Unemployment Insurance Fund Interim Report 25 August 2016 at 14:00
1.1. Financial development
TVR's result in January-June was better than anticipated
- Unemployment insurance contributions and other income in total EUR 2,070 (1,693) million
- Unemployment benefits paid and administrational expenses in total EUR 2,037 (2,065) million
- Change in net position (half-year) EUR 31 (-374) million
- Net position EUR -655 (-686) million
- Investments and assets in total EUR 1,291 million (31/12/2015: 604)
- Raised debt and other liabilities in total EUR 1,946 million (31/12/2015: 1,290)
- Unemployment rate 9.3% in June 2016 (June 2015: 10.0%)
- Return on investments 0.2% (0.1%)
1.2. Managing Director's review
Increase in unemployment has stopped
Short-term outlook still highly uncertain
Financial development at TVR has been more positive than anticipated during the first half of 2016. During budget preparations in August 2015, it was estimated that despite the significant increase in unemployment insurance contributions, TVR's result for the financial year 2016 would show a deficit of slightly over EUR 400 million. Based on the interim report, however, this year's result will be close to zero and it is currently estimated that there will be no need to take out additional loans.
At this stage, however, the signs of an upswing in Finland's economic growth are very faint. Developments during the second half of 2016 and in 2017 will involve great uncertainty as TVR prepares its budget for 2017 and the proposal for next year's unemployment insurance contributions.
The Competitiveness Pact concluded by the national labour and employer confederations in June 2016 will also mean changes at TVR. According to the Competitiveness Pact, the maximum size of the Fund's business cycle buffer will be temporarily raised from the amount of annual expenses corresponding to an unemployment rate of 5% to 7%. This means that the maximum size of the buffer in 2017 will be around EUR 2.3 billion. As of the beginning of 2018, the level of employee's unemployment insurance contributions and employer's average unemployment insurance contributions will be the same. As a result, the composition of TVR's governing bodies will change.
TVR has taken part in the preparations of the National Income Register project. In early 2016, it was decided that TVR would participate in the first phase of the income register, which will be launched in 2019.
1.3. Operational environment of the Unemployment Insurance Fund
The contraction of the Finnish economy was halted during the first half of 2016 and unemployment stopped increasing. In its stock exchange release of 26 April 2016, the Fund adopted a more positive outlook on how the unemployment rate will develop in 2016. In the new forecast, the unemployment rate for 2016 was estimated to be 9.4%, in comparison to the 10.1% stated in the budget approved on 28 August 2015. Furthermore, TVR estimated that its result for the financial year would show a deficit of EUR 39 million, as opposed to the EUR 409 million stated in the budget for 2016.
Unemployment insurance contributions were raised for 2016, which increased the amount of contributions collected by 22%. Expenditure reduced by one per cent during the period under review. The result at the end of the review period was EUR 31 million, which represents an improvement of EUR 405 million from a year earlier.
1.3.1. Personnel
The average number of personnel at TVR was 104 (97), of which 78 (77) were permanent employees. At the end of the review period, the number of personnel was 98 (96).
1.3.2. Risk management
During the period under review, there have been no significant changes in the risks or uncertainties prevailing since the most recent annual financial statements. Operational risk management processes have been developed and our procurement and payment processes have been tweaked.
No changes have been made to the way in which financial risks are managed; the same principles described in the most recent annual financial statements have been applied. The key financial risks of the period under review are described in the following subsections.
1.3.3. Financial risk factors
Market risk
The main market risk factor for the Fund regarding investments and liabilities is the interest rate risk. The investment portfolio is dominated by interest bearing investments (money market investments and bonds). The Fund may make investments directly, or indirectly through investment funds. At the end of the review period, 3.2% (31/12/2015: 3.2%) of investments were indirect. In addition to investments, borrowings with variable interest rates expose the Fund to interest rate risks. At the end of the review period, borrowings with variable interest rates amounted to EUR 86 million (31/12/2015: MEUR 212).
The market risk on 30 June 2016 and 31 December 2015 was as follows:
| 30 June 2016 | |||
| Risk % | Capital, in EUR | Risk, in EUR | |
| Money market | 1.0 | 504,980,974 | 5,049,810 |
| Bonds | 4.0 | 457,445,492 | 18,297,820 |
| Equities | 25 | 7,970 | 1,993 |
| Total risk | 2.43 | 962,434,436 | 23,349,622 |
| 31/12/2015 | |||
| Risk % | Capital, in EUR | Risk, in EUR | |
| Money market | 1.0 | 207,042,334 | 2,070,423 |
| Bonds | 4.0 | 242,494,188 | 9,699,768 |
| Equities | 25 | 8,473 | 2,093 |
| Total risk | 2.62 | 449,544,895 | 11,772,284 |
The total risk was 2.4% (31/12/2015: 2.6%) of the Fund's assets and 0.6% (2015: 0%) of the Fund's income in 2016. The risk posed by the investment portfolio is moderate due to its conservative structure and the low risk level of the securities in the portfolio.
