means that 40 percent of all Volvo cars in Sweden are insured by Volvia. The deal with Volvo is worth approximately 2 billion Swedish krona in premiums earned for If annually.
Sampo Group's life insurance operations continued their fast growth in 2010 with premium income growing almost 40 per cent. Profitability was also good and profit before taxes grew 17 per cent to EUR 142 million (121).
Net investment income, excluding income on unit-linked contracts, amounted to EUR 312 million (270). Net income from unit-linked investments was EUR 333 million (359). During 2010 fair value reserve increased EUR 75 million amounting to EUR 436 million. Return on equity (RoE) in life insurance was 36.2 per cent (97.6).
Mandatum Life Group's investment assets, excluding the assets of EUR 3.1 billion (2.4) covering unit-linked liabilities, amounted to EUR 6.0 billion (5.4) at market values as at 31 December 2010. Fixed income represented 61 per cent (68), equity 28 per cent (23), private equity 4 per cent (4), real estate 3 per cent (3) and other assets 3 per cent (2) of the total assets. Return on investments in 2010 was 11.1 per cent (16.8). At the end of December 2010 duration of fixed income assets was 2.7 years (2.6).
Mandatum Life Group's solvency position is strong. Solvency margin grew to EUR 1,339 million (930) as at 31 December 2010. Mandatum Life's solvency ratio was 25.7 (18.6). Total technical reserves were EUR 7.5 billion (6.8). Unit-linked reserves continued their strong growth and accounted for 3.1 billion (2.4). The share of unit-linked reserves of total technical reserves increased to 41 per cent (35).
investment yield to 2.5 per cent and 3.0 per cent for 2011 and 2012, respectively. All in all, Mandatum Life has increased its technical reserves with EUR 147 million due to low level of interest rates.
A new name was adopted for the Baltic subsidiary in 2010. The company is now called Mandatum Life Insurance Baltic SE. Premium income from the Baltic countries grew by 42 per cent and amounted to EUR 60 million (42).
Mandatum Life's market share in its focus area, unit-linked business, rose to 28.2 per cent (27.8). The company's overall market share in Finland was 22.0 per cent (24.8) and market share in the Baltic countries was 19 per cent (16).
Associated Company Nordea Bank Ab On 31 December 2010 Sampo plc held 830,440,497 Nordea shares corresponding to a holding of 20.5 per cent. The average price paid per share amounted to EUR 6.39 and the book value in the Group accounts was EUR 6.85 per share. The closing price as at 31 December 2010 was EUR 8.16.
The segment's profit before taxes amounted to EUR 474 million (36), of which EUR 523 million relates to Sampo's share of Nordea's 2010 profit. Segment's profit without Nordea was EUR -48 million.
Administration Sampo Group complies in full with the Finnish Corporate Governance Code published by the Securities Market Association on 15 June 2010 replacing the earlier Code from 2008.
Annual General Meeting The Annual General Meeting held on 13 April 2010 decided to distribute a dividend of EUR 1.00 per share for 2009. The record date for dividend payment was 16 April 2010 and the dividend was paid on 23 April 2010. The Annual General Meeting adopted the financial accounts for 2009 and discharged the Board of Directors and the Group CEO and President from liability for the financial year.
The Annual General Meeting decided to pay the following fees to the members of the Board of Directors until the close of the 2011 Annual General Meeting: the Chairman of the Board will be paid EUR 160,000 per year, the Vice Chairman EUR 100,000 per year and the other members EUR 80,000 per year. After deduction of taxes and similar payments, approximately 50 per cent of the Board members' annual compensation will be paid in Sampo A shares and the rest in cash.
Ernst & Young Oy was elected as Auditor. The Auditor will be paid a fee determined by a reasonable invoice. Ernst & Young Oy nominated Heikki Ilkka, APA, as responsible auditor.
Governance in 2010 Sampo Group complies in full with the Finnish Corporate Governance Code published by the Securities Market Association on 15 June 2010 replacing the earlier Code from 2008. The new Code entered into force on 1 October 2010.
The management of Sampo Group is based on healthy and sound business principles. It aims at anticipating changes in society and the capital market, and adapting its operations accordingly to these changes. Sampo Group also aims at providing a non-discriminative, pleasant and open work environment. Through its services, Sampo Group aims to contribute towards the wellbeing and safety of society. Sampo Group is aware of its corporate responsibility and is committed to developing its operations to further economic, social and environmental sustainability.
If P&C represents 92 per cent of the Group's personnel and is a natural focal point for CSR activities in Sampo Group. As the leading insurance company in the Nordic region, If takes on social responsibility heavier than what is 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.
More information regarding corporate responsibility in Sampo Group is available in the Corporate Responsibility section.
Personnel in 2010 The number of full-time equivalent staff decreased to 6,844 employees (7,087) as at 31 December 2010. In P&C insurance, the number of staff mainly decreased in the Baltic and Russian operations and in Norway. In life insurance, the number of staff increased slightly both in Finland and the Baltics.
In Mandatum Life, the main areas for HR policy in 2010 were building the company's working culture and focusing on cooperation, customer skills and high quality leadership.
Further information on staff in Sampo Group is available in the Personnel section of the Annual Report..
Management Incentive Schemes On 8 June 2010 Sampo's Board approved a Compensation Code which applies to all Group companies. The Boards of these companies have adopted company-level policies based on the Code.
The Code lays down the principles for e.g. management incentives and can be viewed at www.sampo.com/compensation.
The variable compensation in Sampo Group is divided into short term and long term compensation. The short term compensation is based on annual performance whilst the long term compensation is carried out through the management incentive schemes. For the short term variable compensation systems decided after 1 January 2011, at least 50.1 per cent of significant pay-outs will be deferred for at least three years. In Sweden different national rules are applied and at least 60 per cent of pay-out for persons in risk-taking positions will be deferred.
The management incentive schemes of Sampo Group were in 2010 of two types; long-term management incentive schemes based on share appreciation rights and one share-based incentive scheme.
In 2006, Sampo's Annual General Meeting decided on a share-based incentive scheme for the Executive Management belonging to the Group Executive Committee. Under the program, the participants are granted the right to receive up to a pre-determined number of Sampo shares, if Sampo's share price has outperformed a predefined threshold value and insurance margin targets have been exceeded. The reward will be paid in Sampo shares, in cash or a combination thereof. Furthermore, the programs are subject to lock-up on Sampo shares received. The scheme ended during 2010.
Risk Management in 2010 Sampo considers that a high quality risk management process is a prerequisite for business operations.
The key objectives of risk management are: • to ensure that risks affecting our profitability and other material risks are identified, assessed and analyzed; • to ensure that capitalization - in the form of capital and foreseeable profitability 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 different business-areas according to chosen strategies and that risks are properly priced; • to limit and mitigate fluctuations in the economic values of group companies; and
• to ensure the overall efficiency, security and continuity of operations.
Sampo Group's major risks, excluding Nordea, arise from the insurance activities and investment portfolios. Risk management related to these areas is seen as core competence and is therefore under constant development. Like all companies Sampo Group is exposed to operational risks and risks related to business environment. Sampo Group is continuously working at improving internal control, core processes and systems, business continuity planning, as well as monitoring and analyzing impacts from changes in the Group's external operating environment to reduce the impact of operational and business risks.
As at 31 December 2010, Sampo plc had 86,294 shareholders, representing an increase of more than 9 per cent from the previous year.
Shares and Share Capital 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.
According to the company's Articles of Association, A Shares must number at least 179,000,000 and no more than 711,200,000. Meanwhile, B shares must number at least zero and no more than 4,800,000. Each A share entitles the holder to one vote and each B share entitles the holder t ve votes at the General Meeting of Shareholders. As at 31 December 2010 Sampo plc's share capital amounted to EUR
At the end of th nancial year, Sampo plc didn't hold any of its own A shares. Neither did the other Group companies hold any shares in the parent company.
