Annual Report OP Life Assurance Company

Transcription

1 Annual Report 2008 OP Life Assurance Company

2 Contents From the Managing Director / 3 The board of directors report for 2008 / 5 Income statement parent company / 16 Balance sheet parent company / 17 Income statement group / 18 Balance sheet group / 19 Cash flow statement parent company / 20 Cash flow statement group / 21 Notes to the financial statements / 22 Accounting principles / 22 Premium income / 25 Investment income / 27 Benefits paid and operating expenses / 29 Investments / 30 Property investments / 36 Unit-linked insurance / 37 Shareholders equity / 41 Solvency and risk management principles at OP Life Assurance Company Ltd. / 42 Key ratios / 51 Signatures to the financial statements and Board of Directors report / 52 Auditor s report / 53 OP Life Assurance Company is a company wholly owned by the OP Pohjola Group. The Owners Holding (%) OP Bank Group Central Cooperative 76 Pohjola Bank member cooperative banks 15 OP Life Assurance Company PB Helsinki Telephone Telefax

3 From the Managing Director Customer operations in order, the financial crisis weakened the result Difficulties in the financial industry were directly reflected on OP Life Assurance Company in The extent of fluctuations in market values, increases in credit risk margins and the steep fall on the share market were of historic proportions. Investment values fell sharply and weakened the company s result to the lowest it had ever recorded. Customers confidence in OP-Pohjola Group is very strong. OP Life Assurance Company s market position remained strong and the company is clearly the largest life insurance company in Finland with a market share of 29 per cent (31) in premium income. Even though the company s result on investment operations collapsed, it did not affect the interest-yield part paid to customers. Depending on the product, customers received an overall return of per cent on their insurance savings. In unit-linked insurance products, the decline in the values of investment funds was directly visible as a fall in the values of customers insurance policies. However, insurance savings comprise very long-term operations and the recovery of the values can be expected in the future. When the investment horizon is long, we should be patient and wait for the market to settle down. Financial year 2009 will also be difficult Even though the worst storm of autumn 2008 has subsided, the hard times are not over yet. As a result, it is essential to focus on the basics in OP Life Assurance Company s operations; that is, looking after our customers needs. The need for risk insurance will increase. The average deficit in the life insurance cover of Finnish people is EUR 135,000 (Government Institute for Economic Research 2008). Shortcomings in our statutory pension system create room for individual pension insurance. Employee benefit schemes are increasing every year. These form a firm ground for facing a difficult year and focusing our strength more efficiently on serving our customers. After all, OP Life Assurance Company is, in addition to its 600,000 insureds,managing more than 300,000 insureds of Suomi Mutual. I wish to thank all of our customers and partners for the confidence they have shown during the difficult year. The company s owners, member cooperative banks, Pohjola Bank and OP-Pohjola Group Central Cooperative also deserve to be thanked. Thanks to their good solvency, the owners created operational conditions for life insurance in a difficult market position. I also wish to thank our staff and sales personnel, as well as my predecessor Jukka Ruuskanen who turned the company into the leading life insurance company in Finland in ten years. February 2009 Jarmo Kuisma Managing Director as of 1 January

4 OP Life Assurance Company s key figures, EUR million Premium Income Insurance savings on 31 Dec. 2,655 3,312 5,563 6,026 5,358 Savings from unit-linked insurance 614 1,017 2,084 2,373 1,610 Savings from interest-bearing insurance 2,042 2,294 3,479 3,653 3,748 Share of unit-linked insurance from insurance savings, % 23 % 31 % 37 % 39 % 30 % Technical interest credited to customers Bonuses paid to customers Benefits paid to customers Solvency capital Minimum amount of solvency capital Market share of premium income 17 % 20 % 28 % 31 % 29 % OP Life Assurance Company s result analysis, EUR million Premium income 477,6 638,5 658,1 843,8 738,3 Net income from investments + increases in value and their adjustments 166,3 301,2 306,5 225,7-1,091,0 Benefits paid -161,4-198,7-295,1-559,8-728,9 Changes in technical provisions before bonuses and changes in equalisation provision -410,4-658,8-571,7-402,4 677,2 Operating expenses -21,8-25,0-24,8-43,0-43,3 Insurance technical result before bonuses and changes in equalisation provisions 50,4 57,3 73,0 64,2-447,7 Other income and expenses 0,0 0,0 0,0 3,1 6,1 Operating profit 50,4 57,3 73,0 67,3-441,6 Changes in equalisation provisions 0,0-0,1-0,1-1,5-1,7 Bonuses -25,1-21,9-36,6-8,8-11,5 Profit/loss before appropriations and taxes 25,3 35,3 36,3 57,0-454,8 Income taxes and appropriations -4,4-10,4-9,1-15,1 76,0 Profit/loss for the period 20,9 24,8 27,2 41,9-378,8 4

