Investments

• High-quality diversified investment portfolio maintained
• Ordinary investment income lower owing to SPEcial effect in the previous year and difficult interest rate environment
• Return on investment at 3.0% slightly higher than expected level of 2.9%

The investment climate was once again challenging in the period under review and notable for considerable uncertainty, which was further exacerbated by the decision of the British people to leave the European Union (“Brexit”). Following the referendum at the end of June the uncertainty surrounding the outcome of this vote gave way to political and legal doubts over how exactly the process of leaving the EU will take place. On the whole, this situation led to sustained volatility and a generally low level of interest rates in most Western nations, and particularly in the United Kingdom, the European Union and the United States. In the United Kingdom further very sharp declines in yields were observed across all durations as a consequence of support buying by the Bank of England. Significant yield drops were, however, also recorded on German and US government bonds during the reporting period. German government bonds are at times being sold at clearly negative returns right through to the ten-year maturity segment.

Credit spreads on European and US corporate bonds also narrowed in most rating classes and remained on a low level overall relative to the historical mean. In total, the unrealised gains on our fixed-income securities increased sharply to EUR 2,048.6 million (EUR 1,046.7 million). After the already significant growth recorded in 2015, our portfolio of assets under own management increased again to EUR 40.7 billion (31 December 2015: EUR 39.3 billion). We adjusted the allocation of our assets to the individual classes of securities in the period under review such that we further expanded our holding of fixed-income instruments rated BBB or lower while at the same time enlarging the proportion of government bonds in our portfolio. In this way we are able to increase the liquidity of our portfolio while maintaining the overall risk level of our fixed-income holdings virtually unchanged and continuing to generate comparatively stable returns. In addition, we had already streamlined our private equity portfolio in the first quarter by selling older investments. The modified duration of our portfolio of fixed-income securities is guided by the duration of the insurance portfolio and increased slightly to 4.8 (4.4).

Our ordinary investment income developed in line with our expectations and decreased to EUR 852.0 million (EUR 912.5 million). While the difficult interest rate environment was a factor here too, this reflects in particular the elimination of the positive special effect recognised in the previous year from life and health reinsurance. We were nevertheless able to partially offset the diminished return potentials associated with the protracted low level of interest rates through stronger income from dividends and real estate. Interest on funds withheld and contract deposits fell to EUR 249.9 million (EUR 292.9 million).

Impairments of altogether EUR 61.0 million (EUR 24.1 million) were taken. This includes an amount of EUR 27.6 million (EUR 1.0 million) attributable to equities – principally as a consequence of lower spot prices following the Brexit decision. Impairments of EUR 9.7 million (EUR 3.0 million) were taken on alternative investments. The impairments on fixed-income securities amounted to just EUR 0.7 million (EUR 2.4 million). Scheduled depreciation on directly held real estate increased to EUR 21.2 million (EUR 16.8 million), a reflection of our growing involvement in this area.

The net balance of gains realised on disposals stood at EUR 153.6 million (EUR 124.2 million) and was in large measure attributable to regrouping activities as part of regular portfolio maintenance, the streamlining of our private equity portfolio through the sale of older investments and internal capitalisation and financing measures within the Group.

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 fair value changes of -EUR 0.3 million (-EUR 18.9 million) recognised in investment income. In economic terms we assume a neutral development for this item over time, and hence the volatility that can occur in specific quarters is of minimal relevance. Altogether, the positive fair value changes in our assets recognised at fair value through profit or loss amounted to EUR 29.2 million. This contrasted with negative fair value changes of EUR 9.2 million in the corresponding period of the previous year. The increase can be attributed principally to fair value changes in a derivative contract component of a reinsurance treaty recognised separately under investments. This development occurred principally as a consequence of repercussions of the Brexit vote on pound sterling interest rates.

Our investment income of EUR 1,146.4 million came in below the comparable period (EUR 1,224.7 million). In view of the low level of interest rates and the elimination of positive effects recorded in the previous year, the result is nevertheless pleasing and consistent with our expectations. Income from assets under own management accounted for an amount of EUR 896.5 million (EUR 931.8 million), producing an annualised average return of 3.0%; this is slightly higher than our target of 2.9%.