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Group Level Risks

As a general principle, the subsidiary companies are managed independently from each other. However, it has been deemed pertinent to asses certain risk issues also on Group level, i.e. concentration risks, liquidity management, capitalization and group structure.

With respect to the underwriting businesses carried out in the subsidiary companies, it has been established that the direct business related correlations between If P&C's non-life business and Mandatum Life's life business are negligible 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 (i.e. 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. Fund investments, 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 parties independent from investment operations. Total group exposures are monitored and controlled by Sampo's Chief Investment Officer, Sampo's Chief Risk Officer and Sampo's Audit Committee.

The largest market and credit risk concentrations related to individual counterparties are presented in table "Concentration of market and credit risks in individual counterparties by asset class, Sampo Group, 31 Dec 2010".

Concentration of market and credit risks in individual counterparties by asset class, Sampo Group, 31 Dec 2010

 EURm

Counterparty (per business area)

Total fair value

% of total investment asssets

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

Svenska Handelsbanken

1,617

9%
495

1,115

0 804
136
175 0
7

Nordea Bank

1,589

9%
562

1,014

0 765 108 140 0 14

Swedbank

918 5%
9 907 43 694 58 112 0 2

Skandinaviska Enskilda Banken

867 5%
149 717 0 426 184 107 0 0

SBAB

744 4%
0 744 57 344 300 43 0 0

Den Danske Bank

569 3%
105 451 0 75 237 139 0 13

DnB NOR Bank

565 3% 0 565 0 104 301 160 0 0

Pohjola Bank

489 3% 306 183 0 0 69 114 0 0
Sweden 281 2%
0 281 0 0 281 0 0 0

UPM-Kymmene

227 1%
0 188 0 0 188 0 39 0
Total top 10 exposures 7,866 43% 1,626 6,165 100 3,212 1,862 991 39 35
                     

Other

10,435

57%                

Total investment assets

18,301

100%
               

The concentrations by asset class, ratings and industry sectors are shown in tables "Investment allocation according to asset classes, sectors and fixed income investments according to rating, If P&C, 31 Dec 2010", "Investment allocation according to asset classes, sectors and fixed income investments according to rating, Mandatum Life, 31 Dec 2010" and "Investment allocation according to asset classes, sectors and fixed income investments according to rating, Sampo Group, 31 Dec 2010". The most significant concentrations on Sampo Group level are in the Nordic financials within which the largest positions relate to short-term instruments and covered bonds.

Furthermore, concentrations 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 Dec 2010" and "Ten largest direct high-yield and non-rated fixed income investments, Sampo Group, 31 Dec 2010".

Ten largest direct equity investments, Sampo Group, 31 Dec 2010

Top 10 equity investments

Total fair value, EURm

% of total direct equity investments

Topdanmark

198 10%

Cardo

126 7%

Nobia

98 5%

YIT

97 5%

Veidekke

79 4%

Alma Media

55 3%

Atlas Copco

53 3%

Fortum

52 3%

Sandvik

52 3%

Volvo

51 3%

Total top 10 exposures

862 45%
     

Other direct equity investments

1,041

55%

Total direct equity investments

1,903

100%

Ten largest direct high-yield and non-rated fixed income investments, Sampo Group, 31 Dec 2010

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

Rating

Total fair value, EURm

% of total direct fixed income investments

UPM-Kymmene

BB 188 1%

Stora Enso

BB 135 1%

A P Moller - Maersk

NR 68 0%

DNO International

NR 67 0%

HeidelbergCement

BB- 65 0%

Boliden

NR 63 0%

Wilh. Wilhelmsen

NR 62 0%

Color Group

NR 53 0%

Outokumpu

NR 52 0%

Finnvera

NR 52

0%

Total top 10 exposures

  805 6%
       

Other direct fixed income investments

 

12,996

94%

Total direct fixed income investments

 

13,801

100%

As discussed above, direct concentration risks may arise 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 á vis If P&C. The historical correlation between If P&C´s and Nordea's quarterly reported profits since 2005 is almost zero.

Liquidity risk is managed at company level, and in normal course of business, subsidiary companies do not invest in Sampo plc´s debt instruments, and very seldom the companies sell their assets to each other. 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 reasoned by business opportunities. Thus, during possible market stresses these options are available to certain extent as well.

The structure of Sampo's financial conglomerate, both legal and reporting structure - parent company, two subsidiaries and one associated company - 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 the conglomerate (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 protect group companies from contagion risks.


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