SPP was highly successful in the premium pension selection process per cent of people who made an active choice chose SPP.

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3 KEY EVENTS IN Key events in 2000 SPP was highly successful in the premium pension selection process per cent of people who made an active choice chose SPP. Taken overall, SPP Liv is the third largest life insurance company in Sweden with a market share of 13 per cent measured in value of new business. At year-end 2000 the market value of investments according to the balance sheet was SEK 86.3 bn (82.1). The total return on investments amounted to SEK 2.8 bn (13.2). Premiums written amounted to SEK 10.0 bn (7.5). The increase was mainly due to a large portion of single premiums in conjunction with early retirement and increased sales of unit linked insurance. New business measured in annual premium amounted to SE 6.6 bn (4.4) during the year. The balance on the technical account for life insurance business amounted to SEK 4 m (10,553). The net loss for the year was SEK 497 m (profit 10,043). The expense ratio fell to 9.1 per cent (9.7). SPP Liv s surplus, the collective reserve, amounted to SEK 13.1 bn (14.5) at the end of The collective solvency margin decreased to 119 per cent (123). The average bonus rate during the year, before deduction for operating expenses and yield tax, was 10.9 per cent (7.5). The bonus rate was reduced to 7.0 per cent on 1 February SPP Liv acquired 50 per cent of Nordben Life and Pension Insurance Co Ltd. Nordben offers insurance solutions for people employed abroad in multinational, Nordic corporations. An agreement for the sale of the SPP brand, SPP Livförsäkring AB and SPP Fonder AB was concluded between the parent company Alecta pensionsförsäkring, ömsesidigt and Svenska Handelsbanken AB. The takeover is planned to take place on 7 March 2001.

4 2 PRESIDENT S COMMENTS A successful year The first year of the 21st century was the most successful in SPP Liv s seven-year history. Our premium income rose by more than 30 per cent and SPP came third in the premium pension selection process. The response from individuals and companies to our different approach to pensions feels extremely inspiring, and we are well placed for continued development as the pension partner of choice for the workplace. This is also the main reason for Handelsbanken s acquisition of SPP Liv and together we will attain a very strong position. It is appropriate to devote the first lines of these comments to something that really made an impression during the year the premium pension selection process. This placed the SPP brand on the map as a realistic alternative and this was also the fundamental aim of our participation. A pension choice The important factors in the premium pension selection process were that people were given a new opportunity to influence their financial future, that they really seized this opportunity, and that they saw this as a pension choice rather than simply choosing a fund. I hope that it is individual people who will be the real winners of the premium pension choice and naturally I am also pleased that 10.8 per cent actively chose SPP. This success surprised many people and was well above our own expectations. Our high credibility as a pensions company, mainly among our own customers, was the deciding factor. Strong three years When summing up the past year, I can conclude that SPP Liv is Sweden s third largest life insurance company, measured in terms of total new business, and holds a leading position in occupational pensions and private pension savings. Premium income rose 33 per cent, which means that the increase over the past three years has been 118 per cent. The competence, concentration and devotion showed by our employees have been a strong contributory factor to this success. At the same time, three of the life insurance market s key segments occupational pensions, private pensions and endowment insurance have shown an increase and we believe in continued strong growth over the next three years. Companies and organisations When we formulated our business strategy in 1995, we were convinced that individuals would acquire greater influence over their pensions. Since our brand was so strong out in the workplaces, where direct distribution is cost effective, we chose to be the pension partner for business and organisations. We chose the work- We believe in continued strong growth for place as our marketplace. the market over the next three years.

5 PRESIDENT S COMMENTS 3 In our year-old customer-driven organisation each business area Key Accounts, Companies and Individuals has total business responsibility for its customers. They have access to a broad range of financial protection and savings, including traditional insurance and unit linked insurance, as well as defined contribution and defined benefit solutions. Penetration for our simple and flexible pension plans has been very high. Products in the insurance market are not exactly known for being intelligible. We offer customers just three components: Sickness benefit, survivors pension and pension for themselves. Choose the components, decide on their distribution. Done. Greater distribution power In 2000, premium income topped the SEK 10 bn mark for the first time. Having started as a lively newcomer in the first years we have grown into an obvious benchmark when it comes to occupational pensions. We are entering 2001 with some 18,000 corporate customers and 650,000 insurance contracts. Naturally this powerful growth puts an enormous strain on the organisation. Substantial investment is involved in developing insurance systems, the organisation and the brand. The number of employees rose by 28 per cent last year and will increase by more or less as much this year since we are taking over services previously provided by Alecta pensionsförsäkring. We have one of the most flexible insurance systems in Sweden and we are now focusing on strengthening cost efficiency and our ability to handle large volumes. By combining qualified advisory services at the companies with easily accessible, broad solutions on the Internet, we strengthen our distribution power and build on our basic strategy to be a leading player in the workplace market. Security for the individual We focus determinedly on the expressed needs of our customers. Our customer advisors and key account managers conduct a continuous dialogue with their clients. They are updated on changes to the customer s situation and can keep them informed about how changes relating to pensions can affect both It is important for us employer and to be able to accompany employees. The financial security of the individual our major customers out is constantly in focus. into Europe. Our vision is to be a leading player as the pensions partner for the workplace in a growing European market. It is important for us to be able to accompany our major customers out into Europe. The two life insurance companies based outside Sweden, Nordben and Euroben, are key tools here. Nordben takes care of Swedes working abroad while Euroben works with Swedish companies local employees abroad. New owner During a year when all the important things went well, we have known that we are to have a new owner. It therefore feels good to be able to act as spokesman for all my colleagues at SPP Liv who are looking forward to the inspiration and security that comes from having a new owner which is professional, financially strong and has a similar customer approach. In addition, we are acquiring competence and products which provide an excellent complement to our own range. Anders Östryd President

