Facing strong economic headwinds

Finland’s life market is
divided into two distinct sections, life insurance, which has fared
poorly over the past decade, and statutory employee pensions, which
have grown robustly. Now, even pensions face a period of low growth
as Finland battles to recovery from the ravages of an economic
slump.

Following a sevee recession
in the early 1990s, which left unemployment at almost 20%, Finland
emerged to become one of the European Union’s economic growth
leaders. Much of Finland’s growth resulted from its prominent
position as an exporter of telecommunications, electronic and
engineering products and equipment. This hi-tech sector helped the
country’s GDP achieve a CAGR of 3.8% between 1995, the year it
joined the European Union, and 2007.

Economic prosperity has enabled it
to become one of the world’s wealthiest countries. According to the
International Monetary Fund, it ranked as the world’s 12th
wealthiest country in 2009, based on its GDP per capita of $44,492.
This compared with GDP per capita of $46,381 in the US, $40,975 in
Germany and $35,334 in the UK.

Given its high level of economic
development and wealth, Finland’s life insurance market
unsurprisingly displays mature characteristics with a penetration
in 2009 of 7.5% of GDP, according to Swiss RE. This ranked Finland
second in Europe behind the UK which recorded life insurance
penetration of 10% of GDP in 2009.

Finland shares another
characteristic of developed life markets: a high concentration of
business in the hands of a small number of insurers. In the life
insurance sector (excluding statutory employee pensions), three
companies held sway in 2009: OP Life Assurance, Mandatum Life and
Nordea Life Finland with respective market share’s of 25.2%, 25%
and 24%, according to the FFFS.

According to Finland’s Federation
of Finnish Financial Services (FFFS), there were 11 life insurance
companies operating in the country at the end of 2009, down from 12
in 2008 and 15 a decade earlier.

OP Life is a unit of Finland’s
largest financial services company, OP-Pohjola Group, which is made
up of 218 member cooperative banks and has three business segments:
banking and investment services, life insurance, and general
insurance. OP-Pohjola Group reported earnings before tax of €464m
($600m) in 2009. OP Life recorded a €43.9m net profit in 2009,
13.3% of the life industry’s total of €721.1m, according to the
FFFS.

At the end of 2009, OP-Pohjola
Group had 1.3m owner-members and 4.1m customers, comprising 3.3m
banking customers and 1.8m life and general insurance
customers.

Also with strong Finnish roots is
Mandatum Life, a wholly-owned unit of Finnish financial services
company Sampo Plc. Sampo was also involved in banking until 2006
when it sold its banking operations to Norwegian bank Danska Bank
as part of its strategy to focus on life and general insurance.

Sampo reported that Mandatum Life
had 243,000 private customers and 24,000 corporate customers in
Finland at the end of 2009. In that year Mandatum Life generated
premium income of €764m.

Mandatum Life was established in
1997 as Sampo Life following the transfer of a portion of the
insurance portfolio of Finland’s oldest life insurer Kaleva Mutual
Insurance Company (established 1874). Sampo Life completed two
acquisitions shortly after its establishment and in 2002 made a
significant strategic change when it decided to focus on
unit-linked insurance products instead of with-profits pension and
investment insurance policies. The name Mandatum Life was adopted
in August 2008.

Sampo reported that, in 2009,
€520m, or 68%, of Mandatum Life’s gross written premium income was
unit-linked. This represented 27% of total unit-linked business
written by Finnish life insurers in 2009. OP Life accounted for
just under 23% of unit-linked business in 2009.

Mandatum Life was also the most
profitable Finnish life insurer in 2009 with the FFFS reporting
that it had generated a net profit of €347.1m. This amounted to
almost half of the Finish life industry’s total net profit of
€721.1m in 2009.

Sampo is also the largest
shareholder of Swedish banking, investment management and insurance
company Nordea. In October 2009, Sampo was granted permission by
the Swedish Financial Supervisory Authority to increase its stake
in Nordea to above 20%. By the end of 2009, Sampo had increased its
stake in Nordea from 19.8% to 20.03%.

Nordia’s life business in Finland
generated gross written premium income of €733m in 2009 and a net
profit of €95.6m, reported the FFFS. Unit-linked business accounted
for three quarters of Nordia’s life business in Finland in 2009 and
28.4% of total unit-linked business.

