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Equity and Spread Risks

Sampo Group is exposed to price risk dependent on changes in equity prices and spreads arising from its fixed income and equity investments. Equity price and spread movements are affected by general market trends and by risk factors that are related specifically to a certain issuer or a specific issue.

Equity and Spread Risks

When the financial strength or future prospects of an issuer deteriorate or value of collaterals decreases, equity and spread risks materialize as decreases in the value of investment assets.

The values of investment assets decrease when credit spreads of tradable debt instruments are changing unfavourably or equity prices are decreasing. Most Sampo Group’s investments are tradable and hence subject to daily mark-to-market valuation. Moreover, the fair values of non-tradable instruments change adversely when the financial strength or future prospects of the issuer deteriorates or value of collaterals decreases. Ultimately the issuer may fail to meet its financial obligations and the risk realizes as credit losses.

Management of Equity and Spread Risks

In Sampo Group, the selection of direct fixed income and equity investments is based primarily on stock and bond-picking and secondarily on top-down allocation. This investment style ensures that the portfolio includes thoroughly analyzed investments with adequate risk return ratios, although the portfolio might not be necessarily as diversified as the finance or portfolio theory suggests.

Decision Making, Limit System and Monitoring
  1. Potential investments are analyzed thoroughly. The creditworthiness and future prospects of the issuer are assessed together with collaterals and structural details of the instruments. Although external credit ratings by rating agencies and opinions of analysts are used to support the internal assessment, Sampo Group’s own internal assessment is always the most important factor in decision making.
  2. Investment transactions shall be executable on a short notice when an opportunity appears. This puts pressure on authorisations and credit limit structures and procedures that must be at the same time (i) flexible enough to facilitate fast decision making regardless of instrument type, (ii) well-structured to ensure that investment opportunities are assessed prudently, taking into account the specific features and risks of all investment types and (iii) able to restrict the maximum exposure of a single name risk to the level that is in balance with the company’s risk appetite.
  3. Accumulated credit exposures over single names and products are monitored regularly at the subsidiary level and at group level to identify unwanted concentrations. Credit exposures are reported, for instance, by sectors and asset classes and within fixed income by ratings.

Exposures in Fixed Income and Equity Instruments

Exposures in fixed income and equity instruments are shown in the tables Credit Exposures by Sectors, Asset Classes and Rating, If P&C, Mandatum Life and Sampo Group, 31 December 2014. The tables include also counterparty risk exposures relating to reinsurance and derivative transactions. Counterparty default risks are described in more detail in section Counterparty Default Risks. Due to differences in the reporting treatment of derivatives, the figures in the table are not fully comparable with other tables in this annual report.

 
Exposures by Sectors, Asset Classes and Rating If P&C, 31 December 2014
EURm AAA AA+
- AA-		 A+
- A-		 BBB+
- BBB-		 BB+
- C		 D Non-
rated		 Fixed income total Listed equities Other Counter-
party risk		 Total Change 31 Dec 2013
Basic Industry 0 0 0 101 83 0 62 246 34 0 0 280 13
Capital Goods 0 0 0 49 0 0 30 79 418 0 0 497 62
Consumer Products 0 0 35 37 46 0 94 212 367 0 0 579 -83
Energy 0 6 0 4 99 0 270 380 0 0 0 380 -122
Financial Institutions 0 1,233 1,145 362 114 0 10 2,865 29 0 22 2,917 193
Governments 693 222 0 2 0 0 0 918 0 0 0 918 -46
Government Guaranteed 105 76 0 0 0 0 0 181 0 0 0 181 -34
Health Care 0 0 0 5 0 0 49 54 45 0 0 99 35
Insurance 0 0 10 41 0 0 0 51 0 0 111 162 -134
Media 0 0 0 0 0 0 18 18 0 0 0 18 -1
Public Sector, Other 857 127 0 0 0 0 0 984 0 0 0 984 303
Real Estate 0 9 0 0 0 0 482 490 0 23 0 513 57
Services 0 0 0 5 42 0 17 64 0 0 0 64 45
Technology and Electronics 0 0 0 0 0 0 35 35 5 0 0 40 6
Telecommunications 0 0 94 14 0 0 27 135 79 0 0 214 -62
Transportation 0 97 7 23 13 0 168 307 9 0 0 317 -12
Utilities 0 0 143 107 0 0 79 329 0 0 0 329 -27
Others 0 0 0 0 0 0 0 0 0 2 0 2 -35
Asset-backed Securities 0 0 0 0 0 0 0 0 0 0 0 0 0
Covered Bonds 2,608 142 0 0 0 0 0 2,750 0 0 0 2,750 -487
Funds 0 0 0 0 0 0 7 7 380 20 0 407 16
Total 4,263 1,911 1,434 751 397 0 1,348 10,105 1,367 45 133 11,650 -316
Change 31 Dec 2013 -37 94 7 -204 -5 0 -24 -168 83 -69 -162 -316
 