6 4 ORGANISATION This is SPP Liv SPP Liv offers financial security solutions with a main focus on the segment of the occupational pension market that is exposed to competition. In addition, SPP Liv offers private complements in the form of sickness, life and pension insurance to employees and members of organisations. SPP Liv conducts insurance business within traditional life insurance and unit linked insurance as well as complementary advisory and consulting services. The company also markets funds and management services. In 1999, the Board of the SPP Group decided to hive off the operations exposed to competition and that the parent company should concentrate on the ITP insurance based on a collective agreement between SAF and PTK. The parent company Försäkringsbolaget SPP, ömsesidigt and Svenska Handelsbanken (publ.) agreed in December 2000 that the bank would acquire the SPP brand, SPP Livförsäkring AB and SPP Fonder AB. An application to purchase was submitted to the Competition Authority and the Swedish Financial Supervisory Authority. On 1 February 2001, the parent company changed its name to Alecta pensionsförsäkring, ömsesidigt. Later in February, the authorities announced that they had no objections to the acquisition. The takeover is planned for 7 March SPP Liv will be a wholly owned subsidiary of Svenska Handelsbanken AB. The main focus of operations is unchanged. At the end of the financial year, the company had 599 (468) employees and was represented in 14 locations in Sweden. The head office is located in Stockholm. On 1 January 2000, SPP Liv acquired the shareholding in Nordben Life and Pension Insurance Co Ltd which was previously owned by Alecta. This holding comprises 50 per cent of the shares in Nordben which is domiciled in Guernsey. Other owners are the Norwegian company Storebrand ASA (25 per cent) and the Finnish companies Försäkringsbolaget Sampo Liv (15 per cent) and Ömsesidiga Pensionsförsäkringsbolaget Varma-Sampo (10 per cent). Nordben s mission is to offer insurance solutions for people employed abroad in multinational, Nordic corporations. SPP Liv also includes Euroben Life and Pension

7 ORGANISATION 5 Ltd which insures Nordic companies local employees outside Sweden. Euroben is owned jointly with Storebrand ASA of Norway and is domiciled in Ireland with branch offices in Sweden and Norway. SPP Liv s business strategy is based on customer segments and the organisation has three business areas: Key Accounts (major employers), Companies and Individuals. The business areas are responsible for the entire customer process from business development to customer care. The business area for individuals has been set up because a growing number of people can now make their own choice within occupational pensions as well. The business areas have separate profit responsibility. They receive support from central staffs and three business support units with responsibility for IT infrastructure and the Internet, product and information systems development, systems management and data production. The subsidiary SPP Konsult s business specialists contribute qualified advice, mainly in connection with pension solutions for large companies. SPP LIV PENSIONSTJÄNST AB SPP KONSULT AB KEY ACCOUNTS STAFFS COMPANIES SPP LIVFÖRSÄKRING AB SPP LIV FONDFÖRSÄKRING AB SPP KUNDCENTER AB NORDBEN 50% EUROBEN 50% PRESIDENT INDIVIDUALS FINANCE IS/IT DEVELOPMENT PROCESS/PRODUCT DEVELOPMENT PRODUCTION SUPPORT

8 6 STRATEGIES The pensions partner for the workplace It is natural to discuss occupational pensions at work and that is why the workplace is SPP Liv s marketplace. It is through the workplace that we reach the individuals we are really there for. SPP Liv is endeavouring to strengthen its position in the workplace and the company-paid part of the occupational pension market. SPP Liv offers financial security solutions with occupational pensions and other insurance as well as insurance advice and administration. The financial security of the individual forms the basis of all development, service and investment management at SPP Liv. Solutions are designed entirely according to the wishes of the individual and without the complications that normally characterise pensions and insurance linked savings. Three business areas Operations are divided into three business areas depending on the customer s situation: Key Accounts, Companies and Individuals. The intention is to make it easier for employers to recruit and retain valued employees and handle their pension and financial security solutions for their employees. The associations in the salaried employee sector, which are key stakeholders, will be able to offer their members clear added value through co-operation with SPP Liv. The individuals market, the sector of the market where the individual makes a choice, even if the employer pays, is growing and of strategic significance. Furthermore, more than one million employees will receive via their workplace an offer from SPP Liv involving complementary private savings in For the individual the terms are particularly advantageous due to lower costs, and for SPP Liv the distribution costs are lower than via traditional marketing. This has proved to be a highly effective method which provides a high proportion of final deals. European vision Swedish companies are international and need a pension partner throughout their geographical operating area. This is reflected in SPP Liv s vision to be a leading player as the pension partner for the workplace in a growing European market. Large Swedish companies already have access to a broad range of products and services from SPP Liv for their employees abroad and the extension of branches, partnerships and offices in London and elsewhere will provide even greater opportunities. The company also owns 50 per cent of the life insurance companies Nordben and Euroben. Strategy without borders Despite the basic international vision, SPP Liv s strategy remains the same today as when the company started. The simple concept meets fundamental needs and lines of development which look the same throughout Europe as they do in Sweden. People in gainful employment want to give themselves and their families extra financial security during employment followed by freedom, preferably with a touch of luxury. Financial security solutions should be individually designed and at the same time easy to understand. The situation of large companies is similar regardless of whether the head office is in London, Frankfurt or Brussels. They need to attract competent people and demand a continuous dialogue with and clear information from a competent pensions partner. They all value security and credibility. This makes the business easy to export and apply in foreign markets. Multi-year development work Strategic development work is part of a multiyear plan where the main items in 2001, as in previous years, will be to build further on SPP s PensionsPlan, to set up electronic market and communication sites, to increase distribution power and to strengthen the brand. A new company customer centre and a new individual customer centre will be set up in Co-operation with brokers and franchise-holders will be intensified. Investments in IT will continue to be extensive and development work will include a portal platform for the Internet. A growing number of companies and employees are taking advantage of

