Risks, risk management and capital adequacy

Taaleri's risk management and risk position

The task of risk management is to identify, assess, measure, handle and monitor business operation-related risks that influence the realization 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 in the company’s operations. Risk management aims to mitigate the likelihood of unforeseeable risks being realized, and their influence on and the threat they present to Taaleri Group’s business operations. Risk management supports the achieving of the goals set in the strategy by promoting better utilization of opportunities related to the different functions and the distribution of risk-taking capacity to the different functions as efficiently as possible and within the framework of risk appetite defined for projects.

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). 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-bearing capacity of the Taaleri Group comprises a properly optimized 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 careful consideration of the risk/return relationship. Taaleri Plc’s Board of Directors has decided that the Group may not in its activities take a risk that jeopardizes the target level set for the company’s own funds. 

Segment-specific risks

The greatest risks of Taaleri’s Wealth Management segment mainly consist of operative 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 realization 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 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. 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. At the end of the review period, Garantia’s claims ratio was -4.2 per cent and the claims incurred in relation to gross exposure remained low at 0.05 per cent. The share of fixed income investments in Garantia’s investments was 87 per cent. Standard & Poor's Global Ratings Europe Limited (S&P) credit rating for Garantia is A- with stable outlook.

The Energy 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 internationalize and expand energy business operations considerably, which naturally grows risks relating to the growth and internationalization of the operations. The Energy 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 internationalization of its operations. The Energy 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 segment consist primarily of private investments and financing granted by Taaleri Investments Ltd and of credit risks related to Taaleri Plc’s granted loans as well as receivables from credit institutions. The Other operations segment’s 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 segment 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 review period, Taaleri’s largest single customer risk was 22.3 (20.8) 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 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 Financial and Insurance Conglomerates (RaVa) (2004/699).

As a RaVa conglomerate, Taaleri Group discloses 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 105.1 (96.1) million, with the minimum requirement being EUR 56.5 (38.3) million. The change in the own funds requirement is mainly due to the capital add-on requirement in 2018 for Garantia of EUR 17.8 million, set by the Financial Supervisory Authority. The conglomerate’s capital adequacy is EUR 48.6 (57.9) million and the capital adequacy ratio is 186.0 (251.2) 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 applies the standardised approach in its regulatory capital calculation. The total solvency capital requirement (SCR) of the parent company Taaleri Plc and the subsidiary Garantia Insurance Company Ltd was EUR 27.5 (28.5) million. The Financial Supervisory Authority confirmed during 2018 a capital add-on totaling EUR 17.8 million. The total solvency requirement was hence EUR 45.3 million for the insurance business.

Taaleri’s own funds fully comprise its own unrestricted Tier 1 basic funds.

Capital adequacy of RaVa conglomerate, 
EUR thousand

31 Dec. 2018 31 Dec. 2017
Shareholders’ equity of the Taaleri Group 122381 106084
Goodwill and other intangible assets -7164 -2205
Non-controlling interests -1661 -384
Planned distribution of profit -8505 -7371
Conglomerate's own funds, total 105051 96124
     
Financing business’ requirement for own funds 11156 9781
Insurance business’ requirement for own funds 45327 28484
Minimum amount of own funds of the Conglomerate total 56483 38265
     
Conglomerate’s capital adequacy 48567 57859
Conglomerate’s capital adequacy, ratio 186.0 % 251.2 %

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) (No 575/2013 of the European Parliament and of the Council) is determined and disclosed to the supervised parties operating in the Financing sector. Taaleri applies the standardised approach in the regulatory capital calculation of the credit risk capital requirement. Taaleri has changed to the standardised approach in the calculation of the operational risk capital requirement from the previously used basic indicator method as of 31 December 2018.

Taaleri Group’s target level for the own funds of the Financing sector is 1.3 times the internal risk based capital requirement, calculated on the basis of the pillar 1 minimum capital requirement and additional pillar 2 risk-based capital requirement. 

The Finnish Financial Supervisory Authority has 31 January 2019 given Taaleri Plc permission pursuant to Article 49 (1) of the EU Capital Requirements Regulation (EU) 575/2013 (CRR). The permission entitles Taaleri Plc to not deduct the investments in the own funds instruments of Garantia Insurance Company Limited from the consolidated common equity tier capital (CET1) of the investment services firm. Instead of deduction, investments in insurance company should be risk-weighted in accordance with CRR Article 49 (4). The permit is for a fixed term and is valid until 31.12.2020.