5 The board of directors report for 2008 Development in the life insurance industry and operating environment The life insurance industry was strained by the financial crisis which started the previous year was the second consecutive year of negative development in the premium income in the life insurance industry, decreasing by 6.3 per cent from last year. However, the decline was smaller than the previous year s fall of nearly nine per cent. In 2008, premium income stood at EUR 2.6 billion. The financial crisis affected the premium income of unit-linked life insurance policies, decreasing by 50.1 per cent from the previous year. Premium income in the industry Share of unit-linked insurance Change Risk-based insurance % Employees group life insurance % Life insurance Technical interest % Unit-linked % 68.9 % 50.2 % Total 1, % Capital redemption policies Technical interest % Unit-linked % 35.3 % 95.7 % Total % Individual pension insurance Technical interest % Unit-linked % 64.4 % 66.4 % Total % Group pension insurance Technical interest % Unit-linked % 18.6 % 14.0 % Total % Total all Technical interest 1,253 1, % Unit-linked 1,533 1, % 55.0 % 46.7 % Total 2,786 2, % 5

6 The share of unit-linked insurance from the total premium income decreased from 55.0 per cent to 46.7 per cent. The premium income of unit-linked capital redemption policies increased significantly. Similarly, the premium income of unit-linked pension insurance increased, although substantially less. In addition, the premium income of traditional risk-based life insurance and group pension insurance increased significantly. The financial crisis did not have any impact on the sale of individual pension insurance policies and capital redemption policies. The sale of pension insurance increased by 3.9 per cent to 74,000 policies. The sale of capital redemption policies increased by nearly tenfold, but their total share is very low only about 1,000 policies within the entire industry in The amount of life insurance savings decreased by 8.5 per cent and stood at EUR 27.7 billion, of which unit-linked insurance comprised 24.0 per cent (29.5 in 2007). The decrease was almost solely caused by the strong decline in the market value of unit-linked insurance. The financial crisis had a profound impact on the entire insurance industry, reducing the financial strength of companies. The solvency of statutory employment pension insurance companies % MARKET SHARE OF PREMIUM INCOME AND INSURANCE SAVINGS Premium income Insurance savings was improved through a law amendment, and they did not need to abandon their risk-carrying share investments to the extent as would have been the situation without the amendment. Life insurance companies have not been provided with any relief through laws or authority regulations, and the financial strength of the companies has decreased significantly, even through the means enabled by valid laws have been exercised for strengthening the solvency margin. The new Insurance Companies Act entered into force at the beginning of October With regard to life insurance, the act included two significant reforms. After the entry into force of the new act, solvency is reported to authorities using the traditional statements and new control reports that predict financial strength. The new calculations approach the Solvency II standard being prepared in the European Union. The Solvency II Directive will enter into force in 2012 at the earliest. The second reform related to life insurance is the more thorough consideration of the principle of equity. Company s operations in 2008 OP Life Assurance Company continues to be a clear market leader measured by premium income. The company strengthened its market position at the beginning of the year but the strong decline in property values which started in October forced the company to slow down its sales at the end of the year, particularly regarding life insurance. This resulted in a fall of the market share of the entire year s premium income to 29.3 per cent (30.8). Insurance operations remained profitable. Even though less premium income was collected than the previous year and the rate of sales commissions was increased, the total underwriting result remained at the previous year s level. During the reporting year, the company invested in new insurance systems. The project was started with Profit Software during spring 2008 as 6

7 OP Life Assurance Company acquired a software package. The operations have used their resources significantly in participating in the integration of the new system and the design of new products. A significant part of the company s portfolio will be transferred to the new system in stages over several years. The management of the investment operations was challenging in the negative market situation during Only some of the company s categories in the investment allocation produced positive figures. Negative earnings caused the largest loss in the company s history and the share capital was strengthened for securing solvency. The majority of owners took part in new issues and the company s solvency remained at the statutory level, although below the company s target values. In addition to the management of the company s insurance portfolio, the company is, within the scope of a separate management agreement, responsible for the management of Suomi Mutual insurance portfolio and benefits operations. The company s operating profit without bonuses stood at EUR million (67.4). The impact of bonuses on the result totalled EUR 11.5 million (8.7). Guaranted interest on insurance amounted to EUR million (114.8). The company s underwriting result continues to produce a positive result. Total result, including the management of Suomi Mutual insurance portfolio, stood at EUR 54.4 million in 2008 (53.0). The highly negative result was caused by impairment in investments. The impairment (a total of EUR million) mainly comprised unrealised decreases in value. Realised sales losses amounted to EUR million and sales profit stood at EUR 74.6 million. The sales losses were mainly caused by sales and currency hedging performed for reducing the share risk. The company s balance sheet stood at EUR 5,685.4 million at the end of the year, as it was EUR 6,563.9 million at the end of the previous year. The fall was mainly caused by the decrease in value of unit-linked technical provisions and the assets backing up liabilities. OP Life Assurance Company s result and balance sheet The company s financial statements and consolidated financial statements have been prepared according to Finnish financial statement practices. The company s result is consolidated with OP Pohjola Group s result following the International Financial Reporting Standards (IFRS). The company s result was strongly negative due to the general crisis in investment operations. Earnings before taxes amounted to EUR million (57.0). The result entered in equity after taxes stood at EUR million (41.9) Changes in valuation differences before taxes amounted to EUR SOLVENCY MARGIN, EUR million SOLVENCY RATIO, per cent % 12 % 10 % 8 % 6 % 4 % 2 % 0 % million (-56.5). The result with fair value was million (0.5). Minimum solvency capital Solvency capital Solvency ratio 7

