SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 20-F
(Mark One)
¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year endedyear-ended December 31, 20062008
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period to
or
¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell report
Commission file number 1-15154
ALLIANZ SE
(Exact name of registrant as specified in its charter)
Federal Republic of Germany
(Jurisdiction of incorporation or organization)
KöniginstrasseKoeniginstrasse 28, 80802 Munich, Germany
(Address of principal executive offices)
Burkhard Keese
ALLIANZ SE
Königinstrasse 28, 80802 Munich, Germany
Telephone: +49 89 3800-16596
Facsimile: +49 89 3800-16598
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Ordinary Shares (without par value)* | The New York Stock Exchange, Inc. | |
8.375% Undated Subordinated Callable Bonds | The New York Stock Exchange, Inc. |
* | Not for trading, but only in connection with the listing of American Depositary Shares, pursuant to the requirements of the New York Stock Exchange. |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock at December 31, 2006:
2008:
Ordinary shares, without par value |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES x NO ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
YES ¨ NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
IndicateU.S. GAAP ¨
International Financial Reporting Standards as issued by the International Accounting Standards Board x
Other ¨
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ¨ Item 18 x¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO x
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Investment Portfolio Impairments, Depreciation and Unrealized Losses |
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ITEM 6. |
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ITEM 7. |
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ITEM 8. | ||||
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ITEM 9. | ||||
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ITEM 10. | 145 | |||
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ITEM 11. | Quantitative and Qualitative Disclosures |
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174 | ||||
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ITEM 12. |
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ITEM 13. |
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ITEM 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds | 176 | ||
ITEM 15. | ||||
ITEM 16A. |
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ITEM 16B. | ||||
ITEM 16C. |
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ITEM 16D. |
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ITEM 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | 180 | ||
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ITEM 17. | ||||
ITEM 18. | ||||
ITEM 19. | ||||
Index to the Consolidated Financial Statements and Schedules |
ii
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
In this Annual Report, the terms “we,” “us” and “our” refer to Allianz Societas Europaea (or Allianz SE, and together with its consolidated subsidiaries, the Allianz Group), unless the context requires otherwise.
Unless otherwise indicated, when we use the term “consolidated financial statements,” we are referring to the consolidated financial statements (including the related notes) of Allianz SE as of December 31, 20062008 and 20052007 and for each of the years in the three-year period ended December 31, 2006,2008, which have been audited by KPMG Deutsche Treuhand-Gesellschaft AG Wirtschaftsprüfungsgesellschaft. The consolidated financial statements of the Allianz Group have been prepared in accordanceconformity with International Financial Reporting Standards (or “IFRS”)(IFRS), as adopted under European Union (EU) regulations in accordance with clausesection 315a of the German Commercial Code.Code (HGB). The consolidated financial statements of the Allianz Group have also been prepared in accordance with IFRS differas issued by the International Accounting Standard Board (IASB). The Allianz Group’s application of IFRSs results in certain respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). For a discussion of significantno differences between IFRS as adopted by the EU and U.S. GAAP and a reconciliation of net income and shareholders’ equity under IFRS and U.S. GAAP, you should read Note 53 toas issued by the consolidated financial statements. In addition, theIASB. The amounts set forth in some of the tables may not add up to the total amounts given in those tables due to rounding.
References herein to “$”, “U.S.$” and “U.S. Dollar” are to United States Dollars and references to “€” and “Euro” are to the Euro, the single currency established for participants in the third stage of the European Economic and Monetary Union (or EMU), commencing January 1, 1999. We refer to the countries participating in the third stage of the EMU as the “Euro zone.”
