Allianz Capital Markets Day: risk management · PDF fileAllianz Capital Markets Day: risk...
Transcript of Allianz Capital Markets Day: risk management · PDF fileAllianz Capital Markets Day: risk...
Allianz Capital Markets Day:risk management
MunichJuly 15, 2004
Agenda
A. Risk management: No Surprises
B. Risk capital methodology
C. RoRAC calculation
Raj Singh
Jürgen Guhe
Rainer Schwarz
A 1
B 1
C 1
D. Appendix Related published charts D 1Investor Relations contacts D 2Financial calendar 2004/2005 D 3Disclaimer D 4
A. Risk management: No Surprises!
Allianz Capital Markets DayJuly 15, 2004
Raj Singh - Head of Group Risk Controlling
Agenda
I. Vision
II. Governance
III. Identification
IV. Quantification
V. Diversification
VI. Solvency II
A 01
The challenge: protect capital base andenhance value creation
Key elements
� Sufficient economic risk capital� Compliance with regulatory requirements� Stress tests and diversification
� Capital requirements� Cost of capital� Risk reports
No Surprises!
� Optimized risk-reward profile� Sustainable profitability� Transparency and accountability
Protect financial strength
Support decision-making process
Enhance value creation
Protect reputationand brand
� Customers� Shareholders� Employees
Assureefficiency and
integrity of riskmanagement
I. Vision
A 02
Agenda
I. Vision
II. Governance
III. Identification
IV. Quantification
V. Diversification
VI. Solvency II
A 03
Incorporate common sense and defy destiny
� General framework of risk managementfor Allianz currently being developed
� “No Surprises” project defines minimumstandards for OEs1
� Operational risk management tooptimise processes
II. Governance
Risk management processes haveto be embedded in the institution
Proactive management of riskon the books can reduce losses
� Active portfolio review processnecessary
� Early warning systems provideinformation to management
� Contingency plans help to reduce riskstimely
1) OE = Operating entity
A 04
Ins./BankingSubcommittees
� Decision making on transactions/products withGroup relevance
Enhanced management of Group risk profilethrough Group Risk Committee (RiCo)
Local risk management is complemented by independent Group risk oversight
Function
Group RiskCommittee
� Monitor Group/OE risk profile and solvency� Approve/recommend actions to mitigate� Set overall risk limits for OEs� Set risk policies and ensure risk controls/culture
Operatingentities
� Manage risks proactively within Group policies,guidelines and limits
� Report exposures to Group risk controlling
Group RiskControlling
� Enhance risk dialogue between Group and OEs� Extend internal risk capital model� Group risk reporting and communication
II. Governance
OE OE OE OE
Group Risk Controlling(GRC)
Insurance/Bankingsubcommittees
AllianzGroup Board
Group Risk Committee
AllianzGroup Board
� Set Group strategic risk framework� Decide risk appetite at segment and risk factor level
A 05
Consistent portfolio oversight by Allianz
Function
II. Governance
AllianzCredit Commission
Risk Executive Committee(RExCo)
� Definition of risk policies/guidelines, frameworks andrisk related methods and instruments
� Definition of risk control/management processes� Portfolio monitoring
Dresdner BankGroup Board � Set Group strategic risk framework
Group CreditCommittee(GCC)
� Credit decisions/recommendations for the Board� Decision about building and dissolving SLLP2 or
recommendations to the Board respectively decisionon country risk
Capital &TreasuryCommittee(CTC)
� Setting of capital sub-limits for divisions and/or risktypes
� Review/approval of risk capital methodology� Initiation of capital management measures
Market RiskCommittee(MaRCo)
� Review of market risk strategy and positions� Preparation of board decision of top level VaR limit� Review of market risk management/control
Dresdner BankBoard
RExCo GCC GTC MaR
CoAZ
GRC1
BU3 BU3 BU3 BU3
Risk Controlling(RCO)
Portfolio review
Dresdner Bank fully integrated into Allianz Grouprisk governance
1) Allianz Group Risk Controlling 3) Business units2) Specific loan-loss provisions
A 06
Group risk policy and minimum standardsare mandatory for all OEs
� Group risk policies and standards ensure consistently high standards of risk management
� OE risk guidelines are tailored to accommodate local context (e.g. regulation, governance)
Hierarchy of standards
� Group risk policy
� OE minimum standards
� Segment-specific guidelines(Insurance, Banking, Asset Management)
� OE-specific risk guidelines
AZ Group
Segments
Insurance
AssetManagement
Banking
Operating entities
II. Governance
A 07
� Risk-based strategy
� Risk limits &policies
� Risk organization
� Risk processes
� Risk reporting
� Risk methodologyand tools
Minimum standards provide the basis for localrisk policies
Minimum standards capture all elements of the Allianz risk governance andmanagement framework
� Clear risk strategy to be defined in line with overall Group strategy
� A limit framework must formalize the risk strategy� OEs must have in place documented policies for all risk-related
processes
� Senior risk committee oversees all OE risk activities� Independent risk oversight without direct p&l responsibility
� Tasks and decision authorities must be clearly defined anddocumented for all steps in the risk process (Risk identification, analysis& evaluation, management decision & execution, monitoring & reporting)
� Holistic risk reporting(to cover all risk categories and exposures in all business areas)
� Local risk methodology to be defined within Group standards� Allianz risk capital tool as central steering parameter� Allianz stress test tool for regulatory and S&P solvency mandatory for
selected OEs
Key elements Details
A 08
II. Governance
Risk diagnostic to be performed annually to assessOE risk management capabilities
Key elements
Analysis of OE risk management
capabilities
Dialogue on results
GRC follow-up & support
in development
Group RiCo status update
� Identification of main development priorities for OE riskmanagement
� Discussion & agreement between Group and OE ondevelopment plan
� Regular reporting on status� Escalation of critical issues
� GRC as internal advisor leverages existing knowledge� Ongoing controlling of implementation process in OE
Senior management commitment for key development needs
II. Governance
A 09
Risk View
Risk/Capital analysis Risk/Capital reporting Capital-management process
Capital View
� Group capital & solvency
� OE capital & solvency
� Recommendations for RiCo decisions
� Internal risk-capital model
� Stress tests
� Quarterly updates
� Senior management report
� Results from quarterly risk-capital analysis and stresstesting as key input
0
1
2
3
4
5
6
OE 1 OE 2 OE 3
1Q 2003
1Q 2004
� Impact of corporate strategyon capital availability
� Capital allocation
� Mandatory contingency plans
Risk/Capital analysis is integrated in existingbusiness-planning process
Pre-strategic dialogue
Strategic dialogue
Planning dialogue
Embedding risk management into existing business processes is a key to success
II. Governance
A 10
Capital overview is supplemented by OE level drill-downs
Example: Allianz Capital View - executive summary
II. Governance
� Comment
Risk capital S&P capital Regulatory capital
� Comment � Comment
A 11
Group
OEs
Segments� Comment � Comment � Comment
� Comment � Comment � Comment
Illustrative
GroupOE1OE2............................................
