4.3 Financial risk and sensitivity analysis

All financial instruments are exposed to market risks, i.e. the risk that future market conditions will affect the value of financial instruments, as well as to credit risk, i.e. counterparty default risk. Financial risks therefore arise in the assets and liabilities management of long-term business funds and assets backing liabilities, in reinsurance operations and in all funding operations within the scope of capital management.

The main types of financial risk to which the Group is exposed are:

  • equity and interest rate risk related to the operating activities (core business) of Group members,
  • credit risk
  • liquidity risk.

Financial risks are managed through a system of clearly defined competences and powers that includes a scheme of exposure limits and a reporting process, both on the Group level and in individual group members. The investment policies of individual Group members are approved by the Assets and Liabilities Committee (ALCO), which regularly monitors the group members' exposure against investment limits.

Investment policies are structured so as to account for the nature and characteristics of individual members' liabilities, optimise asset spread and maximise return.

The breakdown of the Triglav Group's financial assets portfolio by industry is shown in the table below.

Industry

31 December 2011
(in EUR)

Percentage*

31 December 2010
(in EUR)

Percentage*

(Raw) materials

29,012,238

1.25%

20,288,527

0.89%

Communications

46,189,478

1.99%

45,356,311

1.99%

Cyclical activities

35,951,877

1.55%

15,278,176

0.67%

Non-cyclical activities

84,411,100

3.63%

58,523,430

2.56%

Highly diversified activity - conglomerates

7,383,155

0.32%

0

0.00%

Energy

85,317,770

3.67%

42,554,031

1.86%

Finance

837,199,318

35.99%

871,464,589

38.18%

Manufacturing

55,471,424

2.38%

52,370,632

2.29%

Technologies

57,317

0.00%

76,176

0.00%

Goods and services of public interest

47,503,621

2.04%

34,248,165

1.50%

EMU countries

564,425,439

24.27%

591,954,690

25.94%

EU countries (except EMU)

104,730,454

4.50%

112,241,272

4.92%

Other countries

108,366,355

4.66%

65,715,480

2.88%

Small businesses and households

1,607,986

0.07%

1,382,726

0.06%

No data

318,396,290

13.69%

370,995,304

16.25%

TOTAL

2,326,023,822

100.00%

2,282,449,510

100.00%

*Percentages are calculated on the basis of carrying amounts. 

 

Documents

 
 
 

4.3.1 Market risk and asset-liability management of insurance portfolios

In assets and liabilities management we are most exposed to interest rate and equity risks on the assets side. To a lesser extent we are also exposed to the regulatory risk of potential changes in the minimum standard for setting the applicable technical interest rate for calculating mathematical provisions on the existing insurance portfolio.

In order to monitor and manage market risks to which the Triglav Group members are exposed, a wide variety of techniques is applied, such as optimum strategic asset allocation with regard to the nature of liabilities and the effect of the external economic environment, regular monitoring of the current ratios of long-term business funds and assets backing liabilities, regular monitoring of capital adequacy by applying the models described in section 4.2 Capital management and capital adequacy management and hedging against certain risks arising from derivative financial instruments. Moreover, the life insurance portfolio includes unit-linked insurance policies, where most of the financial risk is borne by the insureds.

The goal of the asset-liability management process is to ensure an optimal return on investments with respect to the nature of insurance liabilities. Due to regulatory constraints, insurance liabilities are not sensitive to market parameter changes under the current legislation. Thus, the optimisation process aims at producing a set of investment policies that take into account the static nature of insurance liabilities and optimise the relationship between the sensitivity of the balance sheet to market parameters and investment return. In order to maximise the effect, this process also considers the results of other capital adequacy measurement models (Standard & Poor's, Solvency II), but only to the legally acceptable limit.

By means of the optimisation process, investment policies are determined specifying the strategic asset allocation for every portfolio. These policies are approved by ALCO, which regularly monitors the current ratios for all long-term business funds and assets backing liabilities and the compliance of investment structure with the Group's investment policies.

Sections 4.3.2 and 4.3.3 show the results of the sensitivity analysis of the Group's financial assets for both major risks and their impact on comprehensive income and the income statement of the Group.

4.3.2 Interest rate risk

Interest rate risk is the risk of changes in market interest rates affecting the value of interest-sensitive assets, as well as the risk that interest-sensitive assets and interest-sensitive liabilities reach their maturity at different times at different values. Reinvestment risk arises for interest-sensitive assets yielding coupons in the period up to maturity, depending on the structure of the individual instruments.

The interest rate risk sensitivity analysis includes all financial assets exposed to interest rate risk, i.e. debt securities, classified into »measured at fair value through profit and loss« and »available-for-sale« categories and derivative financial instruments. The value of these assets as at 31 December 2011 amounted to EUR 1,064,169,778 and as at 31 December 2010 to EUR 1,069,818,712. The share of debt securities in the total portfolio is shown in the detailed overview of financial assets per groups of assets in Section 6.5 Financial assets.

