Statement re Group Holding Company's Result Q3

SAMPO PLC         STOCK EXCHANGE RELEASE         1 (44)

            9 November 2006, at 8:45

 

 

Sampo Group's results for January - September 2006

 

RETURN TARGETS ACHIEVED IN ALL BUSINESS AREAS

 

Sampo Group's profit before taxes in January-September 2006 exceeded one billion euros and amounted to EUR 1,019 million (1,007). Earnings per share rose to EUR 1.31 (1.29) and were, including the change in the fair value reserve, EUR 1.21 per share (1.64). All business areas achieved their RoE targets and annualised RoE (including change in fair value reserve) for the Group was 20.6 per cent (32.3). Net asset value per share rose to EUR 8.28 (7.39).

 

- Banking and investment services reported an excellent result for the first nine months of 2006 with profit before taxes rising to EUR 279 million (229). Net interest income amounted to EUR 276 million (255) and fees and commissions to EUR 189 million (166). The RoE target of 20 per cent was exceeded and the annualised RoE rose to 25.2 per cent (22.2).

- The combined ratio for P&C insurance improved to 89.9 per cent for January-September 2006 (91.6). Profit before taxes amounted to EUR 503 million (626). The annualised RoE exceeded the target of 17.5 per cent and was 19.2 per cent (25.3).

- In life insurance profit before taxes for the first nine months of 2006 was EUR 244 million (186). The annualised RoE amounted to 19.5 per cent (52.2), thereby exceeding the target of 17.5 per cent.

 

 

 

* ) Less full deferred tax. 

 

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

 

 

 

Third quarter in brief

 

Sampo Group's profit before taxes for the third quarter of 2006 was EUR 461 million (374) and earnings per share amounted to EUR 0.60 (0.48). Taking the change in the fair value reserve into account, earnings per share were EUR 0.65 (0.66).

 

In the third quarter of 2006 Sampo plc repurchased its own shares for EUR 14.3 million. Together with the EUR 29 million increase in the fair value reserve and the profit for the period this caused net asset value per share to increase from the end of the second quarter by EUR 0.64 to EUR 8.28.

 

Banking and investment services reported a profit before taxes of EUR 101 million (93) in the third quarter. Net interest income grew by over 10 per cent to EUR 96 million (87), because of growth in the lending volumes and higher interest rates.

 

Profit before taxes in P&C insurance was EUR 317 million in the third quarter (251). Net investment income increased from EUR 151 million to EUR 189 million. The insurance technical result was excellent and the combined ratio improved further to 86.3 per cent (89.1).

 

Life operations made a profit before taxes of EUR 28 million (41). Premiums written were EUR 119 million, the same as a year before.

 

The segment Other reported a profit before taxes of EUR 23 million in the third quarter (-10).

 

Business areas

 

 

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 and is starting operations in Russia in late 2006. The investment services companies are Sampo Fund Management Ltd, Mandatum Asset Management Ltd, Mandatum Securities 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 such as life insurance and offers financial advisory services. 

 

 

Banking and investment services performed very well and profit before taxes for the first nine months increased 22 per cent to EUR 279 million (229). This increase was mainly derived from higher net interest and fee and commission income. Annualised return on equity amounted to 25.2 per cent (22.2), clearly above the target RoE of 20 per cent.

 

Profit before taxes for the first nine months includes one-off sales gains worth EUR 40 million. EUR 16 million gain was booked in the third quarter and EUR 24 million gain in the first quarter of 2006. Comparison figure includes one-off sales gains worth EUR 32 million.

 

Net interest income rose to EUR 276 million (255) due to lending volume growth and higher interest rate level. Already risen interest rates had positive impact on interest income, especially during the third quarter. Net income from financial transactions, under which part of the interest income is booked, also benefited from higher rates. Housing loan margins have stabilized, however the average lending margin gradually decreases due to lower margins on new loans.

 

Net fee and commission income grew to EUR 189 million (166) and was particularly driven by strong growth in asset management fees.

 

Total operating costs amounted to EUR 325 million (306). Growth in costs derives mainly from the Baltic operations. Cost-to-income-ratio continued to improve and was 53.7 per cent (58.0) during the first nine months.

 

Loans and advances to customers increased by 12 per cent from year-end 2005 and totaled EUR 20,632 million (18,484). Good growth in mortgages continued and the stock rose year-on-year 22 per cent to EUR 9,307 million. However, Sampo Bank no longer aims to outpace the market growth in Finland and during the third quarter mortgage growth was in-line with the general market growth. Rapid growth continued in consumer credits. At the end of September loans to private customers represented 57 per cent and loans to corporate customers 43 per cent of the total loan portfolio. Corporate lending increased to EUR 8,795 million (8,130).