For convenience only (except where noted otherwise), some of the Euro figures have been translated into U.S. Dollars at the rate of $1.3511$1.3566 =
€1.00, €1.00, the noon buying rate in New York for cable
transfers in Euros certified by the Federal Reserve Bank of New York for customs purposes on May 18, 2007.March 20, 2009. These translations do not mean that the Euro amounts actually represent those U.S. Dollar amounts or could be converted into U.S. Dollars at those rates. SeeRefer to “Key Information—Exchange Rate Information” for information concerning the noon buying rates for the Euro from January 1, 20022004 through May 18, 2007.March 20, 2009.
Unless otherwise indicated, when we use the terms “gross premiums,” “gross premiums written” and “gross written premiums,” we are referring to premiums (whether or not earned) for insurance policies written during a specific period, without deduction for premiums ceded to reinsurers, and when we use the terms “net premiums,” “net premiums written” and “net written premiums,” we are referring to premiums (whether or not earned) for insurance policies written during a specified period, after deduction for premiums ceded to reinsurers. When we use the term “statutory premiums,” we are referring to gross premiums written from sales of life insurance policies as well as gross receipts from sales of unit-linked and other investment-oriented products, in accordance with the statutory accounting practices applicable in the relevant insurer’s home jurisdiction.
Unless otherwise indicated, we have obtained data regarding the relative size of various national insurance markets from annual reports prepared by SIGMA, an independent organization that publishes market research data on the insurance industry. In addition, unless otherwise indicated, insurance market share data are based on gross premiums written and statutory premiums for our Property-Casualty and Life/Health segments, respectively. Data on position and market share within particular countries are based on various third partythird-party and/or internal sources as indicated herein.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report includes “forward-looking statements” within the meaning of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. These include statements under “Information on the Company,” “Operating and Financial Review and Prospects,” “Quantitative and Qualitative Disclosures About Market Risk” and elsewhere in this annual report relating to, among other things, our future financial performance, plans and expectations regarding developments in our business, growth and profitability, and general industry and business conditions applicable to the Allianz Group. These forward-looking statements can generally be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or other similar terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections about future events. These forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that may cause our actual results, performance or achievements or those of our industry to be materially different from or worse than those expressed or implied by these forward-looking statements. These factors include, without limitation:
general economic conditions, including in particular economic conditions in our core business areas and core markets;
function and performance of global financial markets, including emerging markets;markets and events related to market volatility, liquidity and credit;
frequency and severity of insured loss events, including from natural catastrophes, terror attacks, environmental and asbestos claims;claims and the development of loss expenses;
mortality and morbidity levels and trends;
persistency levels;
interest rate levels;
currency exchange rate developments, including the Euro/U.S. Dollar exchange rate;
levels of additional loan loss provisions;
further impairments of investments;
general competitive factors, in each case on a local, regional, national and global level;
changes in laws and regulations, including in the United States and in the European Union;
changes in the policies of central banks and/or foreign governments;
the impact of acquisitions, including related integration and restructuring issues; and
terror attacks, events of war, and their respective consequences.
PART I
ITEM 1. | Identity of Directors, Senior Management and Advisors |
Not applicable.
ITEM 2. | Offer Statistics and Expected Timetable |
Not applicable.
ITEM 3. | Key Information |
Selected Consolidated Financial Data
We present below our selected financial data as of and for each of the years in the five-year period ended December 31, 2006.2008. We derived the selected financial data for each of the years in the five-year period ended December 31, 20062008 from our audited annual consolidated financial statements, including the notes to those financial statements. All the data should be read in conjunction with our consolidated financial statements and the notes thereto. We prepare our annual audited consolidated financial statements in accordance with IFRS.
