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Allianz Annual Report 2013

D Consolidated Financial Statements 127 Consolidated Balance Sheets 128 Consolidated Income Statements 129 Consolidated Statements of Comprehensive Income 130 Consolidated Statements of Changes in Equity 131 Consolidated Statements of Cash Flows 134 Notes to the Consolidated Financial Statements Annual Report 2013    Allianz Group 211 Valuation methodologies of financial instruments carried at fair value The ­Allianz Group follows the new interpretation of IFRS 13 (IDW RS HFA 47) by the Institute of Public Auditors in Germany (IDW) and clas- sifies composite prices in level 2 of the fair value hierarchy. As the ­Allianz Group uses prices provided by pricing agencies on a consen- sus level, the ­Allianz Group shifted most fixed income securities from level 1 to level 2 due to this new interpretation. Furthermore, the ­Allianz Group uses valuation techniques con- sistent with the three widely used classes of valuation techniques listed in IFRS 13: −− Market approach: Prices and other relevant information gener- ated by market transactions involving identical or comparable assets or liabilities. −− Cost approach: Amount that would be currently required to replace the service capacity of an asset (replacement cost). −− Income approach: Conversion of future amounts such as cash flows or income to a single current amount (present value technique). There is no one-to-one connection between valuation technique and hierarchy level. Depending on whether the valuation techniques are based on significant observable or unobservable inputs, financial instruments are classified in the fair value hierarchy. Financial assets carried at fair value through income Financial assets held for trading – Debt and equity securities The fair value is mainly determined using the market approach. In some cases, the fair value is determined based on the income approach using interest rates and yield curves observable at com- monly quoted intervals. Financial assets held for trading – Derivative financial instruments For level 2, the fair value is mainly determined based on the income approach using present value techniques and the Black-Scholes- Merton model. Primary inputs to the valuation include volatilities, interest rates, yield curves, and foreign exchange rates observable at commonly quoted intervals. For level 3, derivatives are mainly priced by third-party vendors. Controls are in place to monitor the valuations of these derivatives. Valuations are mainly derived based on the income approach. Financial assets designated at fair value through income – Debt securities The fair value is determined using the market approach. Financial assets designated at fair value through income – Equity securities For level 2, the fair value is determined using the market approach. For level 3, equity securities mainly represent private equity funds. The fair value is in most cases derived from the net asset value based on the valuation of the underlying private equity companies as pro- vided by third-party vendors. Available-for-sale investments Available-for-sale investments – Equity securities For level 2, the fair value is mainly determined using the market approach or net asset value techniques for funds. For certain pri­vate equity investments, the funds are priced based on transaction prices using the cost approach. As there are only few holders of these funds, the market is not liquid and transactions are only known to partici- pants. For level 3, the fair value is mainly determined using net asset values. The net asset values are based on the fair value meas­urement of the underlying investments and are mainly provided by fund managers. For certain level 3 equitysecurities, the invested capital is considered to be a reasonable proxy for the fair value. Available-for-sale investments – Debt securities Debt securities include: −− Governmentandagencymortgage-backedsecurities(residential and commercial), −− Corporate mortgage-backed securities (residential and com- mercial), −− Other asset-backed securities, −− Government and government agency bonds, −− Corporate bonds and −− Other debt securities. The valuation techniques for these debt securities are similar. For level 2 and level 3, the fair value is determined using the market and the income approach. Primary inputs to the market approach are quoted prices for identical or comparable assets in active markets where the comparability between security and benchmark defines the fair value level. The income approach in most cases means a present value technique where either the cash flow or the discount curve is adjusted to reflect credit risk and liquidity risk. Depending on the observability of these risk parameters in the market, the security is classified in level 2 or level 3.

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