Successful investments

Suomi Mutual achieved a good market-based annual return on investment in the last operating period. The annual return was 6.5%.

Active risk-taking was again rewarded

The investment environment of 2006 continued to be favourable for equity and other risk investments despite a significant rise in the prices of raw materials and energy, in particular, during the year.

Inflation fears and a low starting point for interest rates put pressure on the bond market particularly in the first half of the year. Despite this, the interest rate level stayed reasonably low and favoured the use of debt leverage, for example. Real estate funds and private equity investments were successful.

 

Share prices went up, although a significant correction was seen in May. A strong belief that the investment environment would remain reasonable and the apparently moderate valuation of equities supported the rates. In addition to main markets, equity investments in the developing markets, particularly Russia, did well.

Industrial buyers were active in private equity investments, and conditions were favourable for withdrawal. The foreign currency market remained mostly calm. During the year, interest rates rose and the interest rate differential between short-term and long-term interest rates narrowed. Contrary to the principal rule, it was wise to avoid risk-taking in relation to the actual interest rate risk. However, investors were still rewarded by a reasonable return for carrying credit risk.

The real estate market continued to be characterized by high activity by foreign investors. Demand for properties exceeded supply. Competition for good properties was fierce, it reduced returns and raised prices. However, it was still possible to find individual new building projects that will meet long-term return targets.

Targets achieved

The return on Suomi Mutual's investment operations was 6.5 %. The figure for the previous year was 17.5%, which included the significant profit made from the sale of the Pohjola shares and was therefore exceptionally high. Expressed in euros, investment income totalled EUR 423 million in 2006. The result clearly exceeded the 2006 target of 4.9%, derived from requirements set for the return on technical provisions, for competitive customer bonuses, and for a market-based return on equity.

 

 

A significant proportion of the return (EUR 314 million) was used on additional special benefits and customer bonuses, i.e. increasing technical provisions. Despite this, the company prospered, its solvency capital increased and its capacity to carry investment risks improved.

Suomi Mutual's investment operations also performed well in relation to the market. Benchmarks were exceeded in both equity and bond investments. Annual return on equity and private equity investments was 20%, i.e. about EUR 345 million. Money-market and bond investments yielded a total of 0.7%, i.e. about EUR 25 million. In 2006, the share of equities in the balance sheet total grew from about 21% to about 32%. Correspondingly, the share of bonds fell from about 67% to about 55%.

The 7.0% annual return target set for real estate investments was clearly exceeded. Investments in real estate funds alone returned almost 15 %. In total, real estate investments generated a 9.2% return, i.e. almost EUR 42 million. Real estate investments accounted for about 7% of the balance sheet total at the end of the year.

At the end of the year, alternative investments, i.e. commodities and hedge funds, represented around 6% of the balance sheet total. Commodity investments were discontinued for the time being. The year was good for hedge funds, even if the set annual return target of 10% was not quite achieved. The return was 9.4%. It was a difficult year for commodity investments. Before this asset class was abandoned, investments produced a loss of about EUR 13 million. In total, the return for alternative investments was 4.2%, i.e. just over EUR 16 million.

Challenging business operations principles

A couple of years ago, the Board of Directors of Suomi Mutual approved new principles for the company's business operations. According to the principles, the company's net assets will be distributed to policyholders in the form of special benefits. The main principle is that assets will be distributed when a decrease in technical provisions or an increase in investment returns generates capital which is not needed to cover the risks related to an investment portfolio with a competitive return.

In line with the business operations principles, Suomi Mutual's annual investment return target is market-based. The return target for technical provisions will be derived from the interest rate markets, and the return target for the solvency capital to be retained in the company from the equity markets. In attempting to reach the targets, investment risk may never exceed risk-carrying capacity.

Whenever revised, new decisions, measures, plans and targets will call for challenging changes to the investment operations. The structure of the investment portfolio and operational targets and measures have to be adjusted to the changed circumstances. Last year, operations focused on the reinvestment of the profit from the sale of Pohjola shares. The targeted equity allocation was achieved within the first six months of the year. In fixed income investment, the focus was gradually shifted towards the money market.

In real estate investments, the portfolio was further securitized. In direct investments, new construction was favoured due to the market situation. On the whole, there were no significant changes in the real estate allocation during the year.