On August 31, 2008 Allianz SE (“Allianz”) and Commerzbank AG (“Commerzbank”) agreed on the sale of almost all of Dresdner Bank AG (“Dresdner Bank”) to Commerzbank. Following the announcement, Dresdner Bank qualified as held-for-sale and discontinued operations. Therefore, results from these operations have been eliminated from our results of Banking operations and are now
presented in a separate line item “net income from discontinued operations, net of income taxes and minority interests in earnings”. In addition to our continuing banking business, our Banking operations also reflect the results from those parts of Dresdner Bank that were not sold to Commerzbank: Oldenburgische Landesbank (OLB) and the banking clients that were introduced through our tied agent’s channel. Furthermore, all assets and liabilities that are part of the disposal group have been reclassified and presented in separate line items “Non-current assets and assets from disposal groups classified as held-for-sale” and “Liabilities of disposal groups classified as held-for-sale”, respectively, on the face of the consolidated balance sheet as of December 31, 2008. Certain prior period amounts have been reclassified to conform to the current period presentation. For further information please refer to Note 3 to our consolidated financial statements.
Effective January 1, 2006, we implemented certain revisions to our consolidated financial statements to enhance the reader’s understanding of our financial results and to use a more consistent presentation with that of our peers. These revisions reflect certain reclassifications in our consolidated balance sheet and consolidated income statement, changes to our segment reporting, changes to operating profit methodology and changes to our consolidated cash flow statement. We applied these revisions to all three years of the Allianz Group’s consolidated financial statements. As a result, we have retrospectively applied these revisions to the Allianz Group’s consolidated financial statements as
of and for the years ended December 31, 2005 and 2004, as previously issued in connection with our Annual Report on Form 20-F for the year ended December 31, 2005, without any impact on our consolidated net income and shareholders’ equity for these years. See Note 3 to the consolidated financial statements for detailed information on the changes of our consolidated financial statements and the impact of these revisions. Our selected financial data as of and for the years ended December 31, 2005, 2004, 2003 and 2002 presented below also reflects these revisions, with the exception of total revenues and operating profit for the years ended December 31, 2003 and 2002. Total revenues and operating profit for the year ended December 31, 2003 are presented in accordance with our pre-2006 segment reporting structure and operating profit methodology, and accordingly do not reflect the retrospective application of our revised segment reporting structure and operating profit methodology, due to the unreasonable effort or expense required to prepare such information, in particular resulting from the implementation of our new Corporate segment. Total revenues and operating profit for the year ended December 31, 2002 are not presented, because total income and net income were the relevant performance measures used by the Allianz Group for 2002.
