ALLIANZ GROUP 86 Market and counterparty risks arising from the use of derivative financial instruments are subject to particularly strict control procedures: _  Credit risks are assessed by calculating replacement values. _  Market risks are monitored by means stress tests and limited by specifying stop-loss limits. We limit liquidity risks by reconciling our investment portfolio with our insurance commitments. In addition, we plan our cash flow from ordinary activities. Operational risks These risks are limited by a wide range of technical and organizational measures. We intend to minimize such risks by installing a comprehensive system of internal con- trols and security systems in each operating unit. In the future, data on internal losses attributable to operational risks are to be compiled and analyzed for use in our internal model for the cal- culation of risk capital. The testing phase for such a system for the insurance and asset management segments was successfully completed in the reporting year. It will be installed in the first units in 2004. Legal risks The limitation of legal risks is an important task of the Group’s Legal Department. This is done, for example, by  using internationally recognized standard documentation and, if necessary, by obtaining legal opinions. Contracts for estab- lished products are continuously reviewed to include any amendments required by changes in legislation or jurisdiction.  Organizational controlling of investment risks  In terms of or- ganization, we limit our investment risks through a clear sepa- ration of management and controlling functions. Within the  Allianz Group, risk management is implemented in cooperation with the local units in a top-down bottom-up process. The  Allianz Group Finance Committee, which is made up of mem- bers of the Board of Management of Allianz AG, delegates far- reaching decision-making authority to the regional Finance Committees, which monitor activities in their respective regions or countries. The duties and responsibilities at each decision- making level are defined by guidelines issued at Group level. These guidelines are then applied by the regional Finance Committees, which formulate specific local investment guide- lines. Operational responsibility for investment portfolios lies within the local units. Risk capital At the end of fiscal 2003, risk capital calculated ac- cording to the Standard & Poor’s model, and before minority in- terests, was composed as follows: in property and casualty in- surance, 16.1 billion euros were allocated for actuarial risks, 1.1 billion euros for credit and counterparty risks and 3.5 bil- lion euros for investment risks. Risk capital in life insurance amounted to 10.8 billion euros. As a minimum, the capital we allocate to our local units meets the requirements for an “A” rating from Standard & Poor’s. Credit and counterparty risks These risks are directly linked to granting credits in the banking business. The bank controls these risks through guidelines and credit risk committees. The central element in the approval, supervisory and control process is the rating of our customers. In this process, the various credit- worthiness characteristics of the customers are presented in the form of rating classes. As quality control for these rating meth- ods, validation benchmarks were introduced in the reporting year.  To categorize the default probability of a borrower, a system with 16 different rating classes is used. The first six classes cor- respond to “investment grade”, classes VII to XIV signify “non investment grade”. Rating classes XV and XVI are default classes according to the Basel II Definition. At the end of fiscal 2003, about 75 percent of all counterparty risks in the trading and banking portfolios of the Dresdner Bank Group fell into rating classes I to VI. Risk controlling in the banking business Investment Grade 75 % Non Investment Grade 21 % Default 3 % 0 5 10 15 20 25 30 35 I II III IV V VI VII VIII IX X XI XII XIII XIV XV XVI Credit and counterparty risks by rating classes in %