Interim Results

SAMPO PLC INTERIM REPORT JANUARY - JUNE 2004

 

Strong earnings quarter

 

Sampo Group's second quarter performance was very good. Earnings per share for the first half of the year rose to EUR 0.86 (0.26). Operating profit rose to EUR 547 million (215) while NAV/share was 4.81 (5.14). In April 2004 Sampo paid a dividend of EUR 1.50 per share. Although all business areas fared well, P&C insurance produced an excellent result with the combined ratio improving to 96.2 (103.0).

 

- Earnings per share rose to EUR 0.86 (0.26) and the operating profit to EUR 547 million (215). Net asset value per share was EUR 4.81 (5.14, incl. EUR 1.50 dividend for 2003).

- Operating profit from banking and investment services was EUR 138 million (111). Net income from financial operations weakened to EUR 196 million (207). Costs continued to decrease and fee income showed steady improvement. Lending grew by 10 per cent in a year and non-performing loans decreased.

- If's second quarter operating profit rose to EUR 185 million helped by a favourable claims trend. The combined ratio for the first six months of 2004 improved to 96.2 per cent (103). The second quarter stand-alone combined ratio was 91.7 per cent.

- The life insurance operating profit increased to EUR 127 million (92). The solvency ratio remained high at 19.1 per cent (13.8) and strong growth continued in unit-linked premiums.

- The holding company's operating profit for the review period was EUR 71 million (-11). Operating profit contains a sales gain of EUR 95 million on Skandia shares sold in the first quarter of 2004.

   

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*) Less full deferred tax.

 

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

 

 

 

CEO's Review

 

P&C insurance drives Group earnings

 

When Sampo Group reported its full year 2003 results and at the same time announced the If transaction, my comments on If's earnings potential were regarded as rather optimistic. Many investors thought that the combined ratio target of 97-99 per cent was quite challenging. In the two subsequent quarters, we have witnessed a major change in the Nordic competitive scene with most P&C insurers coming out with targets at least as demanding as If's.

 

 

 

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It is evident that the relatively low investment returns have forced all insurers to shift their focus to the insurance technical side of the profit and loss account. Combined ratios well above 100 per cent are history, the market is more professional and therefore healthier than before.

 

Half a year into the transaction the acquisition of If looks more attractive than ever. The payback period is turning out to be even shorter than we estimated when acquiring the company. After two quarters of 2004 Sampo Group's capital accumulation is clearly ahead of the plan made in connection with the transaction.

 

For the first six months of the year we report earnings per share of 0.86. Even excluding extraordinary gains - sales gains on Skandia shares and tax issues - this is twice as high as the earnings for half-year 2003. If's performance was, of course, spectacular, but other business areas did well, too. In banking we can discern positive trends with slowly rising interest rates, falling costs and our high-quality loan portfolio. Life insurance sustained its profit level although the equity markets were far from favourable in the second quarter of 2004.

 

Focus on costs is unchanged

 

Major cost efficiency measures have been introduced in Sampo Group since late 2001. Many times companies announce ambitious targets and then fail to report the actual developments afterwards. In an earlier interim report I promised that Sampo will report on operating costs and we have done that on a regular basis. We took the cost base down by roughly EUR 150 million in two years time, i.e. by more than a quarter.

 

Two issues have now emerged that render the earlier reporting format obsolete - the changes in Group structure after the If transaction and the accounting treatment of Primasoft, our IT services provider. While the latter change has no implications for the bottom-line and is done purely because of regulatory requirements, it distorts both income and costs figures in a way that makes historical comparisons meaningless.

 

Let me assure you that even if cost accounting has become somewhat more complicated, the focus is unchanged. We will streamline Sampo Group's operations in all business areas and improve cost efficiency continuously. A new reporting format is under development but for practical reasons it will take a while before we can produce historical data for comparisons.

 

 

 

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Free float increased significantly

 

Since the merger of Sampo and Leonia in late 2000 the State of Finland has held over 40 percent of Sampo's shares. The Ministry of Finance clearly expressed its intention to bring down the holding and ultimately sell all its shares. In two separate transactions this year the Ministry sold almost half of its holding to various investors.

