Risks, risk management and capital adequacy

TAALERI’S RISK MANAGEMENT AND RISK POSITION

The task of risk management is to identify, assess, measure, mitigate and supervise risks caused by business operations that influence the implementation of the Group's strategy. Risk management aims to mitigate the likelihood of unforeseeable risks being realised, their influence on and the threat they present to the business operations of the Taaleri Group, as well as to support the achievement of the objectives set in the strategy by ensuring that the principles set by the Taaleri Plc Board of Directors are complied with in the company's operations. Taaleri Group's risks are divided into five main categories: strategic and business operations risk, credit risk, liquidity risk, market risk and operative risk (including compliance risk). The principles of Taaleri's risk and capital adequacy management are described in note 39 to the financial statements.

The risk-bearing capacity of the Taaleri Group comprises a properly optimised capital structure, profitability of business operations and qualitative factors, which include reliable management, internal control and proactive risk and capital adequacy management. Taaleri Group’s attitude towards risk-taking is based on calculated risk/return thinking. The Group may not in its activities take a risk that jeopardises the target level set for the capital adequacy ratio of the company’s own funds (1.5 times the calculated minimum level of equity or 1.1 times for the internal equity requirement).

A key change in Taaleri’s risk position was the 2015 acquisition of Garantia Insurance Company Ltd, not merely because of actual new business in the insurance sector, but also because of the company’s relatively large balance sheet compared to Taaleri’s earlier business, which tied a small amount of assets. Garantia’s capital adequacy is strong and its risk position has remained stable. In 2016, Garantia’s claims ratio was 12.4 percent and the claims incurred in relation to gross exposure remained low at 0.09 percent. The share of interest investments in Garantia’s investments was 70 percent. On 1 December 2016, Standard & Poor’s Credit Market Services Ltd (S&P) confirmed for Garantia an A- credit rating indicating financial strength, and changed the rating prospects from negative to stable.

The greatest risks of Taaleri’s Wealth Management segment mainly consist of operative risks and, to a slight extent, credit risks. In future, Taaleri will also be subject to international risks through the Energia segment, once the operations of Taaleri Energia Oy get fully underway. The most significant risks of other business operations consist of private equity investments made by Taaleri Investments Ltd and loans granted from the credit risks of Taaleri Plc and credit institution receivables.

Taaleri falls within the sphere of regulation of large customer risks determined in the EU Capital Requirements Regulation. At the end of 2016, Taaleri’s largest single customer risk was 38.9 (57.9) percent of the Group’s own funds and, combined, liabilities of one (eight) customer entity exceeded the 25 percent limit required by the law. The maximum customer risk regulation is only applied to Garantia as part of the Taaleri Group. The guaranty insurance liabilities in question were granted in their entirety before the change in ownership, at which time the regulation in question did not concern the insurance company. The Financial Supervisory Authority approved the action plan prepared by Garantia to lower its liabilities to the level required by the law by 30 October 2017.

TAALERI’S CAPITAL ADEQUACY

Capital adequacy under the Act on the Supervision of Financial and Insurance Conglomerates

Taaleri Group forms a financing and insurance conglomerate according to the Act on the Supervision of Financial and Insurance Conglomerates (RaVa) (2004/699) as a result of the acquisition of Garantia Insurance Company Ltd. The Financial Supervisory Authority (FSA) confirmed the formation of the RaVa Conglomerate in its decision on 23 October 2015.

As a RaVa conglomerate, Taaleri Group publishes its own funds and capital adequacy in accordance with the capital adequacy regulations for financial and insurance conglomerates. On 31 December 2016, Taaleri RaVa conglomerate’s own funds amounted to EUR 84.7 (86.9) million, with the minimum requirement being EUR 31.5 (33.5) million. The conglomerate’s capital adequacy is EUR 53.2 (53.4) million and the capital adequacy ratio is 268.9 (259.2) percent, with the minimum requirement being 100 percent. The table below also presents the capital adequacy requirements of the RaVa conglomerate calculated according to the Solvency I rules, which were in force on 31 December 2015. The capital adequacy regulations of Solvency II were not in force in the 2015 financial period, so the capital requirements are not comparable.

The Solvency II rules tightened the capital requirements, which is also reflected in the capital adequacy according to the Act on the Supervision of Financial and Insurance Conglomerates (2004/699). Changes in regulations reduced the conglomerate’s capital adequacy from EUR 53.6 million to EUR 53.4 million and the capital adequacy ratio from 469 percent to 259 percent.


