The Würth Group has a three-tier, Group-wide risk management system which enables risks and opportunities to be identified, evaluated, controlled and communicated: the internal audit monitoring system, Group controlling and the early warning system. The Central Managing Board determines the principles of risk policy and the risk strategy for the Würth Group. Responsibility for implementing an effective and efficient risk management system lies with the respective Management
of each Group entity.
At the Würth Finance Group, entering into, managing and controlling risk are central components of its business. The goal is not to eliminate all risks, but to achieve a balanced relationship between risk and return. Potential risks that might have a negative effect on assets, the financial position and the earnings situation are grouped into three risk categories: market, company and general environment.
Business model: The Würth Finance Group generates around 40% of its revenue through internal counterparties. As a result, there is a direct correlation between its operating result and the course of business of the Würth Group as a whole. At the same time, the company is in competition with external financial services companies. However, because it is part of the Würth Group, the Würth Finance Group enjoys a unique position compared to its rivals, an advantage it has successfully utilised for many years to extend market share.
Financial risks and opportunities: The financial risks of the Würth Group are measured, monitored and controlled largely by the Würth Finance Group. The business activities of the Würth Finance Group expose the company to developments in the financial markets. Fluctuations in exchange rates and interest rates affect revenue, as do share price fluctuations and changes in commodity prices, albeit to a lesser extent. Furthermore, credit risks arise mainly from financial assets and contingent liabilities. The Würth Finance Group measures, controls and monitors financial risks by means of a systematic risk management process. Traceable, safe and audit-proof documentation and transparency of information are ensured by strictly segregating the functions of the risk-taking and risk-monitoring bodies. The Würth Finance Group uses various means to manage financial risk and optimise income, including derivative financial instruments, which are valued and monitored on a daily basis.
The maximum credit risk corresponds to the value of all financial assets, contingent liabilities and unused irrevocably guaranteed lending commitments reported in the financial statements. In order to minimise credit risks, business relations are conducted only with first-class external counterparties. For each rating level, binding counterparty limits are defined. Their absolute value is subjected to regular critical reviews by the supervisory bodies and adjusted if necessary. With all external counterparties for financial derivatives transactions the Würth Finance Group has concluded ISDA agreements, including a Credit Support Annex that ensures the periodic net present value cash settlement of the outstanding transactions. The counterparty risks relating to delcredere business are transferred in full to insurance companies.
Every Würth Group company is granted a credit limit by the appropriate member of the Würth Group’s Central Managing Board. Compliance with such credit limits is monitored by Würth Finance International B.V. Any credit risks relating to loans to individual Würth Group companies with negative equity as at 31 December 2018 are secured by letters of comfort from the superordinate parent company.
The credit ratings of the internal and external counterparties and the limitation on aggregated individual-party risks are constantly monitored.
Interest rate risk
For the Würth Finance Group interest rate risk means the negative impact on the financial position and earnings situation arising from changes in the interest rates for all currencies. A significant proportion of the loans to Würth Group companies are refinanced by fixed-interest bonds with partially similar interest and maturity structures. The appetite of the company for interest rate risks is defined by the net present value sensitivity of all on and off-balance sheet exposures to adverse changes in interest rates by 100 basis points in relation to the equity capital. The Würth Finance Group aims to achieve an equity sensitivity of less than 5% over the medium term. Furthermore, the Group makes use of interest derivatives to manage its exposure.
The objective of liquidity management is to ensure that the Würth Group is able to meet its payment obligations at all times. In close co-operation with the Central Managing Board the liquidity situation of the Würth Finance Group is monitored and managed to ensure that the expected funds needed over the next 12 to 24 months are covered sufficiently by the expected cash flow and liquidity reserves.
The high international creditworthiness of the Würth Group (Standard & Poor’s has awarded its non-current liabilities an “A” rating) allows the Würth Finance Group to raise funds in the international capital markets on favourable conditions. In order to cover any liquidity needs that may arise even in extraordinary circumstances, the Würth Finance Group also has credit lines granted by various banks.
Further information about the risks arising from financial instruments and their management can be found in the notes to the separate financial report on the website (www.wuerthfinance.net under Investor Relations). The expected effects on the results and/or the financial position and the sensitivity analysis can be found in note 19 to the financial statements.
The financial strength of the Würth Finance Group is based on shareholders’ equity of EUR 320.7 million, net profit of EUR 29.9 million and assets of EUR 2,518 million (as at 31 December 2018).
Technological risks and opportunities: As the Würth Group’s “payment factory”, the Würth Finance Group handles large payment volumes, which rely on high-performance IT systems and networks. Consequently, the IT systems and IT security are continually being enhanced and monitored via an information security management system. The Würth Finance Group, in collaboration with cyber security experts, works to counter the constantly growing and evolving threat from attacks on information and communications technology. It does so by extending technical and organisational protection measures and by conducting awareness training for employees. In addition, the Würth Finance Group has a business disaster recovery system. The ICT infrastructure is highly scalable, enabling additional business volumes to be dealt with cost-effectively and with a high level of processing quality.
Operational risks and opportunities: The Würth Finance Group deems an operational risk to constitute a risk of loss due to inadequate or failed internal processes, persons or systems, or as a result of external events. The Würth Finance Group’s internal control system assesses, documents and optimises potential events based on the probability and frequency of their occurrence as well as their impact. The desire to continuously improve the quality, efficiency and safety of core processes – a self-evident aspect of the corporate culture – strengthens the effectiveness of the Würth Finance Group on a sustained basis.
Regulatory risks and opportunities: Meeting regulatory requirements is challenging for financial and insurance service providers. Among other things, this entails rules on dealing with employees, with clients and business partners, with data and with authorities. It goes without saying that the Würth Finance Group endeavours to observe and adhere to all rules and regulations applying to its business. It has the necessary critical mass and the organisational set-up to ensure effective and efficient compliance management and thus to meet the increasing regulatory requirements in the financial and insurance brokerage business.
Basic principles of our risk management system
- The Management bears the responsibility for all risks incurred as a result of the company’s business activities and seeks to achieve a healthy balance between risk and returns.
- An independent control process forms an integral part of the corporate structure.
- Employees are familiar with and alert to the principal risks specific to their area of activity.
- A central element of risk control is the comprehensive, transparent and objective disclosure of risks to the Group and company Management, owners, supervisory authorities and other stakeholders.
- Revenue is protected on the basis of risk tolerance – i.e. the maximum risk that the Würth Finance Group can bear given its financial and earning power.
- Ultimately, the Würth Finance Group’s reputation depends on effective risk management and control.