Sampo Group

Annual Report 2011
ALM Risks
Credit Risks

Investment Portfolio Risks

Investments are managed according to the subsidiaries’ investment policies. The most significant risks are equity, interest rate, credit spread and currency risks. Market risks also arise from private equity and hedge fund investments as well as real estate and commodity investments.

Sampo Group’s Chief Investment Officer is responsible for managing investments within the limitations of Investment Policies prepared by the company and approved by the company’s board. The insurance subsidiaries and the parent company have a common Group-wide infrastructure for investment management as well as performance and risk reporting. Sampo Group considers that it has a thorough understanding of Nordic markets and issuers and consequently Sampo Group’s direct investments are mainly made into Nordic securities. When investing in non-Nordic securities, funds or other third party managed investments are mainly used. These investments are primarily used as a tool in tactical asset allocation when seeking return and secondarily in order to increase diversification.

Market risk control is separated from portfolio management activities. Middle Office functions measure risks and performance and control limits set in investment policies on a daily basis. Market risks and limits are controlled by the ICC in If P&C and ALCO in Mandatum Life at least on a monthly basis. These committees are responsible for the control of investment activities within the respective legal entity. The aggregated market risks and concentrations on Sampo Group level are controlled by the Group’s Audit Committee at least quarterly.

Asset Allocations and Investment Returns

The total amount of Sampo Group's investment assets as at 31 December 2011 was EUR 17,590 million (EUR 18,301 million in 2010). The composition of the investment portfolios in If P&C, Mandatum Life and Sampo plc at year end and in comparison to year end 2010 is shown in figure 'Development of investment portfolios, If P&C, Mandatum Life and Sampo plc, 31 December 2011 and 31 December 2010'.

The composition of the investment portfolios is reported on the basis of fair values of investments. These fair values are determined either on the basis of direct market quotes or by using various valuation models. More information on the valuation methods of the investment assets is presented in note 17 in the Sampo Group financial statements.

Sampo plc’s own market risks are limited. Interest rate risk arising from the company’s gross debt and the liquidity reserve invested into short-term money market securities is the company’s most significant market risk together with the refinancing risk related to gross debt. Most of Sampo plc’s debt is tied to short-term reference rates. This mitigates the Group level interest rate risk because, while lower interest rates would reduce subsidiaries’ investment returns in the long-term, the interest expense in Sampo plc would be lower.

Mandatum Life and If P&C have somewhat differing investment policies, because Mandatum Life is able to aim for higher returns than If P&C due to the different structures of technical provisions.

The more detailed investment allocations of If P&C, Mandatum Life, Sampo plc and Sampo Group are presented in the figure 'Investment allocation, If P&C, Mandatum Life, Sampo plc and Sampo Group, 31 December 2011'.

Investment allocation,
If P&C, Mandatum Life, Sampo plc and Sampo Group, 31 December 2011
  If P&C  Mandatum  Life Sampo  plc Sampo Group
 Asset Class Market value, EURm  Weight Average maturity
(years) 
Market value,
EURm 
 Weight Average maturity (years)  Market value,
EURm 
 Weight Average maturity
(years) 
Market value,
EURm
 Weight  Average maturity
(years)
Fixed income total 9,914 89%  2.5 3,228  60%  2.3  952  96%  0.7 14,095  80% 2.4
Money market securities and cash 1,022  9%  0.3  430  8%  0.3  902  91%  0.7  2,354  13%  0.4 
Government bonds 935  8%  3.1  22  0%  5.0  0%  0.0  956  5%  3.1 
Credit bonds, funds and loans 7,954  71%  2.8  2,732  51%  2.6  0%  0.0  10,686  61%  2.7 
Covered
bonds
3,600  32%  2.7  132  2%  4.0  0%  0.0  3,732  21%  2.7 
Investment
grade bonds
and loans
2,751  25%  2.7  1,205  22%  2.3  0%  0.0  3,956  22%  2.6 
High-yield
bonds and
loans
1,218  11%  3.1  969  18%  2.7  0%  0.0  2,187  12%  2.9 
Asset-
backed
securities
0%  0.0  0%  0.0  0%  0.0  0%  0.0 
Subordinated / Tier 2 295  3%  2.0  220  4%  0.9  0%  0.0  515  3%  1.5 
Subordinated / Tier 1 91  1%  4.6  206  4%  4.3  0%  0.0  297  2%  4.4 
Interest rate derivatives 0%  23  0%  50  5%  76  0% 
Policy loans 0%  0.0  22  0%  2.8  0%  0.0  22  0%  2.8 
Other asset classes total 1,280  11%  2,175   40%  40  4% 3,495  20% 
Equity 1,149  10%  1,453 27%  19  2%  2,620  15% 
Real estate 99  1%  172  3%  1%  278  2% 
Private equity 33  0%  273  5%  15  1%  321  2% 
Commodities 0%  11  0%  0%  11  0% 
Hedge funds 0%  266   5%  0%  266  2% 
Assets classes total  11,194 100%  5,403  100% 993  100%  17,590 100% 
FX Exposure, gross position 120 433  19  572 -

