Varma s Interim Report 1 January 30 September 2016

Transcription

1 1 (8) Varma s Interim Report 1 January 30 September 2016 The comparison figures in parentheses are from 30 September 2015 unless otherwise indicated. Total result amounted to EUR 234 ( 745) million. The nine-month return on investments was 3.1 (1.1) per cent, and the market value of investments stood at EUR 42.4 (40.4) billion. Solvency capital was strong, at EUR 10,101 (9,512) million, which is 31.0 (30.6) per cent of the technical provisions and 2.2 (1.9) times the solvency limit. Economic operating environment Growth in global trade this year is expected to be slower than global economic growth. The investment appetite remains muted; modest development of output is limiting wage increases and consumer demand. In the US, economic development was expected to remain stable during the third quarter, and the labour market has been getting stronger for some time now. In addition to keeping track of the risks of the global economic environment, the Fed also monitors the domestic economy in assessing a tightening of its monetary policy and its possibilities to raise the interest rate. In the eurozone, economic growth continued at a moderate level and recovery is expected to continue, backed by the European central bank. Current account deficits have declined and debt growth has slowed, although debt ratios remain high and will weigh down many euro economies for a long time. The difficulties faced by major banks in larger eurozone countries is creating uncertainty in the area. China has strongly revived its economy while at the same time striving to secure a controlled structural change. The likelihood of a possible financial crisis in China is closely linked to, in particular, the indebtedness of the corporate sector. Russia s economy remains in distress. Its economic structures continue to be one-sided and, for the time being, the financial crisis has not accelerated the structural reforms. The Finnish markets have overcome the recession Finland s economy has left the recession behind and shown a slight upward trend, driven by the domestic market. Overall demand remains strong in many of Finland s key export markets. Finland has been losing more of its market share of global trade, and the volume of exported goods has continued to shrink. Growing global economic risks cast a shadow over the prospects of Finland s exports recovery. In the domestic market, housing and infrastructure construction have experienced growth. Industrial confidence indices took a turn for the better in September, and production volumes are expected to grow slightly in the coming months. Consumer confidence in the Finnish economy strengthened. Growth in overall demand in Finland is projected to be dependent on growth in domestic markets for some time. Boosted by domestic market growth, employment has improved. The unemployment rate in August was 7.2 per cent, which is more than one percentage point lower than in the previous year. At the same time, however, the problem of long-term unemployment has worsened. The tight situation in public finances and the moderate pay increases that are needed to strengthen price competitiveness are limiting domestic market growth. The earnings level is expected to grow this year by roughly one per cent, but slower growth is expected for next year.

2 2 (8) Earnings-related pension system The goal of the new pension legislation due to take effect at the start of 2017 is to lengthen careers and close the sustainability gap in Finland s finances. Varma is a strong expert in workability management and vocational rehabilitation and supports its client companies and the insured in extending working careers. The regulations concerning solvency requirements that will take effect at the start of 2017 are not expected to materially change Varma s solvency position. Varma s financial trends Varma s total result at fair value for the nine-month period was EUR 234 ( 745) million. The most important component of the total result is the investment result, which was 266 ( 772) million. The net investment return amounted to EUR 1,271 (459) million. The interest credited on the technical provisions was EUR 1,005 (1,231) million. The estimated technical underwriting result was EUR 57 (1) million and the loading profit was EUR 26 (26) million. Varma s solvency strengthened in comparison to the situation at the beginning of the year. The solvency capital, which serves as a risk buffer for investment operations, was EUR 10,101 (9,512) million at the end of September, and 31.0 (30.6) per cent in relation to the technical provisions. The solvency capital was on a very sustainable level, i.e. 2.2 (1.9) times the solvency limit. Assets covering the technical provisions amounted to 127 (128) per cent of the technical provisions. Varma s balance sheet and income statement at fair value, solvency and its development as well as investment amounts and portfolios at fair value classified according to risk are presented in the attached notes. Insurance business Varma s pension recipients numbered 339,900 at the end of September (335,500 at the start of the year). Claims paid in January September totalled EUR 3,740 (3,561) million. By the end of September, 17,497 new pension decisions were made, which is roughly 0.8 per cent more than in the corresponding period last year. A total of 35,526 pension decisions were made in January September. Varma succeeded well in the 2016 account transfer rounds which were concluded at the end of September. Strong competence and comprehensive services that support employers brought success especially with mid-sized companies. At the end of September, Varma provided insurance for 536,000 (530,000) employees and selfemployed persons. Varma observes good insurance principles in its operations. Investments Varma s investment result increased strongly into positive territory in January September as the equity markets recovered from their plummet at the start of the year. Fixed income investments and private equity funds also had good yields and, at the same time, diversified the risks of equity investments in Varma s portfolio. The return on investments stood at 3.1 (1.1) per cent, and at the end of September the value of investments totalled EUR 42,440 (40,413) million. Varma s solvency capital grew to more than EUR 10 billion by the end of September, and the solvency ratio has remained high, at 31.0 (30.6) per cent. In the third quarter, the capital markets bounced back from the uncertainty caused by the UK s referendum to exit the EU. Immediately after the Brexit vote, economic growth expectations weakened in both Europe and the US. The realised economic figures proved to be better than expected in late summer on both continents. Expectations of the Fed raising interest rates at the end of the year have grown during the autumn, alongside positive economic data.

