Sampo Group

Annual Report 2011
Credit Risk Management
Operational Risks

Liquidity Risks

Liquidity risk is the risk that insurance undertakings are unable to conduct their regular business activities in accordance with the defined strategy, or in extreme cases, are unable to settle their financial obligations when they fall due. Major sources of liquidity risk in Sampo Group are market illiquidity risk of investments, non-renewal of insurance policies and refinancing risk of debt. Also the availability and price of refinance and financial derivatives affect the company´s ability to conduct regular business.

Liquidity risk is relatively immaterial in Sampo Group’s businesses. The market illiquidity risk is rather limited because a major share of the investment assets are in tradable investment grade securities and in short-term money market instruments.

In P&C insurance, liquidity risk is limited, because premiums are collected in advance and large claims payments are usually known a long time before they fall due. Liquidity risks are managed by cash management functions that are responsible for liquidity planning. Liquidity risk is reduced by having investments that are readily marketable in liquid markets. The available liquidity of financial assets, i.e. the portion of the assets that can be converted into cash at a specific point in time, is analyzed and reported to IRCC on a quarterly basis. At year end, the liquidity position in each legal entity was favorable.

In life insurance, a large change in surrender rates could influence the liquidity situation. However, only a relatively small part of insurance policies can be surrendered and it is therefore possible to forecast short-term cash flows related to claims payments with a very high accuracy.

Sampo Group has a relatively low amount of financial liabilities and thus the Group’s respective refinancing risk is relatively minor. During the year Sampo plc issued several bonds and the maturities were selected carefully to have a well-diversified maturity profile.

Sampo Group companies have business relationships with several creditworthy counterparties which mitigate the risk that Sampo Group will not be able to enter into reinsurance or derivative transactions when needed.

In Sampo Group, liquidity risks are managed by the legal entities, which are responsible for liquidity planning. Liquidity risk is monitored based on the expected cash flows resulting from assets, liabilities and other business. At year end, the liquidity position in each legal entity was in accordance with internal requirements.

The maturities of technical provisions and financial assets and liabilities are presented in table 'Cash flows according to contractual maturity, If P&C, Mandatum Life and Sampo plc, 31 December 2011'. The table shows the financing requirements resulting from expected cash inflows and outflows arising from financial assets and liabilities as well as technical provisions.

Cash flows according to contractual maturity,
If P&C, Mandatum Life and Sampo plc, 31 December 2011
  Carrying amount total Cash flows
EURm Carrying amount total Carrying amount without contractual maturity Carrying amount with contractual maturity 2012 2013 2014 2015 2016 2017-2026 2027-
If P&C                    
Financial assets 12,447 1,677 10,770 2,282 2,197 2,456 1,747 1,625 443 0
of which interest rate swaps 19 0 19 3 0 0 0 0 0 0
Financial liabilities 1,110 0 1,110 -1,590 -85 -14 -164 -7 -143 0
of which interest rate swaps 16 0 16 0 0 0 0 0 0 0
Net technical provisions 9,019 0 0 -3,235 -901 -616 -514 -429 -2,385 -1,851
                     
Mandatum Life                    
Financial assets 5,266 2,227 3,039 872 650 788 240 302 451 0
of which interest rate swaps 22 0 22 7 7 7 2 1 0 0
Financial liabilities 166 0 166 -67 -105 0 0 0 0 0
of which interest rate swaps 1 0 1 0 0 0 0 0 0 0
Net technical provisions 4,141 0 0 -516 -461 -440 -403 -374 -2,546 -2,092
                     
Sampo plc                    
Financial assets 1,188 34 1,154 864 118 12 25 17 143 0
of which interest rate swaps 16 0 16 31 4 4 2 10 0 0
Financial liabilities 2,346 0 2,346 -1,364 -496 -239 -38 -372 0 0
of which interest rate swaps 0 0 0 0 0 0 0 0 0 0

In the table, financial assets and liabilities are divided into contracts that have an exact contractual maturity profile, and other contracts. Only the carrying amount is shown for the other contracts. In addition, the table shows expected cash flows for net technical provisions, which by nature, are associated with a certain degree of uncertainty. In the investment assets of Mandatum Life insurance, the investments of the Baltic subsidiary are included in the carrying amount but excluded from the cash flows.

Credit Risk Management
Operational Risks