The Allianz Group-wide internal risk capital after Group diversification effects and before minority interests, as calculated pursuant to our internal risk capital model discussed more fully above under “Value-at-risk approach” amounted to € 35.8 billion as of December 31, 2006.
Allocated internal risk capital by risk category(1)
– total portfolio –
Before minority interests
After minority interests
As of December 31,
2006
€ mn
20052)
€ mn
2006
€ mn
20052)
€
mn
Market risks
17,457
18,270
16,217
16,592
Credit risks
5,767
6,208
5,199
5,612
Actuarial risks
5,846
5,912
5,190
5,085
Business risks
6,716
6,221
6,075
5,708
Total
35,786
36,611
32,681
32,997
The risk profile of the Allianz Group is actively managed. Under the “3+One” program, we have reduced internal risk capital from € 43.5 billion as of December 31, 2002 to € 35.8 billion as of December 31, 2006, thereby strengthening the Allianz Group’s capitalization. The overall decrease of internal risk capital in 2006 was due to a decline in market risk, resulting from an increase in interest rates, which in turn, decreases our exposure to risk in connection with the minimum guaranteed credits that we must provide to policyholders for some of our Life/Health products.
As an integrated financial service provider we are exposed to a wide range of different risks in our Property-Casualty, Life/Health, Banking, Asset Management and Corporate segments. Although these risks are different in nature and each of these sources of risk has distinct statistical properties internal risk capital sets a common standard for measuring the degree of risk taking, thus making them comparable.
Allocated internal risk capital by segment(1)
– total portfolio –
Before minority
interests
After minority interests
As of December 31,
2006
€ mn
20052)
€ mn
2006
€ mn
20052)
€ mn
Property-Casualty
17,973
18,269
15,826
15,644
Life/Health
5,477
5,773
4,568
4,756
Banking
5,897
6,216
5,887
6,215
Asset Management
2,602
2,474
2,492
2,474
Corporate
3,837
3,879
3,908
3,908
Total
35,786
36,611
32,681
32,997
Concentration of insurance risks
Property-Casualty segment The Allianz Group’s Property-Casualty segment provides both personal and commercial insurance coverage. Our business activities are focused in Western Europe (in terms of IFRS reserves 61% as of December 31, 2006), with further significant activities in North America (in terms of IFRS reserves 11% as of December 31, 2006). The worldwide corporate business is centrally managed by Allianz Global Corporate & Specialty, which was formed in 2006 by the integration of Allianz Global Risks Re and significant elements of Allianz Marine & Aviation. Please see “Allianz Group Success Factors – Important Group Organizational Changes – Merger of Industrial Insurance Business within Allianz Global Corporate & Specialty” for further information.
Potential risk concentrations (e.g. natural catastrophes) are closely monitored on a regular basis. In addition, underwriting guidelines define maximum limits to the segment’s risk exposure. Reinsurance coverage is obtained to mitigate the peak risks resulting from natural catastrophes and to limit the impact of adverse conditions on profit and loss and shareholders’ equity. We analyze the reinsurance program in an effort to further optimize the Allianz Group’s use of reinsurance arrangements.
Life/Health segment The Allianz Group’s Life/Health segment provides both traditional contracts and unit-linked contracts. Traditional contracts include life, endowment, annuity, and supplemental health contracts. We issue both deferred and immediate traditional annuity contracts. In addition, the Allianz Group’s life operations in the United States issues a significant amount of equity indexed deferred annuities.
A significant part of the Allianz Group’s Life/Health segment operations is conducted in Western Europe. Insurance laws and regulations inWestern Europe have historically been characterized by the legal or contractual participation of contract holders in the profits of the insurance company issuing the contract subject to a minimum guaranteed crediting rate. In particular, our Life/Health contracts in Germany, Switzerland and Austria, which comprise approximately 42% of the Allianz Group’s IFRS reserves for insurance and investment contracts as of December 31, 2006, include a significant level of policyholder participation in all sources of risk including market, actuarial and expense risks.
Due to the offsetting effects of mortality risk and longevity risk inherent in its combined portfolio of life insurance and annuity products, as well as due to a geographically diverse portfolio, our Life/Health segment does not have significant concentrations of actuarial risk.
Due to policyholder participation, our internal risk capital model for the Life/Health segment has a specific focus on the interaction between investments and insurance liabilities. We are continuously developing the integrated asset-liability management modeling to enable us to quantify the risk-mitigating effects resulting from policyholder participation in market, actuarial and expense risks.
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