8 Company s solvency The company s solvency margin amounted to EUR million at year-end (431.7). The solvency margin includes the capital value of EUR 24.7 million of future surplus defined according to the instructions issued by the Insurance Supervisory Authority, and tax receivables worth EUR 76.5 million recognised due to the loss made. The statutory minimum solvency margin was EUR million (190.2). At the end of the reporting year, the company s solvency ratio was 6.2% (10.4%). During the reporting year, the company increased its share capital twice by a total of EUR 260 million. The Board of Directors has the general meeting s authorisation to increase the share capital further by EUR 100 million, if required. In addition, shareholder agreements were made at the end of the year, providing OP Bank Group Central Cooperative with the possibility of investing in the company s unrestricted equity. The new Insurance Companies Act enabled these proceedings at the beginning of October. The company develops its ALM management process together with its main owner, OP Bank Group Central Cooperative. In order to improve PREMIUM INCOME, EUR million Unit-linked Interest-bearing INSURANCE PORTFOLIO, ITEMS Savings insurance Individual pension insurance Group pension insurance Risk-based insurance Capital redemption policies the efficiency of development, a management unit for the solvency of insurance organisations was established within OP Bank Group Central Cooperative, to which the company s actuary function belongs in the matrix. Premium income and insurance portfolio OP Life Assurance Company s premium income decreased by 10.7 per cent to EUR million (858.7). The share of unit-linked insurance from the premium income of savings products was 46.6 per cent (58.0). The share of unit-linked premium income from the full premium income decreased from EUR million to EUR million. Savings insurance produced the majority of the company s premium income, i.e., EUR million (530.1). The premium income of individual pension insurance remained close to the previous year s level, amounting to EUR million (152.1). The premium income of group pension insurance nearly doubled to EUR million (65.7). 8

9 The majority of the company s premium income is accrued to insurance taken out by private people. They represented 78.0 per cent of all shares in the previous year and 72.1 per cent in the reporting year. A total of 19,705 new individual pension insurance policies were sold during the year (19,782). At year-end, the company s insurance portfolio consisted of some 540,000 policies (500,000). The number of policies increased by 7.9 per cent during the reporting year (11.3). The number of individual pension insurance policies increased by 9.0 per cent (12.5) to 184,000 policies (169,000). The portfolio transfer approved in the 2007 general meeting was carried out on 1 January 2008 and 1 April Benefits paid During the financial period, the company paid EUR million in benefits (560.1). The share of surrenders from the benefits paid was EUR 332,2 million (204.5), increasing by 62.4 per cent. EUR million of savings amounts matured during the year (221.0). At the end of the financial period, there were 6,360 individual pensions in payment (4,829). EUR 48.7 million of pensions were paid during the year (37.2). The figure includes EUR 17.2 million (14.3) of pensions paid based on group pension insurance. Operating expenses Operating expenses totalled EUR 56.1 million (53.2). During the reporting year, a total of EUR 26.4 million (26.5) of sales commissions were paid to sales channels. Operating expenses without items allocated to benefits, investment operations and service sales amounted to EUR 43.3 million (43.0). Cost ratio was 75.2 per cent (73.4). During 2008, a sales commission reform was carried out where the structure of sales commissions was changed in a more rewarding direction. Similarly, OP Pohjola Group implemented the Focus project where non-life insurance salespersons employed by Pohjola Insurance were transferred to the service of member cooperative banks. The project also required changes in the reward system related to the life insurance portfolio. Investment operations % OPERATING COST RATIO The objective of OP Life Assurance Company s investment operations is to achieve competitive and stable long-term return at a reasonable risk level. The versatile structure of the investment portfolio and the diversification of investments are aimed at minimising the impact of market disruptions on the company s result and its customers insurance return. During the reporting year, the changes in the market were so exceptional that the diversification of investments did not produce the intended benefits. Investments are managed according to the investment plan ratified annually by the company s 9

10 DISTRIBUTION OF INVESTMENTS Fixed-income instruments Money market instruments Shares and participations Alternative investments Property investments Board of Directors. Predictions concerning the company s technical provisions and benefits paid are taken into account when preparing the investment plan. With regard to liquid investments, the plan defines benchmark where the investment return is compared. The operative management of the investment operations was carried out by the OP Central Bank Group Cooperative s investment unit for insurance organisations. The unit was terminated at the end of the year. Responsibility for investment operations will be tied more clearly to the company s business operations and, as a result, a Chief Investment Officer will be hired to the company. The company purchases investment risk management services from the OP Bank Group Central Cooperative s solvency management unit for insurance organisations. During 2008, share investments were hedged and changes were carried out following the Board of Directors authority. The investments which served as cover for insurance with guaranteed interest was EUR 3,888.2 million at fair value at the end of 2008 (4,192.4). It was divided as follows: Interest investments Bonds 24.9% 29.9% Other money market instruments 14.5% 2.1% Mutual funds 33.9% 31.7% Alternative investments 0.4% 0.3% Shares and participations Shares and funds 5.2% 17.1% Alternative investments 13.0% 12.2% Properties 8.1% 6.6% The book-keeping and market value of investments which served as cover for unit-linked insurance was EUR 1,614.1 million at the end of the year (2,374.0). The net return from investment operations of EUR -1,091.0 million over the reporting year (225.7) includes EUR million (96.8) of impact of investments which serves as cover for unitlinked insurance. The return of investments did not meet the targets set in the investment plan. The return was per cent (2.6). The return fell 0.8 percentage points behind its benchmark. The realised volatility was 4.3 per cent (2.2), falling below the volatility of the benchmark. The result of investment operations (excluding the impact of investments which serves as cover for unit-linked insurance) includes a total of 86.1 million (116.3) of sales gains and returns on impairment from previous financial periods. The company s investment plan allows the use of derivatives that were exercised for protection against currency and share risks and as non-hedging instruments in the management of the interest risk. At the end of 2008, the Board of Directors ratified a temporary investment plan for 2009 where the risk level is kept at a low level. The objective is to specify the investment plan during spring