Running a distant fourth in
Finland’s life market is Tapiola Mutual Life Assurance Company, a
unit of Tapiola Group, a Finnish company which also operates in the
banking, pensions, asset management, property and general insurance
markets.

In 2009, the FFFS reported that
Tapiola Mutual Life had achieved gross written life premium income
of €233m to give it a 7.6% market share and a net profit of
€31.2m.

Tapiola Group is significantly
bigger in Finland’s general insurance market where in 2009 the FFFS
reported that it had generated gross written premium income of
€629m. This gave it an 18.9% share and ranked it third behind
OP-Pohjola Group which held a 28.1% share (€934m premium income)
and If P&C, which held a 25% share (€833m premium income).

The only real hint of
non-Scandinavian involvement in Finland’s life insurance market is
provided by Skandia Life, a unit of Swedish insurer Skandia which
was acquired by UK insurer Old Mutual in 2005 for €3.6bn. The FFFS
reported that Skandia Life had generated gross written premium
income of €194m in Finland in 2009 to give it a 6.3% market
share.

A no-growth life
market

Despite the economic
growth success achieved by Finland’s economy during much of the
past decade, premium income in its life insurance market (excluding
statutory employee pensions) can at best be described as having
moved sideways.

From €3.8bn in 2000, gross written
premium income averaged €3.1bn between 2001 and 2006, falling again
to €2.8bn in 2007 and €2.62bn in 2008, before recovering by 17% in
2009 to €3.07bn.

The biggest growth in premiums
written in life insurance took place in what the FFFS terms
“capital redemption policies” which are products similar to term
deposits. In this category, premiums increased by 288% in 2009 to
€714m. The vast majority of capital redemption policies were
written as unit-linked contracts.

Adjusted for inflation the picture
is one of a life industry going backwards. According to the FFFS,
personal gross written premium income stood at €3.1bn in 2000 and
declined in five of the next eight years to reach €1.4bn in 2008
before recovering to €1.9bn in 2009.

Also, claims are rapidly catching
up with gross written premium income, having increased from €1.2bn
in 2000 (31% of premium income) to €2.9bn in 2009 (94% of premium
income).

Contrasting with the life insurance
business, Finland’s statutory employee pensions market has shown
solid growth. Finland has a two-tier pensions system comprising an
income-test-based basic state pension (Kansaneläke) and a
statutory earnings-related employee pension system
(Työeläke) for all employees and self-employed persons
aged 18 to 68. The statutory employee pension system had its
origins more than 40 years ago.

According to the Finnish Centre for
Pensions, the basic state pension is gradually reduced when the
earnings-related pension increases and ends altogether when the
earnings-related pension exceeds between €900 and €1,000. Because
the average earnings-related pension amounts to about €1,100 a
month, most new pensions consist only of an earnings related
pension.

Contributions vary according to
employment category with total contributions for employed workers
ranging from a total of 21.1% of income to 24.8%. Employees share
of these contributions ranges from 4.3% to 11% of their incomes.
For self-employed people contributions vary from 10.73% to 11% of
income.

Finland’s voluntary group and
private pension sector is small. In 2009, voluntary pension premium
income (included as life insurance premium income) totalled
€917.4m, down from €1.13bn in 2008.

The strong economic growth
experienced during most of the past decade was reflected in
statutory employee premium income increasing from €5.6bn in 2000 to
€10.12bn in 2008, a CAGR of 7.7%. However, in 2009, premium income
fell slightly to €10bn, a fall the FFFS attributed to a lower level
of employment which in turn reduced total payrolls and premiums
written by insurers.

Finland’s economy began taking
strain in 2008, with GDP growth falling from 4.2% in 2007 to 0.9%
in 2008. The full impact of the global recession came in 2009 and
saw Finland’s exports slump 32% and its GDP contracted by 7.8% in
2009, the sharpest contraction since Finland gained independence
from Russia in 1917. Unemployment increased from 6.9% at the end of
2008 to 9.1% in January 2010, according to the Bank of Finland.

Seven insurers

Statutory
earnings-related pension insurance in the private sector is managed
by company pension funds of which there are about 30, industry-wide
pension funds of which there are about eight and pension insurance
companies of which there were seven at the end of 2009.