9 STRATEGIES 7 the opportunity to obtain an overview of their cover on SPP Liv s website. The Internet is also an important distribution channel for some products for the individual market. SPP s PensionsPlan It must be simpler with SPP Liv, for both the company and the individual. Simplicity is very much characteristic of SPP s PensionsPlan which was developed in recent years and now accounts for about 40 per cent of premium income. The plan consists of three parts: Sickness Benefit, Survivors Pension and Your Pension. The choice is simple. First decide which components should be included and then how large each part should be. A plan can include everything from one person to large groups of employees. Unlike many other life insurance companies, SPP Liv offers both defined contribution and defined benefit solutions. As a complement to insurance products, SPP Liv offers consulting and advisory services profit sharing systems, foundations, pension liability calculations and forecasts, individual advice, redundancy solutions and advice on tax and legal matters qualified administration and service for both large and small pension solutions for companies with or without operations outside Sweden investment management different forms of risk management. Among other things, SPP Liv is a member of two international networks, Insurope and IGP. COMPANY DECIDES INDIVIDUAL DECIDES ORG. COMPANY PAYS MUNICIPALITIES KEY ACCOUNTS COMPANIES INDIVIDUAL PAYS INDIVIDUALS Operations in the occupational pension market are dominated by company-paid financial security solutions. To a growing extent it is the individual who chooses the pension company. SPP Liv is also making every effort to develop its services and increase market shares in the sector of the market where the individual both pays and decides. The organisation is customer-driven and divided into three business areas based on target groups. Key Accounts takes care of the really big corporate customers. Companies works with medium-sized and slightly smaller companies, while Individuals has direct contact with individual insured via companies or organisations. Each offer is simple and gives the insured almost unlimited flexibility to decide the distribution between security through savings and security through limited risk. The choice is between sickness benefit, survivors pension and your pension. Subject to the employer s approval, the insured chooses both which components should be included in the solution and how the premium should be allocated.

10 8 MARKET The life insurance market The Swedish life insurance market can be divided into two levels depending on who decides and who pays. The diagrams show what is included in the various sub-markets and trends. Parts of the occupational pension market today are protected against competition because suppliers have received exclusivity agreements. This proportion is steadily decreasing in favour of occupational pension solutions exposed to competition, which is SPP Liv s main market. In conjunction with deregulation, the right to decide is being transferred increasingly to the individual. Substantial growth is expected within the market segment where the company pays the premiums but the individual can choose the insurance provider. In the occupational pension market there are solutions where the employer makes the decisions, and solutions where the individual, the employee, makes the decisions. The first-mentioned category includes early retirement pensions, some collectively agreed plans and voluntary occupational pensions. The latter category includes alternative ITP, ITPK, SAF-LO occupational pensions, individual choice for employees in municipalities and county councils (PFA98 pension agreement) and premium pension. Company decides Individual decides Company pays Individual pays Company decides Protected occupational pension Steady decrease Competitive occupational pension Steady increase Individual pays Voluntary group insurance Largely unchanged TRENDS Individual decides Competitive occupational pension Very strong increase Private pension and life insurance Weak increase Company pays Individual pays Protected occupational pension ITP state pension AMF sickness insurance Competitive occupational pension collectively agreed voluntary employer plans early retirement pension pension supplements PFA 98 Voluntary group insurance group sickness group life group accident Competitive occupational pension alternative ITP; ITPK, PFA 98, pension under SAF/LO agreement premium pension pension supplements solutions for high earners Private pension and life insurance life insurance pension insurance endowment insurance sickness insurance

