Varma - Annual Report 2012

Strong investment year in an uncertain economic environment

The investment year 2012 was marked by share prices rising, interest rates continuing to fall from an already exceptionally low level, and measures by the European and U.S. central banks aimed at stabilising the markets. Measures by the central banks calmed the markets and in terms of investments the year was good, although the general economic situation entails major uncertainties and increasing government budget deficits.

At year-end, the value of Varma's investments stood at EUR 34.4 (31.9) billion, and their return was 7.7 (-2.1) per cent. The investment result further improved Varma's already strong solvency, which creates a strong buffer in an uncertain economic situation.


The investment environment was extremely challenging throughout the year and was marked by uncertainty, especially in the euro area. Early in the year, share prices increased, but plummeted by the summer as the European debt crisis escalated and concerns over global economic growth grew.

In July, the European Central Bank lowered its key interest rate to a record low level, 0.75 per cent, and in August issued an unlimited bond purchase programme, provided that certain terms are met. The Federal Reserve of the United States announced a mortgage-backed securities purchase programme aimed at improving employment, and its goal of keeping interest rates at the zero level for a long time.

The central banks' measures boosted investors' risk appetite, and in the latter half of 2012, share prices rose sharply. The falling interest rate level and the narrowing risk margins on corporate bonds for their part improved returns on fixed-income investments.

The trend in the investment markets differed notably from the situation in the real economy. Finland and Europe sank into recession after two successive quarters of negative GDP growth, and the growth forecasts for 2013 were slashed. Finnish companies announced massive job cuts and temporary lay-offs during the year, and the investment level remained low. No sustainable structural solution was found for the European and U.S. budget deficits during the year.

In 2012 the focus of Varma's investment activities remained on active risk management, and the security of investments was emphasised. The key target was to secure a strong solvency position in an uncertain market environment. During the year, Varma reduced the share of its fixed-income investments while increasing the share of equities and other investments in its portfolio.

Owing to the good return trend, Varma's solvency strengthened to 28.0 (24.8) per cent. Varma continued its strategy of consistent return accrual and broad diversification, which it has been following since the onset of the financial crisis. Because of this, the exceptionally strong development in the corporate bonds market was not fully reflected in Varma's investment result.

Positive returns in all asset classes

The total return on Varma's investments was 7.7 (-2.1) per cent. Equities yielded the best return, as companies paid good dividends and share prices strengthened. Fixed-income investments, real estate and other investments also generated a clearly positive return.


The five-year average return on Varma's investments was 2.5 per cent, and the ten-year return 5.5 per cent.

Fixed-income investments accounted for 1.8, equity investments for 4.5, real estate for 0.6, and other investments for 0.8 per cent of the 7.7 per cent return on investments.


Varma's investment activities focussed on maintaining the company's strong solvency and broad diversification of investments, with a strong emphasis on risk management. The company also uses derivatives for investment risk management, mainly for hedging and controlling the portfolio risk level.

Varma has US-dollar-denominated investments particularly in hedge funds, equities and private equity funds. Varma's policy is primarily to hedge against most of the exchange rate risks. A greater proportion of the currency position was unhedged due to the euro crisis. The exchange result is included in the investment returns of various asset classes.