3rd Quarter Results

SAMPO PLC        STOCK EXCHANGE RELEASE               1 (44)

                 3 NOVEMBER 2004, at 9.30 a.m. 

 

 

SAMPO PLC INTERIM REPORT JANUARY - SEPTEMBER 2004

Earnings per share more than doubled

- Earnings per share more than doubled to EUR 1.07 (0.46) and operating profit rose to EUR 753 million (355). Net asset value per share was EUR 5.13 (5.39, incl. EUR 1.50 dividend for 2003).

- Operating profit from banking and investment services rose to EUR 231 million (170). Net income from financial operations weakened to EUR 294 million (304). However, encouraging development in costs and fee income has led into steadily improving operative profitability in banking. Lending grew by 10 per cent in a year and non-performing loans decreased.

 

- Operating profit from P&C insurance increased to EUR 293 million. The combined ratio (SGAAP) for the review period improved to 93.5 per cent (101.5). The third quarter combined ratio decreased to 88.0 per cent (98.5).

- Operating profit from life insurance increased to EUR 166 million (138). Solvency remained strong, even after the EUR 150 million dividend pay-out in September 2004, and was 16.8 per cent (15.6)

 

- The holding company's operating profit for the review period was EUR 45 million (0). Operating profit contains a sales gain of EUR 95 million on Skandia shares sold in the first quarter of 2004.

 

- If P&C Insurance Holding Ltd became Sampo plc's wholly-owned subsidiary on 5 October 2004 after the transaction with Varma Mutual. Sampo Credit was merged into Sampo plc and Sampo Finance into Sampo Bank on 30 September 2004.

 

- Board of Sampo has adopted a new distribution policy.

Internal dividends and sales profits between the different lines of business have not been eliminated in the result analysis and specifications or key figures of banking and investment services and insurance. These items have been eliminated in Group operating profit. Furthermore, profit or loss corresponding to the share earlier held in the associated company, If, has been added to or deducted from operating profit until Q1. Therefore, Group operating profit is not equal to the sum of the business area operating profits.

 

CEO's Review

 

Continued strong performance

 

Sampo Group recorded yet another successful quarter with earnings per share amounting to 0.21 euros (0.20). In line with previous quarters this year all business areas fared well, but P&C insurance was the star performer exceeding all expectations.

 

Sampo's P&C insurance subsidiary, If, posted a record low combined ratio of 88.0 per cent in the third quarter of 2004. There is no doubt in my mind that If will sustain its excellent performance going forward. We have adjusted the combined ratio guidance for If accordingly, and estimate a full year 2004 combined ratio of 93 per cent.

 

The fact that Sampo acquired 100 per cent of If a month ago is an indication of our strong belief in the Nordic P&C insurance market and, in particular, in If's operating model.

 

New distribution policy adopted

 

The Board of Sampo has today adopted a new distribution policy. The term distribution policy is now adopted to illustrate that share buy backs are seen as the preferred method of returning profits to shareholders.

 

With the abolition of the avoir fiscal system in Finland as of 1 January 2005, dividends received by Finnish shareholders cease to be tax-free.

 

 

 

 

 

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From the investor's point of view the amount to be distributed is, I believe, of greater importance than the method. Sampo Group has shown a remarkable capacity to generate cash flow and profits under the new Group structure. In the previous Q2/2004 interim report I stated that our capital accumulation was clearly ahead of the projections made in connection with the acquisition of the majority in If. After the third quarter of 2004 our position is even stronger.

 

This allows Sampo to maintain its target of distributing 50 per cent of net profits in the form of either share buy-backs or dividends. For the year 2004 the Board has, however, made an exception by stating that it will not propose to the Annual General Meeting of April 2005 a total distribution exceeding 25 per cent.

 

The exception is largely a result of Sampo using close to 270 million euros to buy Varma's 10 per cent of If in early October 2004. A bank loan of 200 million euros was used to finance the deal. The Board's view is that it was in the shareholders' best interests to proceed with the transaction, thereby deferring the application of the new distribution policy by one year.

 

Striving for optimal capital structure

 

Sampo targets an optimal capital structure in all Group companies and in so doing respects all its commitments, including those towards bondholders and rating agencies.

 

As communicated earlier, Sampo repaid the bridge loan of 550 million euros used to finance the previous If transaction in April 2004 after having merged Sampo Credit into the holding company on 30 September 2004. The strong profitability of all subsidiaries allows a good dividend stream to the holding company, lowering the parent company leverage faster than originally estimated.