Exposures by Sectors, Asset Classes and Rating Mandatum Life, 31 December 2014
EURm AAA AA+
- AA-		 A+
- A-		 BBB+
- BBB-		 BB+
- C		 D Non-
rated		 Fixed income total Listed equities Other Counter-
party risk		 Total Change 31 Dec 2013
Basic Industry 0 0 0 1 157 0 62 220 199 0 0 420 -49
Capital Goods 0 0 1 1 30 0 42 75 141 0 0 215 -2
Consumer Products 0 0 6 4 108 0 56 175 117 0 0 292 27
Energy 0 1 0 16 0 0 50 67 2 0 0 68 -12
Financial Institutions 2 967 902 22 228 0 0 2,121 28 23 0 2,172 1,033
Governments 334 32 0 21 0 0 0 387 0 0 0 387 -340
Government Guaranteed 0 4 0 0 0 0 0 4 0 0 0 4 4
Health Care 0 0 1 0 47 0 25 73 17 0 0 91 36
Insurance 0 0 1 25 0 0 11 37 5 23 0 65 8
Media 0 0 0 0 13 0 28 40 0 0 0 40 1
Public Sector, Other 0 2 0 0 0 0 0 2 0 0 0 2 2
Real Estate 0 0 0 1 0 0 55 55 0 255 0 311 110
Services 0 0 0 1 88 0 16 105 39 0 0 144 21
Technology and Electronics 1 0 0 1 2 0 1 4 88 1 0 93 -6
Telecommunications 0 0 8 12 52 0 15 88 1 0 0 89 -56
Transportation 0 0 0 0 11 0 7 18 1 0 0 19 -25
Utilities 0 0 54 56 1 0 0 111 0 0 0 111 -87
Others 0 0 0 0 6 0 10 16 0 15 0 31 6
Asset-backed Securities 0 0 0 0 0 0 0 0 0 0 0 0 0
Covered Bonds 23 58 13 0 0 0 0 93 0 0 0 93 -32
Funds 7 0 95 50 24 0 147 323 1,061 632 0 2,017 582
Total 367 1,065 1,082 212 767 0 523 4,016 1,698 951 0 6,664 1,222
Change 31 Dec 2013 156 83 517 -131 118 0 43 787 276 164 -5 1,222
 
Exposures by Sectors, Asset Classes and Rating Sampo Group, 31 December 2014
EURm AAA AA+
- AA-		 A+
- A-		 BBB+
- BBB-		 BB+
- C		 D Non-
rated		 Fixed income
total		 Listed equities Other Counter-
party risk		 Total Change 31 Dec 2013
Basic Industry 0 0 0 102 240 0 124 466 233 0 0 700 -56
Capital Goods 0 0 1 50 30 0 77 158 562 0 0 720 57
Consumer Products 0 0 41 41 154 0 150 387 484 0 0 871 -56
Energy 0 7 0 21 99 0 320 446 2 0 0 448 -134
Financial Institutions 2 2,658 2,363 497 342 0 10 5,871 95 23 29 6,018 1,510
Governments 1,027 254 0 23 0 0 0 1,304 0 0 0 1,304 -386
Government Guaranteed 105 80 0 0 0 0 0 185 0 0 0 185 -30
Health Care 0 0 1 5 47 0 74 128 62 0 0 238 72
Insurance 0 0 11 65 0 0 41 118 5 40 111 226 -126
Media 0 0 0 0 13 0 46 59 0 0 0 59 -0
Public Sector, Other 857 130 0 0 0 0 0 987 0 0 0 987 305
Real Estate 0 9 0 1 0 0 536 546 0 280 0 826 167
Services 0 0 0 5 130 0 33 169 39 0 0 208 66
Technology and Electronics 1 0 0 1 2 0 36 40 92 2 0 134 1
Telecommunications 0 0 102 26 52 0 42 223 80 0 0 303 -118
Transportation 0 97 7 23 24 0 175 325 10 0 0 335 -37
Utilities 0 0 197 163 1 0 79 440 0 0 0 440 -114
Others 0 0 0 0 6 0 10 16 0 17 0 33 -29
Asset-backed Securities 0 0 0 0 0 0 0 0 0 0 0 0 0
Covered Bonds 2,631 200 13 0 0 0 0 2,844 0 0 0 2,844 -519
Funds 7 0 95 50 24 0 154 331 1,441 678 0 2,450 613
Total 4,630 3,434 2,832 1,075 1,164 0 1,907 15,042 3,105 1,042 140 19,329 1,185
Change 31 Dec 2013 119 286 553 -223 113 0 -5 843 383 129 -169 1,185