At the end of 2010, the members of Sampo plc's Board of Directors and their close family members owned either directly or indirectly 11,856,737 Sampo A shares. Their combined holdings constituted 2.1 per cent of the share capital and related votes. The members of the Group Executive Committee and their close family members owned either directly or indirectly 960,349 Sampo A shares representing 0.2 per cent of the share capital and related votes.
Number of shares Shareholders number Shareholders % Shares number Shares % Votes number Votes %
Group Solvency With Nordea Bank AB (publ) as its associated company as of 31 December 2009 Sampo Group became a financial and insurance conglomerate according to the Act on the Supervision of Financial and Insurance Conglomerates (2004/699).
Group solvency has in 2010 been calculated according to Chapter 3 of the Act on the Supervision of Financial and Insurance Conglomerates (2004/699). The Act is based on Directive 2002/87/EC of the European Parliament and of the Council on the supplementary supervision of credit institutions, insurance undertakings and investment.
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.
The economic capital tied up in Group's operations on 31 December 2010 was EUR 4,281 million (3,783) and adjusted solvency capital was EUR 8,521 million (7,077).
Board of Directors' Report Events after the End of the Reporting Year
Nordea's contribution to the Group's profit is expected to be significant.
Mandatum Life's profitability is expected to remain good although it is highly dependent on capital market developments.
The main market risks of Sampo Group during 2010 were equity risk, interest rate risk and credit risk. Equity risk arises from the Group's equity portfolio amounting to EUR 3.4 billion (2.4). Interest rate risk is related to the Group's fixed income investments and insurance liabilities. In the short run, rising interest rates would decrease the valuation of fixed income assets. However, over a long period the risk that interest rates fall and remain at a low level is economically more remarkable, because Group´s liabilities have as an average longer duration than assets. Fixed income investments also expose the Group to credit risks, the significance of which has increased during the year. The amount of the Group's fixed income investments increased to EUR 14.2 billion (13.2) during 2010.
Dividend Proposal On 11 February 2010 the Board adopted a new dividend policy. According to the policy total annual dividends paid will be higher than 50 per cent of Group's net profit for the year (excluding extraordinary items). In addition share buy-backs can be used to complement the cash dividend.
The parent company's distributable capital and reserves totaled EUR 6,597,907,788.86, of which profit for the financial year was EUR 710,467,413.51.
The dividend will be paid to shareholders registered in the Register of Shareholders held by Euroclear Finland Ltd as at the record date of 19 April 2011. The Board proposes that the dividend be paid on 28 April 2011.
Return on assets (at fair values) % 10,0 18,6 -7,4 11,5 4.0
Loss ratio excl. unwinding of discount 3) % 75,6 74,6 74,4 73,4 72.5
Options diluted earnings per share EUR - - - - 1,69
Capital and reserves per share EUR 15.83 13,56 8,25 13,47 9,18
Adjusted number of shares at 31 Dec. 6) 1,000 561,282 561,282 561,372 574,209 562,791
Share trading volume during accounting period 1,000 564,338 452,367 650,816 750,748 592,839
¹) Sampo plc's sales gain (EURm 2,830) arising from the disposal of the share stock of Sampo Bank plc to Danske Bank A/S is included in the Group ke gures for the year 2007. The comparison average numbers of sta etween the year 2006 include the average sta umber of the Banking and investment services (discontinued operations).
2) On 31 Dec. 2009 Nordea was consolidated as an associate to Sampo and Sampo becam nancial and insurance conglomerate, in accordance with the Act on Supervision on Financial and Insurance Conglomerates (2004/699). In 2010 and 2009, the group solvency was calculated according to Chapter 3. In 2007 and 2008 the group solvency was based on adjusted solvency calculations for insurance groups according to the Decree of the Ministry of Socia airs and Health (1106/2000). The adjusted solvency wass determined on the basis of the Grou nancial statements as permitted by the Financial Supervisory Authority (former Insurance Supervisory Authority). In 2006, the solvency was calculated according to the consolidation method de ned in Chapter 3 of the Act on the Supervision of Financial and Insurance Conglomerates.
6) In calculating the per share ke gures, the number of shares used at the balance sheet dateand as the average number of shares was 561,282,390.
In calculating the ke gures the tax corresponding to the result for the accounting period has been taken into account. The valuation di erences, adjusted with deferred tax liability, on investment property and held-to-maturity debt securities have been taken into account in return on assets, return on equity, equity/assets ratio and net asset value per share. Additionally, other comprehensive income have been taken into account in return on assets and return on equity. In net asset value per share, the Group valuation di erence on associate Nordea has also been taken into account.
Calculation of the Key Figures The key figures have been calculated in accordance with the decree issued by the Ministry of Finance and the specifying regulations and instructions of the Financial Supervisory Authority. The Group solvency has been calculated according to the consolidation method defined in Chapter 3 of the Act on the Supervision of Financial and Insurance Conglomerates.
Property & casualty insurance profit before taxes + life insurance profit before taxes + holding business profit before taxes + Group elimination items with result impact
+ insurance premiums written + net income from investments + other operating income - claims incurred - change in liabilities for investment and insurance contracts - staff costs - other operating expenses - finance costs ± share of associates' profit/lo
+ net income from investments + other operating income - staff costs - other operating expenses - finance costs ± share of associates' profit/loss
+ total comprehensive income + change in valuation differences on investments less deferred tax
+ total equity + valuation differences on investments less deferred tax
+ total equity + sectoral items - intangible assets and sectoral deductibles own funds, total - minimum requirements for own funds, total group solvency
+ operating expenses before change in deferred acquisition costs + claims settlement expenses expense charges
Earnings per share, incl. change in fair value reserve total comprehensive income for the financial period attributable to the parent company's equity holders _________________________________________________________________________________________ adjusted average number of shares
Sampo plc also aims to ensure that the activities of the subsidiaries do not lead to unwanted risk concentrations. Thus, the concentrations are first pro-actively prevented by careful division of risk-taking between subsidiaries, and the rest of the concentrations are monitored and the risk profiles are changed if needed.
As a pan-Nordic insurance group If P&C underwrites policies that cover various risks of individuals and corporations on a geographically diverse area. If P&C mainly underwrites insurance risks in the Nordic and Baltic countries, as well as policies for Nordic clients with operations outside the Nordic countries. The business written is well-diversified over insurance classes, client segments and geographical areas. Mandatum Life operates in Finland and Baltic countries and offers savings insurance and pension policies as well as policies covering only insurance risks.
If P&C and Mandatum Life are exposed to various risks, which are selected carefully and priced reflecting the risks. Reinsurance is used to handle low frequency, but high impact events. A critical success factor is also the companies´ ability to maximise investment returns while taking into account all investment risks as well as the features of technical provisions, solvency, regulatory asset coverage rules and rating requirements. The core competence in Sampo Group's businesses is the pricing of risks and the proper management of the arising risk exposures.
Sampo Group's main risks are illustrated in figure "Classification of risks in Sampo Group". The risk classification is based on the major risk factors that affect Sampo Group. Moreover, risks such as ALM risk, concentration risk and reputation risk are by their nature linked to various risk factors.
Premium risk is the risk that the claims cost for future claims exceeds the expected level. This could be due to e.g. inadequate pricing, risk concentration, improper reinsurance coverage or due to unexpected deviations in the frequency of claims (i.e. the number of claims incurred during the period being higher than expected) and / or in the size of claims (i.e. claims when they occur being larger than anticipated).
Reserve risk is the risk that technical provisions are not sufficient to cover the cost for already incurred claims and results from fluctuations in the timing and amount of claim settlements.
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.
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. Market values change together with underlying tradable market risk variables of which the following ones are currently the most important for Sampo Group: interest rates, inflation, credit spreads, foreign exchange rates, share prices and their volatilities.
Business risk is the risk of losses due to changes in the competitive environment or internal flexibility. Unexpected changes in general business environment can cause bigger than expected fluctuations in financial results. Such changes include the general economic development, changes in the institutional environment, technological innovations and competitive factors such as new competitors and changes in margins and volumes.
Compliance risk is the risk of legal or regulatory sanctions, material financial loss or loss of reputation an undertaking may suffer as a result of not complying with laws, regulations and administrative provisions as applicable to its activities. A compliance risk is often the consequence of a legal or operational risk.