 

The investment community has taken an interest in the execution of the State's plans. This was not because the Ministry would have been seen as an unwelcome shareholder, but rather because the expressed intention to sell created an overhang that many investors were wary about. The professional way in which the Ministry reduced its Sampo holding has removed the overhang and significantly increased the free float of Sampo share. I am confident, that once the quiet summer months are over this fact will be reflected in the liquidity and price of the share.

 

Björn Wahlroos

Group CEO and President

 

The second quarter 2004 in brief

 

A profitable quarter

 

Sampo Group's profit for the second quarter of 2004 was significantly higher than in the corresponding period last year. Earnings per share was EUR 0.54 (0.16) and operating profit EUR 295 million (140). Net asset value per share grew by EUR 0.46 excluding the year 2003 dividend paid in April.

 

Group's earnings in the second quarter include two significant one-off items - EUR 115 million reversal of deferred tax liabilities and EUR 25 million VAT refund. The reversal of tax liabilities is based on the change of If's status in the Group and the abandoning of the plans to list it.

 

Operating profit from banking and investment services increased to EUR 81 million (38) during the second quarter. The operating profit includes a EUR 23 million VAT refund. Net income from financial operations remained stable at EUR 99 million (101), with growth in lending compensating for the fall in market rates and tough competition in housing loans. Fees and commissions receivable grew, especially in asset management. Credit losses and non-performing loans decreased.

 

 

 

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If's operating profit for the second quarter improved to EUR  185 million (92), primarily because earnings from insurance operations rose to EUR 126 million (46). Earnings for the second quarter benefited from the low claims outcome and improved selection of risks, which led to lower risk levels in the insurance portfolio. Earnings from asset management decreased marginally to EUR 125 million (126), due to rising interest rates and increased stock-market volatility during the second quarter.

 

Compared with the second quarter last year, the cost ratio and risk ratio declined significantly, due to increased cost-effectiveness and an improved selection of risks. As a result, the combined ratio improved to 91.7 percent (101.0).

 

In life insurance profit before extraordinary items was down by EUR 8 million to EUR 43 million compared with the second quarter of 2003. This is mainly attributable to the exceptionally high equity-linked investment income in the comparison period.

 

The holding company made an operating loss of EUR 7 million in the second quarter (11). The result included a VAT refund of EUR 6 million.

 

Sampo Group

 

Sampo Group's core business areas are banking, long-term savings and P&C insurance. The Group's largest subsidiaries are If P&C Insurance Holding Ltd, Sampo Bank plc, Sampo Credit plc, Sampo Life Insurance Company Ltd, Sampo Fund Management Ltd and Mandatum Asset Management Ltd. Sampo acquired a 89.94 per cent holding in If, the largest P&C insurance company in the Nordic countries in a deal that was closed on 6 May 2004.

 

Sampo Group's earnings per share increased to EUR 0.86 (0.26) and operating profit to EUR 547 million (215). Result includes a reversal of deferred tax liability amounting to EUR 115 million and a VAT refund of EUR 25 million. Net asset value per share increased to EUR 4.81 (5.14). The comparison figure includes the year 2003 dividend of EUR 1.50. Return on Economic Capital (RoEC) was 28.3 per cent or 11.3 percentage points higher than the target of 17 per cent. 

 

 

 

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*) RoEC = Adjusted Net Profit / Adjusted Economic Capital

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

 

 

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

 

Changes in Group structure

 

On 11 February 2004, Sampo plc agreed to acquire the shares held by the Swedish company Skandia and its subsidiary Skandia Liv, and by the Norwegian company Storebrand, in If P&C Insurance Holding Ltd. Following the transaction, Sampo owns 89.94 per cent of If and If became a subsidiary of Sampo on 6 May 2004. Varma Mutual Pension Insurance Company holds 10.06 per cent of If.

 

Sampo financed the transaction by subordinated notes to the amount of EUR 600 million, eligible for inclusion in the tier 2 regulatory capital, senior notes to the amount of EUR 300 million and a short-term syndicated bank loan to the amount of EUR 550 million. The maturity of the subordinated notes is 10 years and Sampo has the right to recall them after 5 years. The new issue spread was 147 basis points above the five-year mid-swap rate. The EUR 300 million in senior notes will be redeemed in full in 2007 and the new issue spread was 3-month Euribor + 57 basis points. These notes have been accepted for public trading on the London Stock Exchange.

