FINLAND - Instability in equity markets has caused two Finnish pension insurance companies - Varma and Ilmarinen - to report negative investment returns for the first three months of 2008.

Varma Mutual Insurance Company reported a -3.4% return on investments, compared to an average of-0.5% over the last 12 months and an average return of 8.5% over the last five years.

However, the mutual pension insurance company highlighted that the market value of investments had increased slightly, from €28.4bn at the end of December 2007, to €28.7bn at the end of March, while the solvency position was 25.3% of technical provisions or 1.8 times the solvency limit.

Fixed income investments provided the best return of 1.7% for the first quarter, equivalent to the entire 2007 fixed-income return, although listed equities performed poorly with a return of -10.2%, while hedge fund investments also produced a negative return of -5.7%.

As a result, Varma has confirmed it has made two "major changes" to its investment portfolio at the end of March, which included reducing its equity exposure by 10 percentage points from the 39% allocation at the end of 2007.

In addition, the pension company revealed it has also started investing in commodities, so that by the end of March the new asset class accounted for approximately 2% of the entire portfolio.

Risto Murto, chief investment officer at Varma, said: "The instability on the market in early 2008 was reflected in Varma's investment portfolio, particularly in the returns on equity investments and hedge funds."

But he added: "Commodity investments represent a continuation of our portfolio diversification process. We'll continue pursuing new opportunities for diversifying investments."

Meanwhile, Ilmarinen pension insurance company also reported a negative investment return of -4% for the first quarter, following a return on its share portfolio of -11%.

It revealed interest rate investments returned 1.1% and property exposure resulted in returns of 1% while other investments produced an overall returns of 4.3%, to increase the market value of investments from €23.7bn at the end of 2007 to €25.4bn at the end of March.

However, Ilmarinen admitted that the "unfavourable development of investment markets" had caused the solvency capital of the firm to drop by €1.1bn to €5bn, to 25.5% of technical provisions, and 1.8 times the solvency limit.

Mikko Mursula, head of listed securities, said: "The long-term success of Ilmarinen's investment operations has been based on seeking high yields, which has meant allocating a large proportion of our investments to shares."

Although he highlighted that equities are "often subject to larger fluctuations than other asset classes", Mursula admitted that because of the "great deal of uncertainty" about the direction of the market Ilmarinen had reduced its equity allocation.

He said: "The weighting of listed shares fell as a result of both the market movement and reduction in share risk from 40.7% at the beginning of the year to 34%."

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