Banking Life IF P&C Other Sampo and Insurance Insurance Group Investment Services
2 Chief Executive Officer’s Review 4 Strategy 5 Sampo Group’s Return Targets 6 Sampo’s Year 2005 8 Sampo’s History 9 Corporate Governance 14 Organisation 15 Main Legal Structure 16 Board of Directors 18 Group Executive Committee 20 Group Staff 21 Corporate Responsibility 22 Shares and Shareholders
...nor did our return on equity – negatively, that is. RoE rose to 28.4 per cent (26.5).
For the second consecutive year our profit before taxes exceeded one billion euros, and this time by rather a wide margin. Following the outstanding year 2004 I did not dare predict an improvement of this magnitude and, as a consequence, characterized our results as “almost too good to be true” at the close of the third quarter. The final quarter did not weaken the results.
If, the Nordic market leader, is fighting fit Our P&C insurance division, If, appears to go from strength to strength. Its combined ratio fell further to reach 90.5 per cent (92.6). The main driver behind the improvement was greater operational efficiency, since, unlike the year before, large claims were somewhat higher than expected.
As a consequence, I am absolutely convinced that our combined ratio target of less than 95 per cent at every stage of the cycle is realistic.
In P&C insurance, we are further increasing our emphasis on risk selection. As the leading Nordic P&C insurer, we have access to a unique pool of information and experience. We will continue to prioritise efficiency and sensible risk selection over market share. Thereby we can offer our customers the best pricing of risk in the market and reach our own profitability targets. This approach has, among other things, led to our success in the competition for Nordic branded auto insurance. While focusing on the many positives it should not be forgotten that there is still room for improvement in the efficiency of If´s operations, particularly in Finland. By the look of things, dramatic measures are unlikely to be called for, but targeted cost cuts will be the order of the day.
Sampo Bank: a big success in the mortgage markets Sampo Bank rose to the growth challenge I offered it a year ago and actually reached or surpassed all its targets. The banking division wrote one in every four new mortgage loans in Finland last year. Growth was similarly rapid in Estonia and Lithuania. Success on this scale cannot be accomplished by just a trick or two; it requires persistence and determined effort over the long term. Our bank operates in Finland and all three Baltic countries. During 2005, we expanded operations in a restricted product area by establishing a branch office in Sweden, and late in the year we announced a project aimed at commencing operations in Russia as well.
Although the past year offered us good returns, I do not wish to count on investments for future results. We want to stand out in the bank and insurance industry by insisting on the profitability of our core businesses in all economic conditions, even at times when capital markets are offering superior returns. To this end, we will continue our efforts to cut costs and improve our risk selection in the present year as well.
If has a unique position in the Nordic market and intends to retain it. In addition, growth in the Baltic market will continue to be strategically important.
Banking, long-term savings and life insurance In the banking and long-term savings business, Sampo’s strategy is to be a longterm partner for its customers, rather than just a vendor of individual products.
In banking, Sampo aims to increase its market share in all sectors, from housing loans to the management of corporate payments. An essential and challenging goal for the coming years is to establish new overall customer relationships.
Sampo Life’s strong expertise and market position provides a good foundation for success in the long-term savings market in the future, too. Significant growth can be expected in the coming years, particularly in supplementary pension insurance and pure risk policies for key corporate personnel, as well as in the management of personal risk for both private persons and entrepreneurs.
Nordic P&C Insurance • Cash flow generation • Economies of scale
An essential part of Sampo’s strategy is the realisation that it need not do everything itself. Sampo’s customers will get the best overall service when Sampo acquires those services from its strategic partners that it cannot effectively produce itself.
� February, 2005 If sells its 42 percent stake in Gard Marine & Energy 17 march, 2005 Sampo Life’s Supervisory Board is abolished 21 march, 2005 Sampo Fund Management launches a new raw materials fund 5 april, 2005 Morten Thorsrud is appointed Head of Industrial business area at If P&C
The main streamlining actions were as follows: In February, If P&C Insurance AB (publ) sold off the rest of Gard Marine & Energy Ltd to Gard P&I Ltd. The company in question was established by If and Assuranceforeningen Gard in January 2004 in connection with the streamlining of If’s functions and withdrawal from the Sea&Energy business area.
In March, the Annual General Meeting of Sampo Life decided to abolish Sampo Life’s Supervisory Board.
realty world (Kiinteistömaailma) celebrates 15th year and achievement of recruiting goal: In 2004, the chain’s revenue grew by nearly 30 per cent, and we brokered 20 per cent more apartment and property sales than in the previous year. Our growth has easily outperformed that of the market.”
Mika Ihamuotila, President and CEO of Sampo Bank plc sampo sells its businesses in Poland: Sampo systematically developed and increased its business in Poland in recent years and became the fifth-largest pension fund on the market. Nevertheless, Sampo Group’s core business areas are in the Nordic countries and, with respect to emerging markets, in the Baltic countries. Thus, this transaction serves to clarify our objectives and operations in the core areas.”
Minna Kohmo, Head of Baltic business, Sampo Life Insurance Company Limited sampo and Vesa Puttonen establish Arvo Asset Management Ltd to focus on the management of value stocks: We can focus on portfolio management and investment strategy when we co-operate with a major investment house like Sampo. And the efficient distribution network of Sampo Bank and Mandatum is a great channel for offering our products to investors.”
Vesa Puttonen, Professor, Helsinki School of Economics sampo Bank is planning to start banking operations in Russia: Now that Russian households are becoming more affluent and legislation has improved, we want to apply our experience in Russia, too. We’re interested both in Nordic corporate customers operating in Russia and in Russian households.”
Sampo’s banking activities were started in 1887 with the establishment of the Finnish state-owned Postisäästöpankki (Post and Savings Bank), which was reconstituted as the Postipankki (Post
Bank) in 1970. After the merger of Postipankki Oyj and Finnish Export Credit Ltd, both state-owned, in 1997, the new company was named Leonia plc in 1998.
Sampo complies with the Corporate Governance Recommendation for Listed Companies issued by HEX Plc, the Central Chamber of Commerce of Finland and the Confederation of Finnish Industry and Employers which entered into effect on 1 July 2004. Sampo’s Board of Directors has also approved internal rules concerning corporate governance, internal control and reporting in Sampo Group.
Board of Directors’ duties 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 the Shareholders’ Meeting. The operating procedures and main duties of the Board of Directors have been defined in the Board’s Charter.
The Board elects the CEO and executives of Sampo Group, releases them from their duties, and decides on their terms and conditions of employment and on other compensation. In addition, the Board confirms the Group’s staff planning targets and monitors their fulfilment, determines the grounds for the Group’s compensation system and decides on other far-reaching matters concerning the staff.
The Board of Directors of Sampo plc convened 13 times in 2005. The average attendance of Board members at meetings was 94.23 per cent.
Sampo Group’s Executive Committee The Board of Directors has appointed Sampo Group’s Executive Committee and a Group MD Committee to the Group Executive Committee, which supports the CEO in preparing matters to be handled by the Executive Committee.
The Group MD Committee comprises Björn Wahlroos, Kari Stadigh, Mika Ihamuotila, Torbjörn Magnusson and Patrick Lapveteläinen. Ilona ErvastiVaintola acts as the Group MD Committee ’s secretary.
Sampo Group | Sampo Group Review 2005 11 used in confirming the criteria and processes for the Board’s self-evaluation.
The Nomination and Compensation Committee is composed of the Chairman of the Board (who acts as the Committee ’s Chairman), the Vice Chairman of the Board and one member elected from among the members of the Board. The Nomination and Compensation Committee comprises Olli-Pekka Kallasvuo, Jyrki Juusela and Georg Ehrnrooth, and met six times in 2005.
Audit Committee The Audit Committee is responsible for overseeing Sampo Group’s internal audit and the actions of the auditors under the laws of Finland, the authenticity of the Group’s financial accounts and the auditors’ professional competence and independence, and for assessing compliance with laws and regulations within Sampo Group. The Audit Committee also prepares the proposal to be made to the Annual General Meeting on the election of the auditor and the auditing fees, and also monitors the auditors’ invoicing in the way it sees fit. The Audit Committee meets at least once every half-year.
The Board of Directors’ Audit Committee comprises at least three (3) members elected from among those Board members who do not hold management positions in Sampo and are independent of the company.
Also participating in the meetings of the Committee are the Auditor, the CEO, the CFO, the Group’s Chief Counsel and the Head of Internal Audit. The Audit Committee comprises Jyrki Juusela (Chairman), Tom Berglund and Christoffer Taxell. In addition, Tomi Englund, Björn Wahlroos, Peter Johansson, Ilona Ervasti-Vaintola and Pentti Mattila attend the Audit Committee ’s meetings. The Audit Committee met three times in 2005.
Risk Control Committee The Board of Directors has appointed a Risk Control Committee to control Sampo Group’s risks at the Group level. The Risk Control Committee is responsible for supervising the preparation of and compliance with Sampo Group’s risk management principles and other related guidelines, supervising Sampo Group’s risks and risk accumulations and the quality and scope of risk management, and monitoring the fulfilment of risk policies, the use of limits and the development of risks and profit in the various business areas.
The Risk Control Committee comprises the Chairman of the Board and two or three members elected from among the independent members of the Board. The
liquidity. The Asset and Liability Committee comprises Patrick Lapveteläinen (Chairman), Martti Porkka, Kai Brander, Aki Palo, Markku Pehkonen, Risto Tornivaara, Jyrki Appelqvist, Pekka Kainulainen and Petri Viertiö, the last three being expert members.
The Credit Committee is responsible for preparing the Group’s credit policy for approval by the Board, preparing credit risk limits and authorisations for the Boards of Group companies, monitoring the use of credit risk limits and authorisations, and making credit decisions in cases requiring the highest level of authority. The Credit Committee comprises Ilkka Hallavo (Chairman), Jukka Apajalahti, Jarmo Lankinen, Patrick Lapveteläinen and Aki Palo (expert member).
The CEO of Sampo Group 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.
With the exception of the Chief Executive Officer, the members of the Group Executive Committee are also participants in the long-term incentive systems for Sampo plc’s executive management for the years 2003, 2004 I and II, and 2005 I and II. The terms of the incentive systems are available on Sampo’s web pages at www. sampo.com.
The CEO was paid a total of EUR 2,324,000 in salaries and profit bonuses for 2005. The Deputy to the CEO was paid a total of EUR 1,445,000 in salaries and profit bonuses.
The retirement age of the members of the Group Executive Committee is 60 years, and the pension paid corresponds to the full amount permitted under the Employees ’ Pensions Act (TEL).
The following companies in Sampo Group keep their own insider registers: Sampo plc, Sampo Bank plc, Mandatum Asset Management Ltd, Sampo Fund Management Ltd, Mandatum Securities Ltd, Mandatum & Co Ltd, 3C Asset Management Ltd and Arvo Asset Management Ltd.
Sampo plc’s insider guidelines and insider register may be viewed on the Internet at www.sampo.com/english, see Investor Relations/Shares and Options/Insiders.
Life insurance p&C insurance * Sampo Group holds 40% of the shares of Primasoft, and 60% of the voting rights. The corresponding figures for both Sampo plc and Sampo Bank plc are 20% and 30%.
P&C Insurance if branch offices: Norway, Denmark, others primasoft oy (Finland) *
Anne Brunila, born 1957 Director-General, Ministry of Finance (Finland) (until 31 October, 2005) Finnish Forest Industries Federation (President from 1 January, 2006) Member of the Boards of Mehiläinen Oyj, the Finnish National Opera Foundation and the Finnish Fund for Industrial Cooperation Ltd (Finnfund) She was appointed to the Board of Directors of Sampo plc on 9 April, 2003 She holds no Sampo plc shares
Christoffer Taxell, born 1948 Chancellor, Åbo Akademi University Chairman of the Confederation of Finnish Industries EK, Finnair Plc, Åbo Akademi University Foundation and Föreningen Konstsamfundet, member of the Investment Committee of the Society of Swedish Literature in Finland, and member of the Boards of Nordkalk Corporation, Raisio plc and Stockmann plc He transferred to the Board of Directors of Sampo plc from the Supervisory Board on 1 January, 1998 He holds 1,000 Sampo plc shares directly or through a controlled company
Matti Vuoria, born 1951 CEO, President of Varma Mutual Pension Insurance Company Member of the Boards of Danisco A/S (Denmark), Stora Enso Oyj, Wärtsilä Corporation and the Central Chamber of Commerce of Finland, Chairman of Winwind Oy and the Finnish Pension Alliance TELA, and member of the Board of the Federation of Finnish Insurance Companies He was appointed to the Board of Directors of Sampo plc on 7 April, 2004 He holds 20,000 Sampo plc shares directly or through a controlled company
Ilkka Hallavo, born 1956 Executive Vice President, Head of Corporate Banking, Deputy to President of Sampo Bank plc Chairman of the Board of MB Equity Partners Oy, member of the Board of MB Rahastot Oy, member of the Executive Committee of the Customer Advisory Office of the Banking Sector, and member of the Supervisory Boards of Finpro ry and Luottokunta He holds 3,799 Sampo plc shares directly or through controlled company Options (2000 programme): 30,000
Mika Ihamuotila, born 1964 President and CEO of Sampo Bank plc Chairman of the Board of the Finnish Bankers’ Association, and member of the Boards of the Confederation of Finnish Industries, Elisa Corporation and HYY Group Ltd He holds 305,138 Sampo plc shares directly or through controlled company
Members of the Group Executive Committee for all of 2005 were Björn Wahlroos, Kari Stadigh, Ilona ErvastiVaintola, Ilkka Hallavo, Mika Ihamuotila, Peter Johansson, Patrick Lapveteläinen, Petri Niemisvirta, Maarit Näkyvä and Torbjörn Magnusson.
Ivar Martinsen and Ricard Wennerklint were appointed members of the Executive Committee on 25 January 2005, and Line Hestvik on 22 June 2005, replacing Gunnar Rogstad.
Björn Wahlroos, born 1952 Group CEO, Managing Director of Sampo plc Chairman of the Board of Sampo Bank plc Member of the Board of Varma Mutual Pension Insurance Company He holds 11,839,890 Sampo plc shares directly or through controlled company Options (2000 programme): -
Torbjörn Magnusson, born 1963 CEO of If P&C Insurance Holding Ltd (publ) Vice Chairman of the Board of the Swedish Insurance Federation He holds no Sampo Plc shares Options (2000 programme): -
Ivar Martinsen, born 1961 Head of Commercial Business Area, If P&C He holds no Sampo Plc shares Options (2000 programme): -
Petri Niemisvirta, born 1970 Managing Director of Sampo Life Insurance Company Limited Member of the Boards of the Federation of Finnish Insurance Companies and the Consumers’ Insurance Office He holds 9,299 Sampo plc shares directly or through controlled company Options (2000 programme): 40,000
Maarit Näkyvä, born 1953 Executive Vice President, Head of Retail and Private Banking, Sampo Bank plc Chairman of the Board of Kiinteistömaailma Oy (Realty World Ltd) Member of the Board of Kesko Corporation She holds 3,228 Sampo plc shares directly or through controlled company Options (2000 programme): 40,000
Line Hestvik, born 1969 Head of Private Business Area, If P&C Member of the Board of the Norwegian Financial Services Association He holds no Sampo Plc shares Options (2000 programme): -
Ricard Wennerklint, born 1969 CFO, If P&C He holds no Sampo Plc shares Options (2000 programme): -
The average number of Sampo Group’s staff was 11,730 in 2005, compared with 11,898 in 2004.
Finland: 52% of total employees Banking and investment services: 3,344 Life insurance: 246 P&C insurance: 1,939 Holding company: 567
Latvia: 1% of total employees Banking and investment services: 26 Life insurance: 32 P&C insurance: 89
Other: 1% of total employees Banking and investment services: 36 Life insurance: 23 P&C insurance: 54
Sampo Group has operations in seven countries, each with its own language and currency. The picture shows Irene Kärnä, Service Advisor (front), Arto Laatikainen, Network Support (on the right) and Tuija Nivala (back left) and Anna-Maija Källi (back right) from Finland’s If P&C Insurance Call Center.
Sampo’s operating environment remained fairly stable in 2005. With respect to corporate responsibility, discussion in the Nordic countries focused on defining what constitutes appropriate contacts or corruption in relationships between companies and the authorities. Yet again, however, Transparency International rated the Nordic countries as among the least corrupted in the world, while the Baltic countries also improved their standings. Furthermore, the quality of environmental management in the Nordic countries was rated highly, and Finland was judged as the world’s most environmentally friendly country in a study published by the Yale and Columbia universities (USA) in January 2005.
A new equality plan and an update of the sustainable development policy At year end, Sampo’s banking and longterm savings businesses introduced a new equality plan that complies with the Finnish equality law and creates further opportunities to improve staff wellbeing. An active, competent staff is a key competitive tool for Sampo. Ethical customer service not only benefits customers but also serves Sampo’s interests in the form of solid, long-lasting customer relationships. Equal treatment of employees regardless of sex, age or other factors is pivotal in establishing a fair and motivating work environment. A staff survey conducted in 2005 showed that job satisfaction had continued to increase.
Sampo’s Board of Directors reviewed the sustainable development policy and made minor additions in it. The policy acknowledges the significance of the company ’s stakeholders and profitable operation as the basis for sustainable development.
Standardisation of Group operations proceeded As a result of Sampo plc’s acquisition of the entire stock of If in 2004, the Group gained a new core business area and expanded its activities to Sweden, Norway and Denmark. P&C insurance is run as a separate business, because it has no major synergies with the other businesses. However, investment activities and Groupwide functions such as financial reporting were centralised and standardised in 2005.
The Corporate Responsibility Steering Group met five times during the year and considered the corporate responsibility indicators. Steps were taken towards better coverage of Sampo Group’s P&C insurance activities in reporting responsibility issues.
Corporate responsibility is also discussed more extensively, complete with environmental indicators, in a separate corporate responsibility report and on our Internet pages at www.sampo.com.
Shares and votes According to Sampo plc’s Articles of Association, the share capital can be at minimum EUR 30,105,638.84 and at maximum EUR 120,422,555.30. On 31 December, 2005, the company’s share capital was EUR 96,088,842.74, divided into 571,318,315 shares, of which 570,118,315 were A shares and 1,200,000 were B shares. The shares have no nominal value. The counter book value of the shares is EUR 0.17 (not an exact value). Each A share has 1 vote and each B share has 5 votes at General Meetings. The A shares have been quoted on the Helsinki Stock Exchange since 1988. All the B shares are owned by the Kaleva Mutual Insurance Company. In addition, Sampo’s year 2000 options are quoted on the main list of the Helsinki Stock Exchange. The subscription period for Sampo’s 1998 warrants ended on 31 May, 2005, and their quotation on the Helsinki Stock Exchange ended on 24 May, 2005.
During the whole subscription period, 3,272,500 warrants were exercised, giving entitlement to a total of 16,362,500 new shares. The subscribed shares represented 2.9 per cent of the share capital at the end of 2005 and 2.8 per cent of the votes.
A total of 5,200,000 options were issued, of which 2,600,000 were designated as A options and 2,600,000 as B options. Each option entitles its holder to subscribe for five Sampo A shares. The share subscription period for the options will end on 31 January, 2007 and the share subscription price is EUR 6.74. If the Annual General Meeting approves the Board’s proposed dividend distribution for 2005, the subscription price will be reduced to EUR 6.14.
At the end of the year under review, 4,838,950 of the 2000 warrants were still unexercised. If share subscriptions are made with the unexercised options, Sampo ’s share capital can increase by a maximum of EUR 4,069,264.92, which equals approximately 4.2 per cent of the share capital at the end of 2005.
Shareholders There were 57,547 registered shareholders on 31 December 2005, which is an increase of 1,228 over the previous year end. 1.38 per cent of all shares had not
Bond with Warrants, 1998, Five conversions Warrant conversion 664,750 93.56 A shares in 2002
Bond with Warrants, 1998, One conversion Warrant conversion 2,018,850 95.16 A shares in 2005
Bond with Warrants, 2000, One conversion Option conversion 382,200 96.15 A shares in 2006**)
*) Rounded out **) Subscriptions during the previous year been transferred to the book-entry securities system. The holdings of nominee-registered and foreign shareholders increased to 48.9 per cent (37.0) of the share capital and 48.5 per cent of the votes (36.7). Almost all of the foreign shareholders have nominee-registered holdings.
