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Credit Risks

In Sampo Group, credit risk can materialize as market value losses when credit spreads are changing unfavourably (spread risk) or as credit losses when issuers of credit instruments or counterparties of financial derivatives or reinsurance transactions are failing to meet their financial obligations (default risk).

Currently spread risk related to tradable bonds and notes has a major role in terms of exposures and management procedures when it comes to credit risk in Sampo Group. However, Sampo Group has gradually increased its investments in illiquid loan instruments and, accordingly, Sampo Group has increased its resources to analyze and manage default risks.

Default risk related to reinsurers arises through reinsurance receivables and through the reinsurers’ portion of the outstanding claims. Default risk of reinsurance counterparties mainly concerns If P&C, as the use of reinsurance in Mandatum Life is relatively limited. In regards to financial derivatives the case is opposite. Mandatum Life together with parent company Sampo plc are frequent users of financial derivatives and are therefore more exposed to default risk of derivative counterparties than If P&C.

In addition, credit risk arises from receivables from policyholders and other receivables related to commercial transactions. Credit risk exposure towards policyholders is very limited, because non-payment of premiums generally results in cancellation of the insurance policies. Also the credit risk exposures arising from other receivables related to commercial transactions are minor in Sampo Group.

The figure Illustration of credit risk presents credit risk on a general level.

Illustration of Credit Risk

Credit exposures including debt instruments and off-balance sheet transactions are shown in the table Credit exposures by sectors, asset classes and rating, If P&C, Mandatum Life and Sampo Group, 31 December 2012. Due to differences in the treatment of derivatives, the figures in the table are not fully comparable with other tables in this annual report.

Credit Exposures by Sectors, Asset Classes and Rating
If P&C, 31 December 2012
EURm      AAAAA+
– AA-
A+
 A-
BBB+
– BBB-
BB+
 C
      
      D
Non-
rated
Fixed
income
total
Equi-
ties
   OtherCounter-
party
risk
      TotalChange
31 Dec
2011
Asset-backed
Securities
0 0 0 0 0 0 0 0 0 0 0 0 0
Basic Industry 0 0 0 116 104 0 121 341 42 0 0 383 100
Capital Goods 0 0 17 27 0 0 71 115 329 0 0 444 106
Consumer Products 0 0 13 278 0 0 139 431 264 0 0 695 95
Covered Bonds 3,641 159 0 0 0 0 0 3,800 0 0 0 3,800 200
Energy 0 7 48 4 95 0 404 558 36 0 0 594 147
Financial Institutions 29 924 1,625 466 252 0 6 3,302 75 0 9 3,386 267
Governments 33 0 0 3 0 0 0 36 0 0 0 36 -413
Government
Guaranteed
173 0 0 0 0 0 56 229 0 0 0 229 -64
Insurance 0 0 0 0 0 0 0 0 0 0 458 458 56
Media 0 0 0 0 0 0 38 38 0 0 0 38 15
Public Sector, Other  449 0 1 0 0 0 0 451 0 0 0 451 -22
Real Estate 0 10 0 0 0 0 75 85 0 102 0 186 64
Services 0 0 0 12 0 0 9 21 4 0 0 25 7
Technology and
Electronics
0 0 0 0 0 0 0 0 3 0 0 3 -2
Telecommunications 0 0 168 42 0 0 22 232 78 0 0 310 157
Transportation 0 29 0 0 0 0 262 292 8 0 0 300 82
Utilities 0 0 219 98 0 0 40 357 1 0 0 358 56
Others 0 0 0 0 0 0 0 0 24 0 0 24 -59
Funds 0 0 0 0 0 0 89 89 384 26 0 500 -27
Total 4,325 1,129 2,090 1,046 452 0 1,333 10,376 1,248 128 467 12,218 765
Change 31 Dec 2011 247 8 -439 383 119 0 286 605 99 -4 66 765  

 

Credit Exposures by Sectors, Asset Classes and Rating
Mandatum Life, 31 December 2012
EURmAAAAA+
 – AA-
A+
 A-
BBB+
– BBB-
BB+
– C
       

