Annual Report 2014



The return on Varma’s investments was 7.1 (9.0) per cent. The value of Varma’s investments grew to slightly over EUR 40 billion. Fixed-income investments accounted for 26 per cent, equity investments for 47 per cent, real estate investments for 6 per cent and other investments for 21 per cent of the investment result.

Share prices strengthened, and interest rates continued to fall from the already low level of the early year, which boosted interest income. Other investments also developed favourably. The average ten-year (nominal) return on investments was 5.5 per cent and the five-year return 6.4 per cent. The real returns were 3.5 and 4.3 per cent respectively.

Economic growth gained momentum in the U.S. but remained weak in the eurozone and was negative in Finland. The European Central Bank held on to its stimulus policy and lowered its interest rates, while the U.S Federal Reserve withdrew its support for the markets and ended quantitative easing. It also gave indications of a moderate interest rate increase in 2015. The U.S. dollar gained clear momentum during the year.

During 2014, Varma’s result developed strongly in the first half, but there was strong fluctuation in the second half. Uncertainty was sparked by the crisis in Russia, geopolitical tension, the sharp decline in the price of oil and the markets’ momentary lack of faith in the steadiness of equity prices. 

Varma has US-dollar-denominated investments in hedge funds, equities, corporate bonds and private equity funds. In accordance with Varma’s policy, most of the exchange rate risks have been hedged. During the year, a proportion of the currency position was unhedged, which improved the overall result as the value of the U.S. dollar increased. In terms of operations, foreign currency risks are managed as a single entity, while in the performance indicators the exchange rate impact is included in the investment returns of various asset classes.

At the end of 2014, the value of Varma’s investments totalled EUR 40,039 (37,718) million and the return at fair value was EUR 2,699 (3,160) million or 7.1 (9.0) per cent. All asset classes yielded a positive return. The value and returns of the investments are grouped according to risk in this report. The Notes show the breakdown of investments and their returns by investment category, grouped according to regulations and according to risk.

The focus of Varma’s investment activities was on active risk management, and the security of investments was emphasised. The key target was to secure a strong solvency position. In its investment risk management, the company used derivatives for hedging purposes and to control the risk level of the portfolio.

Fixed-income investments

Varma’s fixed income investments stood at EUR 11,983 (10,624) million at the balance sheet date and were distributed as follows:

  • loan receivables EUR 1,571 (2,026) million
  • public-sector bonds EUR 3,450 (3,869) million
  • other corporate bonds EUR 6,282 (5,363) million
  • other money-market instruments 680 (-635) million; the impact of derivatives, EUR -81 (1,878) million, is presented separately.

The return on fixed-income investments was 5.5 (1.2) per cent. The return on the loan portfolio was 2.6 (3.3), on public-sector bonds 6.7 (-1.8), on other corporate bonds 6.9 (3.0) and on other money-market instruments 0.5 (-0.4) per cent.

During the year, interest rates continued to fall from the already low level, which clearly improved the return on listed bonds. The duration of the loan portfolio was kept fairly long at around five years, which improved the result.

The return on loan receivables was in line with expectations, but valuation changes in junior loans lowered the overall return on loan receivables. The demand for TyEL loans was subdued, and their amount decreased in the course of the year. The return on money-market investments was in accordance with the prevailing short-term interest rate level.

Interest rates in Europe have dropped to a very low, even negative, level, and it will be challenging to achieve a positive real return on fixed-income investments. Interest income may also easily turn negative, should interest rates rise.  

Equity investments

At the balance sheet date, the value of Varma’s equity investments was EUR 16,333 (14,756) million and were distributed as follows:

  • investments in listed equities EUR 12,879 (11,579) million,
  • private equities EUR 2,451 (2,175) million, and
  • unlisted equities EUR 1,004 (1,002) million.

The return on equity investments was 9.1 (21.8) per cent. Listed equities yielded a return of 7.4 (23.7) per cent, private equities 13.5 (12.1) per cent, and unlisted equities 19.7 (26.7) per cent.

Equity investments yielded good returns and had the strongest performance of all asset classes. Equity investments have had a very strong six-year period, with an average return of 13.3 per cent. Share prices followed an upward trend until June, but there was strong fluctuation in the second half. The overall return on listed equities was good, with the highest return generated by U.S. equities, at 16.3 per cent. The equities of Sampo Corporation, Varma’s largest domestic holding, performed very strongly, at 14.0 per cent. The crisis in Russia weighed on the share prices of certain key holdings, and the total return on Finnish equities was 6.7 per cent.  

Private equity investments and unlisted equities also generated good returns. About half of Varma’s private equity investments are invested in the U.S., and the rest mainly in Europe and the Nordic countries. The value of these investments developed strongly in all areas. Private equity funds exploited the strong demand and liquidated large amounts of their investments. Infrastructure funds included in the portfolio also yielded a strong return.

The return on unlisted equities was improved by the selling of Fingrid Oyj’s shares, the strong development in the value of private equity co-investments, and the considerable dividend income received from the housing real-estate companies SATO Corporation and VVO Group and the increase in the value of their shares.

Private equity and unlisted equities represent a long-term asset class, and their long-term return has been very good.

Real estate investments

Real-estate investments stood at EUR 3,841 (4,304) million at the balance sheet date, with direct real estate investments accounting for EUR 3,375 (3,739) and real estate investment funds for EUR 466 (565) million of the total. The return on real estate investments was 3.8 (3.1) per cent. Direct real-estate investments yielded a return of 3.2 (2.0) per cent and real-estate investment funds 8.0 (11.6) per cent.

The volume of real estate trade in Finland grew to EUR 3.8 billion in 2014. Foreign investors were also active in the market, and especially the share of Swedish investors grew considerably. The increase in transaction volume is partly due to the transactions relating to the establishment of the new logistics and industrial real-estate company Certeum Oy, in which Varma was also involved. Varma made EUR 74 million worth of new real estate investments, and had around 220 new rental flats under construction in the Helsinki area at the end of 2014. As regards business premises, Varma has been focussing on, in addition to maintenance construction and renovations, developing premises under its direct ownership and on improving energy efficiency. The change in fair value of Varma’s directly owned real-estate holdings totalled EUR -76 million. New international investments were made during the year in Sweden and Great Britain.

Other investments

Other investments amounted to EUR 7,962 (6,157) million. These consisted of hedge funds EUR 6,717 (4,850) million, commodities EUR 370 (201) million, and other investments EUR 875 (1,106) million. The return on other investments was 8.7 (4.5) per cent.

Hedge-fund investments performed consistently with only minor fluctuations. Their share of the portfolio was increased during the year, and the strengthening of the U.S. dollar further increased their share. 

Inflation-linked investments include inflation-linked bonds issued by states with good creditworthiness. Returns were also impacted by the decline in interest rates, which improved the value of bonds with a long maturity. Changes in exchange rates also contributed to the strong returns. 

The market risk of investments constitutes the greatest risk affecting the company’s result and solvency. Equities constituted by far the greatest market risk. The VaR (Value-at-Risk) figure describing the total risk of Varma’s investments stood at EUR 1,492 (1,118) million. The figure represents the maximum fall in the market value of the company’s investment portfolio in normal conditions over a period of one month with a probability of 97.5 per cent. 

The central principles in Varma’s ownership policy are high-quality governance in the companies in which it has a holding, transparency of operations, active engagement, and the monitoring of incentive schemes for key personnel. In 2014, Varma actively participated in the Annual General Meetings of the domestic companies in which it owned shares and in the work of the companies’ Shareholders’ Nomination Boards. Varma’s website contains a list of the company’s memberships on the Nomination Boards of listed companies.