Investments

• High-quality diversified investment portfolio maintained
• Ordinary investment income virtually on a par with the previous year
• Return on investment beats expectations at 3.1%

The investment climate was rather volatile in the period under review in the face of numerous geopolitical and economic policy issues. In February, for example, the expectation of higher interest rates as a consequence of an anticipated rise in inflation was reflected around the world in stock market corrections and sharply increased volatility. Our company remained unaffected, however, thanks to the liquidation of our equity portfolio in the previous year. The turbulence on the stock market had scarcely any effect on other markets.

In the area of fixed-income securities, however, the dominant factor was still the generally low level of interest rates. The US dollar segment, which saw further significant interest rate increases at a pace not anticipated by the market, was once again the exception here. Appreciable rate increases were also observed across all maturities in the sterling bond market, whereas EUR-denominated bonds have seen scarcely any changes since the beginning of the year. German government bonds are still being sold at negative returns well into the medium maturities. It was only the repeated flare-up of anxieties surrounding instability in Italy that triggered disquiet in this sector.

Credit spreads on European and US corporate bonds recorded sometimes significant increases in the first half of the year across almost all rating classes, although they remain at historic lows owing to the declines of past years. In this respect it is important to monitor the levels at which the potential for funding companies starts to become restricted. Overall, while the unrealised gains on our fixed-income securities thus fell to EUR 571.3 million (EUR 1,021.5 million) as at 30 June 2018, we benefit from 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 to EUR 40.9 billion (31 December 2017: EUR 40.1 billion). We adjusted the allocation of our investments to the individual classes of securities in the first half of the year in that we somewhat modified the nature of our government bond holdings and expanded our portfolio of instruments with inflation-linked coupons and redemption amounts. By taking this step we are counteracting inflation risks in property and casualty reinsurance. Through the reduction of certain positions in the area of high-yield bonds we also smoothed the risk profile of our investments and generated liquidity for future opportunities in the capital market as well as for financing transactions in life reinsurance. The modified duration of our portfolio of fixed-income securities remained virtually unchanged year-on-year at 4.9 (4.8).

Ordinary investment income excluding interest on funds withheld and contract deposits amounted to EUR 632.5 million as at 30 June 2018, a figure on a par with the comparable period (EUR 635.1 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 slightly stronger earnings from real estate and private equity. We were thus very successful in offsetting the loss of dividend income from the equity portfolio that we had liquidated in the previous year. Interest on funds withheld and contract deposits retreated to EUR 113.8 million (EUR 123.4 million).

Impairments of altogether just EUR 21.1 million (EUR 23.1 million) were taken. Of this amount, EUR 4.5 million (EUR 2.2 million) was attributable to alternative investments. Scheduled depreciation on directly held real estate increased marginally to EUR 16.6 million (EUR 15.0 million), a reflection of our growing ongoing involvement in this area. Once again, the impairments were not opposed by any write-ups. The net balance of gains realised on disposals stood at EUR 53.4 million (EUR 83.4 million). The decrease compared to the previous year reflects the fact that as part of portfolio restructuring activities owing to the steeper US yield curve we realised not inconsiderable hidden losses. These were, however, more than offset by highly profitable realisations on the reduction of highyield bonds. In addition, we are already benefiting from the rising interest rate level for our reinvestments.

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 5.9 million (gain of EUR 3.3 million) recognised in 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 19.6 million. This contrasted with unrealised gains of EUR 10.6 million in the corresponding period of the previous year.

Despite diminished returns from funds withheld and contract deposits we thus 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. The net investment income of EUR 743.6 million was slightly below the level of the comparable period (EUR 779.4 million). Income from assets under own management accounted for an amount of EUR 629.8 million (EUR 656.0 million), producing an annualised average return (including effects from ModCo derivatives) of 3.1%. The half-year result is thus appreciably higher than our expected target of 2.7% for the full year.