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.

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. 

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

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.

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 

Maturity structure of financial assets and liabilities 

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.

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.