Sampo Group’s Online Annual Report 2012 and Sampo’s video ‘25 Years as a Listed Company’ have been granted the international Red Dot Communication Design 2013 Awards.

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Investment Portfolio Risks

Investments (excluding Mandatum Life’s investments covering unit-linked policies) are managed according to the subsidiaries’ Investment Policies. The most significant risks are equity, interest rate, credit and currency risks. Market risks also arise from private equity, real estate and alternative investments.

Sampo Group’s Chief Investment Officer is responsible for managing investments within the limitations of the Investment Policies prepared by the Group companies and approved by the Group companies’ Boards of Directors. 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 also controlled by the ICC in If P&C and ALCO in Mandatum Life at minimum 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 at Sampo Group level are controlled by the Group’s Audit Committee at minimum quarterly.

Asset Allocations and Investment Returns

The total amount of Sampo Group’s investment assets as at 31 December 2012 was EUR 18,164 million (EUR 17,590 million in 2011). The compositions of the investment portfolios in If P&C, Mandatum Life and Sampo plc at year end 2012 and in comparison to year end 2011 are shown in the figure Development of investment portfolios, If P&C, Mandatum Life and Sampo plc, 31 December 2012 and 31 December 2011.

Development of Investment Portfolios
If P&C, Mandatum Life and Sampo plc, 31 December 2012 and 31 December 2011

The investment assets of Sampo plc mainly consist of money market instruments. The main purpose of the assets is to form a liquidity portfolio that fluctuates in size mainly as a result of dividend payments to the shareholders of Sampo plc and dividend payments received from the insurance subsidiaries and the associated company. The investments of Mandatum Life’s Baltic subsidiary are included in Mandatum Life’s investment assets as equity in all tables and graphs in this Risk Management section.

The compositions of the investment portfolios are 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.

Parent company Sampo plc’s asset portfolio is by nature a liquidity reserve and hence its market risks are limited. Interest rate risk arising from the parent company’s gross debt and the liquidity reserve is the company’s most significant market risk together with the refinancing risk related to gross debt. Most of the parent company’s debt is tied to short-term reference rates as a consequence of interest rate swaps used. 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 the parent company would also be lower.

The structures of technical provisions as well as risk appetites of Mandatum Life and If P&C differ from each other and as a result, the structures of the investment portfolios of the two companies may be different.

The investment allocations of If P&C, Mandatum Life, Sampo plc and Sampo Group are presented in the table Investment allocation, If P&C, Mandatum Life, Sampo plc and Sampo Group, 31 December 2012.

Investment Allocation
If P&C, Mandatum Life, Sampo plc and Sampo Group, 31 December 2012
  If P&C  Mandatum  Life Sampo  plc Sampo Group
 Asset ClassMarket value, EURmWeightAverage maturity
(years) 
Market value,
EURm 
WeightAverage maturity (years) Market value,
EURm 
 WeightAverage maturity
(years) 
Market value,
EURm
 Weight Average maturity
(years)
Fixed income total 10,340 88%  2.3 3,162 57% 2.1 897 97% 0.2 14,399 79% 2.1
Money market securities and cash 883 8% 0.2 552 10% 0.3  827 89% 0.2 2,263 12% 0.2
Government bonds 740 6% 3.7 12 0% 4.7 0 0% 0.0 752 4% 3.7
Credit bonds, funds and loans 8,717 74% 2.4 2,576 47% 2.4 70 8% 0.0 11,363 63% 2.4
Covered
bonds
3,800 32% 2.1 139 3% 3.0 0 0% 0.0 3,939 22% 2.1
Investment
grade bonds
and loans
3,010 26% 2.2 1,122 20% 1.7 1 0% 0.0 4,133 23% 2.1
High-yield
bonds and
loans
1,529 13% 3.4 1,055 19% 3.0 0 0% 0.0 2,584 14% 3.3
Subordinated / Tier 2 299 3% 2.2 106 2% 1.8 0 0% 0.0 405 2% 2.1
Subordinated / Tier 1 79 1% 2.0 157 3% 3.6 0 0% 0.0 235 1% 3.1
Hedging swaps -1 0% -2 0% 69 7% 66 0%
Policy loans 0 0% 0.0 22 0% 2.8 0 0% 0.0 22 0% 2.8
Trading derivatives 2 0% 20  0% 0 0% 22 0%
Other asset classes total 1,375 12% 2,337 42% 30 3% 3,743 21%
Equity 1,248 11% 1,578 29% 18 2% 2,844 16%
Real estate 102 1% 187 3% 6 1% 295 2%
Private equity 26 0% 251 5% 6 1% 284 2%
Commodities 0 0% 0% 0 0% 0 0%
Alternative 0 0% 321 6% 0 0% 321 2%  
Assets classes total  11,717 100% 5,519 100% 928 100% 18,164 100%
FX Exposure, gross position 161 199 0 360 -

The figure Annual investment returns at fair values, If P&C and Mandatum Life, 2003–2012 presents the historical development of investment returns. Mandatum Life has had on average higher returns with higher volatility.

