Varma’s solvency remains high despite Q1 investment losses

The solvency ratio of Finnish pension provider, Varma, has remained high, despite suffering investment losses in the first (Q1) of 2020.

Publishing its quarterly results, Varma said it suffered a 10 per cent loss on its investments in Q1. The market value of investments was €43.6bn at the end of Q1, compared to €48.7bn on 1 January.

“The equity market plunged in March at an unheard of rate, and there were moments when liquidity disappeared almost entirely from the capital markets. By reducing equity weights, Varma lowered its risk level to secure solvency also in these extraordinary conditions,” Varma CIO, Reima Rytsölä, explained.

“The equity market has clearly recovered since the end of March. Time will tell, however, whether the equity market will experience a second wave of decline.”

However, Varma’s solvency capital amounted to €7.9bn, compared to €11.6 on 1 January, which is still 1.6 times the solvency limit. Strong solvency ensures that even during a weak investment year, funded pension assets do not need to be used to pay out pensions.

“Despite the economy coming to a grinding halt, Varma’s solvency remained at a good level. This indicates that the risk buffers used to secure the pension system are working as they are supposed to,” Varma CEO, Risto Murto, said.

Of Varma’s investments, real estate yielded a positive return of 1.3 per cent. The return on equity investments fell to –14.6 per cent, and the return on listed equities was –21.1 per cent. The return on fixed income investments was –3.6 per cent. The return on hedge fund investments was –12.7 per cent. The average 10-year nominal return on investments is 4.3 per cent.

“Despite the rate at which it fell, the decline in the investment markets is so far not exceptional in terms of how low it fell. The restrictions and economic uncertainty that followed the coronavirus epidemic have been a bigger crisis in people’s day-to-day lives and the real economy than they have been in the financial markets,” Murto said.

“In terms of economic recovery, the main factor will be how fast we can lift the restrictions. The central banks’ stimulus measures, in particular, have been rapid and substantial, which has slowed the expansion of the economic crisis into a financial crisis,” he adds.

In addition, Varma said it performed well in terms of customer acquisition in the first quarter; the net amount of annual premiums written transferring to Varma from other pension companies was €18m.

New pension decisions made at Varma by the end of March totalled 6,005, which is roughly 4 per cent less than in the corresponding period last year. Partial early old-age pension, which was introduced at the start of 2017, remained popular – Varma received 722 new applications for this pension type during the first quarter. The number of disability and rehabilitation applications decreased slightly year on year.

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