1. Notes to the financial statements
1 Accounting principles
1.1 Changes to the accounting principles and comparability of information
From 2006, information related to the foreign subsidiaries will be consolidated into the Group's financial statements mainly as it was calculated under the local regulations of the relevant country. This change in treatment will have a minor impact on the Group's result and balance sheet.
As the values of the Group's real estate companies were reviewed, the carrying value for property was decreased (EUR 2.6 million) and the comparative 2005 information adjusted accordingly.
Subscription amounts for hedge funds unallocated at the balance sheet date are recorded as investments (previously under the Prepayments and accrued income group). The comparable 2005 information (the subscription amount of EUR 50 million) has been adjusted.
Commission paid to external investment managers will be treated as a direct deduction from investment income from 2006. The comparable 2005 information has been adjusted.
Previously included in the group life insurance category, insurance contracts underwritten by the parent company and applying to several insured are now reported under the sub-category of other individual life insurances, as it better describes their nature. This also applies to the comparable 2005 information.
As of the last quarter of 2006, the commissions from investment funds are recorded as direct income from investments. They were previously included in the value changes for these investments.
1.2 Consolidated accounts
Those corporations in which the parent company either directly or indirectly has a controlling interest are consolidated. The control in all the subsidiaries of Suomi Mutual is based on the majority of voting rights.
The consolidated accounts are combinations of the profit and loss accounts, balance sheets and notes to the financial statements of the parent company and subsidiaries. In this consolidation, inter-group receivables and debts, income and charges, profit distribution, internal gains and losses entered in the balance sheets and mutual share ownership are eliminated. Subsidiaries acquired during the year are consolidated as of the moment of acquisition, while undertakings sold during the year are consolidated up to the moment of sale. Eliminated internal gains and losses are released to income along with scheduled depreciation or reductions in value. Minority interest is shown as an item separate from profit and loss and capital and reserves.
The book value of shares in undertakings included in consolidation is eliminated by the acquisition method. The consolidation goodwill is entered directly against the subsidiaries' asset items and is depreciated in accordance with their depreciation schedule. Suomi Life, a subsidiary of Suomi Mutual, was put into voluntary liquidation in 2003, and its operation licence was cancelled. The company's final dissolution procedure is underway. The depreciation of the unallocated goodwill related to Suomi Life has continued in accordance with the earlier depreciation schedule. The goodwill related to the foreign subsidiaries was fully depreciated by the end of 2006.
Associated undertakings, i.e. undertakings in which the Group holds 20% to 50% of the voting rights, are included in the consolidated accounts mainly by the equity method. The profit and loss account includes the Group's share of associated undertakings' profit or loss. In the balance sheet, the Group's share of associated undertakings' profit or loss which has accrued after acquisition is added to or deducted from associated undertakings' acquisition cost and consolidated profit brought forward. Internal gains/losses entered in the balance sheets and originating from transactions between the Group and associated undertakings are eliminated in proportion to the Group's shareholding. Consolidation goodwill and eliminated internal gains/losses are entered in the profit and loss account in accordance with the principles applied to the consolidation of subsidiaries.
Pohjola Group plc was an associated undertaking of the Suomi Mutual group until its sale in September 2005.
Holdings (20% to 50%) in mutual housing and real estate companies are stated at cost. Since the expenses for these companies are covered by shareholders, the effect on consolidated result and profit brought forward is insignificant.
Ilmarinen Mutual Pension Insurance Company is stated at cost since the Act on employment pension insurance companies provides that a company carrying on statutory pension insurance may not be included in the consolidated financial statements of another company. The prohibition is based on restrictions pertaining to employment pension insurance. There are some transactions between the Group and Ilmarinen in the ordinary course of their insurance or insurance-related activities.
1.3 Book value of investments
Buildings and constructions are shown in the balance sheet at acquisition cost reduced by scheduled depreciation or at current value, whichever is lower. Acquisition cost includes purchase price and variable costs directly attributable to the item in question. Shares in land and buildings as well as land and water areas are shown in the balance sheet at purchase price or at current value, whichever is lower. The book value of certain investments in land and buildings has been written up (see section 1.5). Scheduled depreciation is deducted also from write-ups on buildings if entered as unrealised gains in the profit and loss account.