11 Determination of fair values using the mark-to-model method It was difficult to find a market price for some bonds because no liquid market existed. As a result, a group of bonds have been valued using model prices. The total amount of the nominal values of these bonds was EUR million. Their price received from the market was EUR million at year-end. Their price following the model was EUR million. The pricing model has been executed together with external consultants and auditors. The prices obtained using these models are used in the assessment of solvency, eligible funds and income from investment assets. However, the market prices have been used in accounting. Defining the fair values by means of these models has not affected the accounts, because bonds are recognised and valued at amortised cost. Technical provisions, guaranteed interest and bonuses The company s technical provisions amounted to EUR 5,439.6 million at year-end (6,132.0). The technical provisions decreased by 11.3 per cent from the previous year. The share of unit-linked insurance from the technical provisions was 29.6 per cent (38.7). Non-linked technical provisions stood at EUR 3,829.4 million (3,758.8) and unit-linked technical provisions amounted to EUR 1,610.2 million (2,373.2) at year-end. EUR 21.4 million (19.7) has been entered in the equalisation reserve. Technical provisions 2008 Non-linked Unit-linked Life insurance 47.6% 21.7% Pension insurance 14.0% 7.0% Group pension insurance 7.1% 0.2% Capital redemption policy 1.1% 0.7% Other 0.6% 0.0% Total 70.4% 29.6% Guaranteed interest on insurance with insurance income is determined according to the year of taking out the insurance throughout the insurance period. Bonuses and their impact on the company s result are described in the notes. Targets for the distribution of bonuses TECHNICAL PROVISIONS, EUR million According to the Insurance Companies Act, life in Interest-bearing Unit-linked Growth %, prev year % 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % -10 % -20 % surance companies are to distribute an equitable part of the surplus produced by insurance to policies that, according to agreement terms, are entitled to bonuses. OP Life Assurance Company s Board of Directors has, in compliance with the Insurance Companies Act s principle of equity, approved to apply the following objectives to the insurance policies that, according to their terms, are entitled to bonuses provided on the basis of the surplus accumulated by the insurance portfolio. 11

12 Customer bonuses and other bonuses are subject to consideration. The company grants them if the insurance portfolio have produced a surplus. Assets accumulated from insurance premiums are invested so that a good return is aimed at. However, this is limited by a risk which is measured using variables that represent fluctuation in return and the company s risk-bearing capacity. Interest promised for insurance savings is first paid from the return, i.e., guaranteed interest. If any profit remains, bonuses are paid to customers from the surplus and return is paid to the owner as a response to the owner having tied assets to insurance operations. If the company s solvency needs to be strengthened, some of the surplus is left in the company s balance for securing undisturbed payment of promised insurance benefits. When aiming at a good return, the result will vary from one year to another. Customer bonuses will also vary correspondingly. OP Life Assurance Company is to alleviate the fluctuation in customer bonuses by evening out the bonuses from profitable and unprofitable years. As a result, the legal requirement for the continuity of the bonus level is followed. This will also advance the maintenance of solvency. Ordinary life insurance and other risk insurance are priced in a sufficiently securing manner. This will ordinarily produce a risk surplus. As a result, benefits larger than promised can be paid or lower premiums charged the following year. Guaranteed interest ranges from 4.5 per cent to 1.5 per cent depending on the granting period and insurance type. The company s objective is that the total interest credited does not depend on guaranteed interest which will be credited in any case throughout the validity of the insurance. Long-term and tied savings, such as pension insurance, are compensated for more than shortterm insurance savings sensitive to surrender. Customer bonuses are not differentiated according to customer groups, only according to products. For example, identical policies of private persons and companies produce similar bonuses. Not prevented by this, deviating proceedings can initially be agreed upon with regard to single agreements. Customer bonuses and other bonuses can be granted in various forms. Options include added savings with varying character, an increase in risk cover, a reduction in premiums, a dividend paid in money or other valuable benefit. Management of risks and solvency, and the company s risk position The objective of risk management is to support the achievement of the objectives set in the company s strategy by controlling that any risks taken or faced by the company are in the right proportion to the company s risk tolerance. The task of risk management is to identify the threats that could endanger OP Life Assurance Company s profitability or solvency, or that could have an adverse impact on the company s operational conditions or the fulfilment of its strategy. The company s future result conditions and capital structure, together with effective risk management and the owners commitment towards the company s operations, will secure the company s risk tolerance. The company s Board of Directors ratifies the solvency management principles annually, on the basis of which the company s risk management is guided. In addition, separate operating principles have been prepared for the risk management of the company s investment operations when handling the investment plan. The company s product selection covers all insurance needs of private and corporate custom- 12