The table below shows a sensitivity analysis of the Group's portfolio to interest rate risk and its impact on comprehensive income and the income statement.

     

in EUR

Type of security

31 December 2011

 

31 December 2010

 

 +100bp

 -100bp

 

 +100bp

 -100bp

Government securities

-13,879,083

13,879,084

 

-39,735,631

39,735,631

Securities issued by financial institutions

-3,632,285

3,632,285

 

-8,837,737

8,837,737

Securities issued by companies

-12,617,178

12,617,178

 

-9,679,015

9,679,015

Composite securities

-6,220,840

6,220,840

 

-8,197,577

8,197,577

Other

 

-1,137,177

1,137,177

TOTAL

-36,349,386

36,349,387

 

-67,587,137

67,587,137

Impact on comprehensive income

-32,643,346

32,643,346

 

-61,677,611

61,677,611

Impact on the income statement

-3,706,040

3,706,040

 

-5,909,525

5,909,525

 

Documents

 
 
 

4.3.3 Equity risk

Equity risk is the risk of fluctuation in share prices, which affects the carrying value of securities within the Group's portfolio that are sensitive to such fluctuations. These risks are managed through investment limits as well as through geographical and sectoral diversification. The Group invests most of its assets within the European Union and only spreads the investments to other geographic areas in order to hedge the risks and the profitability of its equity portfolio.

To a large extent, the portfolio consists of debt securities: this diversification causes a slightly lower equity risk.

The structure of the equity portfolio per type of exposure is shown in the table below. The amounts shown are based on the carrying values of assets. 

 

 

in EUR

 

31 December 2011

31 December 2010

Equities in the EU

427,081,235

391,956,919

Equities in the USA

33,460

1,812,824

Equities in Asia*

3,393

3,703

Equities in emerging markets

54,829,800

123,349,490

Global equities**

79,145,836

68,574,526

TOTAL

561,093,724

585,697,462

*Equity investments in developed Asian countries (Japan,Hong Kong)
**Globally diversified equity investments

 

Documents

 
 
 

The equity portfolio's sensitivity to equity price fluctuations and their impact on comprehensive income and/or the income statement of the Group is shown in the table below.

 

 

 

 

 

in EUR

 

31 December 2011

 

31 December 2010

 

10%

-10%

 

10%

-10%

Equities in the EU

42,708,124

-42,708,124

 

39,195,692

-39,195,692

Equities in the USA

3,346

-3,346

 

181,282

-181,282

Equities in Asia

339

-339

 

370

-370

Equities in emerging markets

5,482,981

-5,482,981

 

12,334,949

-12,334,949

Global equities

7,914,584

-7,914,584

 

6,857,453

-6,857,453

TOTAL

56,109,374

-56,109,374

 

58,569,746

-58,569,746

Impact on comprehensive income

19,939,944

-13,632,743

 

19,468,522

-19,468,522

Impact on the income statement

36,169,430

-42,476,631

 

33,677,004

-33,677,004

 
 
 

The above analysis demonstrates the sensitivity of the equity portfolio to equity price fluctuations. If the prices of the equities in the portfolio as at 31 December 2011 were 10% above their disclosed values, the comprehensive income and profit of the Group would be EUR 19.9 million and EUR 36.2 million higher, respectively. In contrast, if the prices of the equities in the portfolio as at 31 December 2011 were 10% lower, the comprehensive income and profit of the Group would be EUR 13.6 million and EUR 42.5 million lower, respectively.

Due to the established long-term decrease in the fair value of equity securities, the Triglav Group, in accordance with International Financial Reporting Standards, impaired certain equity securities. The impacts of impairments are disclosed in Section 7.3.

4.3.4 Liquidity risk

Liquidity risk is the risk or threat of a liquidity mismatch, i.e., the mismatched maturity of assets and liabilities. Such a mismatch can cause liquidity problems or a shortage in liquidity needed to settle due liabilities. Liquidity risk is offset against the volume of highly liquid securities and regular monitoring of projected and actual cash flows from assets and liabilities. In order to obtain additional liquidity when needed, the Group makes use of a number of credit lines with domestic and foreign banks.

The following tables show the maturity structure of the Group's financial assets and liabilities.