11 MARKET 9 COMPETITIVE LIFE INSURANCE One of the most important factors for determining market development in the life insurance market exposed to competition in which SPP Liv operates, is new business. In the life insurance market new business is measured in the form of a standard value calculation for new insurance, known as value of new business.* New business can be divided into four submarkets: occupational pensions, private pension insurance, endowment insurance and private sickness insurance. The total value of new business in real numbers has risen by almost 30 per cent each year over the last five years. The greatest growth has been for endowment insurance, but the increase in the occupational pension sector was also very strong. More than 70 per cent of total value of new business last year comprised unit linked insurance. Five years ago the proportion was less than 40 per cent. Skandia is the market leader followed by SEB Trygg Liv. Both Skandia and SEB Trygg Liv operate in all the sub-markets. SPP Liv is the third largest company, even though the company s new business almost solely comprises occupational pensions and private pension insurance. Handelsbanken s acquisition of SPP Liv will make the bank one of the two leading companies in the life insurance market. COMPETITIVE OCCUPATIONAL PENSION INSURANCE The value of new business in the occupational pension market has accelerated over the last two years with an increase of 55 per cent in The proportion of unit linked insurance was over 50 per cent. Skandia was the leader last year with a share of 35 per cent followed by SPP Liv with 25 per cent. It is gratifying that SPP Liv s market share has risen by 3 percentage points since The market situation within each sub-sector is described below. Unfortunately other measures must be used for these instead of value of new business, and this involves using different measures for the portfolio as a whole. Early retirement pensions Due to its long experience and considerable competence, SPP Liv has a very strong position in the market for early retirement pensions. New insurance business in this area over the last five years is estimated at an average of almost SEK 2 bn per year and SPP Liv is estimated to have captured approximately 80 per cent of this market. COMPETITIVE LIFE INSURANCE Inflation adjusted value of new business SEK bn Private sickness insurance Endowment insurance Private pension Occupational pension *Calculation of market shares (value of new business): The Swedish Insurance Federation reports market shares within Swedish life insurance exposed to competition. Shares are measured by combining single premiums and premiums that are current, i.e. monthly or annual premiums. The value of new business equals single premiums plus ten times the annual total of current premiums Source: Swedish Insurance Federation COMPETITIVE LIFE INSURANCE Market shares of value of new business 2000 (1999) SEB Trygg Liv 15 (16)% LF-Wasa 9 (9)% Alecta 3 (3)% Skandia 29 (27)% Source: Swedish Insurance Federation SPP Liv 13 (11)% FöreningsSparbanken 10 (13)% Handelsbanken 8 (9)% Merita-NB 4 (4)% Others 9 (9)% COMPETITIVE OCCUPATIONAL PENSION Market shares of value of new business 2000 (1999) Alecta 5.7 (7.0)% LF-Wasa 9.4 (10.9)% SEB Trygg 13.1 (13.3)% Skandia 34.5 (37.6)% Source: Swedish Insurance Federation SPP Liv 25.0 (23.6)% Others 6.2 (5.3)% AMF Pension 3.8 (0.7)% SHB 2.3 (1.5)%

12 10 MARKET Competitive collectively agreed plans SPP Liv also has a strong position in this sector where the collective agreement specifies the benefits but the company can choose the supplier. New insurance business is expected to increase substantially over the next few years as a result of the new pension agreement for municipalities and county councils, PFA98, where SPP Liv intends to be a significant player. Voluntary occupational pensions Voluntary occupational pensions have seen strong growth in recent years. Many small and medium sized companies which do not have collectively agreed occupational pensions are taking out voluntary occupational pensions for their employees. In 2000, SPP Liv strengthened its distribution to this customer group by developing a successful franchise concept. SPP Liv expects to achieve a strong position in this sector as well. Alternative ITP Good real salary increases for certain groups of salaried employees in recent years have led to a strong increase in new business for alternative ITP, even though most employees who belong to this market have not yet made a choice. Many have not made a choice because many employers have not yet permitted alternative choices. Out of those who have made a choice so far roughly 50 per cent chose SPP Liv. ITPK The market increased more in 2000 than it has in recent years, mainly because employees at savings institutes have been included in this market with effect from last year. At year-end 2000 this market included 660,000 individuals. SPP Liv is the market leader with 27 per cent of the number of insured. The closest rival is SEB Trygg Liv with 18 per cent. PFA 98 individual choice Approximately one million employees in municipalities and county councils have now made a choice, similar to ITPK and SAF-LO labour market pension, for a premium which corresponds to between three and four per cent of salary. Half of the wage-earners made a choice and SPP Liv received a market share of 7 per cent, thus achieving the goal of 40,000 new customers. Premium pension The first selection of funds in the premium pension system took place in autumn million savers with a total premium for of SEK 56 bn were included. SPP came third in this selection process with a 7.4 per cent share of total invested premium. The market leader was FöreningsSparbanken with a 14.0 per cent share. More than SEK 15 bn will be invested every year in the future. PRIVATELY PAID LIFE INSURANCE The privately paid market can be divided into pension insurance, endowment insurance and sickness insurance. Private pension insurance Private pension insurance is a significantly smaller market than occupational pension insurance. The value of new business has risen by an annual average of 10 per cent over the last five years. One reason for the low rate of increase compared with occupational pensions is the direct competition with Individual Pension Savings (IPS) with banks. PRIVATE PENSION INSURANCE Shares of value of new business 2000 (1999) Others 4 (7)% SHB 12 (9)% SPP Liv 17 (17)% SAF-LO labour market pension This market became open to competition in SPP Liv has only focused on this market to a limited extent and therefore only has a market share of approximately one per cent. Merita-NB 3 (4)% LF-Wasa 12 (13)% SEB Trygg 11 (12)% Folksam 10 (14)% Skandia 30 (23)%

