TAPIOLA GENERAL MUTUAL INSURANCE COMPANY ANNUAL REPORT AND FINANCIAL STATEMENTS

Transcription

1 TAPIOLA GENERAL MUTUAL INSURANCE COMPANY ANNUAL REPORT AND FINANCIAL STATEMENTS 2005 Table of contents Report of Board of Directors Financial Statement Principles for compilation of financial statement Calculation formulae for key figures Parent company s profit and loss account and balance sheet (II) Parent company s funds statement Notes to the parent company s profit and loss account and balance sheet Parent company s key figures and analyses Consolidated profit and loss account and balance sheet Consolidated funds statement Notes to the consolidated profit and loss account and balance sheet Group s key figures and analyses Risks and risk management notes The Board of Directors proposal for the distribution of profits and signatures to the Board s annual report and financial statements

2 REPORT OF BOARD OF DIRECTORS 2005 KEY FIGURES TAPIOLA GENERAL MUTUAL INSURANCE COMPANY The overall result of Tapiola General Mutual Insurance Company (Tapiola General) increased to EUR million (EUR million). Operating profit was EUR 99.0 million (EUR million) and the change in valuation gains/losses was EUR 70.6 million (EUR million). Tapiola General Group s premium income increased by 11.4 per cent to EUR million (EUR million). Market share growth is expected to continue and increase to 18.2 per cent (17.5%). Tapiola General Group s combined ratio before unwinding of discount expense was per cent (106.6%). The return on capital employed at current value achieved by the parent company Tapiola General was 11.0 per cent (8.5%). The Group s solvency capital increased to EUR 1,216.3 million (EUR 1,082.3 million), and solvency ratio (solvency capital in relation to premiums earned) was per cent (221.3%). PARENT COMPANY GROUP Change % or % unit Change % or % unit Premiums written ums written EUR m 588,9 528,9 11,4 589,0 528,8 11,4 Return on investment at current value % 11,0 8,5 2,5 Return on investment at current value % 87,9 87,3 0,6 87,7 87,2 0,5 Expense ratio, percentage % 20,1 21,2-1,1 20,9 21,9-1,0 Combined ratio, percentage % 108,0 108,4-0,5 108,6 109,0-0,4 Loss ratio (excl. unwinding of discount expense), % 85,6 84,8 0,8 85,3 84,7 0,6 percentage Expense ratio, percentage % 20,1 21,2-1,1 20,9 21,9-1,0 Combined ratio (excl. unwinding of discount expense), percentage % 105,7 106,0-0,3 106,2 106,6-0,4 Risk ratio (excl. unwinding of discount expense), percentage % 79,7 79,9-0,2 79,8 79,1 0,7 Operating cost ratio, percentage % 25,9 26,1-1,1 26,4 27,5-1,0 Combined cost ratio (excl. unwinding of discount expense), percentage % 105,7 106,0-0,3 106,2 106,6-0,4 Operating profit EUR m 103,3 115,1-10,3 99,0 102,4-3,3 Operating profit, % 14,2 17,2-3,0 13,5 15,4-1,9 Overall result EUR m 178,6 114,5 56,0 169,6 101,8 66,6 Solvency capital EUR m 1 205, ,4 14, , ,3 12,4 Solvency ratio % 217,8 216,2 1,6 219,7 221,3-1,6 CUSTOMERS Development of number of customers Strong inflow of private household customers continued for Tapiola General continued. The number of private household customers increased to 734,100 (713,400). The number of corporate customers was 29,400 (30,800). The number of corporate customers decreased because enterprises with less than five employees were transferred from the corporate customer group to the private household customers group. The number of customers in Tapiola Bank, a subsidiary of Tapiola General, increased to 48,700 customers (26,500).

3 REPORT OF BOARD OF DIRECTORS 2005 Customer satisfaction TAPIOLA GENERAL MUTUAL INSURANCE COMPANY A committee of seven customers of the Tapiola Group, the mutual committee, started its work in February The committee was established because Tapiola wished to find out how well mutual cooperation is realised within the group. The mutual committee is an independent group chosen by local advisory committees representing the entire customer base. In addition to evaluating owner-customers possibilities for influencing operations of the group, the committee evaluates the long-term nature of Tapiola s operations as well as whether owner-customers benefit from the success of Tapiola. The committee evaluates mutual operations every two years. In the meantime, the committee comments on a targeted question of topical interest. The group handed out their first statement in November In its statement, the committee recommends that the bonus and rebate system be developed Furthermore in a more concrete direction. The committee paid attention to, e.g., the fact that the owner-customers of the companies have the right to participate in Tapiola Group general meetings but in practice, their participation has remained low. OPERATING ENVIRONMENT Insurance The principle of full cost liability for personal injury in motor liability and employers liability insurance has been in use since the beginning of the year This means that accident and motor liability insurance systems must cover all costs for the healthcare of a patient. Previously, the practice was that insurance companies were responsible for those costs that the patients would have had to pay themselves. The most significant change in the competitive situation was the sale of Pohjola to the OP Bank Group late in This transaction will offer more competition especially in the private household customer sector when companies strive to offer customers banking and insurance services in the same financial group. The Tapiola Group is well placed to meet this challenge, as Tapiola is already prepared to offer comprehensive total service for this group of customers. Tapiola will respond to this challenge by investing more in development of services, products and customer benefits also across company boundaries in Investment environment On an international scale, the year 2005 was marked by strong growth particularly in the US and less-developed countries. China continued to grow more rapidly than any other market, boosting the development of the entire Southeast Asia. This also profited the Japanese economy, which showed signs of recovery after a long difficult period. Towards the year-end, the growth rate of the US economy slowed down somewhat, whereas Europe started to show signs of better development. The growth and the record-high oil prices fuelled fears of inflation, and as a result, the ECB began to raise the interest rates. The US Federal Reserve, on the other hand, raised its interest rate close to the neutral level during the course of the year. Stock markets 2005 was the third consecutive positive year in the global equity markets. The European market index yielded 26.7% while the Hex Portfolio Index yielded almost 35%. The year began quite moderately, and equity prices decreased in March-April as investors grew concerned about a slowdown in economic growth. In the summer, equity prices surged, until they decreased again in October as investors pocketed gains in fear of interest rate hikes. The rest of the year was again very strong since investors were reassured that the rate hikes would likely remain modest. In Japan, equity prices rose over 40% and emerging markets also reached a return of almost 35%. In the USA, development of equity prices was slower: with an increase of less than 5%.

