1st Quarter Results (Sampo Group)

SAMPO PLC         STOCK EXCHANGE RELEASE         1 (39)

            11 May 2006, at 9:30

 

 

Sampo Group's results for January - March 2006

 

STRONG PROFITABILITY CONTINUED

 

Sampo Group's earnings per share in the first quarter 2006 rose by almost 50 per cent to EUR 0.44 (0.30). Taking the change in the fair value reserve into account, earnings were EUR 0.52 per share (0.37). Profit before taxes amounted to EUR 339 million (230). Group annualised RoE exceeded the target of 19 per cent and rose to 26.8 per cent (23.3). Net asset value per share amounted to EUR 8.17 (6.46).

- Operating performance of banking and investment services continued to develop favourably. Profit before taxes rose to EUR 91 million (62) supported by rapid growth in fees and commissions and an increase in net interest income. Net income from investments includes a one-off private equity gain of EUR 24 million. Banking and investment services exceeded its RoE target of 20 per cent as the annualised RoE rose to 25.8 per cent (18.2).

- The combined ratio for P&C insurance, in a seasonally difficult winter quarter, was 94.3 per cent (94.9). Cost ratio decreased by 1.1 percentage points to 23.8 per cent. Although rising interest rates were reflected in investment income, the profit before taxes increased to EUR 133 million (117). The RoE target of 17.5 per cent was not achieved as the annualised RoE amounted to 14.8 per cent (15.8).

- Net investment income in life insurance, excluding investments on unit-linked contracts, rose to EUR 171 million (98). Profit before taxes more than doubled to EUR 128 million (62). The change in the fair value reserve in the first quarter of 2006 amounted to EUR 45 million (42). The annualised RoE was 54.2 per cent (48.3) exceeding the target of 17.5 per cent.

 

 

* ) Less full deferred tax. 

 

The figures in this report are unaudited. Profit&loss items are compared on a year-on-year basis whereas comparison figures for balance sheet items are from 31.12.2005 unless otherwise stated.

 

 

 

 

 

Changes in Group structure

 

No changes in group structure took place during the reporting period.

 

On 27 April 2006 Sampo Bank plc signed an agreement to acquire Industry and Finance Bank (Profibank) based in St. Petersburg.

Administration

The Annual General Meeting of Sampo plc held on 5 April 2006 re-elected the following members to the company's Board of Directors: Tom Berglund, Anne Brunila, Georg Ehrnrooth, Christoffer Taxell, Matti Vuoria and Björn Wahlroos. The Annual General Meeting elected Jussi Pesonen and Jukka Pekkarinen as new members. At its first meeting, the Board elected Georg Ehrnrooth Chairman and Matti Vuoria Vice Chairman.

The Annual General Meeting adopted the financial accounts and discharged those accountable from liability. The firm of authorised public accountants, Ernst & Young Oy, was re-elected Auditor.

 

On 15 February 2006 Sampo plc's Board of Directors nominated Morten Thorsrud, head of If Industrial business area, to the Group's Executive Committee.

 

 

Changes in share capital

 

The Annual General Meeting of 5 April 2006 decided, in accordance with the proposal of the Board of Directors, to pay a dividend of EUR 0.60 per share for 2005.

 

The Annual General Meeting also authorised the Board of Directors to repurchase Sampo shares. The authorisation is valid until 5 April 2007. 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 carried by all shares. Shares can be bought back either through an offer made to all holders of A shares in proportion to their holdings and on equal terms determined by the Board, or through public trading on the Helsinki Stock Exchange. Shares can be bought back to implement Sampo Group's equity-based incentive plans and/or to be cancelled.

 

Sampo plc did not repurchase any of its own shares during the first quarter of 2006.

 

On 20 January 2006 the Board approved subscriptions with the warrants of the 2000 option programme for 382,200 A shares. The subscriptions increased the share capital by EUR 64,281.43.

 

On 31 March 2006 Sampo plc's share capital amounted to EUR 96,153,124.17, and the number of A shares totalled 570,500,515. The total number of shares of the company, including 1,200,000 B-shares was 571,700,515. 

 

The Annual General Meeting decided to decrease company's share capital by cancelling the 7,000,000 Sampo A shares repurchased in 2005.  The number of A shares decreased by a corresponding number. Reduction in share capital by EUR 1,777,315.50 was registered on 26 April 2006, after which Sampo plc's share capital amounted to EUR 94,975,808.67, and the number of A shares totalled 563,500,515. The total number of shares of the company, including 1,200,000 B-shares was 564,700,515. After the cancellation Sampo plc and its subsidiaries do not possess Sampo shares.

