LocalTapiola General Mutual Insurance Company. Close to you throughout your life

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1 LocalTapiola General Mutual Insurance Company Close to you throughout your life Annual Report 2013

2 LocalTapiola General grants some of LocalTapiola Group's voluntary non-life insurance policies and the Group's statutory non-life insurance policies, such as vehicle insurance. The company is Finland's largest non-life insurer and its roots stretch back over 150 years. Close to you throughout your life LocalTapiola includes enthusiastic drivers, mothers and fathers, athletes, pet owners, boaters, house builders, world travellers, investors and entrepreneurs. Therefore, we offer the same solutions we want and use ourselves. We handle your most important matters with competence and genuine care. Table of Contents Review by the Managing Director 2 Report of the Board of Directors 1 January 31 December Notes to the financial statements 15 Accounting principles 15 Risks and risk management 23 Calculation of key figures 38 Parent companys profit and loss account, balance sheet, cash flow statement and notes 43 Groups profit and loss account, balance sheet, cash flow statement and notes 70 Board of Directors proposal for distribution of profit 107 Signatures to the report of the Board of Directors and financial statements 107 Auditor s note 108 Auditor s report 109 Statement of the Supervisory Board 110 LocalTapiola in brief LocalTapiola Group is a mutual group of companies owned by its customers. It serves private customers, farmers, entrepreneurs, corporate customers and organisations. We offer non-life and life insurance services as well as investment and saving services. We also provide pension insurance and banking services. LocalTapiola's online reporting LocalTapiola's online annual report 2013 and the companies' annual reports and investment reviews will be available during week 15 in PDF format at the following address:

3 LocalTapiola General in brief is part of LocalTapiola Group. The company is responsible for the Group's statutory non-life insurance policies, such as vehicle insurance policies, and statutory accident insurance policies, insurance policies for large customers and non-life insurance policies in the greater Helsinki area. Services for individuals Voluntary insurance policies that enable you to insure the important things in life, such as your home, cars and vehicles, animals and forests Statutory insurance policies, such as vehicle insurance A comprehensive network of offices all over Finland Personal service, online service and telephone service for handling matters related to insurance and compensation Services for corporate customers Personnel solutions for risk management and insurance Solutions for risk management and insurance relating to assets and operations Personal service, telephone service and Corporate Online Service for handling insurance matters 1

4 ANNUAL REPORT 2013 We were able to improve profitability Our successes in 2013 included the excellent transfer business for statutory accident insurance, improved claims services and promotion of integration. During the period under review, customer satisfaction remained good. The most challenging tasks during the year were to increase sales and to curb customer departures. Managing Director Jukka Kinnunen N on-life insurance saw moderate market development in Slow national economic growth, slackening of exports and a slowdown in the trade and construction sectors was reflected in reduced growth opportunities for non-life insurance. Competition in the industry continues to be based on pricing and customer benefit programmes. Competition will be intensified by If's new distribution partnership with Nordea as well as the active online offering by POP Insurance. Our goals for 2013 included providing customer benefits, ensuring growth, improving profitability and continuing the integration work according to plan. Customer satisfaction remained good. As for customer benefit development, we focused on preparing new non-life insurance products for The reform of the benefit programme and the cooperation agreement concluded with S Group at the end of the year, including S bonus, were important steps. To achieve growth in premium income, we invested in strengthened customer retention and enhanced sales. However, we have not as yet managed to reach these goals as forecast. There was a decrease in the number of customers and the growth in premium income remained below the 4% target. As a result, our market share declined by approximately 1% in However, we achieved a satisfactory result and the combined ratio is less than 100%. 2 More than 70 new customers were gained in the transfer of statutory accident insurance for large companies. Statutory accident insurance highlight of the year In terms of improving profitability, we were moving in the right direction. We succeeded in introducing new statutory accident insurance payment systems, and in motor liability insurance we moved more towards risk-based pricing. In voluntary non-life insurance, claims developed favourably, even though storm damage in December had a somewhat negative impact on the whole year. As part of the integration process, we successfully transferred voluntary claim portfolios to the 19 regional companies. All of the tasks involved in transferring the policies

5 were successfully completed on schedule. The quality of the claims service remained good throughout the year, despite numerous changes. One of the most important changes was building a claims service model together with the regional companies. We were highly successful in getting statutory workers' compensation insurance transferred to us. The annual objective of the Large Companies unit was a positive transfer result, which turned out to be one of the best results in its history. Net premium income stood at EUR 3.4 million. The company gained more than 70 new customers and customer retention was very good. Efficiency of sales activities to improve in 2014 Following the merger arrangements, non-recurring largescale ICT development work is almost complete and the expense load in the central company will decrease. The preconditions for improved results are therefore in place, but the investment environment remains challenging. Investment markets will remain unstable in Interest rates will stay low and return on equity investments is expected to remain low. We still need to strike the right balance in the new Group structure between common operating models and regional competitive factors. These efforts need to be sustained in However, it is by no means certain that we will reach our growth objectives as trends in the Finnish economy may dampen our growth. In 2014, we will improve the efficiency of our sales activities and sales management, harmonise the benefit programme and work towards strengthening customer loyalty. We also need clearer customer communication. These factors will also bring an upturn in premium income. Objectives for 2014 Key figures LocalTapiola General key figures * 2011 * Turnover, EUR m 1, , Operating profit/loss, EUR m Total result, EUR m Premium income, EUR m Solvency, solvency ratio, % Combined ratio, % Customer bonuses, EUR m * The figures are pro forma (the combined figure for Tapiola General and Local Insurance Mutual Company). LocalTapiola General's premium income by customer category, 31 December 2013, % Households 56 Farms 12 SMEs, entrepreneurs and other forms of company 24 Major customers 8 The focus areas are growth and electronic services. Results will be improved by using risk-based pricing and cutting expenses. Quick and successful reform of business operations E-commerce products must be developed further. Supporting and ensuring sales. We must ensure that premium income increases and customer departures decrease. Enhancement of risk-based pricing Correct pricing and risk selection to ensure competitiveness. Strong support for high-potential business operations Supporting growth in greater Helsinki and strengthening the Large Companies operations. Reduction of operating expenses High operating expenses restrict competitiveness. 3