At the end of the year, the members of Sampo’s Board of Directors including the Chief Executive Officer owned, directly or indirectly, 11,921,395 Sampo shares. Their combined holdings constituted 2.1 per cent of the share capital and votes.
To be entitled to participate in the AGM, shareholders must be registered
Dividends and distribution policy The Board of Sampo plc adopted a new distribution policy on 3 November 2004, according to which the company’s objective is to distribute 50 per cent of its net profit to shareholders through share buybacks and/or dividends.
According to the proposal, only shareholders who are registered in the shareholder register kept by Finnish Central Securities Depository Ltd on the record date for dividend payment, 10 April, 2006, are entitled to dividends. The proposed dividend payment date is 19 April, 2006.
Financial information in 2006 The official financial statements for 2005 can be inspected in full at Sampo Legal Affairs, Unioninkatu 22, Helsinki, Finland.
Sampo will publish three Interim Reports in 2006, on 11 May, 10 August and 9 November. The Interim Reports are published on the Internet at reports.
% of share % of a and B shares Number of shares capital votes
The Finnish National Fund for Research and Development, Sitra 998,000 0.17 0.17 Nordea Life Assurance Finland Ltd 909,600 0.16 0.16 Alfred Berg Finland Fund 873,170 0.15 0.15 In the nominee register, total 276,549,664 48.41 48.00 *) 5,793,855 A shares and 1,200,000 B shares shareholders by number of shares owned at �1 December, 2005
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T ra ns la tio n: B el lc re st -T
16 IFRS Financial Statements 16 Consolidated Income Statement 17 Consolidated Balance Sheet 18 Statement of Changes in Equity 19 Cash Flow Statement 22 Notes to the Financial Statements 22 Summary of Significant Accounting Policies 32 Risk Management 50 Segment Information 55 Other Notes 121 Parent Company Financial Statements 134 Auditor’s Report 136 Contact Information
Sampo is also well-known to Finnish customers for its Mandatum brand in asset management, private banking, corporate finance and stock brokerage. Some of the mutual funds also still bear the name Mandatum. In real estate, Realty World (Kiinteistömaailma) offers real estate agency services for houses and apartments on our behalf all over Finland.
If P&C Insurance is the leading property and casualty insurance company in the Nordic countries, with approximately 3.6 million customers and a staff of about 6,600 people. In 2005,
If’s total premiums written were EUR 4 billion. If offers P&C insurance in Finland, Sweden, Norway, Denmark, Estonia, Latvia and Lithuania.
RoE 28.4% Earning per share, EUR 1.68 Profit before taxes EURm 1,295 ampo Group sampo is a financial services group comprising
Contents 2 sampo plc – Board of directors' report 2005 2 Changes in Group Structure 3 Administration 4 Changes in Share Capital 5 Staff 5 Ratings 5 Group Solvency 5 Risk Management 6 Banking and Investment Services 7 P&C Insurance 7 Life Insurance 8 Other 8 Outlook for 2006 9 Board’s Dividend Proposal 10 Key Figures 13 Calculation of Key Figures
�6 ifrs financial statements 16 Consolidated Income Statement 17 Consolidated Balance Sheet 18 Statement of Changes in Equity 19 Cash Flow Statement 22 Notes to the Financial Statements 22 Summary of Significant Accounting Policies 32 Risk Management 50 Segment Information 55 Other Notes
�2� parent company financial statements 121 Income Statement 122 Balance Sheet 124 Notes to the Financial Statements
Sampo Group succeeded well in 2005. The profitability of the Group was very good with an RoE of 28.4 per cent (25.6). The Bank increased its housing loan market share in Finland from 14.3 per cent to 15.5 per cent in 2005. Sampo Life’s market share in Finnish life insurance grew to 19.5 per cent (17.6), although its position in the unit-linked business weakened. Preliminary information would suggest that changes in P&C insurance market shares were small.
The Group’s equity on 31 December was EUR 4,348 million (3,465). Equity was strengthened by the profit for the period, the increase in the fair value reserve and new capital through subscriptions with option rights. Equity was reduced by the dividends paid in April, the repurchase of Sampo A shares in June – July and exchange rate effects. As of 1 January 2005 Sampo Group’s capital adequacy has been measured by the Finnish rules on conglomerate capital adequacy based on the European Union’s Directive 2002/87/EU. At the end of December 2005 Sampo Group’s own funds exceeded the minimum solvency requirements by EUR 2,123.6 million and the solvency ratio was 196.1 per cent (170.6).
Sampo Group’s balance sheet total grew by 13 per cent to EUR 42,985 million. Asset growth was fastest in loans to customers in the banking and investment services segment, which grew by EUR 3,094 million to EUR 18,483 million and in investment assets of the insurance segments, which grew from EUR 13,903 million to EUR 15,332 million. In addition, unit-linked investments increased to EUR 1,262 million (882). On the liability side of the balance sheet, debt securities in issue increased by EUR 1,836 million to EUR 8,461 million. Sampo Housing Loan Bank’s covered bond issue of September 2005 represents EUR 1 billion of the growth.
changes in Group structure Sampo Group streamlined its legal structure to better correspond to the reporting structure in 2005. These reorganisations improve governance and operational efficiency. In addition, Sampo Group established new companies to support core businesses and disposed of non-core operations.
In June 2005, Sampo plc signed a binding agreement to sell its subsidiaries in Poland – the Sampo PTE S.A. pension company and the Sampo T.U. Zycie S.A. life insurance company – to Nordea Life Holding A/S. The transaction was closed in December 2005 when the necessary official permits were obtained. The operations were considered non-core and the transaction released capital for growth in focus areas. The consideration was EUR 95 million, of which Sampo recognises a sales gain of EUR 24 million in the banking and investment services segment. Sampo wrote down most of the companies ’ goodwill in 2002.
The Baltic P&C insurance companies AS If Eesti Kindlustus, AAS If Latvia and UAB If Draudimas (Lithuania) owned by If P&C Insurance Company Ltd (Finland ) were transferred to the ownership of If P&C Insurance Holding Ltd in November 2005. The transaction streamlines the corporate structure of If and has no effect on the results.
Taxes –63 –102 –110 –58 –42 Profit for the financial year 225 273 293 172 239
Attributable to Equity holders of parent company 222 270 288 169 237
In addition, the Annual General Meeting approved the following amendments, as proposed by the Board, to the Articles of Association: - In accordance with Article 2 of the Articles of Association, Sampo plc’s domicile was changed from Turku to Helsinki, where Sampo plc’s head office and administrative domicile are already located.
SAmPo PLC – BoARD oF DIRECToRS’ REPoRT 2005 contained therein to the age of Board members at the beginning of their term of office was deleted.
Björn Wahlroos, Group CEO and President, became Chairman of the Board of Sampo Bank, while the other Board members are Patrick Lapveteläinen, Ilkka Hallavo, Mika Ihamuotila and Maarit Näkyvä. At the same time, Mika Ihamuotila was appointed as President of Sampo Bank. He already had the overall responsibility for all of Sampo’s banking and investment services operations. Ilkka Hallavo and Maarit Näkyvä were appointed as Executive Vice Presidents of Sampo Bank, with Hallavo being deputy to Ihamuotila.
These appointments were linked to the streamlining of the legal structure of Sampo’s banking and investment services segment.
changes in share capital The Annual General Meeting of 11 April 2005 authorised the Board of Directors to repurchase Sampo’s own shares. The authorisation is valid until 11 April 2006. The maximum amount of A shares that can be repurchased is 5 per cent of the company’s share capital or of the number of votes attached to all shares. Shares can be bought back either through an offer made to all holders of A shares in proportion to their holdings and on equal terms determined by the Board, or through public trading on the Helsinki Stock Exchange. Shares can only be repurchased to be cancelled.
On 22 June 2005, the Board of Directors decided, pursuant to the above-mentioned authorisation, to repurchase a maximum of 7 million Sampo A shares through public trading on the Helsinki Stock Exchange. Repurchases started on 29 June 2005 and continued until the maximum amount was achieved on 13 July 2005. EUR 87.7 million was used to acquire the shares. At 31 December 2005 Sampo plc held 7 million of its own A shares, corresponding to 1.2 per cent of the total amount of shares and votes. The repurchased shares corresponded to EUR 1.2 million in share capital.
A total of 5,755,650 subscriptions of shares with the warrants of Sampo plc’s 1998 option programme and 1,800,250 subscriptions with the warrants of 2000 option programme were submitted to the Board and approved in 2005. The subscriptions increased the share capital by EUR 1,270,811.18. The subscription period for the 1998 option programme ended on 31 May 2005 and trading in these warrants on the Helsinki Stock Exchange was terminated on 24 May 2005. The subscription period for the 2000 option programme ends at 31 January 2007 and at the end of the year 4,838,950 warrants were outstanding, of which Satura, a fully-owned subsidiary of Sampo plc, held 1,030,250 warrants. At maximum, if all subscription rights were to be exercised, Sampo plc’s share capital would increase by EUR 4,069,264.92, corresponding to 4.2 per cent of share capital at the end of 2005.
Furthermore, subscriptions with the warrants of the 2000 option programme for 382,200 A shares were approved by the Board at 20 January 2006. As the subscriptions were already submitted in 2005, the new shares are entitled to dividends for the year 2005.
The Sampo A shares subscribed for with warrants from the 1998 or 2000 option programmes after 31 December 2004 were entitled to dividends only after the dividend for 2004 had been paid. The new category was merged with Sampo A shares in April 2005.
At 18 February 2005 Sampo received a disclosure under chapter 2, section 9 of the Securities Markets Act, according to which the Finnish government’s holding in Sampo A shares and voting rights had decreased below 15 per cent. The Finnish government also informed Sampo that it had agreed to a lock-up of its remaining Sampo shares for 90 days.
Group solvency New rules on calculating solvency for financial conglomerates entered into force at 1 January 2005. Group solvency consists of the difference between the group’s own funds and the minimum requirement set for them. The rules determine the own funds and minimum own funds requirements for subsidiaries and associated companies operating in the banking or insurance sector to be calculated according to sectoral rules. In the group solvency calculation, funds that cannot be used to cover losses in other group companies are not taken into consideration. Sampo Group applies the consolidation method to calculate its solvency position. The Group’s solvency ratio (own funds in relation to minimum requirements for own funds) at 31 December 2005 was 196.1 per cent (170.6).
by Barclays plc and the funds managed by it had risen above 5 per cent of Sampo plc’s entire stock. Two weeks later, at 16 November, a new notification was received from Barclays plc stating that the total number of Sampo A shares owned by Barclays plc and the funds managed by it had decreased below 5 per cent.
For a comprehensive review of Sampo Group’s share capital and shareholder development, see Annual Report, section Shares and shareholders.
ness activities. The risks in Sampo Group are described and aggregated internally through economic capital, which describes the amount of capital needed to bear different kinds of risks. The economic capital tied up in the Group’s operations was EUR 3,148 million (2,992). The requirement is well covered by equity and capital securities. The major risks associated with Sampo Group’s activities are credit risk arising from banking and investments, the market risks of investment portfolios, the interest rate and liquidity risks of the banking book and insurance risks. Operational risks and various business risks such as changes in competition or customer behaviour are inherent in all business areas. The perceived risks in the businesses and operating environment did not change significantly during 2005.
The Baltic operations continued high volume growth and the lending volume exceeded EUR 1.4 billion (0.8). The distribution network was expanded by increasing the number of branches to 16 in Estonia, to 12 in Lithuania and to 2 in Latvia. The Estonian and Lithuanian operations grew substantially in 2005 with the number of customers reaching 129,900 in Estonia and 46,900 in Lithuania. Most of the increase came from new retail customers, who are the main focus in the Baltic countries. Housing loans, in particular, grew rapidly all year. The profit before tax of the Baltic banks was EUR 14 million (8).
Corporate lending grew by 14 per cent and off-balance sheet commitments by 15 per cent to EUR 6.9 billion. Spreads in corporate lending remained fairly flat. Credit quality remained good. Net impairment on loans and receivables was positive and added EUR 3 million (11) to the profit.
Deposits rose to EUR 11,442 million (10,410) at the end of the year. Sampo Bank’s market share of domestic deposits by the public at the end of the year was 12.8 per cent (12.7). Faster growth in lending has created a need for additional funding, which was mainly achieved by issuing senior bonds. Sampo Bank Group also diversified its funding by activating Sampo Housing Loan Bank plc, which issued the first Nordic benchmark-size EUR 1 billion covered bond in September 2005. The issue is covered by EUR 1.1 billion in housing loans transferred from Sampo Bank to the Sampo Housing Loan Bank.
The combined ratio improved by 2.1 percentage points to 90.5 per cent (92.6). Efforts both to exploit the economies of scale in If ’s Nordic concept and to improve the quality of risks in If ’s portfolio have been pursued determinedly.
The cost ratio improved by 1.3 percentage points to 24.3 per cent. Total costs decreased to EUR 931 million mainly driven by staff reductions, IT savings and lower commission costs. The cost ratios improved for the whole operation and in each and every business area. The improvement was particularly positive in the Finnish operation, which was subject to a comprehensive cost reduction programme.
Premiums grew by 2 per cent to EUR 3,709 million. Premiums grew by 3 per cent in the Private business area and by 16 per cent in the Baltics. In the Commercial business area, premium income was flat and in Industrial premiums decreased by 3 per cent.
The solvency ratio – i.e. solvency capital in relation to net premiums written – rose to 87.5 per cent (69.8) and solvency capital increased to EUR 3,216 million (2,499). Shareholders’ equity rose to EUR 2,595 million (2,218). If issued noncumulative capital contribution securities of EUR 150 million in June 2005 increasing the solvency ratio by 4 percentage points. A dividend of SEK 4,000 million
If and Ford Credit Europe FCE Bank plc signed a frame agreement on carbranded insurance for Ford, Jaguar, Land Rover, Mazda and Volvo in December 2005. Car owners will be offered a specially designed insurance for their own car brand. The insurance will be marketed by franchised car dealers and by If.
The five-year frame agreement covers Denmark, Finland (excl. Land Rover), Norway and Sweden. The new car -branded insurance policies will be launched gradually during 2006. Altogether, the five Ford car brands have an average Nordic market share of about 20 percent of new car sales.
If launched several new personal and employee benefit insurance products during 2005. These products reached a good sales volume already in the first year as 65,000 contracts were signed. Private clients who concentrate their insurance policies with If are rewarded by lower deductibles and premium rebates. This project, called If Plus, was launched in Sweden and Norway and it extends to other services, such as free change of winter tires, for loyal customers.
tracts of EUR 163 million (53). The fair value reserve grew by EUR 170 million in 2005. The yield on investments at market values was up to 11.5 per cent (8.5) largely because of favourable equity market development. The RoE target of 17.5 per cent was surpassed by a wide margin, as the RoE of life insurance operations amounted to 39.0 per cent.
At 31 December 2005 the investment assets of life operations, excluding the assets of EUR 1.3 billion (0.9) covering unit-linked contracts, amounted to EUR 5.9 billion (5.3) at market values. Of these assets, fixed income covered 64 per cent (57), equity 33 per cent (38) and real estate 3 per cent (5). Equity investments include direct equity holdings, equity funds and private equity.
At the end of the financial year Finnish investments accounted for 40 per cent (35) of all investments, the rest of the euro zone for 29 per cent (29) and other foreign investments for 31 per cent (36). Finland’s share of equity investments was 57 per cent (56).
Particular attention was given to cost control in 2005. As a result the expense ratio decreased to 93.4 per cent (100.6). If all fees intended to cover the operating expenses were taken into account, the ratio would decrease to 83.5 per cent (90.0).
The total gross premium income of Sampo Group’s life insurance companies grew by 27 per cent to EUR 668 million (526). Direct premiums on own account grew by 30 per cent to EUR 649 million (500). Single premium contracts transferring pension fund liabilities to Sampo Life accounted for EUR 101 million of the premium growth. Premiums received from reinsurance were EUR 13 million negative, due to the sale of part of the reinsurance portfolio. Premiums from the Baltic companies grew by 75 per cent to EUR 21 million (12). The Swedish subsidiary, If Livförsäkring AB, was launched in May 2005 and received EUR 0.8 million in premiums. Regular premiums grew to EUR 370 million (302) and their share of total premiums was 55 per cent (57).
Sampo Life failed to achieve its targets in the sale of unit-linked policies and the premiums amounted to EUR 272 million (273). This is due to a drop in the singlepremium endowment policies, whereas new sales of, and premiums from, unitlinked pension policies developed favourably.
other The operations of Sampo plc (the holding company) and Primasoft are reported in this segment. Sampo plc’s main function is to own and control the subsidiaries engaged in insurance, banking and investment services. Primasoft provides IT services for various companies in Sampo Group.
Primasoft has a negligible impact on the profit or loss of the Other segment.
Although macroeconomic developments may lead to more modest investment returns than in 2005, Sampo Group’s profitability is expected to remain good in 2006, as all of its business areas are operationally in excellent shape.
The insurance technical result of If, Sampo Group’s P&C insurance operation, is expected to remain good and If remains firmly committed to a combined ratio of better than 95 per cent. Although If has a fairly low-risk investment portfolio, its result is, of course, subject to capital market development. If will focus on excellence in underwriting and on reaping further benefits from its pan-Nordic business model. Personal risk and employee benefit products are seen as long-term growth opportunities for P&C insurance following a number of product launches in 2005. The RoE target for P&C insurance operations is 17.5 per cent.
Sampo Life Group’s profitability is expected to remain good. Markedto -market results are, of course, highly dependent on capital market development. A renewed focus has been set on the sales of unit-linked insurance and on selected risk policies. The RoE target for life insurance operations is 17.5 per cent.
Premiums written before reinsurers’ share EURm 655 528 528 613 755
Options diluted earnings per share 4) EUR 1.65 1.44 0.64 0.62 1.49 Earnings per share, incl. change in fair value reserve EUR 1.97 1.58 – – – Capital and reserves per share EUR 7.65 6.11 5.43 5.15 5.18 Net asset value per share EUR 7.67 6.16 5.64 5.26 5.67
B shares Adjusted average number of shares 1,000 1,200 1,200 1,200 1,200 1,200 Number of shares at 31 Dec. 1,000 1,200 1,200 1,200 1,200 1,200 Adjusted number of shares at 31 Dec. 1,000 1,200 1,200 1,200 1,200 1,200
1) Group solvency for year 2005 and 2004 is calculated according to the consolidation method defined in Chapter 3 of the Act on the Supervision of Financial and Insurance Conglomerates, which entered into force on 1 January 2005. Solvency ratio is defined as the ratio of own funds to the sum of minimum requirements calculated under sectoral rules. Previously Group’s Capital adequacy ratios have been calculated according to the Act on Credit Institutions, Chapter 9,72-81 §.
3) The income of other business includes the income from If Group, accounted for by the equity method, for the first quarter of 2004 4) The dilution effect has been calculated as if all the remaining subscription rights (4,762,510/the option programme of 2000 at the end of December, 2005) would have been realised. One subscription right entitles to subscribe 5 shares.
If is consolidated as a subsidiary in Sampo Group’s accounts as of April 1, 2004. Accordingly If figures have been taken into account line by line in the consolidated profit and loss account and balance sheet. In the comparison periods and between January 1, 2004 and March 31, 2004 If has been treated as an associated company.
Group key figures revenue + banking and investment services revenue + property & casualty insurance revenue + life insurance revenue + other business revenue ± Group elimination with result impact
The key figures for the insurance business have been calculated according to the decree of the Ministry of Finance and the specifying instruction 12/002/2005 of the Insurance Supervisory Authority.
Other business Calculated using the formula shown above for banking and investment services profit before taxes.
return on equity (at fair values), % + profit before taxes ± revaluation entered into / withdrawn from fair value reserve ± change in valuation differences on investments – tax (incl. change in deferred tax relating to valuation differences on investments)
return on assets (at fair values), % + operating profit + interest and other financial charges + calculated interest on technical provisions ± revaluation entered into / withdrawn from fair value reserve ± change in valuation differences on investments
+ balance sheet total – technical provisions relating to unit-linked insurance ± valuation differences on investments (average of values on 1 Jan. and 31 Dec.)
+ balance sheet total ± valuation differences on investments average number of staff Average of month-end figures, adjusted for part-time staff (Full Time Equivalent)
profit before taxes Formula shown above in connection with calculation of Group key figures.