Other shares, fund units and debt securities classified as investments are shown in the balance sheet at purchase price or at current value, whichever is lower. The difference between the amount repayable at maturity and purchase price of debt securities is released to interest income or charged to that income in instalments during the period remaining until repayment. The counter item is shown as an increase or a decrease in acquisition cost. Acquisition cost is calculated on the basis of the average price method. Shares subject to stock lending are valued in the same manner and their amount is stated in the notes to the financial statements.
Private equity investments in mutual funds are shown in the balance sheet at purchase price or at current value, whichever is lower. The current value applied is the fund unit value, increased by management fees, calculated in accordance with the value most recently reported by each mutual fund. However, the book value of investments in the funds is not lowered until the year after the establishment year, unless the value of a fund has fallen markedly. The value of unquoted direct private equity investments is lowered on the basis of price data available from new financing rounds or equity offerings carried out by outsiders, or in accordance with the net asset value.
Shares and debt securities classified as fixed assets are shown in the balance sheet at acquisition cost reduced by permanent value adjustments. The acquisition cost is calculated in accordance with the FIFO-method.
Investments classified as receivables are shown in the balance sheet at nominal value or at permanently lower likely realisable value.
Insofar as the current value of investments rises, readjustments in value are entered into the profit and loss account up to the previously made downward value adjustments.
Derivative contracts are valued at the market-based current value on the closing day. All derivative contracts are treated in the profit or loss account as non-hedging instruments. The difference between the current value and a higher book value of derivative contracts is entered as charge in the profit and loss account. Unrealised gain is not entered in the books. The solvency margin calculation takes account of the difference between current and book values of derivatives not entered in the profit and loss account and of any possible maximum losses on contracts treated as non-hedging instruments in the books, other than currency derivatives.
Foreign subsidiaries' investment assets, including investments acquired to cover for the technical provisions of unit-linked insurances, are valued at current value in accordance with the local regulations.
1.4 Book value of other assets than investments
Intangible assets as well as machinery and equipment are shown in the balance sheet at acquisition cost reduced by scheduled depreciation. Acquisition cost includes purchase price and directly attributable variable costs.
Premium receivables are shown in the balance sheet at likely realisable value; other receivables at nominal value or at permanently lower likely realisable value.
In the parent company, the depreciation of the goodwill (EUR 45 million) paid in 2003 for the purchase of the insurance business of the subsidiary Suomi Life has been continued in accordance with the depreciation schedule. The dissolution loss of Suomi Life was fully depreciated by the end of 2005.
1.5 Unrealised gains on and revaluation of investments
The book values of land and water areas, buildings and securities can be written up. Write-ups of items classified as investments are entered in the profit and loss account as unrealised gains, while write-ups of items classified as fixed assets are entered in the revaluation reserve. The oldest write-ups are, in accordance with the previous accounting practice, in the revaluation reserve, initial fund or technical provisions. The revaluation reserve may be used for increasing the initial fund to the extent that the revaluation reserve, at the time of the increase, pertains to investments classified as fixed assets.
If a previous write-up becomes unjustified, unrealised gains are entered as unrealised losses in the profit and loss account, and the revaluation is withdrawn from the revaluation reserve or, in the event that the revaluation reserve has been used to increase the initial fund, from non-restricted reserves. Previous write-ups with the counter item in the technical provisions are also adjusted through unrealised losses in the profit and loss account.
Unrealised gains on buildings are depreciated according to schedule.
1.6 Current value of investments and difference between current and book values
The notes to the financial statements indicate, by balance sheet item, the remaining acquisition cost, book value and current value of investments. The difference between the two first-mentioned values consists of write-ups of book values as well as of equity-method adjustments related to associated undertakings. The difference between the two last-mentioned values indicates the difference between current and book values not entered in the balance sheet.
