Strong solvency protected against plummeting market
Varma’s solvency remained at a strong level, although the return on investments was negative due to the fall in equity prices. Active diversification of the investment portfolio, from equities to fixed-income investments and real estate, dampened the effect of strong market movements.
In the challenging market environment, the return on Varma’s investments was -1.4 (5.3) per cent, and the value of investments stood at EUR 41.1 (42.6) billion at the end of March. Owing to the major equity market movements, Varma’s solvency weakened during the first quarter but remained at a high level, at 28.6 (31.4 per cent in the beginning of 2016) per cent, amounting to EUR 9,110 (9,956 in the beginning of 2016) million.
“Uncertainty in the markets continued in the first quarter, and Varma’s return on investments was slightly negative. The company’s strong solvency does allow long-term investment activities, and it serves even now as a risk buffer,” says Varma’s President & CEO Risto Murto.
Since the financial crisis of 2008, Varma’s investment operations have focussed on active risk management, and a key target has been to maintain our strong solvency position.
Of Varma’s investments, the highest returns were generated by unlisted equities at 8.2 (1.5) per cent, fixed income investments at 2.5 (2.6) percent, and real estate investments at 1.2 (2.0) per cent, which were unaffected by the market fluctuations. At the end of March, the average annual nominal investment return over five years was 4.4 per cent, and over ten years 4.3 per cent. The corresponding real returns were 3.3 and 2.5 per cent.
China’s equity market crash and oil prices startled the markets
“January was bleaker than ever in the equity markets, as concerns over China’s economy escalated and the U.S. economy faced headwinds. The equity markets plummeted, with the Chinese stock exchanges leading the way. We focussed on active portfolio management by markedly reducing the weight of equities,” says Varma’s Executive Vice-President Reima Rytsölä.
Despite the increased risks relating to the global economy, economic growth has remained positive in both the U.S. and Europe.
“The economy looks brighter in the second quarter. U.S. economic growth seems to be holding, and China’s situation is no longer completely hopeless. The recovery of commodity and especially oil prices has helped to balance the market sentiment,” Rytsölä says.
CSR programme proceeds in the first quarter
Varma started to calculate the carbon footprint of its investments and launched Green Office activities at the company’s headquarters in order to promote its target of mitigating climate change. Varma also joined Diversity Charter Finland.
In January–March, new pension decisions numbered 5,628, and EUR 1.2 billion in pensions were paid to 336,600 recipients. The TyEL insurance transfer in March round was EUR 11.2 million positive, but as regards YEL insurance, Varma’s transfer round loss was EUR 1.4 million.
Central banks going to extremes to save growth
Economic policies have been exceptional ever since the onset of the financial crisis. The fiscal policies especially in the eurozone have focused on balancing public deficits, and the responsibility for active economic policy has been transferred to central banks.
“Monetary policies are very much focused on stimulus measures, and the measures used by central banks are highly exceptional. Record-low interest rates and quantitative easing now support the markets. For pension investors this shows as negative deposit rates,” says Murto.
The benchmark interest rates of many countries’ central banks are negative.
“It is positive that at least one area of economic policy strives for growth and inflation. Nevertheless, economic policy as a whole should be re-examined within the eurozone. The ECB’s policy options are all but exhausted, and even now the policy entails major long-term risks,” Murto adds.
(The figures presented are unaudited figures of the parent company.)
Varma Mutual Pension Insurance Company is the most solvent earnings-related pension company and largest private investor in Finland. The company is responsible for the statutory earnings-related pension cover of some 860,000 people in the private sector. Premiums written totalled EUR 4.6 billion in 2015 and pension payments stood at EUR 5.2 billion. The company’s investment portfolio amounted to EUR 41.1 billion at the end of March 2016.
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