Varma s Interim Report 1 January 30 June 2016

Transcription

1 Varma s Interim Report 1 January 30 June 2016 The comparison figures in parentheses are from 30 June 2015 unless otherwise indicated. Total result amounted to EUR 733 (700) million. The three-month return on investments was 0.3 (4.3) per cent, and the market value of investments stood at EUR 41.2 (41.9) billion. Solvency capital was strong, at EUR 9,136 (10,956) million, which is 28.3 (35.3) per cent of the technical provisions and 2.0 (2.1) times the solvency limit. Economic operating environment: At the half-year point unsettled market climate continues The first half of the 2016 financial year was marked by strong market volatility, and political uncertainty was on the rise, especially in the eurozone. Forecasting agencies downgraded their expectations of global economic growth. In Finland, emerging growth in the first quarter positively surprised economic forecasters and analysts. The long spell of economic growth in the US is overshadowed by political uncertainty and low-key labour market development. Consumers confidence in the economy remains strong, and companies expectations strengthened in the second quarter of the year. China s economic growth is slowing, along with the structural changes to its economy, which is increasing risks in the global economy. After reaching its lowest point, Russia s economic recession has made a turnaround due to the rising price of oil, and the cheap rouble supports the external recovery of the economy. Europe s economy continues to recover at a moderate pace. Unemployment in the eurozone is still high, and particularly for those countries that have been most deeply affected by the economic crisis, youth unemployment is a persistent problem. Despite the recovering economy, the inflation rate has remained low and is far from the European Central Bank s 2 per cent inflation target. The capital markets experienced fluctuations due to both the central banks actions and their credibility and impacts in the long term and from the growing political uncertainty, which in Europe is particularly related to the expectations and risks of the Brexit referendum on UK s EU membership. The markets reacted strongly to the voting result, but share price levels rebounded already within a week of the vote. Consumers confidence in the economy remains strong, and companies expectations strengthened in the second quarter of the year. 1