The largest holdings are in financial institutions and covered bonds. Most of these investments are in Nordic countries as can be seen in the table Fixed Income Investments in Financial Sector, Sampo Group, 31 December 2014. These exposures increased by EUR 0.9 billion during 2014.

 
Fixed Income Investments in Financial Sector Sampo Group, 31 December 2014
Covered bonds Money market securities Long-term
senior debt		 Long-term
sub-ordinated
debt		 Total, EURm %
Sweden 1,666 1,286 690 241 3,883 44.6%
Finland 223 2,403 118 11 2,754 31.6%
Norway 684 413 77 1,174 13.5%
Denmark 183 45 183 74 486 5.6%
United States 78 25 1 104 1.2%
Switzerland 48 12 60 0.7%
France 36 0 2 20 59 0.7%
Netherlands 2 0 44 46 0.5%
Austria 32 32 0.4%
Iceland 32 32 0.4%
Germany 0 25 0 26 0.3%
Estonia 23 23 0.3%
United Kingdom 4 4 4 13 0.1%
Luxembourg 12 12 0.1%
Jersey 5 5 0.1%
Russia 4 4 0.0%
Italy 1 1 2 0.0%
Spain 1 1 0.0%
Australia 1 1 0.0%
Total 2,844 3,842 1,584 445 8,715 100.0%

The public sector exposure includes government bonds, government guaranteed bonds and other public sector investments. The public sector has had relatively minor role in Sampo Group’s portfolios and these exposures have been mainly in the Nordic countries.

Fixed Income Investments in Public Sector Sampo Group, 31 December 2014
Governments Government guaranteed Public sector, other Total market value, EURm
Sweden 244 726 970
Netherlands 422 422
Germany 347 71 419
Norway 242 242
France 224 4 228
Finland 28 76 19 123
Other 39 33 0 72
Total 1,304 185 987 2,476

The exposures in non-rated and high yield fixed income instruments are significant, because relatively small number of Nordic companies are rated. The largest high yield and non-rated fixed income investment exposures are presented in the table Ten Largest Direct High Yield and Non-rated Fixed Income Investments, Sampo Group, 31 December 2014.

Ten Largest Direct High Yield and Non-rated Fixed Income Investments Sampo Group, 31 December 2014
Largest direct high yield and non-rated fixed income investments Rating Total fair value, EURm % of total direct fixed income investments
ICA Gruppen AB NR 166 1.2%
Eksportfinans ASA BB- 158 1.1%
Stora Enso BB 157 1.1%
High Street Shop AS NR 128 0.9%
PBA Karlskrona NR 80 0.6%
Neste Oil Oyj NR 78 0.5%
Sponda Oyj NR 68 0.5%
Storebrand ASA BB+ 63 0.4%
Sor Boligkreditt AS NR 44 0.3%
Nassa Midco AS B 42 0.3%
Total top 10 exposures 983 6.8%
Other direct fixed income investments 13,446 93.2%
Total direct fixed income investments 14,430 100.0%

The listed equity investments of Sampo Group totaled EUR 3,105 million at the end of year 2014 (EUR 2,749 million in 2013). At the end of year 2014, the listed equity exposure of If P&C was EUR 1,367 million (EUR 1,283 million in 2013). The proportion of listed equities in If P&C’s investment portfolio was 11.9 per cent. In Mandatum Life, the listed equity exposure was EUR 1,698 million at the end of year 2014 (EUR 1,422 million in 2013) and the proportion of listed equities was 25.6 per cent of the investment portfolio.