4 REPORT OF BOARD OF DIRECTORS 2005 Fixed-income markets TAPIOLA GENERAL MUTUAL INSURANCE COMPANY In the euro zone, fixed-income investments yielded nearly 5% in After a brief surge in the beginning of the year, interest rates turned back into a downward trend. Towards the autumn, the euro zone s economy started to show clear signs of a revival as a result of depreciation of the euro, among other things. The oil price rise did not seem to have a significant impact on economic growth but it nevertheless generated gradual inflation pressures; this caused worry among central banks. Market rates started to rise in the second half of the year. Corporate loan market credit risk premiums remained at a low level. Real estate markets In the Finnish real estate market, both domestic and offshore investors continued to show interest in commercial real estates. Demand for new and customised logistics premises was also strong. In the office real estate market, modern and renovated property interested users and investors. Older premises were burdened by a high vacancy rate. The decrease in yield requirements on real estate investments continued, and increased property prises. Despite recent developments, the returns on real estate investments were still high in Finland compared to many other Western European countries. The Finnish real estate fund market continued to develop and new Finnish real estate funds were established; also those investing abroad. The diversification trend in real estate investments continued. Institutional investors diversified their real estate investments internationally chiefly through non-listed real estate funds. DEVELOPMENT OF OPERATIONS Tapiola General s claim service project was started in 2004; and changes in operations methods of the claim service have been made in stages in order to ensure functionality of the methods used. The new model for handling claims was generally in use by the end of The major objective of the claims project was creating, from the customer s point of view, comprehensive, unified system solutions covering the entire claims process and supporting mutual cooperation of the various claims channels in order to improve customer service. Mostly, experiences from the first phase have been positive. The new service is to be fine-tuned so that customers can be provided with the best claims service in Finland by the end of An Internet application for motor vehicle insurance was implemented in May. The online application can be used by car retailers, vehicle inspection stations and insurance agents. This will speed up service and enhance accuracy. The objective was also to gain rationalisation benefits. Furthermore, Tapiola General s head office operations were expanded so that some of the operations are taken care of in Tampere. At the end of 2005, about 50 people in Tampere were occupied with these tasks, and the number of personnel will gradually increase to over one hundred. On January 3, 2005, VVO Group and Tapiola General concluded a deal on interest-subsidised rental apartments. Hence the property sold to VVO will be used as rental apartments in the future as well. The deal was intended as a means of rearranging the structure of real estate investments will be a year of significant investments in the Tapiola Group. It is our goal to provide our customers with even better service and care. The investments will at first worsen expense ratios, as the returns will only be seen in the coming years. CORPORATE STRUCTURE The Tapiola General Mutual Insurance Company Group includes, in addition to the parent company, subsidiaries Tapiola Bank Ltd (share of ownership 74.5 per cent), Alma Insurance Company Ltd. (100%), Tapiola Data Ltd. (51.1%), Aura-Karelia Ltd. (100%) and Tapiola Bank Ltd s subsidiary Tapiola Fund Management Company Ltd. (70%) as well as 28 (43 12/2004) housing associations and real estate companies and five other companies that do not engage in business operations.