 

Geographically the Baltic countries continued to provide the fastest growth in both lending and deposits. The Baltic loan stock exceeded two billion euros and amounted to EUR 2,100 million (1,447).

 

Credit quality remained firm and net impairment on loans and receivables was EUR -1 million (7). Non-performing loans were 24 basis points of the total loan stock at the end of September.

 

Deposits amounted to EUR 12,247 million increasing 7 per cent from year end 2005 (11,442). Deposit margins rose following higher interest rates.

 

Rapid growth continued in mutual fund assets, which rose 17 per cent from year-end 2005 to a new record level of EUR 10,390 million. Net subscriptions in Sampo's mutual funds this year amount to EUR 1,163 million. Mutual fund assets include EUR 983 million of Sampo Group investments (1,226), representing 9.5 per cent of total assets (13.8).

 

Sampo Bank Group's capital adequacy was 11.1 per cent (10.6). The tier 1 ratio was 7.3 per cent (7.6) and tier 1 capital rose to EUR 1,288 million (1,255). Risk-weighted assets grew to EUR 17,682 million (16,466).

 

 

 

 

 

In July Sampo Bank plc securitized approximately one billion euros of the corporate loans in its balance sheet. A special company, Sea Fort Securities plc, was established for the transaction. The transaction released capital for future growth and adjusted the Bank's credit risk profile.

 

In September Sampo Housing Loan Bank plc issued its second EUR 1 billion covered bond on the international capital markets. The bond was issued under the EUR 5 billion covered bond programme and followed a transfer of a EUR 850 million housing loan portfolio from Sampo Bank plc to Sampo Housing Loan Bank plc.

 

 

P&C insurance

 

If P&C insurance group is the leading property and casualty insurance group in the Nordic region. Its operations 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 of the P&C insurance operation was EUR 503 million (626). The technical result rose to EUR 414 million (362). Private business area accounted for 54 per cent, Commercial for 32 per cent, Industrial for 11 per cent and the Baltic countries for 1 per cent of the technical result. EUR 64 million was released from technical reserves relating to prior year claims (24).

 

The insurance margin - technical result in relation to net premiums earned - amounted to 14.7 per cent (13.1). The target RoE of 17.5 per cent was achieved with an annualised RoE of 19.2 per cent (25.3).

 

Combined ratio for the first nine months of 2006 was 89.9 per cent (91.6). Performance improved in all business areas, except in Baltics, which is still suffering from the large claims in the first quarter of 2006. In geographic terms the improvement was most significant in Finland, where the combined ratio decreased by 7.2 percentage points to 93.7 per cent.

 

 

 

The improvements in the combined ratio for the Finnish entities have been achieved despite an intensified competitive situation in Finland during 2006. Competition has been particularly evident in motor insurance for private customers. If has been able to achieve the improved combined ratio both through risk selection as well as cost efficiency measures. If is meeting the increased competition in the market with product and service developments, and by rewarding and retaining risk aware customers.

 

If reported a cost ratio of 23.0 per cent for the first nine months of 2006 (24.4) and a cost ratio of 21.6 per cent for the third quarter (24.0). Nominal costs decreased 4 per cent to EUR 670 million (698). Part of the exceptionally strong decrease is explained by a number of projects, campaigns and manning decisions being delayed until the fourth quarter of 2006. Cost ratio in the fourth quarter will therefore be higher than in the third quarter, although cost efficiency is expected to continue to develop favourably.

 

Gross written premiums grew by 2 per cent and were EUR 3,228 million (3,165). Premium growth was strongest in Baltics with 15 per cent, but business areas Commercial and Industrial also grew by approximately 4 per cent. Geographically premium growth was strongest in Norway.

 

On 30 September 2006 the total investment assets of If amounted to EUR 10.1 billion, of which 89 per cent was invested in fixed income instruments (84), 10 per cent in equity (12) and 1 per cent in other assets (4). Investment climate in the third quarter was significantly better than in the previous quarter and investment income rose to EUR 189 million after having been EUR 47 million negative in the second quarter. January-September 2006 investment income amounted to EUR 226 million (401) and the return on investments was 2.8 per cent at market value (4.9).

 

Solvency capital amounted to EUR 3,079 million on 30 September 2006 (3,216). The solvency ratio - solvency capital in relation to net premiums written - was 81 per cent (88). Reserve ratios strengthened marginally and reserves were 159 per cent (157) of net premiums written and 258 per cent of claims paid (256).

In October 2006 If entered a partnership with Handelsbanken Liv to expand its product range in Norway's compulsory company pensions system (OTP pension system). If will strengthen its focus by offering additional insurance covering both disability and child pension. As part of this process, Sampo Life Insurance Company Limited has sold its Norwegian OTP pension portfolio to Handelsbanken Liv.

