Page added to My Report ()

Equity and Spread Risks

Sampo Group is exposed to price risk dependent on changes in equity prices and spreads arising from its fixed income and equity investments. Equity price and spread movements are affected by general market trends and by risk factors that are related specifically to a certain issuer or a specific issue.

Equity and Spread Risks

 

When the financial strength or future prospects of an issuer deteriorate or value of collaterals decreases, equity and spread risks materialize as decreases in the value of investment assets.  

The values of investment assets decrease when credit spreads of tradable debt instruments are changing unfavourably or equity prices are decreasing. Most Sampo Group’s investments are tradable and hence subject to daily mark-to-market valuation. Moreover, the fair values of non-tradable instruments change adversely when the financial strength or future prospects of the issuer deteriorates or value of collaterals decreases. Ultimately the issuer may fail to meet its financial obligations and the risk realizes as credit losses.

Management of Equity and Spread Risks

In Sampo Group, the selection of direct fixed income and equity investments is based primarily on stock and bond-picking and secondarily on top-down allocation. This investment style ensures that the portfolio includes thoroughly analyzed investments with adequate risk return ratios, although the portfolio might not be necessarily as diversified as the finance or portfolio theory suggests.

Decision making, limit system and monitoring
  1. Potential investments are analyzed thoroughly. The creditworthiness and future prospects of the issuer are assessed together with collaterals and structural details of the instruments. Although external credit ratings by rating agencies and opinions of analysts are used to support the internal assessment, Sampo Group’s own internal assessment is always the most important factor in decision making.
  2. Investment transactions shall be executable on a short notice when an opportunity appears. This puts pressure on authorisations and 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) able to restrict the maximum exposure of a single name risk to the level that is in balance with the company’s risk appetite.
  3. Accumulated credit exposures over single names and products are monitored regularly at the subsidiary 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.

Credit Exposures to Fixed Income and Equity Instruments

Exposures in debt and equity instruments are shown in the table Exposures by Sectors, Asset Classes and Rating, If P&C, Mandatum Life and Sampo Group, 31 December 2013. The table includes also counterparty risk exposures relating to reinsurance and derivative transactions. Counterparty risks are described in more detail in section Counterparty Credit Risks. Due to differences in the reporting 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 2013
EURm AAA AA+
- AA-		 A+
- A-		 BBB+
- BBB-		 BB+
- C		 D Non-
rated		 Fixed income total Equities Other Counter-
party risk		 Total Change 31 Dec 2012
Basic Industry 0 0 0 107 84 0 42 233 34 0 0 267 -115
Capital Goods 0 0 0 26 0 0 41 67 368 0 0 435 -9
Consumer Products 0 0 13 216 11 0 82 322 341 0 0 663 -32
Energy 0 6 0 4 91 0 363 464 38 0 0 502 -92
Financial Institutions 25 959 1,101 406 192 0 16 2,699 24 0 1 2,724 -662
Governments 366 594 0 4 0 0 0 963 0 0 0 963 927
Government Guaranteed 215 0 0 0 0 0 0 215 0 0 0 215 -14
Health Care 0 0 0 0 0 0 62 62 3 0 0 65 65
Insurance 0 0 0 0 0 0 1 1 0 0 295 296 -162
Media 0 0 0 0 0 0 19 19 0 0 0 19 -19
Public Sector, Other 617 64 0 0 0 0 0 681 0 0 0 681 231
Real Estate 0 9 0 0 0 0 355 364 0 92 0 456 270
Services 0 0 0 5 0 0 11 15 3 0 0 19 -6
Technology and Electronics 0 0 0 0 12 0 18 30 4 0 0 34 31
Telecommunications 0 0 137 32 0 0 20 189 87 0 0 276 -33
Transportation 0 25 0 56 13 0 226 320 9 0 0 329 29
Utilities 0 0 176 99 0 0 82 356 0 0 0 356 -2
Others 0 0 0 0 0 0 0 0 37 0 0 37 14
Asset-backed Securities 0 0 0 0 0 0 0 0 0 0 0 0 0
Covered Bonds 3,077 160 0 0 0 0 0 3,237 0 0 0 3,237 -563
Funds 0 0 0 0 0 0 35 35 335 21 0 391 -108
Total 4,300 1,817 1,427 955 402 0 1,372 10,273 1,283 113 296 11,966 -253
Change 31 Dec 2012 -25 688 -664 -91 -49 0 38 -103 36 -15 -171 -253
 