All money market investments carry variable interest (2015: 100%), while 28% of the bonds were at variable rates (2015: 28%). Variable rate investments expose the Fund to cash flow interest rate risk, while investments at fixed rates expose the Fund to fair value interest rate risk.
If on 30 June 2016 the euribor rates and interest rate curve (swap rates) had been 50 basis points higher with all other variables held constant, the total changes in net position would have been EUR 2.7 million (31/12/2015: MEUR 1.7) lower. Respectively, if on 31 December 2015 the euribor rates and interest rate curve (swap rates) had been 50 basis points lower, the total changes in net position would have been EUR 2.7 million (31/12/2015: MEUR 1.7) higher.
Credit risk
The credit risk of the investments is managed by issuer credit limits. Limits for each issuer are determined by taking account of the absolute size, economic position and future outlook of the issuer. The Fund continuously monitors the credit standing and future outlook of the issuers, and when changes occur, the limits are either increased or decreased. The Fund mainly invests in Nordic banks which have high credit ratings, states with strong credit ratings (Finland, Germany, Holland and Sweden), domestic companies and municipalities. Cash and cash equivalents are only held in banks with high credit ratings.
Since the beginning of 2016, a rating requirement came into effect with respect to the investment portfolio's average rating, which requires the average rating to be at least A- (S&P). In 2015, there was no requirement in place for the average rating of the investment portfolio. On 30 June 2016, the estimated level of the investment portfolio's credit rating was approximately A-.
Liquidity risk
To secure its liquidity, the Fund has investments in liquid money market instruments with less than a year's maturity at an amount that equals the Fund's one month's expenses.
When the investment buffer decreases below the above limit, the Fund uses short-term borrowings to cover the temporary liquidity deficit. For this purpose, the Fund has a commercial paper program totalling EUR 300 million (2015: MEUR 300) and a EUR 300 million revolving credit facility (RCF) with six commercial banks. In addition, the Fund has a EUR 700 million committed credit facility, guaranteed by the Republic of Finland. The amounts in the table are in EUR millions.
| EUR Committed credit facilities, not in use | 30/06/2016 | 31/12/2015 |
| Facilities, expiring within a year | 700 | |
| Facilities, expiring after a year | ||
| RCF | 300 | 300 |
| Credit facility (guaranteed by the Government) | 700 | |
| Total | 1,000 | 1000 |
| Non-committed credit facilities, not in use | 30/06/2016 | 31/12/2015 |
| Commercial papers | 214 | 88 |
| Total | 214 | 88 |
The net position of the Fund turned negative during 2015, whereupon the Fund mainly relied on capital markets and domestic markets for commercial papers in financing liquidity. At the end of the review period, the Fund had the following loan facilities and nominal amounts in use. Amounts are in EUR millions.
| Loan | Nominal value 30/06/2016 | Interest rate (%) | Due date | Credit rating |
| Bond-issuance 1 | 600 | 0.375 | 23/09/2019 | AA+/S&P |
| Bond-issuance 2 | 300 | 0.25 | 15/10/2018 | AA+/S&P |
| Commercial papers | 86 | 0.14 | NR | |
| Total | 986 |
The Fund has the following issuance credit ratings, confirmed by Standard & Poor's (10/05/2016):
- Long-term credit rating AA+, negative outlook
- Short-term credit rating A-1+, negative outlook
At the end of the review period, the Fund had EUR 86.3 million (31/12/2015: MEUR 212) of the commercial paper program in use, and short-term bank loans amounting to EUR 0 million (31/12/2015: MEUR 0).