 

Figures 'Annual investment returns at fair values, If P&C and Mandatum Life, 2002-2011' present the historical development of investment returns. Mandatum Life has had on average higher return with higher volatility.

 

The weighted average investment return of the Group’s investment portfolios (including Sampo plc) in 2011 was 1.0 per cent (8.7 per cent in 2010).

Fixed Income Investments

Table 'Investment allocation, If P&C, Mandatum Life, Sampo plc and Sampo Group, 31 December 2011' presents the amount and average maturity of fixed income investments of Sampo Group by type of instrument. Sampo Group has a considerable amount of credit risk investments and is exposed to credit spread risk that is measured and managed as a part of the investment portfolio management. The limit setting is described in detail in the Credit risk chapter.

The average maturity of fixed income investments that affects the size of credit risk and reinvestment risk was 2.5 years in If P&C and 2.3 years in Mandatum Life. When it comes to interest rate sensitivity, the average duration of fixed income investments including derivatives in If P&C was 1.2 years and in Mandatum Life 1.8 years. The duration figure for Mandatum Life does not give a full picture of interest rate sensitivity at the end of the year 2011. This is due to the interest rate derivatives that are currently mitigating the effect of decreasing interest rates.

During 2011, the proportion of money market securities and cash was 13 per cent of the total investment portfolio. The proportion of high yield bonds was respectively 12 per cent. The proportion of public sector bonds was 5 per cent of the total investment portfolio.

Equity Investments

The equity investments of Sampo Group totaled EUR 2,620 million at the end of year 2011 (EUR 3,353 million in 2010). During 2011, the decrease in the weight of equity investments in the investment portfolio was mainly due to the decline in equity prices.

At the end of year 2011 the equity exposure of If P&C was EUR 1,149 million (EUR 1,648 million in 2010). The proportion of equities in If P&C’s investment portfolio was 10.3 per cent. During 2011 If P&C’s ownership in Topdanmark has increased and since May 2011 it has been treated as an associated company, and hence, it is no longer included in the equity portfolio. At the end of 2010 the investment amounted to EUR 198 million. In Mandatum Life the equity exposure was EUR 1,453 million at the end of year 2011 (EUR 1,686 million in 2010) and the proportion of equities was 26.9 per cent of the investment portfolio. The equity portfolio consists of shares of Nordic companies as well as portfolios in funds and ETFs investing outside Nordic countries.

The breakdown of the equity exposures of Sampo Group by geographical regions are shown in figures 'Breakdown of equity investments by geographical regions, Sampo Group, If P&C and Mandatum Life, 31 December 2011'.

 

The geographical emphasis in Sampo Group’s equity investments is in Nordic companies. The proportion of Nordic companies’ equities corresponds to 55 per cent of the total equity portfolio. This is in line with Sampo Group’s Nordic focus and the fact that insurance liabilities are in Nordic currencies.

The sector allocation of direct equity investments in Sampo Group is shown in tables 'Credit exposures by sectors, asset classes and rating, If P&C, Mandatum Life and Sampo Group, 31 December 2011'. The largest sectors are capital goods, consumer products, and basic industry. Equity investments made through investment funds accounted for 45 per cent of the entire equity portfolio.

