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 monitor 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 op-erations. 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 2016 financial statements.

In the assessment of Taaleri’s risk position, its subsidiary Garantia Insurance Company has a significant im-pact on the Group’s overall risk position. Garantia’s capital adequacy is strong and its risk position has re-mained stable. In early 2017, Garantia’s claims ratio was 4.0 (9.6) per cent and the claims incurred in relation to gross exposure remained low at 0.07 (0.13) per cent. The share of interest investments in Garantia’s in-vestments was 80 per cent. Standard & Poor’s credit rating for Garantia is A- with a stable outlook.

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 Energy 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 the review period, Taaleri’s largest single customer risk was 21.8 (38.9) per cent of the Group’s own funds and no customer entity’s liability exceeded the 25 per cent limit required by the law. The maximum customer risk regulation is only applied to Garantia as part of the Taaleri Group. 
 

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). The Solvency II rules that entered into force on 1 January 2016 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).
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 30 June 2017, Taaleri RaVa conglomerate’s own funds amounted to EUR 91.9 million (31 December 2016: 84.7), with the minimum requirement being EUR 33.7 (31.5) million. The conglomerate’s capital adequacy is EUR 58.2 (53.2) million and the capital adequacy ratio is 272.9 (268.9) per cent, with the minimum requirement being 100 per cent. 

 

Capital adequacy of RaVa conglomerate, EUR thousand

Solvency II

30 Jun 2017

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

97,817 93,850

97,060

97,060

Goodwill and other intangible assets

-2 481 -2,513

-2,368

-2,368

Equalization provision

- -

 

-18,716

Minority interests

-310 -354

-2,119

-2,119
Planned distribution of profit - -6,237 -5,670 -5,670
Profit for the period, Financing Sector -3,154      
Total of conglomerate's own funds 91,872 84,746 86,903 68,187

Financing business' requirement for own funds
8,125 7,163 10,844 10,844

Insurance business' requirement for own funds
25,545 24,357 22,678 3,700
Minimum amount of own funds of the Conglomerate 33,670 31,520 33,522 14,544
Conglomerate’s capital adequacy 58,202 53,226 53,381 53,643

Conglomerate’s capital adequacy ratio

272,9 % 268,9%

259,2%

468,8%

 

Within the Taaleri Group, the regulatory capital according to Solvency II is determined and reported not only for Garantia Insurance Company Ltd, but also for Taaleri Plc and Garantia together as part of the RaVa con-glomerate. 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 25.5 million (31 December 2016: 24.4). 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 as-sessed by the Financial Supervisory Authority. The executive management expects the conglomerate’s capi-tal 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 per cent.

Starting from 1 January 2017, the internal insurance company investment of the financing and insurance group will be processed as a risk-weighted item instead of deduction as laid down in Capital Requirements Regulation (CRR) Article 49 (4) in accordance with a special permission granted by the Finnish Financial Supervisory Authority on 29 November 2016. The special permission is valid until 31 December 2018, assuming that the company continuously meets the conditions for the 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. Equity investments include the Group’s internal insurance company investment of EUR 60.0 million with a risk-weight of 100 per cent. The consolidated Common Equity Tier of the investment service company would be negative by EUR 0.2 million on 30 June 2017 if the special permission were not applied, and the insurance company investment would be deducted from the Common Equity Tier. The company meets the requirements for the special permission according to the situation on 30 June 2017, and it considers that it does not need new special permission after this special permission.

 

Capital adequacy for the Financing sector, (CRR 49 permit of exception)

30/6/2017
Common Equity Tier 1 (CET1) before deductions 61 025
• Deductions from CET1  
  Goodwill and intangible assets -2 417
  Non-controlling interest -310
Profit for the period -9 934
Common Equity Tier 1 (CET1) 48 364
• Additional Tier 1 Capital (AT1) before deductions -
• Deductions from AT1 -
• Additional Tier 1 Capital -
Tier 1 Capital (T1 = CET1 + AT1) 48364
Tier 2 Capital (T2) before deductio -
Deductions from T2 -
Tier 2 Capital (T2) -
Total capital base (TC = T1 + T2) 48364
Total risk weighted assets (Total risk exposure) 179 583
– from credit risk 107 942
– from operative risks 71 641
– from other risks -
Common Equity Tier 1 (CET1) capital ratio (%) 26,9 %
Tier 1 (T1) capital ratio (%)
  26,9 %
Total Capital (TC) ratio (%)
  26,9 %

 

 

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 frame-work 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. 

Garantia continues to have strong capital adequacy. At the end of June, Garantia’s own assets were EUR 103.1 (100.9) million, clearly exceeding the capital requirement of EUR 24.6 (23.2) million. Garantia’s solvency ratio, or the ratio of basic own funds to the solvency capital requirement, was 420 (435) per cent. The growth in the solvency capital requirement was the result of growth of the insurance risk due to increase in insurance operations and of 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 the standard method. 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.