13 Most new business now goes to unit linked insurance which last year accounted for more than 70 per cent of the value of new business. SPP Liv s market share has increased substantially since 1996, from 2 per cent to 17 per cent in This makes SPP Liv the second largest company after Skandia, which had 30 per cent of new business. Endowment insurance This market is about the same size as the occupational pension market in terms of new business. Skandia is the market leader with 24 per cent. Handelsbanken s market share amounted to 14 per cent. SPP Liv has so far had a significant share of this market. Private sickness insurance This market is very small compared with the others. The value of new business has hardly varied at all over the last five years. SPP Liv has not operated in this market. CUSTOMERS At year-end 2000, the number of premium-paying companies amounted to 17,500 (15,800) and the number of insurance contracts totalled 649,400 (549,900). The number of unit-linked insurance contracts was 166,300 (104,700). Number, 31 December Insured in active employment 480, ,300 Paid-up policyholders 94,000 81,300 Retirement pensioners 65,100 57,900 Sickness cases 3,000 2,600 Survivors receiving benefits 6,600 5,800 Total 649, ,900

14 12 THE GOOD ELLIPSE Good leadership and dedication Good leadership can make employees feel involved and systems can be used to create satisfied customers which leads to strong loyalty to the brand and good profitability. That is the basis for the development of SPP Liv which is a knowledge company where the key assets are the employees, their competence and the large computer systems. These must interact well towards the customers if the company is to continue to be successful. Competence a pivotal requirement Customers regard competence as being the key factor in their choice of insurance company. It is also here that the company is given the highest marks by companies personnel departments. This requirement also includes the ability to explain complicated pension solutions. SPP Liv has therefore invested considerable resources in developing the role of managers and communicators both internally and in their sales and advisory activities. A manager at SPP Liv must be objective-oriented, dedicated and communicative. The fast growth and complicated processes of change that confront SPP Liv make extra demands on managers. The SPP brand holds a very strong position among the company s customers and in particular among those responsible for pensions at the large companies. Among individuals, the strongest position is among well-educated, middle-aged employees with high salaries. SPP s image has strengthened significantly among individual customers in recent years. SPP is perceived as a secure and reliable supplier. In 2000, SPP was the fourth best known brand among the public with the second highest positive attitude among Swedish life insurance companies. Among high-earners, SPP is ranked among the three most trusted players in the financial sector. One decisive factor for success is loyal customers. Customers must be more than satisfied if they are to remain loyal to a company. Loyalty among SPP Liv s customers is high. Customer care will be strengthened in the company s new customer-responsive organisation. Customer loyalty among ITPK insured was 93 per cent which is higher than similar statistics among rival companies. Satisfied customers Strong brand More customers Loyal customers Extra sales Higher premium income Larger managed assets Lower operating expenses Profitable growth Dedicated employees Good leadership Managers ability to achieve results, enthuse and communicate visions, goals, strategies and customers requirements is of decisive importance for the company s success. Major resources are therefore allocated to leadership development. SPP Liv s management index amounted to 51 in 200 which is comparable to other employers with salaried employees in the private sector. Effective processes and tools are essential if employees are to be able to meet customers needs. The new insurance system provides faster solutions to customer requirements and simpler administration because increasing levels of competence are stored in the system. Dedicated employees with the knowledge and ability to understand the customers situation and supply clear and intelligible solutions are crucial for customer satisfaction. Employee turnover is very low. SPP Liv s human capital index amounted to 647 in 2000 which is higher than other employers with salaried employees in the private sector. 65 per cent of employees felt strong dedication.

15 They must be good at motivating themselves and their colleagues and be able to communicate the overall picture and place the work of their colleagues in a larger context. Training in communicative leadership Our goal is to facilitate managers communication with employees. This was supported by the following activities in 2000: Management Forum All the company s managers and leaders meet 2 3 times/year in order to create a common approach and increase dialogue between managers. Training in the processes of change Managers were given special training so that they feel well prepared and can handle communication with employees in the event of major changes, such as a new owner. Career planning In 2000, SPP Liv also carried out a programme designed to create better opportunities for employees, together with their manager, to take responsibility for their own competence development. SPP Liv s employees must know what goals and results are to be achieved and how to reach them. The success of the company depends on every employee being: Objective-oriented accepting responsibility for their work and for agreed goals. Dedicated interested in learning new things and in developing. Communicative co-operating and actively seeking information. Business school In order to ensure recruitment of new competence to our market organisation, a sales school has been created within our business school.