No immediate threat Yellow light Red light
Heat map of threats - regulatory Comments
Example: Allianz Capital View - heat map of stress resultson supervisory capital requirements across OEs
II. Governance
Current Base Case
Equity Fall IR Rise IR Fall Credit
Def.New
BusinessMini CAT Reserve � Comment on critical developments
and operating entities
A 12
Illustrative
Agenda
I. Vision
II. Governance
III. Identification
IV. Quantification
V. Diversification
VI. Solvency II
A 13
Know where you stand
� Comprehensive definition of risk categories for all business segments
� Standardized risk quantification to allow risk aggregation
� Different models tailored to different applications- Risk capital- Stress tests- Scenario analysis
Risk identification and quantification is the basis for all risk management decisions
III. Identification
A 14
Risk categories
Integrated risk framework throughout Allianz Group
1) Fiduciary
III. Identification
Insurance Banking Asset Management
Market/ALM
Credit/Counterparty� Investment� Reinsurance� Wholesale Banking� Retail Banking
Actuarial� Premium Non-Cat� Premium Cat� Reserve� Life biometric risk
Operating� Business� Operational
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A 15
…split by risk categories …split by business segments
(in EUR bn)
Property/Casualty
Total
Operating risk12%
Actuarial25%
Credit/counter-party risk17%
17.8
35.5
1) Allianz internal risk capital, as of 12/2003
Banking7.7
Life/Health4.8
Holding1.6 Asset Management3.5
The risk-capital analysis sheds light on the truerisk drivers for Allianz
III. Identification
Risk capital for Allianz Group 20031
A 16
Market/ALM risk46%
Independent risk oversight will improve risk-rewardbalance of complex products
Responsibilities
Business
Local risk function
Group risk insurance
subcommittee
Group riskfunction
� Underwriting within limits of risk guidelines� Proactive risk management
� Setting of local product-related risk guidelines� Independent risk oversight over OE transactions/products� Escalation of complex/large transactions
� Setting of global product related risk minimum standards� Independent risk review over OE transactions with Group relevance� Escalation of complex/large transactions in case of dissent
� Decision-making on products/transactions with Group relevance
Basic principle is local responsibility combined with independent riskoversight and management of risk concentrations
III. Identification
A 17
Agenda
I. Vision
II. Governance
III. Identification
IV. Quantification
V. Diversification
VI. Solvency II
A 18
Put money away for a rainy day
� Adequate capitalization of risks mandatory
� Risk buffer to protect against rating downgrade
� Risk-adjusted pricing includes charging for cost of capital
Risk requires capital and capital has a price
IV. Quantification
A 19
Planningquality
Losses are random
Best-estimateNAV
Risk
Expected losses have to be considered in efficient budgeting and planning
Risk capital is required to cover volatility due tounexpected losses
NAVvolatility
Expected Unexpected
IV. Quantification
A 20
Economic risk capital1
Available risk-bearing funds
Allocated economicrisk capital
1) Before minorities
IV. Quantification
Surplus:11.8
Adequate capitalization is key ...(as of 12/2003, in EUR bn)
47.3
35.5
A 21
Economic Value Added
Risk adjustedperformancemeasurement
EVA
MarketexpectationRisk drivers
(Risk Capital CoC)x= NOPAT1 –
� Integration of risk into regular budgeting/planning process
� Management compensation linked to economic value creation
IV. Quantification
... but risk has a price
Cost of capital has to be earned on risk capital
1) Normalized profit after tax A 22
+ Gross premiums earned
– Premiums ceded
+ Investment income
– Operating cost/commissions
– Best estimate reserves
– Capital charge
= EVA
Cost of capital has to be included in pricing
+ Interest income
– Interest expense
+ Fee income
– Operating cost
– Expected loss
– Capital charge
= EVA
EVA for insurance EVA for credit
Calculate break-even combined ratio Calculate break-even margin
IV. Quantification
A 23
� Capital necessary toprotect liabilities even ina worst case shock- One-year time horizon
� Measures economic risk
� In line with regulatorydevelopments
� Standardized riskmeasurement approachwithin Allianz Group
Customized models cover specific aspects of riskand capital
� Testing effect ofpossible scenarios onthe balance sheet- Multi-year time horizon
� Simulates economicbalance sheet
� Internal planning tools(e.g. ALM)
� Model to be developed
Complementary view on risk and capital
� Quantifies effect of astress scenario onbalance sheet- One-year time horizon
� Balance sheet impact(Local GAAP and IFRS)
� Also required byregulators
� Standardized riskmeasurement approachwithin Allianz Group
IV. Quantification
A. Risk capital B. Stress test C. Scenario analysis
A 24
Stress tests on regulatory and rating capital complementthe economic perspective of risk capital
Need for simultaneous risk & capital management for all segmentsunder various perspectives increases management complexity
Regulatory capital
Perspective
Approach
Comment
� Local solvencyperspective
� Rating agencyperspective
� Economicperspective
� Internally definedstress tests
� Internally definedstress tests
� Internal riskcapital model
� Legal solvency onoperating entity (OE) /Group level
� Contingency plan� Integrated into capital
planning process
� OE and Group rating� Contingency plan� Integrated into capital
planning process
� EVA� Capital allocation� Risk management
Rating agency capital Risk capital
IV. Quantification
A 25
Current
Equity
Int. rate up
Int. rate down
Credit
New business
Mini CAT
Reserves
Combined
Current
Equity
Int. rate up
Int. rate down
Credit
New business
Mini CAT
Reserves
Combined
250%
95%
151%
210%
150%
160%
190%
190%
130%
0% 50% 100% 150% 200% 250% 300%