The individual current values of land and buildings and shares therein of Suomi Mutual are annually determined by experts of Pohjola Property Management Ltd. Current values are determined primarily by the yield value method. A parallel assessment method applied to housing real estate and sites is that based on local market price statistics, while the current technical value is applied to buildings. The current values are determined individually, observing the principle of prudence.
The current value of shares, fund units and debt securities quoted on official stock exchanges or which otherwise are subject to public trading is the last bid price in continuous trading on the balance-sheet date or, where this is not available, the corresponding trading price. If the balance-sheet date is not a trading day, the corresponding price for the latest trading day is used. The current value of non-listed shares and debt securities is the likely realisable value, the remaining acquisition cost or the net asset value.
The current value of receivables is the nominal value or the likely realisable value, whichever is lower.
1.7 Technical provisions
In principle, technical provisions are calculated separately for each insurance contract.
The technical interest rate of insurance contracts varies between 3.5% and 4.5%, depending on the insurance type and commencement of the insurance. In addition, permanent additional benefits, such as an annual additional benefit of 2.7%, have previously been declared for part of the insurance portfolio.
The normal discount rate for insurance contracts corresponds to the technical interest rate, except for group pension insurance contracts. The discount rate for Group pension insurances is, in most cases, 3.5%. In this way, their calculation complies with the relevant regulations and decrees. With regard to those additional benefits that are not contractually binding but have nevertheless been previously declared as permanent benefits, technical provisions are valued using the normal discount rates of the relevant insurance contracts and empirical information about the termination of the insurances (including mortality).
Because of the high normal discount rate, Suomi Mutual increased its technical provisions at the time the 2005 financial statements were prepared. In accordance with the decision made at that time, an amount equivalent to the difference between the normal discount rate expense and the interest rate payable, calculated at 3.25%, will be covered from the additional provisions for the financial year.
The technical provisions include a provision for additional benefits. In accordance with the regulations by the Insurance Supervisory Authority, additional benefits comprise all benefits which are not included in the insurance company's liability on the basis of the insurance contract, such as premium rebates, additional sums insured, customer bonuses and the provision for future additional benefits. The impact that the additional benefits declared during the financial year have on the technical account is determined by calculating the amount of technical provisions corresponding to these bonuses.
The technical provisions also include the present value of the difference between an estimated amount for future expenses for the management of the insurance portfolio and of the future expense loadings accrued from the insurance portfolio. The total amount of this additional item at the end of 2006 was EUR 38 million.
The technical provisions of foreign subsidiaries have been determined in accordance with the relevant local regulations and decrees. The discount rates used in those countries also vary according to the insurance type and the commencement time of the insurance. In addition to this, the discount rate is affected by the currency in which the company's provisions are denominated.
1.8 Assets covering technical provisions
The company's technical provisions are covered in accordance with the decree on the covering of technical provisions by a company engaged in direct insurance operations. The Insurance Supervisory Authority has granted the company special permission to deviate from the aforementioned regulations as follows: in so far as fixed-interest funds are included under an asset category that can cover a maximum of 50% of the gross amount of the technical provisions, the percentage of the relevant asset category may be increased by the fixed-interest funds. The special permission is valid between December 31, 2006 and January 1, 2008.
1.9 Principle of equity
In accordance with the Finnish Insurance Companies Act, an equitable part of the surplus generated by the insurance portfolio is to be returned to those policyholders who, in accordance with the insurance contract, are entitled to additional benefits. Suomi Mutual defines the overall return to be credited on customers' insurance savings in terms of the expected long-term return on the company's investment portfolio, as per the target allocation of the company's investments. The cost of the capital tied by the insurance business is taken into account as a factor reducing the return. When the target allocation of investments is being decided, the company's solvency position is considered. The amount of additional benefits to be declared on an insurance contract equals the amount by which the total return defined for the contract exceeds the guaranteed technical interest under the contract. Regarding this annually declared benefit, Suomi Mutual aims at a stable interest rate level, as required by the law. Suomi Mutual calls this additional benefit a customer bonus.