D
Non-
rated
Fixed
income
total
Equi-
ties
OtherCounter-
party
risk
TotalChange
31 Dec
2011
Asset-backed
Securities
0 0 0 0 0 0 0 0 0 0 0 0 0
Basic Industry 0 0 4 8 241 0 73 326 220 0 0 546 -54
Capital Goods 0 3 74 30 15 0 37 160 172 0 0 332 9
Consumer Products 0 0 19 30 58 0 70 177 102 0 0 279 65
Covered Bonds 62 55 11 10 0 0 0 139 0 0 0 139 7
Energy 0  0 14 15 0 0 49 79 11 0 0 90 20
Financial Institutions 0 488 599 113 234 0 0 1,434 18 20 2 1,475 18
Governments 12 0 0 0 0 0 0 12 0 0 0 12 0
Governmant
Guaranteed
0 0 0 0 0 0 0 0 0 0 0 0 0
Insurance 0 0 28 20 0 0 22 70 17 0 0 87 1
Media 0 0 0 0 0 0 16 16 12 0 0 28 -12
Public Sector, Other 0 0 0 0 0 0 0 0 0 0 0 0 0
Real Estate 0 0 0 0 0 0 30 30 0 154 0 185 41
Services 0 0 0 6 59 0 13 79 33 11 0 122 15
Technology and
Electronics
0 0 0 0 4 0 16 20 49 4 0 73 -13
Telecommunications 0 0 34 79 50 0 0 163 1 0 0 164 -29
Transportation 0 0 7 0 0 0 32 39 5 0 0 44 7
Utilities 0 0 124 76 0 0 0 200 72 0 0 272 -27
Others 0 0 0 0 0 0 16 16 3 0 0 19 -29
Funds 0 0 0 0 0 0 204 204 864 569 0 1,638 85
Total 74 545 914 389 662 0 579 3,164 1,578 759 2 5,503 103
Change 31 Dec 2011 -27 -61 -77 -43 25 0 135 -48 125 37 -10 103  

 

Credit Exposures by Sectors, Asset Classes and Rating
Sampo Group, 31 December 2012
EURm AAA AA+
– AA-
A+
– A-
BBB+
– BBB-
BB+
– C
D Non-
rated
Fixed
income
total
Equi-
ties
Other Counter-
party
risk
Total Change 31 Dec
2011
Asset-backed
Securities
0 0 0 0 0 0 0 0 0 0 0 0 0
Basic Industry 0 0 4 124 345 0 215 688 261 0 0 950 67
Capital Goods 0 3 91 57 15 0 108 275 501 0 0 776 115
Consumer Products 0 0 32 308 58 0 210 608 366 0 0 974 161
Covered Bonds 3,703 214 11 10 0 0 0 3,939 0 0 0 3,939 207
Energy 0 7 62 19 95 0 454 636 47 0 0 684 167
Financial Institutions 29 1,762 2,702 579 486 0 6 5,563 93 20 24 5,700 211
Governments 45 0 0 3 0 0 0 48 0 0 0 48 -412
Government
Guaranteed
173 0 0 0 0 0 56 229 0 0 0 229 -64
Insurance 0 0 28 20 0 0 22 70 34 0 458 562 57
Media 0 0 0 0 0 0 55 55 12 0 0 66 4
Public Sector, Other 449 0 1 0 0 0 0 451 0 0 0 451 -22
Real Estate 0 10 0 0 0 0 105 115 0 262 0 377 105
Services 0 0 0 18 59 0 22 100 36 11 0 147 22
Technology and
Electronics
0 0 0 0 4 0 16 20 52 4 0 76 -15
Telecommunications 0 0 201 121 51 0 22 395 78 0 0 474 129
Transportation 0 29 7 0 0 0 294 331 14 0 0 345 89
Utilities 0 0 342 175 0 0 40 557 73 0 0 630 29
Others 0 0 0 0 0 0 16 16 27 0 0 43 -90
Funds 0 0 0 0 0 0 294 294 1,249 601 0 2,144 49
Total 4,399 2,025 3,482 1,435 1,114  0 1,934 14,388 2,844 899 482 18,613 806
Change 31 Dec 2011 220 -452 -192 340 144 0 442 503 223 24 56 806  

More detailed distribution of reinsurance receivables and reinsurers’ portion of outstanding claims in If P&C on 31 December 2012 per rating category is presented in the table Reinsurance recoverables, If P&C, 31 December 2012 and 31 December 2011. In the table, EUR 157 million (EUR 164 million in 2011) are excluded, which mainly relates to captives and statutory pool solutions.

