Varma - Annual Report 2012

Interest rates continued to fall and the return on corporate bonds increased

At the end of the year, fixed-income investments accounted for 37 (41) per cent of Varma's investment portfolio, with a market value of EUR 12.6 billion. They consisted of government and corporate bonds, money-market instruments, and loans, mainly TyEL loans.


During the year, the central banks' measures lowered the general market interest rate level to a record low, which improved interest income. In addition, there was tremendous demand for corporate bonds, which experienced narrowing risk margins, and consequently generated high returns.

The eurozone crisis intensified midway through the year, but the European Central Bank's announcement of unlimited bond purchases eased the situation. The government bond interest rates of Spain and Italy decreased, but remained high in comparison with the general interest rate level. Bank regulation was generally tightened through solvency requirements and tax decisions, creating pressures for leaner balance sheets and increasing margins on business loans.

Inflation has remained higher than the general interest rate level, which will make it more difficult to achieve a positive real return on fixed-income investments. Interest income may also easily turn to negative, should interest rates rise.

The return on fixed-income investments was 4.4 (4.2) per cent. As a precautionary measure, the portfolio's duration was kept relatively short, which slightly lowered the overall return on fixed-income investments.

In government bonds, Varma maintained its cautious risk policy, focussing investments on German, Dutch and Finnish bonds. The share of government bonds in the portfolio was reduced, accounting for 12 per cent of Varma's investments and yielding a return of 3.6 per cent.


Corporate bonds generated the best return of fixed-income investments, at 8.1 per cent, and their share of the portfolio was increased during the year to 16 per cent.

The amount of TyEL loans decreased

Loans consist mainly of TyEL loans granted to our customers. Their proportion of the total investments decreased during 2012 from 9 per cent to 7 per cent, as the demand for new loans decreased and old loans were repaid. The return on TyEL loans was 3.2 per cent.

The interest on TyEL loans is tied to governments' interest rate levels in the European area and they are mainly covered by bank guarantees.