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Allianz Annual Report 2013

Annual Report 2013    Allianz Group112 As of 31 December 2013, our interest rate sensitive investments excluding unit-linked business – amounting to a market value of € 457.3 bn – would gain € 32.7 bn or lose € 29.7 bn in value in case of changing interest rates by - 100 basis points and + 100 basis points, respectively. 1 As described above, the risk related to interest rates lies in the fact that in the long run yields that can be achieved by reinvesting may not be sufficient enough to cover the guaranteed rates. In con- trast, opportunities may materialize when interest rates increase. This may result in higher returns from reinvestments than the guar- anteed rates. As the table above also demonstrates, our solvency ratio would increase by applying a 100 basis point upward parallel shift on the interest rate curve. Equity risk The ­Allianz Group’s insurance operating entities usually hold equity investments to diversify their portfolios and take advantage of attrac- tive long-term expected returns. Strategic asset allocation bench- marks and investment limits are used to manage and monitor these exposures. In addition, they fall within the scope of the CRisP to avoid a disproportionately large concentration of risk. As of 31 December 2013, our investments excluding unit-linked business that are sensitive to changing equity markets – amounting to a market value of € 35.3 bn – would lose € 9.3 bn in value assuming equity markets declined by 30 %. 2 Besides diversification we mainly invest in equities since, as a long-term investor, we expect to be able to earn an excess return on our investments. Risks from changes in equity prices are normally associated with decreasing share prices and increasing equity price volatilities. As stock markets also might increase above expectations, opportunities may arise from equity investments. The potentially positive effect of an increase in equity prices on our capital ratio can be seen in the table above. Credit spread risk Our internal model framework fully acknowledges the risk of declin- ing market values for our fixed income assets – such as bonds – due to the widening of credit spreads. However, for internal risk manage- ment and appetite, we also take into account the underlying econom- ics of our business model. For example, the cash flows of our insur- ance liabilities are to a large degree predictable, limiting to a great extent the risk that we would be forced to sell these bonds prior to maturity at a loss and allowing us to keep the bonds until the matu- rity date. Therefore, we reflect this in our model using a Counter 1 The stated market value includes all investments whose market value is sensitive to interest rate move- ments (excluding unit-linked business) and therefore is not based on classifications given by accounting principles. 2 The stated market value includes all investments whose market value is sensitive to equity movements (excluding unit-linked business) and therefore is not based on classifications given by accounting principles. Cyclical Premium approach and view the more relevant risk to be credit risk rather than credit spread. The advantage of being a long- term investor therefore gives us the opportunity to invest in bonds yielding spreads over the risk free return and earning this additional yield component. Currency risk Based on our foreign exchange management limit framework, cur- rency risk is monitored and managed with the support of Group Trea- sury and Corporate Finance at the operating entity and Group level. The major part of foreign currency risk results from the economic value of our non-Euro operating entities. If non-Euro foreign exchange rates decline against the Euro from a Group perspective, the Euro equivalent net asset values also decrease. Real estate risk Because of the relative size of our real estate portfolio compared to total investments, real estate risk is currently of lesser relevance for the ­Allianz Group. As of 31 December 2013, about 3.5 % (31 December 2012: 4.1 %) of the total pre-diversified internal risk capital was related to real estate exposures. Credit risk The ­Allianz Group monitors and manages credit risk exposures and concentrations to ensure it is able to meet policyholder obligations when they are due and to maintain adequate capital and solvency positions for the operating entities and the Group as a whole. This objective is supported by the internal credit risk model and the CRisP as described in the section Concentration of risks. Group-wide credit data is collected following a centralized process and using standard obligor and obligor group mappings. Credit risk is measured as the potential economic loss in the value of our portfolio due to changes in the credit quality of our coun- terparts (“migration risk”) or the inability or unwillingness of the counterparty to fulfill contractual obligations (“default risk”). Our internal credit risk modeling framework covers counter- party risk and country risk. Counterparty risk arises from our fixed income investments, cash positions, derivatives, structured trans­ actions, receivables from ­Allianz agents and other debtors – as well as reinsurance recoverables and credit insurance. 3 Country risk exposure is calculated as cross-border exposure to all obligors domi- ciled abroad from each operating entity perspective. 3 Exposures to the national governments of OECD and EEA states are modeled as risk free in the credit risk internal model, if the exposure is issued in the local currency of the govern­ment. This is in line with EIOPA’s advice on Level 2 Implementation Measures on Solvency II. For further information on receivables to poli- cyholders, agents and reinsurers, please refer to note 13 to the consolidated financial statements.

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