Sampo Group's business areas are P&C insurance and life insurance under If and Mandatum Life brands, respectively. The Group is also the largest shareholder in Nordea Bank, the leading Nordic banking franchise. On a Group level Sampo has no stated strategy but the business areas have well-defined strategies based on return on equity targets.
During 2010 Sampo plc increased its holding in Nordea only marginally by approximately 20 million shares which amounts to an increase of 0.4 per cent in the holding.
Member of the Board; The Finnish Pension Alliance TELA, Member of the Board; Finnish-Russian Chamber of Commerce, Chairman
• Berglund holds 6,615 Sampo plc shares directly or through a controlled company.
• Pekkarinen holds 6,409 Sampo plc shares directly or through a controlled company.
• Taxell was transferred to the Board of Directors of Sampo plc from the Supervisory Board on 1 January 1998.
Election and Terms of Office of Board Members According to Sampo's Articles of Association, the company's Board of Directors comprises no fewer than three and no more than ten members elected by shareholders at the Annual General Meeting.
• Lapveteläinen holds 229,129 Sampo plc shares directly or through controlled companies or persons closely associated with the Insider.
Based on his employment contract, the Group CEO will be pai xed monthly salary and a yearly short-term variable compensation, which may be no more than an amount corresponding to nine month xed salary. The Group CEO is also a participant in the long term incentive system 2009 I for Sampo's management and in the long-term share-based incentive scheme ‘Sampo 2006' for the Group's key management.
As Sampo's holding exceeds 20 per cent, Nordea is accounted as an associated company in Sampo Group's accounts since 31 December 2009. Sampo's share of Nordea's net profit is shown on the face of Sampo Group's profit and loss account on the line Share of associate´s profit/loss.
If has taken an intensive interest in environmental issues over the past few years, and all the company's actions are guided by a strict environmental policy. If has joined the UN's Clean Development Mechanism (CDM) program in year 2010.
Internal Dividends In 2010, Sampo plc received a total of EUR 540 million (SEK 5,000 million) in dividends from If P&C Insurance Holding AB: in April a dividend of EUR 103 million (SEK 1,000 million) and in December a dividend of EUR 437 million (SEK 4,000 million) was paid.
Debt Financing Sampo plc´s debt financing at the end of 2010 was EUR 1,731 million and interest bearing assets including bank accounts were of EUR 715 million. During the year the net debt decreased marginally by EUR 32 million to EUR 1,016 million (1,048). Gross debt to Sampo plc's equity was 26 per cent (24).
Operational risks, such as failures in internal processes and systems, and business risks, such as changes in the economic environment or business cycle, are inherent throughout all business areas. The perceived risks in the businesses and operating environment did not change significantly during 2010.
+ total balance sheet - technical provisions relating to unit-linked insurance + valuation differences on investments (average of values on 1 Jan. and 31 Dec.)
Other risks in life insurance arise from the uncertainty related to the behaviour of the policyholders. The policyholders have the right to cease paying premiums (lapse risk) and the possibility to interrupt their policies (surrender risk).
Credit risk (default) refers to the negative impact in the financial results arising from defaults of debtors (issuer risk) or other counterparties (counterparty risk in derivatives and reinsurance contracts). Credit risk may realize when the cash flows agreed with the debtor or counterparty fail to materialize. In the case of issuer risk the final loss depends on the company’s holding in the security and the recovery rate. In the case of counterparty risk, final loss depends on potential positive mark-to-market value at the time of default together with recovery rate.
If P&C and Mandatum Life organise their activities autonomously but in accordance with the Group level risk management principles. The Board of Directors of the parent company defines return and capitalisation targets of the subsidiaries. The risk exposure and capitalisation reports of the subsidiaries are consolidated on Group level on a quarterly basis and reported to the Board and Audit Committee of Sampo plc. Sampo Group's overall corporate governance and system of internal control is described in the Corporate Governance section.
The Investment Control Committee (ICC) is responsible for the control of investment activities in If P&C by ensuring compliance with the principles and limits specified in the Investment Policy. ICC reports to the Board and IRCC, and meets at minimum once a month.