IFRS differ in certain significant respects from U.S. generally accepted accounting principles, which in this Annual Report on Form 20-F we refer to as “U.S. GAAP.” For a description of the significant differences between IFRS and U.S. GAAP as they relate to us and a reconciliation of our net income and shareholders’ equity under IFRS to U.S. GAAP, see Note 53 to our audited annual consolidated financial statements included herein.
Income Statement Total revenues(2) Property-Casualty Life/Health Banking Asset Management Consolidation Total Group Operating profit(5) Property-Casualty Life/Health Banking Asset Management Corporate Income (loss) before income taxes and minority interests in earnings Net income (loss)(6) Balance Sheet Investments Loans and advances to banks and customers Total assets Liabilities to banks and customers Reserves for loss and loss adjustment expenses Reserves for insurance and investment contracts Shareholders’ equity Minority interests Returns Return on equity after income taxes(7) Return on equity after income taxes and before goodwill amortization(7) Share Information Basic earnings per share(6) Diluted earnings per share(6) Weighted average number of shares outstanding Basic Diluted Shareholders’ equity per share Dividend per share Dividend payment Share price as of December 31(8) Market capitalization as of December 31 Other data Employees Third-party assets under management as of December 31 U.S. GAAP consolidated data Net income (loss) Basic earnings per share Diluted earnings per share Shareholders’ equity Shareholders’ equity per shareAs of or For the Years ended December 31, 2006 2006 Change from
previous year 2005 2004 2003 2002 $(1) € % € € € € (in millions, except per share data) € mn 59,007 43,674 (0.1 ) 43,699 42,942 43,420 (3) — (4) € mn 64,070 47,421 (1.8 ) 48,272 45,233 42,319 (3) — (4) € mn 9,577 7,088 12.2 6,318 6,576 6,704 (3) — (4) € mn 4,113 3,044 11.8 2,722 2,245 2,226 (3) — (4) € mn (132 ) (98 ) not meaningful (44 ) (47 ) (929 )(3) — (4) € mn 136,635 101,129 0.2 100,967 96,949 93,740 (3) — (4) € mn 8,470 6,269 21.9 5,142 4,825 2,397 (3) — (4) € mn 3,466 2,565 22.5 2,094 1,788 1,265 (3) — (4) € mn 1,921 1,422 102.0 704 447 (396 )(3) — (4) € mn 1,743 1,290 14.0 1,132 839 716 (3) — (4) € mn (1,123 ) (831 ) not meaningful (881 ) (870 ) — (3) — (4) € mn 13,947 10,323 31.9 7,829 5,044 3,812 (4,044 ) € mn 9,486 7,021 60.3 4,380 2,266 2,691 (3,243 ) € mn 402,809 298,134 4.6 285,015 254,085 237,682 239,220 € mn 551,624 408,278 21.2 336,808 377,223 378,295 329,195 € mn 1,423,014 1,053,226 6.5 989,288 990,959 933,802 848,753 € mn 487,852 361,078 16.4 310,316 348,484 332,906 284,598 € mn 88,448 65,464 (2.3 ) 67,005 62,331 62,782 65,961 € mn 388,707 287,697 3.4 278,312 251,497 233,896 225,049 € mn 68,205 50,481 27.8 39,487 29,995 27,993 21,046 € mn 8,659 6,409 (15.8 ) 7,615 7,696 7,266 7,965 % 15.6 15.6 3.0 12.6 7.8 11.0 (12.5 ) % 15.6 15.6 3.0 12.6 11.6 16.5 (8.3 ) € 23.09 17.09 52.0 11.24 6.19 7.96 (11.71 ) € 22.67 16.78 50.6 11.14 6.16 7.93 (11.71 ) mn 410.9 410.9 5.4 389.8 365.9 338.2 276.9 mn 418.3 418.3 6.4 393.3 368.1 339.8 276.9 € 166 123 21.8 101 82 83 76 € 5.13 3.80 90.0 2.00 1.75 1.50 1.50 € mn 2,219 1,642 102.5 811 674 551 374 € 209.10 154.76 21.0 127.94 97.60 100.08 80.80 € mn 90,362 66,880 28.7 51,949 35,936 (9) 36,743 (9) 22,039 (9) 166,505 166,505 (6.3 ) 177,625 176,501 173,750 181,651 € mn 1,032,044 763,855 2.8 742,937 584,624 564,714 560,588 € mn 8,805 6,517 76.5 3,693 2,881 2,245 (1,260 ) € 21.06 15.59 67.1 9.33 7.87 6.71 (4.79 ) € 20.78 15.38 66.1 9.26 7.83 6.70 (4.79 ) € mn 71,607 52,999 19.4 44,383 33,380 30,825 22,836 € 174 129 13.2 114 91 91 82