3 3 (8) Global economic growth has dwindled to some extent, but remained positive. Concerns about economic growth continue to weigh down the capital markets, despite signs of improved growth. In the last quarter of the year, the biggest concerns in the capital markets will centre around the US presidential election and Italy s constitutional referendum. In addition, if the need for capital among a few major European banks is realised, it could lead to more nervousness in the capital markets. Economic growth forecasts, which have remained positive for Western industrial countries, combined with low return expectations for fixed income investments, continue to encourage allocation across internationally diversified equity investments. Effective diversification across asset classes helped offset the risks that resulted from the strong movements in the equity markets. There were no significant changes in Varma s investment allocation between asset classes during the third quarter of the year. Of Varma s investments, the highest returns were recorded in unlisted equities and private equity investments, which were unaffected by the fall in the equity markets early in the year. Fixed income investments also yielded good returns, thanks to the falling interest rate levels and lighter credit risk pricing. At the end of September, the average nominal investment return over five years was 6.7 per cent, and over ten years 4.6 per cent. The corresponding real returns were 5.6 and 3.0 per cent. In the low interest rate environment, the return on fixed income investments was exceptionally high, at 4.2 ( 0.2) per cent. The central banks extensive bond purchase programmes and the banks negative interest rates have pushed the interest on government bonds to a record low level. Corporate bond valuations also rose as credit margins narrowed following the Brexit vote. In the third quarter, the equity markets recovered from the uncertainty caused by the Brexit vote. The return on equity investments, which suffered a severe market decline early in the year, made a clear comeback to 3.2 (1.3) per cent. The return on Finnish equities also experienced an upward trend into positive figures during Q3. Real estate investments yielded a negative return of 0.4 (2.3) per cent during the quarter, due to a value adjustment of EUR 160 million. The construction of Kesko s new K-Kampus in Kalasatama and an expansion of the Flamingo hotel were announced during the third quarter. Varma also acquired a share in the shopping and entertainment centre Heron City in southern Stockholm. The return on other investments also rose into positive territory, to 2.5 (3.4) per cent, after taking a hit in the unstable investment market environment of the early part of the year. The return on hedge funds increased to 2.7 per cent as the market s risk premiums narrowed along with the calming of the market environment. The weakening of the dollar in the early part of the year had a somewhat negative impact on the return. Varma has US-dollar-denominated investments particularly in equity and hedge-fund investments, and in corporate bonds. Varma s approach has been to hedge against most of the exchange rate risks. The exchange result is included in the investment returns of various asset classes. The market risk of investments is the greatest risk affecting the company s result and solvency. Equities constitute by far the greatest market risk. The VaR (Value-at-Risk) figure describing the total risk of Varma s investments stood at EUR 1,399 (1,666) million. Operating expenses and personnel Varma s total operating expenses in the first nine months of the year were EUR 109 (108) million. According to a full-year estimate, Varma will use 75 (75) per cent of the expense loading included in the insurance contributions for operating expenses. The loading profit for the period was EUR 26 (26) million.