13 ers. Insurance risks are limited through the selection of risk, sufficiently concervative technical basis and reinsurance. The most significant risk included in technical provisions is the guaranteed interest requirement of insurance with interest income and related interest risk. The average future duration of nonlinked technical provisions is less than 10 years. The largest investment risk is the market risk, including the value change risk and interest risk. These risks are prepared for allocating investments into different categories, or instruments, both geographically and by industry. The value change risk is measured through the expected risk of share and interest investments. The interest rate risk is monitored by means of modified duration in relation to the duration of the reference portfolio. The investment market was exceptionally challenging in Market volatility increased significantly, while negative correlations of different categories vanished occasionally. The realised risk of the company s investments increased from 2.2 per cent to 4.3 per cent. Valuations on the stock market decreased significantly. For example, OMX Helsinki Cap decreased by 47.3 per cent and Eurostoxx 50 by 44.4 per cent. At the same time, the stock market risk nearly doubled as the average volatility increased above 40 per cent on almost every market. The year was also difficult for alternative investments. Particularly, the return of hedge funds remained at a historically low level, at about -24 per cent. These investments did not produce the benefits of diversified risks during the financial year. A significant decrease occurred in interest rate levels but the credit risk margins were high, having an impact on all interest investments with loan risks. For risks, the company has assets exceeding the liabilities equalling the solvency margin. However, the statutory minimum solvency margin represents the company s actual risks poorly (Solvency I). The new, more risk-related Solvency II standard will only be introduced after a few years, but the new Insurance Companies Act has already prescribed an early warning report which reacts more sensitively to risks. On the basis of this, expanded solvency margin and its objective value will be established which, as a concept, is close to the concept of economic capital. During 2008, the company has prepared early warning report and, above all, developed this reporting. The company s Board of Directors receives regular reports on the company s risks and the development of the risk indicators. Relating to risks and risk management, notes to the financial statements have been prepared, describing the general principles of the company s solvency and risk management, the responsibilities and supervision of risk management, organisation and the measurement and indicators or risk tolerance. Personnel The company employed an average of 146 (136) people. At the end of 2008, the company s personnel consisted of 141 people, of which four were fixed-term employees. At the end of the year, 134 people were present. The company acts in close cooperation with OP Bank Group Central Cooperative s departments and subsidiaries. The company has also outsourced some of its functions to OP Bank Group Central Cooperative. OP Life Assurance Company applies the salary and incentive systems agreed upon within the OP Pohjola Group. A short-term result bonus is paid to the personnel if the agreed annual indicators set for the operations are met. Long-term rewards include payments to the personnel fund and bonus- 13

14 es for the management according to the principles agreed upon in advance. A work satisfaction survey is conducted annually for the entire personnel in the company. According to the 2008 survey, the working atmosphere was at a good level. The personnel s work satisfaction index calculated from the responses was 3.69 (3.97, scale 1 5). Ownership and changes in the Group structure At the end of the year, the shareholders of OP Life Assurance Company included 160 member cooperative banks, Pohjola Bank plc and OP Bank Group Central Cooperative. OP Life Assurance Company is part of the OP Bank Group Central Cooperative Group. Its ownership of the company s shares was 76 per cent, while Pohjola Bank owned 9 per cent and the remaining 15 per cent was divided between different member cooperative banks. OP Bank Group Central Cooperative slightly increased its share from the previous year through new issues. The company has a total of 559,357 shares that all represent an equal number of votes in the general meeting. Administration The company s administration is determined on the basis of the regulations of the Insurance Companies Act and the Companies Act, as well as the articles of association ratified for the company. The general meeting which exercises the highest power of decision held the Annual General Meeting on 26 March The meeting agenda included all issues to be handled in the Annual General Meeting according to the articles of association. The Annual General Meeting ratified that the Board of Directors consists of nine members. At the end of the reporting year, the Board members were the following: Tony Vepsäläinen, President, OP Pohjola Group Central Cooperative, Chairman of the Board of Directors Harri Nummela, Senior Vice President, OP Bank Group Central Cooperative, Vice Chairman of the Board of Directors Jussi Huttunen, Senior Vice President, Helsinki OP Bank plc Sini Kivihuhta, Client Relations, Ilmarinen Mutual Pension Insurance Company Harri Luhtala, CFO, OP Bank Group Central Cooperative Hannu Routamaa, Senior Vice President, Tampereen Seudun Osuuspankki Helinä Saarela, CIO, Oulun Osuuspankki Mikael Silvennoinen, CEO, Pohjola Bank plc Jarmo Somero, President, Ylivieskan Osuuspankki The Board convened 16 times during the year. In addition to the Annual General Meeting, a extraordinary general meeting convened two times. The meetings were held on 21 May 2008 and 28 October 2008, both deciding upon an increase in share capital. The latter meeting also amended the articles of association and authorised the Board of Directors to decide on any new share issue. The company s Managing Director was Jukka Ruuskanen until 31 December 2008 and the Deputy Managing Director was Jarmo Kuisma until 31 December Jarmo Kuisma continued as the Managing Director starting on 1 January The company s chief actuary was Onerva Savolainen, SHV. 14

