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 37 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 proac-tive risk and capital adequacy management. Taaleri Group’s attitude towards risk-taking is based on calculat-ed risk/return thinking. 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 capital adequacy ratio of the company’s own funds (1.5 times the calculated minimum level of equity or 1.1 times the internal equity requirement).

The business operations of Garantia Insurance Company Ltd in the insurance sector and the company’s investment operations play a key role in Taaleri’s risk position. Garantia’s capital adequacy is strong and its risk position has remained stable. Garantia’s claims ratio was 10.1 percent and the claims incurred in relation to gross exposure remained low at 0.07 percent. The share of interest investments in Garantia’s investments was 76.0 per cent. Standard & Poor's Credit Market Services Ltd’s (S&P) credit rating for Garantia is A- with stable prospects. 

The greatest risks of Taaleri’s Wealth Management segment mainly consist of operative risks and, to a slight extent, credit risks. In the future, Taaleri will also be exposed to international risks mainly through the Energy segment. The most significant risks of other business operations consist of private equity investments made by Taaleri Investments Ltd, and of credit risks related to Taaleri Plc’s granted loans and credit institution re-ceivables. 

Taaleri falls within the sphere of regulation of large customer risks determined in the EU Capital Requirements Regulation. At the end of 2017, Taaleri’s largest single customer risk was 20.8 (38.9) percent of the Group’s own funds and the liabilities of any (single) customer entity did not exceed the 25 percent limit set by the law. 

CAPITAL ADEQUACY OF TAALERI 

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 Fi-nancial and Insurance Conglomerates (RaVa) (2004/699) as a result of the ownership of Garantia Insurance Company Ltd. 

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. Taaleri RaVa conglomerate’s own funds amounted to EUR 96.1 (84.7) million, with the minimum requirement being EUR 38.3 (31.5) million. The conglomerate’s capital adequacy is EUR 57.9 (53.2) million and the capital adequacy ratio is 251.2 (268.9) per cent, with the minimum requirement being 100 per cent. 

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 as a part of the RaVa conglomerate. Taaleri ap-plies 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 28.5 (24.4) mil-lion. Taaleri’s own funds fully comprise its own unrestricted Tier 1 basic funds. The final amount of the re-quirements of the insurance business’ own funds is still being assessed by the Financial Supervisory Authori-ty. 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 of RaVa conglomerate, 
EUR thousand

31 December 2017 31 December 2016
Shareholders’ equity of the Taaleri Group 106084 93850
Goodwill and other intangible assets -2205 -2513
Minority interests -384 -354
Planned distribution of profit -7371 -6237
Total of conglomerate’s own funds 96124 84746
     
Financing business’ requirement for own funds 9781 7163
Insurance business’ requirement for own funds 28484 24357
Minimum amount of own funds of the Conglomerate total 38265 31520
     
Conglomerate’s capital adequacy 57859 53226
Conglomerate’s capital adequacy, ratio 251,2 % 268,9 %
     

Capital adequacy according to the Act on Credit Institutions and the EU Capital Requirements Regulation (Basel III)

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 Su-pervisory Authority on 29 November 2016. Taaleri’s Financing sector’s Common Equity Tier with the CRR 49 special permission is EUR 48.8 million, of which the profit of the review period, EUR 19.2 million, is deduct-ed. The risk-weighted commitments were EUR 217.2 million, of which the share of credit risk was EUR 145.6 million and the share of operational risk EUR 71.6 million. The Financing sector’s capital adequacy was 22.5 per cent. 

The CRR 49 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. With the result of the review period, the consolidated Common Equity Tier of the investment service company would be EUR 6.7 million on 31 December 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 31 December 2017, and it considers that it does not need new special permission after this special permission.
 

Financing sector’s capital adequacy        
(with the CRR 49 special permission)                                   

31.12.2017

Common Equity Tier before deductions 70 554
 Deductions from the Common Equity  Tier  
  Goodwill and intangible assets -2 173
  Minority interests -384
Profit of the review period -19 172
Common Equity Tier (CET1) 48 825
Additional Tier 1 before deductions -
Deductions from the Additional Tier 1 -
Additional Tier 1 (AT1) -
Tier 1 capital (T1 = CET1 + AT1) 48 825
Tier 2 capital before deductions -
Deductions from the Tier 2 capital -
Tier 2 capital (T2) -
Total capital (TC = T1 + T2) 48 825
Total risk-weighted commitments (total risk) 217 201
- of which the share of credit risk 145 560
- of which the share of operative risk 71 641
- of which the share of other risks -
Common Equity Tier (CET1) in relation to the amount of total risk (%) 22,5 %
Tier 1 capital (T1) in relation to the amount of total risk (%) 22,5 %
Total capital (TC) in relation to the amount of total risk (%) 22,5 %

Solvency according to the Insurance Companies Act (Solvency II)

Garantia continues to have strong capital adequacy. Garantia’s own assets were EUR 106.8 (100.9) million, clearly exceeding the solvency capital requirement of EUR 27.1 (23.2) million. Garantia’s solvency ratio, or the ratio of basic own funds to the solvency capital requirement, was 393.6 (435.4) per cent. The growth in the solvency capital requirement was the result of growth in the insurance risk and 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. On 27 November 2017, the Financial Supervisory Authority announced it was starting a processing for the increase of Garantia’s capital requirement. The final amount of Garantia’s solvency capital requirement is thus 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.  

Based on the Insurance Companies Act that came into force on 1 January 2016, the Solvency II capital adequacy regulations do not fall within the sphere of statutory auditing. The Solvency II capital adequacy figures have not been audited.