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.
An illustrative picture of the most significant risks in Sampo Group is presented in figure "Key risks in Sampo Group". The most significant risks when Nordea´s figures are included are credit risk, market risk, insurance risk and operational risk. The figure is for illustrative purposes only.
The most significant risk arising from the operations of the insurance subsidiaries is market risk. On the Group level, the most significant risks are market risk and credit risk. This is due to Sampo plc´s holding in Nordea whose business activities in banking results in credit risk being the key risk.
Risk Management Process The core competences of Sampo Group´s business are skillful pricing of risks, selection of risks and proper risk management. A high quality risk management process is a necessary prerequisite for successful business.
• to ensure the overall e ciency, security and continuity of operations.
To meet these objectives Sampo Group's risk management process includes following tasks: Risk Management Risk Management Process
In Sampo Group, the common Risk Management Principles are followed when organizing the activities in general and risk management in particular.
The roles and responsibilities of different governing bodies in Sampo Group and individual subsidiaries are described in more detail in figure "Risk management governance framework in Sampo Group".
Group Risk Governance The Board of Directors of Sampo plc is responsible for ensuring that the Group's risks are properly managed and controlled.
The Group Chief Risk Officer (CRO) is responsible for the appropriateness of risk management on Sampo Group level. The CRO´s responsibility is to monitor Sampo Group's aggregated risk exposure as a whole and coordinate and monitor company specific and group level risk management.
The Boards of Directors in each insurance subsidiary have the overall responsibility for the risk management process and they are the ultimate decision making bodies at If P&C and Mandatum Life respectively. The Boards ensure that the management and monitoring of the risks are satisfactory, and approves the risk management plan. The Boards of Directors of If P&C and Mandatum Life appoint the individual risk management committees within each legal entity and are also responsible for identifying needs for changing policies, guidelines and instructions related to risk management.
The separate risk committees in If P&C which report to the IRCC are Underwriting Committee (UWC), Actuarial Committee (AC), Reinsurance Committee (RC), and Operational Risk Committee (ORC). UWC is responsible for maintaining the Underwriting Policy and for reporting all deviations from the Underwriting Policy to IRCC. AC monitors the technical provisions and technical calculations and reports on reserve risk to the IRCC on a quarterly basis. RC is responsible for approving deviations from the Reinsurance Security Policy and for reporting all deviations to IRCC. ORC considers various policies and recommendations concerning operational risk management within If P&C and monitors deviations from these policies. Moreover, the committee is responsible for follow-up of operational risks identified in the operational risk assessment process.
The Managing Director has the overall responsibility for the risk management according to Board of Directors' instructions.
Operational Risk Committee (ORC) analyses and handles operational risks, e.g. in relation to new products and services, changes in processes and risks as well as realised operational risk incidents. These are reported to the Risk Management Committee and to the Board of Directors quarterly. ORC is also responsible for maintaining and updating the continuity and preparedness plans.
The Baltic subsidiary has its own risk management system. All major incidents are also reported to Mandatum Life's Risk Management Committee.
The current capital adequacy is assessed internally by comparing the amount of available capital to the amount of capital required to bear the risks arising from the current business activities. Internally, the assessment of capital has three phases. First, economic capital is used to assess the capital required by the current activities. Second, the less quantifiable, low probability and high impact risks as well as uncertainties related to the business environment are considered and this may affect Sampo Group´s understanding of capital need. Thirdly, when assessing the capital available, expected profitability is taken into account in addition to other capital components, because earnings are seen as the first buffer against potential losses.
Capital Planning When assessing the future capital requirement, the views of the management and different stakeholders - regulators and supervisors, rating agencies, debt investors, policyholders and shareholders - are considered. Managements' views and plans regarding the future development of the business and investment activities are used when analysing the future capital requirement. Within the planning process it is considered how changes either in business volumes and business mix or changes in existing risk factors may affect profitability, risks and capital needs. The results of these considerations are reflected in risk management and capitalization recommendations to the business management and the Board of Directors. The recommendations are also affected by the external stakeholders' views on the capitalization of Sampo Group.
Capital Management Actions A prudent assessment of capital adequacy and a careful capital planning are important phases when creating an understanding of the actions that maintain a proper balance between capital and risks. In Sampo Group, the proactive management of risks and capitalization are seen as the most important phase in the risk and capital management process. Risk limits and decision making authorizations are set up in a way that they, together with profitability targets, facilitate business and investment units to take well considered risks. The limits reflect the capital adequacy targets and risk appetite in general.
P&C Insurance Risks P&C insurance activities are subject to If P&C´s main underwriting principles; the company should always have the necessary knowledge, expertise and data to understand and quantify the risks.
P&C insurance risks can be split into three components: • Premium risk is the risk that the claims cost for future claims exceeds the expected level. This could be due to e.g. inadequate pricing, risk concentration, improper reinsurance coverage or due to unexpected deviations in the frequency of claims (i.e. the number of claims incurred during the period being higher than expected) and / or in the size of claims (i.e. claims when they occur being larger than anticipated).
• Reserve risk is the risk that technical provisions are not sufficient to cover the cost for already incurred claims and results from fluctuations in the timing and amount of claim settlements.
The UW Policy is supplemented with detailed underwriting guidelines which outline how to conduct underwriting within each business area. These guidelines cover, among other things, tariff and rating models for pricing, guidelines in respect of standard conditions and manuscript wordings, as well as underwriting authorities, underwriting limits such as sums insured and lists risks that are not acceptable to undertake.
Over 80 per cent of the premium income is related to the business areas Private and Commercial which are characterised by a large number of small claims and consequently a lower degree of random variation.
Despite the large degree of diversification, underwriting risk concentrations may still arise through for example exposures to natural disasters, such as winter storms and floods. The most exposed geographical areas to such disasters are Denmark, Norway and Sweden. In addition, single large claims can potentially have a significant impact on the result. The risk of severe outcomes is mitigated by purchasing reinsurance. Since 2003, a Nordic-wide reinsurance program has been in place in If P&C. In 2010 the retentions levels for different classes of insurance were between SEK 100 million (approximately EUR 11.2 million) and SEK 200 million (approximately EUR 22.3 million) per risk and SEK 200 million per event.
Reserve Risk Defining the technical provisions in P&C insurance always includes an element of uncertainty as the final number and sizes of incurred claims are not known. Claims are usually reported to If P&C with some delay and in many cases it takes additional time to determine the final indemnity.
Technical provisions per product and country, If P&C, 31 Dec 2010
In product lines such as MTPL and WC, legislation and hence the product features and risks, differ significantly between countries. For instance, some of the Finnish, Swedish and Danish provisions for these lines include annuities which are sensitive to changes in mortality assumptions and discount rates. The proportion of the technical provisions related to MTPL and WC is 59 per cent.
The technical provisions for many lines of business are sensitive to changes in inflation. Inflation risk refers to the risk that technical provisions have to be increased due to higher inflation than originally expected. The anticipated inflation trend is observed in all provisions, but is of highest importance for claims settled over a long period of time. For long-tailed business, such as MTPL and WC, assessments are made regarding the expected claims inflation. These are based on external assessments of the inflation trend (e.g. consumer price index and wage index) combined with If P&C's own evaluation of cost increases for various types of claims. Inflation risk in the technical provisions is taken into account in the investment strategy of If P&C. The sensitivity towards inflation differs between countries due to the different national rules.
Actuarial estimates are based on historical claims data and any other information that is available at the closing date. Factors that are monitored are e.g. loss development trends, the level of unpaid claims, changes in legislation, legal cases and economic conditions. The methods used in calculating technical provisions include the Chain Ladder and the Bornhuetter-Fergusson methods combined with projections of number of claims and average claim costs.
Sensitivity test of underwriting result, If P&C, 31 Dec 2010 and 31 Dec 2009
Life Insurance Risks Insurance risks in the life insurance business encompass biometric risks, discount rate risk in technical provisions and other life insurance risks, that is, surrender risk, lapse risk and expense risk.