 

I was particularly pleased to note that, not only did the rating agencies take the view that increasing Sampo's share of If to 100 per cent had no rating implications, but, in full knowledge of the upcoming transaction, S&P upgraded If's rating to A- and revised Sampo Bank's outlook to stable.

 

Cost reporting revisited

 

I have often emphasized the need to focus on cost efficiency. In the two quarters that we have operated with the present structure, the Group's total costs have been driven down by approx. 18 million euros. The new model for reporting Group cost development is now finalised and cost reduction still has a high priority in the Group.

 

Björn Wahlroos

Group CEO and President

 

 

 

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The third quarter 2004 in brief

Record low combined ratio for If

Sampo Group's operating profit for the third quarter of 2004 was EUR 206 million (140). Earnings per share was EUR 0.21 (0.20). Net asset value per share increased by EUR 0.32 from the end of the second quarter 2004.

 

Operating profit from banking and investment services increased to EUR 93 million (60) during the third quarter. The operating profit includes a profit of EUR 25 million from private equity investment as well as a dividend amounting to EUR 8 million paid by Sampo Life to Sampo Bank, which is eliminated in the result for the whole Group. Net income from financial operations remained stable at EUR 98 million (97), with growth in lending compensating for the fall in spreads. Fees and commissions receivable continued to grow and rose to EUR 66 million. Credit quality remained good.

 

If's operating result for the third quarter improved to EUR 108 million,  mainly due to an increase in earnings from insurance operations. The earnings for the quarter benefited from the favorable claims trend and improved risk selection, which led to lower risk levels in the insurance stock. Investment earnings declined to EUR 27 million.

 

Compared with the third quarter of 2003, the cost and risk ratios were reduced significantly due to increased cost effectiveness and improved risk selection. Accordingly, the combined ratio improved to 88.0 percent (98.5).

 

Operating profit from life insurance was EUR 39 million (46). The decrease is due to the higher investment income in the comparison period. Total premiums written increased by EUR 16 million to EUR 110 million from the previous quarter.

The holding company recorded an operating loss of EUR 26 million in the third quarter (11). The results include a goodwill amortisation of EUR 12 million and EUR 15 million net interest expenses due to If transaction.

 

Sampo Group

 

Sampo Group's core business areas are banking, long-term savings and P&C insurance. The Group's largest subsidiaries are If P&C Insurance Holding Ltd, Sampo Bank plc, Sampo Life Insurance Company Ltd, Sampo Fund Management Ltd and Mandatum Asset Management Ltd. Sampo increased its holding in If, the largest P&C insurance company in the Nordic countries, to 100 per cent in two transactions carried out in 2004.

 

 

 

 

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Sampo Group's earnings per share increased to EUR 1.07 (0.46) and operating profit to EUR 753 million (355). Results include four one-off items corresponding to approx. EUR 0.40 of earnings per share. Net asset value per share rose to EUR 5.13 (5.39). The comparison figure includes the year 2003 dividend of EUR 1.50. Return on Economic Capital (RoEC) was 24.8 per cent, which is 7.8 percentage points above the target of 17 per cent.

*) RoEC = Adjusted Net Profit / Adjusted Economic Capital

The accounting principles for the key figures are explained in the tables section of the report and on the website www.sampo.com

 

 

 

 

 

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If is consolidated as a subsidiary in Sampo Group's accounts as of April 1, 2004. Accordingly If figures have been taken into account line by line in the consolidated profit and loss account and balance sheet. In year 2003 and the period between 1 January 2004 and 31 March 2004, If has been treated as an associated company and its result is presented in the consolidated profit and loss account under the heading "result of P&C operations" and the investment in If under "net assets of P&C insurance business" in the consolidated balance sheet.

 

Changes in Group structure

 

On 11 February 2004, Sampo plc agreed to acquire the shares held by the Swedish Skandia and its subsidiary Skandia Liv, and by the Norwegian Storebrand, in If P&C Insurance Holding Ltd. On 5 October 2004, Sampo plc agreed to further acquire the shares held by Varma Mutual Pension Insurance Company. Following the transactions, Sampo plc owns 100 per cent of If.

 

Sampo financed the first If transaction by a EUR 600 million subordinated notes issue eligible for inclusion in tier 2 regulatory capital, a EUR 300 million senior notes issue and a EUR 550 million short-term syndicated loan which was repaid in October 2004. The second If transaction was financed by a EUR 200 million bank loan.