6 ANNUAL REPORT 2013 LOCALTAPIOLA GENERAL MUTUAL INSURANCE COMPANY REPORT OF BOARD OF DIRECTORS 1 January 31 December 2013 s (LocalTapiola General) line of business covers all types of voluntary and statutory non-life insurance. LocalTapiola General includes LocalTapiola Bank Plc and its subsidiary LocalTapiola Asset Management Ltd as well as Tapiola Data Ltd, an ICT service provider, and its subsidiary LTC Otso Oy. LocalTapiola General's operating profit increased to EUR million (pro forma *) EUR million). After eliminating the effect of changes to the calculation bases and the integration costs, the comparable operating profit was EUR million (EUR million). The company s overall result before business transfers was EUR million (EUR million) and its comparable overall result was EUR million (EUR million). Premium income increased by 1.3 per cent to EUR million (EUR million). The growth in premium income from direct insurance was 1.2 per cent. The comparable growth in premium income from direct insurance was 2.3 per cent. The comparable combined expense ratio excluding unwinding of discount expenses from which the adjustment to the calculation bases of claim handling provision and integration costs have been eliminated, was 94.5 per cent (95.0%). The official combined ratio was 88.5 per cent (96.1%). The return on capital employed at current value was 4.0 per cent (8.1%). The company s solvency capital totalled EUR 1,646.2 million (EUR 1,791.7 million). The solvency ratio (solvency capital in relation to premiums earned) before business transfers was per cent (210.9%). The solvency margin was 8.2 (7.1) times the minimum value. The Group's operating profit in the banking and asset management services business increased to EUR 10.9 million (EUR 6.1 million). Low interest rates affected the interest margin, which was EUR 18.9 million (EUR 19.4 million). Bank receivables from the public and public corporations increased by EUR million to EUR 1,840.3 million (EUR 1,671.3 million). Liabilities to the public and public corporations increased by EUR 38.1 million to EUR 1,689.0 million (EUR 1,650.9 million). Fund capital in the mutual funds managed by LocalTapiola Asset Management Ltd increased by 23.7 per cent to EUR 2,972.8 million (2,403.7 million). Formation of LocalTapiola Group LocalTapiola Group officially began operating on 1 January The company group was created as a result of the merger of Tapiola General Mutual Insurance Company and Local Insurance Mutual Company on 31 December The Group includes LocalTapiola General Mutual Insurance Company (non-life insurance), LocalTapiola Mutual Life Insurance Company, 19 regional companies engaged in voluntary non-life insurance business, as well as a bank, asset management and real estate asset management companies. Employee pension insurance is offered to customers via Elo Mutual Pension Insurance Company, which was established by merging Mutual Insurance Company Pension Fennia into LocalTapiola Mutual Pension Insurance Company at the beginning of Transfers of insurance portfolios and business transfers On 31 December 2013, LocalTapiola General transferred the voluntary non-life insurance policies taken out by private customers, farmers and small and medium-sized companies, except for the policies of customers in Greater Helsinki, to the 19 regional companies. LocalTapiola General Mutual Insurance Company will continue to handle the statutory non-life insurance policies (employers liability, motor liability, patient injury) and, of the voluntary insurance lines, insurance policies for large corporate customers, as well as credit, guarantee, pharmaceutical and environmental insurance policies in addition to the abovementioned insurance policies of customers in Greater Helsinki. When the insurance portfolios were transferred along with business activities, LocalTapiola General transferred the insurance policies relating to regional insurance portfolios, the equalisation provision including technical provisions (EUR million) and the assets covering technical provisions (EUR million) as well as other assets belonging to regional insurance operations (EUR 60.1 million), liabilities and provisions (EUR 12.1 million) to the regional companies. New guarantee shares issued by the regional companies totalling EUR 64.6 million were received as compensation. When the business was transferred, personnel in the local areas were also transferred to the regional companies. *) LocalTapiola General: The comparative figures presented in parentheses for the items on the income statement are pro forma figures. As regards the items on the income statement and the key figures, these figures show what the items would have been if the merger of Tapiola General and Local Insurance, which occurred on 31 December 2012, had taken place at the beginning of the previous financial year. 4

7 2 (11) Customers and customer benefits The number of customers in the non-life insurance private household customer sector was 1,288,830 (1,292,940) and there were 149,768 (149,742) corporate customers. LocalTapiola General's subsidiary, LocalTapiola Bank Plc, acquired 19,273 new customers, having 274,002 (254,729) banking customers at the year-end. The funds managed by LocalTapiola Asset Management Ltd gained 2,999 new customers, which increased the number of customers to nearly 34,422 (31,423) at the year-end. The number of unit holders increased by 6,821 to 70,070 (63,249). The surplus of LocalTapiola Group s operations is used for the benefit of owner-customers through premium reductions, customer bonuses and service development. The service benefits of owner-customers include a free-ofcharge coverage review and Emergency Service. Some of the profit is used to strengthen the company s solvency, thereby protecting customers future interests. The overall value of the benefits given to Tapiola Group s ownercustomers increased to EUR 85.6 million (EUR 84.5 million), including customer bonuses, loyalty discounts, service benefits and discounts based on cooperation agreements. The figure includes benefits granted through LocalTapiola Bank, the value of which came to EUR 10.5 million (EUR 12.1 million). The bank s benefits were granted as loyalty benefits and as interest rates that are more favourable than market rates. Operating environment Non-life insurance The Federation of Finnish Financial Services (FK) estimates that premium income from direct insurance will increase by about six per cent. Premium income from employers liability insurance is expected to decrease because it is mainly driven by the employment rate, which was lower in the current year than in the previous year. Premium income from motor liability insurance, voluntary motor vehicle insurance and fire and other property insurance is expected to increase from the previous year. The FK expects claims on insurance companies to increase only moderately. Investment activities In 2013, there were two major turning points in the operating environment of investment markets, the first of which was the strengthening of global growth prospects. The exceptionally long recession in the eurozone ended in the second quarter of the year and the acute economic crisis began to subside, even in the most problematic countries. Thanks to Europe's recovery, a global recovery was no longer entirely dependent on US economic growth. On the other hand, the economic outlook in emerging economies remained highly uncertain and began to stabilise only at the very end of the year. In addition, the impact of the global economic recovery on the development of Finland's overall production was less marked than expected, and there was no substantial improvement in the economic outlook during The other major turning point was expected to occur in central banks' monetary policy. In the spring, the US Federal Reserve began to signal that they may have to cut back on recovery measures for the monetary economy. The Fed's new policy also had a major impact on investment markets as the liquidity offered by central banks had significantly supported increases in asset values. During the summer, interest rates increased and risk premiums widened. Fixedincome investment markets in emerging economies, which had perhaps benefited the most from abundant liquidity over the previous years, were hardest hit by the repricing of risks. The equity markets recovered quite rapidly from the decrease of share prices in February as macroeconomic indicators encouraged risk-taking in the investment markets. The increase in risky assets accelerated in the autumn, when the US Federal Reserve surprised the markets by announcing that, for the time being, it will not cut back on quantitative stimulus measures. Long-term interest rates in the US and Germany decreased clearly from the summer's peak levels. Not even the US federal budget dispute and government shutdown at the beginning of October were able to cause major disruptions in the markets. Shares were clearly the best-performing asset class in Share prices in developed economies returned an average of over 19 per cent in euro terms. Emerging markets suffered from the structural slowdown of growth and fears of a tighter monetary economy. Share prices in emerging markets decreased by an average of almost seven per cent in euro terms. In fixed-income investments, government bonds in the euro zone yielded 2.2 per cent. On the foreign exchange market, the euro strengthened against all major currencies. The US dollar weakened by 4,4 per cent against the euro, by 2,1 per cent against the UK pound and by 20,8 per cent against the Japanese yen. The European real estate markets were characterised by the European economic crisis in 2013, when the real estate markets of Southern Europe Spain, Portugal and, in particular, Greece were in deep recession. In these European markets, purchases were mainly made by speculative risk investors. Activity was brought to the UK and German markets when institutional investors were seeking a safe haven for their money in quality real estate located in sought-after submarkets. In London, the prices of high-end real estate rose, boosted by strong international investor demand, while for some properties, return levels have already fallen to the levels seen before the economic crisis. In Germany, real estate markets were steady as local real estate investors sought steady cash flows for their investments. The poor availability of financing represented a bottleneck for many real estate projects. The mood in the Finnish real estate investment market picked up slightly at the end of Investment demand focused on prime properties, where competitive bidding was seen. Due to economic uncertainty and the weak rental market, higher-risk real estate is priced very cautiously and demand for it is low. The financial markets remain challenging. However, financing is available for the right projects at *) LocalTapiola General: The comparative figures presented in parentheses for the items on the income statement are pro forma figures. As regards the items on the income statement and the key figures, these figures show what the items would have been if the merger of Tapiola General and Local Insurance, which occurred on 31 December 2012, had taken place at the beginning of the previous financial year. 5