+ net interest income + net income from financial transactions + net fee and comission income + net income from investments + other operating income property & casualty insurance key figures revenue Formula shown above in connection with calculation of Group key figures.
risk ratio, % + claims incurred – claims settlement expenses insurance premiums cost ratio, % + operating expenses + claims settlement expenses insurance premiums loss ratio, % claims incurred insurance premiums loss ratio before unwinding of discount, % claims incurred before unwinding of discount insurance premiums before unwinding of discount expense ratio, % operating expenses insurance premiums combined ratio, % Loss ratio + expense ratio combined ratio before unwinding of discount, % Loss ratio before unwinding of discount + expense ratio solvency margin + equity after proposed profit distribution ± valuation difference on investment – intangible assets + capital securities ± deferred tax ± other required items (Ministry of Finance decree)
life insurance key figures revenue Formula shown above in connection with calculation of Group key figures.
expense ratio + operating expenses before change in deferred acquisition costs + claims settlement expenses load income solvency margin + equity attributable to parent company’s equityholders after proposed profit distribution ± valuation difference on investment – intangible assets + capital securities ± deferred tax (incl. deferred tax from fair value reserve and profit) ± other required items (Ministry of Finance decree)
relative share trading volume, % number of shares traded through the Helsinki Stock Exchange adjusted average number of shares
Net income from financial transactions 4 75 64 11 Net fee and commission income 5 203 178 25 Impairment losses on loans and receivables 6 1 11 –9
Attributable to Equity holders of parent company 949 817 Minority interest 14 31
Assets Cash and balances at central banks 16 1,665 1,163 Financial assets at fair value through p/l 17 2,537 2,751 Loans and receivables 18 18,918 15,869
Investments related to unit-linked contracts 21 1,262 882 Reinsurers’ share of insurance liabilities 29 558 696
share fair share premium legal value retained minority eUrm capital account reserve reserve earnings total interest total
Cash flow hedges: - recognised in equity during the financial year 3 3 3 - recognised in p/l –10 –10 –10 Financial assets available-for-sale - change in fair value 209 209 209 - recognised in p/l –138 –138 –138 Exchange rate translation difference 16 16 16 Profit for the financial year 817 817 31 848 Total income and expenses recognised for the period 63 833 897 31 928 Dividends –831 –831 –831 Recognition of undrawn dividends 1 1 1 Subscription for shares with options 2 48 49 49 Acquisition of minority interest –23 –23
Cash flow hedges: - recognised in equity during the financial year 3 3 3 - recognised in p/l –8 –8 –8 Financial assets available-for-sale - change in fair value 375 375 375 - recognised in p/l –207 –207 –207 Exchange rate translation difference –62 –62 –62 Profit for the financial year 949 949 14 963 Total income and expenses recognised for the period 163 887 1,049 14 1,063 Dividends –113 –113 –14 –127 Recognition of undrawn dividends 4 4 4 Subscription for shares with options 1 29 30 30 Repurchase of own shares –88 –88 –88
Change (+/–) in assets of operating activities Financial assets at fair value through p/l 257 –201 Loans and receivables –3,058 –594 Investments –1,109 –42 Other assets –146 95 Total –4,056 –743
Change (+/–) in liabilities of operating activities Financial liabilities at fair value through p/l –46 –39 Amounts owed to credit institutions and customers 1,303 298 Other liabilities 10 –108 Paid taxes –177 –178 Total 1,091 –27
Sampo Plc sold during 2005 its Polish subsidiaries, Sampo PTE S.A. engaged in investment service and life insurance company Sampo T.U. Zycie S.A., as well as Mandatum Private Equity Funds Ltd engaged in investment service in Finland.
Balance sheet items of sold companies sampo sampo mandatum pte t.U. Zycie private eUrm s.a. s.a. equity funds
Assets Cash and cash equivalents 0 2 0 Financial assets at fair value through p/l – – 0 Loans and receivables 7 – – Investments related to unit-linked insurance – 15 –
Liabilities Amounts owed to credit institutions and customers – – 0 Liabilities for insurance and investment contracts – 16 Other liabilities 2 1 1
Sampo Plc acquired during 2004 shares of If Skadeförsäkring Holding AB, 51.89 per cent on 6 May 2004 and 10.06 per cent on 5 October in the same year. Sampo’s previous holding in the company was 38,05 per cent. Values used in the cash flow statement are balance sheet values of the holdings at the acquisition dates.
On 17 November 2004 Sampo Bank plc acquired Sampo Banka (AS Marās Banka) in Latvia.
Cash and cash equivalents of acquired companies Sampo Banka 5 If Skadeförsäkring Holding AB 204
Intangible assets – 75 Property, plant and equipment 0 22 Other assets 0 890 Tax assets – 145 Total assets 49 6,335
Liabilities Financial liabilities at fair value through p/l – 22 Amounts owed to credit institutions and customers 41 – Debt securities in issue – 197 Liabilities for insurance and investment contracts – 4,366 Other liabilities 1 486 Tax liabilities – 112 Total liabilities 42 5,184
Basis for preparation Sampo Group has prepared the consolidated financial statements for 2005 in compliance with International Financial Reporting Standards (IFRSs) as adopted by the EU. The standards and interpretations applied are those effective at 31 December 2005. Hedge accounting has been applied in compliance with IAS 39 as approved by the International Accounting Standards Board (IASB), without using the carved out version endorsed by the EU on 19 November 2004. The consolidated financial statements for the year ended 31 December 2004 were prepared in accordance with the applicable and regulatory requirements in Finland (Finnish Accounting Standards, FAS).
The Board of Directors of Sampo Oyj accepted the financial statements for issue on 15 February 2006.
Consistent accounting policies are used throughout the Group for the purposes of consolidation. All intra-group transactions and balances are eliminated upon consolidation.
Summary of Significant Accounting Policiesnotes to the financial statements: page Summary of Significant Accounting Policies 22 Risk Management 32 Segment Information 50 Other Notes 55 � Transition to International Financial Reporting Standards (IFRS) 55 2 Business Combinations 59 3 Net Interest Income 62 4 Net Income from Financial Transactions 63 5 Fee and Commission Income and Expenses 64 6 Impairment Losses on Loans and Receivables 64 7 Insurance Premiums 65 � Net Income from Investments 67 9 Claims Incurred 70 �0 Change in Liabilities for Insurance and Investment Contracts 73 �� Staff Cost 74 �2 Other Operating Expenses 75 �3 Earning per Share 76 �4 Financial Assets and Liabilities 77 �5 Fair Values 78 �6 Cash and Balances at Central Banks 79 �7 Financial Assets and Liabilities at Fair Value Through p/l 80 �� Loans and Receivables 85 �9 Investments 86 20 Investments in Associates 92 2� Investments Related to Unit-linked Contracts 93 22 Intangible Assets 94 23 Property, Plant and Equipment 96 24 Other Assets 98 25 Deferred Tax Assets and Liabilities 99 27 Amounts Owed to Credit Institutions and Customers 100 2� Debt Securities in Issue 101 29 Liabilities from Insurance and Investment Contracts 103 30 Liabilities from Unit-linked Insurance and Investment Contracts 104 3� Other Liabilities 105 32 Employee Benefits 107 33 Continent Liabilities and Commitments 109 34 Equity and Reserves 113 36 Related Party Disclosures 116 37 Legal Proceedings 116 3� Investment in Subsidiaries 117 39 Investment in Shares and Participations other than Subsidiaries and Associates 118
Investments in associates are included in the balance sheet item ‘Investments’ and the Group’s share of the results of associates in ‘Net income from investment activities’ in the income statement.
The income statements of Group entities whose functional currency is other than euro are translated into euro at the average rate for the period, and the balance sheets at the rates prevailing at the balance sheet date. The resulting translation differences are included in equity.
segment information The Group’s primary 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 banking and investment services, P&C insurance, life insurance and other operations. Other operations comprise the operations of the holding company and the Primasoft Oy information technology firm.
The costs of acquiring new and renewed insurance business are treated in the Life Insurance business as fee and commission expenses under ‘Other operating expenses’. In the P&C Insurance business they are treated as deferred acquisition costs, and are accordingly deferred and amortised.
insurance premiums Insurance premiums in the income statement consist of premiums earned for P&C insurance and premiums written for Life insurance. P&C insurance contracts are primarily of short duration (1 year), so that premiums written are recognised as earned on a pro rata basis, adjusting them by a change in the provisions for unearned premium. In Life insurance, premiums are not adjusted, as the benefit period extends far into the future. Therefore the insurance premium and related benefits do not usually match during the same period. The change in the provisions for unearned premiums is presented separately as Change in insurance and investment contract liabilities in expenses.
Purchases and sales of financial assets at fair value through profit or loss, heldto -maturity investments and availablefor -sale financial assets are recognised and derecognised on the trade date, which is the date on which the Group commits to purchase or sell the asset. Loans and receivables are recognised when cash is advanced to the borrower.
available-for-sale financial assets Available-for-sale financial assets are nonderivative financial investments that are designated as available for sale and are not categorised into any other category. Available -for-sale financial assets comprise debt and equity securities.
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 as available-for-sale financial assets.
In other segments, available-forsale financial assets comprise assets that, although they are not acquired for trading purposes, might not be held to maturity.
If the fair value of a financial asset cannot be determined, historical cost is deemed to be a sufficient approximation of fair value. The amount of such assets in the Group balance sheet is negligible.
- Legal restructuring: Corporate restructuring and corresponding rearrangements for personal customers.
derivatives held for trading Derivative instruments that are not designated as hedges are classified as held for trading. They are measured at fair value and the change in fair value, together with realised gains and losses and interest income and expenses, is recognised in profit or loss. Derivatives used for hedging, but which do not qualify for hedge accounting as required by IAS 39, are treated as held for trading.
The cumulative loss removed from equity and recognised in profit or loss is the difference between the acquisition cost and current fair value, less any impairment loss on that instrument previously recognised in profit or loss.
If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss shall be reversed by recognising the amount in profit or loss. Impairment losses recognised in profit of loss for an equity instrument shall not be reversed through profit or loss.
derivative financial instruments and hedge accounting Derivative financial instruments are classified as those held for trading and those held for hedging, including interest rate derivatives, foreign exchange derivatives, equity derivatives and commodity derivatives. Derivative instruments are measured initially at fair value. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
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 ‘Property, plant and equipment’ 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.
In Sampo Group there are no intangible assets with an indefinite useful life.
property, plant and equipment Property, plant and equipment comprise properties occupied for Sampo’s own activities, office equipment, fixtures and fittings, and furniture. Classification of properties as those occupied for own activities and those for investment activities is based on the square metres in use. If the proportion of a property in Sampo’s use is no more than 10 per cent, the property is classified as an investment property.
investment property Investment property is held to earn rentals and for capital appreciation. The Group applies the cost model to investment property in the same way as it applies to property, plant and equipment. Moreover, the depreciation periods and methods and the impairment principles are the same as those applied to corresponding property occupied for own activities. The fair value of investment property is estimated using the method based on estimates of future cash flows and the comparison method based on information from actual sales in the market. The fair value of investment property is disclosed in Note 19.
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 intended to cover anticipated claims
change significantly. The estimated useful lives by asset class are as follows: Residential, business premises and offices 20–60 years Industrial buildings and warehouses 30–60 years Components of buildings 10–15 years IT equipment and motor vehicles 3–5 years Other equipment 3–10 years impairment of intangible assets and property, plant and equipment At each reporting date the Group assesses whether there is any indication that an intangible asset or an item of property, plant or equipment may be impaired. If any such indication exists, the Group will estimate the recoverable amount of the asset. In addition, goodwill and intangible assets not yet available for use will be tested for impairment annually, independent of any indication of impairment. For impairment testing the goodwill is allocated to the cash-generating units of the Group from the date of acquisition. In the test the carrying amount of the cashgenerating unit, including the goodwill, is compared with its recoverable amount.
The recoverable amount is the higher of an asset’s net selling price and its value in use. The value in use is determined as the present value of the future cash flows expected to be derived from an asset in a cash-generating unit. If the carrying amount of an asset is higher than its recoverable amount, an impairment loss is recognised in profit or loss.
The liability adequacy test is applied by each company to all portfolios. The test for non-linked liabilities includes all the expected contractual cash flows. The claims have been estimated including surrenders and other insurance transactions based on historical data. The amounts of claims include the guaranteed interest and an estimation of future bonuses. The present values of the cash flows have been discounted to the balance sheet date by using a risk-free zero-coupon yield curve.
In the test for the unit-linked business, the present values of the insurance risk and expense results are calculated correspondingly. If the aggregate amount of the liability for the unit-linked and other business presumes an augmentation, the liability is increased by the amount shown by the test and recognised in profit or loss.
The collection of funds for this provision is to guarantee the payment of obligations that may arise in the future. In Sampo Group the provision for a collective guarantee is recognised in equity, in accordance with the Framework of the IFRS, until it become probable that the obligation will be settled. The provision for a collective guarantee is not an part of distributable equity.
Pensions paid on the basis of Finland’s statutory P&C insurance (accident, motor third party liability and patient insurance) are raised annually by the TEL (Employee Pensions Act) index in order to maintain the real value of the pensions. The index raises are not the responsibility of the insurance companies, but are funded by the so-called pay-as-you-go principle, i.e. each year premiums written include index raises to the same amount that is paid out in that year. In practice, the P&C insurance companies collect a so-called expense loading along with their premiums written, which is then used immediately to pay claims and benefits in accordance with the pay-as-you-go system.
The acquisition costs are usually amortised in 12 months at the maximum.
The discretionary participation feature (DPF) of a contract is a contractual right held by a policyholder to receive additional benefits, as a supplement to the guaranteed minimum benefits. The supplements are bonuses based on the reserves of policies credited to the policy reserve or additional benefits in the case of death. In Sampo Life, the principle of fairness specifies the application of the feature. In unit-linked contracts the policyholder carries the investment risk by choosing the investment funds linked to the contracts.
For unit-linked contracts, all the liabilities and the assets covering the unitlinked insurance are matched. Both the liabilities and the assets have been presented in the Notes to the financial statements.
A liability adequacy test is applied by company to all portfolios. The test includes all the expected contractual cash flows for not-unit-linked liabilities. The expected contractual cash flows include expected premiums, claims, bonuses and expenses. The claims have been estimated including surrenders and other insurance transactions based on historical data. The amounts of claims include the guaranteed interest and an estimation of future bonuses. The present values of the cash flows have been discounted to the balance sheet date by using a risk-free zero-coupon yield curve.
In defined benefit plans, the company still has obligations after paying the contributions for the financial period and bears their actuarial and/or investment risk. The
Liabilities arising from insurance and investment contracts consist of provisions for unearned premiums and outstanding claims. In the life insurance business, various methods are applied in calculating liabilities which involve assumptions on matters such as mortality, morbidity, the yield level of investments, future operating expenses and the settlement of claims. Changes in the liabilities of reinsurance have been calculated at fixed rates of exchange. Therefore, the impact of the exchange rates on the results in the underwriting business has been included in ‘ Net income from investments’ in the Income statement .
The guaranteed interest rate used in the calculation of the domestic life insurance liabilities is in compliance with the calculation basis approved by the company’s Board of Directors and meet both the decrees (248/1999 and 56/2003) of the Council of State and the requirements of regulation
The Group also has certain voluntary defined benefit plans. These are intraGroup, included in the insurance liabilities of Henki-Sampo and have no material significance.
income taxes Item Tax expenses in income statement comprise current and deferred tax. Current tax is calculated based on the valid tax rate of each country. Tax is adjusted by any tax related to previous periods.
share capital The incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business, are included in equity as a deduction, net of tax, from the proceeds.
fiduciary activities The fiduciary services supplied by the Group are discretionary asset management services, mutual fund services and securities custody services. In these activities, assets are held and placed on behalf of customers. These assets and the income arising thereon are excluded from these financial statements, as they are not assets of the Group.
cash and cash equivalents Cash an cash equivalents comprise cash and balances with central banks including shor-term deposits (3 month) as well as loans and advances to banks repayable on demand.
Sampo Risk management Disclosures 2005 risk management overview Risk is an essential part of Sampo’s operating environment and business activities. Clearly defined strategies and responsibilities, together with strong commitment to the risk management process, are our tools to manage risks.
The major risks associated with Sampo Group’s activities are insurance risk, the credit risk arising from banking and investments, the market risks of investment portfolios, interest rate and liquidity risk of the banking book. Operational and business risks are inherent in all business areas.
The core of the P&C insurance business is transfer of risk from the insured clients to the insurer. P&C Insurance collects insurance premiums from a large group of policyholders and commits to compensate them if an insured event occurs. For P&C Insurance the result depends on both the underwriting result and on the return on investment assets. It is of utmost importance for the underwriting result that insurance policies are prudently priced. However, there is a risk of adverse outcomes due to the inherent uncertainty associated with the insurance business. This uncertainty is managed by reinsurance, for example. Investment operations emphasise absolute return and
risk control. As a major part of the insurance premium must be paid to policyholders through future claims, there has to be assurance that sufficient assets are always available to cover these liabilities. The duration gap between liabilities and fixed investments is under constant monitoring and management. Surplus capital is invested in a diversified portfolio to enhance the total return.
Sampo plc’s main holdings comprise the shares of subsidiaries, which are partly financed by debt instruments. Some holdings are in foreign currencies. Sampo Plc’s earnings are therefore exposed to the profitability of its subsidiaries, interest rates and foreign currency. The subsidiaries ’ business risks are managed by constantly developing the business areas to keep them competitive and profitable.
The capital adequacy and solvency margin figures are presented in Sampo Group’s Key Figures. Since the beginning of 2005, Sampo Group has reported the Group’s capital adequacy in accordance with the Financial Conglomerates Directive (2002/87/EC). See table (1).
operations increased by about EUR 76 million. The capital allocated to life insurance operations increased by about EUR 100 million. The capital allocated to P&C insurance operations decreased EUR 49 million. The capital allocated to the parent company mainly comprises the exchange rate risks of subsidiary holdings. Analysed by risk category, the capital allocated to market risks and credit risks increased the most. The capital allocated to insurance risks decreased. See figures (3), (4) and (5) on page 33.
market risks Movements in risk factors such as interest rates, exchange rates, equity and commodity prices and changes in their respective volatilities affect the fair values of financial assets and liabilities. The sensitivity of existing contracts to different market risk scenarios are shown in tables (2) and (4). These tables do not show the financial risks of technical provisions, which are quantified on pages 36–37, in paragraphs “Market risks of P&C insurance liabilities ” and “Market risks of life insurance liabilities”.
At group level the major interest rate risks are in the bond positions of the insurance segment investment portfolio and in the loan and deposit portfolios of the banking segment. The equity risk applies almost exclusively to the insurance segment. Commodity risks are small compared to interest rate and equity risks.
Economic capital reflects not only the amount of the different kinds of risks, but also slightly their mutual diversification effect. It is very improbable that all risks in the Group’s business areas will materialise at the same time. The magnitude of the diversification effect at the group level is about 14 per cent.
capitalisation and capital management process The basis for the Group’s capitalisation is the need of economic capital. Other factors affecting the need for capital are the expected business growth, changes in the environment, the rating target together with the regulatory minimum capital requirements, and market expectations concerning prudent capitalisation. When the capital needs have been specified, the Group Treasury prepares capital transactions for the approval of ALCO and the Companies’ Boards of Directors. The Group Treasury executes transactions on the markets.
The economic capital tied up in the Group’s operations increased during the year by about EUR 106 million (3 per cent). The reasons for this were the growth of the banking loan portfolios, increase of the market value of the investment portfolios and the sale of the Polish activities. At the same time the minimum capital adequacy requirements increased by about EUR 79 million (4 per cent). The capital allocated to credit institution
Derivatives (Assets–Liabilities) 42 –63 10 2 –8 rency positions of the Group’s companies against their home currency and the translation risks are shown in table (6) on page 36. The currency positions of companies are kept very minor. The Group’s currency risk is EUR 154 million, measured against 5 per cent depreciation of foreign currencies against the EUR.