 

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 reported a profit before taxes of EUR 244 million (186) for the first nine months of 2006. Investment income, excluding income on unit-linked contracts, amounted to EUR 358 million (314). Sampo Life realised a significant amount of equity gains during the first half of 2006. The change of the fair value reserve during the first nine months of 2006 was EUR -52 million (206). RoE target for life insurance operation, 17.5 per cent, was achieved as the annualised RoE reached 19.5 per cent (52.2).

 

Fixed income yields picked up in the third quarter and the overall return on investments at market value for January-September 2006 rose to 5.0 per cent (10.0).

 

Market value of Sampo Life Group's investment assets, excluding the assets of EUR 1.5 billion (1.3) covering unit-linked liabilities, were EUR 5.7 billion (5.9) on 30 September 2006. Fixed income covered 67 per cent (64), equity 31 per cent (33) and real estate 2 per cent (3) of the total assets. Equity investments include direct equity holdings, equity funds and private equity.

                       

Sampo Life Group solvency capital on 30 September 2006 amounted to EUR 1,034 million (1,077), which is 4.5 times the minimum requirement. Solvency ratio remained high at 20.4 per cent (21.3). Total technical reserves were EUR 6.2 billion (6.0), of which unit-linked reserves accounted for 24.7 per cent (21.3).

 

Sampo Life Group's premium income on own account was EUR 422 million (433). The comparison figure contains two single premium with-profit contracts transferring the liabilities of two pension funds to Sampo Life and totalling almost EUR 80 million in premiums. Premiums in the focus area, unit-linked insurance, grew to EUR 281 million (188). Premiums from with-profit policies decreased sharply to EUR 141 million from EUR 245 million. Unit-linked premiums represent 66 per cent (42) of total premiums against the industry average of 53 per cent. Regular premiums amounted to EUR 231 million (215) and their share of total premiums increased to 54 per cent (48).

 

Sampo Life's position in the focus area strengthened further as the market share in unit-linked premiums in Finland increased to 23.7 per cent (20.9). Overall Sampo Life has a market share of 19.3 per cent (20.1) in Finland.

 

The rapid growth of the Baltic subsidiaries continues and their premium income rose by 93 per cent to EUR 23 million (12). Sampo Life's Swedish subsidiary If Liv focuses on risk policies in cooperation with If P&C. The company's premium income amounted to EUR 2 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 11 million (-34). In the third quarter of 2006 the segment reported a profit of EUR 23 million (-10), because Sampo plc was awarded EUR 30 million in compensation for damages for breach of contractual duties.

 

Sampo plc's balance sheet has strengthened significantly in 2006 and the liabilities to external creditors are less than EUR 1 billion on 30 September 2006. 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. Sampo plc's balance sheet total was EUR 4.0 billion (3.6). Of this amount, holdings in banking and investment services companies accounted for EUR 0.8 billion (0.9) and holdings in insurance companies for EUR 2.4 billion (2.4).

 

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

 

 

Developments in the third quarter of 2006

 

Changes in Group structure

 

Sampo plc's fully-owned subsidiary Sampo Bank plc announced in April its intention to acquire Industry and Finance Bank (Profibank), a Russian bank based in St. Petersburg. The necessary official permits, upon which the transaction was conditional, were obtained and Sampo Bank closed the transaction in August 2006. The book value of the acquired assets was EUR 0.4 million and fair value EUR 5.3 million. The acquired assets mostly consist of a banking license, which was entered into intangible assets at the value of EUR 4.9 million.
 

 

Changes in share capital

 

Sampo plc's Board of Directors decided on 11 May 2006, on the basis of the authorisation granted by the Annual General Meeting, to repurchase a maximum of 15 million Sampo A shares. Shares will be repurchased by 31 December 2006 at the latest.

 

Repurchases started on 31 May and 4,328,500 shares have been repurchased by 9 November. EUR 63.8 million was used to acquire the shares. 907,500 shares were repurchased during the third quarter of 2006 for EUR 14.3 million.

 

On 30 September 2006 Sampo plc held 4,328,500 Sampo A shares corresponding to 0.77 per cent of the total amount of shares and votes. The repurchased shares correspond to EUR 0.73 million in share capital on 30 September 2006.

 

 

On 10 August 2006 the Board approved subscriptions with the warrants of the 2000 option programme for a total of 126,800 A shares. The subscriptions increased the share capital by EUR 21,326.23.

 

On 30 September 2006 Sampo plc's share capital amounted to EUR 95,065,103.85, and the number of A shares totalled 564,031,440. The total number of shares of the company, including 1,200,000 B-shares was 565,231,440. 