8 ANNUAL REPORT (11) reasonable terms. The number of completed sales remained low, although several significant real estate transactions were seen during the year. There was a moderate amount of activity in the rental market for business premises during the year. However, the demand-supply situation remained challenging, particularly in the Greater Helsinki premises market. Group structure In addition to the parent company, the LocalTapiola General Group includes the subsidiaries LocalTapiola Bank Plc (share of ownership 78.0 per cent (73.2%)), Tapiola Data Ltd (51.1 per cent (51.1%)), Aura-Karelia Ltd (100 per cent (100%)) as well as 27 (29) housing associations and real estate companies and six (6) other companies that do not engage in business operations. Associated companies include LocalTapiola Real Estate Asset Management Ltd, as well as four (4) real estate companies and three (3) other companies that do not engage in business operations. Turva Mutual Insurance Company is a subsidiary of LocalTapiola General, since all of the company s guarantee share owners have signed an addendum to the mutual guarantee share owner agreement stating that LocalTapiola General has the right to appoint the majority of the Board of Directors of Turva should the company wish to exercise this right. LocalTapiola General s share of the Turva guarantee capital is per cent. Turva guarantee capital amounts to EUR 10,145, Mutual guarantee share owners of a mutual company do not have any right to other assets of the company outside the guarantee capital and guarantee capital interest paid from excess funds based on a decision of the general meeting; the interest may be up to 12 per cent a year. As a result of the above, financial statement data for Turva has not been included in the LocalTapiola General consolidated financial statements. Thus, a correct depiction is given of the results of the operations and financial position of the LocalTapiola General Group. Premium income and claims paid LocalTapiola General s premium income increased by 1.3 per cent to EUR million (EUR million). Direct business (underwritten) premium income increased by 1.2 per cent to EUR million (EUR million). Future reinsurance premium income increased by 2.0 per cent to EUR 64.9 million (EUR 63.6 million). The comparable increase of premium income is 2.3 per cent when the effect of the change in calculation method, which increased the premium income in the previous year, is eliminated. The claims paid totalled EUR million (EUR million), down 7.9 per cent on the previous year. The compensation paid under direct business (underwritten) decreased by 5.2 per cent to EUR million (EUR million). The compensation paid under reinsurance assumed decreased by 31.7 per cent to EUR 45.5 million (EUR 66.6 million). The financial statements were burdened by one (1) claim in excess of one million euros. Claims expenditure came to EUR 7.6 million, whereas the corresponding figure for the previous year was EUR 15.8 million. Employers liability insurance premium income fell by 8.4 per cent to EUR million (EUR million). In comparable terms, premium income decreased by 3.4 per cent. A change in the calculation method implemented during the comparison period increased the premium income in the previous year by EUR 8.4 million. The weakened employment rate is reflected in premium income through reduced payrolls. Voluntary accident and health insurance premium income came to EUR million (EUR 95.5 million), an increase of 6.5 per cent on the previous year. Motor liability insurance premium income fell by 1.8 per cent to EUR million (EUR million). Premiums written for motor vehicle insurance (motor vehicles) increased by 3.6 per cent to EUR million (EUR million). Fire and property insurance premium income was EUR million (EUR million), an increase of 5.9 per cent compared to the previous year. General liability insurance premium income increased by 21.1 per cent to EUR 34.1 million (EUR 28.2 million). Credit losses from outstanding premiums totalled EUR 5.1 million (EUR 7.5 million). Technical provision LocalTapiola General s equalisation provision in relation to technical provisions at own risk was EUR 2,371.5 million (EUR 2,795.0 million). The decrease in technical provisions is explained by a business transfer on 31 December 2013, which resulted in technical provisions decreasing by EUR million. Combined ratio (excl. unwinding of discount expense) and operating expenses LocalTapiola General's combined ratio excluding the unwinding of discount expenses was 88.5 per cent (96.1%). The risk ratio stood at 54.3 per cent (64.5%), the claims handling cost ratio at 7.3 per cent (7.3%) and the expense ratio at 26.9 per cent (24.3%). During the financial period, changes were made to the calculation bases of claim handling provision and to the collective provision of motor liability insurance. The changes in the calculation bases improved the result by a total of EUR 71.5 million. The ongoing integration process increased operating expenses. When the effect of the abovementioned items on the combined expense ratio is eliminated, the comparable combined expense ratio was 94.5 per cent (95.0%). The comparable risk ratio stood at 62.6 per cent (65.1%) and the operating expenses ratio was 31.9 per cent (29.9%). Operating expenses in the profit and loss account stood at EUR million (EUR million), an increase of 12.0 per cent year-on-year. Claims management expenses were *) LocalTapiola General: The comparative figures presented in parentheses for the items on the income statement are pro forma figures. As regards the items on the income statement and the key figures, these figures show what the items would have been if the merger of Tapiola General and Local Insurance, which occurred on 31 December 2012, had taken place at the beginning of the previous financial year. 6

9 4 (11) EUR 62.8 million (EUR 62.1 million). Investment management expenses were EUR 6.5 million (EUR 6.8 million). Other income and expenses LocalTapiola General s service sales include the provision of head office services such as marketing, communications, legal, personnel and internal audit services, as well as the provision of corporate customer business services to the regional companies, LocalTapiola Bank, LocalTapiola Asset Management and LocalTapiola Mutual Pension Insurance Company. In addition, LocalTapiola General offers vehicle registration services to the Finnish Vehicle Administration (AKE). Returns from the sale of these services are included in the profit and loss account under Other returns, and expenses for producing these services are included in the profit and loss account under Other expenses. The transactions are carried out under customary commercial terms. Other returns and expenses totalled EUR 2.5 million (EUR 2.1 million) net. Investments at current value non-life insurance LocalTapiola General's net investment income at fair value amounted to EUR million (EUR million), or 4.0 per cent (8.1%). The average five-year annual return on investment was 5.4 per cent and the average ten-year annual return was 5.4 per cent. In 2013, listed shares and loans were allocated a slightly increased weighting, while the weighting of bonds decreased. Investment assets at current value stood at EUR 3,535.1 million (EUR 3,839.7 million). In the business transfer, investments at current value were transferred to the regional companies to the total value of EUR million. Equity investments Equity investments totalled EUR million (EUR million), accounting for 25.8 per cent (21.5%) of all investments. Finnish shares accounted for 12.4 per cent (16.3%) of direct listed equity investments, which amounted to EUR million (EUR million). Equity investments yielded 11.1 per cent (13.0%). Fixed-income investments Equity investments totalled EUR 1,993.5 million (EUR 2,211.3 million), accounting for 56.4 per cent (57.6%) of all investments. The modified duration of the portfolio, which indicates its interest rate risk, was 3.3 (3.4) years. Fixedincome investments yielded 1.2 per cent (8.1%). Real estate investments Real estate investments totalled EUR million (EUR million), or 17.8 per cent (20.7%) of all investments. Direct real estate investments accounted for 77.2 per cent (80.7%) and indirect real estate investments mutual funds and undertakings for collective investment in transferable securities accounted for 22.8 per cent (19.3%) of all real estate investments. The rate of return from real estate at current value was 5.0 per cent (4.4%) The return from real estate investment funds and UCITS was 5.1 per cent (4.8%). Direct real estate investments yielded 5.0 per cent (4.3%). The average vacancy rate of real estate properties was 9.2 per cent (4.4%). Other investments The current value of other investments was EUR 0.0 million (EUR 7.8 million). Other investments accounted for 0.0 per cent (0.2%) of total investments. Return on other investments was 2.6 per cent (0.0%). Result LocalTapiola General recorded an operating profit of EUR million (EUR million). The change in the difference between current and book values weakened the overall result before the business transfers by EUR 11.4 million (improved by EUR million) to EUR million (EUR million). After eliminating the effect of changes to the calculation bases and the integration costs, the comparable operating profit was EUR million (EUR million). The overall result after the business transfers stood at EUR million. Due to the business transfers, the difference between fair value and book value decreased by EUR 73.3 million. Solvency The solvency margin of LocalTapiola General, which describes the amount by which the company s assets exceed its liabilities and other comparable commitments, totalled EUR 1,162.5 million (EUR 1,175.6 million). The minimum solvency margin was EUR million (EUR million). The solvency margin was 8.2 (7.1) times that of the minimum value. Solvency capital was EUR 1,646.2 million (EUR 1,791.7 million), the solvency ratio before the business transfers was per cent (210.9 %). Risk-carrying capacity in non-life insurance LocalTapiola General's Board of Directors bears the overall responsibility for the company's risk management. The Board determines the risk management targets, limits of risk taking, responsibilities, metrics and monitoring principles for each activity. Investment and risk management plans are drawn up annually in the company and approved by the Board of Directors. The Board also monitors the status of risk management and the development of key risks on a regular basis. Business units recognise and analyse risks threatening their operations and objectives in connection with both strategic and annual planning and daily activities. The importance of preparing for risks is assessed by analysing the probability of the risks occurring, as well as possible implications of their realisation. The managing director and the managers of business units are responsible for risk management activities relating to their own operations. Risk management supervision is always the responsibility of a party other than the one responsible for operational *) LocalTapiola General: The comparative figures presented in parentheses for the items on the income statement are pro forma figures. As regards the items on the income statement and the key figures, these figures show what the items would have been if the merger of Tapiola General and Local Insurance, which occurred on 31 December 2012, had taken place at the beginning of the previous financial year. 7