5 REPORT OF BOARD OF DIRECTORS 2005 INSURANCE Premiums written TAPIOLA GENERAL MUTUAL INSURANCE COMPANY The financial statements of Tapiola Bank Ltd. have been combined with the consolidated financial statements like an associated company with respect to the profit and loss account and divided into balance sheet items with respect to the balance sheet. Associated companies include Finnish Loss Survey SVT Ltd, Tapiola Asset Management Ltd as well as five real estate companies and three other companies that do not engage in business operations. Turva Mutual Insurance Company is a subsidiary of Tapiola General, since all of the company s guarantee share owners have signed an addendum to the mutual guarantee share owner agreement stating that Tapiola General Mutual Insurance Company has the right to appoint the majority of the Board of Turva should the company wish to exercise this right. Tapiola General s share of Turva guarantee capital is per cent. In accordance with a statement issued by the Insurance Supervision Authority, combining financial statement data of Turva in the Tapiola General Group financial statements is not necessary in order to offer a correct and adequate depiction of the results of the operations and financial position of the Group. Mutual guarantee share owners of a mutual company do not have any right to other assets of the company outside the guarantee capital and guarantee capital interest paid from excess funds based on a decision of the general meeting; the interest may be at most 12 per cent a year. Turva s guarantee capital amounts to EUR 7,655, Tapiola General group s premium income increased by 11.4 per cent to EUR million (EUR million). According to an estimate by the Federation of Finnish Insurance Companies, the premium income of non-life insurance companies grew by 6 per cent. Tapiola General Group s combined ratio before unwinding of discount expenses was per cent (106.6%). Risk ratio was 79.8 per cent (79.1%) and operating expenses ratio, i.e., share of operating expenses and claims handling costs was 26.4 per cent (27.5%). Combined expense ratio where unwinding of discount expenses or effects of pension liability discounting dissolution has not been transferred from insurance company costs to investment interest costs, was per cent (109.0%). The combined expense ratio includes the risk ratio of 82.2 per cent (81.6%), the expense ratio of 20.9 per cent (21.9%) and the claims handling costs share of 5.5 per cent (5.6%). Parent company Tapiola General premium income increased by 11.4 per cent to EUR million (EUR million). Direct business (underwritten) premium income increased by 13.0 per cent to EUR million (EUR million). According to an estimate by the Federation of Finnish Insurance Companies, Finnish direct business premium grew by 8.2 per cent. Reinsurance premium income decreased by 9.8 per cent to EUR 33.5 million (EUR 37.1 million). The decrease in premiums written was mainly due to the fact that at the end of 2004 Tapiola General was refused membership of Retro Life Assurance Company Employee s Group Life Insurance Pool due to rearrangements in the pool. This led to a notable decrease in Finnish reinsurance premiums written in 2005.

6 REPORT OF BOARD OF DIRECTORS 2005 TAPIOLA GENERAL TAPIOLA GENERAL MUTUAL INSURANCE COMPANY PREMIUMS WRITTEN DIVIDED INTO INSURANCE PREMIUM CATEGORIES BEFORE REINSURERS SHARE M Change Change % Statutory accident insurance 101,6 69,5 12,1 13,5 Other accidents and sickness 35,8 29,9 5,9 19,6 Motor third party liability 146,5 127,4 21,1 16,5 Motor vehicles 100,5 89,1 11,4 12,8 Marine, aviation and transport 7,0 6,5 0,5 7,5 Fire and other damage to property 121,S 111,9 9,9 8,8 General liability 26,1 24,4 1,7 7,0 Credit and suretyship 0,3 0,3 0,1 18,5 Legal expenses 7,3 6,3 0,6 8,1 Other 6, S 5,9 0,7 11,0 Base premium, total 555,4 491,7 63,7 13,0 Reinsurance, total 33,5 37,1-3,7-9,8 Total 588,9 528,9 60,1 11,4 PREMIUMS WRITTEN FOR EACH CUSTOMER SEGMENT TAPIOLA GENERAL PREMIUMS WRITTEN FOR EACH AREA SEGMENT TAPIOLA GENERAL Employers liability insurance premium income increased by 13.5 per cent to EUR million (EUR 89.5 million). The Federation of Finnish Insurance Companies estimated the growth of sector premium income to be at 17.2 per cent. In 2005, the cumulative result on transfers of employers liability insurance was the second best in the sector. Measured as premiums written, it was profitable by EUR 1.8 million. So-called full cost liability has been effective since the beginning of 2005; insurance companies must pay full price for public sector healthcare services with respect to statutory insurance injuries. The change increased premiums and compensations for accident insurance. Motor liability insurance premium income increased by 16.5 per cent to EUR million (EUR million), while motor vehicle insurance premium income increased by 12.8 per cent to EUR million (EUR 89.1 million). The Federation of Finnish Insurance Companies estimated the growth of premium income in motor liability insurance at 11.1 per cent and in motor vehicle insurance at 7.6 per cent. The increase in premium income is due to growth of the market caused by growth of vehicle sales and Tapiola General s market share. Tapiola General was the second largest insurer of motor vehicles. Fire and property insurance premium income was EUR million (EUR million); the increase compared to the previous year was 8.8 per cent. The premium income increased due to increases in premium that were necessary because of unfavourable developments in claims in the previous years. The Federation of Finnish Insurance Companies estimated that premium income in the sector will increase only a little if at all. Credit losses on premium receivables were EUR 1.6 million (EUR 4.1 million), of which motor liability insurance credit losses amounted to EUR 1.1 million (EUR 2.8 million) and accident insurance losses to EUR 0.4 million (EUR 1.2 million). The decrease in credit losses was caused by dissolution of credit loss allocation in the financial statements for the previous year. Furthermore, the general development of the financial situation, more effective recovery procedures and successful selection of customers have decreased credit losses.