 

Sampo plc has sold its shareholdings in AS Sampo Pank in Estonia and UAB Sampo bankas in Lithuania to Sampo Bank, a wholly-owned subsidiary of Sampo plc. The companies became subsidiaries of Sampo Bank on 2 January 2004. In addition, Sampo plc has sold its life insurance subsidiaries in the Baltic countries, AAS Sampo Dziviba, UAB Sampo Gyvybes Draudimas and AS Sampo Elukindlustus, to Sampo Life. The necessary official permits for the share transactions were received in June 2004. The measures strengthen the role of Baltic markets in Sampo Group's strategy.

 

Sampo will merge Sampo Finance Ltd into Sampo Bank and Sampo Credit plc into the holding company to take effect from 30 September 2004.

  

 

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Administration

 

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

 

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

 

Ernst & Young Oy, a firm of authorised public accountants, was elected as the Auditor.

 

Torbjörn Magnusson, CEO of If P&C Insurance Holding Ltd, was appointed to the Executive Committee of Sampo Group after the If transaction was concluded.

 

Changes in share capital

 

The Annual General Meeting of 7 April 2004 granted the Board of Directors authorisations, valid until 7 April 2005, to buy back and convey Sampo's own shares. The maximum amount of A shares that can be bought back is 5 per cent of the company's share capital or of the number of votes attached to all shares. Sampo plc did not buy back any of its own shares in the review period.

 

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

 

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

 

  

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As a result of the 5,419,200 A shares subscribed for with warrants from Sampo's year 1998 option programme and the 5,000 A shares subscribed for with option rights from Sampo's year 2000 option programme, the company's share capital increased to EUR 94,074,935.27. At the end of the review period, the total number of Sampo plc's shares, including the 1,200,000 B shares, was 559,344,165.

 

Staff

 

P&C insurance employees are counted among the Group's staff from the second quarter of 2004. Therefore, the staff increased in a year by 6,325 employees and from the end of 2003 by 6,631 employees to stand at 11,896 employees at the end of June. 35 per cent of the staff worked in banking and investment services, 57 per cent in P&C insurance, 3 per cent in life insurance, 1 per cent in the holding company and 5 per cent in Primasoft. The average number of employees in the review period was 11,951, compared with 5,679 in the corresponding period of 2003.

 

Ratings

 

In relation to the If-transaction, Moody's upgraded If P&C's ratings to A2 (insurance financial strength) and Baa1 (subordinated debt) on 6 May 2004 with a stable rating outlook. Standard & Poor's downgraded Sampo Bank's counterparty credit rating from A/A-1 to A-/A-2 with a negative outlook on 30 April 2004. S&P also lowered the long-term counterparty credit and insurer financial strength ratings of Sweden-based If P&C Insurance Holding Ltd and Finland-based If P&C Insurance Co. Ltd. from A- to BBB+ with a stable outlook.

 

Banking and investment services

 

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

  

 

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- Operating profit rose to EUR 138 million (111). The profit includes EUR 23 million VAT refund.

- Net interest income decreased to EUR 196 million (207) due to falling market interest rates squeezing the interest margin.

- Fees and commissions receivable increased to EUR 124 million (106).

- Operating expenses fell by EUR 21 million to EUR 179 million.

 

 

*) Fees and commissions net

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

 

  

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Favourable performance in costs and fee income

 

Operating profit from banking and investment services was EUR 138 million (111). The operating profit includes 23 million in VAT refund. The operating profit for the comparison period included Sampo Bank's share (EUR 21 million) of Sampo Life's additional dividend, which is eliminated in the result for the whole Group. The return on adjusted economic capital (RoEC) was 19.9 per cent.