16 14 UNIT LINKED INSURANCE Unit Linked Insurance There is a change in the market for savings in pension insurance both for private and occupational pensions. Out of all new business in premiums today, 70 per cent is unit linked insurance. Through its subsidiary SPP Liv Fondförsäkring, SPP Liv offers pension savings in funds in combination with insurance. SPP Liv s customers can also save in mutual funds without an insurance component. SPP Liv markets all funds at SPP Fonder which manages funds within three categories: equity funds, fixed-income funds and mixed funds. The funds have different profiles with regard to risk and return potential. Returns and risks in savings Savings in funds is a way of spreading risks with all the advantages that this provides and the choice of fund profile decides the level of risk that the person saving wishes to accept. Exactly how great the risk diversification will be depends, among other things, on the fund objective. Regular savings also limit risk due to more units at a lower price (given the same regular savings amount). SPP Fonder s activities Fund management is conducted by SPP Fonder and most fund categories performed mainly on a par with their benchmarks. The fixed-income instruments provided a positive return while funds with a large proportion of equities performed less well due to the weak trend on the stock market. SPP Fonder s objective is to create a high return for the company s customers in relation to the level of risk in each fund combined with cost effective management. In the financial year, SPP Fonder participated successfully in the premium pension selection process which together with other efforts made 2000 SPP Fonder s most successful year so far. SPP Fonder became the third largest manager of premium pension assets and has been entrusted to manage more than SEK 4 bn of these assets on behalf of 400,000 Swedes. SPP Fonder made a substantial reduction to its management charges on 1 April In September, SPP Fonder launched a new website which has been much appreciated by customers and the trade press. In the future this can be the most efficient and used trading venue for the company s products. At year-end SPP Fonder s managed SEK 9,181 m (3,327), an increase of more than 250 per cent. SEK 6,230 m (1,465) was new savings. The number of customers amounted to 168,000, of whom 146,000 make regular savings in unit linked insurance. The Swedish unit linked market had assets under management of approximately SEK 898 bn (855) at year-end. FUND ASSETS IN SPP FONDER SEK m 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,

17 UNIT LINKED INSURANCE 15 RANGE OF FUNDS ALL TYPES OF FUNDS SPP Generation Funds Simplicity SPP Fonder has developed Generation Funds for people who want their savings to automatically change character as they grow older and/or approach the time when they will be taking out the money. SPP was first in the Swedish market with Generation Funds and today many suppliers have followed SPP s lead and developed their own funds. The Generation Funds were the big winner in the premium pension selection process. The risk profile and therefore the return potential changes over time and falls gradually as the payment date approaches. The advantage is that the saver does not need to change the risk profile, SPP changes the composition of the fund towards increasingly safe investments. Since September 2000, the Generation Funds have also provided an opportunity to invest in foreign equities. SPP GENERATION FUNDS Risk level Equities Return, % portion, % 2000 Average since start* SPP Generation 1970s Low SPP Generation 1960s I SPP Generation 1950s I SPP Generation 1940s I SPP Generation 1930s Lowest * , except SPP Generation 1970s Stock index funds Limited risk and low charges Index funds aim to follow development in their respective markets so that the risk taken by the saver coincides with choice of market and the inherent risk in that market. Low commission and efficient management combined with the fact that index management does not require analysis of individual companies, keeps down costs. The stock index funds closely track their benchmarks. During the year, SPP Fonder s charges were at a very competitive level in international terms. The range of index funds was extended in 2000 with the Global Etisk and Nasdaq stock index funds. Otherwise, the stock index funds are linked to different geographical markets: Sweden, Europe, the US and Japan. STOCK INDEX FUNDS Return Benchmark %, 2000 % SPP Aktieindexfond Europa FTSE Eurotop 100 SPP Aktieindexfond Sverige OMX SPP Aktieindexfond Japan Topix 100 SPP Aktieindexfond USA S&P 500 SPP Aktieindexfond Nasdaq Nasdaq 100 SPP Aktieindexfond Global Etisk Dow Jones Sustainability* * DJS Group Index World excl. tobacco, alcohol, gambling. Equity and fixed-income funds SPP Aktiefond Sverige invests in shares and equity-related securities with a wide spread across different sectors in Sweden. SPP Obligationsfond invests in liquid Swedish fixed-income securities issued by the government and mortgage institutions. SPP Penningmarknadsfond invests in Swedish fixed-income securities with short maturities issued by the government and mortgage institutions. EMU Aktiefond and EMU Blandfond invest in shares and securities on European stock exchanges with a broad spread of companies and sectors. SPP EQUITY AND Risk level Return, % FIXED-INCOME FUNDS 2000 Average since the start* SPP Aktiefond Sverige I SPP Obligationsfond I SPP Penningmarknadsfond I SPP EMU Aktiefond I SPP EMU Blandfond I * except SPP EMU funds External funds and international management Five external funds are managed by Capital International, Schroder Investment Management and Storebrand. The funds have very different objectives and risk profiles and provide a complement to SPP s own funds. EXTERNAL FUNDS Risk level Return, % 2000 Average since 1 Jan. 1995* Capital International Fund I Capital International Emerging Markets Fund I Schroder US Smaller Companies Fund I Schroder Pacific Equity I Storebrand Global Miljö I * Annually since 1 January 1996 for Storebrand Global Miljö.