Reinsurance Recoverables
If P&C, 31 December 2012 and 31 December 2011
  31 Dec 2012 31 Dec 2011

Rating

Total EURm

%

Total EURm%

AAA

0 0% 0 0%

AA+ - A-

446

97%

387 98%

BBB+ - BBB-

5 1% 0 0%

BB+ - C

0 0% 0 0%

D

0 0% 0 0%

Non-rated

7 2% 5 1%

Total

458 100% 393 100%
Following a new definition, reinsurance recoverables excludes assumed reinsurance and includes premium reserve for the ceded reinsurance. The comparative figures have been changed accordingly and thus the 2011 figures in the table above differ from the table published in 2011.

The ten largest individual reinsurance recoverables amounted to EUR 398 million, representing 65 per cent of total recoverables. The largest individual reinsurer is Munich Re (AA-), which accounts for 22 per cent of the total recoverables.

The amount of ceded treaty and facultative premiums was EUR 68.9 million. Of this amount, 100 per cent was related to reinsurance counterparties with a credit rating of A- or higher.

In Mandatum Life, the importance of reinsurance agreements is limited and thus credit risk related to reinsurance counterparties in Mandatum Life is immaterial. At the inception of the reinsurance, the accepted credit risk of the reinsurer is considered and the credit risks of reinsurance assets are monitored.

Credit Risk Management

In Sampo Group, the selection of direct debt investments is based primarily on ‘bond-picking’ and secondarily on top-down allocation. This investment style may lead into situation where portfolio is not as diversified as the finance theory suggests but includes thoroughly analyzed investments with risk-return-ratios in focus. Critical success factors of Sampo Group’s investment style are considered to be the following:

  1. Potential investments must be understood thoroughly. Hence, the creditworthiness of the issuer or counterparty is assessed together with collaterals and other structural details of instruments. Although external credit ratings by rating agencies are used to support the internal assessment, Sampo Group’s own internal assessment is always the most important factor in decision making.
  2. When the details of an instrument are understood and the related earnings potential and risks are considered to be in balance, investment transaction shall be executable in a short notice regardless of instrument type. This puts pressure on credit limit structures and procedures that must be at the same time (i) flexible enough to facilitate fast decision making regardless of instrument type, (ii) well-structured to ensure that investment opportunities are assessed prudently, taking into account the specific features and risks of all investment types and (iii) they must restrict the maximum exposure of single name risk to the level that is in balance with the company’s risk appetite. During the last years, credit limit structures and procedures have been in focus when developing the companies’ Investment Policies.
  3. Credit exposure accumulations over single names and products are monitored regularly at company level and at Group level to identify unwanted concentrations. Credit exposures are reported, for instance, by sectors and asset classes and within fixed income by ratings. Individual issuers’ and counterparties’ credit ratings are monitored continuously.

In Sampo Group, derivatives’ counterparty risk is a by-product of managing other market risks. Since there is no earnings potential available in derivative counterparty risk, the risk is mitigated by bilateral ISDA and CSA agreements. This is the case especially in Sampo plc and Mandatum Life which are frequent users of long-term derivatives.

In order to limit and control credit risk associated with reinsurance, If P&C has a Reinsurance Security Policy, which sets requirements for the reinsurers’ minimum credit ratings and the maximum exposure to individual reinsurers. Credit ratings from rating agencies are used to support the assessment of the creditworthiness of reinsurance companies similarly to the assessment of credit risk of investment assets.