Guidelines for the purchase of reinsurance are stipulated in If P&C's Reinsurance Policy. The need and optimal choice of reinsurance is evaluated by use of the internal model and the cost of reinsurance should be favourable compared to the cost of capital. Other factors taken into account when purchasing reinsurance are result volatility and the impact on capital requirements (regulatory, economic and rating).
Reserve Risk Management The Board of Directors of If P&C approves guidelines governing the calculation of technical provisions. If P&C's Chief Actuary is responsible for developing and implementing guidelines on the calculation of technical provisions and for assessing whether the overall level of provisions is su cient. The Chief Actuary issues a report on the adequacy of technical provisions at least quarterly, which is submitted to the Board of Directors, If's Risk Control Committee and If P&C's CEO.
The Actuarial Committee is a preparatory and advisory board for If P&C's Chief Actuary. The committee makes recommendations on policies and guidelines for technical calculations. It also monitors technical provisions and gives advice to If P&C's Chief Actuary regarding their adequacy.
Life Insurance Risk Management Biometric risks are managed by careful risk selection, by pricing that reflects the risks and costs, by setting upper limits for the protection granted and by use of reinsurance.
Reinsurance is used to limit the amount of individual mortality and disability risks. The Board of Directors annually determines the maximum amount of risk to be retained for the company's own account, which for Mandatum Life is EUR 0.5 million per insured. To mitigate the effects of possible catastrophes, Mandatum Life participates in the catastrophe reinsurance bought jointly by Finnish life insurance companies.
Technical provisions are analyzed and the possible supplement needs are assessed regularly. Assumptions related to the technical provisions are reviewed annually. Adequacy of technical provisions is tested quarterly. Tariffs for new policies are set, the Underwriting Policy and assumption used in calculating technical provisions are updated based on adequacy tests and risk result analysis. Tariffs and prices, as well as the reinsurance principles and reserving principles are reviewed and approved annually by the Board of Directors of Mandatum Life.
The Board approves the Investment Policy annually, which sets principles and limits for investment activities. The Investment Policy also includes measures and limits for maximum acceptable market risk. These measures and limits are based on both Solvency I and Solvency II type of approaches. When it comes to the Solvency I type of approach, limits are defined for the regulatory solvency capital in relation to the regulatory capital requirement using a VAR-analysis of the investment assets. In the Solvency II type of approach, limits are set based on different confidence levels in addition to the 99.5 per cent level used in Sampo Group. ALCO reports limit breaches to the Board who makes the decisions related to the capitalization and the market risks in the balance sheet. The general objective is to maintain the required solvency and to ensure that investments are sufficient and eligible for covering technical provisions.
In Mandatum Life, currency transaction risk mainly arises from investments in other currencies than euro because the company's technical provisions are almost completely denominated in euro. Mandatum Life's currency strategy is based on active management of the currency position. The objective is to achieve positive return relative to a situation where the open currency risk exposure is fully hedged.
With respect to the underwriting businesses carried out in the subsidiary companies, it has been established that the direct business related correlations between If P&C's non-life business and Mandatum Life's life business are negligible and, consequently, business lines as such are contributing diversi cation bene ts rather than concentration risks.
Ten largest direct high-yield and non-rate xed income investments, Sampo Group, 31 Dec 2010
The regulatory capital requirements and the regulatory solvency capital of If P&C and Mandatum Life are presented i gure "Regulatory capital measures, If P&C and Mandatum Life, 31 Dec 2010 and 31 Dec 2009". All companies ful lled their regulatory capital requirement during the year 2010. Regulatory solvency capital, which is used to assess the solvency of an insurance company, is not calculated for the parent company Sampo plc.
If P&C and Mandatum Life participated in the fifth Quantitative Impact Study (QIS5). The results of both companies were in line with the expectations.
The significance and prolongation of the impairment in the last-mentioned cases is assessed case by case, taking into consideration special factors and circumstances related to the investment. Sampo invests in private equity and venture capital in order to keep them to the end of their life cycle, so the typical lifetime is 10 - 12 years. In general, a justifiable assessment of a potential impairment may only be done towards the end of the life cycle. However, if additionally there is a well-founded reason to believe that an amount equivalent to the acquisition cost will not be recovered when selling the investment, an impairment loss is recognised.