7 REPORT OF BOARD OF DIRECTORS 2005 TAPIOLA GENERAL MUTUAL INSURANCE COMPANY Combined ratio and loss ratio Combined expense ratio excluding unwinding of discount expenses for parent company Tapiola General where effects of pension liability discounting dissolution have been transferred from claims incurred to investment interest costs, was per cent (106.0%). Loss ratio before unwinding of discount expenses was 85.6 per cent (84.8%) and expense ratio was 20.1 per cent (21.2%). Combined ratio was per cent (108.4%). Loss ratio was 87.9 per cent (87.3%) and expense ratio was 20.1 per cent (21.2%). The Federation of Finnish Insurance Companies estimated that claims paid by non-life insurance companies will increase by ca. 7 per cent. Therefore, loss ratio and combined ratio should remain at the level of 2004 (81.4 per cent in 2004). As a mutual insurance company, the objective of Tapiola General is not a combined ratio of less than 100. The objective is to return investment returns to the customers as decreased premiums and invest in improved service in such a way that the quality of insurance cover will be secured. Employers liability insurance loss ratio decreased to per cent (95.6%). The decrease was influenced by supplementation of claims provision by EUR 8.2 million; this supplementation was, for its part, influenced by the transfer to full cost liability. Loss ratio for motor liability insurance (motor third party liability) was per cent (104.5%). In the financial statements for 2004, allocation regarding compensation for expenses of previous motor liability insurance loss years were increased. Due to an error in coefficient for justification changes in 2004, the increase was EUR 24.5 million short. Correction of the error increased compensation of expenses for 2005 by the error amount. The so-called full cost liability that came into force in the beginning of 2005 also increased compensations paid based on motor liability insurance. Loss ratio for voluntary motor vehicle insurance (motor vehicles) decreased to 71.9 per cent (73.4%). Due to a major loss, loss ratio for offshore reinsurance decreased to per cent (53.5%). INVESTMENTS AT CURRENT VALUE The return on Tapiola General s investment portfolio at current value in 2005 was 11.0% (8.5%). With the exception of fixed-income investments, all investment instruments yielded a higher return than in the corresponding period last year. Investment assets at current value stood at EUR 2,260.7 million (EUR 1,971.2 million). Net investment income at current value was EUR million (EUR million).

8 REPORT OF BOARD OF DIRECTORS 2005 TAPIOLA GENERAL MUTUAL INSURANCE COMPANY Vahinko-Tapiola Investments, allocation and rate of return Current value EUR 2,260.7 million (EUR 1,971.2 million) Rate of return from investment activities 11.0% (8.5%) * Rate of return by type of investment Equity investments At the end of 2005, Tapiola General s equity investments totalled EUR million (EUR million). Equity allocation remained at the same level as in 2004, and stood at 28.1% (28.4%) of the investment portfolio at the review date. Equity investments yielded a return of 28.4% (13.8%) in Fixed-income investments The market value of Tapiola General s fixed-income portfolio, including fixed-income funds and money market investments, stood at EUR 1,123.4 million (EUR million) at the end of Modified duration depicting portfolio interest rate risk was ca Interest investments, including fixed-income funds and money market investments, yielded a return of 4.4 per cent (6.1%) in PERSONNEL Real estate investments At the end of 2005, the market value of Tapiola General s real-estate portfolio totalled EUR million (EUR million). The allocation on real-estate investments has decreased to 18.7% (22.6%) Real-estate investments yielded a return of 7.9% (6.2%) in Loans receivable The proportion of loan receivables in Tapiola General s total investments decreased further in The majority of the loan portfolio consisted of investment loans tailored for companies and loans for own properties. Loan receivables yielded a return of 3.6% in 2005 (3.1%). Number and structure of personnel The personnel of the Tapiola Group insurance companies has an employment relationship with Tapiola General Mutual Insurance Company, Tapiola Mutual Life Insurance Company, Tapiola Corporate Life Insurance Ltd and Tapiola Mutual Pension Insurance Company. Items paid for services produced with the shared resources of Tapiola Group s insurance companies are included in the corresponding items of the company s operating costs in the same way as if the person had been directly employed by the company in question. If the personnel of the Tapiola Group insurance company was divided into the various judicial insurance companies based on the

9 REPORT OF BOARD OF DIRECTORS 2005 TAPIOLA GENERAL MUTUAL INSURANCE COMPANY wages paid by the companies, the share of the non-life insurance company would total 1,260 persons (1,167 persons in 12/2004). The average number of personnel in the entire Tapiola Group has grown by 148 persons since the beginning of the year, now totalling 2,353 persons (2,205 in 12/2004). The number of employees at the end 2004 does not include hourly employees, who are included in the yearend figure for 2005 and totalled 56 persons. Compensation The salaries of Tapiola Group s management and those above the collective agreement are based on the HAY classification and scales; these are based on benchmarking information from the financing industry. A merit pay scheme is a key element of Tapiola's compensation schemes. It covers the whole organisation and forms a part of the management system. The amount of merit pay granted to clerical employees at the head office shall not exceed 7 per cent of the annual payroll. In practice, the amounts paid have been 4 per cent on average. Targets are determined based on of the Group s strategy, and they can be either team-specific or personal. Performance appraisal discussions are conducted in order to evaluate reaching of objectives. The regional organisation's salary schemes include various alternatives for rewarding performance, and their proportion of the total salary varies from a few per cent to approximately fifty per cent. Tapiola Group s top management, including ordinary and deputy members of the board of directors, managing directors and deputy managing directors, is covered by the management merit pay scheme. The scheme also applies to other executives or those in a similar position, unit managers or the like and regional managers and deputy managers or the like. The management s merit pay is based, on one hand, on reaching of company-specific, three-year strategic objectives (maximum 30 per cent) and, on the other hand, on reaching of annual objectives and personal objectives (maximum 20 per cent). In practice, the amounts paid have been on average approximately 50 per cent of the maximum amount. Based on the results, annual payments are made to Tapiola Group s personnel fund, established in The amount of payment is affected, for example, by the result of Tapiola Group s companies and any increase in market shares. In 2005, the amount transferred to the personnel fund accounted for 70.3 per cent of the maximum amount. The contribution made by Tapiola General to the Tapiola Group personnel fund was EUR 1,383, The payment was calculated according to a preliminary estimate and is included in the profit and loss account under Other expenses. TOTAL OPERATING EXPENSES The operating expenses of Tapiola General in the consolidated profit and loss account increased by 8.3 per cent compared to the previous year, standing at EUR million (EUR million). The increase is due to growth of the Group s personnel that has lasted for several years. Relation of operating expenses and premiums earned, i.e., expense ratio, decreased to 20.9 per cent (21.9%). Operating expenses, i.e., operating expenses and claims handling costs, increased by 11.8 per cent to EUR million (EUR million). However, operating expense ratio, i.e., operating expenses and claims handling costs compared to premiums earned, decreased to 26.4 per cent (27.5%). Investment operations costs amounted to EUR 3.2 million (EUR 2.9 million), an increase of 9.6 per cent from the previous year. Other expenses in the profit and loss account (please see chapter Other returns and expenses as well as result for ancillary business) increased by 12.6 per cent and totalled EUR 11.7 million (EUR 10.4 million). The Group s total operating expenses amounted to EUR million (EUR million), an increase of 11.8 per cent from the previous year. The operating expenses of Tapiola General parent company in the parent company s profit and loss account increased by 7.5 per cent compared to the previous year, standing at EUR million (EUR million). The increase in operating expenses was anticipated, since they remained below the amount budgeted. The expense ratio decreased to 20.1 per cent (21.2%). Operating expenses ratio was 25.9 per cent (26.1%).

