Investment business

The 2007 investment year can be divided into two very different halves. In a phase of robust global economic growth many equity markets reached new record highs until the end of May, while interest rates rose substantially. In the second half of the year, the ever increasing effects of the subprime and credit crisis abruptly ended the good mood. Growing uncertainty and a loss of confidence crowded out the earlier euphoria. Except for the Far East and Germany, the equity markets gave up their gains and interest rates started falling. The central banks managed to ward off the worst of the crisis with liquidity measures, but still did not manage to counter the unstable market conditions.
Against this background we continued our solvency-focused investment policy launched in 2006, while at the same time keeping a close eye on real-time risk management.
The duration of the life insurance portfolio was increased again, which allowed us to further reduce the maturities mismatch between the interest-bearing investments and our life insurance liabilities. The rising interest rates intensified this effect and led to a welcome increase in direct earnings. In order to cushion the balance sheet risks associated with the longer maturities, new interest-bearing investments were mostly classified as 'held-to-maturity' investments or as 'loans and receivables'. The share of these valuation categories is 50.4% of all bonds.
The asset allocation remained more or less unchanged. The equity component is 8%, and the bond weighting was increased by almost 1% to the debit of the money market investments. The investment property and mortgage components were almost the same as last year at 14.0% and 11.0% respectively. All asset classes comply with the strategic target bandwidths.

Real-time risk management
Strategic risk management begins with sustainable asset allocation which takes account of the insurance liabilities and the company's risk capacity. Operational risk management means managing the risks associated with the investment portfolio in consideration of current market developments and assessments.
In view of the fact that the euro became increasingly overvalued as the year progressed, we hedged most of our euro exposure with forward contracts and options. We also hedged our dollar exposure to a large extent in the face of growing uncertainties about the economy and the subprime crisis. As the crisis became more pronounced in the second half of the year, we stepped up transactions to hedge our equity holdings, but we mostly refrained from hedging our bond exposure. Thanks to its high quality, the bond portfolio withstood the 'stress test' of the accelerating credit crisis. Helvetia has no direct exposure in the problematic subprime sector, neither in the field of mortgages nor credit cards. We also do not use credit derivatives. Only a few securities in the portfolio were affected by downgrading, and only a very few investments were downgraded to a rating less than the 'A' rating required by our internal investment guidelines. This did not, however, have a negative impact on the high quality of our bond portfolio.
Hedging costs totalled around CHF 74 million. This is an increase of CHF 11 million compared to the previous year.

Higher direct investment income
Interest and dividend income totalling CHF 793.8 million and rental income totalling CHF 231.6 million was up compared to the previous year by a substantial CHF 94.4 million. The increase is due to the higher investment volume, the strong euro, the longer duration of the portfolio, and rising interest rates. Rising interest rates not only resulted in higher bond yields, but also led to an increase in rental income from the real estate portfolio.
In view of the unstable market situation, investment performance was good at 2.4%. Falling bond prices due to rising interest rates and the weaker equity markets in the second semester prevented a better performance. In this difficult environment, investment property and mortgages once again proved to be an important mainstay of our total earnings.

Outlook
After the continued global economic upswing of the past few years, the current economic picture is irregular. While many analysts fear that the US has already slid into a recession, economic growth in the Far East in particular but also in Europe seems intact. The question therefore is whether these economic regions will be able to distance themselves from developments in the US. Many things will depend on the outcome of the still smouldering credit crisis. The quicker acceptable solutions can be found, the faster the economy will recover.
In this difficult environment we will continue to focus our investment policy on consistency and security, and we will react to any new market turbulence with appropriate hedging measures.

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