 

On 16 February 2006 Sampo received disclosure under chapter 2, section 9 of the Securities Markets Act, according to which the total number of Sampo A shares held by Varma Mutual Pension Insurance Company had decreased below 10 per cent. On 30 March 2006 Exafin B.V. notified Sampo that it's holding of Sampo A shares had risen above 5 per cent. On 24 April 2006 Sampo received a disclosure according to which the total number of Sampo A shares held by Barclays and the funds managed by it had risen above 5 per cent. On 27 April 2006 Sampo received a disclosure that the holding of Sampo by Barclays and the funds managed by it had decreased below 5 per cent.

 

 

Staff

 

Sampo Group's full-time equivalent staff at 31 March 2006 amounted to 11,511 employees. The number of staff decreased with 237 in a year. Of the employees, 37 per cent 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 3 per cent in Primasoft. Geographically, 51 per cent worked in Finland, 16 per cent in Sweden, 14 per cent in Norway, 14 per cent in the Baltic countries, 4 per cent in Denmark and 1 per cent in other countries. The staff decreased in P&C insurance and Primasoft, but increased in the Baltic banking operations, because of rapid growth. The average number of employees during the first quarter of 2006 was 11,499 (11,736).

 

 

Management long-term incentive schemes

The payout on Sampo Group's long-term management incentive schemes is dependent on Sampo's financial and share price performance. Payments under the schemes cover the financial years 2005 - 2008. At 31 March 2006 the total provision for management incentive schemes, including social security costs, was EUR 55.8 million and the impact on the first quarter 2006 result was EUR 17.7 million.

The Annual General Meeting approved on 5 April 2006 the "Sampo 2006" equity-based incentive plan. The "Sampo 2006" equity-based incentive plan applies to senior executive management of Sampo plc or its subsidiaries as decided by Sampo's Board of Directors and to Sampo's President and CEO. Within the share-based incentive scheme, the maximum number of Sampo's A shares distributable as a reward is 1,500,000.

 

 

Ratings

 

All the main ratings for Sampo Group companies remained unchanged in the first quarter of 2006.

 

 

At 3 April 2006 Moody's upgraded AS Sampo Pank's (Estonia) Financial Strength Rating (FSR) from D to D+ with stable outlook.

 

 

Group solvency

 

Group solvency is calculated according to the consolidation method defined in the Chapter 3 of the Act of the Supervision of Financial and Insurance

Conglomerates, which entered into force on 1 January 2005. The Group's solvency ratio (own funds in relation to minimum requirements for own funds) at 31 March 2006 was 203.8 per cent (196.1).

 

In Sampo Group risks are described and aggregated internally through economic capital, which describes the amount of capital needed to bear different kinds of risks. The economic capital tied up in the Group's operations at 31 March 2006 was EUR 3,252 million (3,148).

 

 

Banking and investment services

 

Sampo Group's banking and investment service companies are organised under Sampo Bank Group. Sampo Bank plc, the parent company, operates mainly in Finland and through subsidiaries in all the Baltic countries. Sampo Bank also has a branch office for corporate clients in Stockholm. The investment services companies are Sampo Fund Management Ltd, Mandatum Asset Management Ltd, Mandatum Securities Ltd (former Mandatum Stockbrokers Ltd), Mandatum & Co Ltd, 3C Asset Management Ltd and Arvo Asset Management Ltd. Sampo Bank's branch network also operates as a distribution channel for other products like life insurance and offers financial advisory services.

 

 

Operating performance of banking and investment services continued to improve. Profit before taxes rose to EUR 91 million (62) supported by strong growth in asset management and lending. Profit includes one-off sales gain from private equity worth EUR 24 million before minority interests of EUR 9 million. Annualised return on equity amounted to 25.8 per cent (18.2).

 

Net interest income was EUR 86 million (82). Strong volume growth continued in lending. Margins are still under some pressure, but were relative stable during the period. Higher interest rate levels first affect shorter term funding costs and only gradually interest income, which is mostly tied to 12-month Euribor. During the first quarter higher rates increased funding costs, and this had a negative impact on net interest income. Assuming the current interest rate levels will prevail, the positive impact from already realised interest rate rises will materialize during 2006. One percentage point's interest rate rise is estimated to improve Sampo Bank's net interest income and net income from financial transactions by EUR 40 million.   

 

 

 

 

 

Net fee and commission income increased by 28 per cent compared with first quarter 2005 and climbed to EUR 65 million (51). Robust growth continued in asset management and equity brokerage fees, which were favourably impacted by good equity market performance. 