15 Auditors The company s auditors are KPMG Oy Ab, Authorised Public Accounting Organisation, and Timo Nummi, Authorised Public Accountant. The chief auditor issued by KPMG was Mikko Haavisto, Authorised Public Accountant. Deputy auditors were Eija Kauppi-Hakkarainen, Authorised Public Accountant, and Juha-Pekka Mylén, Authorised Public Accountant. Supervisory auditor was Timo Nummi, Authorised Public Accountant, with Jaakko Nyman, Authorised Public Accountant, as his substitute. Board of Directors proposal on the distribution of profit On 31 December 2008, the parent company recorded a loss of EUR 223,310, and the Group a loss of EUR 230,133,435.85, and therefore the Board of Directors states that there are no distributable funds. Outlook In 2009, the focus of sales will move more strongly towards unit-linked insurance. In addition, risk and pension insuring is estimated to continue increasing. The objective of OP Life Assurance Company is to maintain its leading position in the changing market. The company s strategy will be specified during spring The assessment of the 2009 operating environment in the financial industry includes an exceptional amount of uncertainty. The investment environment is also estimated to be difficult this year. The solvency position comprises the central area that the Board of Directors and the management will monitor closely. Insurance operations are expected to be very profitable, even though the premium income of the company and the entire industry is not predicted to increase significantly. 15

16 Income statement Parent Company Jan. 1 Dec. 31, 2008 Jan. 1 Dec. 31, 2007 Insurance technical account Premium income Premium income 766, ,729 Reinsurers share -28, ,302-14, ,820 Investment income 511, ,211 Unrealised increases in the value of investments -696,951-51,986 Benefits paid Benefits paid -731, Reinsurers share 2, , ,837 Changes in claims reserve -51,811-39,703 Reinsurers share 3-780, ,546 Changes in provision for unearned premiums Changes in life insurance provision 690, ,832 Reinsurers share 25, ,808 11, ,070 Operating expenses -43,306-43,002 Investment expenses -905, ,573 Insurance technical result -460,923 53,853 Non-insurance technical calculation Other income 17,949 14,488 Other expenses Depreciation on goodwill -2,916-2,916 Other expenses -8,884-11,801-8,422-11,338 Income taxes for actual operations Taxes for the period and previous periods 75,972-15,141 Profit for the period -378,803 41,862 Amounts in thousands of euros. 16

17 Balance sheet Parent Company Dec. 31, 2008 Dec. 31, 2007 Assets Intangible assets Other long-term expenditure 7,441 1,845 Goodwill 17,498 24,939 20,414 22,259 Investments Property investments Properties and property shares 148, ,194 Loan receivables from Group companies 33, ,636 33, ,206 Investments in Group companies and affiliated companies Shares and participations in Group companies 10,915 8,061 Money market instruments and loan receivables from Group companies 285, ,866 25,877 33,938 Other investments Shares and participations 2,184,305 2,406,986 Money market instruments 1,112,634 1,297,863 Deposits 0 3,296,939 3,775, ,000 3,862,849 4,076,993 Investments as cover for unit-linked insurance 1,614,106 2,373,965 Receivables From direct insurance operations From policyholders 21,293 9,230 From reinsurance operations Other receivables 43,226 64,646 23,400 33,472 Other assets Tangible assets, equipment Cash in hand and bank receivables 108, ,843 30,538 30,614 Tax receivables 76,500 0 Accrued income Interest rates and rents 18,364 24,053 Capitalised acquisition cost of insurance policies 2,521 2,133 Other accrued income 25 20, ,604 Total assets 5,685,385 6,563,907 Liabilities Shareholders equity Share capital 145,433 77,911 Share premium account 249, ,644 Other reserves 118,264 0 Retained earnings 37,229 35,530 Profit for the period -378, ,682 41, ,947 Subordinated loans 90,765 90,687 Insurance technical provisions Life insurance provision 3,538,299 3,517,189 Reinsurers share -37,896 3,500, ,504,331 Claims provision 291, ,561 Reinsurers share ,130 3,791, ,557 3,745,888 Technical provisions for unit-linked insurance Life insurance provisions 1,610,192 2,373,210 Liabilities From direct insurance operations From reinsurance 2,402 2,448 Other liabilities 10,667 13,781 10,783 13,473 Accrued expenses 7,432 9,703 Total liabilities 5,685,385 6,563,907 17

18 Income statement Group Jan. 1 Dec. 31, 2008 Jan. 1 Dec. 31, 2007 Insurance technical account Premium income Premium income 766, ,729 Reinsurers share -28, ,302-14, ,820 Investment income 508, ,964 Unrealised increases in the value of investments -696,951-51,986 Benefits paid Benefits paid -731, ,069 Reinsurers share 2, , ,837 Changes in claims provision -51,811-39,703 Reinsurers share 3-780, ,546 Changes in provision for unearned premiums Changes in life insurance provision 690, ,832 Reinsurers share 25, ,808 11, ,070 Operating expenses -43,306-43,002 Investment expenses -907, ,038 Insurance technical result -466,065 54,141 Non-insurance technical calculation Other income 17,949 14,488 Other expenses Depreciation on goodwill -2,916-2,916 Other expenses -8,884-11,801-8,422-11,338 Income taxes for actual operations Taxes for the period and previous periods 75,972-15,141 Deferred tax , ,326 Minority interest Profit for the period -383,734 42,013 18

