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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 113 The internal credit risk capital model is a state-of-the-art tool which provides bottom-up analysis. The major drivers of credit risk for each instrument are exposure at default, ratings, seniority, col- laterals and maturity. Additional parameters assigned to obligors are migration probabilities and obligor asset correlations reflecting dependencies within the portfolio. Ratings are assigned to single obligors via an internal rating approach which is based on long-term ratings from rating agencies. It is dynamically adjusted using market implied ratings and the most recent information. The loss profile of a given portfolio is obtained through a Monte Carlo simulation taking into account interdependencies and expo- sure concentrations per obligor or segment. To reflect portfolio spe- cific diversification effects, the loss profiles are calculated at different levels of the ­Allianz Group structure (pre-diversified). They are then fed into the overall internal risk capital model for further aggregation across sources of risk to derive Group-diversified internal credit risk capital. Allocated internal credit risk capital by business segment (total portfolio before tax and non-controlling interests) pre-diversified, € mn as of 31 December 2013 2012 Property-Casualty 1,881 2,144 Life/Health 3,591 4,127 Asset Management 169 119 Corporate and Other 277 671 Total Group internal credit risk capital 5,918 7,061 Share of total Group internal risk capital 14.0 % 15.7 % Credit risk capital for the Group decreased due to the stabilizing credit environment and active portfolio management that aims to furtherimproveriskdiversification.Additionally,thedecreaseinLife/ Health and Corporate business segments is driven by a reduction of non-investment grade exposures as well as the divestment of strate- gic assets. The following table displays the sensitivities of credit risk capital to certain scenarios: deterioration of credit quality measured by issuer rating 1 downgrades and the decline of recovery rates in the event of a default (Loss-Given-Default, LGD). The sensitivities are cal- culated by applying each scenario to all exposures individually but keeping all other parameters constant.2 Impact of selected credit scenarios on internal credit risk capital1 pre-diversified, € mn Total as of 31 December 2013 2012 Base case 5,918 7,061 Rating down by 1 notch  7,062 8,349 Rating down by 2 notches 8,404 9,879 LGD up by 10 % 6,333 7,597 1 A notch is referred to rating sub-classes, such as "AA+", "AA", "AA-" at Standard & Poor's scale or "Aa1", "Aa2", "Aa3" at Moody’s scale. Most of the credit risk capital requirements and impact of the sensi- tivities in the above table can be attributed to senior unsecured and lower investment grade borrowers. Different sources of ­Allianz credit risk exposure are described in the table below: 1 Credit risk capital calculations are based on issuer (borrower) ratings as opposed to issue (instrument) ratings. The difference between issue and issuer ratings is primarily due to collateralization and seniority and is reflected in loss-given-default (LGD). 2 Scenarios are applied only to investment and reinsurance exposure positions in portfolios of ­Allianz operating entities. ­Allianz components of credit risk exposure ­Allianz components of credit risk Description Investment portfolio Premiums collected from our customers and shareholders’ capital, which is required to support the risks under­written, are invested to a great extent in fixed income instruments. These investment portfolios ultimately cover the future claims to our customers. However, for certain life insurance products, losses due to credit events can be shared with the policyholder, as described in the context of market risks. Reinsurance portfolio Credit risk to external reinsurers appears when insurance risk exposures are transferred by us to external reinsurance companies to mitigate insurance risk. Potential losses can arise either due to non-recoverability of reinsurance receivables already present at the as-of date or default on benefits that are under reinsurance treaties in-force. Credit insurance portfolio Credit risk arises from potential claim payments on limits granted by Euler Hermes to its policyholders. Euler Hermes protects its policyholders (partially) from credit risk associated with short-term trade credits advanced to clients of the policyholder. If the client of the policyholder is unable to meet its payment obligations then Euler Hermes indemnifies the loss to the policyholder.

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