This section presents the development of these life insurance risks during 2010. In addition, the life insurance risk management principles are presented.
The annual longevity risk result and longevity trend is analysed regularly. The longevity risk result of group pension for the year 2010 was EUR 3.9 million, but last two years' total longevity result is slightly negative. The assumed life expectancy related to the technical provisions for group pensions was revised in 2002 and additional changes were made 2007.
Mortality risk result is positive and the mortality trend has been favourable to the company. Possible pandemics are seen as the most signi cant risk that could adversely a ect the mortality risk result.
The insurance risk result of other biometric risks has been pro table in total, although the di erent risk results di er considerably. In a longer term, disability and morbidity risks are mitigated by the company's right to raise insurance premiums for existing policies in case the claims experience deteriorates.
In addition to the biometric risks, Mandatum Life is exposed to other risks such as discount rate risk, lapse risk and surrender risk.
Discount Rate Risk in Technical Provisions Discount rate risk in technical provisions is the main risk a ecting the adequacy of technical provisions. The guaranteed interest rate in policies i xed for the whole policy period. Thus, if market interest rates and expected investment returns fall, technical provisions may have to be supplemented.
In most with-pro t policies, the guaranteed interest rate is 3.5 per cent. In individual policies sold in Finland before 1999, the guaranteed interest rate is 4.5 per cent, which is also the statutory maximum discount rate of these policies. With respect to these policies, the maximum discount rate used when discounting technical provisions has been decreased to 3.5 per cent. As a result, technical provisions have been supplemented with EUR 86 million (EUR 95 million in year 2009). In addition, EUR 61 million has been reserved to lower the interest rate of with-pro t liabilities to 2.5 per cent in 2011 and to 3.0 per cent in 2012. So due to relatively low market interest rates, Mandatum Life has increased liabilities in total by EUR 147 million.
Expected maturity of insurance and investment contracts before reinsurance, Mandatum Life, 31 Dec 2010
With-pro t and others total 8.6 1,129 868 1,644 1,156 833 582 946
Reserve for decreased discount rate 3.7 77 17 25 14 7 3 4
Subsidiary SE Sampo Life Insurance Baltic 35 15 41 29 12 19 33
Surrender and lapse risks are taken into account when the company is analysing its ALM risk. This is described in more detail in the Market risks section.
The company is also exposed to expense risk because expense charges may not be enough to cover the realised expenses.
The asset and liability management process applied in Sampo Group is illustrated in the figure "Asset and liability management process in Sampo Group".
environment. Hence, from an accounting perspective, the company is mainly exposed to changes in expected future claims inflation and in the regulatory discount rate. The economic value of these reserves, i.e. the present value of future claims payments, is however exposed to changes in market interest rates.
Asset and Liability Management in Mandatum Life In Mandatum Life, the approach to ALM risk management is also based on an analysis of technical provisions. A common feature for all with-profit technical provisions is the guaranteed rate and bonuses based on principle of fairness. The cash flows of Mandatum Life´s technical provisions are relatively well predictable because in most of the company's with-profit products, surrenders and extra-investments are not possible. The company's estimates for claims costs do not contain any significant element of inflation risk and thus the inflation risk in Mandatum Life is mainly related to administrative expenses.
Mandatum Life has prepared for low interest rates on the liability side by e.g. reducing the minimum guaranteed interest rate in new contracts and by supplementing the technical provisions by applying a lower discount rate. In addition, existing contracts have been changed to accommodate improved management of reinvestment risk.
The long-term target for investments is to provide sufficient return to cover the guaranteed interest rate plus bonuses based on principle of fairness as well as the shareholder's return requirement with acceptable level of risk. The company manages its investment portfolio actively.
Sampo plc's Chief Investment Officer is responsible for all investments within the limitations of the companies' Investment Policies. The insurance subsidiaries and the parent company have a common Group-wide infrastructure for investment management as well as performance and risk reporting.
Market risk control is separated from portfolio management activities. Middle-office functions measure risks and performance and control limits on a daily basis. Market risks and limits are controlled by the ICC in If P&C and ALCO in Mandatum Life at least on a monthly basis. These committees are responsible for the control of investment activities within the respective legal entity. The aggregated market risks and concentrations on Sampo Group level are controlled by the Group's Audit Committee at least quarterly.
The composition of the investment portfolios is reported on the basis of fair values of investments. These fair values are determined either on the basis of direct market quotes or by using various valuation models. More information on the valuation methods of the investment assets is presented in note 17 in the financial statements.
Sampo plc's own market risks are limited. Interest rate risk arising from the company's gross debt and the liquidity reserve invested into short-term money market securities is the company's most significant market risk together with the refinancing risk related to gross debt. Most of Sampo plc's debt is tied to short-term reference rates. This mitigates the Group-level interest rate risk because, while lower interest rates would reduce subsidiaries' investment returns in the long-term, the interest expense in Sampo plc would be lower.
Mandatum Life and If P&C have somewhat differing investment policies, because Mandatum Life is able to aim for higher returns than If P&C due to the different structures of technical provisions. Figures "Annual investment returns at fair values, If P&C, 2001-2010" and "Annual investment returns at fair values, Mandatum Life, 2001-2010" present the historical development of investment returns. Mandatum Life has had higher average return with higher volatility.
The total average investment return of the Group's combined investment portfolios (including Sampo plc) in 2010 was 8.7 per cent (13.5 per cent in 2009).
In order to examine potential concentrations and risks on a more detailed level a more comprehensive breakdown of the composition of investment assets is shown in the 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,
Investment allocation according to asset classes, sectors an xed income investments according to rating, If
Fixed Income Investments Table "Fixed income investments by type of instrument excluding derivatives, If P&C, Mandatum Life and Sampo Group , 31 Dec 2010" presents the amount and average maturity o xed income investments of Sampo Group by type of instrument. Sampo Group has a considerable amount of credit risk investments and is exposed to credit spread risk that is measured and managed as a part of the investment portfolio management. The limit setting is described in detail in the Credit risks section.
The average maturity o xed income investments that a ects the size of credit risk was 2.9 years in If P&C and 3.5 years in Mandatum Life. When it comes to interest rate sensitivity, the average duration o xed income investments including derivatives in If P&C was 1.7 years and in Mandatum Life 2.7 years.
Investment allocation according to asset classes, sectors an xed income investments according to rating, Sampo Group, 31 Dec 2010
The sector allocation of direct equity investments in Sampo Group is shown in table "Investment allocation according to asset classes, sectors and fixed income investments according to rating, Sampo Group, 31 Dec 2010". The largest sectors are capital goods, consumer products, insurance due to the Topdanmark holding and basic industry. Equity investments made through investment funds accounted for 43 per cent of the entire equity portfolio.
Sampo Group's largest equity holdings are disclosed in the Notes to the Financial Statements (note 40).
Currency risks Currency risk in general can be divided into transaction risk and translation risk. Transaction risk refers to the currency risk arising from contractual cash flows related to the insurance or investment operations or from hedges related to these cash flows. Translation risk refers to the currency risk that arises when consolidating the financial statements of subsidiaries that have a different base currency than the parent company.
In Sampo Group, the open transaction risk positions are considered and measured separately. The net position in each currency is the net of assets, liabilities and foreign exchange transactions denominated in the particular currency.
If P&C writes insurance policies that are mostly denominated in Scandinavian currencies and in euro. The currency transaction risk is reduced by matching technical provisions with investments in the corresponding currencies or by using derivatives. The open currency position is actively managed to enhance returns.
Base currency: SEK EUR USD JPY GBP SEK NOK CHF DKK EEK LTL LVL Other Net total
Base currency: EUR EUR USD JPY GBP SEK NOK CHF DKK EEK LTL LVL Other Net total
Sampo plc´s transaction risk position is related to SEK-denominated dividends paid by If P&C and to debt instruments issued in other currencies than euro.