Basic objectives of investment operations unchanged

The main objectives and duties of Suomi Mutual's investment operations have remained unchanged despite the changes in the structures of the investment portfolio and balance sheet. The company's investments continue to be managed in a sustainable way aiming at maximum security and profitability. In practice, the operational focus has been on seeking better returns and using equity capital as effectively as possible insted of risk minimization, as the company's solvency has been good.

Following the favourable results, the company's relative solvency improved further last year. The company's investment risk carrying capacity is good. In view of the prevailing level of interest rates, the company's long-term return targets remain very challenging. Therefore, active investment management will be increasingly emphasized  in the future.

Fluctuations in investment markets are reflected in the returns on investment portfolios, and affect the company's solvency and competitiveness. In difficult circumstances, the maintenance of security and solvency are emphasized. In such circumstances, avoiding losses is more important than seeking profits. If this is achieved, it may be possible to emphasize profit seeking instead of risk minimization in a favourable investment environment.

Value adjustments for technical provisions in risk calculation

The trend for change in accounting and financial statements practices (International Financial Reporting Standards, or IFRS) has contributed to the emergence of a requirement that, in addition to actual investment risks, risk calculation must take into account the computational changes in the market value of the technical provisions. Although Suomi Mutual has not otherwise adopted the IFRS standards in its accounting, the technical interest is valued at market value in the risk calculations. Any changes in this area are thus taken into account when calculating the company's risk bearing capacity.

Investment plan guides operations

The investment operations of Suomi Mutual are guided by an investment plan confirmed by the Board of Directors. The plan defines the return and liquidity targets, which derive from the nature and structure of technical provisions. The method for measuring risk carrying capacity and investment risks has also been determined in the plan.

To secure adequate diversification, the plan includes confirmed maximum and minimum amounts for each asset class. The investment plan also includes principles for currency management and a description of the investment organization and its operational powers.

About one third of the company's investment portfolio, i.e. about a tenth of the total balance, is held in equities in Finnish listed companies. In domestic equity investments, Suomi Mutual's aim is to utilize its local and company knowledge to concentrate its investments mainly in equities which provide a higher than average return within a minimum of a few years.

The concentrated investments are set out so that each individual investment is significant to the company's overall result. For this reason, Suomi Mutual aims to be actively involved in the administration of these companies, and thereby also participate in increasing their net asset value.

Suomi Mutual's Board of Directors and internal experts are responsible for investment planning, strategic steering and the selection and supervision of cooperation partners. OKO Asset Management Ltd provides the accounting and reporting services as well as most of the risk management and portfolio services required by the investment operations of Suomi Mutual. Pohjola Property Management Ltd is, either on its own or together with its subcontractors, responsible for operative functions related to the maintenance and administration of Suomi Mutual's real estate properties.

Suomi Mutual has outsourced, either entirely or partially, to companies outside the Pohjola-OKO grouping, such tasks as the selection and monitoring of private equity investments, indirect real estate investments, and investments in absolute return funds. Some of the mutual funds investing in the developing markets and in small-cap companies are funds offered by OP Fund Management Company, others are offered by outside providers. Suomi Mutual aims to find the most suitable asset manager with the optimal knowledge for each mandate.

 

Major mutual fund investments

		Market Value
		Dec 31, 2006
		EUR million
1.	OP-America Index Fund	277
2.	Aviva Global Convertible Bond Fund	153
3.	R2 Crystal Fund	136
4.	OP-Corporate Bond Fund	135
5.	Evli Europe Quant Index B	108
6.	ICECAPITAL US Stock Index B Mutual Fund	102
7.	IXIS Loomis Sayles Senior Loan Class S	97
8.	Pimco Global Investm Grade Credit Fund, Inst Inc	87
9.	OP-Bond Index Fund	81
10.	Nordea Pro Euro Money Market Fund	79
11.	Fidelity Emerging markets Fund	79
12.	Nordea Euro Money Market Fund	62
13.	FIM Russia	62
14.	OP-Japan Index Fund	61
15.	OP-Convertible Fund	54
16.	Mutual Fund Evli Target Bond	51
17.	OKO RMF Opportunities TM38	47
18.	ABN AMRO Latin America Equity Fund I	44
19.	PWT II Opportunistic Value Fund USD I	42
20.	Parvest Japan Small Cap Inst	41