 

Total operating costs were EUR 112 million (105). The growth in costs derives from provisions for performance-related management incentive schemes and Baltic growth. Cost-to-income ratio was 55.2 per cent (64.5).

 

Loans and advances increased by 4 per cent from year-end 2005 and totalled EUR 19,219 million (18,483). Mortgages continued to grow briskly and the growth of mortgage stock year on year was 30.4 per cent in total and 25.4 per cent in Finland, exceeding market growth of 16 per cent. Sampo Bank's market share of Finnish housing loans increased to 15.7 per cent (14.6). Healthy growth of consumer credit continued and the volume grew by 16.4 per cent from one year ago. Corporate lending grew by 15.7 per cent to EUR 7,626 million during the same period. As in earlier quarters, geographically growth in lending and deposits was fastest in the Baltic countries with lending volumes increasing to EUR 1,626 million (1,447).

 

Credit quality remained healthy and net impairment losses for the first quarter of 2006 were 0 euros (4).

 

Deposits amounted to EUR 11,358 million decreasing 1 per cent from the year-end 2005 (11,442) but growing by 3 per cent from the comparable 31 March 2005 figure.

 

The Finnish mutual fund market experienced strong growth and Sampo's mutual fund assets increased  by 15 per cent from year-end 2005 to a new record level of EUR 10.2 billion (8.9) at end of March 2006. Sampo's market share of the assets of mutual funds registered in Finland was stable during the review period and amounted to 19.8 per cent (19.9) on 31 March 2006. Mutual fund assets include EUR 1.0 billion of Sampo Group investments (1.3), representing 10 per cent of total assets (18).

 

Sampo Bank Group's capital adequacy was 10.1 per cent (10.6). The tier 1 ratio was 7.3 per cent (7.6) and tier 1 capital rose to EUR 1,268 million (1,255) due to retained earnings. Risk-weighted assets grew to EUR 17,313 million (16,466) because of the strong growth in lending.

 

On 27 April 2006 Sampo Bank signed an agreement to acquire Industry and Finance Bank (Profibank) in St. Petersburg, Russia. Profibank possesses all relevant banking licenses in Russia including the licence to attract deposits. After having built and strengthened the current operations, Sampo intends to offer corporate banking for Nordic customers operating in Russia as well as retail banking services in St. Petersburg region.

 

 

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 Sweden, is the parent company for property and casualty insurance within the Sampo Group. Business operations are conducted via subsidiaries and branch offices in the Nordic and Baltic countries.

 

 

Profit before taxes for the P&C insurance operations rose to EUR 133 million (117). The annualised RoE was 14.8 per cent (15.8) and the target of 17.5 per cent was not achieved. The technical result remained strong at EUR 93 million (95), of which Private business area accounted for 57 per cent, Commercial for 29 per cent and Industrial for 15 per cent. The insurance margin - technical result in relation to net premiums earned - remained at a healthy level and was 10.2 per cent (10.5).

 

The combined ratio improved by 0.6 percentage points to 94.3 per cent (94.9). Risk ratio rose to 70.4 per cent (70.0), which is mainly explained by a slight increase in the number of frequency claims, particularly motor claims in Norway. Business area Baltics experienced two large claims, which led to an increase in the claims ratio to 77.2 per cent (65.0). EUR 21 million was released from technical reserves relating to prior year claims (23).

The cost ratio improved by 1.1 percentage points to 23.8 per cent. Total costs decreased to EUR 227 million (233) mainly as a result of number of staff decreasing. Cost reductions were most significant in business areas Industrial and Commercial.

Gross written premiums grew by 6 per cent to EUR 1,504 million. Excluding the currency effects the growth was 2 per cent. Premiums earned amounted to EUR 920 million (906) in the first quarter of 2006. Premiums grew by 3 per cent in the Commercial business area and by 12 per cent in the Baltics. In the Private and Industrial business areas, premium growth was approximately 1 per cent. 

Total investment assets of If amounted to EUR 10.1 billion (9.4) at 31 March 2006. Of all investment assets, 89 per cent was invested in fixed income instruments (87), 10 per cent in equity (13) and 1 per cent in other assets (1). Investment income rose to EUR 83 million (74), because the strong performance of equities compensated the decrease in the value of fixed income investments. The return on investment was 1.0 percent at market value (1.0).

 

The solvency ratio - i.e. solvency capital in relation to net premiums written - was 78 per cent (88) and solvency capital decreased to EUR 2,912 million (3,216). The decrease is entirely due to the 2005 dividend of EUR 428 million paid to the parent company, Sampo plc. Shareholders' equity amounted to EUR 2,260 million (2,595).  Reserve ratio development was stable and reserves were 156 per cent (157) of net premiums written.