4 4 (8) Varma s parent company s personnel at the end of September numbered 536 (544), and were distributed as follows: pension and customer service departments 56 (56) per cent, investment operations 13 (13) per cent and other functions 31 (31) per cent. Corporate Governance The Corporate Governance Report and Salary and Remuneration Statement are available on Varma s website. The reports are based on the Finnish Corporate Governance Code. Varma complies with the Code provisions that apply to the statutory activities of earnings-related pension insurance companies. Varma has also published on its website the shares in listed companies held by the members of its Executive Group. The data is updated in real time. A summary of Varma s insider regulations is also published on the company s website. Responsibility As part of its efforts to mitigate climate change, Varma has begun building a sustainable development equity portfolio and introducing solar energy in its buildings. The companies chosen for the sustainable development portfolio will include companies across different sectors whose business benefits from climate change mitigation and who also have ambitious targets in mitigating climate change. We increased our transparency by publishing our updated insider guidelines and sponsorship policies, and by making more information on transactions that must be reported to the Financial Supervisory Authority accessible to the public. As a concrete action to promote diversity, we offered a trainee position to a Somalian asylum seeker as part of the Hanken SSE integration programme. Risk management Varma s risk position did not change during the period under review. Varma s greatest risks are related to investment operations and information processing. Financially the most important risks are those concerning investments. The risks of pension insurance operations are related to pension and insurance processing and to the effectiveness of the joint systems used in the sector. The Board has approved the company s risk management plan covering all risks. More information about insurance, investment, operative and other risks, the means for managing them, as well as related quantitative data, is provided in the notes to Varma s annual financial statements. Varma s Board of Directors investment plan lays down the general security goals for investments, diversification and liquidity goals, and the principles governing the company s foreign currency business. In calculating the solvency and assets covering the technical provisions, investment risks are taken into account according to the actual nature of the risk. The diversification of the investment portfolio is based on allocation that takes into account the return correlations of asset classes. Outlook We expect the global economic uncertainty and market turbulence to continue. The central banks monetary policy continues to support growth. At the same time, however, monetary policy interventions have contributed to an increase in asset values in the markets. In terms of the profitable and secure investment of pension assets, the operating environment remains challenging. Varma s strong solvency and careful risk management are a major competitive edge in securing pensions. Strong solvency is especially important in unsettled markets, as it provides more leeway and improves opportunities to target higher returns.

5 5 (8) The recovery of Finland s domestic markets is expected to continue. The slowdown of the global economy is casting a shadow over growth in the eurozone and the pickup of Finnish exports. Alongside the prevailing difficult economic situation, the Finnish economy is undergoing a significant structural reform. If realised, the Finnish competitiveness pact is expected to improve the cost competitiveness of Finnish work and lend support to the recovery of Finnish exports. The competitiveness pact is also set to transfer the payment of part of the earningsrelated pension contribution currently paid by employers to employees. Helsinki, 25 October 2016 Risto Murto President & CEO The figures presented in this interim report are unaudited figures of the parent company. Varma Mutual Pension Insurance Company is the largest earnings-related pension insurer and private investor in Finland. The company is responsible for the statutory earnings-related pension cover of some 865,000 people in the private sector. Premiums written totalled EUR 4.6 billion in 2015 and pension payments stood at EUR 5.0 billion. The company s investment portfolio amounted to EUR 42.4 billion at the end of September Further information: Pekka Pajamo, Senior Vice President, Finance, tel or Katri Viippola, SVP, HR, Communications and Corporate Social Responsibility, tel or ATTACHMENT: Graphs and charts

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8 8 (8) Investments at fair value 30-September September December / / / m Market value Market value Market value Return Return Return Market Value Risk position Market Value Risk position Risk position MWR MWR MWR Vola- mill. % mill. % mill. % mill. % mill. % % % % tility Fixed-income investments 1 15, , , , Loan receivables 1, , , , , Bonds 11, , , , , Public bonds 5, , , , , Other bonds 6, , , , , Other money-market instruments and deposits 2 1, , , , , Equity investments 16, , , , , Listed equities 13, , , , , Private equity 2, , , , , Unlisted equities , , Real estate investments 3, , , , , Direct real estates 3, , , , , Real estate funds Other investments 6, , , , , Hedge funds 6, , , , , Commodities Other investments Total investments 42, , , , , Impact of derivatives 15, Investment allocation at fair value 42, , , , , The modified duration for all the bonds is 3.3. Includes accrued interest 2 The interest rate risk of fixed income investments has been reduced by using derivatives to shorten the durations