Investments

• High-quality diversified investment portfolio maintained
• Ordinary investment income virtually on a par with the previous year
• Return on investment ahead of expectations at 3.3%

Despite a wide range of geopolitical and economic policy issues the investment climate in the period under review was relatively stable, even though the expectation of higher interest rates as a consequence of rising inflation was reflected in stock market corrections around the world in February, at times with elevated volatility. In the area of fixed-income securities the dominant factor overall was a continued low interest rate level. An exception here was once again the US dollar side, which recorded further appreciable rate increases. Sterling bonds also posted sharp interest rate rises across all maturities, whereas euro bonds have scarcely seen any changes since the start of the year. Negative returns can still be observed here well into the medium maturity segment.

Credit spreads on European and US corporate bonds showed modest increases in virtually all rating classes in the first quarter of the year, although they remain at historically low levels owing to the declines of recent years. In this respect it is important to monitor from what levels the potential for funding companies becomes more restricted. Overall, while the unrealised gains on our fixed-income securities as at 31 March 2018 fell to EUR 624.4 million (EUR 1,021.5 million), we benefit greatly from the higher interest rates and credit spreads when it comes to new investments and the reinvestment of assets. Our portfolio of assets under own management grew modestly to EUR 40.4 billion (31 December 2017: EUR 40.1 billion). We scarcely changed the allocation of our assets to the individual classes of securities in the first quarter. The modified duration of our portfolio of fixed-income securities remained unchanged year-on-year at 4.8 (4.8).

Ordinary investment income excluding interest on funds withheld and contract deposits amounted to EUR 315.8 million as at 31 March 2018, a level on a par with the comparable period (EUR 319.1 million). Particularly bearing in mind the continued low interest rates, it is highly gratifying that we were able to maintain the ordinary income from fixed-income securities on a stable level year-on-year while also booking strong earnings from private equity and real estate that were on a par with the previous year. Interest on funds withheld and contract deposits retreated to EUR 58.7 million (EUR 72.9 million).

Impairments of altogether just EUR 11.0 million (EUR 10.9 million) were taken. Of this amount, EUR 2.8 million (EUR 1.0 million) was attributable to alternative investments. Scheduled depreciation on directly held real estate increased marginally to EUR 8.2 million (EUR 7.4 million), a reflection of our ongoing growing involvement in this area. The impairments were not opposed by any write-ups (EUR 0.0 million). The net balance of gains realised on disposals stood at EUR 48.8 million (EUR 24.1 million).

We recognise a derivative for the credit risk associated with special life reinsurance treaties (ModCo) under which securities deposits are held by cedants for our account; the performance of this derivative in the period under review gave rise to unrealised losses of EUR 4.8 million (gain of EUR 1.3 million) recognised in investment income. In economic terms we assume a neutral development for this item over time, and hence the volatility that can occur in specific quarters provides no insight into the actual business development. Altogether, the unrealised gains in our assets recognised at fair value through profit or loss amounted to EUR 6.1 million. This contrasted with unrealised gains of EUR 10.9 million in the corresponding period of the previous year. Despite diminished returns from funds withheld and contract deposits we generated very healthy investment income. The key drivers were stable ordinary income from fixed-income securities as well as very good earnings from real estate and private equity and higher net realised gains. The net investment income of EUR 391.5 million was on the level of the comparable period (EUR 392.9 million). Income from assets under own management accounted for an amount of EUR 332.8 million (EUR 320.0 million), producing an annualised average return (including effects from ModCo derivatives) of 3.3%. We are thus well on course to achieve our expected target of 2.7% for the full year.