 

If signed in March 2006 a co-operation agreement with the Swedish housing finance corporation SBAB. The agreement will make it possible for SBAB's customers to purchase If's P&C insurance products through SBAB. SBAB has a 15 per cent market share in Sweden of the corporate mortgage market and 9.4 per cent on the retail market.

 

 

Life insurance

 

Sampo Life Group consists of Sampo Life, a wholly-owned subsidiary of Sampo plc, operating in Finland and of its subsidiaries in all the Baltic countries. The company also has a subsidiary in Sweden and a branch office in Norway to complement the product offering of If P&C.

 

 

 

Sampo Life Group's profit before taxes rose to EUR 128 million (62). Net investment income, excluding the return on investments in unit-linked contracts, amounted to EUR 171 million (98). Net income from unit-linked investments was EUR 76 million (26). The fair value reserve increased by EUR 45 million (42) in the first quarter of 2006.

 

The return on investments at market value amounted to 4.0 per cent (2.8) supported by rising equity prices. Life operations have an RoE target of 17.5 per cent, which was clearly exceeded as the annualised RoE rose to 54.2 per cent (48.3). Excluding the assets of EUR 1.5 billion (1.0) covering unit-linked liabilities, the investment assets of Sampo Life Group were at 31 March 2006 EUR 6.1 billion at market value (5.4). Fixed income covered 65 per cent (63), equity 32 per cent (32) and real estate 3 per cent (5) of the total assets. Equity investments include direct equity holdings, equity funds and private equity.

 

Investments in Finland accounted for 42 per cent (42) of total investments at 31 March 2006, the rest of the euro zone for 26 per cent (27) and other foreign investments for 32 per cent (31). Finnish equity investments were 86 per cent of all direct equity investments.

                       

Sampo Life Group's solvency strengthened further and the solvency capital amounted to EUR 1,232 million (949). The solvency ratio rose to 24.3 per cent of technical reserves (19.8). Technical reserves for unit-linked insurance increased to EUR 1,447 million (1,262) of the total technical reserves of EUR 6.2 billion (6.0). The share of unit-linked reserves of total technical reserves grew to 23.5 per cent (21.0).

 

Sampo Life Group's total premium income increased by more than 30 per cent to EUR 174 million (130). The growth came exclusively from unit-linked policies, which incurred a premium income of EUR 127 million (75). The share of unit-linked premiums rose to 71 per cent (58) of total premiums. Regular premiums amounted to EUR 69 million (70) and their share of total premiums decreased to 39 per cent (54).

 

The determined efforts to improve the sales performance in unit-linked insurance bore fruit already in the first quarter of 2006, as Sampo Life's market share of unit-linked insurance in Finland increased to 24.3 per cent (22.2). The overall market share in Finland rose to 19.8 per cent (16.4).

 

Market shares increased also in all the Baltic countries due to the extremely high premium growth. Premiums almost tripled to EUR 12 million (4). Sampo Life Group's share was 32 per cent (15) of the Latvian market, 28 per cent (13) of the Estonian market and 7 per cent (7) of the Lithuanian market. Sampo Group's Scandinavian life operations are in a start-up phase and If Liv's premium income was EUR 0.6 million.

 

 

 

 

 

 

Other

 

The operations of Sampo plc (the holding company) and Primasoft are reported in this segment. Sampo plc's main function is to own and control the subsidiaries engaged in insurance, banking and investment services. Primasoft provides IT services for various companies in Sampo Group.

 

 

The segment's loss before taxes amounted to EUR 19 million (-12). In connection to the legal proceedings against the former management and owners of Interbank Ltd concerning credit and collateral arrangements between Interbank Ltd and Savings Bank of South-Western Finland at the District Court of Salo, Sampo plc was ordered, as the successor of Interbank Ltd's liabilities, to indemnify Arsenal-SSP Oy a total of almost EUR 13 million, including interest on arrears. All parties have appealed against the decision. The interest arrears weakened the net interest income by EUR 7 million.

Sampo plc's balance sheet total was EUR 4.1 billion. Of this amount, holdings in banking and investment services companies accounted for EUR 0.8 billion and holdings in insurance companies for EUR 2.4 billion. In addition to short-term operational financing, liabilities include two debt instruments - a subordinated note and a senior note with face values of EUR 600 million and EUR 300 million respectively. At current market rates Sampo plc is liable for interest payments on the above instruments of approximately EUR 10 million per quarter. 

 

Primasoft has a negligible impact on the profit or loss of the Other segment.