In addition to the ordinary annually declared customer bonuses described above, Suomi Mutual has granted special benefits and special additional benefits to long-standing customers (customers whose current policy was already in effect at Suomi Mutual on July 1, 1997). When defining these benefits, account has been taken of the duration, size and type of insurance. The entitlement to special additional benefits under old policies is limited to the amount about which a conditional promise was given regarding these policies in 1999 and 2000. To the extent that the reduction of the insurance portfolio permits larger additional benefits, these will be declared for the entire insurance portfolio by increasing the annual customer bonus beyond the level determined in the manner described above. With regard to increases to special additional benefits and customer bonuses yet to be declared, the company does not aim at similar stability as for the ordinary bonuses referred to above.
Legislation governing foreign subsidiaries does not include provisions on the principle of equity.
1.10 Book value of other liabilities
Other liabilities than technical provisions are entered in the balance sheet at nominal value or, if the liability concerned is tied to an index or another basis of reference, at a higher value as per the changed reference basis.
1.11 Taxes and deferred tax liabilities and assets
In the profit and loss account, the tax paid or refunded as well as the tax to be paid or to be refunded on the taxable profit is entered under tax for the financial year and tax for previous financial years. Taxes have been entered applying the principle of prudence in such a way that uncertain receivables have not been taken into account.
Under Finnish accounting and tax legislation, untaxed reserves (voluntary provisions and depreciation in excess of schedule) can be included in the annual financial statements. These items are tax-deductible only if deducted also in the books. In the consolidated accounts, untaxed reserves are included partly in result for financial year and reserves and partly in deferred tax charge and deferred tax liability.
For the parent company, deferred tax assets or liabilities are not entered in the balance sheet since they are not likely to become payable. Because of the bonuses declared for customers, no major taxable income is expected to accumulate in future years. Therefore, deferred tax liabilities or assets will not become payable. The realisation of the deferred taxes related to the difference between current and book values of investments and revaluation entered in the revaluation reserve is not deemed probable in the parent company or in the Group.
No tax liability is included in unrealised gains on investments entered in the profit and loss account because these are accounted for as taxable profit for the write-up year and the depreciation and value adjustment made on them are correspondingly deducted from the taxable profit. Nor is any deferred tax liability computed on allocated consolidation goodwill. In the Group, the most important items originate from timing differences, confirmed losses, value adjustments of equity investments and investments in land and buildings, and from depreciation. Deferred tax liability is deducted from the solvency margin and solvency capital only if such liability is deemed likely to become payable in the near future, and no corrections related to deferred taxes are made in calculating the key figures. The deferred tax liability is shown in accordance with the tax rate (26%) confirmed at the time of drawing up the financial statements.
1.12 Solvency margin
The Insurance Supervisory Authority monitors the solvency of insurance companies. The main indicator used is solvency margin, which refers to the difference between assets and liabilities assessed at current value applying the principle of prudence. The solvency margin and capital and reserves have to meet the minimum requirements set in the Insurance Companies Act. The solvency margin is shown in the notes to the financial statements.
1.13 Items in foreign currencies
Transactions in foreign currencies are entered at the rate quoted on the date of the transaction. Receivables and liabilities unsettled at the end of the financial year and current values of investments denominated in foreign currencies are translated into euros at the rates quoted on December 31. Exchange gains and losses arising during the financial year and at year-end are entered in the profit and loss account as adjustments to the income and charges concerned or as investment income or charges, provided that the exchange gains/losses pertain to financing transactions.
The balance-sheet items of foreign subsidiaries are translated into euros at the rate quoted at the balance-sheet date and the profit and loss account items at the average rate for the financial year. The difference resulting from applying the average rate to the profit and loss account is entered in the consolidated non-restricted reserves. The translation differences pertaining to capital and reserves are stated partly under restricted and partly under non-restricted capital and reserves.
1.14 Pension arrangements
The statutory pension cover for staff employed by the Parent Company has been arranged through pension schemes taken out from Ilmarinen Mutual Pension Insurance Company. Supplementary pension cover has, in general, been arranged by group pension insurance issued by Suomi Mutual. The cost of pension arrangements has been entered in the profit and loss account, also as regards the part of pension cover that is left for the company's own account without insurance. The possible costs arising from individual choices enabled by supplementary pension cover have not been entered in the profit and loss account. For the employees of foreign subsidiaries, pension cover has been arranged in accordance with local practice.