 

Sampo plc's wholly-owned subsidiary, Sampo Credit plc, was merged into Sampo plc on 30 September 2004. The remaining loan portfolio was sold to Sampo Bank plc in September. The merger transferred some EUR 600 million in capital to Sampo plc, which was used to repay the above-mentioned short-term loan of EUR 550 million. The EUR 100 million subordinated loan, issued by Sampo Life and previously held by Sampo Credit, was transferred to Sampo plc.

 

Sampo Bank plc's wholly-owned subsidiary, Sampo Finance Ltd, was merged into Sampo Bank plc on 30 September 2004.

 

During the first half of 2004, Sampo plc sold its shareholdings in AS Sampo Pank in Estonia and UAB Sampo bankas in Lithuania to Sampo Bank plc, a wholly-owned subsidiary of Sampo plc. In addition, Sampo plc sold its life insurance subsidiaries in the Baltic countries, AAS Sampo Dziviba, UAB Sampo Gyvybes Draudimas and AS Sampo Elukindlustus, to Sampo Life Insurance Company Limited. The measures emphasized the role of the Baltic markets in Sampo Group's strategy.

 

Administration

The Annual General Meeting held on 7 April 2004 elected eight members to the company's Board of Directors. Tom Berglund, Anne Brunila, Georg Ehrnrooth, Jyrki Juusela, Olli-Pekka Kallasvuo, Christoffer Taxell and Björn Wahlroos were re-elected for a further term. Matti Vuoria was elected as a new member.

 

 

 

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The Annual General Meeting approved the financial accounts for 2003 and discharged the Board of Directors and the Chief Executive Officer from liability. The Meeting also decided, in accordance with the proposal of the Board of Directors, to pay a dividend of EUR 1.50 per share, for a total dividend payment of EUR 831 million.

 

Ernst & Young Oy, authorised public accountants, were nominated to audit the Group.

 

The Corporate Governance Recommendation for Listed Companies issued by HEX plc, the Central Chamber of Commerce of Finland and the Confederation of Finnish Industry and Employers entered into force on 1 July 2004. Sampo follows the recommendations and is in full compliance with the new rules.

Changes in share capital

The Board of Directors was authorised by the Annual General Meeting of 7 April 2004 to decide on the repurchase and conveyance of Sampo's own shares. The authorisation is valid until 7 April 2005. The maximum amount of A shares that can be repurchased is 5 per cent of the company's share capital or of the number of votes attached to all shares. No shares were bought back in the review period.

During the review period, Sampo received the following disclosures under chapter 2, section 9 of the Securities Markets Act. The holding in Sampo of the Finnish Government first fell below 1/3 of the votes and shares, and later below 25 per cent. The holding of Varma Mutual Pension Insurance Company rose above 15 per cent, while that of the Franklin Templeton Group fell below 5 per cent. On 17 June 2004, the Finnish Government informed Sampo that it has agreed to lock-up its remaining Sampo shares until 1 December 2004.

The B options of Sampo plc's year 2000 option programme were accepted for trading on the main list of the Helsinki Exchanges from 2 January 2004, at which time they were also combined with the A options. At the same time, the options were renamed as year 2000 A/B options.

A total of 6,815,425 A shares have so far been subscribed for with warrants from Sampo's 1998 option programme. Similarly, 5,000 A shares have been subscribed for with option rights from Sampo's 2000 option programme. At the end of the review period, Sampo plc's share capital amounted to EUR 94,180,359.67, totalling 559,970,990 shares and including 1,200,000 B shares.

 

 

 

 

 

 

 

 

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On 5 October 2004, Sampo plc's Board of Directors decided to apply for the listing of a new share category called Sampo Uudet (Sampo New) on the main list of the Helsinki Exchanges. The Sampo A shares subscribed for with warrants from the 1998 or 2000 option programs after 31 December 2004 will be traded as a new category. Such shares are entitled to dividends only after the dividend distribution for 2004 has taken place, and the new share category will be adopted to facilitate the payment of year 2004 dividends.

 

Staff

P&C insurance employees are counted among the Group's staff from the second quarter of 2004. Therefore, the staff increased in a year by 6,466 employees and from the end of 2003 by 6,640 employees to stand at 11,905 employees at the end of September. 35 per cent of the staff worked in banking and investment services, 56 per cent in P&C insurance, 3 per cent in life insurance, 1 per cent in the holding company and 5 per cent in Primasoft. The average number of employees in the review period was 11,939, compared with 5,618 in the corresponding period of 2003.