Annual Investment Returns at Fair Values 2003–2012
If P&C

 

Annual Investment Returns at Fair Values 2003–2012
Mandatum Life

The weighted average investment return of the Group’s investment portfolios (including Sampo plc) in 2012 was 7.3 per cent (1.0 per cent in 2011).

Fixed Income Investments

The table Investment allocation, If P&C, Mandatum Life, Sampo plc and Sampo Group, 31 December 2012 presents the amount and average maturity of fixed income investments of Sampo Group by type of instrument.

Sampo Group’s fixed income investments are exposed to creditworthiness of issuers and derivative counterparties in general. Sampo Group, as an investor, invests mainly in tradable instruments instead of being a lender with mainly non-tradable loan instruments in its portfolio. Therefore, most of the Group’s credit risk potentially materializes as market value loss (spread risk) and the significance of credit losses (default risk) is secondary. The single name limit procedures to mitigate spread and default risks and Sampo Group’s approach to manage fixed income investments are described later in detail in the Credit risk section.

The average maturity of fixed income investments that affects the size of credit risk and reinvestment risk was 2.3 years in If P&C and 2.1 years in Mandatum Life. Interest rate sensitivity in terms of the average duration of fixed income investments including hedging derivatives in If P&C was 1.1 years and in Mandatum Life 1.8 years.

At the end of year 2012, the proportion of money market securities and cash was 12 per cent of the total investment portfolio. The proportion of high yield debt instruments was respectively 14 per cent. The proportion of public sector bonds was 4 per cent of the total investment portfolio.

Equity Investments

The equity investments of Sampo Group totaled EUR 2,844 million at the end of year 2012 (EUR 2,620 million in 2011). During 2012, the increase in the weight of equity investments in the investment portfolio was mainly due to the rise in equity prices.

At the end of year 2012, the equity exposure of If P&C was EUR 1,248 million (EUR 1,149 million in 2011). The proportion of equities in If P&C’s investment portfolio was 10.6 per cent. In Mandatum Life, the equity exposure was EUR 1,578 million at the end of year 2012 (EUR 1,453 million in 2011) and the proportion of equities was 28.6 per cent of the investment portfolio. The equity portfolio consists of shares of Nordic companies as well as mutual fund and ETF investments outside Nordic countries.

The breakdown of the equity exposures of Sampo Group by geographical regions are shown in the figure Breakdown of equity investments by geographical regions, Sampo Group, If P&C and Mandatum Life, 31 December 2012.

Breakdown of Equity Investments by Geographical Regions
Sampo Group, 31 December 2012

 

Breakdown of Equity Investments by Geographical Regions
If P&C, 31 December 2012

 

Breakdown of Equity Investments by Geographical Regions
Mandatum Life, 31 December 2012

The geographical emphasis in Sampo Group’s equity investments is in Nordic companies. The proportion of Nordic companies’ equities corresponds to 56 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 table Credit exposures by sectors, asset classes and rating, If P&C, Mandatum Life and Sampo Group, 31 December 2012. The largest sectors are capital goods, consumer products and basic industry. Equity investments made through mutual funds and ETF investments accounted for 44 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 by subsidiary companies. 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 transaction 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 risk strategy is based on active management of the currency position. The objective is to achieve a 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 currencies are shown in the table Transaction risk position, If P&C and Mandatum Life, 31 December 2012. 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 December 2012
 Base
currency
EURUSDJPYGBPSEKNOKCHFDKKLTLLVLOtherTotal, net
 If P&C SEKm                        

Insurance operations

  -390 -114 0 -17 39 -2,849 0 -790 -1 -1 -7

-4,130

Investments

  659 17 1 150 2,468 0 382 0 0 1

3,683

Derivatives

  384 -561 -22 16 -243 337 0 385 0 0 7 303

Total transaction risk, net position, If P&C

 
-1 -16 -5 -1 -54 -44 0 -23 -1 -1 1 -144

Sensitivity: SEK -10%

 
0 -2 0 0 0

-4

0 -2 0 0 0 -9

 

           

 

           

Mandatum Life

EURm          

 

           

 Technical provisions

  0 0 0 0 -2

0

0 0 0 0 0 -2

 Investments

  0 1,076 7 222 36

4

89 14 2 0 160 1,610

 Derivatives

  0 -1,100 -8 -220 -32

10

-102 0 0 0 -38 -1,490

Total transaction risk, net position, Mandatum Life

0 -24 -1 2 2

14

-13 14 2 0 122 118

Sensitivity: EUR -10%

0 -2 0 0 0

1

-1  1 0 0 12 12

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 fund and alternative investments. The Investment Policies set limits for maximum allocations into these markets and products. On 31 December 2012, 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 1.1 per cent and in Mandatum Life it was 13.8 per cent.

Private equity and alternative investments are managed by external asset managers. The private equity fund portfolio is diversified both according to fund type and geographical areas. Alternative 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.