10 ANNUAL REPORT (11) activities. Internal Audit supports the management and Board of Directors in implementing and developing risk management. The Audit Committee, which assists the Cooperation Committee of the Supervisory Boards, also monitors and evaluates risks. The most significant risks in operations are insurance risks in non-life insurance, market risks associated with investments, operational risks, risks related to the operating environment and risks related to strategic intent. The major insurance risks in non-life insurance relate to the pricing of insurance products, inflation, changes in mortality rate, occupational diseases and reinsurance covers. Market risks are caused by fluctuations in market values, including fluctuations resulting from changes in interest rates, share prices and exchange rates. Operational risks refer to the risk of losses caused by insufficient or failed internal processes, personnel, systems and external factors. Legal risks are included in operational risks, Risks related to the operating environment and strategic intent include risks associated with the general operating environment, changes in the markets and customer behaviour, the competitive situation and competitors, and the content of the strategy. The formation of the LocalTapiola conglomerate and the regional company strategy based on local accessibility and new partnerships offer Finland's leading insurance-driven conglomerate significant business opportunities for success. Significant risks are also associated with mergers and new partnerships, and the management of these requires control of the overall structure and well-functioning risk management systems. A simultaneously prevailing uncertain financial operating environment, restructuring of our own operations and outsourcing measures create further challenges for LocalTapiola's risk management. The LocalTapiola conglomerate forms a financial and insurance conglomerate referred to in the Act on the Supervision of Financial and Insurance Conglomerates as well as a group referred to in the upcoming Solvency II legislation. LocalTapiola General acts as the conglomerate's leading company and it is its task to ensure that the conglomerate and its companies fulfil legal requirements relating to solvency and risk management. To ensure this, conglomeratelevel risk management and internal audit policies have been defined for LocalTapiola, as well as core risk management and solvency management principles and other guidelines. LocalTapiola's non-life insurance companies are the most solvent businesses in the non-life insurance sector in Finland. Thus, the conglomerate's solvency is built on a firm foundation despite the economic uncertainty. LocalTapiola conglomerate's solvency management will be based on guaranteeing customers' continuous financial security through the good solvency of the entire conglomerate and its companies. Due to the postponement of the Solvency II Directive, regulations contained in Solvency II are being adopted in phases in the European Union and in Finland. As of the beginning of 2014, new provisions of the Insurance Companies Act have taken effect, as well as guidelines issued by the European Insurance and Occupational Pensions Authority (EIOPA) concerning the insurance companies' and the group's governance system, own risk and solvency reporting and reporting to the authorities. According to the current estimate, the actual Solvency II regulations will take effect at the beginning of LocalTapiola has prepared for the new regulations by updating the insurance companies' and conglomerate-level governance to comply with the provisions of the new Insurance Companies Act as well as by developing the solvency and risk management calculation, reporting systems and practices to comply with the requirements. In addition to ensuring compliance with the regulations, these measures create the basis for more comprehensive and effective solvency and risk management at LocalTapiola. For more detailed information on LocalTapiola General s risk management and most significant risks, please see the section Risks and risk management in the notes to the financial statements. Banking and Investment Services Banking The banking operations' receivables from the public and public corporations increased by EUR million to EUR 1,840.3 million (EUR 1,671.3 million), while the deposit base grew by EUR million to EUR 1,751.9 million (EUR 1,634.4 million). LocalTapiola Bank s market share of deposits remained at 1.2 per cent (1.2%). The bank s credit risks did not increase significantly. Reference rates remained low throughout The 12-month Euribor interest rate was per cent (0.543%) at the end of The LocalTapiola Prime rate decreased from per cent to per cent on 24 June 2013 and to per cent on 25 October Low interest rates over the long term have restricted banks interest income on lending. The expenses of asset management have not decreased correspondingly. Therefore, banks' interest margin development has been based on increased loan margins. Banks' expenses have been increased by more extensive regulation and bank tax, among other factors. Due to increased expenses, the interest margins charged on lending have increased. Investment service business The customer funds managed by LocalTapiola Asset Management grew by 10.7 per cent to EUR 8,593.4 million (EUR 7,763.2 million). Positive development in the private banking service and institutional investment contributed to the growth in capital under management. The recovery in equity markets also increased the value of assets in LocalTapiola's funds and other customer assets. LocalTapiola Asset Management manages a total of 31 equity, fixed-income and balanced funds. The fund capital in the mutual funds managed by LocalTapiola Asset Management Ltd increased by EUR million from EUR 2,403.7 to EUR 2,972.8 million during the financial period. The company s market share in the fund market was 4.0 per cent (3.6%), and it was the eighth (8th) largest in the market *) LocalTapiola General: The comparative figures presented in parentheses for the items on the income statement are pro forma figures. As regards the items on the income statement and the key figures, these figures show what the items would have been if the merger of Tapiola General and Local Insurance, which occurred on 31 December 2012, had taken place at the beginning of the previous financial year. 8