Breakdown of the listed equity exposures of Sampo Group by geographical regions is shown in the figure Breakdown of Listed Equity Investments by Geographical Regions, Sampo Group, If P&C and Mandatum Life, 31 December 2014.

 
Breakdown of Listed Equity Investments by Geographical Regions If P&C, 31 December 2014, total EURm 1,367
Breakdown of Listed Equity Investments by Geographical Regions Mandatum Life, 31 December 2014, total EURm 1,678

Breakdown of Listed Equity Investments by Geographical Regions Sampo Group, 31 December 2014, total EURm 3,105
 

The geographical emphasis of Sampo Group’s equity investments is in Nordic companies. The proportion of Nordic companies’ equities corresponds to 53 per cent of the total equity portfolio. This is in line with Sampo Group’s investment strategy to focus on Nordic companies. Moreover, the Group’s insurance liabilities are mostly denominated in the euro and in the Nordic currencies. In the long run the proportion of investments outside of the Nordic countries has gradually increased, because the amount of companies issuing securities in the Nordic countries is limited and from a tactical point of view other geographical areas have recently provided interesting investment opportunities.

The sector allocation of direct listed equity investments in Sampo Group is presented in tables Exposures by sectors, asset classes and rating, If P&C, Mandatum Life and Sampo Group, 31 December 2014. The largest allocations are to capital goods, consumer products and basic industry sectors. Listed equity investments made through mutual funds and ETF investments accounted for 46 per cent of the entire equity portfolio.

Furthermore, the largest direct listed equity exposures are presented in the table Ten Largest Direct Listed Equity Investments, Sampo Group, 31 December 2014.

Ten Largest Direct Listed Equity Investments Sampo Group, 31 December 2014
Top 10 equity investments Total fair value, EURm % of total direct equity investments
Nobia 156 9.4%
UPM-Kymmene 130 7.8%
Veidekke 100 6.0%
Hennes & Mauritz 94 5.7%
Amer Sports 82 4.9%
TeliaSonera 80 4.8%
Volvo 77 4.6%
ABB Ltd 74 4.4%
Husqvarna Ab 50 3.0%
Sectra Ab 45 2.7%
Total top 10 exposures 889 53.3%
Other direct equity investments 777 46.7%
Total direct equity investments 1,666 100.0%

In addition, Sampo Group’s largest listed equity holdings are disclosed in the Notes to the Financial Statements (Note 40).

The largest exposures by individual issuers and counterparties are presented in the table Largest Individual Exposures by Issuer and by Asset Class, Sampo Group, 31 December 2014.

 
Largest Individual Exposures by Issuer and by Asset Class Sampo Group, 31 December 2014
EURm
Counterparty		 Total fair value % of total investment assets Cash & short-term fixed income Long-term fixed income, total Long-term fixed income: Government guaranteed Long-term fixed income: Covered bonds Long-term fixed income: Senior bonds Long-term fixed income: Tier 1 and Tier 2 Equities Uncolla-
teralized derivatives
Nordea Bank 1,600 8% 926 674 0 387 172 115 0 0
Svenska Handelsbanken 1,490 8% 908 582 0 509 69 4 0 0
Danske Bank 1,002 5% 631 371 0 130 167 74 0 0
Skandinaviska Enskilda Banken 945 5% 590 355 0 124 129 102 0 0
Sweden 665 3% 0 665 0 0 665 0 0 0
Swedbank 484 3% 59 425 0 275 150 0 0 0
DnB 440 2% 0 440 0 232 165 43 0 0
OP Pohjola 436 2% 383 52 0 0 42 10 0 0
Netherlands 424 2% 0 424 0 0 424 0 0 0
Germany 347 2% 0 347 0 0 347 0 0 0
Total Top 10 Exposures 7,833 41% 3,499 4,334 0 1,656 2,329 348 0 0
Other 11,385 59%
Total investment assets 19,218 100%
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