As of or For the Years ended December 31, | 2008 | 2008 | Change from previous year | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||
$(1) | € | % | € | € | € | € | ||||||||||||||||||
(in millions, except per share data) | ||||||||||||||||||||||||
Income Statement | ||||||||||||||||||||||||
Total revenues(2) | ||||||||||||||||||||||||
Property-Casualty | € | mn | 58,859 | 43,387 | (2.0 | ) | 44,289 | 43,674 | 43,699 | 42,942 | ||||||||||||||
Life/Health | € | mn | 61,881 | 45,615 | (7.6 | ) | 49,367 | 47,421 | 48,272 | 45,233 | ||||||||||||||
Banking | € | mn | 738 | 544 | (12.5 | ) | 622 | 604 | 6,318 | (3) | 6,576 | (3) | ||||||||||||
Asset Management | € | mn | 3,917 | 2,887 | (11.4 | ) | 3,259 | 3,044 | 2,722 | 2,245 | ||||||||||||||
Consolidation | € | mn | 156 | 115 | not meaningful | 144 | 130 | (44 | )(3) | (47 | )(3) | |||||||||||||
Total Group | € | mn | 125,551 | 92,548 | (5.3 | ) | 97,681 | 94,873 | 100,967 | (3) | 96,949 | (3) | ||||||||||||
Operating profit(4) | ||||||||||||||||||||||||
Property-Casualty | € | mn | 7,663 | 5,649 | (10.3 | ) | 6,299 | 6,269 | 5,142 | 4,825 | ||||||||||||||
Life/Health | € | mn | 1,636 | 1,206 | (59.7 | ) | 2,995 | 2,565 | 2,094 | 1,788 | ||||||||||||||
Banking | € | mn | (42 | ) | (31 | ) | not meaningful | 32 | 63 | 704 | (3) | 447 | (3) | |||||||||||
Asset Management | € | mn | 1,256 | 926 | (31.9 | ) | 1,359 | 1,290 | 1,132 | 839 | ||||||||||||||
Corporate | € | mn | (255 | ) | (188 | ) | 42.2 | (325 | ) | (831 | ) | (881 | ) | (870 | ) | |||||||||
Income (loss) from continuing operations before income taxes and minority interests in earnings | € | mn | 7,425 | 5,473 | (48.2 | ) | 10,563 | 9,563 | 7,829 | (3) | 5,044 | (3) | ||||||||||||
Net income (loss) from continuing operations(5) | € | mn | 5,382 | 3,967 | (45.8 | ) | 7,316 | 6,640 | — | — | ||||||||||||||
Net income (loss) from discontinued operations, net of income taxes and minority interests in earnings(5) | € | mn | (8,697 | ) | (6,411 | ) | not meaningful | 650 | 381 | — | — | |||||||||||||
Net income (loss)(6) | € | mn | (3,315 | ) | (2,444 | ) | not meaningful | 7,966 | 7,021 | 4,380 | 2,266 | |||||||||||||
Balance Sheet | ||||||||||||||||||||||||
Investments | € | mn | 352,915 | 260,147 | (9.3 | ) | 286,952 | 298,134 | 285,015 | 254,085 | ||||||||||||||
Loans and advances to banks and customers | € | mn | 156,898 | 115,655 | (70.8 | ) | 396,702 | 423,765 | 359,610 | 406,218 | ||||||||||||||
Total assets | € | mn | 1,296,334 | 955,576 | (9.9 | ) | 1,061,149 | 1,110,081 | 1,054,656 | 1,058,612 | ||||||||||||||
Liabilities to banks and customers | € | mn | 25,031 | 18,451 | (94.5 | ) | 336,494 | 376,565 | 333,118 | 377,480 | ||||||||||||||
Reserves for loss and loss adjustment expenses | € | mn | 86,719 | 63,924 | 0.3 | 63,706 | 65,464 | 67,005 | 62,331 | |||||||||||||||
Reserves for insurance and investment contracts | € | mn | 402,309 | 296,557 | 1.5 | 292,244 | 287,032 | 277,647 | 251,497 | |||||||||||||||
Shareholders’ equity | € | mn | 45,696 | 33,684 | (29.5 | ) | 47,753 | 49,650 | 38,656 | 29,995 | ||||||||||||||
Minority interests | € | mn | 4,835 | 3,564 | (1.8 | ) | 3,628 | 7,180 | 8,386 | 7,696 | ||||||||||||||
Returns | ||||||||||||||||||||||||
Return on equity after income taxes(7) | % | 9.7 | 9.7 | (8) | (5.3 | ) pts | 15.0 | (8) | 15.0 | (8) | 12.9 | 7.8 | ||||||||||||
Return on equity after income taxes and before goodwill amortization(7) | % | 9.7 | 9.7 | (8) | 6.7 | pts | 15.0 | (8) | 15.0 | (8) | 12.9 | 11.6 | ||||||||||||