11 6 (11) share comparison by the Federation of Finnish Financial Services (FK). Asset management customers' capital increased by EUR million to EUR 5,625.2 million (EUR 5,359.5 million). Banking and Investment Services: financial performance The Group's operating profit in the banking and asset management services business increased to EUR 10.9 million (EUR 6.1 million). The low interest rate level burdened the development of the interest margin, which was EUR 18.9 million (EUR 19.4 million). Net commission income on banking and investment services stood at EUR 25.7 million (EUR 14.7 million). A nonrecurring item that reduced the commission income of Local Tapiola Asset Management in the comparison period, an increase in fund capital, and the recovery of the investment markets contributed to the increase in commission income. The cost-return ratio of banking and investment services was 0.8 (0.8). The solvency of Banking and Investment Services The solvency ratio of LocalTapiola Bank Plc was 17.2 per cent (13.9%) at the end of the financial year. The solvency ratio of primary own funds was 16.3 per cent (12.2%). The solvency ratio of the Bank Group was 16.4 per cent (12.7%) and the ratio with primary own funds was 15.3 per cent (10.9%). LocalTapiola Bank s equity capital was increased with a directed equity issue during the financial year. The equity capital increase amounted to EUR 9.0 million and an amount of EUR 21.0 million was transferred to invested distributable reserves. The solvency ratio of LocalTapiola Asset Management Ltd was 17.9 per cent (21.9%). The risk position of Banking and Investment Services The Bank Group s risk management is based on risk management concepts, the purpose of risk management, strategic intent and the willingness to take risks defined in LocalTapiola Group, as well as on official regulations. The Group companies Boards of Directors bear overall responsibility for risk management. The Boards determine the risk management targets, limits of risk taking, responsibilities, indicators and monitoring principles for each activity. Risk management plans are drawn up annually in the companies and approved by the Boards of Directors. The Boards also monitor the status of risk management and the development of key risks on a regular basis. The Bank Group s Risk Management Committee and Balance Sheet Management Committee monitor and manage risk management. The Group s corresponding organs direct the work of these Committees. Risks threatening operations and goals are identified and analysed in business units in connection with both strategic and annual planning and daily activities. The importance of preparing for risks is assessed by analysing the probability of the risks occurring, as well as possible implications of their realisation. The risk management measures and related responsibilities are defined in the risk management plans. Responsibility for risk management supervision has been separated from responsibility for operational activities. Internal Audit supports the management and Board of Directors in implementing and developing risk management. The Audit Committee, which assists the Cooperation Committee of the Supervisory Boards, monitors and assesses operational risks as well as risks associated with the general operating environment and strategic risks. No significant changes took place in risk management principles compared to the previous year. Capital adequacy requirements are calculated for strategic and operational risks on the basis of risk mapping and the scope of the operation. Capital adequacy requirements are part of the economic capital calculation model. The internal solvency management process (ICAAP) of the Bank Group, which is used to define the amount of economic capital, has been described in greater detail in the notes to the financial statements LocalTapiola Bank Plc's notes to the financial statements regarding risk include a more detailed description of the organisation of the Bank Group's risk management and the monitoring of different risk classes as well as risk levels. More detailed information on the risk management and the most significant risks of the banking and investment service business is available in the section on risks and risk management in the notes to the financial statements. Solvency in an insurance and financial conglomerate LocalTapiola Group forms a conglomerate as referred to in the Act on the Supervision of Financial and Insurance Conglomerates. The insurance and financial conglomerate includes the following companies: LocalTapiola General Mutual Insurance Company and its non-consolidated subsidiary, Turva Mutual Insurance Company, 19 regional nonlife insurance companies, LocalTapiola Mutual Life Assurance Company, and companies operating in the financial sector ( LocalTapiola Bank Plc and its subsidiary LocalTapiola Asset Management Ltd, as well as Tapiola Data Ltd, an ICT service provider). The company at the head of LocalTapiola Group is. The coordinating supervisory authority of the conglomerate was the Financial Supervision Authority. Solvency management Solvency management is a part of the conglomerate s risk management. Because Tapiola Group is a mutual company, its solvency management focuses on good solvency to ensure the financial security of customers at all times. Solvency management is based on a proactive and comprehensive approach, which builds on strategic and operational plans. The solvency of the Group and its companies, as well as the development of solvency, is monitored regularly and comprehensively with statutory and internal solvency and risk reports. The main risks and the probability of their realisa- *) LocalTapiola General: The comparative figures presented in parentheses for the items on the income statement are pro forma figures. As regards the items on the income statement and the key figures, these figures show what the items would have been if the merger of Tapiola General and Local Insurance, which occurred on 31 December 2012, had taken place at the beginning of the previous financial year. 9

12 ANNUAL REPORT (11) tion, as well as their potential impact on the Group and its companies if realised, are assessed as a part of the business planning process. This enables the Group companies to proactively implement any measures needed to strengthen and maintain solvency. The Group s solvency management is described in greater detail in the section on risks and risk management in the notes to the financial statements. Solvency statement of the insurance and financial conglomerate The Act on the Supervision of Financial and Insurance Conglomerates provides that the amount of a conglomerate s own funds must at all times be at least equal to the minimum amount of the conglomerate s own funds. On the basis of the calculation, it can be noted that the Group s solvency is approximately 3.3 (3.5) times the required minimum. Corporate governance in LocalTapiola General LocalTapiola General has reported on its corporate governance separately from the Board of Directors report, in accordance with recommendation 54 concerning Finnish listed companies corporate governance (15 June 2010). LocalTapiola General adheres to good corporate governance, which is based on the legislation concerning the insurance sector, as well as the regulations and guidelines issued by the Financial Supervisory Authority. More extensive information on LocalTapiola s corporate governance is available on the company s website, Annual General Meeting LocalTapiola General's Annual General Meeting was held on 15 May The meeting approved the financial statements for 2012, decided on the use of the company's result and elected the company's auditor. The meeting confirmed the number of members of the Supervisory Board and elected the new members. Of Tapiola General s Supervisory Board members whose turn it was to resign, the following were re-elected: Iiro Ketola (Elected Representative, LocalTapiola Group), Veli- Matti Kilpeläinen (Managing Director, Varkauden Asuntomarkkinat Oy), Matti Kähkönen (Executive Director, Disabled War Veterans Association Of Finland), Timo Leppänen (Managing Director, Kajaanin tilitaito Oy), Folke Lindström (Chairman of the Board of Directors, Commercial Councillor Förlags Ab Lindan Kustannus Oy), Ulla-Maija Moisio (Master of Laws trained on the bench, Teollisuuden Voima Oyj), Pentti Neitola (farmer), Eero Nykänen (police constable, retired), Kati Partanen (farmer), Markku Tuuna (Master of Laws trained on the bench, Lawyer's office Markku Tuuna Ky) and Jouko Virranniemi (Industrial Counsellor, Pölkky Oy). The following were elected as new members: Taavi Heikkilä (Managing Director, Hämeenmaa Cooperative Society), Sanna Leivo (Chairman of the Board of Directors, Leivon Leipomo Oy), Anu Ojala (Director of Finance and Business Operations, Lemminkäinen Talo Oy) and Heikki J. Perälä (CEO, Helsinki Region Chamber of Commerce). KPMG Oy Ab was elected as the auditing firm, and the auditor with the main responsibility is Mikko Haavisto, Authorised Public Accountant. A decision was also made at the Annual General Meeting on assigning the regional non-life insurance portfolios and the related business operations to LocalTapiola Group's 19 regional non-life insurance companies. Supervisory board LocalTapiola General s Supervisory Board held its organising meeting on 5 June The meeting elected the Chairman and Deputy Chairmen to the Supervisory Board. Antti Lemmetyinen, Councillor of Social Welfare, was elected as Chairman of the Supervisory Board. Juha Marttila, Chairman of the Central Union of Agricultural Producers and Forest Owners MTK, was elected as First Deputy Chairman of the Supervisory Board. Jouko Virranniemi, Industrial Counsellor, Pölkky Oy, was elected as the Second Deputy Chairman of the Supervisory Board and Pauliina Haijanen, Master of Laws trained on the bench, Municipal Counsellor, was elected as Third Deputy Chairman. The Supervisory Board met five times. On average, 78,6% of the members participated in the meetings. The salaries and remunerations paid to the Supervisory Board members, their pension commitments, money loans and terms thereof, as well as guarantees and contingent liabilities are presented in section of the notes to the profit and loss account. Committees of the Supervisory Board Co-operation Committee The Cooperation Committee, which comprises the Chairmen of the Supervisory Boards of LocalTapiola General and LocalTapiola Life, held its organising meeting on 5 June Antti Lemmetyinen was elected as Chairman and Jouko Havunen as Deputy Chairman of the Cooperation Committee. The Cooperation Committee met 11 times. On average, 95,9% of the members participated in the meetings. *) LocalTapiola General: The comparative figures presented in parentheses for the items on the income statement are pro forma figures. As regards the items on the income statement and the key figures, these figures show what the items would have been if the merger of Tapiola General and Local Insurance, which occurred on 31 December 2012, had taken place at the beginning of the previous financial year. 10

