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Interim Report Third Quarter 2014

102 Interim Report Third Quarter and First Nine Months of 2014    Allianz Group Valuation methodologies of financial instruments carried at fair value For fair value measurements categorized within level 2 and level 3, the ­Allianz Group uses valuation techniques consistent with the three widely used classes of valuation techniques listed in IFRS 13: −− Market approach: Prices and other relevant information gener- ated by market transactions involving identical or comparable assets or liabilities. −− Cost approach: Amount that would be currently required to replace the service capacity of an asset (replacement cost). −− Income approach: Conversion of future amounts such as cash flows or income to a single current amount (present value technique). There is no one-to-one connection between valuation technique and hierarchy level. Depending on whether the valuation techniques are based on significant observable or unobservable inputs, financial instruments are classified in the fair value hierarchy. Financial assets carried at fair value through income Financial assets held for trading – Debt and equity securities The fair value is mainly determined using the market approach. In some cases, the fair value is determined based on the income approach using interest rates and yield curves observable at com- monly quoted intervals. Financial assets held for trading – Derivative financial instruments For level 2, the fair value is mainly determined based on the income approach using present value techniques and the Black-Scholes- Merton model. Primary inputs to the valuation include volatilities, interest rates, yield curves, and foreign exchange rates observable at commonly quoted intervals. For level 3, derivatives are mainly priced by third-party vendors. Controls are in place to monitor the valuations of these derivatives. Valuations are mainly derived based on the income approach. Financial assets designated at fair value through income – Debt securities The fair value is determined using the market approach. Financial assets designated at fair value through income – Equity securities For level 2, the fair value is determined using the market approach. For level 3, equity securities mainly represent unlisted equity securi- ties measured at cost. Available-for-sale investments Available-for-sale investments – Debt securities Debt securities include: −− Governmentandagencymortgage-backedsecurities(residential and commercial), −− Corporate mortgage-backed securities (residential and com- mercial), −− Other asset-backed securities, −− Government and government agency bonds, −− Corporate bonds, and −− Other debt securities. The valuation techniques for these debt securities are similar. For level 2 and level 3, the fair value is determined using the market and the income approach. Primary inputs to the market approach are quoted prices for identical or comparable assets in active markets where the comparability between security and benchmark defines the fair value level. The income approach in most cases means a present value technique where either the cash flow or the discount curve is adjusted to reflect credit risk and liquidity risk. Depending on the observability of these risk parameters in the market, the security is classified in level 2 or level 3. Available-for-sale investments – Equity securities For level 2, the fair value is mainly determined using the market approach or net asset value techniques for funds. For certain pri­vate equity investments, the funds are priced based on transaction prices using the cost approach. As there are only few holders of these funds, the market is not liquid and transactions are only known to partici- pants. For level 3, the fair value is mainly determined using net asset values. The net asset values are based on the fair value meas­urement of the underlying investments and are mainly provided by fund managers. For certain level 3 equitysecurities, the invested capital is considered to be a reasonable proxy for the fair value.

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