The Value-at-Risk (VaR) figures for the investment portfolios of insurance companies and the trading services of banking are shown in table (5). To interpret the var figures, on a horizon of one month, Sampo Group has a 2.5 per cent probability of losing more than EUR 95 million of its economic value due to market risk in the P&C investment portfolio. See also ”Market risk management” on page 44.
market risk sensitivities for financial assets and, liabilities by segment, dec. 3�, 2005 risk interest rate equity commodity �% parallel �% parallel �0% fall �0% fall eUrm shift down shift up in prices in prices
Banking and Investment Services –28 18 0 0 P&C Insurance, investment assets 194 –183 –101 0 Life insurance, investment assets 197 –162 –197 –22 Holding and other 1 0 –6 0 Sampo Group total 364 –327 –305 –21
Var 99% � day horizon eUrm dec.�2, 2005 average maximum minimum
In the banking book, loans to customers are mostly linked to Euribor rates. The interest rates for a majority of demand deposits are set by the banks on the basis of the competitive situation and general interest levels. The market-based funding of Sampo Bank is mainly linked to the Euribor rates. In a low rate environment, the net interest rate margin is under pressure. When rates climb, the net interest rate margin rises. The main risk is a situation in which the Euribor rates remain at a very low level for a long period of time.
In 2005 the Euribor rates stayed at a low level, but hedging contracts improved net interest income. These hedges have now mostly expired. During recent years, the bank has not made any new long-term hedges of this kind, because there has been an expectation of rising rates. As per 31 December 2005, a hypothetical one percentage point interest rate rise would have improved the net interest margin of Sampo Bank by EUR 45 million. The combined interest rate risk for other currencies was less than EUR 1 million.
Sampo Bank’s operations are mostly in euros. Although the Baltic subsidiaries have operations in their home currencies, in fact their currencies already behave like the euro. Later, when the Baltic countries join the EMU, Sampo Bank Group’s banking book will become almost exclusively euro-denominated. This has already been taken into account in risk management. Market risks in trading services are small compared to banking book risks. See also ”Market risk management” on page 44.
Sampo Life’s investment operations achieved a return of 12.0 per cent in 2005. The year was particularly good in terms of equity investments. On the fixed income side, there was an expectation of rising interest rates and therefore short-term interest-bearing instruments were heavily favoured. During the year the real estate and hedge fund allocation was diminished. Sampo Life was also a net seller of equity investments, but the equity allocation actually increased because of excellent permarket risks of p&c insurance liabilities
Insurance liabilities (technical provisions ) can be divided into provisions for unearned premiums and unexpired risks, and provisions for claims outstanding. As per 31 December 2005, net provisions for unearned premiums and unexpired risks amounted to EUR 1,579 million, while provisions for claims outstanding amounted to EUR 5,753 millions. Figure (11) illustrates the distribution of reserves per product. The majority of technical provisions are stated in the balance sheet in nominal terms, and hence, from an accounting perspective, are exposed only to changes in future inflation. However, the economic value of these reserves, i.e. The present value of future claims payments, is exposed to changes in interest rates.
Banking and Investment Services EUR –1 0 0 6 1 2 0 –4 0 2
Holding and Other companies EUR 3 0 0 0 0 0 1 18 0 0 5% depreciation of foreign currency against EUR –132 0 0 –4 –1 –3 –1 0 –3 –10
Fixed income investments, life insurance and P&C insurance, 12,744 EURm, Dec. 31, 2005
The most noteworthy risk included in liabilities is the interest rate risk related to the guaranteed interest. In most withprofit policies, the guaranteed interest rate used in the premiums basis is 3.5 per cent.
Sector allocation – total fixed income, 11,237 EURm, Dec. 31, 2005
Equity investments, life insurance and P&C insurance, 2,541 EURm, Dec. 31, 2005
maximum exposure by segment Banking and sampo investment p&c life eUrm Group services insurance insurance other
outstanding exposure by geography Banking and sampo investment p&c life eUrm Group services insurance insurance other
US, CA, JP, AU, NZ, Other Western Europe 1,067 377 525 149 16 and capital redemption policy operations. This risk is reduced by the relatively short maturity of such contracts , the surrender penalties of the first years and the reserve for a decreased discount rate. See also table (19) on page 45.
The figures in tables (7), (8), (9) and (10) show the exposures of customers of Sampo Group excluding baltic P&C insurance. The internal receivables of Sampo group companies have been eliminated from these figures. Exposures are primarily categorised according to customers or counterparties. However, in cases where the credit decision was based on the creditworthiness of a guarantor, they are categorised according to the guarantor. Geographical reporting is based on the country of registration of the customer or guarantor. The reporting of credit risks covers all agreements and derivative contracts, both on and off-balance sheet, with which they are associated.
Sampo group’s outstanding exposures to customers totalled EUR 40.0 billion and they increased during the year by about EUR 5.9 billion. Corporate exposures increased by EUR 2.1 billion, of which banking accounted for EUR 1.4 billion and P&C insurance for EUR 0.7 billion. Analysed by industry, the greatest relative increases were in forest industry (61 per cent), construction (35 per cent) and the wholesale and retail distribution (31 per cent) . The greatest reductions in exposures was in financial institutions (5 per cent). About 63 per cent of the banking exposures to corporate customers are secured by category I–V collateral.
Retail customer lending increased by 2.3 billion (28.6 per cent) of which Baltic covers 0.3 billion (88%). 78 per cent of the retail loan portfolio and most of the new lending were used to finance the purchase of dwellings. The Baltic countries accounted for 6.5 per cent of the retail loan portfolio and 14 per cent of the growth. In Finland 81 per cent of lending and 85 per cent of its growth was in areas of net in-migration of population. Just under 2 per cent of lending was in areas with significant net out-migration. About 94 per cent of lending to retail customers was secured by category I–IV collateral, which are mainly dwellings and government guarantees. 6 per cent of the total was unsecured credits.
In terms of geographical area, 95 per cent of exposures were in EU countries. The growth of exposures were concentrated to Scandinavian and Baltic countries.
outstanding exposure by sector Banking and sampo investment p&c life eUrm Group services insurance insurance other
rating analysis, maximum exposure Banking and % sampo investment p&c life (sampo eUrm Group services insurance insurance other Group level)
Exposures to customers in default stood as follows (EUR million): Corporate and Institutional customers 69 70 Retail customers 42 46
New impairment losses totalled EUR 38 million, while recoveries totalled EUR 39 million. Net losses of retail customers amounted to EUR 3 million and corporate customers’ recoveries exceeded losses by EUR 4 million.
The distribution of reinsurance receivables and reinsurers’ share of the claims provisions at December 31, 2005 per rat-
Liquidity risks are managed on the legal company level. Table (13) shows a contractual maturity analysis. In the table, financial assets and liabilities are divided into contracts having an exact contractual maturity profile and to other contracts. Only the carrying amount is shown for the other contracts. In addition, the table shows expected cash flows for net technical provisions which, by nature, are associated with a certain degree of uncertainty.
About half of Sampo Bank Group’s funding comes from liabilities to customers. This balance sheet item has been stable in Finland and it is growing mainly in the Baltic countries. In contrast, the loan growth has been rapid in all areas. As a result, Sampo Bank Group’s market-based funding needs have been growing steadily. To maintain its current liquidity profile, Sampo Bank has been an active issuer of medium term notes. To broaden its funding vehicles and to further ensure access to funding sources, Sampo Bank Group built up a covered bond programme and under it Sampo Housing Loan bank issued its debut covered bond (EUR 1 billion) in which the Finnish residential mortgage pool was the collateral for issued bonds. This programme will have a central role in funding in the coming years.
ing category is presented in table (11). In the table reinsurance receivables and reinsurers ’ portion of outstanding claims EUR 108 million are excluded. The excluded portion relates mainly to pool solutions and captive companies.
In order to limit the credit risk associated with reinsurance operations, P&C Insurance complies with a reinsurance policy that stipulates the requirements for reinsurers’ credit ratings and the maximum total exposure to individual reinsurers. The distribution of ceded treaty and facultative premiums in 2005 per rating category is presented in table (12).
ratings for 2005 ceded treaty and facultative premiums s&p premiums % rating in eUrm of total
Liquidity profile 494 –1,910 –637 –673 2,600 –126 *) Trading – items are in shortest maturity at market value. Demand deposits are reported over maturities.
One concentration risk for P&C Insurance is the exposure to natural disasters, such as winter storms and floods. The most exposed geographical areas to such disasters are Denmark, Norway and Sweden. The risk is measured by analysing historical events and studying the insurance values exposed, and is managed by purchasing reinsurance. Since 2003 a Nordic -wide reinsurance program has been in use in If. On 2005 the retentions levels were sek 200 million (EUR 21 million) for property (per risk) and per event
life insurance risks The liabilities of Sampo’s Life Insurance business arise almost entirely (99 per cent) from Sampo Life’s Finnish operations. The insurance risks in Sampo’s baltic and swedish life insurance companies are managed using similar principles to those applied in Sampo Life.
should be accepted. A sensitivity analysis of the underwriting risk at December 31, 2005 is presented in table (15).
Effect on pretax profit 1% change in Private’s combined ratio +/– 20 1% change in Commercial’s combined ratio +/– 12 1% change in Commercial’s combined ratio +/– 5 1% change in premium level +/– 37 1% change in claims frequency +/– 27 10% change in ceded reinsurance premium +/– 23
Inflation in Nominal Increase by Sweden 157 nominal reserves long tailed 1%-point Denmark 8 Norway 36 Denmark 14 Discount rate Finalized Decrease by Sweden 42 annuities 1%-point Denmark 8 Finland 76 Mortality Finalized Life expectancy Sweden 7 annuities increased with 1 year Denmark 3 Finland 16
� Finland 2 Sweden 3 Norway 4 Denmark 5 Baltics 6 Other
Among the most significant of the insurance risks included in life insurance policies is protection covering death, disability and medical expenses. These risks are limited through careful risk selection, by pricing to reflect the risks and costs, by setting upper limits for the protection granted and by reinsurance. The amount of individual risk is limited by reinsurance. The companies’ Board of Directors annually determines the maximum amount of risk to be retained for its own account, which in Sampo Life is EUR 0.5 million. To mitigate the effects of possible catastrophes, Sampo Life participates in the catastrophe pool of Finnish life insurance companies. Possible pandemics are not covered by the reinsurance. At this stage, no reliable predictions of mortality in the case of a pandemic can be made. As an indication for the reader, the effect of doubling normal mortality of insurance portfolio, would mean around EUR 15 million in additional expenditure for Sampo Life.
Although group life insurance includes some concentration risk, the whole portfolio is quite well diversified and does not include major concentration risks.
changes in liabilities arising from insurance and investment contracts of sampo life Group *)
liability claims expense Guaranteed liability share eUrm 2004 premiums paid charges interest Bonuses other 2005 %
Reserve for decreased discount rate 122 0 0.0 0 0 0 46 168 3
Sampo Life Parent Company total 5,478 633 –4,45.5 –56 166 16 171 5 962 99 *) Before reinsurers’ share **) Investment contracts
Analysis of the change in liabilities in 2005. The most remarkable items in the column “Other” are the savings conversions between unit-linked and with-profit savings and the changes in the values of assets linked to unit-linked policies. The column also includes the risk result of Table 18.
Claim ratios of Sampo Life after reinsurance. The figures for individual pension policies in 2004 do not include the provision supplemented at 31 December 2004.
The provision risk is managed by analysing and annually reviewing the assumptions related to the liabilities. Due to the process of reviewing risk variables, the effect of changes in the underlying variables on insurance liabilities is not symmetrical. While improved estimates normally have no impact on the value of liabilities, a significant deterioration in estimates does have an impact.
risk management process and methods risk management governance The risk management process consists of risk control and risk management. Risk control consists of formulating risk management principles, setting limits and granting authorisations, management accounting and risk calculation, assessing the economic capital needed, and monitoring the functionality of the risk management process. Risk management consists of identifying and pricing risks, risk-taking decisions, and portfolio management. Sampo plc’s Board of Directors and the Risk Control Committee, together with the Boards of Directors of subsidiaries, the Group-level bodies and the Financial Control, share the responsibility for risk control. Line organisations are responsible for risk management.
The RCC supervises the Group’s risks and the quality and scope of its risk management. It meets on a quarterly basis with an agenda that consists of the overall risk and capital summary reports and specific risk reports focusing on actual risk areas.
The business line organisations make customer business-related decisions and ensure that decisions are made within the given authorisations and limits. In P&C insurance a new risk governance model has been established. It includes a centralised P&C Insurance Risk Control Committee, which reports to the Risk Control Committee and to Risk Control. Group’s Risk Control is independent from business activities. Group’s Risk Control is responsible for monitoring the risk position of the Group.
market risk management The Group’s Asset And Liability Committee sets limits, control parameters and risk-taking authorisations for market risks in banking activities and formulates the main risk-taking policies for the Boards of the operating companies.
Trading operations cover Sampo’s customer -related businesses in interest rate, foreign exchange, stock, commodity and credit products and their combinations. The trading unit operates independently within the set VaR limits. See table (5) on page 35.
maturity of liabilities arising from insurance and investment contracts of sampo life Group *)
matures in the years eUrm duration –2007 –2009 –20�4 –20�9 –2024 –2029 –
tries. Limits are set for risk concentrations, measured by the ratio of a customer group’s nominal exposures to the Bank’s total capital, as well as by the ratio of a customer group’s economic capital, calculated by a credit risk model, to the total economic capital. The risk concentration parameters are at a clearly lower level than official norms.
Each significant corporate customer has a customer account officer who is familiar with the customer’s business and monitors its development. In addition, a credit analyst who is independent of the customer business units continually analyses the customers with the biggest credit risks or largest exposures.
In addition, the ratings of listed customers are monitored by a model which estimates the default probabilities by combining stock market and financial statements information.
The profitability and target-setting of the operations of customer-responsible units and the pricing of the credit risk of the customer relationship is estimated by using the return on risk-adjusted capital (RORAC) calculation.
The creditworthiness of retail customers is assessed by analysing each customer’s or household’s income, living expenses and debt repayment obligations, as well as other factors that have a bearing on the customer’s solvency. These are used for customer credit scoring. The scoring technique varies by product, because the information available for each product differs. A default probability is attached to the credit score calculated by each scoring technique. Uncertainties related to the evaluation of creditworthiness are covered by using collateral which, in the case of long-term loans, is usually a dwelling. Normally the value of a dwelling is based on recent housing trade. When updating these values, regional indices are used. The “loss given default” is computed on the basis of the counterparty’s exposure and collateral position. Using this information the economic capital tied up in the contract can be calculated. Sampo applies risk-weighted pricing to loans. The incidence of delayed loan repayments and the development of non-performing loans are monitored and reported on continuously.
Sampo Bank utilises a statistical credit risk model to quantify its credit risks. The model estimates the expected credit losses and economic capital for credit risk. The counterparty level inputs to the model are the default and transition probabilities implied by the Sampo ratings and the estimated loss given default. The latter is a function of the counterparty’s exposure and collateral position, and its estimated other recoverables. In addition, the diversification of the bank’s corporate exposures affects the amount of the loss.
At the beginning of 2005, the risk parameter estimates of corporate customers were updated based on an analysis of the Sampo data. The most substantial change occurred in the amount of the loss given default, which, due to a more extensive definition of default, decreased significantly in the case of a counterparty default. The change caused a decrease in the economic capital for credit risks. During autumn 2005, the risk quantification parameters of private persons were tested by the Sampo data and updated at the end of the year. The effects of the changes were insignificant.
The Underwriting Policy is the principal document for underwriting activities and gives general principles, restrictions, limits and directions for the organisation of underwriting activities. The Underwriting Committee is responsible for maintaining the underwriting policy and for making proposals for adjustments
Within each business area of P&C Insurance, separate underwriting and pricing units are responsible for the tariffs and pricing of insurance contracts. Among other things, statistical analyses of historical claims and individual analyses of major undertakings are performed on a continuous basis in order to secure accurate pricing.
Large claims are nevertheless an inherent part of the property and casualty insurance business. In the Reinsurance Policy it is stated that reinsurance must be bought to provide the capacity needed and to give economic stability to P&C Insurance companies. Based on statistical methods and models, the need and optimal choice of reinsurance is evaluated by Corporate Finance and Risk Management. The remaining net exposure must meet the capital requirements (regulatory, economic and rating) and the cost of reinsurance must be favourable compared to the cost of capital.
To analyse the exposure to natural catastrophes, the likelihood of severe losses and the need for reinsurance, P&C Insurance co-operates with external consultancies.
Two different approaches are used for these analyses – statistical modelling in which historical losses are used to estimate distributions for the frequency and size of losses, and so-called technical, or catastrophe, modelling in which catastrophes are simulated based on historical and meteorological data and from which insurance losses are calculated (taking into account vulnerability, exposure and policy terms).
For business connected to the RunOff portfolios, P&C Insurance uses external actuarial firms with local knowledge to evaluate technical provisions.
The uncertainty of technical provisions is normally larger for new portfolios for which complete run-off statistics are not yet available, and for portfolios where claims are often not settled for a long time. If the claims involve compensation for personal injuries, the uncertainty in the estimates increases even further. Typical portfolios with these characteristics are Workers’ Compensation (WC), Motor Third Part Liability (MTPL) and Personal Accident and Liability.
The results of such analyses are used to decide on • the overall capital needs for P&C Insurance and its subsidiaries • the allocation of capital to the various lines of business in order to achieve consistent profit targets throughout the organisation • the allocation of investment assets between asset classes and regions • the requirements for reinsurance life insurance risk management Sampo Life analyses, at least annually, the actual claims expenditure and the claims expenditure assumed in insurance premiums of every risk cover. See table (18). In both disability and medical expenses policies, the company has the right to raise insurance premiums for existing policies if the claims experience deteriorates. In addition, the administration and acquisition expenses of every product are followed annually. Based on these analyses, Sampo Life sets prices for the new business and increases the liabilities of existing business if necessary. In addition to this, Sampo Life makes a quarterly liability adequacy test. Decisions on changing prices and reserving principles are made by the Board of each life company.
The business areas are responsible for organising and monitoring operational risk management in accordance with the principles defined by Group management. The centralised functions (security, information management, legal affairs, human resources) support the business units in their own expert areas. The Group’s risk management organisation develops methods to manage operational risks, co-ordinates the risk management operations of the business units and companies and is responsible for the group’s risk management reporting. Internal auditing assesses the adequacy and efficiency of internal control and risk management. The compliance function supports the business units in operating in compliance with regulations, and is responsible for the validity of the released financial information.
Risk indicators have been set to depict changes in the risk position. Their validity is assessed regularly. Generally, the risk indicators are process deviations, volume changes, customer feedback and changes in the external and internal operating environment. The business units follow the indicator values systematically. The indicator values are compared to earlier averages or with some target level. For example, in the Group Treasury and Trading business area, regular process meetings are arranged in order to follow operational risks. Company and Group level risk indicators have also been set.
With respect to operational risks, internal loss incident data is collected systematically. Incidents with direct costs exceeding a fixed sum are reported to Group risk management. Incidents are classified into risk classes, and the event control points and cost structure are analysed. Operational risk incidents may also lead to credit losses. These incidents are followed separately.
Insurance and a new crisis management organisation has been established. Exercises designed to test the crisis management organisation have been conducted in all of the nordic and baltic countries. The P&C Insurance actions against money laundering and terror financing have been revised, and P&C Insurance has adopted Sampo Group guidelines concerning this area.
preparation for changes in the operating environment The regulations affecting the capital adequacy of Sampo Group’s business areas will change in the coming years. The reform of credit institution activity is known as the basel ii reform. The corresponding reform affecting insurance companies is known as Solvency II. The new legislation concerning the capital adequacy of financial groupings came into force in Europe at the beginning of 2005.
With respect to banking, the aim of the EU’s capital adequacy framework reform is to increase the risk sensitivity of banks’ capital adequacy calculations, and to encourage banks to develop their internal risk management systems in line with the recommendations of the Basel Committee. According to the proposal on capital adequacy, banks can select the method of calculating capital adequacy that is the most appropriate for the bank’s own risk management system. The reform aims at maintaining the capital base in the international banking system at its present level. The new capital adequacy framework will affect all credit institutions and investment firms in the EU. The reform will probably come into force in stages from the beginning of 2007.
The Basel II compliance project currently underway in Sampo is responsible for Sampo Group’s full compliance with the new framework. The biggest changes affecting Sampo’s capital adequacy calculations are the new capital adequacy requirement for operational risks and the possibility to use the Internal Ratings Based Approach for calculating credit risks. Sampo has already used the Internal Ratings Based Approach for corporate customers for many years and, with respect to retail customers, for some years. During 2005 these internal models were further developed to correspond even better with the requirements of the capital adequacy calculations. In addition, the main databanks and risk evaluation methods required in the reform have been developed.
