Investments

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

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 euro-denominated bonds have seen scarcely any changes since the beginning of the year and 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. The threat of tariff and trade wars as well as the continuing lack of clarity around the outcome of Brexit negotiations have exacerbated the uncertainty among market actors. Our company has so far not been affected by the crises in Turkey and Argentina since we do not directly hold any investments in the currencies of either country.

Credit spreads on European and US corporate bonds recorded sometimes significant increases in the period under review across almost all rating classes, although in some instances these had softened again by the closing date. On the whole, risk premiums remain at historic lows owing to the declines of recent 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 fell to EUR 304.1 million (EUR 1,021.5 million) as at 30 September 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 41.5 billion (31 December 2017: EUR 40.1 billion). Along with the positive operating cash flow, this also reflects the fact that the issuance of a senior bond in the second quarter and currency effects more than offset the aforementioned valuation declines. We adjusted the allocation of our investments to the individual classes of securities in the reporting period in that we expanded our portfolio of instruments with inflation-linked coupons and redemption amounts. By taking this step we are counteracting inflation risks, particularly 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 and reinsurance markets. The modified duration of our portfolio of fixed-income securities was left unchanged year-on-year at 4.8 (4.8).

Ordinary investment income excluding interest on funds withheld and contract deposits amounted to EUR 991.4 million as at 30 September 2018, a figure slightly in excess of the comparable period (EUR 942.6 million). Particularly bearing in mind the continued low interest rates, it is highly gratifying that we were able to appreciably increase the ordinary income from fixed-income securities year-on-year while also booking stronger earnings from real estate and private equity than in the previous year. 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 163.3 million (EUR 180.1 million).

Impairments of altogether just EUR 36.9 million (EUR 34.0 million) were taken. Of this amount, EUR 9.1 million (EUR 5.5 million) was attributable to alternative investments and EUR 2.3 million (EUR 2.1 million) to real estate funds. Scheduled depreciation on directly held real estate increased marginally to EUR 25.3 million (EUR 22.6 million), a reflection of our growing ongoing 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 100.8 million (EUR 343.3 million). This sharp decrease compared to the previous year reflects the extraordinarily high gains realised in the previous year from the liquidation of our portfolio of listed equities. A further factor is 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 attractive realisations from the sale of high-yield bonds. In addition, we benefit from the rising interest rate level in 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 3.9 million (gain of EUR 3.2 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 19.9 million. This compares with unrealised gains of EUR 22.1 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 slightly higher ordinary income from fixed-income securities as well as very good earnings from real estate and private equity. The net investment income of EUR 1,155.4 million was below the level of the comparable period (EUR 1,382.5 million), which had been boosted by extraordinary income of EUR 223.3 million from the disposal of the equity portfolio. Income from assets under own management accounted for an amount of EUR 992.1 million (EUR 1,202.4 million), producing a very pleasing annualised average return (excluding effects from ModCo derivatives) of 3.3%. We are thus well on track to achieve our expected minimum target of 2.7% for the full year.