Press release 22 March 2019

Financial position and risks of supervised entities as at 31 December 2018: Finnish financial sector's capital position remained good, despite a steep decline in share prices

According to fourth quarter 2018 data, the capital position of the Finnish financial sector remained good overall. The solvency position of the employee pension sector weakened from the previous quarter, but in the life and non-life insurance sectors, the solvency position strengthened, despite lower returns on investment. The Finnish banking sector's capital ratio weakened, as expected, reflecting the transfer of Nordea's domicile to Finland, but it remained stronger than the EU average.

Finnish banking sector’s capital position remained stronger than European average

Reflecting the transfer of Nordea's domicile to Finland, the capital ratios of the Finnish banking sector weakened considerably in the fourth quarter of 2018, as expected (press release 5.12.2018).

The banking sector's Common Equity Tier 1 (CET1) capital ratio (12/2018: 17.2%) weakened by 3.8 percentage points and the total capital ratio (12/2018: 20.9%) by 2.5 percentage points, which is explained mainly by the restrictions imposed by the European Central Bank on Nordea's internal models for capital adequacy calculations and the risk weight floor set by Finansinspektionen for Swedish mortgages. Due to the transfer of Nordea's domicile to Finland, growth in the banking sector's exposures exceeded growth in Tier 1 capital, which in turn was reflected in the banking sector's leverage ratio, i.e. the indicator of non-risk based capital adequacy, which fell to 5.8% (12/2017: 6.8%).

Despite the weakening, the Finnish banking sector's capital position remained stronger than the EU average. At the end of 2018, the banking sector’s Common Equity Tier 1 (CET1) capital ratio and total capital ratio were some 2 percentage points higher than the EU average. The Finnish banking sector’s leverage ratio at the end of 2018 was slightly higher than the European average.

Reflecting the transfer of Nordea's domicile, the banking sector's dependence on market funding grew further. In Finland, the indicator of market-based funding – i.e. the loan-to-deposit ratio (173%), is among the highest in Europe. The funding risk associated with the high ratio of market funding is alleviated, however, by the high degree of diversification of market funding in the Finnish banking sector. In addition to higher funding risk, the amount of financial assets and liabilities held for trading and the capital requirements for market risk increased manifold. The share of capital requirements for market risk in banks’ total capital requirements remained, however, moderate and smaller than the European average.

Financial market uncertainty reflected in pension sector solvency

Employee pension institutions’ solvency position weakened, particularly in the fourth quarter. At the end of 2018, the amount of pension assets relative to technical provisions, i.e. the solvency ratio, was 125.0% (130.7%, 12/2017). The solvency position of employee pension institutions was 1.6, i.e. virtually unchanged on the previous year. Solvency capital declined during the year by some EUR 5 billion, to EUR 24.6 billion, due to negative returns on investment.

At the end of 2018, the total risk-based solvency limit of employee pension institutions was EUR 14.9 billion, i.e. some EUR 2 billion lower than at the end of 2017. The decline in the solvency limit was due to the decrease in the company-specific share of equity risk. In addition, the decline in the solvency limit in value terms was due to the lower value of investment assets and the smaller volume of equity investment.

Solvency position of life insurance companies increased despite low level of interest rates

The life insurance sector's solvency ratio (12/2018: 205.6%) strengthened in 2018. Finnish life insurance companies have maintained their resilience even to large market crises. Compared with the corresponding period a year earlier, Solvency II ratios increased significantly. This was mainly due to the lower solvency capital requirement, in response to, for example, the shrinking of the solvency capital requirement for market risk resulting from the decline in equity markets.

Life insurance companies’ premiums written in 2018 declined slightly on the previous year. In the fourth quarter, however, premiums written rose slightly, year-on-year. Capital redemption contracts became the top life insurance product category.

Life insurance companies’ return on investment was 0.0% in 2018 (2017: 3.9%). For the year as a whole, equities generated a return of -5.4%, i.e. the weak developments in the equity markets eroded the total return. The return on equity investments was negative for the first time since 2011.

Lower solvency capital requirement strengthened solvency of non-life insurance companies

Non-life insurance companies’ solvency ratio (12/2018: 237.6%) strengthened despite a decrease in own funds, as the solvency capital requirement decreased, in relative terms, more than own funds. At the end of the year, the solvency capital requirement decreased most for companies with a larger-than-average volume of equity investments. The decrease in the solvency capital requirement was due to, for example, the steep decline in equity prices, and growth in strategic equity investments for which the solvency capital requirement is smaller.

Real estate investments generated steady returns. Over half of the investments were fixed income investments, and nearly 60% of them were corporate bonds. The fall in equity prices contributed to uncertainty in the investment markets and credit risk margins widened, causing a fall in corporate bond yields. Nearly all non-life insurance companies recorded a negative return on fixed-income investments. Return on equity investments was also negative for nearly all companies. Private equity investments and unquoted shares generated a return for only few non-life insurance companies.

The pick-up in the economy boosted premiums written in several insurance classes. Premiums written started to increase, following a downward trend or zero growth since 2015. In the insurance classes with the largest premiums written, i.e. property insurance and motor insurance, development remained weak, however.

Further information

  • Jyri Helenius, Deputy Director General
  • Samu Kurri, Head of Department

Requests for interviews are coordinated by FIN-FSA Communications, tel. +358 9 183 5030, weekdays 9.00–16.00.


Financial position and risks of supervised entities (in Finnish)