Investments

• High-quality diversified investment portfolio maintained
• Ordinary investment income improves again on previous year’s level
• Net realised gains higher due to release of hidden reserves connected with Viridium participation
• Return on investment of 3.5% beats full-year guidance

The investment climate remained unsettled and in search of direction during the first half of 2019 as it continued to face a host of geopolitical and economic policy issues. While the fixed-income markets that are particularly important for our company had seen the nervousness observed at the end of the previous year show some levelling off in the form of sharp decreases in risk premiums for corporate bonds, credit spreads began to widen again from the middle of the first half-year onwards.

Interest rate decreases – in some instances very appreciable – affecting euro-denominated bonds as well as the US dollar and sterling markets were recorded above all in the longer maturities. Euro bonds are increasingly being traded on the markets at negative yields well beyond the ten-year mark. The uncertain signals coming from policy makers and hints of softening fundamentals led to greater volatility overall on the markets.

The strained geopolitical situation and growing trade wars were reflected not least in sharply higher prices for gold and oil. The cautious approach adopted by central banks further highlights the continued lack of market stability despite the buoyant mood on equity markets. Even though the US economy still looks to be in robust shape, the US Federal Reserve surprisingly made an abrupt about-turn from its previously restrictive policy in favour of more expansive moves. Nor were matters helped by the continued astonishing confusion surrounding the process of the United Kingdom’s withdrawal from the European Union, despite the lengthy acclimatisation phase that has already passed.

Reflecting the fall in interest rates compared to the end of the previous year and decreased risk premiums, the unrealised gains on our fixed-income securities rose sharply as at 30 June 2019 to reach EUR 1,612.0 million (31 December 2018: EUR 318.1 million). Our portfolio of assets under own management grew to EUR 44.8 billion (EUR 42.2 billion), in part thanks to the continued very positive operating cash flow. With effect from this reporting period we are entering into term repurchase agreements as a supplementary liquidity management tool. The holdings exchanged in this context are fully collateralised. The modified duration of our portfolio of fixed-income securities increased slightly year-on-year to 5.2 (4.8).

Ordinary investment income excluding interest on funds withheld and contract deposits amounted to EUR 694.5 million as at 30 June 2019, a significantly higher figure than in the previous year’s period (EUR 632.5 million). Particularly bearing in mind the continuing low level of interest rates, it is very pleasing to note that we were able to appreciably boost the ordinary income from fixed-income securities compared to the previous year, while again supplementing this with another increase in income generated from real estate and strong earnings from private equity. Interest on funds withheld and contract deposits contracted to EUR 93.8 million (EUR 113.8 million).

Impairments of altogether EUR 41.5 million (EUR 21.1 million) were taken. Of this, EUR 17.3 million (EUR 4.5 million) was attributable to alternative investments. Write-downs of just EUR 3.8 million (EUR 0.0 million) were taken on fixed-income securities. Depreciation recognised on directly held real estate was slightly higher at EUR 18.5 million (EUR 16.6 million), reflecting further growth in our exposure in this area. The impairments were not opposed by any appreciations (EUR 0.0 million).

The net balance of gains realised on disposals stood at EUR 127.5 million (EUR 53.4 million) and was due for the most part to the release of hidden reserves in connection with the restructuring of the Viridium shareholding.

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 gains of EUR 8.9 million (loss of EUR 5.9 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 43.7 million (EUR 19.6 million).

Driven by sharply higher ordinary income from fixed-income securities and increased net realised gains as well as very healthy earnings from real estate and private equity, we were able to generate highly gratifying investment income of EUR 865.6 million (EUR 743.6 million) despite diminished returns from funds withheld and contract deposits. Income from assets under own management accounted for an amount of EUR 771.8 million (EUR 629.8 million), producing an annualised average return (excluding effects from ModCo) of 3.5%. Even without the one-time effect of the gains realised from the Viridium participation, the return stood at 3.0%. We are thus very well on track to achieve our expected minimum target of 2.8% for the full year.