 

Ratings

 

Standard & Poor's revised its outlook on Sampo Bank plc's rating, A-, to stable from negative on 28 September 2004. S&P also affirmed its A-/A-2 counterparty credit rating on Sampo Bank. On the same day, S&P raised its long-term counterparty credit and insurer financial strength ratings on Sweden-based If P&C Insurance Ltd and Finland-based If P&C Insurance Company Ltd to A- from BBB+. The outlook is stable. S&P stated that the revisions reflect the strong results in Sampo Group's operating entities, particularly in the If Group, as well as reduced leverage at the level of the holding company, Sampo plc. Moody's upgraded If P&C's ratings to A2 (insurance financial strength) and Baa1 (subordinated debt) on 6 May 2004 with a stable rating outlook.

Banking and investment services

 

The Group's most important Finnish banking and investment service companies are Sampo Bank plc, Sampo Fund Management Ltd, Mandatum Asset Management Ltd, Mandatum Stockbrokers Ltd, Mandatum & Co Ltd, Mandatum Private Equity Funds Ltd and 3C Asset Management Ltd. The Sampo PTE S.A. pension fund company in Poland and AS Sampo Pank in Estonia and UAB Sampo bankas in Lithuania are also included in Sampo's banking and investment services. The branch network also operates as a distribution channel for a wide range of advisory services and long-term savings products.

 

- Operating profit rose to EUR 231 million (170). The profit includes a EUR 23 million one-off VAT refund and 25 million of gains arising from private equity investments.

 

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- Net interest income decreased to EUR 294 million (304).

- Fees and commissions receivable increased to EUR 190 million (159).

- Operating expenses fell by EUR 20 million to EUR 230 million.

 

 

 

*) Fees and commissions net

**) RoEC = Adjusted Net Profit / Adjusted Economic Capital

 

 

Favourable performance in fee income and costs

 

Operating profit from banking and investment services was EUR 231 million (170). In the third quarter the operating profit contains EUR 25 million in private equity gains. This item affects dividend income, net income from transactions in securities, and the income from companies accounted for by the equity method. Operating profit also includes a dividend of EUR 8 million paid by Sampo Life to Sampo Bank, which is eliminated in the Group profit. The comparison period included EUR 21 million in Sampo Life's additional dividend. The return on adjusted economic capital (RoEC) was 23.5 per cent.

 

 

 

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The key figures for different divisions within banking and investment services are now released for the first time. The more detailed figures are available in the Q3/2004 Supplementary Financial Information Package on www.sampo.com/ir. 

 

The private clients division includes Finnish household/retail and private banking units. The division has suffered from declining interest rates and the relatively tough competitive environment. However, during the recent quarters the strong restructuring measures have more than offset these negative effects. The operating profit for the review period, EUR 50 million and the return on adjusted economic capital, 18.8 per cent, have clearly improved and are expected to continue improving in the future. The key drivers are lower costs, higher fees due to successful cross-selling and the steadily growing housing lending portfolio. Significant growth is sought in this division.

 

The corporate banking division includes not only corporate and institutional clients but also SME clients that are often reported as part of retail banking in the banking industry. The operating profit for the period was EUR 126 million and return on economic capital was 22.0 per cent. However, the figures include EUR 25 million from private equity investments and significant loan loss recoveries. The operative profitability before credit losses and without items of extraordinary nature is expected to remain stable. In this division less aggressive revenue growth is sought and a strong emphasis is placed on credit quality.

 

Asset management and Baltic banking have the most promising growth prospects of all divisions. The Estonian Sampo Pank increased its customer base by 10 000 new customers to 106 000 in the third quarter. The housing loan market share of UAB Sampo bankas in Lithuania grew by 0.7 per cent to 13.6 per cent. Although Baltic banking posted positive results, they have so far a relatively small impact on the profitability of Sampo's banking operations.

 

Net income from financial operations weakened to EUR 294 million (304). This reduction was due to the narrowing of interest margin caused by the fall in market rates and tough competition in housing loans. Sampo Bank's interest spread between deposits and lending averaged about 2.35 percentage points in the first nine months of the year, which was about 0.4 percentage points lower than it had been one year earlier. During the third quarter net income from financial operations stayed at roughly the same level as in the five previous quarters.

 

Fees and commissions receivable increased to EUR 190 million (159), with the biggest increase recorded in asset management. Fees and commissions receivable from traditional banking operations were also higher than in the comparison period, partly reflecting increased activity in the financial markets and change of fee structure implemented during the first quarter. Fees and commissions payable grew to EUR 45 million (37).

