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Allianz Annual Report 2012

Annual Report 2012    Allianz Group Interest rate risk Due to our insurance business model, interest rate risk is highly relevant for the Life/Health segment, bearing in mind that our life insurance entities – for example in Ger- many, France, Italy, the United States and South Korea – typically offer long-term asset accumulation and savings products subject to minimum guaranteed crediting rates. However, many local fixed income asset markets are not sufficiently liquid to adequately match our long-term life insurance obligations which gives rise to re-investment risk. As interest rates may fall below the guaranteed rates in those markets, 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 partofourinternalriskcapitalmodel.Inaddition,ourasset 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 signifi- cant part of the Life/Health segment’s pre-diversified inter- nal risk capital for interest rate risk lies in Western Europe – 79.8 % as of 31 December 2012 – mainly to cover traditional life insurance products with guarantees. We manage interest rate risk from a comprehensive corpo- rate perspective: While the potential payments related to our liabilities in the Property-Casualty segment are typi- cally shorter in maturity than the financial assets backing them, the opposite usually holds true for our Life/Health segment due to the long-term life insurance contracts. This provides us with a natural hedge on an economic basis at the Group level. Due to the fact that we manage our net interest rate risk exposure from a Group perspective, including securities issued to fund the capital requirements of the ­Allianz Group, the assets and liabilities of the Corporate and Other segment are not necessarily matched in terms of interest rate duration. Equity risk The ­Allianz Group’s insurance operating entities hold invest­ ments usually to diversify their portfolios and take advan- tage of attractive long-term returns. Strategic asset alloca- tion benchmarks and investment limits are used to manage and monitor these exposures. In addition, they fall within the scope of the Group-wide country and obligor group limit management framework (CRisP) to avoid a ­disproportionately large concentration of risk. 93.1 % of the pre-diversified internal risk capital allocated to the Property- Casualty and Life/Health segments for equity risk arises fromourentitiesoperatinglocallyinGermany,Italy,France and the United States. The Corporate and Other segment contains the equity in- vestments of ­Allianz SE and its finance subsidiary holding companies. Real estate risk Because of our diversified real estate portfolio, real estate risk is currently of less relevance for the ­Allianz Group. About 4.1 % of the total pre-diversified internal risk capital is related to real estate exposures. Currency risk In addition to any local regulatory requirements, the Group’s policy is to require each operating entity to match liabilities in congruent currencies with assets and keep local currency risk within limit boundaries. Based on a foreign exchange management limit framework, currency risk is monitoredandmanagedwiththesupportofGroupTreasury and Corporate Finance at operating entity and Group levels. The major part of foreign currency risk results from the eco- nomic 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 decline. This risk is allocated to the respective business seg- ments. In addition, limited exposures to non-Euro denominated assets and liabilities are held at the Corporate and Other segment level. 198