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Elo’s return on investment 1.9 per cent – burdened by uncertainty, the first quarter depressed the financial market globally
/ News
Accelerating inflation, global tightening of monetary policy and Russia’s invasion of Ukraine increased uncertainty and affected the financial market. Elo’s return on investment was -1.9 per cent (3.9 per cent). The market value of the investments was EUR 28.8 (26.8) billion at the end of the first quarter. The solvency ratio was 126.1 (125.0) per cent.
As a result of the accelerating inflation, the US Federal Reserve increased its rates in March for the first time since December 2018. The European Central Bank also announced that it will tighten its monetary policy. The war in Ukraine and the economic sanctions imposed quickly weakened the prerequisites for economic growth, especially in Europe.
“After an optimistic start to the year, the mood in the economy as well as the financial market quickly became gloomy, not to even mention the situation in Ukraine. Unfortunately, it seems that the war also hit several Finnish companies hard. Even though Finland’s dependence on trade with Russia has continuously decreased, we have both large and smaller companies with the big share of their turnover or procurement coming from Russia. The situation is extremely concerning,” says Elo’s CEO Carl Pettersson.
“The return on Elo’s investments became negative in several asset classes after the strong previous year. However, our solvency remained good,” Petterson says.
The equity market decreased, and interest rates increased
The equity market declined strongly. The steepest decline was seen after Russia invaded Ukraine. Elo’s equity investments generated a return of -3.3 (7.8) per cent in the first quarter. The decline was moderated by private equity investments, which generated a positive return. In listed equities, the returns were negative in all main markets. The impacts of the war in Ukraine were most visible in Finnish and European equity market returns.
“We started to reduce Elo’s listed equity allocation already at the end of January. We also made some changes in the geographical allocation by decreasing the weight of European equities and increasing the weight of US equities. No significant change took place in the allocation of Finnish equities during the first quarter,” says Elo’s Chief Investment Officer Hanna Hiidenpalo.
Accelerating inflation and surged inflation expectations have considerably increased interest rates. Elo’s fixed income investments generated a return of -1.7 per cent (-0.3 per cent) since the start of the year. The interest rate sensitivity of Elo’s investments was decreased already during 2021. Interest rate hedges helped to mitigate losses from rising market rates.
The positive development of transaction volumes in the real estate investment market continued in the first quarter. The occupancy rates of Elo’s real estate remained at a good level. Real estate investments returned 1.3 (0.9) per cent in the first quarter.
Elo does not have direct equity investments, corporate bond or real estate investments in Russia. The share of Elo’s sovereign bond investments in Russia was very low in the first quarter.
The result of Elo’s investment operations at fair values was EUR -515.7 (416.3) million.
Uncertain economic and market outlook, smooth pension insurance operations
The outlook of the global economy and financial markets is very uncertain. The global economy is expected to grow by 3,5 per cent this year. If prolonged, the war in Ukraine will accelerate inflation as a result of steep increases in the prices of energy, food and other raw materials. Furthermore, the production and delivery issues caused by COVID-19 result in problems in the global economy and will sustain inflation for longer than previously forecast. Central banks have announced that they will mitigate inflation by further tightening monetary policy.
The European economy is associated with challenges, such as soft economic growth combined with high inflation. The growth forecast for the euro zone is in the region of 3 per cent. In addition, major European countries are significantly dependent on energy imported from Russia, and the transition to renewable energy sources is, despite the good start, still in progress.
In Finland, inflation development is more moderate than in the EU on average. Economic growth is expected to remain at slightly over 2 per cent. From the point of view of the equity market, maintaining companies’ profitability in a situation with a risk of increasing costs is essential.
Elo has actively assessed the potential impacts of the war in Ukraine on Elo’s operations and paid attention to continuity management. Elo’s continuous investments in information security also prepare for increased cyber threats.
Elo’s premiums written amounted to EUR 989.0 (983.1) million in the review period. Elo administered 51,800 (49,100) TyEL and 84,200 (83,300) YEL insurance policies. The total number of self-employed persons and employees insured was almost half a million.
Approximately 244,200 (242,800) pensioners were paid their pensions by Elo at the end of March. A total of EUR 944.9 million (EUR 905.7 million) was paid in pensions in January–March. The number of pension decisions issued on the basis of an application was 7,343 (6,973). Mental health reasons continued to be the most common reason for applying for disability pension, even though their share of applications is declining. The share began to decrease during 2021. In recent years, the rejection rate of rehabilitation application continued to rise. In the first quarter, Elo rejected 43.6 (35.7) per cent of applications, while the sector average was one-half of applications. Often, the timeliness of applying for rehabilitation is the challenge.
Continuous development could be seen as an excellent level of customer service in the review period. Elo issued pension decisions faster than the pension sector on average, and net promoter scores (NPS) were consistently good.