SFSA has developed a new supervisory tool - the traffic light system - to measure exposure to financial risks in lifeinsurance companies and occupational pension funds. The traffic light system will be implemented in 2006. There will be no impact on if, If is a P&C insurance company.
Claims incurred –2,457 –557 –3,014 Change in liabilities for insurance and investment contracts –390 –390 Staff costs –200 –447 –20 –44 5 –706 Other operating expenses –220 –484 –37 –55 100 –695 Total operating expenses –420 –3,387 –1,004 –98 105 –4,805 net income between the segments 28 35 18 –81
Profit before taxes from continuing operations 316 800 234 –49 –6 1,295
Attributable to Equity holders of parent company 949 Minority interest 14
The Group’s business segments are Banking and investment services, P&C insurance, Life insurance and Other operations. Other operations comprise the operations of the holding company and the Primasoft Oy information technology firm.
Net interest income 322 –38 12 297 Net income from financial transactions 74 –5 –6 64 Net fee and commission income 197 –1 –17 178 Impairment losses on loans and receivables 11 0 11
Attributable to Equity holders of parent company 817 Minority interest 31
Liabilities Financial liabilities at fair value through p/l 464 149 36 649 Amounts owed to credit institutions and customers 12,336 106 –182 12,260
Assets Cash and balances at central banks 921 269 179 –206 1,163 Financial assets at fair value through p/l 2,538 176 38 5 –5 2,751 Loans and receivables 15,835 95 –61 15,869
Geographical segment information revenue by geographical segment eUrm finland sweden norway denmark Baltic other total
Income 2004 Banking and investment services 647 – – – 37 –1 682
Assets 2004 Banking and investment services 18,701 – – – 1,183 5 – 19,889
� transition to international financial reporting standards, ifrs Sampo adopted the IFRSs in its consolidated financial statements on 1 Jan. 2005. The transition included the adoption of IFRS 1 First time adoption. The transition date was 1 Dec. 2004. The comparitive figures for 2004 have been adjusted according to IFRSs.
In the opening balance of the comparison year 2004 the adoption of IFRSs increased Sampo Group’s equity by EUR 307 million.
Sampo Group’s transition to IFRSs and the changes arising from it are illustrated on Sampo Group’s Internet-page (www.sampo.com/ir).
With respect to the impairment of financial assets, the most prominent change is the recognition of interest income on the impaired carrying amount of a loan. According to previous accounting practice, the interest income was reversed, if the loan became non-performing. According to IAS 39 the interest income continues to be recognised on the impaired carrying amount at the original effective interest rate.
In P&C insurance, in accordance with IFRS 4, insurance contracts are classified depending on the insurance risk either as insurance contracts or as other than insurance contracts. Those insurance products that do not include significant insurance risk have been classified as other than insurance contracts. Examples of these are Captive and Reverse Flow Fronting agreements. Income and expenses arising from these agreements are netted.
IFRS 4 obliges the insurance company to perform a liability adequacy test. Based on this test Sampo’s technical reserves are adequate in both the P&C and the life insurance business.
exemptions applied in the transition to ifrss In its first-time adoption of IFRS, Sampo applies the following exemptions referred to in IFRS 1: IFRS 3 is not applied retrospectively to past business combinations that occurred before 1 Jan. 2004. The goodwill acquired in previous business combinations has been tested for impairment in accordance with IAS 36. No impairment losses were recognised in the opening balance sheet on the basis of these tests.
effects of transition to ifrss on the equity of the opening balance sheet for � Jan. 2004 and on the equity of the closing balance sheet for 3� dec. 2004 and on the result for the financial period ended 3� dec. 2004. 1) The preferred capital securities included in equity under Finnish accounting practice have been transferred to subordinated liabilities.
2) The equalisation provision less deferred tax has been recognised in the Group’s equity.
4) Derivative financial instruments are measured at fair value through p/l in compliance with IAS 39.
In life insurance the non-hedging derivative financial instruments were measured, in accordance with the previous national accounting practice, at the lower of cost and fair value.
6) The change in deferred tax arises from the valuation of balance sheet items at fair value through p/l in the transition to IFRSs.
8) The effect of the change in the equalisation provision. Continues, Note 1→
share preferred fair share premium legal capital value retained minority eUrm capital account reserve notes reserve earnings total interest total
Valuation of AFS debt securities 3) 74 19 93 93 Valuation of financial derivatives hedging
Valuation of other financial derivatives 4) 53 53 53 Net result of hedge accounting 0 0 0
Deferred taxes 6) –77 –56 –132 –132 Transfer of minority interest to equity 7) 26 26 reconciliation of profit eUrm
For the year ended 31 December 2004, FAS 779 Change in equalisation provision 8) 54 Valuation of shares available-for-sale –3 Valuation of securities available-for-sale 9) –33 Valuation of financial derivatives 10) –42 Reversal of amortisation of goodwill 11) 46 Depreciation and amortisation related to allocation of business combination 12) –7 Other adjustments 13) –32 Income tax for the period 14) 51 Change in minority interest 15) 4 For the year ended 31 December 2004, IFRS 817
9) The effect of the change in value of both shares and participations and debt securities available-for-sale.
10) The effect of the change in fair value for derivative financial instruments.
11) After the transition to IFRSs, goodwill is no longer amortised. The previous amortisations under FGAAP have been restored to the result for the financial year ended 2004.
12) In revising the reporting of the acquisition of the If Group to conform to IFRS 3, EUR 47 million was re-allocated from acquisition cost to customer intangibles. These long-term expenses will be amortised straight-line in 6 years.
classifying assets as financial assets at fair value through p/l and financial assets available-for-sale in the opening balance sheet for � Jan. 2004 Financial assets and liabilites are classified according to their valuation practice. Financial assets at fair value through p/l are measured at fair value and the changes in fair value are recognised in the income statement. The changes in fair value for the financial assets available-for-sale are recognised in the fair value reserve as a separate component of equity.
Banking and investment services Debt securities, other held for trading 648 649 Financial assets available-for-sale Shares, financial fixed assets 20 24 Financial assets available-for-sale life insurance Other investments, shares and participations 2 2 Financial assets designated as at fair value through Other investments, debt securities 8 8 Financial assets designated as at fair value through Investments related to unit-linked Financial assets designated contracts *) 603 603 as at fair value through Investments in group undertakings, Debt securities 151 151 Financial assets available-for-sale Other investments, shares and participations 1,647 1,898 Financial assets available-for-sale Other investments, debt securities 2,848 2,876 Financial assets available-for-sale
2 Business combinations acquisition of if Group in the year 2004 On 11 February 2004, Sampo plc agreed to acquire the 51.89 per cent of If P&C Insurance Holding Ltd’s shares held by Skandia and its subsidiary Skandia Liv, and by Storebrand. The transaction was completed and If became an 89.94 per cent owned subsidiary of Sampo plc on 6 May 2004. On 5 October 2004, Sampo plc acquired the shares held by Varma Mutual Pension Insurance Company. Following these transactions, Sampo plc now owns 100 per cent of If. Both acquisitions were paid in cash. The profit of If Group for April to December 2004 included in Sampo Group’s profit is EURm 369.
specification of the cost of the business combination acquired percentage of shares eUrm
Liabilities Financial liabilities at fair value through p/l 27 27 Debt securities in issue 262 319 Liabilities for insurance and investment contracts 8,070 8,070 Other liabilities 746 746 Tax liabilities 181 217 Total liabilities 9,285 9,379
Reinsurer’s share of insurance liabilities 954 954 Intangible assets 145 122 Property, plant and equipment 33 33 Other assets 1,094 1,094 Tax assets 198 198 Total assets 11,230 11,241
Acquired share of net assets 10.06% 205 Purchase price 271 Goodwill 66
Assets Cash and balances at central banks 3 3 Loans and receivables 46 46 Other assets 0 0 Total assets 49 49
Liabilities Amounts owed to credit institutions and customers 41 41 Other liabilities 1 1 Total liabilities 42 42
Pro forma profit for the financial year Sampo Group’s profit for the financial year 2004 excl. If Group 402 If Group’s profit for the financial year 2004 471 Sampo Banka’s profit for the financial year 2004 0 Sampo Group’s pro forma profit for the financial year 2004 873
disposed entities during the year 2005 In June 2005, Sampo plc signed a binding agreement to sell its subsidiaries in Poland – the pension company Sampo PTE S.A. and the life insurance company Sampo T.U. Zycie S.A. – to Nordea Life Holding A/S. The consideration is EUR 95 million, of which Sampo recognised a sales gain of EUR 24 million. Sampo has already written off most of the goodwill associated with the acquisition of the disposed entities. The figures of Sampo PTE S.A are reported in the banking and investment services segment and those of Sampo T.U. Zycie S.A. in the life insurance segment in Other operating income.
Interest expenses Amounts owed to credit institutions and customers –145 –108 Debt securities in issue –179 –148 Other interest expenses –1 –5 Total –325 –261
In the item is also included a change in fair value of cash flow hedging instruments EURm 11 (EURm 14), which have been transferred from the fair value reserve at the maturity of the contracts.
Interest expenses Amounts owed to credit institutions and customers –6 –13 Debt securities in issue –36 –30 Other interest expenses 0 0 Total –42 –43 other business, total –39 –38
Net interest income from other business, total In net interest income -39 -38 In net income from financial transactions 0 –1 In net income from investments 6 3
Banking and investment services Trading assets/liabilities Debt securities and interest rate derivatives Interest income 23 26 Gains/losses 7 –7 Equity securities and equity derivatives Gains/losses 6 –1 Dividend income 1 12 Other Gains/losses 1 0
Financial assets designated as at fair value through p/l Debt securities Interest income 32 26 Gains/losses –13 6
Group, total 1 11 5 fee and commission income and expenses
Fee and commission income and expenses of insurance business are included in Net income from investment.
Insurance premiums include all payments from insurance and investment contracts. These are specified in tables below.
Premiums from insurance contracts Premiums from contracts with discretionary participation feature 377 250 Premiums from unit-linked contracts 284 275 Premiums from other contracts 3 1
Single and regular premiums from direct insurance Regular premiums, insurance contracts 370 302 Regular premiums, investment contracts – 0 Single premiums, insurance contracts 293 224 Single premiums, investment contracts 4 5 *)
Included in gains/losses is a net gain of EURm 1 transferred from the fair value reserve.
p&c insurance Financial assets Trading assets and derivative financial instrument Derivatives Gains/losses –7 37 Financial assets designated as at fair value through p/l Debt securities Interest income 210 166 Gains/losses 48 3 Equity securities Gains/losses 253 15 Dividend income 27 12
Financial liabilities Debt securities in issue Interest expenses from subordinated debt securities –23 –14 other financial expenses –10 –5 other assets Investment properties Gains/losses –1 –17
Financial liabilities Debt securities in issue Interest expenses from subordinated debt securities -6 –6 other Interest expenses –3 –4 other assets Investment properties Gains/losses 20 15 Impairment losses –4 –3
Included in gains/losses is a net gain of EURm 273 transferred from the fair value reserve.
Included in gains/losses is a net gain of EURm 4 transferred from the fair value reserve.
p&c insurance and life insurance Income and expenses arising from derivative contracts are included entirely in net investment income. Gains/losses include profit/losses on sales of derivatives, unrealised changes in fair values and exchange differences.
The effect of discounting annuities in p&c insurance is disclosed separately. The provision for annuities is calculated in accordance with actuarial principles taking anticipated inflation 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.
9 claims incurred 2005 2004 p&c p&c insurance insurance eUrm Gross ceded net Gross ceded net p&c insurance P&C Insurance Claims cost attributable to current-year operations Claims paid –1,222 53 –1,169 –958 17 –941 Claims portfolio – – – 0 –16 –16 Change in provision for claims outstanding (incurred and reported losses) –658 62 –596 –307 53 –254 Change in provision for claims outstanding (incurred but not reported losses, IBNR) –738 29 –708 –442 –20 –462 Claims-adjustment costs –11 – –11 –7 0 –7 Change in claims provision for annuities –12 – –12 – – – Total claims cost attributable to current-year operations –2,640 144 –2,496 –1,714 34 –1,680
Claims costs attributable to prior-year operations Claims paid –1,019 109 –910 –698 160 –538 Annuities paid –17 – –17 –38 0 –38 Claims portfolio –159 158 –2 1 –3 –2 Change in provision for claims outstanding (incurred and reported losses) 710 –131 579 576 –204 372 Change in provision for claims outstanding (incurred but not reported losses, IBNR) 513 –124 389 143 2 145 Total claims cost attributable to prior-year operations 27 12 39 –16 –46 –62
Claims portfolio –159 158 –2 1 –19 –18 Total claims paid –2,354 319 –2,035 –1,624 158 –1,467
Change in provision for claims outstanding Change in provision for claims outstanding (incurred and reported losses) 52 –69 –16 269 –152 118 Change in provision for claims outstanding (incurred but not reported losses, IBNR) –225 –94 –319 –299 –18 –317 Change in claims provision for annuities –74 – –74 –69 0 –69 Claims-adjustment costs –12 – –12 –7 0 –7 Total change in provision for claims outstanding –259 –163 –422 –105 –170 –275
*) 2.5 per cent has been used as a discount percentage for claims in a form of annuities for 2004 and 2005. For older annuities the percentage was 3.5. The average of these two as for 31 Dec. 2005 was 3.4.
claims change in provision claims paid for claims outstanding incurred life insurance Insurance contracts Life-insurance Contracts with discretionary participation feature (DPF) –126 –134 –5 0 –131 –134
Unit-linked contracts –2 –2 0 – –2 –2 Total –222 –197 –109 –53 –331 –250
Life insurances insurance and investment contracts –436 –419 –122 –45 –557 –464 claims paid by type of benefit
Pension insurance, unit-linked Pension payments – – Surrender benefits –1 –1 Death benefits 0 0 Loss adjustment expenses – 0 Other – 0 Total –2 –2
Investment contracts Capital redemption policies Surrender benefits –23 –6 Loss adjustment expenses –24 –35 Other – – Total –46 –41
Investment contracts Capital redemption policies, unit-linked Surrender benefits –1 –4 Loss adjustment expenses –2 –12 Other – – Total –3 –17
�0 change in liabilities for insurance and investment contracts life insurance Insurance contracts Life-insurance Contracts with discretionary participation feature (DPF) 40 73 Other contracts –4 0 Unit-linked contracts –226 –185 Total –190 –111
Pension insurance Contracts with discretionary participation feature (DPF) –93 –42 Other contracts 2 0 Unit-linked contracts –159 –96 Total –250 –138
Change in liabilities for insurance and investment contracts total, gross –387 –191
Change in liabilities for insurance and investment contracts in total, net –390 –191
Banking and investment services Staff costs Wages and salaries –160 –146 Pension costs – defined contribution plans –23 –24 Other social security costs –18 –15 Banking and investment services, total –200 –185 p&c insurance Staff costs Wages and salaries –303 –228 Pension costst - defined contribution plans –48 –24 - defined benefit plans [note 32] –27 –27 Other social security costs –68 –50 P&C insurance, total –447 –329 life insurance Staff costs Wages and salaries –17 –16 Pension costs - defined contribution plans –2 –2 Other social security costs –1 –1 Life insurance, total –20 –19 other business Staff costs Wages and salaries –36 –38 Pension costs - defined contribution plans –5 –6 Other social security costs –2 –3 other business, total –44 –46
Banking and investment services IT costs –57 –59 Other staff costs –9 –11 Marketing expenses –19 –12 Postage and telephone costs –10 –11 Depreciation and amortisation –40 –43 Rental expenses –26 –28 Other –58 –54 Banking and investment services, total -220 -218 p&c insurance IT costs –63 –45 Other staff costs –20 –21 Marketing expenses –49 –33 Depreciation and amortisation –20 –28 Rental expenses –46 –33 Change in deferred acquisition costs –9 –24 Credit loss on outstanding premiums –1 –8 Direct insurance comissions –116 –96 Commissions on reinsurance ceded 18 29 Other –178 –114 P&C insurance, total –484 –375 life insurance IT costs –8 –8 Other staff costs –1 –1 Marketing expenses –2 –1 Depreciation and amortisation –2 –3 Rental expenses –1 0 Direct insurance comissions –16 –15 Comissions of reinsurance assumed –2 –1 Commissions on reinsurance ceded 1 2 Other –7 –3 Life insurance, total –37 –29 other business IT costs –24 –46 Other staff costs –1 –1 Marketing expenses –1 0 Depreciation and amortisation –8 6 Impairment losses on intangible assets and property, plant and equipment – –9 Rental expenses –6 –8 Other –15 –24 other business, total –55 –83
Diluted earnings per share Profit or loss attributable to the equity holders of the parent company/continuing operations 949 824 Profit or loss attributable to the equity holders of the parent company/discontinuing operations 0 –7 Profit or loss for the purpose of calculating diluted earning per share 949 817 Weighted average number of shares outstanding during the period 565 558 Dilutive effect of options 1) 10 8 Weighted average number of shares outstanding during the period for the purpose of calculating diluted earning per share 575 566 Diluted earnings per share (EUR per share)/continuing operations 1.65 1.45 Diluted earnings (EUR per share)/discontinuing operations 0 –0.01 1) In calculating the diluted earnings per share, option rights, which have not been exchanged to shares during the year but have exercice price lower than the average market price of the ordinary share, have been taken account. The diluting effect is the number of shares, that would be issued without consideration. The fair value of the ordinary share is determined as the average market (closing) price of the shares during the period, being EUR 11.97 (EUR 8.72) in 2005. No dilutive effect arises from the 1998 bond with warrants (3 million shares in 2004). For 2000 option programme the dilutive effect is 10 million shares (5 million shares). More detailed information on option schemes by Sampo Group is disclosed in Note 34.
Financial liabilities, total 22,576 396 carrying interest/ Gains/ impairment divided eUrm amount inc./exp losses losses income financial assets Financial assets at fair value through p/l Trading assets and derivative financial instruments 2,179 24 –31 – 14 Financial assets designated as at fair value through p/l 10,004 196 129 – 7
Financial assets available-for-sale 4,783 99 182 – 77 financial liabilities Financial liabilities at fair value through p/l Trading liabilities and derivative financial instruments 589 –
Balances with central banks 1,253 886 Banking and investment services, total 1,290 921 p&c insurance Cash at bank and in hand 248 173 Short term deposits (max 3 months) 117 96 P&C insurance, total 366 269 life insurance Cash at bank and in hand 37 5 Short term deposits (max 3 months) 174 174 Life insurance, total 211 179
Banking and investment services, total 2,409 464 2,538 451 p&c insurance life insurance other business Assets/liabilities held for trading 1 – 0 – Derivative financial instruments 2 – 4 0 other business, total 3 – 5 0
Currency options, bought and sold 234 4 3 543 2 2
Equity derivatives OTC derivatives OTC equity and equity index options 7 2 2 – – – Total OTC derivatives 7 2 2 – – –
Derivatives held for hedging Derivatives designated as fair value hedges Interest rate derivatives
Foreign exchange derivatives Currency options, bought and sold 275 0 2 – – –
Equity derivatives Equity and equity index derivatives, bought and sold 448 53 52 468 8 28 Total derivatives designated
Debt securities Treasury bills and other eligible bills 648 546 Total debt securities 648 546
Equity derivatives Exchange traded derivatives Equity and equity index options 4 6 – 132 1 – Total exchange traded derivatives 4 6 – 132 1 –
Currency options, bought and sold 618 4 4 467 9 6
2005 2004 contract/ fair value contract/ fair value notional notional eUrm amount assets liabilities amount assets liabilities
other business Assets held for Trading Equity securities – 0 Debt securities 1 – Total assets held for trading 1 0 2005 2004 contract/ fair value contract/ fair value notional notional eUrm amount assets liabilities amount assets liabilities derivative financial instruments Derivatives held for hedging Derivatives designated as fair value hedges Interest rate derivatives
The Group uses derivative instruments for trading and for hedging purposes. The derivatives used are foreign exchange, interest rate, equity and commodity derivatives. Derivatives held for trading relate primarily to customer business and, to a lesser degree to proprietary trading. In Banking and investment services derivatives held for hedging purposes are used for hedging loans, liabilities and future cash flows. In insurance business derivatives are used for hedging interest rate risk and foreign exchange risk, but hedge accounting is not applied.