AAABBBStress test results: rating
IllustrativeExample: Capital View shows results for regulatoryand rating stress tests
IV. Quantification
A 26
Stress test results: regulatory solvency
260%
160%
170%
250%
220%
200%
230%
210%
180%
0% 50% 100% 150% 200% 250% 300%
Contingency plans approved by SD (for relevant OEs only)
Full risk analysisFull stress test
Risk viewCapital view
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Risk analysis updateStress test update
Management reporting
Analysis
Management process � Action plan
approval by RiCo(in case ofdisagreement withOE plan escalationto board)
� Action planapproval by RiCoand integration inSD
� Action planapproval by RiCo(in case ofdisagreement withOE plan escalationto board)
� Action planapproval by RiCo
� Support for OEidentification forpre-strategicdialogue
Risk analysis updateStress test update
Risk analysis updateStress test update
Risk viewCapital view
Risk viewCapital view
Risk viewCapital view
IV. Quantification
Risk capital analysis and stress testing is integratedinto management processes and quarterly reporting
A 27
Action plan
No actionrequired
Contingencyplan
Action plan
No actionrequired
Contingencyplan
Action plan
No actionrequired
Contingencyplan
Action plan
No actionrequired
Contingencyplan
Example: OE-specific action plan
Proposed actions GRC recommendationsAction Description Timing Cost / benefit
1
2
3
Impact on CARImpact on regulatory solvency
80%90%
100%110%120%130%140%
No Acti
onActi
on 1
Action 2
Action 3
Action
4
80%90%
100%110%120%130%140%
No Acti
onActio
n 1Acti
on 2
Action
3Actio
n 4Worst case Base case
IV. Quantification
A 28
Illustrative
Scenario analysis uses available inputs to generate“what if” outputs that link to planning
Business figures Profit & loss
Balance sheet
Risk capital
EVA
Cash flows
All of these are readilyavailable
Scenario analysis
From business plan:� Business growth� Claims ratio� Expense ratio� Investment mix
From Dresdner economics unit� Equity markets� Interest rates� Exchange rates Data from risk analysis
� Liability structure� Durations� Profit sharing rules
Market environment
Scenario analysis extends one year decision horizon
OutputsInputs
IV. Quantification
A 29
Agenda
I. Vision
II. Governance
III. Identification
IV. Quantification
V. Diversification
VI. Solvency II
A 30
� Limits are necessary to avoid high concentrations
� Capital requirements can be reduced through diversification
� Reinsurance and securitization provide means to optimize diversification
Diversification is key principle for risk management
Don’t put all your eggs in one basket
V. Diversification
A 31
� Controlling of concentration risksat Group and portfolio level
– Counterparty (credit)
– Insurance accumulation
– Combinations of risks
� Triggering specific risk reductionor capital actions according tocapital/risk action plans
� Avoidance of non-strategic risks
A comprehensive limit system is necessary to manageconcentration risks
� Optimization of risk/return structure
� Budgeting, i.e. allocation of scarceresources (e.g. Risk-adjusted capital)
� Definition and delegation of risktaking competencies consistentwith pre-agreed business unitstrategy and mandate
V. Diversification
Management steering Risk control
Focus on value management Focus on risk monitoring
Limitframework
A 32
The overall Group limit framework coversdifferent types of limits
Implementation of a comprehensive limit system
Develop internal risk limits rather than receive prescriptive limits from supervisors
Solvency limits
Capital budgets
Concentration limits
Investment limits
Nat Cat limits1
Types of limits Group limits OE limits set by Group
Solvency target & corridor
Counterparty/obligor exposure limits
OE risk capital limit
Group-wide counter-party credit risk limit
Group-wideNat Cat limit
V. Diversification
1) Implementation under development A 33
Loan products
Derivatives
Bonds
Creditinsurance
Cededreinsurance
Equity
IntegratedGroup limits
set byAllianz GRC
Aggregatelimit usage
acrossall OEs
Volume-basedmeasure of
“Maximum LossPotential”
Net commitment
MtM1 + Internaladd-on
Max of (MtM1;face value)
Named limits
Market value
Best estimate ontotal exposures
� Maximum of client limit and usage to account for instances ofoverdrafts/limit breaches (both banking and insurance)
� Current MtM-value of derivative position (both banking andinsurance) plus the internal add-on approximating the 95%-ile of thefuture exposure profile after internal economic netting (“worst case”)
� Maximum of current MtM1-value or face value of the bond, i.e. face valueis taken in case bonds trade at a discount to the nominal (par) value.For Pfandbriefe a 5% and for MBS a 10% risk factor is applied
� Aggregation across all insurers regarding net probable maximumloss
� Aggregated ceded reserves plus IBNR/IBNER plus unearnedpremiums plus accounts receivables plus prospective exposures
� Current MtM1-value of equity position including strategicshareholdings (both banking and insurance)
Available limit
V. Diversification
Maximum loss potential as a harmonized measureof usage within integrated group limits
1) Marked-to-market A 34
Example: limit system to manage and controlcounterparty credit exposure
Approach helps to identify growing risk concentrations at an early stage
Group level
OE level
Credit limit- Purely based on counterparty financials
Capital limit - Considers concentrations within Allianz Group portfolio
Early warning limit - Market data (share price) considered to achieve a real-time adjustment of the limit in line with actual development of credit quality
Steering limit- Actual limit for the operating entities- Set to control difference between capital limit and actual exposure
MaxNet limit- Relation of gross to net exposure- Defines potential for additional collateralized exposure
V. Diversification