Sampo Group’s largest equity holdings are disclosed in the Notes to the Financial Statements (note 40).

Currency Risks

Currency risk in general can be divided into transaction risk and translation risk. Transaction risk refers to the currency risk arising from contractual cash flows related to the insurance or investment operations or from hedges related to these cash flows. Translation risk refers to the currency risk that arises when consolidating the financial statements of subsidiaries that have a different base currency than the parent company.

In Sampo Group, the open transaction risk positions are considered and measured separately. The net position in each currency is the net of assets, liabilities and foreign exchange transactions denominated in the particular currency.

If P&C writes insurance policies that are mostly denominated in Scandinavian currencies and in euro. The currency risk is reduced by matching technical provisions with investment assets in the corresponding currencies or by using currency derivatives.

In Mandatum Life, currency transaction risk mainly arises from investments in other currencies than euro because the company’s technical provisions are almost completely denominated in euro. Mandatum Life’s currency strategy is based on active management of the currency position. The objective is to achieve positive return relative to a situation where the currency risk exposure is fully hedged.

The currency transaction risk positions of If P&C and Mandatum Life against their home currency are shown in table 'Transaction risk position, If P&C and Mandatum Life, 31 December 2011'. The table shows the net transaction risk exposures and the changes in the value of positions given a 10 per cent decrease in the value of the home currency.

Transaction risk position,
If P&C and Mandatum Life, 31 Dec 2011
  Base
currency

EUR

USD JPY GBP SEK NOK CHF DKK LTL LVL Other Total, net
 If P&C SEKm                        

Insurance operations

  -355  -126  -16  -120  -3,010  -1  -785  -1  -1  -14 

-4,428

Investments

  20  748  28  225  1,959  286 

3,268

Derivatives

  292  -610  -28  18  -91  1,057  475  -4  1,109

Total transaction risk, net position, If P&C

 
-43  12  14  -1  -24  -1  -1  -17  -52

Sensitivity: SEK -10%

 
-4 1 0 0 0

1

0 -2 0 0 -2 -7

 

           

 

           

Mandatum Life

EURm          

 

           

 Technical provisions

  -2 

-2 

 Investments

  972  10  203  18 

34 

31  140  1 423 

 Derivatives

  -761  -10  -201  -15 

12 

-38  -9  -1,022 

Total transaction risk, net position, Mandatum Life

 
211 

45 

-6  131  400 

Sensitivity: EUR -10%

 
21 

5

-1  1 13  40 

 Options are included according to their delta-values.

Sampo plc's transaction risk position is related to SEK-denominated dividends paid by If P&C and to debt instruments issued in other currencies than euro.

In addition to transaction risk, Sampo Group and its insurance subsidiaries are also exposed to translation risk. Sampo Group's consolidated financial statements are denominated in euro. Translation risk arises when entities with another base currency are consolidated into the Group financial statements. The effect of changes in foreign exchange rates result in translation differences which are recognized in the consolidated comprehensive income statement. Translation risks arise also within If P&C and to a lesser extent within Mandatum Life from their subsidiaries whose base currency is different from that of the respective parent company.

Other Investments

If P&C and especially Mandatum Life have real estate, private equity funds, hedge funds and commodity investments. The Investment Policies set limits for maximum allocations into these markets and products. On 31 December 2011, the combined share of the above mentioned investments was 5.0 per cent of the total investment portfolio. In If P&C the proportion was 1.2 per cent and in Mandatum Life it was 13.4 per cent.

Private equity and hedge funds are managed by external asset managers. The private equity fund portfolio is diversified both according to fund type and geographical areas. Hedge fund investments are diversified between underlying asset classes, fund types and investment styles. The Group’s real estate portfolio is managed by Sampo Group’s real estate management unit. The portfolio includes direct investments in properties as well as indirect investments in real estate funds and shares and debt instruments in real estate companies. The main risks related to property investments are limited by diversifying holdings both geographically and by type of property.

ALM Risks
Credit Risks