 

 

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Dividend income grew slightly to EUR 28 million (26). This growth was mainly derived from private equity gains and a dividend paid by Sampo Life during the third quarter. Comparison period included also an additional dividend paid by Sampo Life. Net income from securities transactions and foreign exchange dealing was EUR 2 million and therefore remained approximately at the earlier level (1). Other operating income increased to EUR 31 million (25) mainly because of the VAT refund.

 

Efficiency improvements lowered administrative expenses by EUR 20 million. The third quarter figure contained a EUR 5 million provision for staff reductions over 2004 and 2005. The gradual reduction is taking place in support functions and has no effect on the customer service. The cost to income ratio (including the net amount of fees and commissions receivable and payable) improved to 58.6 per cent (64.2).

 

Households continue to dominate loan growth

 

Sampo Group's loan portfolio grew by 10 per cent in a year, with growth continuing to be focused on loans to households. The amount of housing loans increased by 15 per cent year-on-year. Spreads of the housing loans remained stable during the third quarter, but further erosion is possible in the advent of Basel 2 with reduced capital needs. The annual growth rate of loans granted to domestic companies decreased to 7 per cent, but corporate spreads remained stable in third quarter and credit quality continued to be very good.

 

Total deposits grew 12 per cent year-on-year, but the growth originates almost solely from the liquidity peak derived from the merger of Sampo Credit.

 

Credit losses and non-performing loans decreased

 

Net provisions for bad and doubtful debts increased operating profit by EUR 14 million (-3), because of recoveries exceeding new provisions. At the end of the period, provisions pooled by customer group were EUR 39 million (34). The amount of non-performing loans was EUR 53 million (74) on 30 September 2004, while other non-interest-earning loans totalled EUR 1 million (1).

 

Strong growth in equity funds

 

Mutual fund assets grew 30 per cent in a year, assisted by new products and strong overall market growth. The increase was biggest in equity and balanced funds, which resulted in Sampo Fund Management becoming the largest equity fund manager in Finland in September. The recent focus on equity funds has shifted the share of mutual fund assets in equity funds from 25 per cent in September 2002, at the peak of money market domination, to 38 per cent in September 2004, compared to the market average of 34 per cent (31).

 

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Mutual fund assets had increased by the end of September to EUR 6.6 billion (4.9). This figure includes about EUR 1.3 billion in investments by Sampo Group companies, which include If P&C. According to the Finnish Association of Mutual Funds Report, Sampo had a 22.7 per cent (22.6) market share in September. Mainly due to the increase in funds, the assets management business continued to show good growth. Assets under management in businesses in the foreign operations grow rapidly, but compared to the total these volumes are still minor.

 

Sampo PTE, the fifth largest Polish pension fund management

company, continued strong growth. The company had 654,000 members

at the end of September and assets under management exceeded

EUR 430 million.

 

Capital adequacy

 

Because its operations are weighted towards financial services, Sampo's capital adequacy is calculated under the Act on Credit Institutions. The Group's capital adequacy ratio was 14.4 per cent (17.1). The tier 1 capital ratio was 13.0 per cent (18.3). The decline in capital adequacy from the end of third quarter in 2003 derives largely from the dividend of EUR 831 million. In comparison to year end 2003, the capital adequacy was affected by the If transactions. The consolidation group comprises Sampo Bank Group, Sampo PTE, Sampo Fund Management Ltd, Mandatum Asset Management Ltd, Mandatum Private Equity Funds Ltd, Mandatum Stockbrokers Ltd, Mandatum & Co Ltd, 3C Asset Management Ltd and the holding company, Sampo plc.

P&C insurance

 

If is the leading property and casualty insurance company in the Nordic region, with insurance operations that also encompass the Baltic countries. If P&C Insurance Holding Ltd,  headquartered in Solna, Sweden, is the parent company for property and casualty insurance. Business operations are conducted via subsidiaries and branch offices in the Nordic and Baltic countries.

 

Sampo increased its holding in If to 89.94 percent in May 2004 and in October 2004 acquired the remaining 10.06 percent of the shares. As of 1 April 2004 If is consolidated as a subsidiary in Sampo Group's accounts. For the first quarter of 2004 and for year 2003, If is treated as an associated company and consequently 38.05 per cent of its profit is shown in the consolidated profit and loss account. The Group consolidated accounts have been prepared according to FGAAP. The information in this section of Sampo plc's interim report refers to If's first three quarters of 2004 in total (SGAAP).

 

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- Operating profit improved substantially to EUR 383 million (205).

 

- Earnings from the insurance business (technical result) continued to improve to EUR 357 million (129), mainly as a result of an extremely favorable claims trend during the period.

- The combined ratio improved to 93.5 percent (101.5).