Hierarchical order of different limit perspectives
A 35
Reducing risk concentrations reducescapital requirements
Diversification effects
Portfolio optimization can create value
Original portfolioOptimized portfolio
0
20
40
60
80
100
120
140
160
Unit A Unit B Unit C Unit D Unit E Unit F
Business units
Risk
Total
� Reduction of high risks(concentrations) causes over-proportional reduction of total risk
� Smaller risks can be increasedwithout significant increase of totalrisk
� Potential instruments- Volume growth/shrink- Limit systems- Secondary markets
(e.g. reinsurance)
V. Diversification
Portfolio optimization
A 36
Illustrative
Agenda
I. Vision
II. Governance
III. Identification
IV. Quantification
V. Diversification
VI. Solvency II
A 37
Solvency II project will significantly change theEuropean insurance solvency system
While the new framework is familiar to banks, it is a radical change for insurers
� Provide supervisors with quantitative and qualitative tools to assessthe overall solvency of an insurance company
� Risk-sensitive approach– Higher risk business will require more capital– Businesses will be given an incentive to enhance risk management
� Ensure consistency across financial sectors– Interaction of directives to be considered– Inconsistencies and multiple supervision to be avoided– Products containing similar risk should be subject to the same capital requirements
� Main focus on individual operating entities within a group– Need to adequately account for risk aggregation across individual regulated entities
VI. Solvency II
A 38
Basel II type three-pillar structure proposed fornew solvency system
Allianz Group is proactively shaping risk management and risk governanceframework to comply with developing regulatory requirements
Quantitative requirements Supervisory review process Disclosure requirements
� Harmonization ofprovisions for outstandingclaims
� Risk capital requirements
� Investment rules
� Risk governanceprinciples: internal controland risk management
� ALM principles
� Long-term viability of thebusiness
� Intervention powers andresponsibilities ofsupervisors
� Enhanced transparency
� Disclosure requirementswill depend on methodsand measures adoptedfor pillars 1 and 2
� Reporting requirementsto be coordinated withIASB, InternationalAssociation of InsuranceSupervisors (IAIS) andBasel II
VI. Solvency II
A 39
Allianz risk management approach should lead tofull compliance with regulatory requirements
Need to co-operate with regulators in order to develop adequate standards
Building blocks Solvency II
Identification; quantification;diversification
Risk and capital reporting
Governance
Pillar I(Quantitative requirements)
Pillar II(Supervisory review process)
Pillar III(Transparency)
VI. Solvency II
A 40
B. Risk capital methodology
Allianz Capital Markets DayJuly 15, 2004
Jürgen Guhe - Head of Risk Aggregation & Control
Agenda
I. Valuation
II. Risk capital framework
III. P/C
IV. L/H
V. Bank
VI. Asset Management
VII. Diversification
VIII. Stress tests
B 01
Available capital acts as a buffer against unfavorabledevelopments
=Required capital
+Excess capital
Market crisis
Large claims
How much capital does a company need to withstand extreme events?
Liabilities
Availablecapital
Assets
I. Valuation
B 02
Available capital� Shareholders’ equity (IAS)� Total adjusted capital (S&P)� Risk bearing funds (Risk capital)
Liabilities
Required capital
Excess capital
Capital definitions are driven by the valuation concept
There is no unique definition of required capitalnor of available capital
Assets Regulatory capital
Rating agency capital
Internal risk capital
I. Valuation
B 03
IAS equity artificially volatile due to inconsistent valuation ofassets and liabilities
Equitysecurities
Real estate
AFS fixedmaturities(marketvalue)
IAS equity
Insuranceliabilities
Application example: interest rate increase in L/H business; IAS balance sheet
IAS equity volatility due to accounting mismatch is not true economic risk
Equitysecurities
Real estate
AFS fixedmaturities(marketvalue)
IAS equity
Insuranceliabilities
Equity decreases
IAS b/s IAS b/s after IR-increase
Interest rateincrease
I. Valuation
B 04
Risk capital quantifies capital due to volatility ofeconomic value of business
1) PV of expected premiums - claims - expenses
Allianz takes a market consistent approach for the valuation of liabilities, i.evaluation approach is calibrated to the market environment
Assets LiabilitiesStatutory balance sheet
Economicvalue
Regulatoryavailablecapital
Statutory valueof assets
Statutoryvalue ofliabilities
Solvencymargin
Excess capital
Market valueof current
assets
Fair valueof future
cash flows1
Fair valueof liabilities
Economicrisk capital
Excess capital
Assets LiabilitiesEconomic balance sheet
I. Valuation
B 05
Agenda
I. Valuation
II. Risk capital framework
III. P/C
IV. L/H
V. Bank
VI. Asset Management
VII. Diversification
VIII. Stress tests
B 06
Risk is uncertainty about the future development ofthe economic value of the business
Market value of assets
Fair value of liabilities
Available capital after one year
Probability
0
Availablecapital
Economicvalue
Asset volatility
Liability volatility
Need to quantify the minimum required amount of capital
Economic insolvency
II. Risk capital framework
B 07
AAA AA A
Probability
Common risk framework allows for consistenttranslation of risk taking into capital requirement
Solvencystandard
0Worstcase
Change ineconomic value
Expectation= Best estimateRequired risk capital
Risk capital is the minimum amount of capital required to ensure solvency over thecourse of one year with a certain probability which is linked to our rating ambition
One year value at risk (VaR) approach
II. Risk capital framework
B 08
To calculate risk capital, all risk drivers have to beidentified and classified into broader risk categories