 

Net income from financial operations weakened to EUR 196 million (207), due to the interest margin being narrowed by the fall in market rates and tough competition in housing loans. Sampo Bank's interest spread between deposits and lending averaged about 2.35 percentage points in the first half, which was about 0.5 percentage points lower than it had been one year earlier. The spread stabilised during the second quarter, however, compared to the first quarter. During the second quarter net income from financial operations stayed at roughly the same level as in the four previous quarters.

 

Fees and commissions receivable increased to EUR 124 million (106), with the biggest increase recorded in asset management. Fees and commissions receivable from banking operations were also slightly higher than in the comparison period, partly reflecting increased activity in financial markets and change of deposit fee structure implemented during the first quarter. Fees and commissions payable grew slightly to EUR 29 million (24).

 

Dividend income decreased to EUR 7 million (21). The comparison period included the additional dividend paid by Sampo Life. Net income from securities transactions and foreign exchange dealing declined by EUR 5 million and was a small loss. Other operating income increased to EUR 27 million (10) mainly because of the VAT refund.

 

Efficiency improvements lowered administrative expenses by EUR 21 million. The cost to income ratio (including the net amount of fees and commissions receivable and payable) improved to 60.7 per cent (65.5).

  

 

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Households dominate loan growth

 

Sampo Group's loan portfolio grew by 10 per cent in a year, with growth continuing to be focused on loans to households. Housing loan stock increased by 15 per cent year-on-year. Due to the rapid growth of the Estonian and Lithuanian banks, foreign loans accounted for a higher share of the loan portfolio than at the beginning of 2004. The annual growth of loans granted to domestic companies decreased to 10 per cent. Pressure on the spreads of both corporate and housing loans continued in the second quarter.

 

Total deposits remained stable year-on-year, amounting to EUR 8,689 million (8,726). The volume of deposits in savings accounts and foreign currency accounts increased, while time deposits and current accounts decreased.

 

Credit losses and non-performing loans decreased

 

Net provisions for bad and doubtful debts affected operating profit positively by EUR 10 million, because of recoveries exceeding new provisions. At the end of the period, provisions pooled by customer group were EUR 40 million (31). The amount of non-performing loans was EUR 52 million (63) on 30 June 2004, while other non-interest-earning loans totalled EUR 1 million (2).

 

Mutual fund growth strongest in equity and balanced funds

 

Mutual fund assets grew 25 per cent in a year, assisted by new products and favourable stock market performance in the spring. The growth was strongest in equity and balanced funds.

 

Mutual fund assets had increased by the end of June to EUR 6.1 billion (4.9). This figure includes about EUR 1 billion in investments by Sampo Group companies, which now include If P&C. According to the Finnish Association of Mutual Funds Report, Sampo had a 22.3 per cent (23.8) market share in June. Mainly due to the increase in funds and consultative asset management, the total amount of assets under management within Sampo Group increased to EUR 21.2 billion (18.8).

 

  

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Capital adequacy

 

Because its operations are weighted towards financial services, Sampo's capital adequacy is calculated under the Act on Credit Institutions. The Group's capital adequacy ratio was 13.9 per cent (17.3). The tier 1 capital ratio was 12.0 per cent (18.5). The decline in capital adequacy from the end of second quarter in 2003 derives largely from the dividend of EUR 831 million. In comparison to year end 2003, the capital adequacy was affected by the If transaction. The consolidation group comprises Sampo Bank Group, Sampo Credit plc, Sampo PTE, Sampo Fund Management Ltd, Mandatum Asset Management Ltd, Mandatum Private Equity Funds Ltd, Mandatum Stockbrokers Ltd, Mandatum & Co Ltd, 3C Asset Management Ltd and the holding company, Sampo plc.

 

P&C insurance

 

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

 

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

 

- Continued positive earnings trend. Operating profit improved significantly to EUR 264 million (123), of which Sampo Group consolidated EUR 27 million in the first quarter and EUR 185 million in the second quarter.

- The insurance business's sharp earnings improvement to EUR 196 million (63) was due to stringent risk selection and a favorable claims outcome during the period. The combined ratio improved to 96.2 percent (103.0).

 

- The investment return deteriorated slightly to 2.7 percent (2.9), due to higher interest rates and falling equity prices during the second quarter.