2 Finland s economy took an encouraging upswing in the first quarter of 2016, when total output grew an estimated 1.6 per cent from the corresponding period last year. Strengthening domestic demand boosted the growth. The situation in the labour market is no longer weakening, and the trend indicator for unemployment has taken a slight downturn. The low interest rate level also supports domestic consumption, and sustained growth in the eurozone is, as expected, supporting the recovery of Finland s economy. Earnings-related pension system The competitiveness pact concluded between the labour market organisations in February will bring changes to the financing of earnings-related pensions when a proportion of the private-sector earnings-related pension contributions paid by employers is transferred to the employees, and the number of members appointed to the boards of employees central organisations rises from its current number. The agreed changes are still subject to a change in legislation. Earnings-related pension insurance companies have agreed that the expense loading included in insurance contributions, determined by the common calculation principles, will be cut by roughly 7 per cent at the start of The pension reform that will enter into force on 1 January 2017 will bring changes to pension legislation, as well as to pension benefits and the financing thereof. Varma is prepared for the upcoming changes and offers its customers the latest information, pension calculators and advice. Varma works together with its client companies in extending careers. Effective rehabilitation and workability management services target longer careers by supporting the workability and well-being of employees. Longer careers will help manage the upcoming growing pension expenditure, which is rising alongside the aging of the population. Varma s financial trends Varma s total result at fair value for the six-month period stood at EUR 733 (700) million. The most important component of the total result is the investment result, which was 704 (680) million. In the first half of 2016, the net investment return, EUR 143 (1,731) million, fell short of the interest credited on technical provisions, which was EUR 561 (1,052) million. The estimated technical underwriting result was EUR 46 (3) million and the loading profit was EUR 17 (17) million. Varma s solvency weakened compared to the situation at the beginning of the year. The solvency capital, which serves as a risk buffer for investment operations, was EUR 9,136 (10,956) million at the end of June, and 28.3 (35.3) per cent in relation to the technical provisions. The technical provisions used to calculate the solvency limit stood at EUR 32,257 (31,032) million. The solvency capital was on a sustainable level, i.e. 2.0 (2.1) times the solvency limit. The value of investments was (132.5) per cent of the technical provisions. Longer careers will help manage the upcoming growing pension expenditure, which is rising alongside the aging of the population. Varma s balance sheet and income statement at fair value, solvency and its development, investment amounts and portfolios at fair value classified according to risk, total result by quarter, as well as the half-year key figures required under the regulations of the Financial Supervisory Authority are presented in the attached notes. Insurance business Varma s pension recipients numbered 337,260 at the end of June (337,100 at the start of the year). Claims paid in January June totalled EUR 2,446 (2,331) million. In the first half of the year, a total of 11,374 new pension decisions were made, which is 4 per cent more than in the corresponding period last year. Varma s pension processing times have speeded up considerably and are currently below the sector average. Processing times increased temporarily when Varma developed and adopted its new pension application processing system. At the end of June, Varma provided insurance for 526,100 (523,200) employees and self-employed persons. Varma s TyEL payroll in 2016 is estimated at EUR 18.7 (18.4) billion. Premiums written are expected to grow slightly in 2016 from the level of the previous year. There have been no significant changes in the number of disability pension applications this year. The average age of transferring to disability pension has, however, increased slightly. Varma s long-term co-operation with its client companies and with their occupational health care services in supporting the management of pension costs and continuing in employment has increased further. This is reflected in, among other things, the continuous growth in vocational rehabilitation. Investments Varma s investment result for the first six months of 2016 was slightly negative due to the weak price development in the equity markets during the period. Fixed income investments, real estate and private equity funds, on the other hand, yielded good returns, diversifying the risks of equity investments in Varma s portfolio. The return on investments stood at 0.3 (4.3) per cent, and at the end of June the value of investments amounted to EUR 41,242 (41,899) million. In the second quarter of 2016, the capital markets recovered from their plunge in the first quarter, which was triggered by concerns about China s economic growth and the drop in the market price of oil. The market was calmed by the ECB s 2

3 announcement in March that it was expanding its monetary stimulus measures and especially by the postponement of the Fed s potential interest rate hike until the end of the year. With the weakening US dollar, the price of oil returned to a higher level during the second quarter. Return on investments As other market sentiment improved, the capital markets started to become rattled by the Brexit vote scheduled for the end of June. After the vote, the European equity markets plummeted and both the British pound and the euro weakened considerably against the US dollar. The uncertainty surrounding the UK s future withdrawal from the EU is likely to weaken economic growth expectations not only in the UK, but also elsewhere in Europe. Global economic growth has remained moderately positive, but risks related to the sustainability of economic growth are on the rise. The strong improvement in the employment rate in the US has been steady, but the inflation rate has remained low in both the US and Europe. Global economic expectations are weakened by fears of the impacts of the US presidential election on global trade and by the continuing geopolitical tensions in Europe s neighbouring areas. 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. There were no significant changes in Varma s investment allocation between asset classes during the second quarter of the year. Of Varma s investments, unlisted equities and private equity generated the highest returns, at 13.5 (6.4) per cent and 4.0 (6.6) per cent respectively, as they were unaffected by the fall in the equity markets early in the year. Fixed income investments and real estate investments also produced good returns. At the end of June, the average annual nominal investment return over five years was 4.8 per cent, and over ten years 4.6 per cent. The corresponding real returns were 3.6 and 2.9 per cent. In the low interest rate environment, the return on fixedincome investments was also good, at 2.2 (0.3) per cent. The ECB s extensive bond purchase programme and the central banks negative interest rates have pushed the interest on government bonds to a record low level. Corporate bond interest rates also fell in the second quarter with the lighter market pricing of credit risk. Equity markets plummeted early in the year, but the stabilisation of oil prices and the expected continuation of central banks expansive monetary policies prompted a slight rise in the equity markets during the spring. The result of the Brexit vote in June once again rattled the equity markets, but they recovered in July. As a result of the equity market fall, the return on equity investments remained negative, at 3.1 (8.3) per cent. In keeping with the other equity markets, the return on Finnish equities was also negative early in the year, at 8.0 (13.6) per cent. Real estate investments yielded a consistent return of 2.6 (3.4) per cent. The uncertainty experienced in the UK s real estate market in the wake of the Brexit vote has begun to dissipate, and the impacts will probably be mild. As a consequence of the uncertainty, investors interest in real estate has partly channelled to continental Europe and eurozone real estate markets. Other investments were also negatively affected by the unsettled investment market environment in the first half of the year, yielding a return of 0.8 (4.0) per cent. The returns on hedge fund investments responded negatively to the growth in risk premiums caused by the weaker investment market environment in the first half of the year. The return on hedge fund investments was 0.6 (4.0) per cent. 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 1,608 (1,529) million. Operating expenses and personnel Varma s total operating expenses in the first half of the year amounted to EUR 73 (72) million and were divided as follows: personnel 34 (34) per cent, IT 30 (30) per cent, statutory charges 8 (9) per cent and other expenses 28 (27) per cent. Varma used 75 (75) per cent of the expense loading included in the insurance contributions for operating expenses. The loading profit for the period was EUR 17 (17) million. Varma s parent company s personnel at the end of June numbered 538 (552), 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. Governance In its meeting on 19 May 2016, Varma s Supervisory Board elected its Chairman and deputy chairmen. Kari Jordan continues as Chairman of the Supervisory Board, and Martti Alakoski and Satu Wrede were re-elected as deputy chairmen. 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 3

