Risks, risk management and capital adequacy

Taaleri's risk management and risk position

The task of risk management is to identify, assess and measure risks and to ensure adequate risk treatment and risk control 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 reduce the likelihood of unexpected risks being realised and their impact 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). The principles of Taaleri's risk and capital adequacy management are described in note 37 to the financial statements of 2017.

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 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 capital adequacy ratio of the company’s own funds (1.5 times the minimum level of own funds).

The business operations of Garantia Insurance Company Ltd in the insurance sector and the company’s investment operations are major factors in Taaleri’s risk position. Garantia’s capital adequacy is strong and its risk position has remained stable. At the end of June 2018, Garantia’s claims ratio was -3.3 percent and the claims incurred in relation to gross exposure remained low at 0.05 per cent (LTM). The share of fixed income investments in Garantia’s investments was 79.7 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. 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 private equity 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 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 internationalise and expand energy business operations which naturally grows risks relating to the internationalisation and growth 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 Other business operations segment (balance sheet investments) 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 changes in the value of investments and of sales profits/losses gained in connection with sales of the 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 exposures determined in the EU Capital Requirements Regulation. At the end of the review period, Taaleri’s largest single customer exposure was 22.8 (20.8) per cent 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 Financial and Insurance Conglomerates (RaVa) (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 June 30th 2018, Taaleri RaVa conglomerate’s own funds amounted to EUR 103.7 (96.1) million, with the minimum requirement being EUR 58.2 (38.3) million. The change in the own funds requirement is mainly due to capital add-on requirement for Garantia of EUR 17.8 million, set by the Financial Supervisory Authority. The conglomerate’s capital adequacy was EUR 45.5 (57.9) million and the capital adequacy ratio was 178.1 (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 standard formula 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 29.3 (28.5) million. The Financial Supervisory Authority confirmed during the review period a capital add-on totalling EUR 17.8 million. The total solvency requirement was hence EUR 47.1 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

30 June 2018 31 December 2017
Shareholders’ equity of the Taaleri Group 109638 106084
Goodwill and other intangible assets -2388 -2205
Non-controlling interests -1001 -384
Profit for the period, Financing sector -2567  
Planned distribution of profit   -7371
Conglomerate's own funds, total 103683 96124
     
Financing business’ requirement for own funds 11152 9781
Insurance business’ requirement for own funds 47075 28484
Minimum amount of own funds of the Conglomerate total 57226 38265
     
Conglomerate’s capital adequacy 45457 57859
Conglomerate’s capital adequacy, ratio 178,1 % 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 reported 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 and the basic indicator 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 a deduction as laid down in CRR Article 49 (4) in accordance with a special permission granted by the Finnish Financial Supervisory Authority on 29 November 2016. On June 30, 2018, Taaleri’s Financing Sector’s Common Equity Tier 1 with the CRR 49 special permission was EUR 60.8 (48.8) million, of which the profit of the review period, EUR 11.4 (19.2) million, was deducted. The risk-weighted commitments were EUR 243.7 (217.2) million, of which the share of credit risk was EUR 158.0 (145.6) million and the share of operational risk EUR 85.7 (71.6) million. The Financing sector’s capital adequacy was 24.9 (22.5) per cent.

Financing sector’s capital adequacy        
(with the CRR 49 special permission)                                   
30 June 2018 31 Dec. 2017
Common Equity Tier before deductions 75150 70554
Deductions from the Common Equity  Tier    
Goodwill and intangible assets -2020 -2173
Non-controlling interests -1001 -384
Profit of the review period -11359 -19172
Common Equity Tier (CET1) 60770 48825
Additional Tier 1 before deductions - -
Deductions from the Additional Tier 1 - -
Additional Tier 1 (AT1) - -
Tier 1 capital (T1 = CET1 + AT1) 60770 48825
Tier 2 capital before deductions - -
Deductions from the Tier 2 capital - -
Tier 2 capital (T2) - -
Total capital (TC = T1 + T2) 60770 48825
Total risk-weighted commitments (total risk) 243656 217201
- of which the share of credit risk 157952 145560
- of which the share of operative risk 85703 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 %

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. 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 60.0 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 12.4 million on 30 June 2018, if the special permission were not applied, and the insurance company investment would be deducted from the Common Equity Tier 1. The company meets the requirements for the special permission on 30 June 2018.

Solvency according to the Insurance Companies Act (Solvency II)

Garantia’s own funds at the end of June were EUR 100.8 (106.8) million. The solvency capital requirement including the capital add-on was EUR 45.4 (44.9 pro forma) million and excluding the capital add-on EUR 27.6 (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 222.0 (237.6 pro forma) per cent and excluding the capital add-on 365.3 (393.6) per cent. The decrease in own basic funds was a result of the distribution of funds implemented in June, and the change in the fair value of investments. The growth in the solvency capital requirement excluding the capital add-on was the result of growth in the non-life 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 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 requirement 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 is valid as of 30.6.2018 until further notice, and the Financial Supervisory Authority will assess the amount at least once a year.

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.