 

 

 

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

 

Strong operating result

 

Operating profit continued to improve during the second quarter and amounted to EUR 264 million (123) for the first six months of the year. The earnings for the first half year derived mainly from insurance operations. The claims trend was significantly better than usual, with a low claims frequency and few large claims. Improved risk selection also had a favorable impact on earnings. All business areas improved their earnings significantly compared with the year-earlier period, particularly the Industrial business area.

 

The combined ratio improved considerably during both the second quarter and the first six months of the year, as a result of the implemented premium adjustments and cost savings, combined with the favorable claims outcome.

    

Investment earnings were satisfactory but weakened slightly compared with the first half of 2003, due to higher market interest rates and the lower return on equities resulting from increased uncertainty in stock markets.

 

 

 

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Premiums and claims development

 

Gross premiums written decreased by 4 percent compared with the first half of 2003, mainly as a result of the divestment of the Marine and Energy portfolio and negative exchange-rate effects resulting from the strengthening of the Swedish krona in relation to the Norwegian krone. Excluding exchange-rate effects and the divestment of Marine and Energy operations, gross premiums written rose by approximately 1 percent, since both the Private and the Commercial business areas noted good premium growth.

 

As a result of the favorable claims outcome, the Group's risk ratio improved by 5 percentage points during the first six months of the year. In addition, all of the business areas reported an improved risk ratio. The claims frequency continued to develop favorably, particularly for property claims, thanks to a more stringent selection of risks. There were significantly fewer large claims than usual, which resulted in the cost of large claims being approximately EUR 20 million lower than normal.

 

Nominal costs decreased further

 

Nominal costs for the first half of the year amounted to EUR 460 million (509) and the cost ratio decreased during both the second quarter and the period as a whole. Reduced commission and staffing costs, combined with lower IT costs, mainly as a result of refunded VAT, contributed to the cost reduction.

 

Investment return marginally weaker

 

Earnings from asset management decreased marginally to EUR 224 million (228) and the return on capital amounted to 2.7 percent (2.9) for the first half of 2004. Based on the assets' current value, the return on capital decreased to 2.4 percent (2.8) and earnings from asset management to EUR 197 million (219).

 

The percentage of equities in the portfolio (including derivative instruments) was increased during the first half of the year and amounted to approximately 16 percent at the end of the period. The duration for interest-bearing assets was exclusively kept below the target length of 3.5 years and amounted to 1.9 years on June 30.  Since interest rates rose during the second quarter, the lower duration had a positive impact on earnings.

  

 

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Despite the divestment of Marine and Energy operations, the volume of investment assets rose to EUR 8,526 million from EUR 8,001 million at the beginning of the year, as a result of a positive cash flow from insurance operations.

 

Reserves and solvency situation

 

Gross reserves on June 30 amounted to EUR 8,078 million (7,931). Net reserves, which were affected by the divestment of Marine and Energy operations and a decrease in run-off reserves during the first quarter of the year, decreased to EUR 7,056 million (7,063).

 

The solvency ratio rose to 58.4 percent (51.6) compared with the first half of 2003. Solvency capital increased to EUR 2,214 million (1,974), as a result of an increase in shareholders' equity and a reduction in deferred tax. Shareholders' equity rose to EUR 1,975 million during the first half of the year, as a result of the profit reported for the period.

 

Cash flow from insurance operations during the first six months of the year decreased to EUR 334 million (552), mainly because of reinsurance flows in connection with the Marine and Energy transaction at the beginning of the year. Cash flow from investments declined slightly to EUR 110 million (146).

 

Life insurance

 

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

 

- Operating profit EUR 127 million up by 40 per cent (92)

- Return on assets at current values was 3.3 per cent in the first half of 2004

- Solvency remained high, solvency ratio 19.1 per cent (13.8)

- Strong market position maintained in focal areas 

 

 

 

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*) RoEC = Adjusted Net Profit / Adjusted Economic Capital

 

Operating profit for Sampo Group's life operation rose by almost 40 per cent to EUR 127 million (92) in the review period. Net investment income increased to EUR 237 million (202), due to the exceptionally good investment result in the first quarter. The return on investment assets at current values was 3.3 per cent (4.1). Sampo Life's cost ratio (incl. kickbacks from mutual funds) declined to 99 per cent (102).