With the permission Garantia’s book acquisition expense of EUR 60.4 million can be left undeducted. The impact on the result accumulated by the insurance company investment is not included in the consolidated Common Equity Tier 1 of the investment service company. Equity investments include the Group’s internal insurance company investment of EUR 60.4 million with a risk-weight of 100 per cent. With the result of the review period, the consolidated Common Equity Tier 1 of the investment service company would be EUR 16.6 million on 31 December 2018, if the CRR 49 permission were not applied, and the alternative calculation method where the insurance company investment would be deducted from the Common Equity Tier 1 would be used.

Taaleri’s Financing sector’s Common Equity Tier 1 with the CRR 49 permission is EUR 57.1 (48.8) million, from which the profit of year 2018, EUR 21.3 (19.2) million, is deducted. The risk-weighted commitments were EUR 229.6 (217.2) million, of which the share of credit risk was EUR 150.0 (145.6) million and the share of operational risk EUR 79.6 million according to the standardized approach (according to the basic indicator method approach 2017:  EUR 71.6 million). The Financing sector’s capital adequacy ratio was 24.9 (22.5) per cent.

Financing sector’s capital adequacy        
(with the CRR 49 special permission)                                   
31 Dec. 2018 31 Dec. 2017
Common Equity Tier before deductions 86321 70554
Deductions from the Common Equity  Tier    
Goodwill and intangible assets -6228 -2173
Non-controlling interests -1662 -384
Profit of the review period -21318 -19172
Common Equity Tier (CET1) 57113 48825
Additional Tier 1 before deductions - -
Deductions from the Additional Tier 1 - -
Additional Tier 1 (AT1) - -
Tier 1 capital (T1 = CET1 + AT1) 57113 48825
Tier 2 capital before deductions - -
Deductions from the Tier 2 capital - -
Tier 2 capital (T2) - -
Total capital (TC = T1 + T2) 57113 48825
Total risk-weighted commitments (total risk) 229622 217201
- of which the share of credit risk 150023 145560
     - of which insurance company holdings 60350 60000
- of which the share of operative risk 79599 71641
- of which the share of other risks - -
Common Equity Tier (CET1) in relation to the amount of total risk (%) 24.9 % 22.5 %
Tier 1 capital (T1) in relation to the amount of total risk (%) 24.9 % 22.5 %
Total capital (TC) in relation to the amount of total risk (%) 24.9 % 22.5 %

Solvency according to the Insurance Companies Act (Solvency II)

Garantia continues to have strong capital adequacy. Garantia’s own funds at the end of December 2018 were EUR 103.3 (106.8) million. The solvency capital requirement including the capital add-on was EUR 44.3 (44.9 pro forma) million and excluding the capital add-on EUR 26.4 (27.1) million. Garantia’s solvency ratio, or the ratio of basic own funds to the solvency capital requirement, including the capital add-on was 233.4 (237.6 pro forma) per cent and excluding the capital add-on 390.7 (393.6) per cent. The decrease in own basic funds was mainly a result of the change in expected dividends. The decrease in the solvency capital requirement excluding the capital add-on was the result of the decreased investment risk, which was faster than the growth of insurance risk.

Garantia’s own funds fully comprise its unrestricted Tier 1 basic own funds. Garantia uses neither matching adjustment nor volatility adjustment in the calculation of technical provisions. In the calculation of the solvency capital requirement, Garantia applies the standard formula. Garantia does not apply technical provision or market risk calculation transition arrangements. In June 2018 the Financial Supervisory Authority confirmed Garantia’s capital add-on to EUR 17.8 million. The Financial Supervisory Authority states that the risk profile of Garantia’s non-life underwriting risk differs from the underlying assumptions in the standard formula for the solvency capital require-ment calculation. In addition, the Financial Supervisory Authority notes that the requirement to use an internal model is not appropriate for Garantia. The increase in the capital add-on was at the expected level and the capital add-on including the increase is somewhat smaller than what Garantia uses in its internal riskmodel for solvency capital requirement.

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.