Banking and investment services Loans and advances to credit institutions By type of loan - Reverse repos – 81
Banking and investment services, total 18,911 15,835 other business other business loans and receivables, total 62 95
Present value of minimum lease payments receivable not later than one year 197 238 later than one year and not later than five years 452 335 later than five years 117 77
Banking and investment services Investments held-to-maturity 46 28 Financial assets available-for-sale 14 18 Investment property 1 1 Investments in associates (Note 20) 14 30 Banking and investment services, total 74 78 p&c insurance Financial assets designated as at fair value through p/l 9,535 8,559 Loans and receivables 3 2 Investment property 84 122 Investments in associates (Note 20) 4 4 P&C insurance, total 9,625 8,687 life insurance Financial assets designated as at fair value through p/lt 53 14 Investments held-to-maturity 16 112 Loans and receivables 5 20 Financial assets available-for-sale 5,501 4,867 Investment property 130 260 Investments in associates (Note 20) 1 3 Life insurance, total 5,707 5,275 other business Financial assets available-for-sale 183 155 Investment property 21 54 Investments in associates (Note 20) 21 21 Investments in subsidiaries 3,149 3,310 other business, total 3,374 3,540
Group investments comprise investments in financial assets, property and associates. Investment activities have been concentrated on Group insurance companies. In P&C insurance business financial investments have been designated on initial recognition as financial assets at fair value through profit or loss. In Life insurance financial investments have been designated primarily as financial assets available for sale.
Investments held-to-maturity Treasury bills and other eligible bills 2 2 Other debt securities 44 26 - Issued by public bodies 44 25 Government bonds 44 25 - Other debt securities – 1 Total debt securities 46 28
Financial assets designated as at fair value through p/l Debt securities - Other debt securities 6,060 5,268 Total debt securities 8,509 7,597
Opening net carrying amount 122 185 Additions resulting from subsequent expenditure recognised as an asset 0 Disposals –37 –46 Depreciations –1 –1 Impairment losses –2 –18 Reversal of impairment losses 3 2 Exchange rate changes 0 –1 Closing net carrying amount 84 122
Accumulated depreciation –2 –1 Accumulated impairment losses –17 –18 Net carrying amount at 31 Dec. 84 122
Certificates of deposit issued by banks 4 2 Other debt securities 32 2 Total debt securities 49 11
Accumulated depreciation –53 –48 Accumulated impairment losses –22 –23 Net carrying amount at 1 Jan. 260 303
Disposals –123 –41 Depreciations –4 –6 Impairment losses –4 –3 Closing net carrying amount 130 260
Financial assets designated as at fair value through profit or loss: During the year Life insurance bought a loan of EURm 30 with an embedded derivative. The interest on the loan is linked to the Dow Jones Investment Grade credit index. In addition, financial investments of EURm 22 of the Baltic companies have been designated as at fair value through profit or loss.
Financial investments held-to-maturity: A zero-coupon loan of EURm 99 matured during the year.
Financial assets available-for-sale: The amount of bonds with corporate risk included in the interest rate portfolio has decreased by EURm 320 during the year other business financial assets
Non-cancellable minimum rental - not later than one year 1 5 - later than one year and not later than five years 2 2 - later than five years 1 1
The premises in investment property are leased on market-based, irrevocable contracts. The lengths of the contracts vary from those for the time being to those for several years.
Disposals –41 –769 At end of year 39 57 associates that have been accounted for by the equity method at 3� dec. 2005 eUrm carrying fair % interest assets/ profit/ name amount value *) held liabilities revenue loss
associates accounted for by the equity method at 3� dec. 2004 eUrm carrying fair % interest assets/ profit/ name amount value *) held liabilities revenue loss
MB Equity Fund Ky 2 – 32.52 6/– 17 13 MB Equity Fund II Ky 5 – 18.03 28/0 39 39 associates not accounted for by the equity method at 3� dec. 2004 Consulting AB Lennemark & Andersson 5/2 1 0 Tapio Technologies Oy 2/1 1 0 Euro-Alarm A/S 2/1 8 0 *) If there exists a published price quatation.
2� investments related to Unit-linked contracts life insurance Financial assets designated as at fair value through p/l Debt securities Issued by public bodies 5 12 Government bonds 5 12 Other – 0 Certificates of deposit issued by banks 6 – Other debt securities – 2
Accumulated amortisation – –60 –60 Net carrying amount 72 74 145 opening net carrying amount 72 74 145
Disposals –66 –18 –84 Amortisation charge – –55 –55 Other changes – –4 – Closing net carrying amount 5 61 66
other intangible eUrm Goodwill assets total life insurance At 1 January
Accumulated amortisation – –12 –12 Accumulated impairment – – – Net carrying amount 153 3 156
Life insurance, total 157 other intangible eUrm assets other business At 1 January Cost 39 Accumulated amortisation –6 Accumulated impairment –9 Net carrying amount 24
At 31 December Cost 47 Accumulated amortisation –12 Accumulated impairment losses –9 Net carrying amount at 31 Dec. 26 other business, total 26
Goodwill is tested for impairment in accordance with IAS 36 Impairment of assets. No impairment losses were recognised based on these tests.
Accumulated depreciatio –1 –27 –28 Net carrying amount 10 24 34
Accumulated depreciation –1 –53 –54 Accumulated impairment losses 0 0 0 Net carrying amount 10 22 31
Banking and investment services, total 82 eUrm equipment p&c insurance At 1 January Cost 89 Accumulated depreciation –55 Net carrying amount 33
Accumulated depreciation –2 –4 –2 Accumulated impairment losses – – – Net carrying amount 4 1 5
Accumulated depreciation –1 –5 –6 Accumulated impairment losses –1 – –1 Net carrying amount 19 6 25
Accumulated depreciation –1 –5 –7 Accumulated impairment losses –1 – –1 Net carrying amount 14 5 19 other business, total 19
Arising from direct insurance operations 747 655 Arising from reinsurance operations 34 91 Settlement receivables 12 – Deferred acquisition costs 97 112 Assets related to Patient Insurance Pool 52 49
From policyholders 7 6 Arising from reinsurance operations 1 2 Settlement receivables 24 10
Deferred tax liabilities Depreciation differences and untexed reserves 33 0 –1 –2 31 Changes in fair values 120 42 –20 14 –7 149
Amounts owed to customers Deposits Demand deposits 2,856 2,559 Savings accounts 1,075 1,009 Current accounts 3,716 3,215 Money market deposits 1,122 1,334 Other time deposits 2,673 2,292 Total deposits 11,442 10,410 other liabilities Other liabilities 28 18 Total amounts owed to customers 11,470 10,427
Banking and investment services, total 12,336 10,985 other business Amounts owed to credit institutions Liabilities to credit institutions – –
Sampo Bank issued on 18 March 2004 EUR 125 million preferred capital securities. The loan pays fixed interest rate for the first ten years and floating rate interest after that. The interest can be paid only from the distributable capital. The loan is perpetual and is repayable only with the consent of the Finnish Financial Supervision Authority at the earliest on 2014 and on any interest payment after that.
Sampo Bank issued on 16 December 2005 EURm 125 capital securities. The loan was a floating rate perpetual and pays an interest at 3-month Euribor plus 1.6%. The interest on the loan can be paid only from the distributable capital. Sampo Bank can repay the loan, with the consent of the Finnish Financial Supervision Authority, at the earliest on 16 December 2010 and thereafter on any interest payment date.
If P&C Insurance Company Ltd issued on 2002 EURm 65 preferred capital note. The loan was wholly subscribed by the If Group’s owners of that moment. The loan has a maturity of 20 years. It pays fixed interest rate for the first 10 years and the last 10 years floating rate interest. The loans is not listed.
Sampo Life issued on 2002 EUR 100 million Capital Notes. The loan is perpetual and pays floating rate interest. The interest is payable only from distributable capital. The loan is repayable only with the consent of the Insurance Supervisory Authority and at the earliest on 2012 or any interest payment date after that. The loans was 100% subscribed by Sampo Plc.
other business Debt securities in issue Certificates of deposit 149 325 Bonds and notes 290 299 Total debt securities in issue 438 624
29 liabilities from insurance and investment contracts p&c insurance liabilities from insurance contracts
Insurance contracts Provision for unearned premiums 1,628 1,601 Provision for claims outstanding 6,257 5,999 Incurred and reported losses 1,952 1,902 Incurred but not reported losses (IBNR) 2,747 2,611 Provisions for claims-adjustment costs 207 200 Provisions for annuities and sickness benefits 1,351 1,287 P&C insurance total 7,885 7,600
Recoverable from insurers Provision for unearned premiums 49 34 Provision for claims outstanding 504 645 Incurred and reported losses 285 345 Incurred but not reported losses (IBNR) 219 300 Total recoverable from insurers 553 679 life insurance insurance contracts
Liabilities for contracts with discretionary participation feature (DPF) Provision for unearned premiums 3,108 3,058 Provision for claims outstanding 1,463 1,336 Liabilities for contracts without discretionary participation feature (DPF) Provision for unearned premiums 15 13 Provision for claims outstanding 3 15
Assumed reinsurance Provision for unearned premiums 3 19 Provision for claims outstanding 2 3
Investment contracts Liabilities for contracts with discretionary participation feature (DPF) Provision for unearned premiums 144 182 Investment contracts total 144 182
Recoverable from reinsurers Provision for unearned premiums 0 –3 Provision for claims outstanding –5 –13 Total –5 –16
Group, total 12,623 12,226 30 liabilities from Unit-linked insurance and investment contracts life insurance Unit-linked insurance contracts 1,246 870 Unit-linked investment contracts 16 14
Items in transit 369 296 Finance lease liabilities – 3 Other liabilities 251 155
In addition to statutory retirement pension insurance, the Group has certain voluntary defined benefit plans. The voluntary defined benefit plans are intra-Group and included in the insurance liabilities of Henki-Sampo. The amount is negligible and they have no material impact on the Group profit or loss or equity.
other liabilities Arising out of direct insurance operations 142 166 Arising out of reinsurance operations 32 46 Settlement liabilities 0 46 Liabilities related to Patient Insurance Pool 52 49 Prepayments and accrued income 154 173 Other liabilities 119 145
32 employee Benefits employee benefits Sampo has defined benefit plans in P&C insurance business in Sweden and Norway.
In addition, the Group has certain voluntary intra-Group defined benefit plans, which are included in the insurance liabilities of Sampo Life and the amount of which is negligible.
Net cumulative unrecognised actuarial gains/losses –60 –7 –67 –40 –3 –43 Net pension obligation recognised in the balance sheet 35 46 81 42 38 81 Expected wage taxes/social security costs 12 7 19 13 6 19
The following actuarial assumptions have been used for the calculation of defined benefit pension plans in Sweden and Norway: sweden sweden norway norway 3� dec. 2005 3� dec. 2004 3� dec. 2005 3� dec. 2004
Pension obligations, and the pension cost accrued during the fiscal 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 adjusted to take into account the duration of the company’s pension obligations. After deducting plan assets, a net asset or liability is entered in the balance sheet. The net obligation reported in the closing balance pertained to definedbenefit pension plans for employees in Sweden and Norway. The pension benefits arising in the other countries covered by the Group’s operations have been classified as defined-contribution plans.
long-term incentive schemes With the exception of the CEO, the members of the Group Executive Committee are participants in the long-term incentive schemes 2003, 2004 and 2005 for Sampo plc´s executive management. The bonuses shall be paid during year 2005–2008 and they shall be based on the financial performance of Sampo and the value of Sampo’s Series A share. At 31 December 2005 the total provision for the long-term incentive schemes was EUR 38 million. The estimated amount was increased by EUR 22 million in 2005. Based on the Scheme 2003, the first payment amounting to EUR 5.7 million was paid in December 2005. The terms of the schemes are available on Sampo’s website at www.sampo.com.
Off-balance sheet items consist mainly of guarantees and commitments to extend credit. Guarantees including irrevocable letters of credit comprise commitments written on behalf of customers. Commitments to extend credit are irrevocable commitments and comprise undrawn loans, overdraft facilities and other commitments to lend. The commitments are stated to the amount that can be required to be paid on the basis of the commitment. For guarantees a provision is recognised when the Group considers it more likely than not that an obligation exists under its guarantees.
Assets pledged as collateral Financial assets at fair value through p/l
Sampo Bank plc has entered into long-term deposit contracts called Guaranteed Investment Contracts. In each contract the maximum amount permitted to be invested and the fixed interest rate to be paid for the investment are specified with the customer. This means that the amount to be invested varies during the term of the contract but the interest rate is fixed. The maximum amount permitted to be invested under these contracts was EURm 151 at the balance sheet date. Contracts mature in 2025 at the latest.
Non-cancellable operating leases Minimum lease payments under non-cancellable operating leases - not later than one year 21 20 - later than one year and not later than five years 53 50 - later than five years 43 50
Lease and sublease payments recognised as an expense in the period
Assets pledged as collateral Cash at balances at central banks 42 0 35 – Investments
In connection with the transfer of property and casualty insurance business from the Skandia group to the If Group as of March 1, 1999, If P&C Insurance Holding Ltd and If P&C Insurance Ltd issued a guarantee for the benefit of Försäkringsaktiebolaget Skandia (publ.) whereby the aforementioned companies in the If Group mutually guarantee that companies in the Skandia group will be indemnified against any claims or actions due to guarantees or similar commitments made by companies in the Skandia group within the property and casualty insurance business transferred to the If Group.
life insurance off-balance sheet items Fund commitments 184 179 assets pledged as collateral for liabilities or contingent liabilities assets liabilities/ assets liabilities/ eUrm pledged commitments pledged commitments
Non-cancellable operating leases Minimum lease payments under non-cancellable non-cancellable operating leases - not later than one year 2 – - later than one year and not later than five years 6 – - later than five years 7 – Total 15 –
Own shares held by the company 7,000,000 reserves and retained earnings eUrm total
The legal reserve comprises the amounts that shall be transferred from the distributable equity according to the articles of association or on the basis of the decision of the AGM. No change has been in the legal reserve during the financial years of 2004 or 2005.
Cash flow hedge: Recognised in equity 3 Transferred to profit or loss –8 Financial asset available-for-sale Recognised in equity 375 Transferred to profit or loss –207
Profit for the financial year 811 Dividend distribution –831 Recognition of undrawn dividends 1 Exchange rate translation difference 22
The A shares and the 2000 A/B options are quoted on the Helsinki Stock Exchange.
The new share category was adopted at the beginning of 2005 in order to facilitate the payment of year 2004 dividends, because Sampo’s A shares subscribed for after 31 December 2004 are entitled, on the basis of the option programs, to dividends only after the dividend distribution for 2004. The Sampo Uudet share category was combined with Sampo A shares after the dividend distribution in April 2005.
The shares can only be bought back to be cancelled. The shares can only be cancelled with the separate approval of shareholders ’ meeting to lower share capital.
On 31 December 2005, Sampo plc held 7 million Sampo A shares, which corresponds to approximately 1.2 per cent of the total number of shares and votes. The shares were bought through public trading on the Helsinki Stock Exchange and EUR 87.7 million was used for acquisition of the shares. Other Group companies did not hold shares in parent company at the end of 2005.
option schemes the number of shares entitled to subscription, the average subscription price and the subscription period option schemes �99� 2000 total
The subscription rights for 5,151,250 shares owned by the Satura, a wholly-owned subsidiary of Sampo Plc, have not been deducted from the share amounts.
the weighed average subscription price and the market price of the share in the subscription day
Average subscription price 4.07 6.74 5.05 Average market price 11.21 13.93 12.21
�99� Bond with warrants On May, 1998 Sampo issued a bond with warrants valued at approximately EURm 1.1. The bond, which did not pay interest, was repaid on 22 May, 2001. All staff permanently employed by Sampo Group and the Kaleva Mutual Insurance Company were entitled to subscribe. Around 72 per cent of the staff employed at the time utilised their entitlement to subscribe.
The subscription period ended on 31 May, 2005. As a result of subscriptions, the share capital could have increased by the maximum of 16,500,00 A shares. At the end of the subscription period 16,362,500 A shares were subscribed.
A total of 5,200,000 options were issued, of which 2,600,000 are designated as A options and 2,600,000 as B options. Each option entitles its holder to subscribe for five Sampo A shares. The year 2000 B option were admitted for trading on the main list of Helsinki Stock Exchange after the stipulated subscription requirements had been met and were combined with the A options to form A/B options. The share subscription period for all the options ends on 31 Jan, 2007.
At the end of the year under review, 4,762,510 of the 2000 A/B warrants entitled to subscription for 23,812,550 shares, were still unexercised. With 382,200 share subscriptions still unapproved at the end of the year, the share capital can increase by a maximum of EURm 4,07, which equals approximately 4,2 per cent of the share capital as of the end of 2005.
The share subscription price is EUR 6,74. If the Annual General Meeting approves the Board’s proposed dividend distiribution for 2005, the subscription price will be reduced to EUR 6,14.
37 legal proceedings There are a number of legal proceedings against the Group companies outstanding on 31 December 2005, arising in the ordinary course of business. No provisions have been made as professional advice indicates that it is unlikely that any significant loss will arise.
Key management personnel with close family members and entities that are controlled or significantly influenced by these 23 21
Loans and receivables 100 94 Liabilities to credit institutions and customers 79 21
Net income from financial assets available for sale –1 102 Gains (losses) from hedge accounting 0 – Net income from investment property –1 3 Other operating income 12 11
Depreciation and impairment on property, plant and equipment and intangible assets –7 –14 Other operating expenses –21 –34 Impairment on loans and advances –2 0 Impairment on other financial assets – –43 operating profit 460 429
Liabilities to customers Other liabilities Other than repayable on demand 99 105
Other liabilities 49 77 Accruals and deferred income 43 47 Subordinated liabilities Other than capital securities 597 596 Deferred tax liabilities 5 –
Equity Share capital 96 95 Share premiums account 1,048 1,019 Other undistributable reserves Legal reserve 366 366 Distributable reserves Fair value reserve Changes in fair value –9 – Other reserves 273 273 Retained earnings 194 1 Treasury shares –88 – Profit for the year 474 286 off-balance sheet items Commitments Other than sale and option to resell transactions 12 17
� interest income and expenses by balance sheet item eUrm 2005
Interest income Loans and advances to credit institutions 2 Loans and advances to customers 1 Debt securities 6 Derivative financial instruments 0 Other interest income 0 Total 9
Financial assets designated as available for sale 6 Group companies 530 Associates 3 Total 540 3 fee and commission income and expenses eUrm 2005
Fee and commission expenses On guarantees 1 Other 0 Total 1 4 net income from financial assets available for sale from disposal impairment eUrm of assets losses
Debt securities – – Shares and participations 0 –1 Total 0 –1
Rental income 8 Depreciation according to plan 0 Profits on disposals 6 Losses on disposals –3 Impairment losses –7 Other income 0 Other expenses –5 Total –1 7 other operating income and expenses eUrm 2005 other operating income Rental income from property occupied for own activities 1 Profits on disposal of property occupied for own actitivies 0 Other 11 Total 12 other operating expenses Rental expenses 3 Expenses on property occupied for own activities 1 Losses on disposal of property occupied for own actitivies 1 Other 16 Total 21
Depreciation and amortisation On property, plant and equipment 1 On intangible assets 6 Total 7 9 impairment losses on loans and advances and other financial assets eUrm 2005
�� loans and advances to credit institutions repayable eUrm on demand
Impairment losses at beginning of year – + Impairment losses recognised on individual loans and advances 2 – Reversals of impairment losses recognised for individual loans and advances – Impairment losses at end of year 2
Issued by public bodies For trading purposes – 1 1 Government bonds – 1 1
Shares and participations Available for sale 3 48 51 Shares and participations in Group companies – 3,157 3,157 Shares and participations in associates 16 1 18 of which at cost 16 3,159 3,175 of which in credit institutions – 787 787
�5 derivative financial instruments notional remaining maturity fair value eUrm less than � year �–5 years over 5 years positive negative
Amortisation according to plan –4 –2 Accumulated amortisation at beginning of year –4 –2 Accumulated impairment losses at beginning of year –9 – Carrying amount at end of year 11 14
Shares and participations in property companiest Occupied for own activities 8 7
Classification between those occupied for own activities and for other is based on the area in Group’s use.