13 8 (11) The Cooperation Committee s Audit Committee Jouko Havunen (Chairman), Pauliina Haijanen and Marjut Nordström were elected as members of the Cooperation Committee's Audit Committee. The Audit Committee held six meetings. On average, 88,9% of the members participated in the meetings. The Cooperation Committee's Compensation Committee On 15 January 2013, the Cooperation Committee established a separate Compensation Committee with the task of assisting the Cooperation Committee in matters relating to the compensation of senior managers in accordance with its rules of procedure. The Chairman of the Compensation Committee from 15 January 2013 to 5 June 2013 was Antti Lemmetyinen, Councillor of Social Welfare, and the members were Jouko Virranniemi, Managing Director, and Hans Böhling, Managing Director. At its organising meeting held on 5 June 2013, the Cooperation Committee elected Antti Lemmetyinen (Chairman), Jouko Virranniemi and Ralf Wickström as members of the Compensation Committee. The Compensation Committee met four times. On average, 91,7% of the members participated in the meetings. Board of Directors In accordance with the Supervisory Board's decision dated 7 February 2012, the number of members of the Boards of Directors during the three-year term from 2013 to 2015 will be eight until 30 June 2013 and seven thereafter until the end of the term. Additionally, Ralf Wickström, a member of the Board of Directors, announced his resignation from the Board of Directors on 30 June Until the end of June 2013, the members of the Board of Directors comprised three of LocalTapiola Group's Group Directors responsible for the business areas, two representatives of the regional companies, one person appointed by Local Insurance and one person appointed by Tapiola. Board members as of 1 January 2013 President Erkki Moisander, Chairman Asmo Kalpala, Board Member from 1 January 30 June 2013 Ralf Wickström, Board Member from 1 January 30 June 2013 Harri Lauslahti, Group Director Jari Sundström, Group Director, Deputy Chairman Jari Eklund, Group Director Marjatta Leiviskä, Managing Director, LocalTapiola Lappi Mutual Insurance Company Pentti Kuusela, Managing Director, LocalTapiola Pirkanmaa Mutual Insurance Company The Board of Directors met 26 times. The attendance rate at meetings was 94.4 per cent. The salaries and remuneration paid to the members of the Board of Directors, their pension commitments, money loans and terms thereof, as well as guarantees and contingent liabilities, are specified in Section of the Notes to the profit and loss account. Managing Director Jukka Kinnunen, Master of Science in Economics, holds the post of Managing Director of LocalTapiola General. Mika Makkonen, Master of Laws and Master of Business Administration, is Deputy Managing Director. The salaries and perquisites paid to the Managing Director totalled EUR 299,136, including EUR 91,296 of merit pay. The management s merit pay is based on the achievement of company-specific, three-year strategic objectives (maximum 30 per cent) and on the achievement of annual objectives (maximum 40 per cent). The Managing Director s retirement age is 63. The agreed compensation for premature termination of the employment relationship is a sum corresponding to 12 months salary. Supervisory authority LocalTapiola General is a non-life insurance company subject to public supervision by the Financial Supervisory Authority operating under the Bank of Finland. The FIN-FSA ensures that insurance companies comply with legislation and sound insurance practices, and apply appropriate methods in their operations. It monitors and assesses the financial position, appropriateness of management, supervision and risk management systems, operating prerequisites and changes in the operating environment of the supervised companies. Personnel The personnel are employed by both LocalTapiola General Mutual Insurance Company and LocalTapiola Mutual Life Insurance Company. During the financial period, Group services provided services to the different legal companies of LocalTapiola Group, while LocalTapiola General provided the central head office and similar services and LocalTapiola Life the sales and customer services for private households, as well as web services. The service providers and service users have signed outsourcing agreements on shared services. In the beginning of September 2013, the personnel producing services for the Bank Group in customer telephone service, legal services, financial management and risk management, as well as the personnel in the branch network, a total of 190 people, were transferred to LocalTapiola Bank with a business transfer. The number of employees in the non-life insurance and life insurance companies averaged 2,286 (1,926) in the financial period. The number of employees allocated to non-life insurance in proportion to wages paid averaged 1,883 (1,454) in the financial period. The number of employees in LocalTapiola General's units averaged 733 (522). The increase in the average number of personnel compared with the previous year is explained by the merger of Local Insurance Mutual Company with Tapiola General on 31 December *) LocalTapiola General: The comparative figures presented in parentheses for the items on the income statement are pro forma figures. As regards the items on the income statement and the key figures, these figures show what the items would have been if the merger of Tapiola General and Local Insurance, which occurred on 31 December 2012, had taken place at the beginning of the previous financial year. 11

14 ANNUAL REPORT (11) In the business transfer, personnel in the local areas were transferred to the regional companies on 31 December A total of 457 employees transferred from LocalTapiola General to the regional companies. The number of employees in LocalTapiola Bank Plc averaged 179 (113). The number of employees in LocalTapiola Asset Management Ltd averaged 51 (50). As a result of outsourcing functions, Tapiola Data Ltd had no personnel at the end of the financial period (an average of 280 in 2012). The number of employees in Aura-Karelia Ltd averaged 14 (17). The number of employees in LocalTapiola General Group Ltd averaged 2,573 (2,498). The number of employees in relation to payroll was 2,128 (1,914) Compensation LocalTapiola General complies with LocalTapiola Group s salary and compensation schemes. The schemes are planned and prepared under the leadership of HR in cooperation with financial and risk management services, legal services and representatives of business operations, including representation from the regional companies and the Cooperation Committee of the Supervisory Boards. If necessary, external consultants are used. The Supervisory Boards Cooperation Committee decides on LocalTapiola Group s salary and compensation schemes, as well as the compensation for the President and members of the Board of Directors. Otherwise, decisions are made by the companies Boards of Directors. Remuneration for managers is based on the company group's strategy. The indicators are based on the key figures relating to the targets of the business operations. The remuneration is established as the product of the outcome rate of the above-mentioned elements, the maximum remuneration percentage based on the position and the annual salary. The maximum remuneration percentages vary between 30 and 120 per cent. The amount of merit pay granted to clerical employees may not exceed seven per cent of the annual salary, except for some experts in investments and asset management, as well as in risk management, whose maximum merit pay may not exceed 83 per cent of the annual salary. The objectives are determined on the basis of the Group's strategy and business targets, and they can be either team-specific or personal. The achievement of targets is evaluated in performance review discussions. The sales organisation s salary schemes include various alternatives for rewarding performance, and their proportion of the total salary varies from a few per cent to approximately fifty per cent. Some employees in the Group's investment organisation had their own long-term merit pay model during the preceding strategy period in which the merit pay was determined for a three-year period based on investment returns compared to an index. Delayed payments of this merit pay will be made until Bonus levels varied annually between 10 and 33 per cent of the annual salary. During the validity of this merit pay scheme, the maximum annual bonus was 50 per cent of the annual salary. Based on the results, annual payments are also made to LocalTapiola Group's personnel fund, established in This profit bonus item is mainly determined by the companies' profits, efficiency and growth in accordance with the Act on Personnel Funds. The payment is subtracted from the preliminary estimate of the result of the financial period. The salaries of LocalTapiola Group s management and professional employees are based on HAY job evaluations and points, which in turn are based on benchmarking information from the financing industry. A.M. Best Co. granted LocalTapiola General a rating of A (Excellent) LocalTapiola General was awarded an A (Excellent) rating by A.M. Best Co, the oldest and most highly respected rating institution specialised in the insurance business and situated in the USA. A.M. Best has rated Tapiola as of 2006 and the rating has been A (Excellent) on each occasion. According to A.M. Best's press release issued on 17 January 2014, the excellent rating of LocalTapiola General was due to strong profit development in the insurance business and the company's strong solvency outlook. A low number of large accidents has contributed to the good profit development. The rating is needed in business and in insurance and banking operations whenever a customer or partner requires it. From the perspective of corporate image and reputation, a good rating increases reliability and respect. Events during the financial year Non-life insurance LocalTapiola Group entered a new strategy period at the beginning of LocalTapiola General's strategic goals for 2013 included providing customer benefits, ensuring growth, improving profitability and continuing the integration work according to plan. As regards integration work, one of the key focus areas has been preparation for business transfers. The business transfers require a considerable amount of ICT work as well as generation of new types of service packages for the new products offered in the traditional sales channels and online. Furthermore, product conversions have required a significant amount of preparation as regards both sales and service concepts as well as in the construction of mechanical conversions. During the financial period, work has continued on the implementation of profitability measures, revision of service processes, improvement of claim service levels and development of new products. Organisational changes were implemented during the financial period. At the beginning of 2013, the claims services for personal accident and travel insurance were transferred back to LocalTapiola General from LocalTapiola Life. A change in the organisational structure was implemented at the beginning of June in which a Service Centre was set up to support the regional companies and at the same time, the corporate customer business organisation was incorpo- *) LocalTapiola General: The comparative figures presented in parentheses for the items on the income statement are pro forma figures. As regards the items on the income statement and the key figures, these figures show what the items would have been if the merger of Tapiola General and Local Insurance, which occurred on 31 December 2012, had taken place at the beginning of the previous financial year. 12