 

On 9 October 2006 the subscriptions of 121,450 A shares were approved with the warrants of the Sampo plc's 2000 option programme. Sampo plc's share capital after the subscription amounts to EUR 95,085,530.27 and the number of A shares is 564,152,890 shares. After the increase, the total number of shares of the company, including 1,200,000 B shares, amounts to 565,352,890 shares.

 

 

Staff

 

Sampo Group's full-time equivalent staff on 30 September 2006 amounted to 11,676 employees (11,627). 38 per cent of the staff worked in banking and investment services, 55 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. 50 per cent worked in Finland, 16 per cent in Sweden, 14 per cent in Norway and 20 per cent in other countries. The staff continued to decrease in P&C insurance and Primasoft and increase in the banking operations, mainly because of rapid growth in the Baltic countries. The average number of employees during the first three quarters of 2006 was 11,628 (11,735).

 

 

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. The incentive schemes 2003I - 2006I extend to 2009. The incentive schemes increased staff costs in the third quarter of 2006 by EUR 6 million and on 30 September 2006 the total provision for the schemes was EUR 42 million.

 

Under the "Sampo 2006" share-based incentive plan a maximum of 1,500,000 Sampo A shares can be distributed in 2008-2010. Sampo's Board of Directors has allocated 1,300,000 shares of the plan and confirmed the performance criteria. This incentive plan increased staff costs by EUR 1 million in the third quarter of 2006.

 

 

Ratings

 

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

 

 

 

 

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. In the consolidation method items, which according to bank or insurance regulations are part of own funds but not equity, are added to group's balance sheet equity. Items, which are not available to cover losses in other group companies, are, however, not included in own funds.

 

The Group's solvency ratio (own funds in relation to minimum requirements for own funds) on 30 September 2006 was 209.7 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 on 30 September 2006 was EUR 3,185 million (3,148).

 

 

Outlook for the rest of 2006

 

Sampo Group's result for 2006 is expected to be good, mainly as a result of sound operating profitability in all of its business areas.

 

Sampo Bank Group continues to benefit from rising interest rates and is foreseen to report an excellent result for 2006. Favourable trends in fee income growth and moderate cost growth are expected to continue. The bank will achieve its RoE target of 20 per cent.

 

Sampo Group's P&C insurance operation, If, is expected to reach a combined ratio of 90-91 per cent for the full year 2006. If is foreseen to reach its RoE target of 17.5 per cent unless investment market conditions weaken significantly. If reports its investments at market value through the income statement whereby changes in share prices or interest rates are directly reflected in its result.

 

Sampo Life Group's full-year 2006 result is expected to be good and it is also foreseen to reach the RoE target of 17.5 per cent. Life insurance operations continue to focus on unit-linked insurance and risk policies both in Finland and the Baltics.

 

The parent company, Sampo plc (included in the segment Other), will in the last quarter of 2006 report a loss of approximately EUR 8 million, consisting mainly of interest payments on debt.  

 

The biggest risk for the outlook is a severe weakening of equity markets. A sudden rise in interest rates would in the short term cause losses by lowering the value of bond portfolios, but in the longer run it would enhance fixed income yields and bank's net interest income. Sampo Group is strongly capitalised and can therefore withstand significant investment market volatility.

 

 

SAMPO PLC

Board of Directors

 

 

For more information, please contact:

Peter Johansson, Group 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 third quarter results at 12.30 p.m. Please call +44 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 will publish the full year 2006 results on 13 February 2007.

 

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 560,902,940, the average number of shares during the period 563,511,668 and the diluted average number of shares 577,852,010. The numbers have been adjusted for the 4,328,500 own shares held by Sampo Plc.                      

                       

³) The dilution effect has been calculated as if all the remaining subscription rights (4,656,325/the option programme of 2000 at the end of September, 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. Investment property has been measured at fair value when calculating 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 liability has been deducted from valuation differences.                       

The key figures for Banking and Investment Services and Other business have been calculated in accordance with FSA standard 3.1. The key figures for the insurance business have been calculated in accordance with 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.                               

                                   

                                   

SEGMENT INFORMATION                                  

                                   

The Group's primary segmentation is based on business areas whose risks and performance bases as well as regulatory environment differ from each other. Business segments are Banking and investment services, P&C insurance, Life insurance and Other operations. Other operations comprise the operations of the holding company and the Primasoft Oy information technology firm.                              

                                   

Inter-segment pricing is based on market prices. Inter-segment transactions, assets and liabilities are eliminated in the consolidated financial statements on a line-by-line basis.                                   

                                   

CONSOLIDATED INCOME STATEMENT BY SEGMENT FOR NINE MONTHS ENDED 30 SEPTEMBER 2006