Share Information | ||||||||||||||||||||||||
Basic earnings per share(6) | € | (7.37 | ) | (5.43 | ) | not meaningful | 18.00 | 17.09 | 11.24 | 6.19 | ||||||||||||||
Diluted earnings per share(6) | € | (7.42 | ) | (5.47 | ) | not meaningful | 17.71 | 16.78 | 11.14 | 6.16 | ||||||||||||||
Weighted average number of shares outstanding | ||||||||||||||||||||||||
Basic | mn | 450.2 | 450.2 | 1.7 | 442.5 | 410.9 | 389.8 | 365.9 | ||||||||||||||||
Diluted | mn | 456.0 | 456.0 | 1.4 | 449.6 | 418.3 | 393.3 | 368.1 | ||||||||||||||||
Shareholders’ equity per share | € | 102 | 75 | (30.6 | ) | 108 | 121 | 99 | 82 | |||||||||||||||
Dividend per share | € | 4.75 | 3.50 | (9) | (36.4 | ) | 5.50 | 3.80 | 2.00 | 1.75 | ||||||||||||||
Total dividend | € | mn | 2,152 | 1,586 | (9) | (35.9 | ) | 2,476 | 1,642 | 811 | 674 | |||||||||||||
Share price as of December 31 | € | 101.75 | 75.00 | (49.3 | ) | 147.95 | 154.76 | 127.94 | 97.60 | |||||||||||||||
Market capitalization as of December 31(10) | € | mn | 46,096 | 33,979 | (49.0 | ) | 66,600 | 66,880 | 51,949 | 35,936 | (11) | |||||||||||||
Other data | ||||||||||||||||||||||||
Employees | 182,865 | 182,865 | 0.9 | 181,207 | 166,505 | 177,625 | 176,501 | |||||||||||||||||
Third-party assets under management as of December 31 | € | mn | 954,338 | 703,478 | (8.0 | ) | 764,621 | 763,855 | 742,937 | 584,624 |
(1) | Amounts given in Euros have been translated for convenience only into U.S. Dollars at the rate of |
(2) | Total revenues comprise Property-Casualty segment’s gross premiums written, Life/Health segment’s statutory premiums, Banking segment’s operating revenues and Asset Management segment’s operating revenues. Please refer to “Operating and Financial Review and Prospects—Introduction” for a reconciliation of total revenues to premiums written for the Allianz Group. |
(3) |
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(4) |
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| The Allianz Group uses operating profit to evaluate the performance of its business segments. For further information on operating profit, as well as the particular reconciling items between operating profit and net income, |
(5) | Following the announcement of the sale on August 31, 2008, Dresdner Bank qualified as held-for-sale and discontinued operations. Therefore, all revenue and profit figures presented for our continuing business do not include the parts of Dresdner Bank that we sold to Commerzbank on January 12, 2009. Starting as of 2006 the results from these operations are presented in a separate net income line “net income from discontinued operations, net of income taxes and minority interests in earnings”. |
(6) | Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized. |
(7) | Based on average shareholders’ equity. Average shareholders’ equity has been calculated based upon the average of the current and preceding year’s shareholders’ equity. |
(8) | Based on net income from continuing operations. |
(9) | Subject to final approval at Annual General Meeting. |
(10) | Source: Thomson |
| Excluding treasury shares. |
The following table sets forth the annual dividends declared in 2008 and paid in prior years per ordinary share and American Depositary Share (or “ADS”) equivalent for 20022004 through 2006.2008. The table does not reflect the related tax credits available to German taxpayers. SeeRefer to “Additional Information—German Taxation—Taxation of Dividends.”
