Low interest-rate level reflected in fixed-income investments

At year-end, fixed-income investments accounted for 28 (31) per cent of Varma’s investment portfolio and their market value amounted to EUR 10.6 billion. They consisted of government and corporate bonds, money-market instruments, and loans, mainly TyEL loans.

The return on fixed-income investments was 1.2 per cent, and was marked by divided returns. Considering the underlying interest rate level, the return on the loan portfolio and on corporate bonds was good. The returns on government bonds were burdened as a result of adhering to bonds with the best credit rating and also by the increase in long-term interest rates during the year.

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

In government bonds, Varma maintained its cautious risk policy, focussing investments on bonds with the best credit rating. The share of government bonds in the portfolio was reduced, accounting for 10 per cent of Varma’s investments and yielding a return of -1.8 per cent. The conservative investment policy lowered returns. The situation in the eurozone eased during 2013, and the previously high interest rates of Italy and Spain continued to fall.

Corporate bonds continued to generate reasonably good returns at 3.0 per cent. Varma’s risk selection was successful, as index returns remained practically at the zero level. The share of corporate bonds was reduced during the year and stood at 14 per cent.

Good return on TyEL loans

Varma’s loans consist mainly of TyEL loans granted to our customers. Their proportion of the total investments decreased during 2013 from 7 per cent to 5 per cent, as the demand for new loans decreased and old loans were repaid. The return was good, at 3.3 per cent, and clearly higher than the average interest rate level.

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