10 REPORT OF BOARD OF DIRECTORS 2005 TAPIOLA GENERAL MUTUAL INSURANCE COMPANY Administrative expenses for claims activities, included under Claims paid in the profit and loss account, rose by 34.0% to EUR 32.6 million (EUR 24.3 million). The increase in claims handling costs is due to a change in recording method made in 2005 regarding entries of claims inspection costs for motor vehicle and boat insurances acquired elsewhere. Previously, inspection costs were entered directly under claims incurred instead of via total business expenses as claims handling costs under claims incurred. The change in recording method will not have an impact on the official key figures. Investment management expenses, included in the profit and loss account under Investment expenses, increased by 29.6% compared to the previous year, standing at EUR 2.9 million (EUR 2.2 million). Other expenses in the profit and loss account amounted to EUR 3.1 million (EUR 2.8 million). The profit and loss account item includes, for example, expenses from services offered by Tapiola General to the company s subsidiary Tapiola Bank (please see Ancillary operations). The payment to the personnel fund is also included in it (please see Compensation). Total operating expenses amounted to EUR million (EUR million), an increase of 12.8 per cent from the previous year. OTHER INCOME AND EXPENSES AS WELL AS ANCILLARY OPERATION RESULT Tapiola General offers to Tapiola Bank Ltd marketing, communications, legal, data management, personnel and internal audit services, etc. as well as the above-mentioned services plus financial administration services for Tapiola Fund Management Company and Tapiola Asset Management Ltd. Returns from sales of services are included in the profit and loss account under other returns, and expenses for producing these services are included in the profit and loss account under other expenses. The result for sales of services to the partner companies showed a loss of EUR million (profit of EUR million). The result for sales of other services was EUR 0.3 million (EUR 0,4 million). The profit and loss account item Other expenses also includes transfer to the personnel fund that affected the result by EUR 1.4 million (EUR 2.0 million). RESULT FOR THE PERIOD SOLVENCY Tapiola General s consolidated overall result totalled EUR million (EUR million). The operating profit was EUR 99.0 million (EUR million) and the change in valuation gains/losses was EUR 70.6 million (EUR -0.6 million). The Group s profit and loss account shows a profit of EUR 49,328, million. The consolidated balance sheet total amounted to EUR 2,364,268, (EUR 2,085,035,484.10). Parent company Tapiola General s overall result was EUR million (EUR million). The operating profit was EUR million (EUR million) and the change in valuation gains/losses was EUR 75.3 million (EUR -0.6 million). The profit and loss account shows profit of EUR 52,934, million. The balance sheet total amounted to EUR 2,069,336,184.1 (EUR 1,887,457,890.99). Tapiola General Group s solvency margin at current value was EUR million (EUR million) and solvency capital EUR 1, million (EUR 1,082.3 million). The risk-carrying capacity, a percentage representing the company's solvency, was per cent (221.3%). Parent company Tapiola General s solvency margin at current value was EUR million (EUR million) and solvency capital EUR 1,205.4 million (EUR 1,057.4 million). The riskcarrying capacity, a percentage representing the company's solvency, was per cent (216.2%).

