Declining interest rates boosted interest income

The return on fixed income investments was at a good level, at 5.5 (1.2) per cent. They accounted for 30 (28) per cent of investments and had a market value of EUR 12.0 (10.6) billion.

Fixed income investments consisted of loan receivables, mainly premium loans to Varma's customers, and government and corporate bonds, and money-market instruments.

During the year, interest rates continued to fall from the already low level, which clearly improved the return on listed bonds. The return on government bonds was 6.7 (-1.8) per cent and on corporate bonds 6.9 (3.0) per cent. The duration of the loan portfolio was kept fairly long, at around five years, which improved the result. The good return on fixed-income investments was a key contributor to Varma’s strong overall result.

Good return on fixed-income investments was a key contributor to Varma’s strong overall result.

The return on loan receivables, 2.6 (3.3) per cent, was in line with expectations, but valuation changes in junior loans lowered their overall return. The demand for premium 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, at 0.5 (-0.4) per cent.

Interest rates in Europe have dropped to a very low level and were largely negative for government bonds. It will be challenging to achieve a positive real return on fixed-income investments in future. Interest income may also easily turn negative, should interest rates rise.