In the case of debt securities, the amount of the impairment loss is assessed as the difference between the acquisition cost, adjusted with capital amortisations and accruals, and the fair value at the review time, reduced by previously in profit or loss recognised impairment losses.
In accordance with the Group's risk management principles, fair value hedging is used to hedge changes in fair values resulting from changes in price, interest rate or exchange rate levels. The hedging instruments used include foreign exchange forwards, interest rate swaps, interest rate and cross currency swaps and options, approved by the managements of the Group companies.
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.
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, additional benefits in the case of death, or lowering of insurance premiums. In Mandatum Life, the principle of fairness specifies the application of this feature. In unit-linked contracts the policyholder carries the investment risk by choosing the investment funds linked to the contracts.
The provision for annuities is valued in accordance with normal actuarial principles taking anticipated in ation and mortality into consideration, and discounted to take the anticipated future investment return into account. To cover costs for the costs for the upward adjustment of annuity provisions required for the gradual reversal of such discounting, an anticipated return is added to the annuity results. Provisions for incurred but not reported losses pertaining to annuities in Finland are discounted. The provisions in 2010 amounted to EURm 281 (290). The nondiscounted value was EURm 472 (444). The change is partly due to foreign exchange e ects and partly to porlonged estimated payment pattern.
Speci cation of activity-based operating expenses included in the income statement
Financial assets available-for-sale for Holding business include impairment losses EURm 2 (2).
The sensitivity o nancial assets and liabilites to changes in exchange rates is assessed on business area level due to di erenct base currencies. In P&C insurance, 10 percentage point depreciation of all other currencies against SEK would have resulted in an e ect reognised in pro t/loss of EURm 14 and in an e ect recognised directly in equity of EURm -10. In Life insurance, 10 percentage point depreciation of all other currencies against EUR would have resulted in an e ect recognised in pro t/loss of EURm -12 and in an e ect recognised directly in equity of EURm -72. In holding, 10 percentage point depreciation of all other currencies against EUR would have resulted in an e ect recognised in pro t/loss of EURm -2 and in an e ect recognised idredctly in equity of EURm -2.
Financial Statements 18 Movements in level 3 financial instruments measured at fair value
There are other short-term staff incentive schemes in the Group, the terms of which vary according to country, business area or company. Benefits are recognised in the profit or loss for the year they arise from. An estimated amount of these profit-sharing bonuses, social security costs included, for 2010 is EURm 38.
Short-term employee bene ts comprise salaries and other short-terms bene ts, including pro t-sharing bonuses accounted for for the year, and social security costs.
On 5 April 2006, the Annual General Meeting of Sampo plc agreed on the ”Sampo 2006” share-based incentive programme. The programme applies to senior executive management of Sampo plc and its subsidiaries, and to Sampo’s president and CEO. On 11 May 2006, the Board of Directors of Sampo plc allocated 1,300,000 shares of the maximum of 1,500,000 shares of the programme. The programme ended in 2010.
Responsibility of the Board of Directors and the Managing Director The Board of Directors and the Managing Director are responsible for the preparation of consolidate nancial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, as well as for the preparation of nancial statements and the report of the Board of Directors that give a true and fair view in accordance with the laws and regulations governing the preparation of th nancial statements and the report of the Board of Directors in Finland. The Board of Directors is responsible for the appropriate arrangement of the control of the company's accounts an nances, and the Managing Director shall see to it that the accounts of the company are in compliance with the law and that it nancial a airs have been arranged in a reliable manner.
Opinion on the company' nancial statements and the report of the Board of Directors In our opinion, th nancial statements and the report of the Board of Directors give a true and fair view of both the consolidated and the parent company' nancial performance an nancial position in accordance with the laws and regulations governing the preparation of th nancial statements and the report of the Board of Directors in Finland. The information in the report of the Board of Directors is consistent with the information in th nancial statements.
Sampo will publish three Interim Reports in 2011. The Interim Reports and related Supplementary Financial Materials are published on Sampo’s website. Press and stock exchange releases, the monthly updated list of shareholders and other investor information published by Sampo are available at www.sampo.com.