The Financial Statements have been compiled in accordance with the decisions, instructions and regulations of the Finnish Accounting Act, Companies Act, Insurance Companies Act, and the authorities responsible for monitoring insurance companies.
Buildings and structures are presented in the Balance Sheet at the lower of acquisition cost less the planned depreciation or current value. Real estate shares and land and water areas are presented at the lower of acquisition cost or current value. Planned depreciation is made on revaluations entered as income arising from buildings.
Stocks and shares in the nature of investments are presented at the lower of acquisition cost or current value. Stocks and shares in the nature of fixed assets are entered at the lower of acquisition cost or current value, if the value adjustment is considered permanent. The acquisition cost is calculated using the average price.
Debt securities are entered in the Balance Sheet at acquisition cost. The acquisition cost is calculated using the average price. The difference between their nominal value and acquisition cost is accrued as interest income, or interest payable, over the life of the debt security instrument, and entered as an increase or decrease in their acquisition cost. Changes in value arising from the variation in interest rates are not entered. Value adjustments relating to the issuer’s creditworthiness are entered at profit or loss.
Loan receivables and deposits are presented in the Balance Sheet at nominal value or at a permanently lower likely realisable value.
Value adjustments that have been made earlier on investments are re-adjusted with impact on the result up to the original acquisition cost if the current value increases.
Derivative contracts are mainly used for hedging investment portfolios. In accounting terms, however, they are treated as non-hedging instruments. The profits and losses resulting from the termination or expiry of contracts are entered as income or expenses for the financial year. The negative difference between the current value of the derivative contracts treated as non-hedging and a higher book value/contract rate is entered as an expense. Unrealised income is not entered.
Investments covering the unit-linked insurances are valued at their current value.
Other long-term expenses which have been capitalised are basic renovation expenses for real estate and planning expenses for information systems. Those expenses, as well as equipment, are entered in the Balance Sheet at acquisition cost less planned depreciation. During the financial year, impairment write-offs were recorded on the capitalisation of information systems.
Premium receivables are presented in the Balance Sheet at probable value and other receivables at their nominal value, or at a probable value permanently lower than this. Receivables that, on the basis of experience from previous years, are likely to expire have been deducted from the par value of premium receivables, resulting in their probable value. Receivables that are likely to remain unsettled are entered as a credit loss.
Depreciation according to plan is calculated as a straight-line depreciation on the acquisition cost based on the estimated economic life of the asset. The average estimated depreciation times are as follows:
|Computer software||3–7 years|
|Planning expenses for information systems||5–10 years|
|Other long-term expenses||5–10 years|
|Business and industrial premises and offices||20–75 years|
|Components in buildings||10–20 years|
|Vehicles and computer hardware||3–5 years|
|Office machinery and equipment||7 years|
Revaluations and revaluation adjustments on investments in the nature of investment assets and on investments covering unit-linked insurances are entered with impact on the result.
Revaluations on investments in the nature of fixed assets and their reversals are entered in the revaluation reserve under restricted capital and reserves. Planned depreciation is made on revaluations entered as income arising from buildings.
The value of real estate and shares in real estate is entered at values not exceeding market-based current values. The investments are evaluated by an external authorized real-estate appraiser using the net present value rule based on cash flow.
Shares and participations in a life insurance company that is a subsidiary are valued at the cautiously estimated market price, which is based on the subsidiary’s net asset value.
Quoted securities and securities that are otherwise subject to public trading are valued at the last bid price in continuous trading on the Balance Sheet date or, if this is not available, at the latest trading price. Unquoted securities are valued at the estimated market price, the undepreciated portion of acquisition cost or a value based on net asset value. Private equity investment funds are valued at acquisition cost or at the estimated current value of the fund reported by the administrative company.
Derivative contracts are valued at their current value on the date of closing the accounts. The possible maximum loss on non-hedging derivatives is deducted from the solvency margin.
Receivables are valued at the lower of par value or probable value.
Transactions in foreign currency are entered at the exchange rate of the transaction date. In the annual closing of the accounts, currency-denominated receivables and liabilities and current values of investments have been translated into euro using the European Central Bank’s rate on the date of closing the accounts. Exchange rate gains and losses arising during the financial period and the closing of the accounts are entered as adjustments to the income and expenses concerned or as investment income and charges, if they are related to financing operations. Currency conversion differences on the technical account have not been transferred to the investment income/charges on the profit and loss account. This has no impact on the profit and loss account, giving a true and fair view of the results.
Pension insurance cover has been arranged for the staff of the Group companies by means of TyEL insurance with Elo Mutual Pension Insurance. Pension insurance premiums are entered in the profit and loss account on the accrual basis.
Finnish legislation allows certain optional untaxed reserves and depreciation above plan to be made in the final accounts. In the final accounts of the Group companies, deferred tax is not deducted from appropriations, revaluations transferred to reserves and valuation differences on investments. Revaluations entered as income are taxable income. Deferred tax receivables arising from timing differences between accounting and taxation are not entered in the annual accounts of the Group companies, and the Group companies have no corresponding deferred tax liabilities. The deferred tax liabilities and deferred tax receivables resulting from consolidation measures, as well as revaluations transferred to reserves and timing differences are entered in the consolidated accounts.