The fixed interest rate periods for loans in the statement of net position were as presented in the tables below. Amounts are in EUR millions. Liabilities for securities under settlement matured within a few days of the end of the period under review.
| Loan | Nominal value 30/06/2016 | Fixed interest rate period in years, 30/06/2016 | Credit rating |
| TVR bond 2019 | 600 | 3.21 | AA+/S&P |
| TVR bond 2018 | 300 | 2.28 | AA+/S&P |
| Commercial papers | 86 | 0.21 | NR |
| Credit facilities | - | - | - |
| Total | 986 | 2.67 |
| Loan | Nominal value 31/12/2015 | Fixed interest rate period in years, 31/12/2015 | Credit rating |
| TVR bond 2019 | 600 | 3.71 | AA+/S&P |
| TVR bond 2018 | 300 | 2.78 | AA+/S&P |
| Commercial papers | 212 | 0.26 | NR |
| Credit facilities | - | - | - |
| Total | 1,112 | 2.80 |
In the following tables, the financial liabilities of TVR are divided into groups based on remaining contractual maturities.
| Maturities based on contracts of financial liabilities (TEUR) 30/06/2016 | Under 6 months | 6-12 months | 1-3 years | 4-5 years | Total cash flow based on contracts | Book value assets (-) / liabilities |
| Accounts payable | 272 | 0 | 0 | 0 | 272 | 272 |
| Loans (exl. finance lease liabilities) | 97,300 | 2,000 | 306,000 | 602,250 | 1,007,550 | 897,980 |
| Total | 97,572 | 2,000 | 306,000 | 602,250 | 1,007,822 | 898,252 |
| Maturities based on contracts of financial liabilities (TEUR) 31/12/2015 | Under 6 months | 6-12 months | 1-3 years | 4-5 years | Total cash flow based on contracts | Book value assets (-) / liabilities |
| Accounts payable | 375 | 0 | 0 | 0 | 375 | 375 |
| Loans (exl. finance lease liabilities) | 182,298 | 36,300 | 306,000 | 602,250 | 1,126,848 | 1,113,001 |
| Total | 182,673 | 36,300 | 306,000 | 602,250 | 1,127,223 | 1,113,377 |
1.3.4. Business cycle buffer
In accordance with Section 3 of the Act on the Financing of Unemployment Benefits, the Unemployment Insurance Fund maintains a business cycle buffer generated from the difference between the Fund's income and expenditure, in order to safeguard the Fund's solvency and even out changes in unemployment insurance contribution rates caused by predictable trend cycles in the national economy. The maximum size of this buffer is the amount of annual expenses corresponding to an unemployment rate of five per cent. During times of severe economic downturn, the Fund may maintain a deficit equal to the amount of expenditure corresponding to this unemployment rate.
According to the investment principles accepted by the Supervisory Board, the Fund must have investments in liquid money market instruments with less than a year's maturity at an amount that equals one month's expenses. This amount is approximately EUR 300 million. In the first half of 2016, debt financing was used to finance this liquidity buffer.
The maximum size of the buffer is calculated by dividing the annual expenditure that TVR is liable for, EUR 2,860 million in 2015, by the year's average unemployment rate (9.4) and multiplying the result by 5. In 2015, the maximum size of the buffer, provided for in legislation, was EUR 1,521 million. The maximum size of the business cycle buffer for 2016 will be calculated on the basis of the confirmed financial statements of 31 December 2016.
The net position of TVR (business cycle buffer) at the end of the reporting period was EUR 655 million (31/12/2015: MEUR -686) negative. The total amount of the Fund's long-term and short-term liabilities was EUR 1,946 million (31/12/2015: MEUR 1,290).
According to the estimate determined by TVR's Board of Directors on 26 April 2016, TVR's net position would be EUR 725 million in the negative on 31 December 2016.
1.3.5. Events after the review period and outlook for the second half of 2016
Based on the information published by Statistics Finland, the unemployment rate in June 2016 was 9.3%, which is 0.7 percentage points lower than a year earlier. According to information published by the Ministry of Employment and the Economy, the number of unemployed persons in June 2016 was slightly lower than a year earlier. TVR estimates that no significant unemployment-related changes will occur during the second half of 2016. Furthermore, TVR estimates that the result for the financial year 2016 will be close to zero and that on 31 December 2016, net poition will amount to a debt of around EUR 650 million.
Helsinki, 25/08/2016
Unemployment Insurance Fund
Board of Directors
Additional information:
Janne Metsämäki, Managing Director. tel. +358 40 522 3614
Tapio Oksanen, Deputy Managing Director, CFO tel. +358 40 539 4651
Helsinki, 25 August 2016
Unemployment Insurance Fund (TVR)
Tapio Oksanen
Deputy Managing Director
Distribution:
NASDAQ OMX Helsinki
Media
www.tvr.fi
Attachment: TVR Interim Report 1.1.-30.6.2016.pdf