1.15 Activity-based profit and loss account layout
Insurance undertakings' profit and loss account layout requires activity-based cost accounting. Operating expenses and depreciation on intangible assets and on machinery and equipment are included, by activity, in the profit and loss account items. Claims management expenses are included in claims paid; investment management expenses in investment charges. Only expenses for policy acquisition and portfolio administration as well as general administrative expenses are shown under operating expenses. Commissions received in ceded reinsurance are deducted from operating expenses. Expenses corresponding to services sold to other companies are included in other charges. Scheduled depreciation on buildings is shown as investment charges.
1.16 Definition of key figures
The key figures are based on the parent company's data and, where applicable, on consolidated data and they comply with the regulations issued by the Finnish Insurance Supervisory Authority for insurance companies.|
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| Premiums written = | ||
| Premiums written before reinsurers' share | ||
| Turnover = | ||
| + | Premiums written before reinsurers' share | |
| + | Net investment income in profit and loss account | |
| + | Other income | |
| Operating profit or loss = | ||
| Profit or loss before change in equalisation provision, | ||
| bonuses and rebates, extraordinary items, untaxed reserves and tax | ||
| Total earnings = | ||
| ± | Operating profit/loss | |
| ± | Change in off-balance-sheet difference between current and | |
| book values of investments, fair value reserve and revaluation reserve | ||
| Expense ratio of expense loading (%) = | ||
| + | Operating expenses before change in deferred acquisitions costs | |
| + | Claims settlement expenses x 100 | |
| Expense loading | ||
| Expense loading is an allowance covering expenses as | ||
| per the bases of calculation. | ||
| Expense ratio of balance sheet total (%) = | ||
| + | Total operating expenses before change in deferred acquisition costs | |
| + | Claims settlement expenses x 100 | |
| + | Balance sheet total |
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| Net return on investments at current values for capital employed (%) = | ||
| Investment income at current values in proportion to capital employed is calculated using the so-called modified Dietz method, under which capital employed is calculated by adding to the opening current value the cash flows in the period, weighted by the relative share of the length of the whole period that remains from the transaction date or from the middle of the transaction month to the end of the period. | ||
| Analysis of net investment income = | ||
| + | Direct net investment income at book values | |
| ± | Changes in book value | |
| ± | Change in difference between current and book values | |
| Return on assets excl. unit-linked insurance % | ||
| (at current values) = | ||
| ± | Operating profit or loss |
|
| + | Interest and other financing expenses | |
| + | Guaranteed interest credited |
|
| ± | Revaluation entered in/withdrawn from revaluation reserve//unrealised gains/losses recognised in fair value reserve and their reversals | |
| ± | Change in difference between current and book values of investments x 100 | |
| + | Balance sheet total |
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| − | Technical provisions for unit-linked contracts |
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| ± | Difference between current and book values of investments | |
| (average of financial period and previous
financial period)
Guaranteed interest credited refers to the guaranteed interest credited on policies during the financial period increased/decreased by any changes in additional strengthening of technical provisions related to guaranteed technical interest. |
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| Solvency margin = | ||
| + | Capital and reserves after deduction of proposed distribution of profit | |
| ± | Accrual of untaxed reserves | |
| ± | Difference between current and book values of
investments
|
|
| ± | Deferred tax liability |
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| + | Subordinated loans (by permission of Insurance Supervisory Authority) | |
| − | Intangible assets |
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| ± | Other items required by the law | |
| Solvency capital = | ||
| Solvency margin + equalisation provision + minority interest |
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| Solvency capital as a percentage of technical provisions (solvency ratio) = | ||
| Solvency capital x 100 | ||
| + | Technical provisions |
|
| − | Equalisation provision |
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| − | 75 % of technical provisions for unit-linked insurance |
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| Average number of employees = | ||
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Average of number of employees at the end of each month. The figure is adjusted by the number of employees working on a part-time basis only. The staff is considered to include those employees who were paid a salary during the financial period. |
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