Real-estate, private equity and hedge fund investments If P&C and especially Mandatum Life have real estate, private equity and hedge fund investments. The Investment Policies set limits for maximum allocations into these markets and products. On 31 December 2010, the combined share of the above mentioned investments was 4.1 per cent of the total investment portfolio. In If P&C the proportion was 0.9 per cent and in Mandatum Life it was 10.5 per cent.
Private equity and hedge funds are managed by external asset managers. The private equity portfolio is diversified both according to fund type and geographical areas. Hedge fund investments are diversified between underlying asset classes, fund types and investment styles. The real estate portfolio in Mandatum Life is managed by Sampo Group's real estate management unit. The portfolio includes direct investments in properties as well as indirect investments in real estate funds and shares and debt instruments in real estate companies. The main risks related to property investments are limited by diversifying holdings both geographically and by type of property.
Credit Risks Credit risks in Sampo Group mainly consist of the issuer risk related to investment assets, and counterparty risk related to derivatives and reinsurance transactions.
The essential difference in terms of risk is that in the case of issuer risk, the entire market value of the instrument is at risk, whereas in the case of counterparty risk, it is only the possible positive market value of the contract that is at risk. Credit risk related to reinsurers arises through reinsurance receivables and through the reinsurers' portion of outstanding claims. Credit risk related to reinsurance mainly concerns If P&C, as the use of reinsurance in Mandatum Life is relatively limited.
In addition, credit risk arises from receivables from policyholders and other receivables related to commercial transactions. Credit risk exposure towards policyholders is very limited, because non-payment of premiums generally results in cancellation of the insurance policies. Also the credit risk exposures arising from other receivables related to commercial transactions are minor in Sampo Group.
Before an investment in a new security or a transaction with a new counterparty, the credit standing of the issuer or counterparty is thoroughly assessed. Credit ratings mainly from Standard & Poor's, Moody's and Fitch are used to support the assessment of the creditworthiness of issuers and counterparties. The portfolio development and the counterparties' credit standings are monitored continuously.
In order to limit and control credit risk associated with reinsurance, If P&C has a Reinsurance Security Policy, which sets requirements for the reinsurers' minimum credit ratings and the maximum exposure to individual reinsurers. Similar to credit risk in investment assets, credit ratings from rating agencies are used to support the assessment of the creditworthiness of reinsurance companies.
The amount of ceded treaty and facultative premiums was EUR 62 million. Of this amount 99.9% was related to reinsurance counterparties with a credit rating of A- or higher.
Reinsurance receivables and reinsurers' portion of outstanding claims per rating category, If P&C, 31 Dec 2010 and 31 Dec 2009
The proportion of reinsurance recoverables related to the ten largest individual reinsurance counterparties amounts to EUR 344 million, which is 68.8 per cent of total recoverables. The largest individual reinsurance counterparty is Munich Re (AA-rating) which accounts for 30.5 per cent of total recoverables.
In Mandatum Life, the amount of reinsurance agreements is small and the credit risk related to reinsurance counterparties in Mandatum Life is immaterial. At inception of reinsurance, the accepted credit risk of the reinsurer is considered and the credit risks of reinsurance assets are followed.
Liquidity Risks Liquidity risk is the risk that insurance undertakings are unable to conduct their regular business activities in accordance with the de ned strategy, or in extreme cases, are unable to settle thei nancial obligations when they fall due. Major sources of liquidity risk in Sampo Group are market illiquidity risk of investments, non-renewal of insurance policies and re nancing risk of debt. Also the availability and price of re nance and nancial derivatives a ect the company´s ability to conduct regular business.
Liquidity risk is relatively immaterial in Sampo Group's businesses. The market illiquidity risk is rather limited because a major share of the investment assets are in readily marketable investment-grade securities and in short-term money market instruments.
Sampo Group has a relatively low amount o nancial liabilities and thus the Group's respective re nancing risk is relatively minor.
In Sampo Group, liquidity risks are managed by the legal entities, which are responsible for liquidity planning. Liquidity risk is monitored based on the expected cas ows resulting from assets, liabilities and other business. At year-end, the liquidity position in each legal entity was in accordance with the internal requirements.
The maturities of technical provisions an nancial assets and liabilities are presented in table "Cas ows according to contractual maturity, P&C insurance, Life insurance and Holding, 31 Dec 2010". The table shows th nancing requirements resulting from expected cash in ows and out ows arising fro nancial assets and liabilities as well as technical provisions.
Financial assets 5,902 2,357 of which interest rate swaps of which interest rate swaps
Holding of which interest rate swaps of which interest rate swaps
In the investment assets of life insurance, the investments of the Baltic subsidiary are included in the carrying amount but excluded from the cas ows.
Operational Risks 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.
Operational risks may realize as a consequence of: • internal misconduct; • external misconduct; • insufficient human resources management; • insufficiencies in operating policies as far as customers, products or business activities are concerned; • damage to physical property; • interruption of activities and system failures; and
Operational Risk Management in P&C Insurance The continuity of operational risk management is secured through the Operational Risk Committee (ORC). ORC handles policies and recommendations concerning operational risk management within If P&C as well as contingency plans, follow-up of risks identified in the Operational Risk Assessment (ORA) process, occurred incidents and other reports related to operational risks.
Identification and Management In If P&C, operational risk is categorized as follows: process execution failures, business disruptions and system failures, customer, product and business practices, employment practices, and internal and external fraud.
• Self-assessment process is used to map and evaluate the major operational risks and their probabilities and significance, including an evaluation of internal controls and sufficiency of instructions. Self-assessment is conducted annually.
The most significant operational risks for Mandatum Life identified in the operational risk self-assessment process include the following: changes in the external operating environment, IT, especially ageing IT systems, manual phases in processes, loss of key personnel, missselling and false information to customers.
In order to limit operational risks, Mandatum Life has approved a number of policies including e.g. Security Policies, Continuity and Preparedness Plans, Outsourcing Policy, Complaints Handling Policy and a number of other policies related to ongoing operative activities. Deviations from different policies are followed up independently in each business unit and reported to ORC.
Internal control system in processes prevents negative incidents. However, would there be an operational risk event or a near miss, this must be reported to ORC.
Group Level Risks As a general principle, the subsidiary companies are managed independently from each other. However, it has been deemed pertinent to asses certain risk issues also on Group level, i.e. concentration risks, liquidity management, capitalization and group structure.
On the subsidiary level, investment risk concentrations are monitored and controlled by the ICC in If P&C and ALCO in Mandatum Life, which have been established as parties independent from investment operations. Total group exposures are monitored and controlled by Sampo's Chief Investment O cer, Sampo's Chief Risk O cer and Sampo's Audit Committee.
The largest market and credit risk concentrations related to individual counterparties are presented in table "Concentration of market and credit risks in individual counterparties by asset class, Sampo Group, 31 Dec 2010".
The concentrations by asset class, ratings and industry sectors are shown in tables "Investment allocation according to asset classes, sectors an xed income investments according to rating, If P&C, 31 Dec 2010", "Investment allocation according to asset classes, sectors an xed income investments according to rating, Mandatum Life, 31 Dec 2010" and "Investment allocation according to asset classes, sectors and xed income investments according to rating, Sampo Group, 31 Dec 2010". The most signi cant concentrations on Sampo Group level are in the Nordi nancials within which the largest positions relate to short-term instruments and covered bonds.
Furthermore, concentrations of direct equity as well as high-yield and non-rate xed income investments are broken down in tables "Ten largest direct equity investments, Sampo Group, 31 Dec 2010" and "Ten largest direct high-yield and non-rate xed income investments, Sampo Group, 31 Dec 2010".
Concentration of market and credit risks in individual counterparties by asset class, Sampo Group, 31 Dec 2010
As discussed above, direct concentration risks may arise due to large exposures in investment assets. A more general group level concentration risk arises when the group companies' pro tability and/or capital positions react similarly to general economic development, i.e. the correlation between general economic development and the pro tability of di erent subsidiaries is more or less analogous. This type of concentration risk can be analyzed indirectly based on reported pro ts. From that perspective, especially Nordea's, which is Sampo plc's associate company, result is creating clear diversi cation bene ts, in particular when analyzed vis á vis If P&C. The historical correlation between If P&C´s and Nordea's quarterly reported pro ts since 2005 is almost zero.
