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Allianz Annual Report 2013

C Group Management Report Risk and Opportunity Report and Financial Control 105 Risk and Opportunity Report 123 Controls over Financial Reporting and Risk Capital Annual Report 2013    Allianz Group 111 decision on the amount of hedging.1 The hedging of risks stemming from investments is also an element applied to manage and limit risks efficiently. For example, protective puts are used to limit down- ward exposure of certain investments.2 In the following table, we present our Group-wide internal risk capital related to market risks: 1 For further information about the risk concentration in the Life/Health business, please refer to note 20 to the consolidated financial statements. 2 Further information on derivatives used for hedging can be found in note 43 to the consolidated financial statements. Furthermore, we have put in place standards for hedging activi- ties due to exposures to fair value options embedded in life insurance products. Life/Health operating entities carrying these exposures are required to follow these standards, including making a conscious Allocated internal market risk capital by business segment and source of risk (total portfolio before tax and non-controlling interests) pre-diversified, € mn Interest rate Credit spread Equity Real estate Currency  Total as of 31 December 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Property-Casualty 735 402 976 1,309 924 768 752 880 282 574 3,669 3,933 Life/Health 4,181 5,227 3,174 2,795 2,996 3,570 626 765 676 1,047 11,653 13,404 Asset Management  3 16 2 – 32 66 6 5 642 472 685 559 Corporate and Other  334 216 183 259 707 607 104 197 659 240 1,987 1,519 Total Group 5,253 5,861 4,335 4,363 4,659 5,011 1,488 1,847 2,259 2,333 17,994 19,415 Share of total Group- internal risk capital 42.4 % 43.1 % Our total pre-diversified internal market risk capital showed a decrease, mainly driven by market movements. In particular, rising interest rates and reduced volatilities lead to lower sensitivities of options and guarantees making our Life/Health business segment the biggest contributor to the reduction in market risk. With respect to equity risk, improved hedging activities as well as higher policy- holder participation more than offset a higher equity exposure due to rising markets and additional investments. Overall, this resulted in a decrease in equity risk. The following chart presents the sensitivity of the internal model solvency ratio under certain standard financial scenarios. These are defined by reasonably possible individual movements in key market parameters while keeping all other parameters constant with the effects impacting both the available capital and internal risk capital. Impact of standard financial scenarios on internal capital ratios (total port­folio before non-controlling interests and after tax and Group diversification) € mn as of 31 December 2013 2012 Internal capital ratio 222 199 Interest rates up by 1 % 230 220 Interest rates down by 1 % 194 177 Equity prices up by 30 % 232 210 Equity prices down by 30 % 210 188 Combined down scenarios 182 165 Interest rate risk As interest rates may fall below the rates guaranteed to policyholders in some Life/Health markets and given the long duration of insur- ance obligations, we are specifically exposed to interest rate risk when we have to reinvest maturing assets prior to the maturity of life contracts. This interaction of investment strategy and obligations to policyholders forms an integral part of our internal risk capital model. In addition, our asset/liability management approach is closely linked to the internal risk capital framework and designed to achieve investment returns over the long term in excess of the obligations related to insurance and investment contracts. These risks are reflected in the internal risk capital results and managed by interest rate sensitivity limits. A significant part of the Life/Health business segment’s pre-diversified internal risk capital for interest rate risk lies in Western Europe – 80.2 % as of 31 December 2013 (31 December 2012: 79.8 %) – mainly to cover traditional life insur- ance products with guarantees. We manage interest rate risk from a comprehensive corporate perspective: While the potential payments related to our liabilities in the Property-Casualty business segment are typically shorter in maturity than the financial assets backing them, the opposite usually holds true for our Life/Health business segment due to the long-term life insurance contracts. In part, this provides us with a natural hedge on an economic basis at Group level.

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