4 In May, Varma published its climate policy, which guides its investments. 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. Responsibility In May, Varma published its climate policy, which guides its investments. The policy covers all of the company s asset classes and outlines how Varma mitigates climate change in its investment operations. The long-term target is to develop the portfolio such that Varma s investments are in line with the 2-degree target of the Paris Climate Conference. In the shorter term, Varma s goal is to reduce the carbon footprint of its listed equity investments by 25%, that of its listed corporate bond investments by 15%, and that of its real estate investments by 15% by the year While drawing up the climate policy targets, the carbon footprint was calculated for 39 per cent of Varma s investment portfolio. The carbon footprint of Varma s investments is smaller than that of the comparison index. In order to reduce the carbon footprint of its real estate investments, Varma began using solar power in June. In May, Varma joined the Montréal Carbon Pledge initiative, in which investors commit to measure and publicly disclose the carbon footprint of their listed equity investments annually. Varma has also signed the CDP (formerly Carbon Disclosure Project), which compiles data on companies greenhouse gas emissions and other climatechange-related data. In April, Varma published its updated Code of Conduct. The company observes good insurance principles. 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 includes 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 Global economic growth will continue, albeit at a slower pace than during the years immediately following the financial crisis. Monetary policy in the major industrial countries will continue to focus on stimulus measures, and nominal interest rates in the eurozone will be exceptionally low. The competitiveness pact in Finland and the projected wage increases in its competing countries will lend greater support to cost-competitiveness in the coming years, which is expected to lead to moderate growth in Finnish exports. Prospering and well-being in Finland call for a boost in profitable business activities with high added value, as well as improved work productivity. The extended transformation process surrounding Finland s business and trade structures is currently under way and will have a lasting impact on the nation s economic development. Defined-benefit, statutory earnings-related pensions are well-secured also during periods of uncertainty. Varma will focus on strong solvency and managing investment risks. Helsinki, 15 August 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 more than 860,000 people in the private sector. Premiums written totalled EUR 4.6 billion in 2015 and pension payments stood at EUR 5.2 billion. Varma s investment portfolio amounted to EUR 41.2 billion at the end of June 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, 4

