Varma

Steady investment returns in volatile markets

In 2015, the return on Varma’s investments was good, at 4.2%. Exceptionally large movements were experienced in the capital markets in both equities and fixed income investments in 2015. These movements were stimulated by the central banks’ monetary policy measures and concerns over the state of Greece’s economy and the sustainability of China’s economic growth. Broad diversification of investments muted the risks caused by strong market movements, and returns were generated consistently by the different asset classes.

The value of Varma’s investments grew to EUR 41.3 billion. Solvency capital remained at a strong level and totalled EUR 10.0 billion at year-end. The return on investments was lower than the interest credited on the technical provisions, which weakened Varma’s solvency to 31.4% (34.0%). Varma’s solvency remained at a high level.

Cumulative return 2009-2015

The central bank’s measures were at the core of the investment markets. In January, the European Central Bank announced a government bond purchase programme and launched it in March. In the second quarter, the capital markets were negatively influenced by concerns over Greece’s ability to pay off it loans maturing at the end of June. In late summer, the Chinese central bank let the value of the yuan fall against the U.S. dollar without prior notice, which was taken as a sign of major weakening in China’s economic growth. As a result, the equity markets plunged. Later in the year, market sentiment again picked up as the economic indicators in the US improved and the ECB signalled its commitment to further stimulus measures. The U.S. central bank, the Fed, started to raise its benchmark rate in December.

Despite concerns over China’s economic growth and fears of interest rate hikes by the Fed, the economic growth environment has remained positive both in the U.S. and in Europe. The U.S. economic growth rate has increased to over 2%, and economic growth in Europe is also showing signs of picking up. Expectations concerning economic growth in Asian countries, however, have been revised down somewhat.

Varma’s result developed strongly early in the year, but fluctuated from the spring onwards. Market uncertainty was exacerbated by, in addition to the economic problems in Greece and China, expectations of interest hikes by the Fed and the steep decline in the prices of energy and other commodities.

Consistent returns through effective diversification

The return on Varma’s investments was 4.2% (7.1%). Fixed-income investments accounted for 30, equity investments for 45, real estate investments for 9 and other investments for 17 percentage units of the investment allocation.

Equities generated the strongest return, and Finnish equities in particular performed strongly. Real estate and other investments also generated reasonable returns. The return on fixed-income investments remained slightly negative.

The average 10-year nominal return on investments was 4.8% and the 5-year return 5.1%. The real returns were 3.0% and 3.6% respectively.

Varma’s investment activities focussed on maintaining the company’s strong solvency and broad diversification of investments, with a strong emphasis on risk management.

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.

Investments classified according to risk

RiskRiskReturnReturn
positionpositionMWRMWR
12/201512/20141–12/20151–12/2014Volatility
mn €%mn €%%%24 m
Fixed-income investments 1)12,26829.712,84532.1-0.45.8
Loan receivables1,3613.31,5713.92.42.6
Bonds8,75721.210,59426.5-0.97.11.9
Public bonds2,6536.44,31210.8-2.57.4
Other bonds6,10514.86,28215.70.46.9
Other money-market instruments and deposits2,1515.26801.70.50.5
Equity investments18,46544.716,33340.88.89.1
Listed equities14,93836.212,87932.28.07.412.0
Private equity2,6176.32,4516.17.813.5
Unlisted equities9092.21,0042.521.219.7
Real estate investments3,9069.43,8419.63.33.8
Direct real estates3,3138.03,3758.42.33.2
Real estate funds5931.44661.29.98.0
Other investments6,99116.97,10017.73.58.4
Hedge funds6,66316.16,71716.83.97.82.2
Commodities3520.93700.9
Other investments-24-0.1130.0
Total investments41,630100.840,1201004.27.14.6
Impact of derivatives-336-0.8-81
Investment allocation at fair value41,293100.040,039100
The modified duration for all the bonds is 2.3.
1)Includes accrued interest

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The year in brief

In 2015, Varma’s return on investments stood at 4.2 per cent. The value of investments increased to EUR 41.3 billion. Premiums written increased clearly, and operating expense efficiency also showed positive development. Solvency capital was strong at EUR 10.0 billion.

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President & CEO review

2015 was a good year for Varma, and we succeeded well according to all key indicators: we maintained our strong solvency position, our premium income increased, we processed pension applications faster than before and our operational efficiency is at a competitive level.

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Lower earnings-related pension contributions for customers

Varma is a solvent company. That means the best client bonuses in the sector and lower pension contributions for our customers. Our modern digital services provide our customers with a comprehensive set of tools that enable them to take care of their pension matters easily.

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Varma for entrepreneurs

Varma is a solvent company and thus a safe choice. Varma’s extensive services, provided through various channels, make attending to insurance matters easy.

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Pension cover

The number of pensioners and the euro amount of pensions paid is constantly rising at Varma. Our task is to pay pensions correctly and on time to an increasing number of pensioners.

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Workability and good working life

Workability management promotes companies’ competitiveness and productivity and the societal goal of longer careers. Our workability services improve employee well-being and working life at our client companies.

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Varma’s targets and strategy

Varma's core task is to secure pensions. Our main goals of strong solvency, good development in premiums written, high quality pension services and efficient operations, also stem from this.

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Operating environment

The economic year 2015 ended in a climate of turbulence. Uncertainty in the global economy is again on the rise.

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Solvency

Varma’s strong solvency secures pensions. Thanks to its high solvency, Varma has been paying very competitive client bonuses for several years now.

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Fixed income investments

The return on fixed-income investments remained slightly negative, at -0.4 per cent. They accounted for 30 (32) per cent of investments and had a market value of EUR 12.3 (12.8) billion.

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Equity investments

Equity investments performed the best of all asset classes. They accounted for 45 (41) per cent of Varma’s investments and yielded a return of 8.8 (9.1) per cent.

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Real estate investments

Varma’s real estate investment portfolio amounted to EUR 3.9 (3.8) billion at the end of 2015, and the total return stood at 3.3 (3.8) per cent.

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Other investments

Other investments accounted for 17 (20) per cent of Varma’s portfolio.

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Varma’s investment principles

With EUR 41.3 billion in investment assets, Varma is Finland’s largest private investor. We invest the assets to secure present and future pensions.

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Targets and measures

On the basis of the materiality assessment, we defined Varma’s CSR targets, indicators and measures.

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Personnel

Varma’s success is based on competent personnel efficiently handling our customers’ pension cover. Customer focus is at the core of Varma’s expert work and operational development. Service that is appreciated by our customers is the result of broad competence and co-operation.

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Responsible investment

Responsibility is an integral part of our investment operations and ownership practices. In 2015, we looked into the responsibility of our hedge funds and decided to determine the carbon footprint of our investments.