19 Balance sheet Group Dec. 31, 2008 Dec. 31, 2007 Assets Intangible assets Other long-term expenditure 7,441 1,845 Goodwill 17,498 20,414 Consolidated goodwill 5,530 30,469 5,678 27,937 Investments Properties and property shares 178, ,175 Investments in Group companies and affiliated companies Shares and participations in Group companies 10,915 8,061 Money market instruments and loan receivables from Group companies 285, ,866 25,877 33,938 Other investments Shares and participations 2,184,305 2,406,986 Money market instruments 1,112,634 1,297,863 Deposits 0 3,296,939 3,772, ,000 3,862,849 4,078,962 Investments as cover for unit-linked insurance 1,614,106 2,373,965 Receivables From direct insurance operations From policyholders 21,293 9,230 From reinsurance operations Other receivables 44,045 65,464 24,419 34,491 Other assets Tangible assets, equipment Cash in hand and bank receivables 109, ,156 31,335 31,411 Tax receivables 76,500 0 Accrued income Interest rates and rents 18,364 24,053 Capitalised acquisition cost of insurance policies 2,521 2,133 Other accrued income 44 20, ,622 Total assets 5,689,229 6,573,388 Liabilities Shareholders equity Share capital 145,433 77,911 Share premium account 249, ,644 Other reserves 118,264 0 Retained earnings 38,122 36,448 Profit for the period -383, ,644 42, ,015 Minority interest Subordinated loans 90,765 90,687 Insurance technical provisions Life insurance provision 3,538,299 3,517,189 Reinsurers share -37,896 3,500,403-12,858 3,504,331 Claims provision 291, ,561 Reinsurers share ,130 3,791, ,557 3,745,888 Technical provisions for unit-linked insurance Life insurance provisions 1,610,192 2,373,210 Liabilities From direct insurance operations From reinsurance 2,402 2,448 Other liabilities 8,968 9,883 Deferred taxes 6,535 18,618 6,715 19,289 Accrued expenses 9,662 11,456 Total liabilities 5,689,229 6,573,388 19

20 Indirect cash flow statement Parent Company Cash flow from operating activities Profit (loss) from actual operations / profit (loss) -378,803 41,862 before extraordinary items Adjustments Changes in insurance technical provisions -717, ,726 Investment impairment and increases in value 1,110, ,645 Unrealised exchange gains/losses 3,526 4,396 Planned depreciation 3,993 4,081 Other income and expenses that do not include payments Other adjustments 8, ,587 Cash flow before changes in working capital 29, ,249 Changes in working capital: Increase (-)/decrease (+) in current non interest-bearing business receivables -25,092 62,577 Increase (-)/decrease (+) in current non interest-bearing liabilities -1, Business cash flow before financial items and taxes 3, ,586 Paid interest and payments on other business financing costs -2,228-5,231 Direct taxes paid ,407 Cash flow before extraordinary items ,948 Cash flow caused by business extraordinary items (net) Cash flow from operating activities ,948 Cash flow from investing activities Investments in investments (excluding cash and cash equivalents) -210, ,007 Proceeds from investments (excluding cash and cash equivalents) -82, ,958 Investments in and proceeds from tangible and intangible assets and other property (net) -6, Cash flow from investing activities -299, ,080 Cash flow from financing activities Share issue for cash 259,701 0 Paid dividends/guaranteed capital interest and other distribution of profits -40,163-39,911 Cash flow from financing activities 219,538-39,911 Change in cash flow -79,752 88,958 Cash and cash equivalents at beginning of period 188,538 99,580 Cash and cash equivalents at end of period 108, ,538 20

21 Indirect cash flow statement Group Cash flow from operating activities Profit (loss) from actual operations / profit (loss) -383,734 42,013 before extraordinary items Adjustments Changes in insurance technical provisions -717, ,726 Investment impairment and increases in value 1,110, ,645 Unrealised exchange gains/losses 3,526 4,396 Planned depreciation 4,709 4,614 Other income and expenses that do not include payments -5,839-5,763 Other adjustments 8, ,635 Cash flow before changes in working capital 19, ,996 Changes in working capital: Increase (-)/decrease (+) in current non interest-bearing business receivables -24,892 57,149 Increase (-)/decrease (+) in current non interest-bearing liabilities -2,113 5,686 Business cash flow before financial items and taxes -7, ,831 Paid interest and payments on other business financing costs -2,228-5,231 Direct taxes paid ,407 Cash flow before extraordinary items -9, ,193 Cash flow caused by business extraordinary items (net) Cash flow from operating activities -9, ,193 Cash flow from investing activities Investments in investments (excluding cash and cash equivalents) -206, ,080 Proceeds from investments (excluding cash and cash equivalents) -82, ,958 Investments in and proceeds from tangible and intangible assets and other property (net) -1, Cash flow from investing activities -289, ,262 Cash flow from financing activities Share issue for cash 259,701 0 Paid dividends/guaranteed capital interest and other distribution of profits -40,163-39,911 Cash flow from financing activities 219,538-39,911 Change in cash flow -80,237 89,020 Cash and cash equivalents at beginning of period 189, ,315 Cash and cash equivalents at end of period 109, ,335 21