15 10 (11) rated in the non-life insurance company. The aim of the changes was to clarify the division of responsibilities and to unify service processes. LocalTapiola General's subsidiary Tapiola Data Ltd and ICT service company Logica (now known as CGI) signed a letter of intent on 24 May 2012 on establishing an ICT service company. The joint venture began operating on 1 February The new company, LTC-Otso Ltd, develops and offers banking- and insurance-sector ICT services for the LocalTapiola Group, Etera and Turva. A total of 240 employees transferred from Tapiola Data to the new company. LTC-Otso's operations are based in Espoo and Tampere. S Group and LocalTapiola Group signed agreements on strategic cooperation and bonus cooperation on 25 November The intention is to restart bonus cooperation as regards insurance on 1 June 2014 after a break of a few years. Concerning the deepening of strategic cooperation between S Group and LocalTapiola new forms of cooperation are currently under investigation. The Omnibus II Directive, which amended the Solvency II Directive, was approved in the European Parliament in November The Solvency II Directive and the related standardised reporting will be applied as of 1 January As of 1 January 2014, the Financial Supervisory Authority has validated the guidelines issued on 31 October 2013 by the European Insurance and Occupational Pensions Authority (EIOPA) for national supervisors. The guidelines include instructions for supervised companies on preparing for Solvency II coming into force on 1 January The guidelines concern the governance of insurance companies, including risk assessment (previously known as ORSA), criteria for the pre-assessment of internal models and reporting delivered to the supervisor. LocalTapiola General continues to prepare for the Solvency II Directive on the basis of the guidelines as part of LocalTapiola Group's preparations. Banking and Investment Services On 11 April 2013, the Board of Directors of Tapiola Bank Ltd decided in its meeting on a change of company form and name to a public limited company as of 8 June The company's name is: LähiTapiola Pankki Oyj in Finnish, LokalTapiola Bank ABp in Swedish and LocalTapiola Bank Plc in English. The name of Tapiola Asset Management Ltd changed on 8 June 2013 to LocalTapiola Asset Management Ltd. A corresponding change was made to the names of the managed funds. A set of agreements was concluded between LocalTapiola Group and S Group, which was announced on 6 June The parties agreed to merge S Bank and LocalTapiola Bank to form a new S Bank. S Group owns 75 per cent and LocalTapiola Group 25 per cent of the new bank, which will begin operating on 1 May At the same time, the parties agreed to transfer LocalTapiola Asset Management's mutual fund operations to a fund management company to be incorporated into the S Group. The intention is to execute the transfer on 1 March In connection with the management of the funds being transferred, LocalTapiola Asset Management will give up its fund management licence and apply for an investment company licence. The company will become LocalTapiola General's subsidiary. In October 2013, LocalTapiola Asset Management established a new fixed-income fund, LocalTapiola Nordic Corporate Interest. The main focus of the fund's investments is in Nordic companies' corporate bonds. LocalTapiola Bank has been registered as the insurance agent of LocalTapiola General, 19 regional companies and LocalTapiola Life Assurance Company. Corporate social responsibility As a mutual company owned by its customers, LocalTapiola General's primary responsibility is towards its customers. LocalTapiola aims for sustainable solutions, openness and transparency in its operations. The development of LocalTapiola's corporate responsibility policy is based on the Group companies various roles in and impacts on society. The Board of Directors has approved common principles of corporate responsibility for the group of companies. Day-to-day operations are guided by responsibility commitments to customers, personnel, the environment, local communities and society. The main theme is promoting the security, welfare and prosperity of people throughout their lives, with young people and seniors being the key target groups. The Group aims to continuously improve the comprehensibility and clarity of its products and services. Investments are made in improving the personnel's competence and expertise to ensure that customers are provided with reliable specialist services. In a target-oriented manner, LocalTapiola aims to decrease its environmental footprint by improving the energy efficiency of its properties and by encouraging the use of online services and operating methods. Furthermore, LocalTapiola aims to promote social responsibility by contributing to measures that prevent the exclusion of people and enhance financial skills, as well as those that combat the grey economy, among other things. LocalTapiola invests its customers' assets in accordance with the principles for responsible investing. Taking care of solvency is a factor of financial responsibility and it supports social stability. The regional companies' presence, actions and impact provide genuine interaction with nearby communities and are a clear example of the company's local presence. LocalTapiola is committed to the ICC Business Charter for Sustainable Development and to the United Nations Principles for Responsible Investment. LocalTapiola s office buildings in Espoo and the office in Tampere participate in the WWF Green Office environmental management system. LocalTapiola Group has reported on its social responsibility and the realisation of responsible business operations in its annual report 2013 under "Close to you throughout your life". It is available online at *) LocalTapiola General: The comparative figures presented in parentheses for the items on the income statement are pro forma figures. As regards the items on the income statement and the key figures, these figures show what the items would have been if the merger of Tapiola General and Local Insurance, which occurred on 31 December 2012, had taken place at the beginning of the previous financial year. 13

16 11 (11) ANNUAL REPORT 2013 Future prospects Non-life insurance business The deceleration of growth in the Finnish national economy is also reflected in the form of slower growth in the non-life insurance business. The new organisation of the LocalTapiola Group calls for an adequate balance between common operational models and regional competitive factors. The focus will be on following through the planned ICT projects, product reforms, services concepts and product conversions. We will also invest in the development of online, mobile and electronic claims services. Maintaining sufficient profitability requires strong management and a focus on pricing that corresponds to risk will see the launch of many things that will be visible to customers, such as strategic cooperation with the S Group, new products and the website. The outlook for the European real estate market in 2014 is slightly brighter than in previous years. We are nearly past the worst of the eurozone crisis, and the positive impact of the German economy is slowly beginning to have a positive effect on the markets of neighbouring economies. Southern European real estate markets seem to have passed their nadir. The availability of real estate financing has improved slightly, and this will also increase the liquidity of the real estate markets in The outlook for the Finnish commercial real estate market for 2014 is fairly moderate. If the budding economic growth takes hold in the Finnish economy, the outlook for the rental markets may be slightly better in the latter part of the year. No significant changes are in sight for the availability and price of financing, and investment demand is expected to slowly increase if the outlook for the real economy improves. Investments Global economic growth accelerated in the second half of 2013 and, based on anticipatory indicators in developed economies, economic conditions are also expected to strengthen in the early part of All in all, 2014 will be better than the previous year in terms of economic growth. In the eurozone, the basic economic trend is more favourable than in the previous year. However, there is no strong upswing in sight only slightly positive growth at best. High unemployment and a moderate increase in salaries will slow down the recovery of consumer demand. On the other hand, weak growth prospects do not encourage investments and the public authorities will have no choice but to tighten their belts. Competitive devaluations and protectionism, in turn, will put a brake on global trade recovery. The sources of sustainable growth will continue to be scarce. During 2014, GDP development in the most important emerging economies will set out on a new path of long-term growth. This means growth of about 6 7 per cent for China and India and a growth rate of about 3 4 per cent for Brazil and Russia. Within emerging markets, the focus of growth is shifting from the BRIC countries to new, less developed areas. In the BRIC countries, growth is being slowed down by several structural problems, such as sloped demand structures, ineffective public sectors and labour competence bottlenecks. However, many African countries are entering a phase of stronger growth. From the point of view of the investment markets, the outlook for the operating environment continues to be rather favourable: there are positive changes, but economic growth in the main market areas will remain so low for a long time to come that central banks will not be able to start tightening their monetary policies to a significant extent for quite some time. Investment risks, however, will be increased by structural economic changes and the associated political risks, as well as by the weaker predictability of the global economic cycle. *) LocalTapiola General: The comparative figures presented in parentheses for the items on the income statement are pro forma figures. As regards the items on the income statement and the key figures, these figures show what the items would have been if the merger of Tapiola General and Local Insurance, which occurred on 31 December 2012, had taken place at the beginning of the previous financial year. 14