 

 

- The investment return deteriorated to 3.0 percent (4.0), due to low return on equities.

 

**) RoEC = Adjusted Net Profit / Adjusted Economic Capital

 

Combined ratio improved further

 

The operating result continued to improve during the third quarter and amounted to EUR 383 million (205) for the first nine months of the year. The improved earnings during the period were mainly due to insurance operations. The claims trend was substantially better than normal, with the claims frequency remaining low and very few large claims reported. The improved risk selection also contributed to the favorable earnings. All business areas improved their earnings substantially compared with the year-earlier period.

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The combined ratio improved significantly during both the third quarter and the first nine months of the year, due to the implemented premium adjustments and cost savings, and the highly favorable claims trend.

 

Gross premiums written declined by 5 percent compared with the first nine months of the preceding year, which was mainly attributable to the sale of the Marine and Energy portfolio and to negative exchange-rate effects, resulting from the strengthening of the SEK in relation to the NOK. Excluding exchange-rate effects and the sale of marine and energy operations, gross premiums written were unchanged. The Private and Commercial business areas showed premium growth, while the reduction of risks led to lower premium volumes within Industrial business area.

 

The risk ratio improved by 6.2 percentage points during the first nine months of the year, due to the favorable claims trend. The risk ratio improved in all business areas. The claims frequency within property claims in particular continued to develop favorably, particularly in the Norwegian market. Large claims remained much lower than normal, which resulted in the cost for large claims being approximately EUR 65 million lower than normal. Provisions for prior year losses amounted to EUR 47 million.

 

Operating costs amounted to EUR 684 million (767) for the first nine months of the year. Exchange-rate effects, resulting from the strengthening of the SEK in relation to the NOK, contributed EUR 16 million to the reduced costs. The cost ratio declined additionally during the third quarter and during the period as a whole. The sale of Marine and Energy business had a significant effect on cost reduction. Lower commission payments and consultant costs, reduced staffing and lower IT costs also contributed to the cost reduction.

 

Investment return decreased

 

Investment income decreased to EUR 250 million (318) and the return on capital was 3.0 percent (4.0) for the first nine months of 2004. Based on the fair value of the assets, the return on capital was 3.0 percent (3.7) and investment income amounted to EUR 248 million (294).

 

The proportion of equities (including derivative instruments) in the portfolio decreased somewhat during the quarter and amounted to about 11 percent at the end of the period. The duration for interest-bearing assets was kept consistently shorter than the target value of 3.5 years and was 0.8 years on September 30. Despite the short duration for interest-bearing assets, results from the fixed-income portfolio were relatively strong.

 

The volume of investment assets rose to EUR 8 476 million compared with EUR 8 008 million at the end of the preceding year, despite the sale of marine and energy operations, mainly as a result of a positive cash flow from insurance operations.

 

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Solvency position strengthened

 

Gross reserves on September 30 amounted to EUR 7,901 million, compared with EUR 7,456 million at the end of the preceding year. Net reserves rose to EUR 6,957 million, compared with EUR 6,801 million during the first nine months of the year.

 

The solvency ratio rose to 62.4 percent (52.4), compared with the first nine months of the preceding year. Solvency capital increased to EUR 2,343 million (2,025), due to an increase in shareholders' equity and a decrease in deferred tax. Shareholders' equity rose to EUR 2,064 million, compared with EUR 1,871 million at the end of the preceding year.

 

Cash flow from insurance operations during the first nine months decreased to EUR 517 million (580), mainly because of reinsurance flows in connection with the Marine and Energy transaction at the beginning of the year. Adjusted for this transaction, cash flow increased by approx. EUR 165 million during the period. Cash flow from investments decreased marginally to EUR 188 million (190).

 

Life insurance

 

The core of the Group's life insurance business is Sampo Life, operating in Finland. The business area also includes life insurance companies located in the three Baltic states and Sampo T.U. Zycie in Poland.

- Operating profit rose by 20 per cent to EUR 166 million (138).
- Yield on assets for the review period was 5.0 per cent at market value (6.2).

- Total solvency capital for Sampo Group's life companies amounted to EUR 810 million on 30 September 2004 (748).
- Sampo Life's market position in unit linked insurance and regular premium retail business remained strong.

*) RoEC = Adjusted Net Profit / Adjusted Economic Capital

 

Sampo Group's life companies produce a total operating profit of EUR 166 million (138) in the review period. Net investment income rose to EUR 310 million (303). Investments yielded 5.0 per cent at market values for the review period (6.2).

