By Hamlin Lovell, NordicInvestor

This article is part of our 2021 Nordic Insurers Report. You can access the full report here.

Timo Salminen, Head of Capital Management at Fennia in Helsinki, heads a team which manages around EUR 2.8 billion for both Fennia’s non-life insurance and life insurance units (Fennia Asset Management and Fennia Properties were sold to S-Bank in 2020).

The Pandemic: Remote Working, Volatility and New Manager Engagement

Flexibility has to be balanced against interactions with colleagues: “Working at home has been beneficial in terms of flexible working hours, but I have small children at home so I cycled to work every day anyway to use my own room in the office. Seamless remote communication and Microsoft Teams has meant we had no delay or disruption to our well-defined decision-making roles. Well defined roles let us take prompt decisions”.

“The biggest disadvantage has been less spontaneous conversations and free exchange of ideas over the coffee machine”.

“In light of volatility, we have improved VAR models for collateral and liquidity management, but overall market volatility was well within our risk tolerance”.

“Our external asset managers are in Finland with our key partners being S-Bank and FIM Asset Management. Majority of our fund selection process is outsourced, and we are not really engaging with new managers at the moment”.

A Lower for Longer World

“We are now pretty indifferent to yield changes, since we have used ALM to match all liabilities, almost fully hedging our interest rate risk and liability return requirements. This also means that the investment portfolio is not forced to take extra risk due to low yields. We continue to stay focused on analyzing the optimal combination of market risk premia for efficient utilization of our risk budget regardless of the prevailing yield level.”.

Strategic Asset Allocation

Mainly fixed income and reducing real estate

“Since 2019 the assets were split into hedging and investment portfolios. The hedging portfolio of EUR 1.3 billion hedges majority of liability cashflows for the life and non-life businesses (both companies have their own hedging portfolios that match the company specific liabilities and investment portfolios that match the company specific risk tolerance and appetite). We hedged most of our interest rate liability exposure at much higher interest rates in the beginning of 2019, which was a very important decision at the time and has kept our solvency steady throughout the corona pandemic and negative interest rate environment. We use interest rate swaps and short maturity corporate bonds to match the liability cashflows. Our credit duration is less than three years”.

“The other half of the portfolio is around EUR 1.3 billion in an investment portfolio, of which fixed income is 47%, real estate is 32%, equities are 16%, and private equity is 5%. We have been slightly increasing equities, but are balancing risk distribution by reducing real estate, which currently has the biggest risk contribution in the investment portfolio.”.

“We have a small allocation to private debt mainly through our customer loan portfolio. Overall, our aim is to reduce our weight in illiquid investments which currently consists mainly of real estate. We will reassess our position one we have reached our target with the total allocation to illiquids”.

(There is also a strategic portfolio that has assets that have a strategic purpose aside investment return (including partner companies and real estate that is in our own use)

Tactical Asset Allocation

  • Increasing equity exposure in 2020 and reducing interest rate exposure in 2021

“Tactical asset allocation applies to both the hedging and investment portfolios, within certain risk budgets set by the board to cover liabilities. The risk budget is shared between the hedging and investment portfolios, so that if we take more risk on the hedging portfolio, e.g. by reducing liability hedge ratio, we may need to take less risk on the investment portfolio. Our main metric is to analyze the expected Return/Risk ratios between different forms of tactical risk taking. For example, going net short in duration risk is a money losing position in the long run and tactical timing is critical. Also, the return of that position has to cover the opportunity cost of having less higher yielding assets in the investment portfolio”.

“Currently we have very high solvency which allows for more tactical risk taking”.

“Tactically, we increased equities in 2020 but during spring 2021 we have now determined that reducing interest rate duration is more attractive than going overweight in equities, and our own capital is now net short in duration risk. We also see increased risk to current equity valuations in the rising yield environment and have started to buy out-of-money equity put option cover for the Q4”.

(“Group NAV or “own capital” is the difference between all assets and liabilities and the current amount is around 1 bln EUR. Our liabilities have a very long duration and, when unhedged, create a significant negative duration for the own capital. We have now reduced the duration in the hedging portfolio to be significantly lower than the duration of hedged liabilities so the effective duration of own capital is negative”).

Corporate Credit Risk

“In the hedging portfolio, we are in high quality investment grade bonds with very moderate credit risk, so we are well covered against defaults and have a limited risk of credit downgrades. In the investment portfolio, we have somewhat riskier corporate and emerging market debt but this risk is well within our risk budget”.

Liquidity and Cash Management

“Our main liquidity risk comes from the need to provide collateral on interest rate derivatives. We have very illiquid liabilities so do not expect them to require more liquidity. We have very high buffers of liquidity according to our VAR models”.

“We cannot avoid negative interest rates on liquidity management, but we use interest rate swaps to swap them to positive longer-rates in the hedging portfolio”.

In House versus External Management

“Our in house team are mainly focused on broad asset allocation, asset/liability management for the hedging portfolio using fixed income derivatives, equity derivatives for tactical asset allocation and some strategic investments. We use external managers for mandates such as credit and fund selection. External mandates follow neutral allocation and risk limits based on our ALM strategy”.

Active versus Passive Management

“Fixed income is all active management”.

“In equities just over half of the allocation is passive. We monitor net information ratio levels to monitor the benefit from active management”.


ESG – Coverage

“We are in the process of clarifying our ESG policies. The main tool is exclusions of certain industries including controversial weapons, tobacco and pornography”.

“ESG does not really apply to our legacy private equity book”.

ESG – Impact Investing

“ESG has most impact in real estate, where we can have an immediate and tangible effect on energy efficiency. Our biggest investment is an office in Helsinki used by Danske Bank. It has a LEED (Leadership in Energy and Environmental Design) GOLD certification and was awarded the highest score for any property on sustainability in Finland”.

“In the hedging portfolio we are not sure we can have much impact through very short corporate bonds traded in the secondary market but we still have exclusion criteria set in the portfolios”.

“Sovereign debt is not very relevant because we mainly use derivatives rather than cash bonds. This is partly to avoid basis risk with the Euro Swap curve which is specified as our liability curve under Solvency II”.

ESG – Engagement and voting

“We engage directly with some of our strategic investments in Finland, but mainly use passive funds”.

ESG – Reporting

“Reporting total sustainability of the portfolio is an ongoing project this year. The Fennia Life ESG policy is being updated due to SFDR”.

Solvency II Framework and Reforms

“We were happy to see Solvency II changing the interest rate module to be more market consistent so that the floor moves from zero to a negative level and companies have to hold capital for interest rates becoming more negative. The new module will recognize the capital relief we get from hedging liability interest rate exposure, which was previously reflected in our balance sheet but mostly unrecognized under Solvency II capital requirements”.

“We are not seeking more freedom to invest in longer term assets, as we cannot prove that they would match longer term liabilities. We have enough freedom to diversify and make an adequate return. We fully match liabilities and have a systematic market beta exposure with aim to add alpha from some active management and manager selection”.

IFRS changes

“This is not relevant because we use Finnish accounting standards”.