Investments

• High-quality diversified investment portfolio to be maintained
• Ordinary investment income on a par with the comparable period
• Return on investment of 3.4% better than planned

Hannover Re’s investment policy continues to be guided by the following core principles:

• generation of stable and risk-commensurate returns while at the same time maintaining the high quality standard of the portfolio;
• ensuring the liquidity and solvency of Hannover Re at all times;
• high diversification of risks;
• limitation of currency exposures and maturity risks through matching currencies and maturities.

The investment climate was once again challenging in the period under review and notable for a low level of interest rates overall as well as relatively low risk premiums on corporate bonds. Modest declines in yields were observed across most durations in our main currency areas. Moderate increases, on the other hand, were recorded for US treasury bonds in the short and medium duration segments. In the case of the Southern European countries with higher risk premiums – which have been the focus of so much attention of late – and in Ireland yields were lower across the maturity curve.

Credit spreads on US corporate bonds showed slight declines in most rating classes, whereas they remained very largely stable in the case of European corporate bonds. In general, credit spreads on corporate bonds from emerging economies were virtually unchanged. In total, the unrealised gains on our fixed-income securities increased to EUR 1,048.3 million (EUR 767.9 million). The fact that our portfolio of assets under own management nevertheless contracted to EUR 31.7 billion (EUR 31.9 billion) can be attributed to repayment of the bond that we had issued in 2004 with a volume of EUR 750 million. We left the allocation of our assets to the individual classes of securities broadly unchanged in the first quarter, as a consequence of which only minimal adjustments were made in the context of regular portfolio maintenance. The modified duration of our fixed-income portfolio remained stable relative to the previous year at 4.4 years (4.4 years).

Despite the sustained low level of interest rates, ordinary investment income excluding interest on deposits was only slightly lower than in the corresponding period of the previous year at EUR 241.4 million (EUR 246.1 million). This comparatively moderate decline despite the reduced average investment portfolio is attributable in large measure to the expansion of the corporate bonds asset class over the past two years. Interest on deposits decreased from EUR 93.8 million to EUR 88.6 million.

Impairments of altogether just EUR 5.5 million (EUR 3.2 million) were taken. This includes impairments of EUR 1.1 million (EUR 0.3 million) on alternative investments. Scheduled depreciation on directly held real estate rose to EUR 4.4 million (EUR 2.9 million), a reflection of our increasing involvement in this area. No write-ups (EUR 0.2 million) were made in this quarter.

The net balance of gains realised on disposals stood at EUR 54.1 million (EUR 34.8 million). The increase relative to the comparable quarter can be attributed primarily to portfolio regrouping measures in connection with the changeover in reporting currency at our subsidiary in Bermuda and to repayment of the bond that we had issued in 2004.

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 positive fair value changes of EUR 1.6 million (EUR 5.6 million) recognised in investment income. The inflation swaps taken out to hedge part of the inflation risks associated with the loss reserves in our technical account have produced negative fair value changes in the year to date of EUR 1.2 million (-EUR 1.7 million) recognised in investment income. These changes in fair value are recognised in income as a derivative pursuant to IAS 39. In economic terms we assume a neutral development for these two items over time, and hence the volatility that can occur in specific quarters has no bearing on the actual business performance. Altogether, the positive changes in the fair value of our assets recognised at fair value through profit or loss amounted to EUR 7.4 million (EUR 3.3 million).

In view of the stubbornly low level of interest rates, we are very pleased that our investment income came in slightly higher than in the comparable quarter at EUR 361.2 million (EUR 357.4 million). Of this, an amount of EUR 272.5 million (EUR 260.9 million) was attributable to assets under own management, equivalent to an annualised average return (excluding effects from ModCo derivatives and inflation swaps) of 3.4%. We are therefore well on track to reach our anticipated target of 3.2% for the full financial year.