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19 INVESTMENT MANAGEMENT 17 MARKETS Macroeconomic factors The global economy became even stronger in 2000 with positive growth and a big increase in world trade. Growth rose in the US as a result of a significant increase in private consumption and a strong rise in investment. In Europe, the economy became stronger and real incomes rose. This led to increased private consumption while exports grew. The Japanese economic remains uncertain. The rate of growth in private consumption is low and the sustainability of the recovery which started in 1999 is uncertain. The growth rate in Sweden remained high within all sections of the economy. Credit and foreign exchange markets Growth and strongly rising crude oil prices led to concern about increased inflation in several quarters. This led to many central banks raising their key lending rates at the beginning of the year, which resulted in rising long-term interest rates in the first quarter. In the rest of the year, however, long-term rates on government bonds fell, as oil prices did not create the anticipated inflationary pressure. Public finances in the US and Europe improved which led to reduced government borrowing requirements. The euro weakened substantially against the US dollar and the Japanese yen despite the central banks efforts to counteract this trend. Stock markets 2000 was dominated by extreme price fluctuations on the world s stock markets. The year began with sharp price rises for companies in technology, media and telecommunications. Then came a substantial correction as investors started to question the expectations on the companies in the new economy. The markets calmed down in the summer and share prices rose slowly driven by companies in the banking and pharmaceutical sectors. September and October, however, brought another fall for shares in companies within computer manufacture and mobile telephony. A slight recovery occurred at the end of the year. The FT/S&P World Index fell by a total of 8.9 per cent in The Stockholm Exchange (AFGX) fell by 12.2 per cent. Foreign equities 19% INVESTMENTS Traditional life insurance Swedish fixed-income 42% Europe 17.3% EQUITY INVESTMENTS Traditional life insurance Japan 6.4% Mortgage institutions 21% FIXED-INCOME INVESTMENTS Traditional life insurance Other foreign issuers 4% Other Swedish issuers 3% Swedish equities 23% Foreign fixed-income 16% USA 20.8% Sweden 55.5% Foreign governments 24% Swedish Government 49% Market value 31 Dec SEK 83,460 m Market value 31 Dec SEK 35,314 m Market value 31 Dec SEK 48,146 m

20 18 RISK MANAGEMENT Effective risk management provides security Insurance operations involve some risk acceptance in exchange for a premium. The insurance component can be large or small and sometimes insurance contains no savings at all but only covers risks. Experience and expertise contribute to the assessment and management of risks in an insurance portfolio. Effective risk management enables the provision of sustainable financial security solutions for customers. For every part of its operations SPP Liv has a well developed system of analysis, valuation and control which limits the risks the company takes day by day and in individual deals. In a life insurance company there are risks both in the insurance business and in investment management. In the insurance business these include insurance risks and administrative risks. Investment management operations are exposed to market risks, currency risks and liquidity risks. Insurance risk SPP Liv manages insurance risks in different ways depending on the type of insurance. Collectiveagreement based pension plans require inclusive support which eliminates selection risks. Other occupational pension insurance is subject to health checks for morbidity and mortality risks. Furthermore, reinsurance is taken out for large individual risks. The company only offers private customers standardised products with a low risk. The price or premium for the insurance is set based on the assessed insurance risk and the stipulated base rate. The premium can be changed during the insurance period which reduces the risk taken by the company. Administrative risk Administrative risks include inadequacies in the organisation, internal control, risk assessment and reporting. In order to limit such risks there are effective routines for internal control, authorisation requirements for different systems and other routines, and tools which contribute to an effective and reliable organisation. Investments in IT systems also help to improve efficiency and quality. Financial risks in unit linked insurance In unit linked insurance savings the policyholder takes all the financial risk involved in the savings. The value development is linked entirely to the fund units market value at the time. There is no guaranteed minimum return in unit linked insurance. Policyholders funds Policyholders funds function as a buffer against variations in the company s insurance risks and return on investment. The reserve contains the funds put aside by the company for use if, for example, the bonus rate has been slightly higher than return for a period. A change in provisions to this reserve should always be seen against the background of the fact that the company s commitments are generally very long term. New Swedish Insurance Business Act and interest rate when calculating liabilities A new Swedish Insurance Business Act came into force on 1 January Important changes include the fact that profit distributions from life insurance companies are now allowed, although the Articles of Association must be changed first. Handelsbanken intends to start a process designed to reconstruct SPP Liv into a profit distributing company. The new Act also facilitates competition and product development and gives policyholders better insight into operations and protection. The older wording in the Insurance Business Act may be applied, however, until yearend On the basis of falling interest rates in recent years and a directive from the EU, in 1999 the Swedish Financial Supervisory Authority reduced the highest interest rate assumption a Swedish insurance company may apply when deciding its life insurance provisions. As a result of this change, SPP Liv reduced the interest rate used for calculation of life insurance provisions from four to three per cent before tax. In 1998, an interest rate reduction was also made following a directive from the Swedish Financial Supervisory Authority. SPP Liv applies interim rules