Capital adequacy of RaVa conglomerate, EUR thousand

Solvency II

31 Dec 2016

Solvency II

31 Dec 2015

Solvency I

(Valid on 31 Dec 2015)

31 Dec 2015

Shareholders' equity of the Taaleri Group

93,850

97,060

97,060

Goodwill and other intangible assets

-2,513

-2,368

-2,368

Equalization provision

-


-18,716

Minority interest

-354

-2,119

-2,119
Planned distribution of profit -6,237-5,670-5,670
Total of conglomerate's own funds 84,74686,90368,187

Financing business' requirement for own funds
7,16310,84410,844

Insurance business' requirement for own funds
24,35722,6783,700
Minimum amount of own funds of the Conglomerate 31,52033,52214,544
Conglomerate’s capital adequacy 53,22653,38153,643

Conglomerate’s capital adequacy ratio

268,9%

259,2%

468,8%


Within the Taaleri Group, the regulatory capital according to Solvency II is determined and reported not only to Garantia Insurance Company Ltd, but also to Taaleri Plc and Garantia together as part of the RaVa conglomerate. Taaleri applies the standard approach in its regulatory capital calculation. The solvency capital requirement (SCR) of the parent company Taaleri Plc and the subsidiary Garantia Insurance Company Ltd was EUR 24.4 (22.7) million. Taaleri’s own funds fully comprise its own unrestricted Tier 1 basic funds. The final amount of the requirements of the insurance business’ own funds is still being assessed by the Financial Supervisory Authority. The executive management expects the conglomerate’s capital adequacy to remain strong, in spite of a possible increase in the capital requirement for insurance risk.

Capital adequacy according to the Act on Credit Institutions and the EU Capital Requirements Regulation

Within the Taaleri Group, the regulatory capital according to the Act on Credit Institutions (610/2014) and the EU Capital Requirements Regulation (CRR) (Regulation (EU) No 575/2013 of the European Parliament and of the Council) is determined and reported to the supervised parties operating in the Financing sector. Taaleri applies the standard approach in the regulatory capital calculation of the credit risk capital requirement and the basic approach in the calculation of the operative risk capital requirement. The Taaleri Group’s objective for the capital adequacy of the Financing sector is 12 percent.

On 23 October 2015, the Financial Supervisory Authority granted Taaleri Plc special permission valid until 31 December 2016, based on which a new consolidation group for capital adequacy calculations has been formed for Taaleri, which does not include Taaleri Plc. Due to this, the Group does not report the regulatory capital according to CRR, only the capital adequacy requirement according to RaVa.

On 29 November 2016, the Financial Supervisory Authority granted Taaleri Plc permission not to deduct its holding in Garantia from the Common Equity Tier consolidated in the investment service company as of 1 January 2017. Instead of deducting them, investments in insurance companies must be risk-weighted in accordance with CCR Article 49 Paragraph 4. Special permission is valid from 1 January 2017 until 31 December 2018, assuming that the Company continuously meets the conditions for special permission. Garantia’s book acquisition expense of EUR 60 million can be left undeducted. Neither is the impact on the result accumulated by the insurance company investment included in the consolidated Common Equity Tier of the investment service company. When using a method allowed by special permission in the processing of an insurance company investment, the insurance company investment is processed as a risk-weighted item in the consolidated capital adequacy calculation of the investment service company. The consolidated Common Equity Tier of the investment service company would be negative on 1 January 2017 if the special permission was not applied but the insurance company investment was deducted from the Common Equity Tier. The company meets the requirements for special permission in the situation of 1 January 2017, and considers that it does not need new special permission after this special permission.

Solvency according to the Insurance Companies Act (Solvency II)

The Solvency II regulatory capital requirements for insurance companies entered into force on 1 January 2016. The objective of Solvency II is a harmonised, comprehensive and risk-based regulatory capital framework that promotes internal competition within the EU, the effective utilisation of capital and companies’ own risk management and, through this, enhances the security of the benefits of the insured.

On 31 December 2016, Garantia Insurance Company Ltd’s own funds amounted to EUR 100.9 (96.1) million, which clearly exceeded the solvency capital requirement of EUR 23.2 (19.0) million. Garantia’s solvency ratio, or the ratio of basic own funds to the solvency capital requirement, was 435 (506) percent. The growth in the solvency capital requirement was the result of growth in the market risk related to investments. Garantia’s own funds fully comprise its own unrestricted Tier 1 basic funds. Garantia uses neither correlation correction nor volatility correction in the calculation of technical reserves. In the calculation of the solvency capital requirement, Garantia applies a standard formula. Garantia does not apply technical reserve or market risk calculation transitional provisions. The final amount of Garantia’s solvency capital requirements is still being assessed by the Financial Supervisory Authority. The executive management expects Garantia’s capital adequacy to remain strong, in spite of a possible increase in the capital requirement of insurance risk.

The Solvency II capital adequacy regulations were not valid in the 2015 financial period, neither do they come within the sphere of statutory auditing based on the Insurance Companies Act that came into force on 1 January 2016. The Solvency II capital adequacy figures have not been audited.

Group's Risk management Priciples and Capital adequacy