Maturity structure of financial assets and liabilities 

     

 

   

in EUR

31 December 2011

Not defined

Under 1 year

From 1 to 5 years

From 5 to 10 years

Over 10 years

TOTAL

FINANCIAL ASSETS

           

Investments in associates

20,504,563

 

 

 

 

20,504,563

Financial assets

495,131,141

335,614,391

664,673,714

534,315,284

296,289,292

2,326,023,822

Reinsurers’ share of technical provisions

482,240

25,893,097

11,481,694

4,526,098

1,599,954

43,983,083

Receivables

5,503,317

199,350,508

178,131

9,695

7,619

205,049,270

Cash and cash equivalents

17,553,389

5,218,278

0

0

0

22,771,667

TOTAL FINANCIAL ASSETS

539,174,650

566,076,274

676,333,539

538,851,077

297,896,865

2,618,332,405

FINANCIAL LIABILITIES AND PROVISIONS

 

 

 

 

 

 

Subordinated liabilities

0

0

10,998,000

29,934,090

0

40,932,090

Insurance technical provisions

368,800,112

690,276,031

395,169,444

292,975,857

486,921,328

2,234,142,772

Other financial liabilities

 

29,231,960

10,259,160 

 

 

39,491,120

TOTAL FINANCIAL LIABILITIES

368,800,112

719,507,991

416,426,604

322,909,947

486,921,328

2,314,565,982

 
 
 

Maturity structure of financial assets and liabilities 

     


    in EUR
31 December 2010

Not defined

Under 1 year

From 1 to 5 years

From 5 to 10 years

Over 10 years

TOTAL

FINANCIAL ASSETS

           

Investments in associates

117,067,739

0

0

0

0

117,067,739

Financial assets

546,480,998

182,333,283

516,233,632

735,936,383

301,465,214

2,282,449,510

Reinsurers’ share of technical provisions

0

26,319,593

12,485,687

3,989,017

1,427,018

44,221,316

Receivables

0

214,269,173

2,361,523

13,264

0

216,643,960

Cash and cash equivalents

0

34,108,090

0

0

0

34,108,090

TOTAL FINANCIAL ASSETS

663,548,737

457,030,139

531,080,842

739,938,664

302,892,232

2,694,490,615

FINANCIAL LIABILITIES AND PROVISIONS







Subordinated liabilities

0

0

10,998,000

29,934,090

0

40,932,090

Insurance technical provisions

364,755,023

693,613,838

291,589,363

240,770,641

680,187,024

2,270,915,889

Other financial liabilities

0

21,476,980

13,393,444

0

0

34,870,425

TOTAL FINANCIAL LIABILITIES

364,755,023

715,090,818

315,980,807

270,704,731

680,187,024

2,346,718,404

 
 
 

4.3.5 Foreign exchange risk

Our exposure to foreign exchange risk is minor, as most of our assets are denominated in euros. In terms of the foreign exchange risk structure, the highest exposures are to the currencies of the countries that emerged from the former Yugoslavia, which in total represent no more than 5% of the portfolio.

4.3.6 Credit risk

Credit risk is the risk of loss due to a counterparty's failure to meet its obligations. The main credit risk exposures arise from debt securities holdings and insurance operations (reinsurance credit risk, credit risk of default on receivables from insurance operations).

The Group manages its exposure to credit risk through a system of exposure limits, which constitute part of the investment policies for different types of assets. The aim is to achieve optimum diversification of the credit portfolio and achieve the desired »A« credit rating. Exposures to individual issuers and changes in their credit ratings are continually monitored in order to ensure timely and suitable responses to potential adverse developments on the financial markets.

Credit risk exposure arising from insurance business operations is regularly monitored by analysing:

  • The maturity structure of receivables from insurance operations (see Section 2.11 for guidelines and Section 6.7 for analysis of receivables by maturity) and
  • Reinsurers' and co-insurers' credit ratings. The Group monitors the financial standing of reinsurers and, as a rule, enters into retrocession reinsurance agreements for liability insurance only with A- rated reinsurers, and for all other insurance classes only with at least BBB+ rated reinsurers (70% of reinsurers are A-rated).

The Group's financial assets that may be exposed to credit risk (i.e. financial investments, assets from reinsurance contracts, operating receivables and cash or cash equivalents) as at 31 December 2011 amounted to EUR 2,618,332,403 (vs. EUR 2,694,490,615 as at 31 December 2010).

The table below shows the credit-rating structure of debt securities.

Credit rating

31 December 2011
(in EUR)

Percentage

31 December 2010
(in EUR)

Percentage

AAA

133,986,431

9.39%

133,895,788

9.60%

AA

405,105,707

28.39%

592,502,034

42.47%

A

299,579,162

20.99%

255,087,967

18.28%

BBB

298,354,327

20.91%

237,912,752

17.05%

BB

107,408,814

7.53%

87,944,398

6.30%

B

18,428,007

1.29%

977,491

0.07%

No credit rating

164,140,370

11.50%

86,856,459

6.23%

TOTAL

1,427,002,818

100.00%

1,395,176,889

100.00%

 

Documents

 
 
 

In 2011, the single largest exposure of the Triglav Group was to Abanka Vipa amounting to EUR 94,601,082, same as the year before (EUR 79,175,397).

Total exposure of the Triglav Group to Greece, Portugal, Spain, Ireland, Italy and Hungary on the reporting date amounting to EUR 73.9 million.

Due to adverse developments in the global financial markets and increased credit risk, certain debt securities were impaired. The impact of impairments is described in detail in Section 7.3 Expenses from financial assets and liabilities.

 
 
 
 
 
 
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