Sampo Group

Annual Report 2011
Operational Risk Management in Mandatum Life
Capitalization

Group Level Risk Considerations

As a general principle, the subsidiaries are managed independently from each other. However, it has been deemed pertinent to assess certain risk issues also on the Group level, i.e. concentration risks arising from exposures, correlations of profitability and capital positions, liquidity management and Group structure.

Concentration Risks

With respect to the underwriting businesses carried out in the subsidiary companies, it has been established that If P&C and Mandatum Life are operating mostly in different lines of business and hence their underwriting risks are different. The most material common risk factor is life expectancy in Finland that is affecting both companies’ technical provisions. It is difficult to see material risk concentrations under normal conditions and, consequently, business lines as such are contributing diversification benefits rather than concentration risks. On the other hand, both subsidiaries have significant investment portfolios and, thus, are potentially threatened with investment related concentration risks (for example large combined exposures).

On the Group level, eventual large exposures are monitored and managed in several ways. Firstly, concentration risk is mitigated through effective differentiation in asset allocation. Mandatum Life’s direct investments are mainly denominated in euro and in companies geographically located in Finland, whereas If P&C has the majority of its direct investments in Scandinavian currencies and in the respective countries. Investments managed by external asset managers, on their behalf, are selected for both companies by the same investment team. Consequently, the risk of unidentified or unwanted concentrations is relatively easy to negotiate by appropriate limit setting and by applying sufficient level of control over the activity itself. Secondly, concentrations are actively monitored and, if deemed necessary, further managed by deploying Group level exposure restrictions for instance by industries or individual issuers.

On the subsidiary level, investment risk concentrations are monitored and controlled by the ICC in If P&C and ALCO in Mandatum Life, which have been established as independent parties from investment operations. Total group exposures are monitored and controlled by Sampo Group’s Chief Investment Officer, Sampo Group’s Chief Risk Officer and Sampo Group’s Audit Committee.

Concentrations are illustrated in tables 'Credit exposures by sectors, asset classes and rating, If P&C, Mandatum Life and Sampo Group, 31 December 2011' which are shown in Credit Risk section. Nordic financial sector is the largest concentration at Sampo Group level. Conversely, the significance of public sector bonds is minor and Sampo Group does not have investments in government bonds of the PIIGS countries (Portugal, Ireland, Italy, Greece, Spain).

Fixed income investments in financial and public sector are shown, respectively, in tables 'Fixed income investments in financial sector, Sampo Group, 31 December 2011' and 'Fixed income investments in public sector, Sampo Group, 31 December 2011'. When it comes to the financial sector most of the investments are in Nordic countries, and product wise covered bonds and short-term money market investments have a major emphasis. The public sector figures include government bonds, government guaranteed bonds and other public sector investments.

Fixed income investments in financial sector,
Sampo Group, 31 December 2011
   Covered bonds  Money market securities  Long-term senior debt   Long-term subordinated debt  Total, EURm   %
Sweden 3,028 614  1,143 316 5,101  56%
Finland 118  1,471  169  50  1,807   20%
Norway 339    479  203  1,021   11%
Denmark 76    170  131  377   4%
France 68    153  12  232   3%
United States     132  140   2%
Germany 60    71    131   1%
Switzerland     95    95   1%
United Kingdom     40  16  56   1%
Estonia   46    46   1%
Netherlands     43    43   0%
Austria 33      33   0%
Luxembourg 11        11   0%
Belgium      0%
Latvia        0%
Total 3,732  2,130  2,502  739   9,103  100%
Fixed income investments in public sector,
Sampo Group, 31 December 2011
  Governments

Government

guaranteed

Public sector,

other

Total market

value, EURm

Sweden 142 61 239 442
Finland 22 53 112 186
Norway     90 90
Germany    74   74
United States    71   71
Denmark    13 26 39
Netherlands  26     26
France  9     9
Austria  6     6
Total 205 271 466 943

The largest exposures by individual counterparties are presented in table 'Largest individual exposures by asset class, Sampo Group, 31 December 2011'.