Dividend per ordinary share | Dividend paid per ADS equivalent | |||||||
€ | $ | € | $ | |||||
2002 | 1.50 | 1.76 | 0.150 | 0.176 | ||||
2003 | 1.50 | 1.82 | 0.150 | 0.182 | ||||
2004 | 1.75 | 2.27 | 0.175 | 0.227 | ||||
2005 | 2.00 | 2.43 | 0.200 | 0.243 | ||||
2006(1) | 3.80 | 5.13 | 0.380 | 0.513 |
Dividend per ordinary share | Dividend paid per ADS equivalent | |||||||
€ | $ | € | $ | |||||
2004 | 1.75 | 2.27 | 0.175 | 0.227 | ||||
2005 | 2.00 | �� | 2.43 | 0.200 | 0.243 | |||
2006 | 3.80 | 5.13 | 0.380 | 0.513 | ||||
2007 | 5.50 | 8.45 | 0.550 | 0.845 | ||||
2008(1)(2) | 3.50 | 4.75 | 0.350 | 0.475 |
(1) | Dividend amounts given in Euros have been translated for convenience only into U.S. Dollars at the rate of |
(2) | Subject to final approval at the Annual General Meeting. |
The ability to pay future dividends will depend upon our future earnings, financial condition (including our cash needs), prospects and other factors. You should not assume that any dividends will actually be paid or make any assumptions about the amount of dividends which will be paid in any given year. SeeRefer to “Financial Information—Dividend Policy.”
The table below sets forth, for the periods indicated, information concerning the noon buying rates for the Euro expressed in U.S. Dollars per €1.00. No representation is made that the Euro or U.S. Dollar amounts referred to herein could be or could have been converted into U.S. Dollars or Euros, as the case may be, at any particular rate or at all.
High | Low | Period average(1) | Period end | |||||
($ per €1.00) | ||||||||
2002 | 1.0485 | 0.8594 | 0.9454 | 1.0485 | ||||
2003 | 1.2597 | 1.0361 | 1.1321 | 1.2597 | ||||
2004 | 1.3625 | 1.1801 | 1.2478 | 1.3538 | ||||
2005 | 1.3476 | 1.1667 | 1.2400 | 1.1842 | ||||
2006 | 1.3327 | 1.1860 | 1.2481 | 1.3197 | ||||
September | 1.2833 | 1.2648 | 1.2847 | 1.2687 | ||||
October | 1.2773 | 1.2502 | 1.2759 | 1.2773 | ||||
November | 1.3261 | 1.2705 | 1.3016 | 1.3261 | ||||
December | 1.3327 | 1.3073 | 1.3257 | 1.3197 | ||||
2007 | ||||||||
January | 1.3286 | 1.2904 | 1.3142 | 1.2998 | ||||
February | 1.3246 | 1.2933 | 1.3126 | 1.3230 | ||||
March | 1.3374 | 1.3094 | 1.3274 | 1.3374 | ||||
April | 1.3660 | 1.3363 | 1.3517 | 1.3660 | ||||
May (until May 18, 2007) | 1.3616 | 1.3494 | 1.3556 | 1.3511 |
High | Low | Period average(1) | Period end | |||||
($ per €1.00) | ||||||||
2004 | 1.3625 | 1.1801 | 1.2478 | 1.3538 | ||||
2005 | 1.3476 | 1.1667 | 1.2400 | 1.1842 | ||||
2006 | 1.3327 | 1.1860 | 1.2661 | 1.3197 | ||||
2007 | 1.4862 | 1.2904 | 1.3797 | 1.4603 | ||||
2008 | 1.6010 | 1.2446 | 1.4695 | 1.3919 | ||||
September | 1.4737 | 1.3939 | 1.4302 | 1.4081 | ||||
October | 1.4058 | 1.2446 | 1.3370 | 1.2682 | ||||
November | 1.3039 | 1.2525 | 1.2706 | 1.2694 | ||||
December | 1.4358 | 1.2634 | 1.3276 | 1.3919 | ||||
2009 | ||||||||
January | 1.3718 | 1.2804 | 1.3190 | 1.2804 | ||||
February | 1.3064 | 1.2547 | 1.2735 | 1.2662 | ||||
March (until March 20, 2009) | 1.3730 | 1.2549 | 1.2880 | 1.3566 |
(1) | Computed using the average of the noon buying rates for Euros on the last business day of each month during the relevant annual period or on the first and last business days of each month during the relevant monthly period. Noon buying rates are as published on a weekly basis by the Federal Reserve Bank of New York. On January 1, 2009, the Federal Reserve Bank discontinued daily publication of noon buying rates. |
On May 18, 2007,March 20, 2009, the noon buying rate for the Euro was $1.3511.$1.3566.