5 Balance sheet at fair values, Parent Company million 6/2016 6/ /2015 Assets Investments 41,242 41,899 41,293 Receivables Furniture and fixtures ,607 42,187 41,958 Liabilities Capital and reserves Valuation differences 7,905 10,039 9,755 Equalisation provision 1,035 1,183 1,171 Provision for future bonuses ,083 Solvency capital, total 9,136 10,956 9,956 Provision for current bonuses (for client bonuses) Equity-linked provision for current and future bonuses 1,309 1,334 1,402 Actual technical provision 30,910 29,660 30,260 Total 32,219 30,994 31,662 Other liabilities ,607 42,187 41,958 Income statement at fair values, Parent Company million 1-6/ / /2015 Premiums written 2,324 2,265 4,576 Claims paid -2,446-2,331-4,835 Change in technical provisions ,463 Net investment income ,749 1,710 Total operating expenses Taxes Total result 1) ) Result at fair value before the change in provision for current and future bonuses and equalisation provision million 1-6/ / /2015 Underwriting profit/loss Investment result Loading profit Total result

6 Solvency capital and limits (As the percentage of the technical provisions used in calculating the solvency limit) 30/06/ /06/ /12/2015 Solvency limit Maximum amount of solvency capital Solvency capital before equalisation provision Solvency capital Solvency development 6

7 Investments at fair value 30 June June June December / / / m Market value Market value Market value Return Return Return Market Value Risk position Market Value Risk position Market Value Risk position MWR MWR MWR Vola- mill. % mill. % mill. % mill. % mill. % mill. % % % % tility Fixed-income investments 1) 15, , , , , , Loan receivables 1, , , , , , Bonds 11, , , , , , Public bonds 4, , , , , , Other bonds 6, , , , , , Other money-market instruments and deposits 3, , , , Equity investments 15, , , , , , Listed equities 11, , , , , , 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 41, , , , , , Impact of derivatives Investment allocation at fair value 41, , , , , , The modified duration for all the bonds is 4.1 1) Includes accrued interest Total result by quarter 7

8 Summary of the key figures 1-6/ / /2015 Premiums written, million 2,324 2,265 4,576 Net investment income at fair value, million ,731 1,679 Return on invested capital, % /2016 6/ /2015 Technical provisions, million 33,392 31,860 31,866 Solvency capital, million 9,136 10,956 9,956 % of technical provisions 1) in relation to solvency limit Equalisation provision 1,157 1,183 1,203 Pension assets, million 2) 41,301 41,910 41,629 TyEL payroll, million 3) 18,743 18,233 18,367 YEL payroll, million 3) ) Ratio calculated as a percentage of the technical provisions used in calculating the solvency limit 2) Technical provisions + valuation differences 3) Estimated payroll and earnings of the insured for the entire year Investments at fair value, broken down as per the regulations of the Financial Supervisory Authority Market value Risk position 30-Jun Jun Dec Jun Jun Dec-15 million % million % million % million % million % million % Fixed-Income Investments 15, , , , , , Loan receivables 1, , , , , , Bonds 11, , , , , , Other money-market instruments and deposits 3, , , , Equity investments 15, , , , , , Listed equities 11, , , , , , 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 41, , , , , , Impact of derivatives Total 41, , , , , , Modified duration of the bond portfolio 4.1 8

9 Net return on invested capital Net investment return at fair value Invested capital Return % on invested capital Return % on invested capital Return % on invested capital 31-Dec Jun Jun-15 million million % % % Fixed-Income Investments , Loan receivables 25 1, Bonds , Other money-market instruments and deposits -12 3, Equity investments , Listed equities , Private equity 102 2, Unlisted equities Real estate investments 100 3, Direct real estates 81 3, Real estate funds Other investments -53 6, Hedge funds -38 6, Commodities Other investments Total , Unallocated income, costs and operating expenses from investment activities Net investment return at fair value ,