Credit Exposures by Sectors, Asset Classes and Rating
Mandatum Life, 31 December 2013
EURm AAA AA+
- AA-		 A+
- A-		 BBB+
- BBB-		 BB+
- C		 D Non-
rated		 Fixed income total Equities Other Counter-
party risk		 Total Change 31 Dec 2012
Basic Industry 0 0 0 8 211 0 67 286 183 0 0 468 -77
Capital Goods 0 0 8 29 12 0 37 86 131 0 0 218 -114
Consumer Products 0 0 3 29 57 0 71 160 105 0 0 265 -14
Energy 0 0 14 15 0 0 49 77 3 0 0 80 -10
Financial Institutions 0 352 455 63 220 0 0 1,090 23 21 5 1,139 -336
Governments 151 576 0 0 0 0 0 727 0 0 0 727 715
Government Guaranteed 0 0 0 0 0 0 0 0 0 0 0 0 0
Health Care 0 0 0 0 27 0 19 45 10 0 0 55 55
Insurance 0 0 0 21 0 0 18 39 17 0 0 56 -31
Media 0 0 0 0 12 0 26 38 1 0 0 40 11
Public Sector, Other 0 0 0 0 0 0 0 0 0 0 0 0 0
Real Estate 0 0 0 0 0 0 31 31 0 170 0 201 16
Services 0 0 0 0 51 0 18 70 42 12 0 124 1
Technology and Electronics 0 0 0 0 28 0 0 28 72 0 0 100 27
Telecommunications 0 0 6 96 30 0 13 145 0 0 0 145 -19
Transportation 0 0 7 31 0 0 5 43 1 0 0 44 -1
Utilities 0 0 61 52 0 0 0 114 82 2 0 198 -74
Others 0 0 0 0 0 0 13 13 3 8 0 25 6
Asset-backed Securities 0 0 0 0 0 0 0 0 0 0 0 0 0
Covered Bonds 61 53 11 0 0 0 0 125 0 0 0 125 -13
Funds 0 0 0 0 0 0 112 112 775 548 0 1,435 -203
Total 211 981 565 343 649 0 480 3,229 1,448 761 5 5,443 -60
Change 31 Dec 2012 137 436 -349 -46 -13 0 -99 66 -130 2 3 -60
 
Credit Exposures by Sectors, Asset Classes and Rating
Sampo Group, 31 December 2013
EURm AAA AA+
- AA-		 A+
- A-		 BBB+
- BBB-		 BB+
- C		 D Non-
rated		 Fixed income
total		 Equities Other Counter-
party risk		 Total Change 31 Dec 2012
Basic Industry 0 0 0 115 295 0 129 539 217 0 0 756 -194
Capital Goods 0 0 8 54 12 0 89 163 499 0 0 663 -113
Consumer Products 0 0 16 245 68 0 153 481 446 0 0 927 -46
Energy 0 6 14 19 91 0 411 542 41 0 0 582 -102
Financial Institutions 25 1,660 1,843 469 413 0 16 4,426 47 21 14 4,508 -1,192
Governments 517 1,170 0 4 0 0 0 1,690 0 0 0 1,690 1,642
Government Guaranteed 215 0 0 0 0 0 0 215 0 0 0 215 -14
Health Care 0 0 0 0 27 0 80 107 13 0 0 166 166
Insurance 0 0 0 21 0 0 48 69 34 0 295 352 -210
Media 0 0 0 0 12 0 45 58 1 0 0 59 -8
Public Sector, Other 617 64 0 0 0 0 0 681 0 0 0 681 231
Real Estate 0 9 0 0 0 0 386 395 0 264 0 659 281
Services 0 0 0 5 51 0 29 85 46 12 0 142 -5
Technology and Electronics 0 0 0 0 40 0 18 58 76 0 0 134 58
Telecommunications 0 0 143 128 30 0 33 334 87 0 0 421 -52
Transportation 0 25 7 87 13 0 231 363 10 0 0 373 28
Utilities 0 0 237 151 0 0 82 470 82 2 0 554 -76
Others 0 0 0 0 0 0 13 13 41 8 0 63 20
Asset-backed Securities 0 0 0 0 0 0 0 0 0 0 0 0 0
Covered Bonds 3,138 213 11 0 0 0 0 3,362 0 0 0 3,362 -576
Funds 0 0 0 0 0 0 147 147 1,110 580 0 1,837 -307
Total 4,511 3,148 2,279 1,298 1,051 0 1,912 14,199 2,749 887 309 18,144 -469
Change 31 Dec 2012 112 1,123 -1,203 -137 -63 0 -22 -189 -95 -13 -172 -469