11 REPORT OF BOARD OF DIRECTORS 2005 Solvency capital, EUR m and solvency ratio, percentage TAPIOLA GENERAL MUTUAL INSURANCE COMPANY Vahinko-Tapiola BANKING For Tapiola Bank Ltd, a subsidiary of Tapiola General, the ended accounting period was the second one as a provider of banking services to the general public. It was the first full year of service, however. The bank has continued to acquire new customers in line with the plans made. At the end of 2005, the bank had 48,700 customers (more than 26,000). Tapiola Bank s deposit base totalled EUR million (EUR million), and the bank s public credit balance totalled EUR million (EUR million). For the accounting period, the bank s interest margin was EUR 2.5 million (EUR 1.4 million). Losses for the accounting period totalled EUR 8.5 million (losses of EUR 10.8 million). Solvency ratio was 11.1 per cent (26.9%); the minimum requirement is 8 per cent. Tapiola Bank Ltd purchased 70 per cent of the shares of Tapiola Fund Management Company Ltd on 3 January The financing balance for the Bank Group for the accounting period was EUR 2.6 million. Losses for the accounting period totalled EUR 8.0 million. Solvency ratio for the Bank Group was 11.5 per cent. In 2006, the solvency of the bank will be strengthened by an increase of equity capital. The equity issue will be realised in March and directed to the current shareholders of the bank. Including the premium fund, the issue will amount to EUR 10 million. Secondary equity will be acquired, in line with the solvency strategy, later on in the year. This equity will also amount to EUR 10 million. The result for 2006 is still expected to show losses due to investments made in growth. MOST SIGNIFICANT RISKS AND UNCERTAINTIES The major risks connected with Tapiola General s technical provisions are connected with pricing of insurance products and types, inflation, changes in interest rate, changes in mortality rate, occupational diseases and reinsurance covers. Investment risks include market risks, liquidity risks, credit and counter party risks as well as operational risks. Business processes involve operational risks referring to the risk of losses caused by insufficient or failed internal processes, personnel, systems and external factors. Legal risks are included in operational risks. Tapiola General s general principles of risk management have been described in the notes to the financial statements under Risk management general principles, responsibilities and monitoring.

12 REPORT OF BOARD OF DIRECTORS 2005 TAPIOLA GENERAL MUTUAL INSURANCE COMPANY SOCIAL RESPONSIBILITY Tapiola Group prepares a separate Social Responsibility Report annually. Tapiola s Social Responsibility Report 2004 was published in May The report describes responsible business operations at three levels: economic, social and environmental responsibility. Due to the nature of the insurance business, financial responsibility of an insurance company is very close to social responsibility. Non-life insurance companies play an important role in society by providing employers liability insurance and motor liability insurance. Furthermore, insurance companies offer the opportunity to supplement one s social security by taking out voluntary insurance policies. As for financial responsibility, Tapiola General wishes to be among the most solvent non-life insurance companies in Finland, thus ensuring that investment activities and customer benefits can be planned on a long-term basis. Operations principles for the Group s financial service companies also include cost-efficiency and a stable financial basis. The most important principles in investment operations are solidity and productivity of investments. When making investment decisions, Tapiola General strives to avoid investments that would contradict the company s values. Social responsibility is thought to include Tapiola General s responsibility for people and communities as well as the company s operations in co-operative networks. The cornerstones of Tapiola's personnel policy are stability and responsibility. The company s management and representatives of the personnel work in close cooperation to develop the company s operations in order to find ways of creating new jobs while increasing efficiency. Tapiola Group has renewed cooperation with Red Cross Finland at the beginning of Tapiola became the primary cooperation partner for Red Cross Finland for as the only company in its sector. Tapiola Group s named project is Friendship Operations of Red Cross Finland. Tapiola Group s environmental activities are coordinated by an environmental team, whose management is part of Tapiola corporate security programme. All regional offices have been appointed a person in charge of environmental issues. The insurance and financial business does not have any major adverse impacts on the environment. However, by using risk management and insurance services, Tapiola General can assist the customer companies in promoting their environmental objectives. Tapiola General is also a notable party in real estate ownership and building contracting. It is possible to indirectly benefit the environment through investment operations. A good environmental programme delivers savings and creates a stable basis for future operations. Tapiola Group s head office operations were granted a Green Office diploma in Developed by WWF Finland to reduce the ecological footprint of corporations, Green Office is an environmental management system suitable for offices. The Green Office system benefits both the environment and the company. By reducing the load posed by their operations to the environment, offices can achieve savings in material, waste management and energy costs. At the same time, organisations can actually save forests and reduce their carbon dioxide emissions. CORPORATE GOVERNANCE The corporate governance model of Tapiola Group is based on customer-owners. All policyholders and guarantee share owners are shareholders of Tapiola. All guarantee shares are owned by the mutual companies of the Group.