The market value of investment assets (excl. unit-linked insurance investments) was EUR 5.4 billion (5.5) at the end of the review period. Valuation differences in total amounted to EUR 356 million (285). Asset allocation was as follows: 57 per cent in fixed income instruments (60), 37 per cent in equity-linked instruments (34) and 6 per cent in real estate (6). Due to regulatory reporting requirements the proportion of equity-linked investments includes 6 percentage points of investments in fixed-income funds (6).

Finnish investments accounted for 31 per cent (43) of all investments at the end of the review period, the rest of the euro zone for 29 per cent (30) and other foreign investments for 40 per cent (27). 35 per cent of the equity-linked investments were in Finland, 3 per cent elsewhere in the euro zone and 62 per cent outside the euro zone.

The total solvency capital of Sampo Group's life insurance companies increased to EUR 810 million (748). Solvency capital amounted to 16.8 per cent of technical reserves on own account (15.6). Sampo Life's solvency capital of EUR 798 million (737) was almost four times the required minimum after the company paid out a dividend of EUR 150 million in September 2004.

 

 

 

 

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Uncertainty about the tax treatment of individual pension insurance slowed down the sale of new policies in the first half of the year. The tax issues have now been settled but the sales are expected to return to the level before tax reform only next year.

The total premium income of Sampo Group's life insurance companies was EUR 349 million (336). Unit linked premiums increased to EUR 186 million (123) and amounted to 54 per cent of total premiums (37). Sampo Life maintained its strong position in the Finnish unit linked market and its market share was 25.7 per cent (28.3). Regular premiums grew to EUR 209 million (179) increasing their share of total premiums to 61 per cent (54). Sampo Life increased its overall market share in Finland to 17.4 per cent (16.8).

 

Holding company

 

The holding company's main function is to own and control subsidiaries engaged in insurance, banking and investment services. The holding company figures comprise, in addition to Sampo plc, the IT-services provider Primasoft.

- Operating profit was EUR 45 million (0) as a result of the sale of Skandia shares in the first quarter of 2004.

- Goodwill amortisation in the third quarter of 2004 amounted to EUR 12 million, of which If accounted for EUR 7 million.

 

 

 

The holding company posted an operating profit of EUR 45 million for the review period (0). A major one-off item distorts the operating profit - a sales gain of EUR 95 million on Skandia shares sold in the first quarter of 2004. The holding company profit includes goodwill amortisation in the third quarter 2004 of EUR 12 million, of which EUR 7 million is due to the If transaction. The goodwill created in the If transaction amounted to EUR 500 million.

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Sampo plc's balance sheet total was EUR 4.0 billion. Of this amount, holdings in banking and investment services companies accounted for EUR 1.4 billion and holdings in insurance companies for EUR 1.6 billion.

The If transactions, first completed in April and second in October 2004, are reflected in Sampo plc's balance sheet. Three elements were used to finance the first transaction, subordinated notes to the amount of EUR 600 million, eligible for inclusion in the tier 2 regulatory capital, senior notes to the amount of EUR 300 million and syndicated loan of EUR 550 million. The syndicated loan was paid back in early October. A new bank loan of EUR 200 million was taken to largely finance the latter If transaction. 

At current market rates, the holding company is liable for interest payments on the above instruments of approx. EUR 11 million per quarter.

At the end of the review period, Sampo plc had 83 full-time employees (86).

Distribution policy

 

The Board of Sampo plc adopted a new distribution policy on 3 November 2004, according to which the company aims to distribute 50 per cent of Group net profits to shareholders through share buy-backs and/or dividends. Adopted change in the Finnish dividend taxation is likely to shift the focus to buy-backs.

 

In line with the financial plan laid out in connection with the acquisition of If in February 2004, the Board of Sampo will, however, propose to the AGM of Spring 2005 a distribution for the year 2004 not exceeding 25 per cent.

 

Outlook for the rest of 2004

 

Sampo Group will record a very good result for full year 2004. Four major one-off items boosted the earnings in the review period by EUR 0.40 per share. The biggest risks for achieving the expected results are an exceptionally strong weakening of capital markets, equity market in particular, major claims events and adverse development of Finnish economy.

 

Sampo's P&C insurance subsidiary If is expected to continue to perform well in the last quarter of 2004 and the company's combined ratio for the full year to reach approx. 93 per cent. If is targeting a combined ratio of less than 95 per cent.

 

 

 

 

 

 

 

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The merger of Sampo Credit to Sampo plc will reduce net interest income in banking by approx. EUR 5 million per quarter while reducing the interest paid by the holding company by a corresponding amount. On the other hand profitability of banking operations will improve because of the growth of fees and commissions and the steadily lowering costs. Credit quality shows no signs of deteriorating. Strong growth continues in the Baltic banking operations.