The largest holdings are in financial institutions and covered bonds. Most of these investments are in Nordic countries as can be seen in the table Fixed Income Investments in Financial Sector, Sampo Group, 31 December 2013. These exposures decreased by EUR 1.4 billion during 2013.  

 
Fixed Income Investments in Financial Sector
Sampo Group, 31 December 2013
Covered bonds Money market securities Long-term senior debt Long-term sub-
ordinated debt		 Total, EURm %
Sweden 2,431 593 951 120 4,095 52.6%
Finland 241 1,320 97 18 1,677 21.5%
Norway 506 0 559 107 1,172 15.1%
Denmark 80 11 123 114 328 4.2%
United States 101 56 10 167 2.1%
France 60 0 25 19 104 1.3%
Netherlands 0 92 92 1.2%
Switzerland 31 11 42 0.5%
Austria 33 1 34 0.4%
Estonia 27 27 0.3%
Iceland 15 15 0.2%
Luxembourg 11 11 0.1%
Belgium 5 5 10 0.1%
Russia 6 6 0.1%
Jersey 5 5 0.1%
Italy 1 1 0.0%
Latvia 0 0 0.0%
Germany 0 0 0.0%
Total 3,362 2,060 1,954 411 7,788 100.0%

The public sector (governments, government guaranteed, public sector, other) has had relatively minor role in Sampo Group’s portfolios and these exposures have been mainly in the Nordic countries. However, public sector investments increased by EUR 1.9 billion during 2013. The exposure increased especially in the Netherlands and in France.

Fixed Income Investments in Public Sector
Sampo Group, 31 December 2013
Governments Government guaranteed Public sector, other Total market value, EURm
Netherlands 845 845
Sweden 57 502 559
Germany 448 73 522
France 325 325
Norway 159 159
Finland 11 106 20 137
Other 4 36 39
Total 1,690 215 681 2,586
 

The exposures in non-rated and high-yield fixed income instruments are significant, because relatively small number of Nordic companies are rated. The largest high-yield and non-rated fixed income investment exposures are presented in the table Ten Largest Direct High Yield and Non-rated Fixed Income Investments, Sampo Group, 31 December 2013.

Ten Largest Direct High Yield and Non-rated Fixed Income Investments
Sampo Group, 31 December 2013
Largest direct high yield and non-rated fixed income investments Rating Total fair value, EURm % of total direct fixed income investments
ICA Fastigheter NR 169 1.2%
Eksportfinans ASA BB- 159 1.1%
Stora Enso BB 159 1.1%
UPM-Kymmene BB 106 0.7%
PBA Karlskrona NR 85 0.6%
Neste Oil Oyj NR 76 0.5%
Sponda Oyj NR 68 0.5%
Seadrill LTD NR 51 0.4%
Wilh Wilhemsen ASA NR 51 0.4%
Aker Solutions ASA BB 45 0.3%
Total top 10 exposures 969 6.9%
Other direct fixed income investments 13,140 93.1%
Total direct fixed income investments 14,108 100.0%

The equity investments of Sampo Group totaled EUR 2,749 million at the end of year 2013 (EUR 2,844 million in 2012). During 2013, the decrease in the weight of equity investments in the investment portfolio was mainly due to the net selling of equities.