Liquidity risk is managed at company level, and in normal course of business, subsidiary companies do not invest in Sampo plc´s debt instruments, and very seldom the companies sell their assets to each other. However, a general prohibition to intra-group asset transactions has not been deemed necessary and, thus, subsidiaries are allowed to invest in the parent company's debt instruments and sell assets to each other at market prices, especially when this is reasoned by business opportunities. Thus, during possible market stresses these options are available to certain extent as well.
Largest direct high-yield and non-rate xed income investments Rating Total fair value, EURm
Risks and the respective capital requirements in Sampo Group are assessed internally, as well as according to the methods defined by the regulators and rating agencies. The amount of adjusted solvency capital is compared to economic capital and regulatory solvency capital is compared to the regulatory capital requirement. Furthermore, rating agency capital targets for different ratings are compared to the respective rating agency measures of available capital.
Updates and refinements are frequently done to the models used for calculating the economic capital. Thus, the economic capital figures may not be fully comparable between years.
Nordea is included in the calculation of Sampo Group´s economic capital by adding Sampo Group's share of the economic capital reported by Nordea, converted into the 99.5 % confidence level. At year end, the risks arising from Nordea constitute the largest single component in Sampo Group´s economic capital. The correlations between risk types and business areas, and thereby indirectly the amount of diversification, are defined by Sampo on a Sampo Group level.
The amount of adjusted solvency capital on the Group level increased during the year to EUR 8,521 million (EUR 7,076 million in 2009) due to a good investment return and insurance result, and to some extent due to an increase in the liability side adjustment. The increase in the liability side adjustment is mainly due to a lower risk margin, as the QIS5 methodology, where diversification is accounted for between lines of business, is now applied. Thus, the adjusted solvency capital exceeded the economic capital by EUR 4,240 million (EUR 3,294 million in 2009).
Figure "Breakdown of economic capital by risk type, Sampo Group, 31 Dec 2010" presents the split of economic capital by the different risks.
related to the insurance operations has been moved from insurance risk to market risk, which explains the decrease in insurance risk now being EUR 583 million (EUR 683 million in the end of 2009). The insurance risk is, however, expected to increase going forward, as the correlations used when calculating the insurance risk most likely has to be increased for regulatory approval of the internal model.
Share of Nordea's capital not included in Group capital 915 889
Risk Management Outlook Sampo Group continuously develops its risk management framework and systems. Hence, as in 2010, also in 2011 the Group's and the subsidiaries´ economic capital framework, additional stress tests and scenario analysis methods will be further developed.
During 2010 If P&C and Mandatum Life have made extensive efforts in monitoring, evaluating the effects and commenting to the authorities and industry interest groups on the draft Solvency II implementing measures. The work will continue during 2011.
Financial Statements Statement of Changes in Equity in equity 19 19
Equity at 31 *) The total comprehensive income includes also the share of the associate Nordea's other comprehensive income, in accordance with the Group's share holding. As Nordea's other comprehensive income comprise mainly the currency hedging of net investments and exchange di erences, the Group's share of Nordea's other comprehensive income EURm 48 is also included in the Group's exchange di erences in the statement of changes in equity.
The amount included in the translation, available-for-sale and cas ow hedge reserves represent other comprehensive income for each component, net of tax.
Dividend income received 64 123 *) Investments include investment propert nancial assets and investments related to unit-linked insurance contracts.
The items of the statement of cas ows cannot be directly concluded from the balance sheets due to e.g. exchange rate di erences, and acquisitions and disposals of subsidiaries during the period.
Summary of Significant Accounting Policies Sampo Group has prepared the consolidated financial statements for 2010 in compliance with the International Financial Reporting Standards (IFRSs). In preparing the financial statements, Sampo has applied all the standards and interpretations relating to its business, adopted by the commission of the EU and effective at 31 December, 2010.
During the financial year 2010 Sampo adopted the following new or amended standards or interpretations relating to its business.
IFRIC 17 Distributions of Non-cash Assets to Owners clarified the recognition and measurement of assets other than cash paid in dividends. The adoption of the interpretation had no effect on Sampo's financial statements reporting.
In preparing the notes to the consolidated financial statements, attention has also been paid to the Finnish accounting and company legislation and applicable regulatory requirements. Some of the risk management disclosures are presented in the Group's financial statements' Risk Management section.
The acquisition method of accounting is used for the purchase of subsidiaries. The cost of an acquisition is allocated to the identifiable assets, liabilities and contingent liabilities, which are measured at the fair value of the date of the acquisition. Possible non-controlling interest of the acquired entity is measured either at fair value or at proportionate interest in the acquiree's net assets. The acquisitionspecific choice affects both the amount of recognised goodwill and non-controlling interest. The excess of the aggregate of consideration transferred, non-controlling interest and possibly previously held equity interest in the acquiree, over the Group's share of the fair value of the identifiable net assets acquired, is recognised as goodwill.
Exchange differences that existed at the Group's IFRS transition date, 1 January 2004, are deemed to be zero, in accordance with the exemption permitted by IFRS 1.
The following exchange rates have been applied in the consolidated financial statements: Currency Balance sheet date 1 euro (EUR) = Average exchange rate 1 euro (EUR) =
Segment reporting The Group's segmentation is based on business areas whose risks and performance bases as well as regulatory environment differ from each other. The control and management of business and management reporting is organised in accordance with the business segments. The Group's business segments are P&C insurance, life insurance and holding business.
The costs of acquiring new and renewed insurance business are treated as deferred acquisition costs in the P&C insurance. In the life insurance business the acquisition costs are treated as fee and commission expense under ‘Other operating expenses'.
The change in the provisions for unearned premiums is presented as an expense under 'Change in insurance and investment contract liabilities'.
Financial assets and liabilities Based on the measurement practice, financial assets and liabilities are classified in the following categories upon the initial recognition: financial assets at fair value through profit or loss, loans and receivables, available-for-sale financial assets, financial liabilities at fair value through profit or loss, and other liabilities.
According to the Group's risk management policy, investments are managed at fair value in order to have the most realistic and real-time picture of investments, and they are reported to the Group key management at fair value. Investments comprise debt and equity securities. They are mainly classified as financial assets available-for-sale.
In the life insurance business, IFRS 4 Insurance Contracts provides that insurance contracts with a discretionary participation feature are measured in accordance with national valuation principles (except for the equalisation reserve) rather than at fair value. These contracts
and investments made to cover shareholders' equity are managed in their entirety and are classified mainly as available-for-sale financial assets.
Loans and receivables comprise non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Group does not intend to sell immediately or in the short term. The category also comprises cash and balances with central banks.
value reserve, taking the tax effect into account. Interest income and dividends are recognised in profit or loss. When the available-for-sale assets are sold, the cumulative change in the fair value is transferred from equity and recognised together with realised gains or losses in profit or loss. The cumulative change in the fair value is also transferred to profit or loss when the assets are impaired and the impairment loss is recognised. Exchange differences due to available-for-sale monetary balance sheet items are always recognised directly in profit or loss.
Other financial liabilities are recognised when the consideration is received and measured to amortised cost, using the effective interest rate method.
If a market for a financial instrument is not active, or the instrument is not quoted, the fair value is established by using generally accepted valuation techniques including recent arm's length market transactions between knowledgeable, willing parties, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models.
When there is objective evidence of impairment of a financial asset carried at amortised cost, the amount of the loss is measured as the difference between the receivable's carrying amount and the present value of estimated future cash flows discounted at the receivable's original effective interest rate. The difference is recognised as an impairment loss in profit or loss. The impairment is assessed individually.
normally assessed to be significant, if the fair value of a listed equity or participation decreases below the average acquisition cost by 20 per cent and prolonged, when the fair value has been lower than the acquisition cost for over 12 months.