21 RISK MANAGEMENT 19 with interim bases for the total increased debt and therefore spreads the earnings effect over several years. Interim bases will cease to apply at the beginning of 2002 since the new Insurance Business Act must then be applied. On that date SPP Liv will have about SEK 7.5 bn left to expense. Risks within investment management In order to limit the risks of securities trading this is controlled by legislation, directives from the Swedish Financial Supervisory Authority, and SPP Liv s Board through investment regulations. Diversification between different asset classes spreads risks and investment performance is compared with different benchmarks. Organisationally, responsibility for investment decisions, liquidity management, risk assessment and reporting is placed at different functions which enhances the security of investment management. Effective IT systems allow daily and highly accurate follow up. The IT systems have authorisation checks which provide added security. Market risk Market risk is the risk that the value of the investment portfolio will be negatively affected by changes in interest rates, shares prices or exchange rates. In order to limit market risk, SPP Liv works with a normal portfolio where the allocation between different asset classes is defined. Within each asset class there is a deviation mandate which the portfolio manager must stay within. In addition, there is a defined maximum active risk, known as tracking error, for each class of asset and for the total investment portfolio. The use of derivative instruments such as Swedish interest-rate, stock index and currency futures and currency swaps, reduces the risks from major price fluctuations and makes management more effective. Sensitivity analysis A number of factors affect the Group s operations and assets under management. If only one variable at a time should change, which is never the case in reality, the result would be as described in the table below. SEK m % Equities Fixed-income 2, The table shows how the market value theoretically would be affected by a one percentage point change in the market value of equities and a one percentage point change in the general interest rate level in Sweden, the US, the EMU area and the UK with regard to fixed-income investments. Currency risk Currency risk is controlled by deciding which asset classes should be hedged and the deviation mandate in relation to the currency exposure in the normal portfolio. The total currency exposure for SPP Liv was 17.7 per cent (14.7). CURRENCY EXPOSURE Currency Exposure in SEK m USD 6,929.5 GBP 1,927.9 JPY 2,492.0 EUR 2,683.5 CHF Others Liquidity risk Liquidity risk is the risk of loss if a financial instrument cannot be sold immediately without a substantial price reduction. SPP Liv limits liquidity risks by mainly investing in Swedish and foreign government securities and in equities with good liquidity. Major investments SPP Liv has two investments which exceed five per cent of total assets: FöreningsSparbanken SEK 5,243 m and Ericsson 5,186 m. Administrative risk in investment management Administrative risks include inadequacies in the organisation, internal control, risk assessment and reporting. SPP Liv handles such risks through a strict division of responsibility, effective IT support with suitable authorisation routines, and efficient routines for internal control. This work is managed by a special internal audit unit.

22 20 CLIENT COMPANY FUNDS Collective reserve and client company funds SPP Liv s collective reserve amounted to SEK 13,124 m at year-end This gives a solvency margin of 119 per cent which represents a decrease of four percentage points compared with the previous year. The solvency margin expresses the relationship between the market value of assets and commitments to policyholders. SPP Liv applies two principles for determining surplus and bonus rate depending on the insurance commitment. The present surplus funds policy for collectiveagreement related occupational pension will be reviewed in 2001 when a decision will also be made on whether a new allocation of surplus funds will be made. Over-funding and client company funds In the last years of the 1990s the return on investments was very high and inflation was low. The reserve then rose more than was required to secure insurance commitments and surplus funds were built up. SPP Liv s Board has made a decision in principle to adhere to Alecta pensionsförsäkring, ömsesidigt s collective reserve policy for insurance within collective-agreement related occupational pensions. This means that SEK 2 bn was earmarked from the surplus funds at year-end 1998 for pension improvements to be agreed between SAF and PTK. At the same time, SEK 9 bn was allocated to SPP Liv s corporate customers. More than half of the funds placed at the disposal of the parties were used for measures within the ITP Plan in The use of client company funds has been examined by the Swedish Competition Authority and following extensive deliberations the rules for use and application of client company funds were finally established on 28 April Summary of the rules Briefly, the areas chosen for use of client company funds, once an initial cash payment of 20 per cent has been made, mean that funds can be used for payment of 80 per cent of: current ITP premiums to Alecta pensionsförsäkring or SPP Liv ITPK premiums to Förenade Liv premiums for so-called alternative ITP to a freely chosen insurance company (for high-earners) single premiums for PRI redemption in Alecta pensionsförsäkring premiums to a freely chosen insurance company* for pensions not regulated in the ITP Plan, such as - single premium for early retirement pension - current premiums to complement traditional ITP - single premiums or current premiums for other pension over and above ITP *A decision on this must be made together with representatives for the ITP insured at the company. Following a review by Alecta pensionsförsäkring, client company funds can also be transferred to another ITP-affiliated company. Client company funds in 2000 Cash payments started in September 2000, which meant that each eligible company was paid up to SEK 100,000 from the funds or 20 per cent of the funds, whichever amount was the largest. If the client company funds for an individual company were less than SEK 100,000 the full amount was paid directly. In this way, 3,900 companies in SPP Liv received their entire amount in cash. Starting in November, 80 per cent of invoiced premiums for collective-agreement related occupational pension could be taken from client company funds, unless the employer had specified otherwise. This meant that companies used SEK 134 m for November and December Customer accounts Use to pay premiums, including single premiums, started on 1 December Since the client companies received compensation from Alecta pensionsförsäkring in arrears for these premiums, SPP Liv offered a customer account solution to customers who wished payment of premiums. This meant that the customers did not need to pay the entire amount in advance to SPP Liv but could spread their premium payments over a longer period. For SPP Liv new sales of single premiums for early retirement pension or other pension commitments rose sharply in the final months of the year and amounted to approximately SEK 5 bn, represented by premiums written in both 2000 and 2001.