FINLAND - The €25.7bn Ilmarinen Mutual Insurance Pension Company reported a negative return on investments of -4.9% in the first half of 2008.

The firm's interim report for January to June 2008 claimed the poor returns on investment were primarily the result of the "weak development of share prices and an increase in interest rates".

In the first six months of the year, Ilmarinen revealed, its allocation to equities fell from 47% to 40% as a result of active decisions and falling share prices, while the firm's investments in fixed income increased to 45%, real estate to 10%, while the remaining 5% was allocated to loan receivables.

Illmarinen, which had investment assets valued at €25.2bn at 30 June 2008, confirmed it aims to "further increase the proportion of investments in equity" under its long-term investment strategy.

That said, Harri Sailas, president and chief executive of Ilmarinen, admitted in the report the "current difficult market conditions" meant the allocation to equities has "been kept at a level lower than the long-term objective".

In the first half on this year, the return on equity investments as a whole was -11.1%, compared to 12.6% in the same period in 2007, although this compared favourably to the 11.9% drop in the S&P500 and the 23.8% fall in the EuroStoxx50 index.

The report also noted increases in long-term interest rates in the first six months reduced the return on the firm's bond portfolio, which achieved returns of -0.7%, slightly below the -0.5% result in 2007.

The result from real estate investments fell slightly from 3.9% to 2.5%, but the return on Ilmarinen's investments in other financial market instruments and deposits increased from 1.8% to 2.2%, while the return on loan receivables rose from 2.2% in 2007 to 2.4% at the end of June.

Meanwhile, the interim report showed listed equity investments were the worst performers for the firm with a return of -14.6%, while unlisted equities, in contrast, returned 13.3% and capital investments 0.1%.

Ilmarinen's allocation to hedge funds within its equity portfolio remained at 3% of assets and returned 1.5%, while direct real estate reported a result of 2.6% and real estate investment funds returned 1.1%.

The effect of rising interest rates and falling equities meant the net return on investments was -€1.26bn, compared to a positive return of €1.25bn in 2007, while the overall investment result - taking into account the interest credited to technical provisions - was -€1.71bn.

Combined with the result of the firm's underwriting activities of pension policies for both employed (TyEL) and self-employed workers - which increased by 40,000
 In the first half to 513,000 insured people - the overall result was -€1.69bn.

Despite this, Ilmarinen claimed its solvency position - which is used as a buffer against fluctuations in investment values and returns - remained strong with a solvency ratio of 22.3% at the end of June, approximately 1.9 times the minimum requirement.

The firm, which took on part of the Nokia pension fund in March, admitted the amount of solvency capital fell from €6.07bn in December 2007 to €4.47bn at the end of June, though Ilmarinen claimed while the ratio fell from 32.5% to 22.3%, this is still above its lowest solvency position in the last 10 years of 16.2% in March 2003.

The interim report also predicted Ilmarinen will see the number of TyEL policies for employed people increase by 15% from 2007 by the end of the year, while the value of premiums is expected to rise to €3.2bn by the end of 2008, - an increase of 14% from 2007.

As a result, Ilmarinen said while there are signs of a "worsened economic situation" for the rest of the year, it will "have good opportunities for continuing to pursue a return-orientated investment strategy in the future" because of the company's strong solvency position.

Sailas said: "Ilmarinen's solvency, high proportion of equity investments and good return on investments in the long-term form a combination that inevitably leads to an above-average fluctuation in results.

"The selected strategy leads to poor short-term results figures when the investment market is on the decline, but the company's good solvency withstands the anticipated fluctuations in share prices well. It allows Ilmarinen to utilise the positive trend in the stock market once it eventually sets in," he added.

Ilmarinen's figures follow similar poor first half performance from rival pension insurance companies Varma and Tapiola who posted returns of -3.8% and -3.7% respectively. (See earlier IPE article: Finnish funds report negative returns in H1)

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