The Sampo Group may hedge its operations against interest rate risks, currency risks and price risks through fair value hedging and cash flow hedging. Cash flow hedging is used as a protection against the variability of the future cash flows, while fair value hedging is used to protect against changes in the fair value of recognised assets or liabilities.
Leases of assets in which substantially all the risks and rewards of ownership are transferred to the Group are classified as finance leases. Finance leases are recognised at the lease's inception at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The corresponding obligation is included in ‘Other liabilities' in the balance sheet. The assets acquired under finance leases are amortised or depreciated over the shorter of the asset's useful life and the lease term. Each lease payment is allocated between the liability and the interest expense. The interest expense is amortised over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Leases in which assets are leased out and the Group retains substantially all the risks and rewards of ownership are classified as operating leases. They are included in ‘Investment property' in the balance sheet. They are depreciated over their expected useful lives on a basis consistent with similar owned property, plant and equipment, and the impairment losses are recognised on the same basis as for these items. Rental income on assets held as operating leases is recognised on a straight-line basis over the lease term in profit or loss.
Other than insurance contracts, i.e. contracts where the risk is not transferred, include Captive contracts in which an insurance company underwrites a company's direct business and reinsures the same risk in an insurance company in the same group as the policyholder. There are also contracts in P&C insurance (Reverse Flow Fronting contracts) in which the insurance company grants insurance and then transfers the insurance risk to the final insurer. For both the above types of contract, only the net effect of the contract relationship is recognised in the income statement and balance sheet (instead of the gross treatment, as previously). The prerequisite for net treatment is that the net retention recognised on the contract is zero.
The provision for unearned premiums is, for the most part, calculated on a strictly proportional basis over time (so called pro rata temporis principle). The adequacy of the provision for unearned premiums is tested by calculating a provision for unexpired risks for each company per business area and line of business. If the provisions are judged to be insufficient, the provision for unearned premiums is augmented by recognising a provision for unexpired risks.
The provision for a collective guarantee has been regulated by Finland's Traffic and Accident Insurance Act and has been collected by insurers. Its purpose has been to guarantee the payment of claims to customers in the event that any insurers are put into liquidation or bankruptcy. Previously in the Sampo Group, the provision for a collective guarantee has been recognised in undistributable equity, in accordance with the Framework of the IFRS, until it has become probable that the obligation will be settled. Due to the legislative changes the provision for a collective guarantee was dissolved on 31 Dec. 2010. The funds related to the Workers' compensation were transferred to the pay-as-you-go system where they will be returned to policyholders over the next 3 years.
Mortality assumptions have an essential effect on the amount of liability, particularly in group pension insurance, the liability of which accounts for about 37 per cent of the technical provisions of the Finnish life company. A so-called cohort mortality model is used in calculating the group pension insurance liability since 2002, incorporating the insured person's birth year in addition to his or her age and sex. The cohort mortality model assumes that life expectancy increases by one year over a ten-year period.
Mandatum Life aims at giving a total return before charges and taxes on policyholders' savings in contracts with DPF that is at least the yield of a Finnish government long-term bond. The total return consists of the guaranteed interest rate and bonuses determined annually. Continuity is pursued in the level of bonuses. The aim is to maintain the company's solvency status on such a level that it neither limits the giving of bonuses to policyholders nor the distribution of profit to shareholders. The principle is explained in detail on the company's website.
When the parent company or other Group companies purchase the parent company's equity shares, the consideration paid is deducted from the share capital as treasury shares until they are cancelled. If such shares are subsequently sold or reissued, any consideration received is included in equity.
In 2011, the Group will apply the following new or amended standards and interpretations related to the Group's business, if approved by the EU. If not stated otherwise, the following standards or interpretations or their amendments have already been approved by the EU at the balance sheet date.
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on 1 July 2010 or after) clarifies the accounting by the entity that, after renegotiations, issues equity instruments to its creditor in order to settle all or part of its financial liability. The Group estimates that the interpretation will have no influence on the Group's financial statements reporting.
Depreciation and amortisation by segment are disclosed in notes 11 - 13 and investments in associates in note 14.
Consolidated income statement by business segment for year ended 31 December 2010
Premium revenue ceded to reinsurers on insurance contracts issued -6 -6
¹) The change in unearned premiums is presented in note 4 " The change in insurance and investment liabilities".
Included in gains/losses fro nancial assets available-for-sale is a net gain of EURm -143 (26) transferred from the fair value reserve.
All the income and expenses arising from investments are included in Net income from investments. Gains/losses include realised gains/losses on sales, unrealised and realised changes in fair values and exchange di erences. Unrealised fair value changes fo nancial assets available-for-sale are recorded in other comprehensive income and presented in the fair value reserve in equity.
The e ect of discounting annuities in P&C insurance is disclosed separately. The provision for annuities is calculated in accordance with actuarial principles taking anticipated in ation and mortality into consideration, and discounted to take the anticipated future return on investments into account. To cover the costs for upward adjustment of annuity provisions required for the gradual reversal of such discounting, an anticipated return on investments is added to annuity results.
Change in claims provision for annuities -9 - -9 -15 - -15
Change in claims provision for annuities 3 - 3 -8 0 -8
Pension costs - de ned contribution plans -41 -49 - de ned bene t plans (Note 31) -22 -26
In 2010, item Other for P&C Insurance includes also the e ect of dissolvement of the collective guarantee item EURm 25.
2) Includes other technical income EURm 25 (23) and other technical expenses EURm 24 (22).
Non-cancellable minimum rental - not later than one year 1 1 - later than one year and not later tha ve years 1 0 - later tha ve years - 0
At 31 Dec. 2010, the carrying amount of investments in associates included goodwill EURm 909 (866), including goodwill from the Nordea acquisition EURm 905 (866). The share of loss/pro t for 2009 does not include Nordea, as it was consolidated as an associate only at 31 Dec. 2009.
Nordea is an universal bank with positions within corporate merchant banking as well as retail banking and private banking. With approximately 1,400 branches, call centers in all Nordic countries and an e-bank, Nordea also has a large distribution network for customers in the Nordic and Baltic sea region, including more than 260 branches i ve new European markets, Russia, Poland, Lithuania, Latvia and Estonia.
Financial assets available-for-sale for P&C insurance include impairment losses EURm 179 (170).
Net gains from exchange derivatives designated as fair value hedges amounted to EURm 4 (-9). Net losses from hedged risks in fair value hedges of available for sale financial assets amounted to EURm 3 (9).
At 31 Dec. 2010 he total amount of gains recognised in equity from the changes in the fair values of hedging instruments was EURm 12 (15). These gains are recognised in the income statement at the time when the hedged items affect profit or loss. The table below the periods when the cash flows are expected to occur and when they are expected to affect profit or loss.
EURm Total Up to 1 year 1 - 2 years 2 - 3 years
Tota nancial assets designated as at fair value through p/l 61 50
Financial assets available-for-sale for life insurance include impairment losses EURm 131 (183).
Financial assets available for sale /shares and participations: Listed equity securities include EURm 674 (554) quoted shares. Unlisted equity securities include EURm 551 (359) investments in capital trusts.
The fair value of loans and othe nancial instruments which have no quoted price in active markets is based on discounted cas ows, using quoted market rates. The market’s yield curve is adjusted by other components of the instrument, e.g. by credit risk.
A large majority of Sampo Group' nancial assets are valued at fair value. The valuation is based on either published price quatations or valuation techniques based on market observable inputs, where available. For a limited amount of assets the value needs to be determined using other techniques.
Th nancial instruments measured at fair value have been classi ed into three hierarchy levels in the notes, depending on e.g. if the market for the instrument is active, or if the inputs used in the valuation technique are observable.
Tota nancial liabilities measured at fair value -3 -108 - -111
Interest rate Equity Othe nancial investments shi own shi p 20 % fall in prices 20 % fall in prices
Financial Statements 18 Movements in leve nancial instruments measured at fair value
19 Sensitivity Analysis of Level 3 Financial Instruments Measured at Fair Value
Financial assets designated at fair value through pro t or loss
Tota nancial assets designated at fair value through p/l 131 70
In P&C insurance, EURm 1 of deferred tax asset has not been recognised on unused tax losses and temporary di erences.