13 REPORT OF BOARD OF DIRECTORS 2005 TAPIOLA GENERAL MUTUAL INSURANCE COMPANY Policyholders can exercise their right of decision in the annual general meeting. In the meeting, members of the insurance company Supervisory Board are elected and decisions are made on reinforcement of the profit and loss account and balance sheet, as well as on release from liability for the members of the governing bodies and the managing director. The annual general meeting of Tapiola General was held on 17 May The meeting approved the financial statements for 2004 and elected new members to the Supervisory Board. The term of a Supervisory Board member is three years. Supervisory Board members Juha Laaksonen, Erkki Lepistö, Pirkko Rantanen-Kervinen and Jari Sarjo, all of whom were in turn to resign, were re-elected. Furthermore, Director Antti Lemmetyinen of the Helsinki Deaconry Institute in Espoo was elected as a new member. The Supervisory Board supervises the company s operations and appoints the members of the board of directors, for example. Tapiola General Supervisory Board consists of 26 members. Tapiola General's Supervisory Board held an organisation meeting on 14 June 2005 and elected among its members the chairman and deputy chairman. Agricultural Councillor Reino Penttilä of Nurmo was appointed as the chairman, and Director Antti Lemmetyinen of Espoo as the deputy chairman. The Supervisory Board held three meetings in 2005, and the average attendance rate of board members was 70 per cent. The salaries and remunerations paid to the supervisory board members, their pension commitments, money loans and their terms, as well as security and financial commitments are specified in section 3 to the notes to the profit and loss account. The Cooperation Committee of the Supervisory Boards comprising the chairmen and deputy chairmen of the Supervisory Boards monitors the operations of the entire Tapiola Group and prepares matters to be handled by the Supervisory Boards. Agricultural Councillor Reino Penttilä, the chairman of Tapiola General Supervisory Board, was appointed as the chairman of the Supervisory Boards Cooperation Committee. Managing Director Marjut Nordström, the chairman of Tapiola Corporate Life Supervisory Board, is the deputy chairman of the Cooperation Committee. The Cooperation Committee held eight meetings in 2005.On average, 84 per cent of the members participated in the meetings. Supervising activities of the Audit Committee established by the Cooperation Committee include monitoring solvency, risk management, and adherence to laws and regulations; monitoring financial reporting; monitoring the work of auditors and their independence; as well as assessing internal auditing, internal supervision and risk management. The Audit Committee held five meetings in On average, 80 per cent of the members participated in the meetings. Duties of the Compensation Committee established by the Cooperation Committee, include preparation of suggestions on remuneration and benefits of the members and deputy members of the insurance companies boards of directors and on matters relating to their employment in general and in individual cases, to be decided by the chairmen and deputy chairmen of the supervisory boards in a meeting of the Cooperation Committee. Additional duties include development of the compensation scheme for the members and deputy members of the insurance companies boards of directors using external benchmarking information, and monitoring development of the compensation scheme for management and personnel of the entire Tapiola Group. The compensation committee did not have any meetings in The matters under its authority were addressed in meetings of the Cooperation Committee. The board of directors is responsible for corporate governance and appropriate organisation of operations. Its duties include verifying strategic plans and operational principles as well as annual operating plans. Tapiola General board of directors comprises four ordinary members and four deputy members. The ordinary board members are full-time members, and they are the same in Tapiola General and the Tapiola life insurance companies. The chairman of the board of directors is Tapiola's President, Asmo Kalpala. The board of directors held 13 meetings in 2005, and the average attendance rate of members was 91 per cent. Along with their board duties, ordinary members are responsible for the Group s services to different customer groups: Private households and corporate customers, major customers and organisations banking, savings and investment customers. The salaries and remunerations paid to the members of the board of directors, their pension commitments, money loans and their terms, as well as security and financial commitments are specified in section 3 of the notes to the profit and loss account. The Managing Director manages the company's affairs in accordance with the instructions and orders issued by the board of directors. Managing Director of Tapiola General is Juha Seppänen and his deputy is the Deputy Managing Director Antti Calonius.

14 REPORT OF BOARD OF DIRECTORS 2005 In 2005, wages and perks of the Managing Director totalled EUR 160, and merit pay EUR 47, The management s merit pay is based, on one hand, on reaching of companyspecific, three-year strategic objectives (maximum 30 per cent) and, on the other hand, on reaching of annual objectives and personal objectives (maximum 20 per cent). Retirement age of the managing director is 63. The agreed compensation for premature termination of the employment relationship is a sum corresponding to a 12 months salary. Tapiola Group also has company and unit-specific executive teams whose purpose is to assist the managing directors and act as the companies negotiation and decision-making bodies. Their duties are determined by the boards as approved rules of procedure. The advisory committees serve as an interactive channel between the customers and the Group, supplementing the administration. Tapiola has 20 regional advisory committees as well as advisory committees for agriculture and forestry, SMEs and Tapiola Bank, for example. Internal auditing assists the top management in controlling, supervising and securing the company s operations by carrying out inspections. It evaluates the performance level of operations, efficiency, sufficiency of internal control and supervision, appropriateness of risk management, as well as compliance with legislation, official regulations and internal instructions. Internal auditing is managed by the Group s President. The annual general meeting appoints the auditors and deputy auditors who audit the company s accounts, financial statements and administration. For the financial year 2005, the annual general meeting elected PricewaterhouseCoopers Ltd, a company of Authorised Public Accountants, and Authorised Public Accountant Pekka Nikula as the company s regular auditors. The auditor with the main responsibility for Tapiola Group is Authorised Public Accountant Matti Nykänen, appointed by PricewaterhouseCoopers Ltd. Authorised Public Accountant Mirja Tonteri will continue as deputy auditor, and Authorised Public Accountant Hannu Pellinen was appointed as a new deputy auditor. In accordance with the Insurance Companies Act, PricewaterhouseCoopers Ltd was appointed as supervisory auditor and Authorised Public Accountant Pekka Nikula as deputy supervisory auditor. In 2005, these remunerations totalled EUR ,24 (EUR 313,957.63). Tapiola General is a non-life insurance company subject to public supervision by the Insurance Supervisory Authority (ISA). ISA ensures that insurance companies comply with legislation and sound insurance practices and apply appropriate methods in their operations. ISA monitors and assesses financial position, appropriateness of management, supervision, and risk management systems, operating prerequisites, and changes in operating environment of the supervised companies. Tapiola Bank Ltd, a subsidiary of Tapiola General, is a credit institution subject to public supervision, supervised by the Finnish Financial Supervision Authority (FIN-FSA) operating under the Bank of Finland. FIN-FSA monitors and assesses financial position, risks, risk carrying capacity, risk management systems of the supervised companies. FIN-FSA stresses the responsibility of owners and management in internal supervision and risk management of the supervised companies. Supervision aims at securing that the supervised companies have adequate financial and other prerequisites for practicing their operations and that when making decisions, the companies use proper operations methods. FUTURE PROSPECTS Performance of operations and loss ratio have developed as planned. However, the loss ratio is still too high for some insurance types. The objective is to affect loss ratio development by improving choice of customers and by using risk management measures. In 2006, the major risks are connected to economic development of the United States, the US dollar and price of oil. Should the US economy slow down more dramatically than is expected, the repercussions would be felt in financial and commodity markets all over the world.