� Currentaccidentyear– Cat– Non-Cat
� Previousaccidentyears– Under-reserving
�Equities
� Interestrates(Asset-liabilitymismatch)
�Real Estate
�Mortality
�Calamity
� Longevity
� Lapses/ renewals
�Costinflation
Premiumrisks
Reserverisks
� Investments
� Loans
�Reinsurance
Establish a common risk language across the group while ensuring that all risk typesare adequately captured
� IT failure
� Litigation
�External events
Market/ALM risks
Credit/Counterparty
risksL/H
risksBusiness
risksOperational
risks
Operatingrisks
P/Crisks
Actuarialrisk
II. Risk capital framework
B 09
Risk categories
Integrated risk framework throughout Allianz Group
1) Fiduciary
Insurance Banking Asset management
Market/ALM
Credit/Counterparty� Investment� Reinsurance� Wholesale Banking� Retail Banking
Actuarial� Premium Non-Cat� Premium Cat� Reserve� L/H biometric risk
Operating� Business� Operational
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II. Risk capital framework
B 10
All standalone risk capital numbers are aggregated
Premiumrisks
Reserverisks
Market/ALM
Credit /counterparty OperatingActuarial
P/C
Aggregationto OE-widerisk capital
Aggregationto risk types
L/Hrisks
II. Risk capital framework
Operating entity risk capital
B 11
Economic capital is a customized refinement ofrating agency capital adequacy methodologies
Internal model - the stochastic approach
� Customized approach to account for localbusiness specifics
� Systematic evaluation of internal loss data
� Explicitly accounting for diversificationeffects
� Explicit modeling of all relevant risk drivers
� Hedging activities (derivatives) can beexplicitly modeled
� Direct links to specific risk tools (e.g.NatCat, Embedded Value)
S&P model - the deterministic approach
� Standard approach heavily influenced byUS experience
� Risk factors based on average marketloss data
� No diversification effects
� Risk drivers not always explicitly modeled(e.g. NatCat)
� No explicit modeling of hedging strategies
� No interfaces to other risk tools
Internal risk capital model provides management with more accurate view onunderlying risks than standard approaches
II. Risk capital framework
B 12
Agenda
I. Valuation
II. Risk capital framework
III. P/C
IV. L/H
V. Bank
VI. Asset Management
VII. Diversification
VIII. Stress tests
B 13
P/C risk capital requirements aremainly driven by actuarial risks
Premium riskTwo components
� Non-CAT– Losses– Pricing margin
� CAT– Losses– Pricing margin
Reserve risk� Volatility of best estimate ultimate
loss reserves
Actuarial models applied for premiumand reserve risk
Market/ALM
Businessrisks
ActuarialrisksCredit
Currentaccident year
� Non-Cat
� Cat
Previousaccident years
� Loss reserves
Premiumrisk
Reserverisk
P/C
III. P/C
B 14
Measuring NatCat exposure relies on probabilisticmodeling techniques
� Financial model– Exposure– Reinsurance coverage
� Vulnerability model
� Hazard model– Location geocoding– Local conditions– Regional impacts– Hazard
Key elements
Risk concentrations need to be managed by limit system
III. P/C
B 15
Reinsurance has a dual effect on risk capital
Reduction of actuarial risk� Extreme events passed on to reinsurer
Increase of credit risks� Possibility of reinsurer default
Market/ALM
BusinessrisksCredit
P/C
Internal risk capital model properly accounts for reinsurance effects
III. P/C
Actuarialrisks
B 16
Other risk categories in P/C
� Equity
� Interestrate
� Realestate
Market risk� Equity and real estate modeled by
standard approach
� Liability cash flows (claims run-off) for ALM risk determined with actuarial models
Credit� Monte Carlo simulation of correlated
losses
Business risk� Risk that fixed costs are not covered by
new or renewal business (assumption ofnormally distributed renewal rates)
� Invest-ments
� Rein-surance
� Newbusinessrisk
� Renew-al risk
Market/ALM
Businessrisks
ActuarialrisksCredit
P/C
III. P/C
B 17
Group risk capital by line of business1
Actuarial (49%)
Credit (8%)
Market/ALM (39%)
Operating (5%)
P/C risk capital split(as per 12/2003)
1) Group diversified
Total risk capital EUR 17.8bn
III. P/C
B 18
Agenda
I. Valuation
II. Risk capital framework
III. P/C
IV. L/H
V. Bank
VI. Asset Management
VII. Diversification
VIII. Stress tests
B 19
L/H business is mainly driven by Market/ALM risk –insurance risks diversify away in large portfolios
Profit sharing creates a tie between assetreturns and liability value� Liability cash flows (usually) depend on
future asset returns
Policyholders own valuable options(guarantees)� Embedded value improper to assess
value of embedded options as just onedeterministic scenario is used
Complex modeling required to getliability cash flow projections undervarious scenarios
� Equity
� Interestrate
� Realestate
Market/ALM
Businessrisks
ActuarialrisksCredit
L/H
IV. L/H
B 20
LiabilitiesAssets
L/H
Fair value of liabilities determined by
- Future cash flows to P/H ➨ simulation required- Discount rate (risk adjusted) ➨ risk neutral technique
Economic value
PV of futurenet outflows
(Benefits+ Expenses- Premiums )
Investments at
market value
Guaranteedrate
Discounted future cash flows
Return
Time
Credited returns
Investment return
Options and guarantees are implicitly valued on a market consistent basis within arisk neutral framework
Fair value balance sheet Simulation of future cash flows
Value of liabilities has to be determined in astochastic asset/liability model
IV. L/H
B 21
Overview of valuation steps
1
2
3
4
5
Generate market scenario (risk neutral) Determine cash flows
Generate asset returnsDiscount @ Risk-free rate
Average simulation values
Liability value = USD 1.7bn
Liability value = USD 1.3bn
0%4%8%
12%16%
0 10 20 30 40 50 60Year
Rate (%)
-30%
-10%
10%
30%
0 10 20 30 40 50 60
Return (%)
Year
Asset allocation strategy
Determining cash flowsfrom asset returns
requires assumptions-200
-150
-100
-50
0
50Year
CF's