17 Notes to the financial statements Accounting principles Notes to the financial statements The financial statements of (LocalTapiola General) have been prepared in accordance with the Accountancy Act, the Companies Act and the Insurance Companies Act. In addition, the Decree of the Ministry of Social Affairs and Health on financial statements and consolidated financial statements of insurance companies and the provisions of the Accounting Decree, as prescribed in the above Decree, are complied with. Finally, the decisions, regulations and instructions issued by the authorities regulating insurance companies the Ministry of Social Affairs and Health and the Financial Supervisory Authority are adhered to. Valuation and allocation of intangible assets Other long-term expenditure Other long-term expenditure includes capitalised costs of renovations in apartments and design costs of ICT systems. These are stated in the balance sheet at cost less planned depreciation. Valuation and allocation of investments Real estate and shares in real estate Buildings and other constructions are stated at cost less planned depreciation or at current value, whichever is lower. Shares in real estate are stated at the lower of cost and current value. Revaluations may have been made on the values of real estate and shares in real estate if the values were significantly higher over a long period of time than the historical cost at the end of the financial year. The counter-item of the revaluation of real estate or shares in real estate classified as investments has been recognised as income since 1978, and earlier revaluations have been entered in the revaluation reserve in restricted capital and reserves. The counter-item of an investment classified as fixed assets has been entered in the revaluation reserve of restricted capital and reserves. Previous value adjustments of investments are reversed in the profit and loss account at most up to the historical cost if the current value rises. Shares and holdings Shares and holdings are stated at the lower of cost and current value. Acquisition cost is calculated using the average price method. Previous write-downs of shares and holdings are reversed to the extent that the current value exceeds the book value. Loaned securities are included in the balance sheet. Information on loaned securities is presented in the notes to the balance sheet.. Debt securities Debt securities include bonds and other money market instruments. Debt securities are stated at cost in the balance sheet. Acquisition cost is calculated using the average price method. The difference between the nominal value and acquisition cost of debt instruments is released or charged to interest income during the term to maturity. The counter-item has been entered as an increase or decrease of the acquisition cost of the debt security. Value adjustments owing to interest rate fluctuations or other reasons have been recorded as have value readjustments, if the current value of a debt security has at a later date exceeded the adjusted acquisition cost,, at most up to the original acquisition cost. 15

18 ANNUAL REPORT 2013 Notes to the financial statements Accounting principles Loans, deposits and deposits with ceding undertakings Loans, deposits and deposits with ceding undertakings are stated at nominal value or a permanently lower, likely realisable value. Derivative contracts Valuation of receivables Derivative contracts are mainly used for hedging investment portfolios. In the accounts, however, derivatives are primarily treated as non-hedging, even though they are effective for hedging purposes. Gains and losses incurred during the financial year from the closing or lapsing of contracts have been entered as income or expenses for the financial year. Non-hedging derivatives A negative difference between the current value and higher book value of a non-hedging derivative or a derivative treated as non-hedging is entered as an expense. Unrealised gains are not recognised. The potential maximum loss from non-hedging derivative contracts is deducted from the solvency margin. Application of hedging calculation When using hedging calculation, a decrease in the value of a derivative is not entered to the extent that an increase in the value of the hedged item covers the change. Any loss exceeding the increase in the value of the hedged item is entered as an expense. The difference between the current value and the lower book value of a derivative is entered as income from the hedged item up to the amount entered as expense. If no value change is entered in the profit and loss account for the hedged balance sheet item, no valuation income or expense arising from the hedging derivative is recognised. Premiums receivable Premiums receivable are stated at their maximum likely realisable value. Lapsed contracts have been deducted from the nominal value of premiums receivable based on experience, which gives the likely realisable value. Receivables that are not likely to be settled are recognised as credit losses. Foreign currency items Receivables and liabilities in foreign currencies have been translated into euros at the rates quoted by the European Central Bank on the day of closing of the accounts. The rate used for other investments is that of the moment of acquisition or of the day of closing of the accounts, whichever is lower. Exchange rate differences have been entered as adjustments on the income and expenses concerned. Exchange rate differences concerning cash at bank and in hand and deposits, as well as items that cannot be entered directly as adjustments on income or expenses, have been recognised as exchange gains or losses from investment activities. 2(8) 16

19 Notes to the financial statements Accounting principles Depreciation Acquisition costs of buildings and their components, equipment, intangible rights and long-term expenditure have been capitalised and are entered as expenses under planned depreciation over their expected useful lives. The estimated average depreciation periods of the various commodity groups are as follows: Intangible assets Renovations in apartments IT system design expenses Real estates Residential, office and hotel buildings Department store buildings and other store buildings Industrial buildings, warehouses, and similar buildings Building components, reducing balance method 25% 5 yrs 5 10 yrs yrs yrs yrs Equipment Office machinery, equipment, etc., reducing balance method, 25% The effect of renovations in buildings on their lifetime is assessed separately. As regards revaluations released to income, depreciation has been carried out according to the expected useful life of the item in question. The accumulated difference between write-offs in the accounts and depreciation according to plan is recorded in the balance sheet under liabilities, in the item Accumulated appropriations, depreciation difference, and the increase or decrease during the financial year is stated in the profit and loss account as a separate item. Accumulated appropriations Depreciation difference See Depreciation Voluntary provisions Provisions have been made that must be recognised as revenue according to fiscal and accountancy legislation. Obligatory provisions Direct taxes Pension and unemployment pension expenditure arising from future obligations that concerns the most recently or previously ended financial year has been deducted from income as obligatory pension provisions. Provisions for interest on late payments for unfinished claims have been deducted from income as other provisions. Direct taxes have been entered in the profit and loss account on an accrual basis. 3(8) 17

20 ANNUAL REPORT 2013 Notes to the financial statements Accounting principles Deferred tax assets and tax liabilities Deferred tax assets and liabilities pertaining to timing differences between taxable profit and accounting profit and to other temporary differences are shown in the notes to the financial statements. The notes include deferred tax liability calculated based on the valuation difference between the current and book values that is deemed likely to become payable during the next year. Deferred tax liabilities for one year have been taken into account when calculating key figures. Other liabilities Liabilities other than technical provisions are stated in the balance sheet at nominal value. Definition of current value of investments Real estate investments Real estate and shares in real estates are stated at market-based current values. The valuation principles and practices as set out in the IVS (International Valuation Standards) and good real estate valuation practices (so-called AKA criteria) are applied in the valuation of real estate investments. Residential buildings are valued using a sales value method based on reference sales. Commercial real estate is valued using a yield value method based on cash flow or a sales value method if representative sales price data is available. Values of special items are defined using a marketbased evaluation method deemed best suited for the item. The current value of real estate funded by state housing loans is the assignment price as defined in section 10 of the Act on the Use, Assignment and Redemption of State-Subsidized (ARAVA) Rental Dwellings and Buildings (1190/1993). Valuations are either conducted by external authorised property valuers or LocalTapiola Real Estate Asset Management s experts, instructed and audited by an external authorised property valuer in accordance with the requirements of the Financial Supervisory Authority. Shares, holdings and debt securities As regards quoted securities and securities for which there is a market, the latest trading price or, if not available, the bid price is used as the current value. Current value of other investments is the likely realisable value, book value or value based on substance. The current value of private equity funds is the acquisition cost or the management company s estimate of the fund s current value. Loans, deposits and deposits with ceding undertakings The current value of loans, deposits and deposits with ceding undertakings is the nominal value, taking into consideration any reduction in the nominal value to the likely value required by the risk of credit loss. Account of technical provisions deductions and compounding used in calculating claims provision Provision for unearned premiums Provision for unearned premiums includes that part of premiums written during the accounting period and previous years whose risk relates to a time after the accounting period. The same compounding is used also for future reinsurance premiums. The amount of provision for unearned 18 4(8)

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