We employ a value-based approach (Economic Value Added or “EVA”®(1)), among other approaches, to manage our business activities, which are conducted through our local operating units. Risk capital, which is required to protect against unexpected losses, is one of the key parameters of this approach.
Internal risk capital, as described below, forms the central element for our local risk-oriented control performance measurement processes. However, in managing our capital position we have to consider additional conditions imposed by our regulator (the BaFin) and rating agencies.
As a Financial Conglomerate based in the European Union, our regulatory solvency capital requirements are defined by the EU Financial Conglomerate Directive (or “FCD”), which was issued in 2002 and transposed into German national law effective at the end of 2005.
As of December 31, 2006, our regulatory capital required by the FCD amounted to € 26.1 billion in comparison to our admissible capital of € 50.5 billion.
Stress tests
In addition to internal risk capital analysis, we perform regular stress tests, which act as early-warning indicators in monitoring the regulatory solvency capital ratios for the Allianz Group. We also apply regular stress tests on a local operating unit level in order to monitor capital requirements imposed by regulators and rating agencies locally.
A 10% price decline in our available-for-sale equity securities as of December 31, 2006 would have resulted in a € 3.1 billion decline in shareholders’ equity before minority interests. If the interest rate had increased by 100 basis points, shareholders’ equity before minority interests would have decreased by € 3.9 billion, if we take into account the available-for-sale fixed income securities as of December 31, 2006. A 10% devaluation of the U.S. Dollar against the Euro as of December 31, 2006 would have decreased shareholders’ equity before minority interests by € 1.0 billion. These calculations do not take into account derivatives.
(1) EVA® is a registered trademark of Stern Stewart & Co.