24 Tax E ects Relating to Components of Other Comprehensive Income
Financial Statements 24 Tax e ects relating to components of other comprehensive income
As the P&C Insurance is exposed to various exchange rates, comparing the balance sheet data from year to year can be misleading. The strengthening of the Swedish krone had a signi cant e ect on the technical provisions for own account. The exchange e ect on SEK-nominated technical provisions for own account amounted to net decrease of EURm 535 during th nancial year.
Financial liabilities in the segments include liabilities from derivatives, debt securities in issue and other nancial liabilities.
If P&C Insurance Ltd issued in 2001 EURm 200 preferred capital note. The loan pay xed interest rate for th rst ten years an oating rate interest a er that. The loan falls due at the latest March 2021. The loan is listed on the Luxembourg Exchange.
If P&C Insurance Company Ltd issued in 2002 EURm 65 preferred capital note. The loan was wholly subscribed by If Group's owners of that moment. The loan has a maturity of 20 years. It pay xed interest rate for th rst 10 years and the last 10 year oating rate interest. The loan is not listed.
If P&C Insurance issued in June 2005 EURm 150 preferred capital note. The loan is perpetual and pay xed interest rate for th rst ten years. The loan is listed on the Luxembourg Exchange.
The development of e cient administrative and claims-adjustment processes and structural changes in distribution channels result in organisational changes that a ect all business areas. The provision consists mainly of assets reserved for future expenses attributable to previously implemented or planned future organisational changes.
In addition to statutory retirement pension insurance, the Group has certain voluntary de ned bene t plans. The voluntary de ned bene t plans are intra-Group and included in the insurance liabilities of Mandatum Life. The amount is negligible and they have no material impact on the Group pro t or loss or equity.
IAS 19 Employee bene ts is applied in the accounting for the de ned bene t plans from the beginning of the nancial year 2005.
Pension obligations, and the pension cost accrued during th scal period, are calculated using actuarial methods. Earned pension rights are calculated on a straight-line basis during the employment period. The calculation of pension obligations is based on anticipated future pension payments and includes assumptions regarding mortality, employee turnover and salary growth. The nominally calculated liability is discounted to present value using an interest rate based on the current market rate and adjusted to take into account the duration of the company’s pension obligation er deducting plan assets, a net asset or liability is entered in the balance sheet. The net obligation reported in the closing balance pertained to de ned-bene t pension plans for employees in Sweden and Norway. The pension bene ts arising in the other countries covered by the Group’s operations have been classi ed as de ned contribution plans.
The expected rate of return on the plan assets has been calculated based on the following division of investment assets: Debt
Actuarial gains (-) or losses (+) recognised during the nancial year 2 5
Item Other includes e.g. witholding taxes, social expenses related to Workers Compensation insurance policies and employee bene ts, unpaid premium taxes and other accruals.
Item Other includes e.g. liabilities arising from intra-group management fees and unredeemed dividends.
Lease and sublease payments recognised as an expense in the period minimum lease payments -34 -34 sublease payments 0 0
The Group had at the end of 2009 premises a total of 188,589 m2 (180,872) taken as a lessee. The contracts have been made mainly for 3 to 10 years.
The reserve included investments of equity nature and the issue price of shares to an extent it was not recorded in share capital by an express decision. During th nancial year 2009, EURm 1,161 was transferred to the reserve for invested unrestricted equity from the share premium reserve.
Other components of equity include fair value changes o nancial assets available for sale and derivatives used in cas ow hedges, and exchange di erences.
On 13 April, 2010, the Annual General Meeting granted the Board of Directors authorisation to buy back Sampo's shares, valid until the close of the next AGM, nevertheless not more than 18 months after the AGM's decision. The maximum amount of A-shares that 50,000,000 can be bought back is shares in either one or various set. Shares may be acquired otherwise than inproportion to the shareholders' holdings through public trading at a market price prevailing at the time of purchase.
Post employment bene ts include pension bene ts under the Employees’ Pensions Act (TEL) in Finland and voluntary supplementary pension bene ts.
Each plan has three performance periods and bonuses are settled in cash in three installments. In the schemes 2008 I, 2008 II and 2009 I when the bonus is paid, the employee shall buy Sampo's Ashares at th rst possible opportunity, taking into account the provisions on insiders, with 30 per cent of the amount of the bonus a er taxes and other comparable charges, and in schemes 2008 I and 2008 II to keep the shares in his/her possession for one year and in the scheme 2009 I for 2 years. A premature payment of the bonuses may occur in the event of changes in the group structure or in the case of employment termination on speci cally determined bases. The fair value of the incentive schemes is estimated by using the Black-Scholes princing model.
End of performance period II 35 % Q1-2009 Q3-2009 Q1-2010 Q2-2012
End of performance period III 35 % Q3-2009 Q2-2010 Q4-2010 Q2-2013
50 per cent of the amount of the reward eventually payable was based on the price performance of Sampo's A-share, and the other 50 per cent was based on the development of insurance margin (IM). The programme had three performance periods that covered the years 2006 – 2010. Each installment corresponded, at the maximum, to one third of the total amount of shares. The terms of the programme included a limitation according to which the amount of the reward payable was decreased, if Sampo's share price increased by more than 160 per cent during an individual performance period. The shares to be distributed as a reward were partly subject to a two-year lockup.
The cost from the incentive scheme during the reporting period 2010 was EURm 0.4.
There are a number of legal proceedings against the Group companies outstanding on 31 Dec. 2010, arising in the ordinary course of business. The companies estimate it unlikely that any signi cant loss will arise from these proceedings.
Danske Invest Europe Enhanced Index Kasvu Finland 37,941,655 60 db x-trackers DAX ETF Luxemburg 200,000 14
Goldman Sachs Loan Partners I, L.P. Debt EUR Cayman islands 2,082,716 21
Goldman Sachs Loan Partners I, L.P. Debt USD United States 8,848,184 65
Financial Statements 40 Investments in shares and participations other than subsidiaries and associates
Goldman Sachs Asset Management Liquidity Partners 2007 United States 397,734 22
GSAMI China Funds X EUR Accumulation Class Shares United States 700,000 8
In the meeting of 9 Feb. 2011, the Board of Directors decided to propose at the Annual General Meeting on 14 April 2011 a dividend distribution of EUR 1.15 per share, or total EUR 645.474.850, for 2010. The dividends to be paid will be accounted for in the equity in 2011 as a deduction of retained earnings.
Net change in cash and cash equivalents -356 377 *) Investments include both investment property an nancial assets.
Amortisation according to plan during th nancial year 0 0 0 0
Accumulated impairment losses at beginning of year - - 0 of which related to disposals - - - -
Carrying amount at end of year 2,370 2,370 9 Receivables from group companies
Carrying amount at end of 11 Other shares and participations 2010 Fair value changes 2009 Fair value changes
Financial Statements Notes to the Financial Statements 12 Other investment receivables
Debentureloan, nominal value EURm 600, call 21.4.09 annua xed interest 4,625% until April 2009, therea er oating 18 Other liabilities
Over one year but not more tha ve years 3 3
Notes on the sta nd management 24 Sta umbers Average during the year
The retirement age of the Managing Director is 60 years, when the pension benefit is 60% of the pensionable salary.
Notes on shares held 26 Shares held as of 31 Dec, 2010
Opinion on the consolidate nancial statements In our opinion, the consolidate nancial statements give a true and fair view of th nancial positio nancial performance, and cash ows of the group in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU.
Shareholder who is registered on the record date for the Annual General Meeting in the company’s Shareholder Register kept by Euroclear Finland Ltd has the right to participate in the General Meeting. Shareholders whose shares are registered on their personal Finnish bookentry accounts are registered in the company’s Shareholder Register.
Sampo plc's Annual General Meeting will be held on 14 April, 2011 at 2 pm (Finnish time), at the Helsinki Exhibition and Convention Centre, address Messuaukio 1, Helsinki. The listing of persons who have registered for the meeting will commence at 12.30 pm.