Investments

• Diversified investment portfolio continues to be of a high quality
• Ordinary investment income virtually on a par with the previous year
• Return on investment of 3.3% slightly higher than target

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The investment climate remained challenging in the period under review and was shaped overall by the protracted low level of interest rates as well as relatively low risk premiums on corporate bonds. Government bonds in the Eurozone were particularly notable for declines in yields – sometimes markedly so – across all durations. This was also true of the Southern European countries with higher risk premiums – which have been the focus of so much attention of late – and Ireland. Yields on US treasuries, on the other hand, tended to hold stable.

Credit spreads on US corporate bonds moved lower in most rating classes, whereas they remained largely stable in the case of European corporate bonds. In general, credit spreads on corporate bonds from emerging economies were virtually unchanged or recorded modest declines. In total, the unrealised gains on our fixed-income securities increased to EUR 1,365.3 million (EUR 767.9 million). The fact that our portfolio of assets under own management – amounting to EUR 32.4 billion – did not show stronger growth relative to the position as at 31 December 2013 (EUR 31.9 billion) can be attributed principally to repayment in the first quarter of the bond that we had issued in 2004 with a volume of EUR 750 million as well as the dividend distribution in the second quarter.

We left the allocation of our assets to the individual classes of securities broadly unchanged in the first half-year, making only minimal adjustments as part of regular portfolio maintenance and modestly expanding our exposure to emerging markets. The modified duration of our fixed-income portfolio was unchanged from the previous year at 4.4 years (4.4 years).

Against the backdrop of a stable average investment portfolio, and 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 490.1 million (EUR 503.6 million). The merely minimal decrease is attributable in large measure to the expansion of the corporate bonds asset class and our increased exposure to the real estate sector. Interest on deposits fell short of the previous year’s period at EUR 174.9 million (EUR 187.5 million).

Impairments of altogether EUR 10.3 million (EUR 8.4 million) were taken. This includes impairments of EUR 1.3 million (EUR 2.3 million) on alternative investments; as in the corresponding period of the previous year, no impairments had to be taken on fixed-income securities or equities. Scheduled depreciation on directly held real estate rose to EUR 9.0 million (EUR 6.1 million), a reflection of our increasing involvement in this area. The impairments were not opposed by any write-ups (EUR 0.3 million).

The net balance of gains realised on disposals stood at EUR 88.5 million (EUR 84.5 million). It can be attributed primarily to portfolio regrouping measures in connection with the changeover in reporting currency at our subsidiary in Bermuda and to repayment in the first quarter of this year 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 4.6 million (EUR 0.8 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 positive fair value changes in the year to date of EUR 4.5 million recognised in investment income, as against negative fair value changes of EUR 39.7 million recognised in investment income in the previous year’s period. 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 10.0 million, contrasting with negative fair value changes of EUR 37.5 million in the corresponding period of the previous year.

It was principally due to this increase that our investment income of EUR 707.5 million was roughly on the level of the previous year (EUR 689.0 million). In view of the stubbornly low level of interest rates, we are highly satisfied with this performance – in particular also because we were able maintain ordinary income virtually unchanged on a par with the previous year. Altogether, net income from assets under own management totalled EUR 532.6 million (EUR 501.4 million), equivalent to an annualised average return (excluding effects from derivatives) of 3.3%. We are thus well on track to achieve our anticipated target of 3.2% for the full financial year.