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The market value of investment assets (excl. unit-linked insurance investments) amounted to EUR 5.5 billion (5.4) on 30 June 2004. Assets were allocated between fixed income instruments, 58 per cent (61), equity-linked instruments, 37 per cent (32), and real estate, 6 per cent (6). Due to regulatory reporting requirements the proportion of equity-linked investments includes 6 percentage points of investments in fixed-income funds (6).

 

At the end of the review period Finnish investments accounted for 40 per cent (46) of all investments, the rest of the euro zone for 28 per cent (29) and other foreign investments for 32 per cent (26). Of the equity-linked investments 56 per cent were in Finland, 2 per cent elsewhere in the euro zone and 42 per cent outside the euro zone.

 

The solvency position of the Group's life insurance companies remained strong. At the end of the review period solvency capital amounted to 19.1 per cent of the technical provisions on own account (13.8). Sampo Life's solvency margin of EUR 914 million (652) is appr. 4 times the minimum regulatory requirement.

 

Sampo Life's accounting practice with respect to the principle of fairness attributes 25 per cent, i.e. EUR 85 million of the valuation differences to shareholders (61). Total amount of valuation differences was EUR 338 million (243).

 

The focus of new life sales is on unit-linked insurance and regular premium policies acquired mainly by retail customers. The Group maintained its strong market position in these segments with unit-linked premiums growing by 80 per cent to EUR 137 million (76) and regular premiums by 14 per cent to EUR 131 million (115). Unit-linked share of total direct premiums rose to 59 per cent (35), while regular premiums accounted for 57 per cent (53) of total premium income.

 

The premiums written by the Group's life insurance companies increased in the review period to EUR 236 million (220). The strong growth in premiums written by the Baltic subsidiaries continued with premiums written (incl. Poland) amounting to EUR 8 million. The new sales of the Polish life insurance company, Sampo T.U. Zycie, were discontinued because of difficult market conditions.

 

Sampo Life's total market share was 16.1 per cent (15.4). In unit-linked insurance the company's market share was 25.4 per cent (26.7).

 

 

 

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The tax rules for individual pension insurance were adopted by the Parliament in June 2004. The new rules provide a good basis for new pension policyholders and a five-year transition period for the existing policyholders.

 

 

Holding company

 

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

 

- Operating profit rose to EUR 71 million (-11) due to the sale of Skandia shares in the first quarter of 2004.

-         The If transaction and its financing increased the holding company's balance sheet.

 

 

The holding company's operating profit for the review period was EUR 71 million (-11). Operating profit contains a sales gain of EUR 95 million on Skandia shares sold in the first quarter of 2004 and a VAT refund of EUR 6 million in the second quarter. The goodwill created in the If transaction was EUR 0.5 billion and the holding company result includes goodwill depreciation of EUR 7 million.

 

Sampo plc's balance sheet total was EUR 3.9 billion. Of this amount, holdings in banking and investment services companies accounted for EUR 1.5 billion and holdings in insurance companies for EUR 2.1 billion. Other investments totalled EUR 0.1 billion.

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The If transaction is reflected in Sampo plc's balance sheet. Liabilities include the three elements used to finance the transaction - subordinated notes to the amount of EUR 600 million, eligible for inclusion in the tier 2 regulatory capital, senior notes to the amount of EUR 300 million and syndicated bank loan of EUR 550 million. The syndicated loan will be paid in its entirety after the third quarter 2004. 

 

At current market rates, the holding company is liable for interest payments on the above instruments of approx. EUR 9 million per quarter once the syndicated bank loan has been paid off.

 

At the end of the review period, the holding company had 80 full-time employees (87).

 

Outlook for the rest of 2004

 

Sampo Group will record a good result for 2004 despite the somewhat gloomier capital market developments of recent months. Three major extraordinary items boosted the earnings in the first half of 2004 by EUR 0.37 per share. The biggest risks for achieving the good results are significant weakening of capital markets, equity market in particular, major claims events and adverse development of Finnish economy.