Disposals –49 –6 – Transfers to and from items 0 0 – Depreciation according to plan 0 0 –1 Impairment losses and reversals –2 1 – Accumulated depreciation and impairment losses on disposed and transferredd items 1 0 – Accumulated depreciation at beginning of year –1 –1 –5 Accumulated impairment losses at beginning of year –17 –1 – Carrying amount at end of year 17 14 5
Commercial paper 149 149 Bonds and notes 290 290 23 other liabilities eUrm 2005
Deferred interest 23 Other 20 Total 43 25 subordinated liabilities eUrm 2005
nominal carrying interest maturity issuer Value amount rate *) date *) Interest rate 4.625% until 21 April 2009 and after that 3-month Euribor plus 2.97%.
Repayable on interest payment date in April 2009 and after that on any interest payment date in January, April, July and October.
Assets Loans and advances to credit institutions 47 – 47 47
2� fair value measurement using other than quoted prices Methods used in fair value measurement are disclosed in Group accounting policies.
Subscription for shares with options 1 29 30 Dividends –113 –113 Recognition of undrawn dividends 4 4 Change in fair value 1 1 Treasury shares –88 –88 Profit for the year 474 474
Fair value reserve at 1 Jan. 2005 Financial assets available for sale –13 Deferred tax assets 3 Total –10
Retained earnings at the beginning of year as in the previous financial statements 288 Valuation of hedging instruments and hedged items 1 Transfer of the negative fair value of available for sale financial assets into fair value reserve 20 Deferred tax –5 Retained earnings at 1 Jan. 2005 303 distributable equity at 3� dec. 2005 Parent company Profit for the year 474 Retained earnings 106 Other reserves 273 Total 853
Group Profit for the year 949 Retained earnings 1,128 Other reserves 335 Total 2,412 Undistributable items –395 Distributable equity total 2,017 30 share capital Information on share capital is disclosed in Note 34 to the consolidated financial statements.
32 shareholdings and principal shareholders on 3� december 2005 shareholding number Holders Book-entry Voting rights of shares number % number % number %
of which in nominee register 16 276,678,657 48.4 On joint account 7,871,960 1.4 7,871,960 1.4 shareholders at 3� december, 2005 number % of share % of a and B shares of shares capital votes
Varma Mutual Pension Insurance Company 60,438,785 10.6 10.5 Wahlroos Björn 11,739,890 2.1 2.0 Stora-Enso Oyj 8,746,620 1.5 1.5
The Finnish Natinal Fund for Research and Development, Sitra 998,000 0.2 0.2 Nordea Life Assurance Finland Ltd 909,600 0.2 0.2 Alfred Berg Finland Fund 873,170 0.2 0.2 20 largest shareholders in total 205,032,614 35.9 36.4
33 assets pledged as collateral security other eUrm pledges mortgages securities total
34 pension liabilities The basic and supplementary pension insurance of Sampo plc’s staff is handled through insurances in Varma Mutual Insurance Company and in Sampo Life Insurance Company Limited.
Sampo plc considers the Tax Office for Major Corporations’ December 2004 decisions ungrounded and has appealed the decisions to the Helsinki Administrative Court.
staff and management 3� staff numbers average change durduring the year ing the year
Full-time staff 83 +2 Part-time staff 1 – Temporary staff 1 – Total 85 +2 39 management's salaries, fees and pension benefits eUr thousand 2005 managing Director and Debuty managing Director Managing Director Björn Wahlroos 2,324 Deputy Managing Director Kari Stadigh 1,445 members of the Board of Directors Olli-Pekka Kallasvuo 63 Jyrki Juusela 51 Tom Berglund 41 Anne Brunila 39 Georg Ehrnrooth 40 Christoffer Taxell 39 Matti Vuoria 41
The interest on loans to the key management personnel is at least as high as on the staff loans referred to in the Income and Capital Tax Act, section 67. Also other terms of the loans equal to the terms of the staff loans confirmed in the Group. The loans are secured.
Property company Kiinteistö Oy Hervannan Tieteenkatu 1, Tampere Finland 100.00 1 other Satura Oy, Helsinki Finland 100.00 1 Primasoft Oy, Espoo Finland **) 20.00 (30.00) 1 *) Percentage of the voting rights held is presented in brackets, if it differs from that of the shares held.
Information on associates is disclosed in Note 20 to the consolidated financial statements.
other information 4� information on credit institutions within the Group The Parent Company of Sampo Group is Sampo plc, whose registered office is in Helsinki. Copies of the consolidated financial statements of Sampo plc are available on request by post from: Unioninkatu 22. FI-00075 SAMPO
Jyrki Juusela matti Vuoria christoffer taxell olli-pekka Kallasvuo Björn Wahlroos Chairman Group CEO
parent company’s financial statements and administration In our opinion the parent company’s financial statements have been prepared in accordance with the Finnish Accounting Act and other rules and regulations governing the preparation of financial statements in Finland. The financial statements give a true and fair view, as defined in the Finnish Accounting Act, of the parent company’s result of operations as well as of the financial position. The financial statements can be adopted and the members of the Board of Directors and the Managing Director of the parent company can be discharged from liability for the period audited by us. The proposal by the Board of Directors regarding the distribution of distributable funds is in compliance with the Companies’ Act.
Visiting address Unioninkatu 22, Helsinki, Suomi Postal address FI-00075 SAMPO, FINLAND
co nc ep t, gr ap hi c de si gn a nd la yo ut
| ph ot og ra ph er s: H or st N
If P&C Insurance is the leading property and casualty insurance company in the Nordic countries, with approximately 3.6 million customers and a staff of about 6,600 people. In 2005, If’s total premiums written were EUR 4 billion. If offers P&C insurance in Finland, Sweden, Norway, Denmark, Estonia, Latvia and Lithuania.
• If, the leading P&C insurance company in the Nordic countries • Sampo Bank, an expert in retail and corporate banking services for customers in Finland and the Baltic countries • Sampo Life, an expert in life and pension insurance products for customers in Finland and the Baltic countries • Sampo Group also operates under brand names such as Arvo Asset Management, Realty World (Kiinteistömaailma),
Sampo Group’s core businesses are banking, long-term savings and property and casualty insurance.
...and we succeeded. We accepted the challenge, and this is the result: Our share of the Finnish housing loan market´s growth increased to 23 per cent (14).
2 President’s Review 4 Banking Retail Customers 7 Realty World (Kiinteistömaailma)
The world over, banks are generally product-oriented. Their service is passive, bureaucratic and slow. At the same time, however, many other fields have reorganised their operations in line with what customers feel benefits them the most. We may ask, have banks been developed mainly to generate benefit for themselves, instead of their customers?
In the future, I believe that bank customers will demand better service in two areas in particular.
Secondly, the bank’s service must be fast and smooth under all circumstances. The bank needs to get the job done.
These two service promises are summed up in our motto: From idea to action! In other words – beneficial solutions, carried out promptly and fast.
How did our service promise play out in practice in 2005? For example, in January we promised to issue housing loan decisions in less than one hour, without exception. This was very useful for our homebuyer customers. In 2005, Sampo was the supreme winner in the Finnish housing loan market.
In September, we introduced the “Boring” Housing loan – in other words, we openly and directly encouraged our customers to link their housing loans to a long-term fixed interest rate, because we expected the interest rates to go up.
This policy of ours differed distinctly from that of any of our competitors, and we believe that customers choosing this loan will, in years’ after, be pleased with the savings in their loan management expenses. We also encouraged our numerous corporate customers to pay attention to the historically low price of debt finance and expand their operations through acquisitions or mergers. In 2005, we were the number one bank in Finland in both financing and advising of acquisitions.
Our service promise was also manifested in investment services and long-term saving. During the past two to three years we have been bolder than our competitors in recommending mutual fund and life insurance products that benefit from rising share prices. We at Sampo are pleased to see that those customers who followed our advice again increased their assets in 2005.
At Sampo, we believe that putting a strong emphasis on customer benefit is not in conflict with achieving a good business result – quite the contrary. In 2005, we attained our best operating result ever, even though the prevailing low interest rates weaken banking results and hard competition has narrowed loan spreads.
Our growth and expansion was vigorous outside Finland as well. The Baltic banks’ business grew in almost all product segments, totally by over 60 per cent, and despite expansion-related investments, their profitability improved substantially. Sampo Life set up a branch office in Oslo to enable our participation in Norway’s new employee pension system. The bank’s Stockholm branch, established mainly for our corporate customers, commenced in September. In the autumn we also announced that we are preparing to initiate banking activities in Russia. There, too, we are interested in serving Nordic corporate customers expanding to this area, and we believe that our successful Baltic operating concept will, in due course, be useful for Russian retail customers as well.
In recent years, Sampo Bank’s Personal Financial Plan has become an effective tool for bank-customer co-operation. Through this service the bank can quickly respond to evolving customer needs and oversee the customer’s financial plans far into the future.
Through the Personal Financial Plan, customers are able to concretely identify their personal financial needs. Planning solutions together with a specialist ensures that customers are aware of the financial possibilities, no matter whether they are related to housing, leisure or planning for the future. The aim is to improve the quality of the customer’s life.
Sampo Bank aims to help ease the lives of Finns and provide workable solutions for their everyday financial needs. 130,000 customers have already drawn up a Personal Financial Plan.
One of Sampo Bank’s focal areas during the year was the provision of better, more flexible and faster service for housing loan customers. In January, the bank launched a new service, promising housing loan decisions in one hour! In autumn, the bank began to market a new housing loan dubbed “Boring” with a safe, fixed rate of interest that keeps customers free of interest rate risk for up to 20 years.
In 2005, Sampo Bank opened a new branch office at the Jumbo shopping centre in Vantaa, and four sales or service points in other locations in the Greater Helsinki area.
Sampo Bank also co-operated closely with Realty World (Kiinteistömaailma ) by combining services in many locations under one roof, so that customers could do their banking and home seeking at one stop. The process of renovating and standardising branch offices in line with the Sampo Bank brand, commenced a few years ago, was continued.
Sampo promises to make housing loan decisions within one hour of negotiations ending. However, this speedy service is not intended to bind customers; instead, they can take their time to weigh all the facts and devote more time to planning their new home.
Realty World (kiinteistömaailma) continued its vigorous growth. the chain’s brokerage revenue increased by 21 per cent in 2005.
Realty World celebrated its 15th anniversary in May. During this time, Realty World has changed the Finnish real estate business by, for example, bringing real estate agencies to the street level and publishing sales information and photos on the Internet. In 2005, three-dimensional layout images and 360-degree virtual presentations of apartments for sale became increasingly common. The Kodinkoneturva domestic appliances insurance policy, developed together with If P&C Insurance, became established as a benefit for home buyers.
Realty World awarded actor Kari Väänänen for his role as real estate agent Jarmo Kesämaa in the film Trench Road (Juoksuhaudantie). Kari Väänänen, who received a bronze statuette of a real estate agent by sculptor Rauni Liukko, portrayed the many facets of this work in a very human and credible way.
The strengthening of co-operation between local real estate agents and the Sampo Bank branches continued as in previous years. In many locations, this was reinforced by combining services under one roof, allowing customers to take care of their banking and home seeking at one stop.
Sampo’s core expertise in corporate customer business includes financing, payments, cash management and investment services. But other services related to corporate management and staff incentive systems, ownership arrangements, life insurance and the management of property and casualty risks, offered together with Sampo Group’s other businesses, are also an integral part of service packages offered to customers.
Sampo Bank’s corporate branch network comprises 15 corporate branches located in the largest Finnish cities, a number of small business (SME) branches specialising in the banking and insurance needs of small businesses, and the 56 Sampo branches located around Finland which serve both retail and corporate customers. The new operating concept, the new small business branches and the Sampo branches have gained plenty of new customers and participated in corporate restructuring on a countrywide scale.
Sampo Bank’s corporate banking business was expanded in 2005. Two new corporate branches specialising in the banking and insurance needs of small businesses were established in Helsinki – one at Pitäjänmäki and another at Itäkeskus. Additionally, Sampo Bank reinforced its mergers and acquisitions concept by signing a co-operation agreement with Suomen Yrityskaupat Oy.
Sampo Bank won an international award from The Banker magazine, which is part of the Financial Times group. Sampo’s Netvisor eAccounting service was awarded as the best network service solution provided by a retail customer bank in 2005. In conjunction with the introduction of web-based invoicing, an increasing number of entrepreneurs, companies and business chains now also utilise electronic financial administration, benefiting from its ease of use and the resulting increased competitiveness.
2005 was also an active year with respect to the introduction of web-based invoicing and online salary payments for corporate customers. The number of parties involved and the volumes of webbased invoicing increased. The largest invoice recipients have paved the way for web-based invoicing, which has thus became established as a cost-efficient tool. Sampo Bank offered web-based invoicing tools, plus any necessary accessories (such as scanning and printing services) to all sizes of corporate customers.
Agreement numbers and volumes of the certification service and other webbased services offered by Sampo grew rapidly during the year.
tomers were offered a new alternative of higher-risk fixed income funds.
In the capital markets, 2005 was again a year of syndicated loans. Finnish companies signed new loans worth nearly EUR 14 billion, which is a new record.
Sampo acted as the mandated lead arranger in over one-third of these, retaining its position as one of the top mandated lead arrangers of medium-sized syndicated loans. Due to the favourable market situation, the loans were mainly used to re-finance existing corresponding arrangements.
The previous years’ record figures were not reached in European corporate bonds, despite the low interest rates and spreads. Nearly EUR 200 billion worth of corporate bonds were issued in Europe. Sampo Bank retained its position as the market leader in Finnish corporate issues.
Activity in the buy-out mergers and acquisitions market continued to be intense. Sampo became the leading provider of financing for buy-outs and acted as the mandated lead arranger in the financing of 11 buy-out transactions.
Market shares of the lead managers of public bonds of Finnish issuers
Customers’ interest in insurance saving affected the life insurance market for Sampo Life and the whole country and was reflected in growth in premiums written and insurance savings. Savings decisions were influenced primarily by the good performance of the investment markets and the stabilisation of legislation related to pension insurance savings.
Customers’ interest in insurance saving was reflected in growth in premiums written and insurance savings for Sampo Life and for the whole Finnish life insurance market. the picture shows Iida kaivonen, Customer Relationship Manager at Sampo Life.
Excluding the liability transfers of funds, premiums written in the corporate segment grew by about 10 per cent.
in looking after the future of company employees. About 250 companies have already procured an employee benefit package for their personnel.
The need to supplement statutory pensions was also reflected in rapid growth in the sales of private pension insurance policies. In total, some 12,000 private pension insurance policies were sold, which is 40 per cent more than in 2004. Almost all of these policies were unit-linked, in accordance with Sampo Life’s strategy.
As a result mainly of the Asian tsunami disaster, customers became more safe aware and sales of risk policies rose. More new risk policies were written both separately and in conjunction with other savings, financial and insurance policies than ever before. Premiums written from Sampo Life’s risk policies increased by 12 per cent and totalled almost EUR 30 million.
nordic growth If’s clientele are potential customers for life and pension insurance in the Nordic countries. In 2005, therefore, Sampo Life commenced sales of life and disability insurance policies in Sweden in collaboration with If Liv. At the beginning of 2006, a Sampo Life branch in Norway also began to sell group pension insurance policies to If’s corporate customers there.
Sampo Life’s investment activities were successful, and the return at current values was 11.8 per cent. At the same time, the company’s solvency ratio increased to 21.3 per cent.
In September 2005, Sampo Fund Management launched a mutual fund which, with just one investment, gives access to all of the world’s emerging equity markets, from Africa to India and from Latin America to the Middle East.
Fund assets continued to increase at a record rate the assets in mutual funds administered by Sampo Fund Management increased during the year by 30 per cent to almost EUR 8.9 billion. Most assets flowed into Sampo’s emerging market funds.
Sampo’s mutual funds are administered by Sampo Fund Management Ltd. The mutual funds’ assets are managed by Mandatum Asset Management Ltd, 3C Asset Management Ltd (a specialist in absolute return strategies), Arvo Asset Management Ltd (a new asset manager focusing on value stocks) and carefully selected foreign asset management companies.
The year 2005 was yet another record breaker for Finland’s mutual fund market. EUR 7.3 billion in new investments were made in funds registered in Finland. Due to the new investments and the strong development of equity markets, total fund assets in Finland increased to EUR 44.7 billion. Sampo retained its strong market position in mutual funds with a 19.9 per cent (21.8) market share and was, as in the previous year, the second-largest fund manager in Finland with mutual fund assets totalling EUR 8.9 billion (6.8).
The favourable performance of Sampo’s equity and balanced funds and the trend for new fund subscriptions to be focused on equity funds increased their share in Sampo’s mutual fund assets. At the end of 2005, Sampo Fund Management’s market share of equity funds stood at 22.1 (25.1) per cent and they contained assets of over EUR 3.6 billion (2.8).
In 2005 Sampo continued its strong investment in emerging markets by launching four new equity funds: Mandatum China, Mandatum Black Sea, Mandatum Russia Small Cap and Sampo Emerging Markets. The fund selection was also augmented by two high-yield fixed income funds, one equity fund investing in Europe as well as one fund investing in Finnish value stock. With the new funds Sampo has also increased the number of its international partners by three new asset managers.
Mandatum Asset Management Ltd is Sampo’s asset manager for corporate and institutional customers and the manager of most Sampo and Mandatum mutual funds.
The successful 2005 investment year reinforced Mandatum Asset Management ’s position as Finland’s leading asset manager. While relationships with long-term customers grew deeper, new agreements were made with both domestic and foreign institutions. The success of the Sampo and Mandatum funds managed by the company also won an international award.
During the year Mandatum Asset Management enhanced its customer service and portfolio management by increasing the number of personnel. A new special group was created for investment directed at Eastern Europe. Multi-management activities were further expanded to meet increasingly international investment needs.
Significant expansion of the product selection continued in funds, as well as in risk management and reporting. New funds were focused on limited special areas and especially on emerging markets, which are attracting significant investment due to their fast development.
Arvo Asset Management Ltd, an asset manager focusing on value stocks, began operations. Value stocks are investments in publicly listed companies whose market price is low in relation to the value of equity in the balance sheet, i.e. the net asset value.
On 21 September, 2005, the Finnish Financial Supervision Authority granted Arvo Asset Management a licence to operate as an investment services firm, and, at the start of October, the company took over management of the Sampo Euro Value mutual fund, later renamed Arvo Euro Value. In October, Sampo Fund Management launched the Arvo Finland Value fund, which began investment operations on 18 October.
During 2005, value stock investment proved popular with both private individuals and institutions. At the end of 2005 the assets in funds managed by Arvo Asset Management totalled EUR 127.3 million and the funds had a total of 4,082 unit holders.
3C Asset Management 3C Asset Management Ltd is Finland’s leading asset manager focusing on absolute return strategies. Funds with an absolute return objective are characterised by the independence of returns from general market development, active risk management and the hedging of invested assets.
In particular, the popularity of fundbased investing in absolute return objective funds has increased. This is indicated by a near doubling of the assets in the Eliksir fund managed by the company during 2005. The company believes demand for absolute return objective investment will continue, as a result of the need of institutions to spread their investments also to targets independent of market trends, and the need of private investors to receive a higher absolute return on their investments.
Strong profitability performance continued A favourable operating environment, expanded product portfolio and higher quality doubled operating profit.
In Finland, capital market transactions continued in modest quantities, despite the healthy climb in share prices on Nordic stock exchanges. Mandatum’s objective is to maintain its position in Finnish and Finland-related Nordic mergers and acquisitions and to improve its position in capital market transactions.
Mandatum Securities Ltd is responsible for Sampo Group’s securities brokerage services and investment research.
2005 was a very positive year for the equity markets. The DJ STOXX 600 index, reflecting the performance of European stock exchanges, rose by 23.5 per cent. Total turnover on the Helsinki Stock Exchange increased by 24.2 per cent, almost reaching the level of the peak year of 2000. Activity was up not only among Finnish investors but also among foreign institutions, whose interest in Finnish domestic shares rose sharply. Low interest rates and a steep increase in corporate profits were the elements underpinning the strong stock exchange year.
The accession of the Baltic countries to the European Union has promoted their economic growth. Sampo further strengthened its position in the fastgrowing banking and long-term savings markets of the Baltic economies.
Sampo’s Baltic banking and longterm savings businesses comprise its banks and life insurance companies in Estonia, Latvia and Lithuania. Sampo Group’s general operating policies are applied in the company’s Baltic banking and long-term savings businesses.
