Risks and risk management
The task of risk management is to identify, assess, measure, treat and control risks in all Taaleri Group’s businesses that influence the realisation of the Group’s strategic and operative goals, as well as to oversee that the principles approved by the Taaleri Plc Board of Directors are complied with.
Risk management aims to mitigate the likelihood of unforeseeable risks being realised, and their influence on and the threat they present to Taaleri Group’s business operations. Risk management supports achievement of strategic goals by promoting better utilisation of opportunities in all activities and more efficient distribution of risk-taking capacity to the different functions and projects within the defined risk appetite framework.
Taaleri Group’s risks are divided into five main categories: strategic and business risk, credit risk, liquidity risk, market risk and operational risk (including compliance risk). In addition, Taaleri follows the development of political risks. The principles of Taaleri’s risk and capital adequacy management are described in note 36 to the 2018 Financial Statements.
The risk capacity of the Taaleri Group consists of a properly optimised capital structure, profitability of business operations and qualitative factors, including good corporate governance, internal control and proactive risk and capital adequacy management. Taaleri Group’s attitude towards risk-taking is based on careful consideration of an adequate risk/return relationship. Taaleri Plc’s Board of Directors has decided that the Group may not in its activities take a risk that jeopardises the target level set for the company’s own funds.
The main risks of Taaleri’s Wealth Management segment consist mainly of operational risks and, to a slight extent, credit risks. The result of the Wealth Management segment is influenced by the development of assets under management, which depends on the progress of the private equity funds’ projects and the development of the capital markets. The profit development is also influenced by the realisation of performance fee and commission income tied to the success of investment operations. On the other hand, private equity fund management fees are based on long-term contracts that bring in a steady cash flow.
The insurance and investment activities carried out by Garantia Insurance Company are central to Taaleri’s risk position. The principal risks associated with Garantia’s business operations are credit risks arising from guaranty operations, and the market risk regarding investment assets covering technical provisions. Garantia’s capital adequacy is strong and its risk position has remained stable, even though the outlook in the construction sector weakened during the first half of the year. At the end of June 2019, Garantia’s claims ratio was 21.1 per cent and the claims incurred in relation to gross exposure remained at a low level 0.05 per cent. The share of fixed income investments in Garantia’s investments was 86 per cent. Standard & Poor’s Global Ratings Europe Limited (S&P) credit rating for Garantia is A- with a stable outlook.
The Energia segment’s objective is to channel assets under management to renewable energy production projects and to other energy projects supporting sustainability. The goal is to internationalise and expand energy business operations considerably, which naturally grows risks relating to the growth and internationalisation of the operations. The Energia segment’s earnings are impacted by its success in finding suitable projects, its ability to identify all risks related to renewable energy’s international development, construction, financing and operations, and its success in the internationalisation of its operations. The Energia segment’s earnings are also affected by the success of its own investments in development-stage energy projects.
The most significant risks of the Other Operations consist primarily of private investments and financing granted by Taaleri Investments Ltd as well as of credit risks related to Taaleri Plc’s granted loans and receivables from credit institutions. The Other Operations’ returns consist of the fair value changes in investments and of profits/losses gained in connection with the sales of its investments. The returns and income of the Other Operations may thus vary significantly between periods under review.
Taaleri falls within the sphere of regulation of large customer risks defined in the EU Capital Requirements Regulation. At the end of the January-June 2019 review period, Taaleri’s largest single customer risk was 20.4 (22.3) per cent of the Group’s own funds and the liabilities of any (single) customer entity did not exceed the 25 per cent limit set by law.