 

P&C insurance market continues to perform positively and If's combined ratio is expected to be slightly lower than the target range of 97 - 99 per cent. If's operating profit for 2004 will be significantly higher than last year.

 

Banking operations maintain their stable performance with net income from financial operations starting gradually to reflect the growth in loan portfolios and the rise in interest rates. Credit quality shows no signs of deteriorating and the earlier cost efficiency measures will have their full impact during 2004. Baltic banking operations will continue to grow fast.

 

Life insurance results depend to a large extent on investment income on the asset covering the traditional book. Even if equity markets remain weak Sampo Life and its subsidiaries are expected to post a good result for 2004.

 

Sampo plc, the holding company, financed the If transaction with two debt issues and will consequently show interest payments of EUR 9 million per quarter in its profit and loss account.

 

 

 

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No significant changes are expected in Sampo Group's leading position in the Nordic P&C insurance market and its strong position in Finnish long-term savings and traditional banking market.

 

Helsinki, 16 August, 2004

 

SAMPO PLC

 

Board of Directors

 

 

For more information, please contact:

 

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

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

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

 

 

 

An English-language telephone conference for investors and analysts will be held on 16 August, 2004 at 4.00 p.m. Finnish time. You can participate in this conference by calling +44 (0)20 7162 0180 (Europe) or +1 888 222 0364 (USA). Password: Sampo. You can also participate in the conference on the Internet at www.sampo.com. A recording of the conference call will be available at the same internet address at a later stage.

 

Additional information on H1/2004 performance is available at www.sampo.com.

 

The figures in this Interim Report are unaudited.

 

 

  

GROUP FINANCIAL REVIEW                22 (46)

 

 

*) The internal dividends and sales profits between the different lines of business have not been eliminated in the result analysis and specifications or key figures of banking and investment services and insurance business. However, above mentionned items have been eliminated in the Group operating profit. In addition, the operating profit includes the income from If Group, accounted for by the equity method, for 2003 and for the first quarter of 2004. Therefore, the Group operating profit is not equal to the sum of business area operating profits.               

 

** Figures of P&C insurance for April to June 2004

 

 

                             24 (46)

 

 

***) The dilution effect has been calculated as if all    the remaining subscription rights (2,062,280/the bond loan with warrants of 1998 and 5,199,000/the option programme of 2000 at the end of June, 2004) would have been realised. One subscription right entitles to subscribe 5 shares.                  

                  

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

                  

In calculating the key figures, the tax consists of that corresponding to the profit of the financial period. In calculating the net asset value per share, the return on equity and the solvency ratio the 29% deferred tax liability which is estimated to be realised during the next three years has been deducted from the holding company's valuation differences. Furthermore, the net asset value per share has been reported for all periods less full deferred tax.                

                  

In calculating the net asset value per share and the return on equity, an interpretation of the principle of fairness in life insurance has been taken into account, according to which the owners' share of the valuation differences is a standard 25 %. As valuation differences are not included in the Balance Sheet, their deferred  tax and the change in deferred tax are not entered in the Profit and Loss Account or in the Balance Sheet. Other items of the solvency margin, including derivative contracts, have been deducted from/added to the valuation differences when calculating the key figures. The capital and reserves of life insurance, including a share of optional reserves and accumulated depreciation difference, is considered to belong entirely to the owners.

 

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

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

into account line by line in the consolitated profit and

loss account and balance sheet. In the comparison periods

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

If has been treated as an associated company and its result

is presented in the consolidated profit and loss account

under the heading "result of P&C operations" and the

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

in the consolidated balance sheet.

                             25 (46)

 

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

 

 

 

BANKING AND INVESTMENT SERVICES

SPECIFICATION OF ANALYSIS OF RESULTS

 

NET INCOME FROM TRANSACTIONS IN SECURITIES

AND FOREIGN EXCHANGE DEALING

 

 

PREMIUMS WRITTEN, PROPERTY & CASUALTY

 

 

 

 

  

                             33 (46)

INVESTMENT INCOME AND CHARGES,

PROPERTY & CASUALTY INSURANCE BUSINESS

 

 

INVESTMENT INCOME AND CHARGES,LIFE INSURANCE BUSINESS