The results of life insurance operations will clearly exceed the target of 15 per cent return on economic capital unless the development in the capital markets is exceptionally unfavourable.

 

Sampo plc financed the If transactions with debt issues and bank loans. The holding company will consequently produce a normalized operating loss of approx. EUR 15 million per quarter. In the fourth quarter of 2004 Sampo plc will in addition make a goodwill amortisation of EUR 12 million.

Sampo Group's position as the leading Nordic P&C insurer and a leading Finnish long-term savings and traditional banking services provider is expected to remain unchanged.

Helsinki, 3 November, 2004

 

SAMPO PLC

 

Board of Directors

 

 

For more information, please contact:

 

Peter Johansson, CFO, tel. +358 (0)10 516 0010

Jarmo Salonen, Head of Investor Relations,
tel. +358 (0)10 516 0030

Hannu Vuola, Head of Group Communications,
tel. +358 (0)10 516 0040.

 

An English-language telephone conference for investors and analysts will be held on 3 November, 2004 at 4.00 p.m. Finnish time. You can participate in this conference by calling + 44 207 162 0180 (Europe) or +1 888 222 0364 (USA). Password: Sampo. You can also participate in the conference on the Internet at www.sampo.com. A recording of the conference call will be available at the same internet address at a later stage.

 

Supplementary Financial Information Package on January - September 2004 performance is available at www.sampo.com.

 

The figures in this Interim Report are unaudited.

 

 

 

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*) The internal dividends and sales profits between the different lines of business have not been eliminated in the result analysis and specifications or key figures of banking and investment services and insurance business.                   

                  

 

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However, above-mentioned items have been eliminated in the Group operating profit. In addition, the operating    profit includes the income from If Group, accounted for by the equity method, for 2003 and for the first quarter of 2004. Therefore, the Group operating profit is not equal to the sum of business area operating profits.                  

**) The dilution effect has been calculated as if all     the remaining subscription rights (2,058,390/the bond loan with warrants of 1998 and 5,199,000/the option programme of 2000 at the end of September, 2004) would have been realised. One subscription right entitles to subscribe 5 shares.                          

The key figures for Banking and Investment Services and the holding company have been calculated according to regulation 20/420/98 of the Financial Supervision. The key figures for the insurance business have been calculated according to the decree of the Ministry of Finance and the specifying instruction 23/09/2002 of the Ministry of Social Affairs and Health.                          

In calculating the key figures, the tax consists of that corresponding to the profit of the financial period. In calculating the net asset value per share, the return on equity and the solvency ratio the deferred tax liability which is estimated to be realised during the    next three years has been deducted from the holding company's valuation differences. Furthermore, the net asset value per share has been reported for all periods less full deferred tax.                

                  

In calculating the net asset value per share and the return on equity, an interpretation of the principle of fairness in life insurance has been taken into account, according to which the owners' share of the valuation differences is a standard 25 %. As valuation differences are not included in the Balance Sheet, their deferred  tax and the change in deferred tax are not entered in the Profit and Loss Account or in the Balance Sheet.          

Other items of the solvency margin, including derivative contracts, have been deducted from/added to the valuation differences when calculating the key figures. The capital and reserves of life insurance, including a share of optional reserves and accumulated depreciation difference, is considered to

belong entirely to the owners.

 

 

 

 

 

 

 

 

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If is consolidated as a subsidiary in Sampo Group's accounts

as of April 1, 2004. Accordingly If figures have been taken

into account line by line in the consolitated profit and

loss account and balance sheet. In the comparison periods

year 2003 and between January 1, 2004 and March 31, 2004 If

has been treated as an associated company and its result is

presented in the consolidated profit and loss account under

the heading "result of P&C operations" and the investment in

If under "net assets of P&C insurance business" in the

consolidated balance sheet.

 

 

* Income from If Group until 31 March 2004, accounted for by the equity method            

 

 

 

 

 

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BANKING AND INVESTMENT SERVICES

SPECIFICATION OF ANALYSIS OF RESULTS

 

 

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PREMIUMS WRITTEN, PROPERTY & CASUALTY

 

 

 

INVESTMENT INCOME AND CHARGES,

PROPERTY & CASUALTY INSURANCE BUSINESS

 

 

 

 

 

 

 

 

 

 

 

 

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INVESTMENT INCOME AND CHARGES,

LIFE INSURANCE BUSINESS