Crediting strategy
Risk neutral valuation allows: expected asset return = risk-freediscount rate = risk-free
Illustrative
IV. L/H
B 22
Value
Best estimate
asset value Asset
value impact
Bestestimate
Liabilityvalue
impact
Assetvalue
impactLiabilityvalue
impact
Risk capital
Worstcase
Economic scenario generator provides stress scenarios
The asset/liability model allows calculation of risk capitalthrough a revaluation of business under economic stresses
Worstcase
IV. L/H
B 23
Current IAS does not adequately reflect interestrate changes on L/H business
Non-linear interest rate sensitivity in L/H
-30%
-15%
0%
15%
30%
-2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
Shift of yield curve
Cha
nge
of e
cono
mic
val
ue
The fair value sensitivity to interest rate movements isinverse to IAS and less pronounced
Fair value
Current IAS
Illustrative
IV. L/H
B 24
� Traditional Macaulay duration- Reasonable proxy for the interest rate sensitivity of assets- Misleading for the liability side as liability cash flows depend on asset returns
Actual liability interest rate sensitivity much lowerthan respective duration
AssetsLiabilities
Economicvalue
Duration: 6.09IR sensitivity1: 4.65
Duration: 14.31IR sensitivity1: 5.41
Interest rate sensitivity is much lower than suggested by duration due toadjustment of liability cash flows in response to change in interest rates
Illustrative
IV. L/H
1) Quantifiable change in value caused by interest rate shifts B 25
Group risk capital by line of business1
Market/ALM (55%)
Credit (23%)
L/H risk capital split(as per 12/2003)
1) Group diversified
Total risk capital EUR 4.8bn
Actuarial (2%)
Operating (20%)
IV. L/H
B 26
Agenda
I. Valuation
II. Risk capital framework
III. P/C
IV. L/H
V. Bank
VI. Asset Management
VII. Diversification
VIII. Stress tests
B 27
Credit risk is the main risk driver for the bank
Potential loss in value due to changesin credit quality� Downgrade� Default
Need for credit portfolio measurementand management� Credit risk depends on portfolio
composition (correlation andconcentration effects)
� Loan risk
� Issuer risk
� Counter-party risk
MarketALM
OperatingriskCredit
Bank
V. Bank
B 28
Credit risk is characterized by high loss potentialdue to default correlation and obligor concentration
Credit losses
Time (years)
Credit losses
Frequency
Expected Loss
Risk capital
V. Bank
B 29
The expected portfolio credit loss is the sum ofexpected losses of individual exposures
Exposure atdefault(EaD)
Loss givendefault(LGD)
Expected loss of obligor iELi = PDi x EaDi x LGDi
EL ELii
=�
For the determination of risk capital the completeportfolio loss distribution needs to be estimated
Max loss incase ofdefault
Fraction ofexposure lost
in case ofdefault
Probabilityat default
(PD)
Calibrationbased on
historical data
Allows calculationof transaction and customer
specific loss figure
V. Bank
B 30
Monte Carlo simulation is required to derive theportfolio credit loss distribution
� Defines probability that different obligordefault at the same time
� High default correlation implies high riskcapital requirement
1) According to the chosen solvency standard of A
7 bp chance of annuallosses exceeding
this point 1
Probability
LossesExpected loss Market value of portfolio
Risk capital
Default correlation� Exists if significant share of overall exposure
is attributable to single obligor
� High concentration will increase risk capitalrequirement
Obligor concentration
V. Bank
B 31
Market/ALM and operational risk tools complywith Basle II advanced approach
Market risk� Trading book
– Scaling of (99%, 10 days) VaR to (99.93%,1 year) VaR
– (99%, 10 days) VaR model approved byBaFin
� Banking book– (99.93%, 1 year) VaR approach for equity
positions
Operating risk� Operational risk
– Structured self assessment process andloss database provide basis for lossdistribution parameters
� Business risk– Difference between expected/budget NOP1
and stress NOP1
OperatingriskCredit
Bank
� Interest rate
� FX
� Equity
� Commo-dities
� Failures inprocesses,controls,projects
� Profitmargins
� Volumes
1) Normalized Profit
V. Bank
Market/ALM
Operational risk
Businessrisk
B 32
Group risk capital by line of business1
Credit (50%)
Market/ALM (42%)
Operating (8%)
Bank risk capital split(as per 12/2003)
1) Group diversified
Total risk capital EUR 7.7bn
V. Bank
B 33
Agenda
I. Valuation
II. Risk capital framework
III. P/C
IV. L/H
V. Bank
VI. Asset Management
VII. Diversification
VIII. Stress tests
B 34
Rating agency approach in place – internal modelfor operational risk under development
Operational event risk� Current capital charge: based on assets
under management� Roll-out of advanced measurement
approach (AMA) underway based onstructured self assessment and internaldata
� Combined operational riskmanagement/SOX compliance procedure
MarketALM
OperatingriskCredit
AssetManagement
Business
� Failures inprocesses,controls,projects
VI. Asset Management
Operationalrisk
B 35
Agenda
I. Valuation
II. Risk capital framework
III. P/C
IV. L/H
V. Bank
VI. Asset Management
VII. Diversification
VIII. Stress tests
B 36
Since most risks are not fully correlated, diversificationbenefits have to be considered
Probability
Equity valueExpectedcase
Worstcase
Probability
Real estate valueExpectedcase
Worstcase
Equity risks
Real estate risks
Aggregation
Probability
Asset valueExpectedcase
Worstcase
VII. Diversification
B 37
All standalone risk capital numbers are aggregatedusing appropriate diversification
OE riskcapital
Market/ALM
Credit
Actuarial
Operating
OE riskcapital
Group riskcapital
OE riskcapital
Diversified risk capital can be disaggregated to individual risk types
Geo-graphicaldiversi-fication
Diversi-fication
between risk types
VII. Diversification
B 38
1Q 2004 risk capital diversification effects (EUR bn)
� Correlation partly based on assumptions - benchmarking with peers requiredto improve reliability