22 Notes to the financial statements Accounting principles 31 December 2008 General The financial statements have been prepared following the Insurance Companies Act, the Companies Act, the Accounting Act, the Ministry of Social Affairs and Health s Decree 614/2008 and other decisions, regulations and instructions issued by the Ministry of Social Affairs and Health and the Insurance Supervisory Authority. Accounting principles for consolidated financial statements OP Life Assurance Company prepares the consolidated financial statements, including OP Life Assurance Company and its subsidiaries where the parent company holds more than half the voting power. The companies that belong to the Group are specified in the notes and changes in the Group structure are presented in the annual report. The consolidated financial statements have been prepared as combinations of the parent company and subsidiaries income statements, balance sheets and notes. Transactions, receivables and liabilities between the companies have been eliminated. Share ownership within the Group has been eliminated using the acquisition cost method. The subsidiaries acquired during the year have been included starting from the acquisition date or the target s completion date. The difference between the acquisition cost and the company s acquisition date is primarily allocated to the properties of the subsidiaries, and depreciated according to their depreciation plan. OP Life Assurance Company Ltd. is a subsidiary of OP-Pohjola Group Central Cooperative, and the company and its subsidiaries are consolidated line by line with OP-Pohjola Group Central Cooperative s financial statements. For consolidation purposes, all information has been converted to follow the IFRS standards. For conversion, OP Life Assurance Company has followed the IFRS accounting principles that are uniform with OP-Pohjola Group Central CooperativepConsolidated. Valuation and classification principles and methods Intangible assets and equipment have been recognised in the balance sheet at acquisition cost less planned depreciation and amortisation. Property shares and building projects have been recognised at acquisition cost or a lower fair value in the balance sheet. Investment shares and units have been recognised at acquisition cost or a lower fair value in the balance sheet. Previously made impairment will be returned as the fair value increases to the original acquisition price at the most. Shares and units have been recognised following the average price principle. Fixed asset shares have been recognised at acquisition cost. Money market instruments are recognised at acquisition cost in the balance sheet. The difference between the acquisition cost and nominal value are matched in interest income or its deduction with acquisition cost as the counter-item during the money market instrument s exercise period. Receivables and investments similar to receivables are presented at their nominal value or a lower fair value. Derivative agreements are prepared for hedging purposes. Agreements that are open on the financial statement date are recognised at fair value on the balance sheet date. Profit or loss resulting from 22

23 a hedging agreement is entered in the income statement to the extent it corresponds to the amount entered as income or cost from the item to be hedged. Loss that exceeds the increase in the value of the hedged item is, however, entered fully as expenses. If an agreement has been handled as non-hedging, negative changes in value will be fully entered in the income statement, and the unrealised profit will not be registered at all. Any valuation differences of derivatives not entered in the income statement and any maximum losses from derivatives handled as non-hedging are taken into account in the solvency margin calculation. Fund units that serve as cover for unit-linked insurance have been recognised at fair value in the balance sheet. Any increases in their value or their adjustments, impairment and returns have been entered with an impact on result. Receivables and liabilities denominated in a foreign currency have been converted according to the buying rate on the financial statement date quoted by the European Central Bank. Investments have been recognised at the buying rate on the financial statement date so that the impact of the exchange rate and market difference has not been separated in the valuation of investment property shares and units. Exchange rate differences are presented in other investment income and expenses. Fair values of property Property sites are recognised annually on the basis of their net income, location and market situation. The company s own experts and outside expertise is used in the valuation. Shares and money market instruments that are quoted in an official stock exchange or are otherwise targeted by public trading are recognised at the final buying rate on the financial statement date or, if it isgnot available, the transaction rate. The probable redemption price, the mark to model value determined through valuation methods or the remaining acquisition price are used as the fair value of other shares and money market instruments. The nominal value or a lower probable value is used as the fair value of loan receivables and deposits. Depreciation Depreciation has been calculated according to the plan, following eliminations based on the financial lifetime of property items in accordance with the OP-Pohjola Group Central Cooperative Group s calculation principles. The following depreciation plan has been used when calculating depreciation: Years Intangible assets Intangible rights straight-line depreciation 4 5 Goodwill straight-line depreciation 10 IT software straight-line depreciation 4 5 Tangible assets Office machines and equipment straight-line depreciation 4 10 IT hardware straight-line depreciation 3 4 Properties Business and industrial buildings straight-line depreciation Intangible rights for buildings straight-line depreciation Activated repair and modification work straight-line depreciation Depreciation pursuant to the Act on Income from Professional Activities exceeding the plan in accounting has been presented as changes in depreciation difference as a separate item in the income statement. Expenses per function and taxes Business expenses are allocated to functions according to the matching principle. Function-specific expenses are presented in the income statement in 23