In the consolidated accounts, optional reserves and the depreciation difference are divided into the change in deferred tax and share of profit/loss for the financial year, and deferred tax and share of capital and reserves. The rate of tax used is 20 per cent.
Claims outstanding include the claims payable by the company after the financial year, arising from major losses and other insured events that have occurred during or before the financial year.
Due to the low interest rate level, the company lowered the technical rate of interest used in 2013 in the discounting of technical provisions to 2.5 per cent. The provision for outstanding claims pertaining to annuities is calculated by discounting, applying an interest rate of 2.5 per cent. Discounting is not applied to other parts of the provision for outstanding claims.
In connection with the change in the discount rate, a number of other changes were also made in 2013 to the so-called collective provisions. The impacts by line of insurance were as follows:
|statutory accident insurance (workers compensation)||EUR -41 million|
|motor liability insurance||EUR +4 million|
|liability insurance||EUR +2 million|
|motor vehicle insurance||EUR +1 million|
|other property insurance||EUR +1 million|
|legal expenses insurance||EUR +1 million|
In calculating pension provisions, the company uses the 2011 mortality model that is generally applied by insurance companies with a confidence level of 75 per cent.
Fennia uses the Finnish Patient Insurance Centre’s technical provisions estimate as it stands. The Finnish Patient Insurance Centre has adjusted the reservation basis of assisted living and this had a significant impact on the increase made on the provision for claims outstanding.
The provision for claims outstanding also includes the equalisation provision, which must be shown separately in the Balance Sheet. The equalisation provision is a buffer for years when large numbers of losses occur. The amount of the equalisation provision is determined in accordance with the calculation bases prescribed for the company by the Finnish Financial Supervisory Authority, to which the company applied for and received an adjustment for the years 2014 and 2015. The new base for the equalisation provision strengthens the transfer to the equalisation provision.
The calculation of technical provisions complies with the provisions and instructions of the Insurance Companies Act, the Ministry of Social Affairs and Health and the Financial Supervisory Authority.
No technical rate of interest is applied to unit-linked insurances. For other insurances, the technical provisions are calculated separately for each insurance and the technical rate of interest applied varies as follows:
– For individual life and pension insurance, the technical rate of interest applied is between 1 and 4.5 per cent, depending on the starting date of the insurance. For new insurance contracts, the technical rate of interest is 1 per cent.
– For capital redemption contracts, the technical rate of interest applied is between 0 and 3.5 per cent, depending on the starting date of the contract and the target group.
– The technical interest rate for group pension insurance is 1 per cent, 2 per cent or 3.5 per cent. The technical interest rate for new group pension insurance is 1 per cent.
– In order to fulfil the 4.5, 3.5 and 2.5 per cent interest rate requirement for pension and savings insurance policies, the technical provisions have been supplemented both during the reporting year and in previous financial statements. The supplementary provision for the guaranteed interest rate as of 31 December 2014 is approximately EUR 64.1 million. As a result of the supplementary provision, the minimum annual return requirement for investment operations on the part of these policies is 2.0 per cent for a period of roughly 14 years.
Deferred acquisition costs have no longer been deducted from the provision for unearned premiums, i.e. zillmerisation, in the Financial Statements.
According to Chapter 13, Section 2 of the Insurance Companies Act, a so-called Principle of Fairness must be observed in life insurance with respect to such policies which, according to the insurance contract, entitle to bonuses and rebates granted on the basis of any surplus yielded by the policies. This principle requires that a reasonable part of the surplus be returned to these policies as bonuses, in so far as the solvency requirements do not prevent it.
Fennia Life aims at giving a long-term gross return on policyholders’ with-profit insurance savings that is at minimum based on the risk-free interest rate. The surrender right and the duration of the insurance are taken into account in distributing bonuses. The yield to be distributed to clients is determined based on the company’s long-term net income on investments.
The total interest rate consists of the technical interest rate and additional interest rate on the insurance contract in question. The level of technical interest for the contract is taken into account in the amount of additional interest to be paid on the insurance. When the company’s net income from investments is low, the level of distributed bonuses is reduced. Thus the total interest rate of insurance policies with lower technical interest rates may remain below the highest technical interest rate. When the net income from investments is high, insurance policies with lower technical interest rates may be credited a higher total interest rate than insurance policies with higher technical interest rates.
The aim is to retain continuity in the level of bonuses paid, as a result of which the surplus from returns on investments can be accrued as distributable bonuses for the group of insured in question for the coming years.
The company’s aim is to achieve competitive bonuses in comparison with other insurance companies and other low-risk forms of investment.
The level of bonuses is limited by the owner’s requirements for return on capital, as well as the company’s solvency target. The solvency target is set in such a way that all the solvency limits set by legislation are exceeded and so that the company is able to take risks in its investment operations to the extent required by solvency maintenance, by the return requirement on technical provisions and by the return requirement of the owners.