� Conservative approach: no negative correlation
� Consistency of correlation between OE and Group level
0
20
40
60
80
100
47.437.0 32.0 35.0
-21%-14% +9%
Group diversified(business mix and IR risk netting) [A]
Group divers. incl. geogr. divers. [A]
Total Group [AA]
Market/ALMCreditActuarialOperating
OE diversified [A]
VII. Diversification
Risk capital before and after diversification
B 39
Agenda
I. Valuation
II. Risk capital framework
III. P/C
IV. L/H
V. Bank
VI. Asset Management
VII. Diversification
VIII. Stress tests
B 40
Modelapproach
Analysis
Stress test models were built to identify threats toexternal capital requirements (early warning system)
Contingency plans required for each OE
Regulatory stress test on OE level
� Stresses applied to year endprojection of solvency ratio
� Once per year full review ofassumptions, quarterly updates ofbalance sheets and planing data
� Stresses applied to current solvencyratio as instant shock
� Once per year full review ofassumptions, simplified quarterlyupdates
All other stress tests1
1) S&P Group & OE solvency, regulatory Group solvency
Seven standalone stresses:� Equity -30%� Interest rate +200 bps / -150 bps� Credit default (EL + Standard deviation)� New business +50%� Mini-CAT (for P/C)� Reserve strengthening (for P/C)
Calibrated to“1-in-10-year”
event
VIII. Stress tests
B 41
C. RoRACN calculation
Allianz Capital Markets DayJuly 15, 2004
Rainer Schwarz - Head of Group Planning and Controlling
Allianz capital efficiency metrics – accounting view
Simple measure, direct determination fromP&L and balance sheet
IFRS net income does not reflect full operatingperformance
Based on shareholders’ equity, which does notrepresent economically required capital
Determination from published annual report possible
Adjustments eliminate inconsistenciesand many distortions
Ratio still follows accounting conventions
Based on shareholders’ equity, which does notrepresent economically required capital
Simple measure, direct determination fromP&L and balance sheet
Corrected for goodwill amortization; however,some distortions and inconsistencies remain
Based on shareholders’ equity, which does notrepresent economically required capital
Net incomeØ SH equity
Net income + GW amort.Ø SH equity
“Total” gain to SH1
Ø SH equity
-4.66.4
1) IFRS net income adjusted for change in revaluation reserves (EUR 2.5bn), goodwill amortization (EUR 1.4bn),currency translation differences (EUR -1.7bn), and other impacts (EUR -0.8bn)
-0.3
12.1
-32.4
11.8
2002 2003
2002 2003
2002 2003
IFRS RoE b/goodwillamortization (%)
IFRS RoE (%)
Comprehensive IFRS RoE b/goodwill amort.(%)
+
+
+
+
-
-
-
-
--
C 01
C. RoRACN calculation
First publication in 2003 analysts’ presentation;will replace RoACN going forward
Good approximation of economic reality, accountsfor Allianz’s specific economic risk situation
Corresponds to Allianz keyinternal performance metrics
Based on internal profit metrics
Better approximation of economic reality
S&P model rather mechanistic
Diversification effects on Group level not considered
Allianz capital efficiency metrics – economic view
NOPAT1
Ø Capital necessary for AA rating
NOPAT2
Ø Risk-adjusted capital3
3.211.8
3.1
12.6
1) Normalized profit after taxes (old model)
2) Normalized profit after taxes (new model); definition see on page C 09
3) Probability of economic insolvency ≤ 7bp
2002 2003
2002 2003
RoACN/old model (%)
RoRACN/new model (%)
+
+
--
+
+
+
C 02
C. RoRACN calculation
Why RoRACN?
� Reflects economic reality better thanalternative metrics
� Corresponds to Allianz Group’s keyperformance metric (EVA)
� Adjusted IFRS data– Includes all relevant sources of economic
gains and losses from operating activities– Includes normalized investment income
� Avoids mechanistic accounting conventions,but also introduces several assumptions
� Normalization cannot be reproduced frompublished financial reports
� Superior metric of capital adequacy(as compared to alternatives likeshareholders’ equity/rating requirements)
� Represents funds required to maintainAA rating over 1-year horizon
� Derived through internal, stochastic model
� Financial diversification fully considered
NOPAT
Risk-adjusted capital (RAC)
C 03
C. RoRACN calculation
Economic ValueAdded (EVA) Risk Capital (RoRACN - CoC)
Performancemeasurement Risk drivers Market
expectation Capital efficiency
RoRACN and EVA are closely linked
NOPATRAC
� Portfoliomanagement
� Target setting
� Capital allocation
� Managementcompensation
� Risk analysis
� Limit setting
� Early warning
� Risk-adjustedbenchmark
� Effective use of allocated capital
RoRACN === x with:
C 04
C. RoRACN calculation
Overview: the numerator – NOPAT
IFRS net
incomeNOPAT
Adjustment and normalization process on OE level
1
2
3
4 Other impacts, mainlya) Non-Life reserve discountingb) Normalized investment incomec) Excess capital charge
Elimination of goodwill and acquisition-related expenses
Banking: Restructuring expenses
C 05
C. RoRACN calculation
Banking: IAS 39 impact
Economic rationaleAdjustment
The numerator – adjustments
Item
Claims reserves4a
2
3
Banking:Restructuringexpenses
Discounting
Add-back
Elimination
Elimination
Because claims payments relating to balance sheet reservesare not due immediately, reserves are discounted in thenormalization process. The discount rate equals the actual,average bond yield on investments.
Restructuring expenses in Banking segment are exceptionaland not part of operating performance.
Under IFRS, timing differences of P&L impacts arise betweenclasses of securities because of their different classification(e.g. hedges and their underlying), even though economically,those impacts should occur simultaneously.
Operating management performance is not impacted bygoodwill-like expenses which arise as part of companyacquisitions.
