Equity and Spread Risks

The values of tradable investment assets decrease when credit spreads of debt instruments are changing unfavourably or equity prices are decreasing. Most of 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 the value of collaterals decreases. Ultimately, the issuer may fail to meet its financial obligations and the risk is realized as a credit loss.

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 analysed investments with risk return ratios internally considered to be adequate, although the portfolio might not be necessarily as diversified as the finance or portfolio theory suggests.

The main steps in decision making, limit and monitoring process are as follows:

1. Potential investments are analysed 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 the 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 short notice when an opportunity appears. This puts pressure on authorisations and credit limit structures and procedures that must be simultaneously (i) carried out flexibly 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 Exposures by Sectors, Asset Classes and Rating, If P&C, Mandatum Life and Sampo Group, 31 December 2015. The tables also include 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

The largest holdings are in financial institutions and covered bonds. Most of these investments are in the Nordic countries as can be seen in the table Fixed Income Investments in Financial Sector, Sampo Group, 31 December 2015. These exposures increased by EUR 0.3 billion during 2015.

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

The exposures in non-rated and high-yield fixed income instruments are significant, because a 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 2015.

The listed equity investments of Sampo Group totaled EUR 3,431 million at the end of year 2015 (EUR 3,105 million in 2014). At the end of year 2015, the listed equity exposure of If P&C was EUR 1,498 million (EUR 1,367 million in 2014). The proportion of listed equities in If P&C’s investment portfolio was 13.1 per cent. In Mandatum Life, the listed equity exposure was EUR 1,732 million at the end of year 2015 (EUR 1,698 million in 2014) and the proportion of listed equities was 26.0 per cent of the investment portfolio.

A 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 2015.

The geographical emphasis of Sampo Group’s equity investments is in the Nordic companies. The proportion of Nordic companies’ equities corresponds to 55 per cent of the total equity portfolio. This is in line with Sampo Group’s investment strategy to focus on Nordic companies. However, these Nordic companies are mainly competing on global markets and few of them are pure domestic companies. Hence, the ultimate risk is not highly dependent on the Nordic economies. Moreover, Group’s insurance liabilities are mostly denominated in 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 2015. The largest allocations are to consumer products, capital goods and financial institutions. Listed equity investments made through mutual funds and ETF investments accounted for 38 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 2015.

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 Exposures by Issuer and by Asset Class, Sampo Group, 31 December 2015.