15 NOTES TO FINANCIAL STATEMENT- PRINCIPLES FOR COMPILATION OF FINANCIAL STATEMENT During the ongoing financial year, the risk of emergence and spread of a pandemic has increased considerably. For Tapiola General, this may lead to risks connected with investment returns, increased claims incurred and ability to secure the most important services in case of wide-spread illness and sick leaves among the personnel. Risks connected with investment operations are the most notable ones of the risks mentioned, claims incurred are not expected to increase notably and risk of wide-spread illness among personnel is estimated to be low. Compared with previous years, expectations for an increase of investment property prices in 2006 are more modest, as lowering of required return slows down in Europe.

16 NOTES TO FINANCIAL STATEMENT- PRINCIPLES FOR COMPILATION OF FINANCIAL STATEMENT The accounts of Tapiola General Mutual Insurance Company have been prepared in accordance with the Accountancy Act, the Companies Act, and the Insurance Companies Act, as well as complying with the decisions, regulations, and instructions of the Insurance Supervisory Authority. Valuation and depreciation of tangible and intangible assets Other long-term expenditure Other long-term expenditure includes capitalised costs of material improvements in apartments and design costs of IT systems. These are stated in the balance sheet at cost less planned depreciation. Valuation and allocation of investments Real estates and shares in real estates, shares and holdings Buildings and other constructions are stated in the balance sheet at cost less planned depreciation or at current value, whichever is lower. Shares in real estates as well as shares and holdings are stated at the lower of cost and current value. Revaluations may have been made on the values of real estates and shares in real estates if the values have been permanently significantly higher than the historical cost at the end of the financial year. The counter-item of the revaluation of real estate or shares in real estate classified as investments has been entered as income since 1978, and earlier revaluations have been entered in the revaluation reserve in non-distributable capital and reserves. The counter-item of an investment classified as fixed assets has been entered in the revaluation reserve of non-distributable capital and reserves. Previous value adjustments on investments are entered in the financial statement as value readjustments at most up to the historical cost if the current value rises. Shares and holdings Shares and holdings are stated in the balance sheet at the lower of cost and current value. Acquisition cost is calculated using the average price method. Previous value adjustments on shares and holdings are readjusted insofar as the current value exceeds the book value. Loaned securities are included in the balance sheet. Information on loaned securities is presented in the notes to the balance sheet. Debt instruments Debt instruments include bonds and other money market instruments. Debt instruments are stated at cost in the balance sheet. Acquisition cost is calculated using the average price method. Difference between nominal value and acquisition cost of debt instruments is released or charged to interest income during the term to maturity. The counter-item has been entered as an increase or decrease of the acquisition cost of the debt security. Value adjustments owing to interest rate fluctuations or other reasons have been recorded as have value readjustments, if the current value of a debt security has at a later date exceeded the adjusted acquisition cost, at most up to the original acquisition cost.

17 NOTES TO FINANCIAL STATEMENT- PRINCIPLES FOR COMPILATION OF FINANCIAL STATEMENT Loans receivable, deposits and deposits with ceding undertakings Derivative contracts Loans receivable, deposits and deposits with ceding undertakings are stated in the balance sheet at nominal value or permanently lower estimated probable value. Derivative contracts are mainly used for hedging investment portfolios.in the accounts, however, derivatives are primarily treated as non-hedging, even though they are effective for hedging purposes. Gains and losses incurred during the financial year from closing or expiration of contracts have been entered as income or expenses for the financial year. Application of hedging calculation When using hedging calculation, a decrease in the value of a derivative is not entered to the extent that an increase in the value of the hedged item covers the change. Any loss exceeding the increase in value of the hedged item is entered as an expense. The difference between the current value and the lower book value of a derivative is entered as income from the hedged item up to the amount entered as expense. If no value change is entered in the profit and loss account for the hedged balance sheet item, no valuation income or expense arising from the hedging derivative is recognised. Non-hedging derivatives A negative difference between the current value and higher book value of a non-hedging derivative or a derivative treated as non-hedging is entered as an expense. Unrealised gains are not entered. The potential maximum loss from non-hedging derivative contracts is deducted from the solvency margin. Valuation of receivables Premiums receivable Foreign currency items Depreciation Premiums receivable are stated in the balance sheet at their maximum likely realisable value. Expiration based on experience has been deducted from the nominal value of premiums receivable which gives the likely realisable value. However, receivables that are not likely to be settled are recognised as credit losses. Receivables and liabilities in foreign currencies have been translated into Finnish currency at the rates quoted by the European Central Bank on the day of closing of the accounts. The rate used for other investments is that of the moment of acquisition or of the day of closing of the accounts, whichever is lower. Exchange rate differences have been entered as adjustments on the income and expenses concerned. Exchange rate differences concerning cash in hand and at bank and deposits, as well as items that cannot be entered directly as adjustments to income or expenses, have been recognised as exchange gains or losses from investment activities. Acquisition costs of buildings and their components, equipment, intangible rights, and longterm expenditures have been activated and are entered as expenses under planned depreciation over their expected useful life.