At the end of year 2013, the equity exposure of If P&C was EUR 1,283 million (EUR 1,248 million in 2012). The proportion of equities in If P&C’s investment portfolio was 11.0 per cent. In Mandatum Life, the equity exposure was EUR 1,448 million at the end of year 2013 (EUR 1,578 million in 2012) and the proportion of equities was 26.6 per cent of the investment portfolio. The equity portfolio consists of Nordic companies’ shares as well as mutual fund and ETF investments outside the Nordic countries.

Breakdown of the equity exposures of Sampo Group by geographical regions is shown in the figure Breakdown of Equity Investments by Geographical Regions, Sampo Group, If P&C and Mandatum Life, 31 December 2013.

 
Breakdown of Equity Investments by Geographical Regions
Sampo Group, 31 December 2013, total 2,749 EURm
Breakdown of Equity Investments by Geographical Regions
If P&C, 31 December 2013, total 1,283 EURm
Breakdown of Equity Investments by Geographical Regions
Mandatum Life, 31 December 2013, total 1,448 EURm
 

The geographical emphasis of Sampo Group’s equity investments is in Nordic companies. The proportion of Nordic companies’ equities corresponds to 58 per cent of the total equity portfolio. This is in line with Sampo Group’s investment strategy to focus on Nordic companies. Moreover, the Group’s insurance liabilities are mostly denominated in the euro and in the Nordic currencies. In the long run the proportion of investments outside of the Nordic countries has gradually increased, because the amount of companies issuing securities in the Nordic countries is limited and from a tactical point of view other geographical areas have recently provided interesting investment opportunities.  

The sector allocation of direct equity investments in Sampo Group is presented in table Credit exposures by sectors, asset classes and rating, If P&C, Mandatum Life and Sampo Group, 31 December 2013. The largest allocations are to capital goods, consumer products and basic industry sectors. Equity investments made through mutual funds and ETF investments accounted for 40 per cent of the entire equity portfolio.

Furthermore, the largest direct equity exposures are presented in the table Ten Largest Direct Equity Investments, Sampo Group, 31 December 2013.

Ten Largest Direct Equity Investments
Sampo Group, 31 December 2013
Top 10 equity investments Total fair value, EURm % of total direct equity investments
Nobia 130 7.9%
UPM-Kymmene 117 7.1%
TeliaSonera 87 5.3%
Fortum 82 5.0%
Hennes & Mauritz 73 4.4%
Veidekke 72 4.4%
ABB 61 3.7%
Amer Sports 60 3.7%
Volvo 54 3.3%
YIT 44 2.7%
Total top 10 exposures 781 47.3%
Other direct equity investments 870 52.7%
Total direct equity investments 1,651 100.0%

In addition, Sampo Group’s largest equity holdings are disclosed in the (Note 40) to the Financial Statements.

The largest exposures by individual issuers and counterparties are presented in the table Largest Individual Exposures by Issuer and by Asset Class, Sampo Group, 31 December 2013.

 
Largest Individual Exposures by Issuer and by Asset Class
Sampo Group, 31 December 2013 
EURm Counterparty Total fair value EURm % of total investment assets 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 derivatives
Svenska Handelsbanken 1,100 6% 460 640 0 567 70 3 0 0
Nordea Bank 1,044 6% 305 737 0 499 226 13 0 1
Swedbank 900 5% 88 812 0 639 173 0 0 0
Skandinaviska Enskilda Banken 869 5% 345 522 0 243 179 101 0 2
Netherlands 845 5% 0 845 0 0 845 0 0 0
Danske Bank 647 4% 300 347 0 104 123 120 0 0
DnB 541 3% 0 541 0 186 312 43 0 0
OP Pohjola 493 3% 446 47 0 0 47 0 0 0
Germany 448 3% 0 448 0 0 448 0 0 0
France 325 2% 0 325 0 0 325 0 0 0
Total top 10
exposures		 7,212 40% 1,944 5,265 0 2,238 2,747 279 0 3
Other 10,637 60%
Total investment assets 17,849 100%
Note
✕
Make a note