 

 

Outlook for the rest of 2006

 

Sampo Group's result for 2006 is expected to remain good, because of high operating profitability in all its business areas.

Rapid growth in Finnish consumer, mortgage and Baltic lending volumes is foreseen to continue. However, Sampo Bank Group no longer aims to significantly outpace market growth. Instead the bank focuses on servicing its existing client base in their various financial needs. Credit quality remains firm and operating profitability will improve further. The RoE target for banking and investment services is 20 per cent.

If, Sampo Group's P&C insurance operation, is once again well on track to achieve its combined ratio target of better than 95 per cent, despite a long winter and marginal increase in price competition. If continues to focus on realising efficiency and underwriting gains from its pan-Nordic structure. The RoE target for P&C insurance operations is 17.5 per cent.

Sampo Life Group's profitability is expected to remain good in the coming quarters. Marked-to-market results are highly dependent on capital market development. The renewed focus on unit-linked insurance is already reflected in the first quarter 2006 sales and premiums. The trend is anticipated to continue. The RoE target for life insurance operations is 17.5 per cent.

Sampo plc, the parent company, is included in the Other segment, which reports a loss of approximately EUR 12 million per quarter, mainly because of interest payments on the financing associated with the If acquisition in 2004.

 

The most significant risk for the outlook is a severe adverse development in the capital markets with falling equity prices and sharply rising interest rates.

 

 

SAMPO PLC

Board of Directors

 

 

For more information, please contact:

Peter Johansson, CFO, tel. +358 10 516 0010

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

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

 

Sampo will arrange an English-language telephone conference for investors and analysts on the first quarter results at 4 p.m. Please call +44 (0) 20 7162 0025 (UK/Europe) or +1 334 323 6201 (North America). Password: SAMPO.

 

The conference can also be followed from a direct transmission on the Internet at www.sampo.com/ir. A recorded version will later be available at the same address.

 

Sampo Life has today published the 2005 Embedded Value Report, which is available at www.sampo.com/ir.

 

Sampo will publish the second quarter 2006 interim report on 10 August 2006.

 

 

DISTRIBUTION:

The Helsinki Stock Exchange

The principal media

Financial Supervisory Authority

 

 

 

¹) Group solvency is calculated according to the consolidation method defined in Chapter 3 of the Act on the Supervision of Financial and Insurance Conglomerates, which entered into force on 1 January 2005. Solvency ratio is defined as the ratio of own funds to the sum of minimum requirements calculated under sectoral rules.                    

                       

²) Key figures for P&C Insurance are based on activity based costs and cannot, therefore, be calculated directly from the consolidated income statement. The result analysis of P&C insurance is presented in note 20.                   

 

In calculating the per share key figures the number of shares used at the balance sheet date was 564,700,515, the average number of shares during the period 564,700,515 and the diluted average number of shares 578,999,337.          

                       

³) The dilution effect has been calculated as if all the remaining subscription rights (4,762,510/the option programme of 2000 at the end of March, 2006) would have been realised. One subscription right entitles to subscribe 5 shares.                             

In calculating the key figures the tax corresponding to the result for the accounting period has been taken into account. The valuation differences of investment property and held-to-maturity debt securities have been taken into account in return on assets, return on equity, equity/assets ratio and net asset value per share. Additionally, the change in fair value reserve has been taken into account in return on assets and return on equity. A deferred tax liabilities has been deducted from valuation differences.                                

The key figures for Banking and Investment Services and other business have been calculated according to standard 3.1 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 12/002/2005 of the Insurance Supervisory Authority.   

     

 

 

 

 

 

 

 

 

The cash flow statement reports cash flows during the period classified by operating, investing and financing activities. Cash flows are reported by using the indirect method. Cash flows from operating activities derive primarily from the principal revenue-producing activities. Cash flows from investments in subsidiaries and associated undertakings and those from investments in intangible assets and property, plant and equipment are presented in investing activities. Financing activities include cash flows resulting from changes in equity and borrowings in order to conduct the business. Cash and cash equivalents consist of cash at bank and in hand, balances with central banks, loans and advances to credit institutions repayable on demand and short-term deposits (under 3 months).               

 

 

NOTES                              

                                   

ACCOUNTING POLICIES                                  

                                   

Sampo Group's consolidated financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) adopted by the EU. The interim financial statements are presented in accordance with IAS 34 Interim Financial Reporting.                                  

                                   

In preparing the interim financial statements, the same accounting policies and methods of computation are applied as in the financial statements for 2005. The financial statements for 2005 are available on Sampo's website at the address www.sampo.com/ir.