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Allianz Annual Report 2012

Annual Report 2012    Allianz Group As described previously, insurance liability values are de- rived from replicated portfolios of standard financial market instruments in order to allow for effective risk manage- ment. However, for life portfolios with embedded guaran- tees, the available replicating instruments may be too simple or too restrictive to capture all factors affecting the change in value of insurance liabilities. Therefore, the opti- mal replicating portfolio, which is used to calculate inter- nal risk capital, is subject to the set of available replicating instruments. Its value and behavior under market move- ments may deviate from the actual liabilities’ characteris- tics. Nevertheless, we believe that the liabilities are ade- quately represented by the replicating portfolios due to our stringent data and process quality controls. Since internal risk capital takes into account the change in the economic fair value of our assets and liabilities, it is crucial to accurately estimate the fair market value of each item. For some assets and liabilities, it may be difficult, if not impossible – notably in distressed financial markets – to obtain either a current market price or to apply a mean- ingful mark-to-market approach. For certain assets and lia­ bilities, where a market price for that instrument or similar instruments is currently not available, we apply a mark-to- model approach. For some of our liabilities, the accuracy of fair values depends on the quality of the actuarial cash flow estimates. Despite these limitations, we believe the esti- mated fair values are appropriately assessed. The internal risk capital model used for most of our major insurance operations only allows for the modeling of com- mon derivatives such as equity calls, puts, forwards and interest rate swaps and options. For internal risk capital calculations, non-standardized instruments – such as de- rivatives embedded in structured financial products – are represented by the most comparable standard derivative types, because the volume of non-standard instruments is not material at either the local or the Group level. A more precise modeling of these instruments might change the fair value and resulting internal risk capital for these deriv­ atives.Howeverwealsobelievethatanysuchchangewould not be material. Model updates in 2012 In 2012, we also updated our internal model. Our general practice was to apply changes in areas where the final ­Solvency II regulation is clear but take our own economic view where uncertainty about the final regulation still pre- vails. The following section briefly summarizes the most important model updates implemented during 2012 that affect both our available capital and internal capital models. In order to provide an isolated view of the impact, we ­recalculated our 2011 disclosed figures, taking only these updates into account. Available capital and internal risk capital as of 31 December 2011 by comparison C 088 € bn As disclosed in 2011 Annual Report After model updates of 2012 After change in confidence level 50 40 30 20 10 49.2 34.5 44.3 23.2 143 % 49.2 26.7 184 % 191 % Capital ratio    Available capital    Internal risk capital  The change in the confidence level from 99.97 % to 99.5 % ­accounts for a € 7.8 bn decrease in risk capital as of 2011 year-end. To compensate for the resulting higher solvency ratio, we increased our internal solvency targets accord- ingly. Additional model updates improved our internal model solvency ratio, based on a 99.5 % confidence level, from184 %to191 %.Thiswasdrivenbyareductioninrequired capital of € 3.5 bn and a decrease in available capital of € 4.9 bn. In the following section we present a breakdown of the model updates and their impacts in more detail. Impact on available capital With respect to the recognition of available capital, we are now reporting our available capital including a conservative recognition of restrictions on transferability and fungibility as expected to be introduced by Solvency II, acknowledging that final regulation might apply deviating and potentially less conservative rules. The net impact of these restrictions has been partially offset by other model updates, including a change in the yield curve modeling following latest guid- ance of Solvency II. C Group Management Report Risk Report and Financial Control 184 Risk Report 214 Controls and Procedures 193

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