In June, Sampo announced the divestment of its Polish subsidiaries, the Sampo P.T.E. S.A. pension insurance company and the Sampo T.U. Zycie S.A. life insurance company. The official permits needed for the transaction were obtained in December.
The number of corporate customers increased as well in both countries. Sampo’s market share in corporate lending increased in Lithuania and decreased slightly in Estonia. In addition to actively selling finance services, Sampo has paid special attention in both countries to promoting its payments and deposit services. As Finnish companies operating in the Baltic countries are also an important customer group, the
Sampo Life’s Baltic subsidiaries are AS Sampo Elukindlustus in Estonia, AAS Sampo Dziviba in Latvia and AB SAMPO gyvybes draudimas in Lithuania. These companies that were previously owned by Sampo plc were wholly acquired by Sampo Life in 2004. Sampo Life had already earlier assumed operational control over them, and the transfer of legal ownership further facilitated their development.
The bankassurance concept has been developed further, and new sales originating from banks already account for some 50 per cent of all new life insurance sales in the Baltic countries.
All of the Sampo Life companies focus on selling unit-linked products, with the Latvian subsidiary becoming the first in its market to introduce unitlinked sales in 2004. Sampo is the third largest provider of unit-linked products in the Baltic market.
Gross premiums written of the SAMPO gyvybes draudimas life insurance company in Lithuania increased by 26 per cent. The company’s share of the Lithuanian life insurance market rose to seven per cent.
In June, Sampo announced the divestment of its Polish subsidiaries, the Sampo Towarzystwo Ubezpieczen na Zycie life insurance company and the Sampo Powszechne Towarzystwo Emerytalnen pension insurance company to Nordea Life Holding. The transaction was carried out in December, after the necessary official permits were obtained.
The training provided by the Sampo Business School continued, and the second Business Training programme targeted at key personnel was implemented during the year.
The goal of occupational health has been to evaluate and support the ability to work through regular health inspections, the monitoring of sick leaves and referral to treatment programmes. To support these activities, an electronic health and well-being survey that covers various areas of well-being at work was
In an employee satisfaction survey carried out in autumn, matters related to gender equality were surveyed for the first time. According to Sampo employees, supervisors also put equality into practice. the picture shows (from left) Risto Riskala, Financial Specialist, and Arja Lähteenmäki and Marjut kantola, Customer Advisors at the Sampo Bank branch at the Sello shopping centre in Espoo.
introduced. With this tool, the Group’s occupational health function, which is responsible for co-ordinating occupational health activities, has a better opportunity to monitor the effectiveness of occupational health work and to direct its activities more purposefully.
The salaries of clerical staff, supervisors, specialists and management are based on job evaluations. In jobs relating to the acquisition of new customers, salaries are largely based on sales commissions.
At Sampo Bank, the basic salary systems are complemented by the personnel fund and by an annual lump-sum bonus system. The bonus system covers all staff groups, and payment of bonuses is based on excellent individual or team performance. The personnel fund is a form of long-term collective reward, and each year profit-sharing bonuses are paid to the personnel fund according to a system agreed upon in advance and based on Sampo Bank Group’s operating profit. In 2005, the personnel fund was paid a total of EUR 4.9 million, based on the profit for 2004.
The Co-operation Board for Sampo’s banking and long-term savings activities met six times during the year. The Board has 15 members, with seven representing clerical employees, two representing supervisors and specialists and six representing the employer.
Staff surveys on job satisfaction were conducted for the fourth consecutive year in 2005, and were designed to be comparable with the surveys of previous years. In the main areas, the already good results had further improved. Comparison of results from several years also indicates a consistent improving trend. The satisfaction of Sampo employees has increased in almost all staff groups, and on a scale of 4 to 10, overall satisfaction was rated 8.2. The equivalent result for 2004 was 8.1. The response rate was 74 per cent, which is the second highest rate recorded with the current type of job satisfaction survey.
P&C Insurance number of staff working in Life Insurance in Sampo Group number of staff working in Banking and Investment Services in Sampo Group
For Sampo, the key social issues of 2005 related especially to the challenges of population ageing, as in previous years. Sampo focused attention on the measures needed to prepare for this demographic change. Measures promoting working capacities and well-being have already been emphasised for a number of years.
At the end of 2005, Sampo Bank started activities to develop corporate culture and staff training continued at the Sampo Business School and elsewhere. In Estonia, the main focus was on management training.
Mandatum Stockbrokers became the first stockbroker service in Finland to integrate corporate responsibility into its investment analysis. Mandatum’s corporate responsibility criteria have been defined together with other securities firms in the European Securities Network.
Mandatum Stockbrokers arranged an SRI seminar for investors, in which six Finnish listed companies presented their business from the standpoint of good governance and social and environmental responsibility. The seminar showed that corporate responsibility issues are valued highly in the management of Finnish listed companies.
Sampo Bank aims to prepare to all data security problems, including cases of attempted fraud in Internet banking, by developing security systems in its web bank and informing customers about risks.
Sampo continued to support the enterprise of children and youth in 2005. Sampo donated almost EUR 200,000 to 103 Finnish comprehensive schools and upper secondary schools, especially for projects increasing handicraft skills. Donations were also made to the Association of Care-Giving Relatives and Friends and the Mannerheim League for Child Welfare.
Discarded security systems were donated to the Vantaa Vocational Institute. The purpose of the donation is to support vocational security education. Sampo earlier made corresponding donations to other vocational institutes providing security education.
Net income from financial transactions 74 -5 -6 64 Net fee and commission income 197 -1 -17 178 Impairment losses on loans and receivables 11 0 11
Assets Cash and balances at central banks 1,290 366 211 -201 1,665 Financial assets at fair value through p/l 2,409 87 46 3 -8 2,537
Investments related to unit-linked contracts 1,262 1,262 Reinsurers’ share of insurance liabilities 553 5 558
Equity Share capital 96 Reserves 1,814 Retained earnings 2,412 Equity attributable to parent company’s equityholders 4,322 Minority interest 26 total equity 4,348 total equity and liabilities 42,985
Liabilities Financial liabilities at fair value through p/l 451 129 9 0 589 Amounts owed to credit institutions and customers 10,985 313 -260 11,037
Liabilities for insurance and investment contracts 7,600 4,626 12,226 Liabilities for unit-linked insurance and investment contracts 884 884
Arvo Asset Management Ltd Visiting address: Bulevardi 10 C, 5th floor, Helsinki, Finland Postal address: P.O.Box 152, FI-00121 HELSINKI, FINLAND Telephone: +358 10 236 5370 www.arvovalue.fi
Mandatum Asset Management Ltd Visiting address: Bulevardi 10 A, Helsinki, Finland Postal address: P.O.Box 152, FI-00121 HELSINKI, FINLAND
Mandatum Private Bank Visiting address: Bulevardi 10, Helsinki, Finland Postal address: P.O.Box 152, FI-00121 HELSINKI, FINLAND
Sampo Bank plc Visiting address: Unioninkatu 22, Helsinki, Finland Postal address: FI-00075 SAMPO, FINLAND Telephone: +358 10 515 15
Latvia AAS Sampo Dziviba (Life insurance company) Kronvalda bulvaris 3, LV-1010 RIGA, LATVIA Telephone: +371 7 503 333 Fax: +371 7 503 555 www.sampo.lv
www.sampo.lt norway Sampo Life Insurance Company´s branch office in Norway Visiting adress: Lysaker Torg 35, Lysaker, Oslo Postal address: P.O. Box 240, N-1326, LYSAKER, NORWAY
Estonia AS Sampo Elukindlustus (Life insurance company) Narva mnt 11, EE-15015 TALLINN, ESTONIA Telephone: +372 6 302 300 Fax: +372 6 302 299 www.sampo.ee
In 2005, If’s total premiums written were EUR 4 billion. If offers P&C
• Sampo Bank, an expert in retail and corporate banking services for customers in Finland and the Baltic countries
• Sampo Life, an expert in life and pension insurance products for customers in Finland and the Baltic countries
• Sampo Group also operates under brand names such as Arvo Asset Management, Realty World (Kiinteistömaailma), Mandatum and Volvia.
4 Business mission, strategy & financial objectives 5 Market and competitors 6 Business area Private 9 Business area Commercial 12 Business area Industrial 14 Business area Baltic countries 16 Human resources 17 Social responsibility 18 Risks and risk management 19 Five-year summary 20 Cash flow statement 21 Income statement 22 Balance sheet 24 Glossary and defintitions 25 Addresses
If reported its best earnings to date in 2005. Operating profit amounted to MSEK 7,493 (5,319), corresponding to an excellent return of 31.8% on equity, after paid taxes. The earnings derived from both a highly favorable trend for insurance operations, with a combined ratio of 90.5% (92.6), and a strong return on investment assets. As a result of target-oriented efforts to increase earnings, If’s combined ratio has improved quarter by quarter since 2001.
The strong earnings are attributable to the work conducted by If on two fronts. Firstly, we have established one of the most competitive cost levels in the market by capitalizing on economies of scale within If and by establishing and consolidating a corporate culture characterized by thrift. Secondly, the quality of the risks associated with the insurance portfolio has been raised. Today, risk selection within If is significantly better than it was a few years ago, as is our ability to help customers avoid claims. Despite the storm Gudrun, one of the most serious events in the history of Nordic insurance, resulting in total costs of nearly SEK 10 billion for the sector as a whole, If ’s combined ratio improved.
One of the concepts underlying If is the company’s ability to generate economies of scale. It is gratifying to note that, six years after its inception, this strategy is continuing to bear fruit in terms of both direct savings and forward-looking customer initiatives. One major synergistic gain achieved during the year was the pan-Nordic sourcing agreement concluded in spring 2005 with TietoEnator, Telenor/Elisa and Pitney Bowes for If ’s IT operations. If receives the same IT support in all countries and the quality of the support provided was increased by moving from general agreements to specialist suppliers within clearly defined areas. As a result of these agreements, If achieved an annual saving of at least MSEK 100.
Like all insurance companies, If is IT intensive, with IT and telephony accounting for approximately one sixth of the company ’s costs. IT initiatives create conditions for both superior customer service and increased efficiency. This trend is the result of interaction between technological innovation and changes in customer preferences and requirements. During the year, If completed a new Nordic production system for industrial customers, which will replace 14 old systems in 2006. In the Finnish private market, we successfully converted 800,000 customers to new insurance products within a new production system during the year. These are both examples of how investments can lead to faster and cheaper administration and improved opportunities for control and risk selection.
During 2005 and 2006, If is introducing If Plus, a completely new Nordic customer-benefit program. If Plus will provide a series of benefits to private individuals who concentrate their insurance coverage within If, such as lower insurance premiums, lower deductibles and better prices for claims-prevention products. The If Plus concept is unique and has been received extremely well by customers.
It is with great pleasure that I present the Group’s excellent earnings for 2005, which were achieved with the help of all of If ’s employees. This is the result of the long-term efforts of our insurance operations, which demonstrates the strength of If ’s Nordic business model and encompasses major investments in the future. Finally, the earnings reported are proof of the validity of our ambition to continue to be “Best in Risk.”
Vision If is the leading casualty and property insurance company in the Nordic region and offers stability and security to its customers through competitive insurance solutions and unrivaled insurance expertise.
Being the leading player mainly entails that: • Customers view If as the foremost insurance expert with the most competitive insurance solutions.
Business mission If develops and sells property and casualty insurance solutions that offer customers security in their business operations, housing and daily lives.
Strategy By capitalizing on the benefits offered by the Nordic organization in such areas as insurance solutions, pricing, and risk selection and through the introduction of standardized work processes, If will establish sustainable profitability that is superior to that of competitors.
Sharper customer focus Correct and rapid claims adjustment is the factor that is most important in efforts to ensure that existing customers continue to select If as their insurance company and also to attract new, risk-aware customers. If devises unique Nordic customer concepts that reward loyalty. Digital solutions make it easier for private individuals and commercial customers to contact If.
Credit rating: rating of A according to the Standard & Poor’s and Moody’s rating institutions.
The Nordic region If is the only specialized Nordic property and casualty company, although certain competitors pursue focused cross-border operations. If ’s total market share corresponds to more than one fifth of the Nordic market. It is the largest company in Finland, with a market share of 29%, and the second largest company in Norway (31%) and Sweden (20%). In the more fragmented Danish market, If is the fifth largest player with a market share of 6%.
The premiums for reinsurance reflect the major claims incidents that have occurred in recent years, such as the winter storm Gudrun, the tsunami disaster and hurricanes in North America. The opportunities for direct reinsurance remain limited since the credit ratings of several major reinsurers have been reduced, which means that these companies no longer fulfill the direct insurance companies’ official demands for financial solvency.
The public welfare system in the Nordic countries has changed in recent years, which has led to increased demand for insurance solutions that supplement the public systems. During the year, If launched a number of new insurance solutions in this area, such as child insurance and healthcare insurance.
The Baltic markets are characterized by high growth, in part because a relatively low portion of the population is insured and in part because GDP growth is considerable. In 2005, the market grew by 13%. During the same period, If grew by 16%. New players established positions in the Baltic markets in 2005.
Brands: If, Europeiske (travel insurance in Norway) and car-make insurance in cooperation with automakers and branded workshops, such as Saab Försäkring and Volvia.
Excluding exchange-rate effects, costs rose by MSEK 160, following increased sales costs connected to the launching of new personal risk products, restructuring costs and some one -offs. However, due to enhanced efficiency the cost ratio remained on the same level as last year (24.5%).
Activities during the year If endeavors to cost-effectively deliver good products to private customers in the Nordic region. The company also aims to provide customers with good advice about claims prevention and access to products that make their everyday life safer. To improve customer service and spare customers from obtaining
Gross premiums written per product Gross premiums written per distribution channel
Personal insurance is an important growth area for If. Accordingly, several new personal insurance products were launched in 2005: child insurance, accident insurance, life insurance and adult insurance. The personal insurance products achieved a sales volume of 65,000 signed policies as early as during the year of launching.
Market requirements for efficient and rapid service in connection with claims are increasing. As part of efforts to improve both service and efficiency, If ’s customers will themselves be able to report their claims and have claims decisions by the Internet within certain product areas. During 2005, this system was launched successfully in Finland in the personal claims area. Starting in 2006, the system will be expanded to also include other countries and product areas.
In a survey, a full 82% of Norwegians state that their greatest cause for concern is fire at home. Of Swedish respondents, only slightly more than half were concerned about this, although nearly half of them were instead concerned about burglary, while fewer than two of every ten Norwegians were worried about a visit from thieves.
Swedish respondents stating that they are scared to die. The corresponding figures for Norway and
Nordic people feel less threatened than other nationalities by increasing terror and instability in the world. Virtually no Swede, Finn or Norwegian stated that they were afraid of terror attacks.
If is a market leader among small and medium-size companies (companies with up to 500 employees) in the Nordic region and has operations in Sweden, Finland, Norway and Denmark. The company has approximately 340,000 customers, of whom about 70% are small companies that are offered standardized insurance solutions, while the remaining 30% require more specialized insurance solutions and counseling.
Property Motor TPL Motor hull Workers’ comp. Liability Personal accident Cargo Other
It is essential that each company has exactly the insurance cover it needs
Future focus The ability to continuously refine riskselection and risk-evaluation processes is one of the keys to success in the insurance market of the future. A well-developed understanding of risk is of vital importance to efforts to increase customer satisfaction and secure long-term profitability superior to that of competitors.
• A broad skills-development program focusing on risk awareness and risk expertise, including the transfer of knowledge among Nordic countries, commenced in 2005 and is continuing during 2006.
Asked whether they were concerned about the risk of crime against their company, approximately 67% of businessmen in Norway, 60% in Sweden and slightly more than 45% in Finland responded no. The difference in responses among owners of small and midsize companies amounted to only a couple of percentage points.
Another question concerned whether new laws and ordinances were affecting business and the extent to which this was worrying the businessmen. The responses show that Swedish businessmen are least concerned, with 67% not worried about changes in legislation. In Finland and Norway, the responses of midsize companies differed from those of the small companies.
In Finland, 71% of small companies were not concerned about changes in legislation. Among the midsize businesses, the percentage was 55%. In
Business trend during the year Earnings during 2005 declined, despite improved risk selection and efficiency improvements as it was a more normal claims trend 2005, compared to the extremely favourable claims outcome in 2004. The technical result amounted to MSEK 494 (714) and the combined ratio increased to 94.5% (91.0).
The risk ratio rose to 75.1% (67.0), as a result of an increase in major claims compared with the preceding year and the winter storms experienced in January 2005. In the property and cargo segments, the cost of major claims was somewhat higher than a normalized level. The winter storms at the beginning of the year accounted for MSEK 106 of the increasing claims costs.
The Industrial business area is a market leader in industrial insurance in the Nordic region and insures large companies with Nordic connections. For companies with operations outside the Nordic region, If has branch offices in several European countries and an extensive global network of local business partners. Customers are primarily companies with sales exceeding MSEK 500, or more than 500 employees, and with complex insurance requirements. The business area has approximately 1,200 customers.
Pro- Motor Motor Workers’ Lia- Personal Cargo Other perty TPL hull comp. bility accident
Risk ratio Cost ratio Net premiums earned operates using a single system, despite the differing legal requirements and taxcalculation methods prevailing in the various countries.
In order to be perceived by industrial customers as an attractive insurance supplier, it is essential that customers with operations outside the Nordic region are offered good service. Accordingly, If established a new business unit during 2005 with the assignment of improving and developing customer service outside the Nordic region with the help of If ’s own branch offices abroad and selected international business partners.
If is a leading player in the Nordic market for industrial customers.
Industrial insurance is sold through brokers and via If ’s proprietary sales force. During recent years, the importance of the broker’s role has increased in all of the Nordic countries. In 2005, the brokers’ share of the market stabilized in all Nordic countries, apart from Finland, where the portion of brokered business is still rising. As an insurer, If is dependent on upholding close direct cooperation with customers, regardless of whether a broker is used or whether the customers themselves have established in-house units for risk management.
Business trend during the year The profitablity was good, however, the technical result deteriorated to MSEK 89 (101) in 2005 and the combined ratio increased to 92.0% (87.9) due to the extremely favourable claims outcome in 2004.
As a result of thorough cost follow-ups and cost control, efficiency increased during the year. The cost ratio improved to 32.8% (33.4), despite considerable investments in IT during the year with the aim of further enhancing efficiency.
In Latvia, If introduced a bonus program for motor insurance customers, under which profitable and loyal customers receive compensation in the form of premium discounts. The aim of this action is to increase customer satis-
However, If is focusing on profitable growth in the Baltic countries and on increasing its preference among customers. Based on the experiences gained from Estonian operations, increased centralization of work processes will also help to enhance the profitability and efficiency of the other two Baltic countries. Risk competencies, for example, will be strengthened through in-house training programs and thorough customer segmentation. Market growth is expected to continue and may even by complemented through the addition of new products within the personal risk area.
If ’s objective is to secure the performance and motivation of its employees. The most important building blocks are ensuring that our employees have the correct skills to achieve satisfactory results in work roles, that they are met with accessible and respectful leadership and that they are developed toward realizing their full potential. It is also important to have a motivating reward system, good relations with trade unions and effective HR administration.
Employee profit-sharing program All employees who do not receive management bonuses or commission participate in a Group-wide profit-sharing program. Allocations from this program are linked in part to If ’s earnings trend and in part to the fulfillment of targets by the individual employee and/ or the working group to which the employee belongs. The maximum allocation per employee is SEK 25,000 per year.
In addition, approximately 117,000 Finnish households received a safety-promoting product or service. Against a backdrop of New Year firework displays, If in Finland also distributed 20,000 pairs of safety glasses, in cooperation with the Eye and
The need for a well functioning insurance system became very clear in 2005, as exemplified by the aftermath to the tsunami disaster in Southeast Asia on Boxing Day 2004, when somewhat extraordinary efforts and new forms of cooperation within the industry were created.
Several Nordic public welfare projects were launched by If in 2005, including the “Security Funds” in Finland, Norway and Sweden. Individuals and organizations can apply for grants from these funds for local injury and crimeprevention efforts. If has also recently begun work to provide approximately 30,000 preschool children in Finland with reflective vests. In Sweden, a pilot project called “Driving forces at If” has also been started, in which personnel are invited to participate during working hours in social reform work, primarily focusing on children and young people.