Largest individual exposures by asset class,
Sampo Group, 31 December 2011

EURm

Counterparty

Total fair value

EURm

% of total investment assets

Cash & short-term fixed income

Long-term fixed income, total

Long-term fixed income:
Government guaranteed

Long-term fixed income: Covered bonds

Long-term fixed income: Senior bonds

Long-term fixed income: Tier 1 and
Tier 2

Equities

Uncolla-teralized deri-
vatives

Nordea Bank

1,670

10% 697

972

0 715 231 27 0 0

Svenska Handelsbanken

1,258

7% 355  903  669  117  118 

Skandinaviska Enskilda Banken

1,058 6% 284  772  393  275  104 

Swedbank

952 5% 30  922  44  682  159  37 

Pohjola Bank

633 4% 511  114  81  33 

Danske Bank

630 4% 167  458  105  218  136 

SBAB

525 3% 525  316  166  43 

DnB NOR Bank

483 3% 483  130  264  89 
Landshypotek 285 2% 285  251  34 

Kommuninvest Sverige

266 2% 56  210  22  188 
Total top 10 exposures 7,759 45% 2,100 5,645 66 3,261 1,732 587 0 13
                     

Other

9,647

55%                

Total investment assets

17,406

100%                

Furthermore, largest exposures of direct equity as well as high-yield and non-rated fixed income investments are broken down in tables 'Ten largest direct equity investments, Sampo Group, 31 December 2011' and 'Ten largest direct high-yield and non-rated fixed income investments, Sampo Group, 31 December 2011'.
Ten largest direct equity investments,
Sampo Group, 31 December 2011

Top 10 equity investments

Total fair value, EURm

% of total direct equity investments

Fortum

82 6%

UPM-Kymmene

 77 5%

YIT

76 5%

TeliaSonera

69 5%

Veidekke

60 4%

Nobia

58 4%

Investor

55 4%

Hennes & Mauritz

54 4%

Volvo

47 3%

Atlas Copco

42 3%

Total top 10 exposures

620 43%
     

Other direct equity investments

832

57%

Total direct equity investments

1,452

100%
Ten largest direct high-yield and non-rated fixed income investments,
Sampo Group, 31 December 2011

Largest direct high-yield and non-rated fixed income investments

Rating

Total fair value, EURm

% of total direct fixed income investments

UPM-Kymmene

BB  185 1%

Stora Enso

BB  135 1%

A P Moller - Maersk

NR  67 0%

Wilh. Wilhelmsen

NR  64 0%

Boliden

NR  61 0%

Metsäliitto

NR  60 0%

Finnvera

NR  53 0%

Seadrill

NR  50 0%

Neste Oil

NR  48 0%

Color Group

NR  44

0%

Total top 10 exposures

  768 6%
       

Other direct fixed income investments

 

12,776

94%

Total direct fixed income investments

 

13,544

100%

Fixed income investments in UPM-Kymmene decreased by EUR 78 million in January 2012 when a bond matured.

Correlations of Profitability and Capital Positions

As discussed above, direct concentration risks may arise in Sampo Group due to large exposures in investment assets. A more general Group level concentration risk arises when the Group companies’ profitability and/or capital positions react similarly to general economic development, i.e. the correlation between general economic development and the profitability of different subsidiaries is more or less analogous. This type of concentration risk can be analyzed indirectly based on reported profits. From that perspective, especially Nordea’s, which is Sampo plc’s associate company, result is creating clear diversification benefits, in particular when analyzed vis à vis with If P&C and Mandatum Life. The historical correlation between If P&C´s and Nordea’s, as well as Mandatum Life’s and Nordea’s, quarterly reported profits since 2005 is very low.

The historical correlations of quarterly reported profits between If P&C, Mandatum Life and Nordea are depicted in the figure 'Correlations of quarterly reported profits, If P&C, Mandatum Life and Nordea, 1 January 2005 - 31 December 2011'.

Correlations of quarterly reported profits,
If P&C, Mandatum Life and Nordea, 1 January 2005 - 31 December 2011
  If P&C  Mandatum Life  Nordea
If P&C  1    
Mandatum Life 0.87  1  
Nordea 0.17 0.16  1

Liquidity

Liquidity risk is managed at company level, and in normal course of business, subsidiary companies do not invest in Sampo plc's debt instruments. However, a general prohibition to intra-group asset transactions has not been deemed necessary and, thus, subsidiaries are allowed to invest in the parent company’s debt instruments and sell assets to each other at market prices, especially when this is justified by business opportunities. Thus, during possible market stresses these options are available to certain extent as well.

Corporate Structure Related Risks

The structure of Sampo Group, both legal and reporting structure – parent company, two subsidiaries and two associated companies – is simple, straightforward and transparent. The structure as such effectively mitigates any risks related to complex structures. Structural simplicity and transparency together with a limited amount of exposures within Sampo Group (i.e. direct and/or indirect claims between different companies excluding normal course of business transactions with Nordea) and diligently managed capitalization of subsidiaries also effectively protects Group companies from contagion risks.

Operational Risk Management in Mandatum Life
Capitalization