Fennia Life’s Board of Directors confirms the amount of additional interest rate on a quarterly basis in advance. The amount of future bonuses can, however, be changed during the course of a quarter if necessitated by the company’s solvency or the general market situation.
The Principle of Fairness can be applied in risk life insurances, on the part of death cover, to specified insurance groups in the form of increased compensation.
Bonus targets are not binding and are not part of the insurance contract between the company and the policyholder. The bonus targets are in force until further notice, and the company reserves the right to alter the bonus targets.
Fennia Life’s bonuses in 2014 correspond to the targets set for the company’s Principle of Fairness. The yield to be distributed to insurance policies is determined based on the company’s long-term net income on investments. The aim is to retain continuity in the level of bonuses paid, as a result of which the surplus from returns on investments can be accrued as distributable bonuses for the group of insured in question for the coming years.
The company’s return on investments in 2014 was good. In response to the extremely low interest rate level and the upcoming Solvency II requirements, EUR 14 million was transferred from the investment result to the supplementary provision for the guaranteed interest rate in order to cover the cost of the company’s interest rate promises in the coming years. The provision for future bonuses for savings insurance with the 4.5 per cent and 3.5 per cent technical interest rates was transferred to the supplementary provision for the guaranteed interest rate. This will be used to secure the company’s ability to cover the high technical interest rate also in future. A share of the bonuses granted in 2014 was financed from the provision for bonuses reserved during previous years. The supplementary provision for the guaranteed interest rate was decreased according to plan.
The risk-free interest rate has remained low for both short-term and long-term government bonds since 2009. The total interest credited by Fennia Life has clearly exceeded the risk-free interest rate of the corresponding investment period from 2009 to 2014. When distributing bonuses, not only the contract’s technical rate of interest, but also the surrender right and the duration of the insurance have been taken into account. For that reason, the total interest credited on pension insurance has been higher than the interest credited on savings insurance. The table below indicates the total interest credited by Fennia Life in 2014:
Total annual interest on with-profit policies in 2014
|Technical interest rate||Individual savings insurance||Individual pension insurance||Group pension insurance||Capital redemption policy|
Fennia’s consolidated accounts include the Parent Company and all the subsidiaries in which the Parent Company either directly or indirectly holds more than half of the voting rights. Fennia Life Insurance Company Ltd belongs to the Fennia Group as a subsidiary. The accounts of Fennia Life and its subsidiaries are consolidated with the Group’s accounts on the basis of the consolidated accounts of the Fennia Life sub-group. eFennia Oy (holding 20 per cent, voting rights 63.6 per cent) is a subsidiary of Fennia and Fennia Asset Management Ltd is a subsidiary of Fennia Life (holding 100 per cent). The other subsidiaries included in the consolidated accounts are real estate companies. At the end of 2014, the Group had 28 real estate companies, 14 of which belonged to the Fennia Life sub-group.
The consolidated accounts have been drawn up as combinations of the profit and loss accounts, balance sheets and notes of the Parent Company and the subsidiaries. Amounts due to or from Group companies, internal gains and losses, profit distribution and mutual share ownership have been eliminated. Minority interests in results and in capital and reserves are presented as separate items. Mutual share ownership is eliminated using the acquisition method. The consolidation difference is entered under the fixed asset items concerned and depreciated according to their depreciation plan. The negative goodwill on consolidation resulting from the acquisitions made during 2013 has been entered as income. The unallocated part of goodwill on consolidation has been written off.
In the accounts of the real estate subsidiaries, the revaluations at the time of acquisition have been reversed, as they have affected the acquisition price of the shares.
The companies in which the Group holds 20–50 per cent of the voting rights have been included in the consolidated accounts as associated undertakings using the equity method of accounting. However, holdings (20–50 per cent) in mutual real estate undertakings and property companies are not included. This has no significant impact on the Group’s results and capital and reserves.
Fennica Properties I real estate fund was launched by Eufex Fund Administration Ltd on 31 December 2013, into which real estate from Fennia, Fennia Life and Etera Mutual Pension Insurance Company was transferred as a distribution in kind at the establishment date. The transfer of the real estate was recorded in the Group’s result for the year under comparison as EUR 12 million in capital gains. The transaction value of the real estate and their current value at Fennia and Fennia Life were almost equal. Therefore the transfers had little effect on the solvency of the companies and Group. Eufex Fund Administration Ltd (now Elite Asset Management Ltd) has outsourced the portfolio management of the Fennica Properties I real estate fund to Fennia Asset Management. The current value of the shares of Fennica Properties I real estate fund in the Consolidated Financial Statements was EUR 55 million. Fennia and Fennia Life have not made any further subscriptions to the fund since its establishment. Fennia Group’s participating interest in the fund after subscriptions made by 31 December 2014, which are included in the fund’s value calculation on 31 March 2015, was just under 48 per cent. The fund has not been consolidated to the Consolidated Financial Statements as an associated undertaking. Therefore the Group’s participating interest in the fund is included in the balance sheet as real estate fund units at purchase price and the valuation difference between their current value and purchase price is included in the valuation differences for the Group’s investments.