Of the pension insurance companies,
there is a tight race between Varma Mutual Pension Insurance
Company and Ilmarinen for top position with the two holding market
share’s of 34% and 31.8% in 2009, respectively, according to the
FFFS.

Varma was formed in 1998 when
Pension Sampo and Pension Varma merged, to create Varma-Sampo which
in 2003 adopted its current name. Varma has an 8.6% stake in Sampo
Plc.

Varma reported that, at the end of
2009, its customer base was made up of 850,000 employees,
self-employed persons and pensioners from over 60,000
workplaces.

Varma’s premiums written totalled
€3.4bn in 2009, pension payments €3.6bn and investments €29.9bn.
Varma’s net profit in 2009 was €3.3bn, according to the FFFS.

Mutual insurer Ilmarinen traces its
origins back to 1961 when it was formed by a consortium of insurers
including Sampo and OP-Pohjola. Sampo withdrew in 1984, leaving
control of Ilmarinen with OP-Pohjola.

At the end of 2009, Ilmarinen
reported that almost 36,000 employer companies were insuring their
employees with Ilmarinen. The number of persons insured totalled
470,000 while the number of people receiving pension benefits was
some 283,000. In addition, Ilmarinen had 52,000 self-employed
policyholders.

Ilmarinen’s earned premium income
of €3.18bn in 2009 and, according to the FFFS, generated net income
of €3.86bn. Total investment assets stood at €22.9bn at the end of
2009.

In third position in 2009, trailing
far behind Varma and Ilmarinen, was mutual insurer Tapiola which
reported premium income of €1.39bn for a market share of 13.9%.
According to the FFFS, Tapiola’s statutory pension business
generated a net profit of €1.56bn in 2009 while total investment
assets ended the year at €7.6bn.

The only other player in the
statutory pension market to achieve a double-digit market share in
2009 was 70-year old mutual insurer, Fennia Mutual Insurance
Company. Fennia reported premium income of €1.1bn from its pensions
unit, Pensions Fennia, giving it a market share of 10.9%. Pensions
Fennia’s net profit amounted to €952m in 2009 while investment
assets ended the year at €5.6bn.

Fennia Mutual also operates a
separate life insurance unit, Fennia Life, which in 2009 generated
premium income of €70m, giving it a market share of 2.3% and
placing it in eighth position.

Holding a distant fifth position in
the statutory pension market is 50-year-old Etera Mutual, which in
2009 reported premium income of €537m for a market share of
5.4%.

Clearly dissatisfied with the state
of play in the statutory pensions market Etera MD Hannu Tarkkonen
commented in the mutual insurer’s 2009 annual report: “It is
important the employment pension market involves several actors and
that operations are not concentrated on a few major companies.

“A decentralised earnings-related
pension scheme increases competition and improves the services
offered to both employers and the insured. It is also important
that the investment risks of the pension scheme are diversified
among various companies.”

Good start to
year

Though no detailed industry-wide
data are available for 2010, two insurers, Nordea and Mandatum
Life, reported strong growth in the first quarter of the year.
Driven primarily by stronger unit-linked product sales Nordea’s
first half premium income was €255.1m, up 70% compared with €150m
in the same period in 2009.

Nordea’s performance in the first
half of 2010 gave it a market share of 19.4%, up from 15% in the
first quarter of 2009.

Based on Nordea’s results, the
Finnish life industry’s total premium income increased by 29.4%
from €1bn in the depressed first quarter of 2009 to €1.294bn in the
first quarter of 2010.

Performing even better than Nordea
in the first quarter of 2010 was Mandatum Life, which reported that
premium income had increased by 142% compared with the €144m first
quarter of 2009 to €348m. This increased its market share from
14.2% (25.2% for 2009 as a whole) to 26.9%. Unit-linked product
sales led the strong performance and increased their share of the
insurer’s total premium income from 64% in the first quarter of
2009 to 69%.

But despite positive indications in
the life market in the first quarter of 2010, Finland’s economic
prospects remain clouded. This was highlighted by recent comments
by the governor of the Bank of Finland, Erkki Liikanen.

“Finland’s real GDP has stopped
contracting, said Liikanen.

“GDP growth will, however, be much
slower in the immediate years ahead than it was before the
financial crisis. Real GDP will not reach the level of 2008 even by
the end of the forecast period in 2012.”

Liikanen added that unemployment was unlikely to fall below 9%
in the foreseeable future.

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