C _ Group Management Report Equity risk Insurance-focused Allianz entities may hold equity investments to Credit risk is measured as the potential economic loss in the value of diversify their portfolios and to take advantage of expected long-term our portfolio that would result from either changes in the credit quality returns. Strategic asset allocation benchmarks, investment and equity of our counterparties (“migration risk”) or the inability or unwillingness sensitivity limits are used to monitor and manage these exposures. In of a counterparty to fulfill contractual obligations (“default risk”). addition, equity investments fall within the scope of the credit risk platform to avoid single-name risk concentrations. Risks from changes The Group’s credit risk profile originates from three sources: our in equity prices are normally associated with decreasing share prices investment portfolio, our credit insurance business, and our external and increasing equity price volatilities. As stock markets might also reinsurance. increase, opportunities may arise from equity investments in those events. − Investment portfolio: Credit risk results from our investments in fixed-income bonds, loans, derivatives, cash positions, and Credit spread risk receivables whose value may decrease depending on the credit Fixed-income assets such as bonds may lose value if credit spreads quality of the obligor. However, losses due to credit events can be widen. However, our risk appetite for credit spread risk takes into shared with the policyholder for certain life insurance products. account the underlying economics of our business model: As a liability- − Credit insurance: Credit risk arises from potential claim payments driven investor, we typically hold fixed-income assets until maturity. on limits granted by Euler Hermes to its policyholders. Euler This implies that we are less affected economically by short-term Hermes insures its policyholders against credit risk associated with changes in market prices. In our capacity as a long-term investor, this short-term trade credits advanced to policyholder’s clients. When gives us the opportunity to invest in bonds yielding spreads over the the client of the policyholder is unable to meet its payment risk-free return and earning this additional yield component. obligations, Euler Hermes indemnifies the loss to the policyholder. − Reinsurance: Credit risk arises from potential losses from non- Currency risk recoverability of reinsurance receivables or due to default on Allianz SE and the other related undertakings of the Allianz Group benefits under in-force reinsurance treaties. Our reinsurance typically invest in assets which are denominated in the same currency partners are carefully selected by a dedicated team. Besides as their liabilities. However, some foreign currency exposures are focusing on companies with strong credit profiles, we may also allowed to support portfolio diversification and tactical investment require letters of credit, cash deposits, or other financial measures decisions. Our largest exposure to foreign currency risk comes from our to further mitigate our exposure to credit risk. ownership of non-euro entities: Whenever the euro strengthens, the euro equivalent net asset value of our foreign subsidiaries will The internal credit risk capital model takes into account the major decline from an Allianz Group and Allianz SE perspective; however, at determinants of credit risk for each instrument, including exposure at the same time the capital requirements in euro will decrease, partially default, rating, seniority, collateral, and maturity. Additional mitigating the total impact on Allianz Group and Allianz SE parameters assigned to obligors are migration probabilities and capitalization. Based on Allianz Group’s foreign exchange obligor asset correlations reflecting dependencies within the portfolio. management limit framework, currency risk is monitored and Ratings are assigned to single obligors using a clearly defined managed at the levels of Allianz Group, Allianz SE, and the other assignment process. Central components of this assignment process operating entities of the Allianz Group. are long-term ratings from external rating agencies, and internal rating models in case of specific internal investment strategies. If Real estate risk available, a dynamic adjustment using market-implied ratings and Despite the risk of decreasing real estate values, real estate is a the most recent qualitative information available is applied. suitable addition to our investment portfolio due to good The loss profile of a given portfolio is obtained using a Monte diversification benefits as well as to the contribution of relatively Carlo simulation, taking into account interdependencies and exposure predictable, long-term cash flows. concentrations per obligor segment. The loss profiles are calculated at Allianz’s Group Investment Committee has defined a framework different levels of the Allianz Group, and then fed into the internal for standard transactions for real estate equity and commercial real model at each level for further aggregation across sources of risk to estate loan investments. These standards outline diversification derive diversified credit risk. targets, minimum-return thresholds, and other qualitative and Our credit insurance portfolio is modeled by Euler Hermes, based quantitative requirements. All transactions that do not meet these on a proprietary model component which is a local adaptation of the standards or have a total investment volume (including costs) central internal credit risk model. Euler Hermes’ loss profile is exceeding a defined threshold must be reviewed individually by Group integrated in the Group’s internal credit risk model to capture the Risk and other Group center functions. In addition, all applicable limits concentration and diversification effects. must be respected, in particular those resulting from strategic asset To ensure effective credit risk management, credit VaR limits are allocation as well as its leeways and risk limits, with regards to an derived from our internal risk capital framework, and rating bucket investing entity’s portfolio. benchmarks are used to define our risk appetite for exposures in the lower investment-grade and non-investment-grade area. Annual Report 2021 − Allianz Group 101