Banking:IAS 39 impact
Goodwillamortization andacquisition-related expenses
C 06
C. RoRACN calculation
1
Economic rationale
The numerator – normalized investment income
Normalization
Adjustment
4b
Cash (4%)2
Real estate(4%)
Equity(16%)
Fixed income(76%)
Current IFRS investment income of period
Risk-free interest rate times 120%
Average, long-term yield for equity investmentsconsistent with cost of capital, assuming β = 1(in Euro and US zones: 8.5%), plus: average deviationof actual investment results from benchmark3
Current IFRS investment income plus:average3 IFRS realized gains/ losses
∅∅∅∅ normalizedinvestment
income rate forOE
1) % of total investments of Group of EUR 338bn (without trading assets)2) Including “other” investments3) Average over 3 years; benchmark defined by OE and “Group Investments”; by default respective MSCI country index4) NII = normalized investment income
� Neutralize the volatility of equity markets� Eliminate discretionary effects from realization of capital gains/losses� Determine an adequate economic normalized return from the investment portfolio
OE asset allocation1 Normalization OE NII rate4
Valuation base: market value of portfolio at beginning of period plus 50% of net new investments in period
C 07
C. RoRACN calculation
OEs earn normalized investment income on all their investments.Thus they earn income also on the portion of capital held on top of risk-adjustedcapital requirements. This extra income is reversed for RoRACN calculations tocreate a numerator consistent with the denominator.
Economic rationale
The numerator – excess capital charge
Deduct
Adjustment
4c
Illustrative example1 (EUR m)
Net asset value
RAC
Excess capital
Normalized return rate
Excess capital charge
1000
800
200
6%
12
Capital held on top of risk requirements
Weighted normalized investment yield of OE
Eliminated from normalized profits to reflectinvestment income on RAC basis only
1) All numbers here for demonstration purposes only
C 08
C. RoRACN calculation
The numerator – from IFRS net income to NOPAT(2003)
C 09
C. RoRACN calculation
IFRS netincome
Banking: IAS39 impact1
Banking:restructuringexpenses1 Other 3
Goodwillamortization,acquisition-
related expenses2 NOPAT
1,616 142
588
1,880
-126
Allianz Group (EUR m)
4,100
1) After tax; before tax: IAS 39 impact EUR 202m; restructuring expenses EUR 840m2) Of which goodwill amortization: EUR 1,413m; acquisition-related expenses: EUR 467m3) Includes normalized investment income adjustment, reserve discounting and minorities
Before minorities
The denominator – RAC factors in diversificationbenefits
Allianz Group (Average 2003, after minorities, EUR bn)
P/C L/H BankingAsset
Management CorporateGroupbefore
diversifi-cation
Diversificationimpact
RACdiversified
OEs consolidated in segment
21.2
7.6
10.82.7
2.4 44.7
-12.1
32.6
C 10
C. RoRACN calculation
Allianz Group: RoRACN calculation(2003, after minorities)
= 12.6%RoRACN =Average RAC EUR 32.6bn
C 11
C. RoRACN calculation
Normalized profit EUR 4.1bn
D. Appendix
Allianz Capital Markets DayJuly 15, 2004
Allianz Group risk capital: required vs. available funds(in EUR bn)
Required vs. available
1) Without reserves on real estate own use, before minorities2) Excluding asset valuation differences
Available funds
Shareholders’ equityMinoritiesHybrid CapitalSupp. Cap. at DresdnerOff b/s rev. Reserves1
Loss reserve discountPVFP not acc. in IFRS equ.2
OtherGoodwillTotal
28.68.45.67.31.54.12.22.0
-12.447.3
35.5
47.3
SurplusEUR 11.8bn
Availablefunds
RequiredFunds
(internalmodel)
Business linesProperty/CasualtyLife/HealthBankingAsset ManagementHoldingTotal
17.84.87.71.63.5
35.5
Required risk-adjusted capital
Risk categoriesMarket/ALMCredit/counterpartyPremiumReserveLife actuarialBusinessTotal
16.26.27.11.80.14.1
35.5
D. Appendix
from: Analysts‘ Conference 2004, Page B 54
D 01
Investor Relations contacts
D. Appendix
Oliver Schmidt Tel. +49 (0) 89 3800-3963
Head ofInvestor Relations
e-mail:[email protected]
Susanne Arheit Tel. +49 (0) 89 3800-3324
e-mail:[email protected]
Peter Hardy Tel. +49 (0) 89 3800-18180
e-mail:[email protected]
Andrea Förterer Tel. +49 (0) 89 3800-6677
e-mail:[email protected]
Stefan Engelke Tel. +49 (0) 89 3800-18124
e-mail:[email protected]
DanielaMeintzschel
Tel. +49 (0) 89 3800-17975
e-mail:[email protected] events
Fax: +49 (0) 89 3800-3899
e-mail: [email protected]
Internet (English): www.allianzgroup.com/investor-relations
Internet (German): www.allianzgroup.com/ir
ChristianLamprecht
Tel. +49 (0) 89 3800-3892
e-mail:[email protected]
D 02
Financial calendar 2004/2005
15 July 2004 Capital Markets Day
16 August 2004 Financial report first half 2004
12 November 2004 Financial report first three quarters 2004
17 March 2005 Financial press conference for the 2004 fiscal year
18 March 2005 Analysts’ conference on fiscal year 2004 in Munich
21 March 2005 Analysts’ conference on fiscal year 2004 in Frankfurt
22 March 2005 Analysts’ conference on fiscal year 2004 in London
04 May 2005 Annual General Meeting 2005
13 May 2005 Financial report first quarter of 2005
12 August 2005 Financial report first half 2005
11 November 2005 Financial report first three quarters of 2005
D. Appendix
D 03
Disclaimer
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking StatementsCertain of the statements contained herein may be statements of future expectations and other forward-looking statements that are basedon management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actualresults, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which areforward-looking by reason of context, the words ‘may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts,potential, or continue’ and similar expressions identify forward-looking statements. Actual results, performance or events may differmaterially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economicconditions in the Allianz Group's core business and core markets, (ii) performance of financial markets, including emerging markets, (iii)the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent ofcredit defaults, (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. dollar exchange rate, (ix) changing levels ofcompetition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in thepolicies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii)reorganization measures and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many ofthese factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The mattersdiscussed herein may also involve risks and uncertainties described from time to time in Allianz AG’s filings with the U.S. Securities andExchange Commission. The company assumes no obligation to update any forward-looking statement.
No duty to updateThe company assumes no obligation to update any information contained herein.
D. Appendix
D 04