You should carefully review the following risk factors together with the other information contained in this annual report before making an investment decision. Our financial position and results of operations may be materially adversely affected by each of these risks. The market price of our ADSs may decline as a result of each of these risks and investors may lose the value of their investment in whole or in part. Additional risks not currently known to us or that we now deem immaterial may also adversely affect our business and your investment.
Risks arising from the financial markets
The share price of Allianz SE has been and may continue to be volatile.
The share price of Allianz SE has been volatile in the past, in particular over the last year. The share price and trading volume of our common stock may continue to be subject to significant fluctuations due in part to the high volatility in the securities markets generally, and in financial institutions’ shares in particular, as well as developments which impact our financial results. Factors other than our financial results that may affect our share price include but are not limited to: market expectations of the performance and capital adequacy of financial institutions generally; investor perception of and the actual performance of other financial institutions; investor perception of the success and impact of our strategy; a downgrade or rumored downgrade of our credit ratings; potential litigation or regulatory action involving the Allianz Group or any of the industries we have exposure to through our insurance, banking and asset management activities; announcements concerning the bankruptcy or other similar reorganization proceedings involving, or any investigations into the accounting practices of, other insurance or reinsurance companies, banks or asset management companies; and general market volatility and liquidity conditions.
Allianz Group’s financial condition, liquidity needs, access to capital and cost of capital may be significantly affected by adverse developments in the capital and credit markets.
The capital and credit markets have been experiencing extreme volatility and disruption for
more than eighteen months. In the second half of 2008, the volatility and disruption reached unprecedented levels. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers. The ability of Allianz Group to meet its financing needs in this environment depends on the availability of funds in the international capital markets. The financing of Allianz Group’s activities includes, among other means, funding through commercial paper facilities and medium- and long-term debt issuances. A sustained break-down of such markets could have a materially adverse impact on the availability and cost of funding as well as on the refinancing structure of Allianz Group. The availability of financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long- or short-term financial prospects if we incur large investment losses or if the level of our business activity decreased due to a market downturn. Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. Our internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain additional financing on favorable terms, or at all.
In addition, the ability of Allianz Group to meet its financial needs also depends on the availability of funds across the Group (e.g., in the form of intra-Group loans or an international cash pooling infrastructure). A worldwide persistent collapse of financial markets and downturn affecting many of the Group’s operating entities, however, may reduce the Group’s flexibility in internally transferring funds.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business, most significantly our insurance operations. Such market conditions may limit our ability to: replace, in a timely manner, maturing liabilities; satisfy regulatory capital requirements; generate fee income and market-related revenue to meet liquidity needs; and access the capital necessary to grow our business. As
such, we may be forced to delay raising capital, issue shorter duration securities than we prefer, or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. Our results of operations, financial condition and regulatory capital position could be materially adversely affected by disruptions in the financial markets.
Furthermore, a limited amount of Allianz Group’s funds is invested in private equity or other alternative assets classes. The value of these investments may be impacted by the current turbulence in the financial markets. Therefore, it may be difficult to renew the debt structure of leveraged investments.
The Allianz Group has been and may continue to be adversely affected by ongoing turbulence and volatility in the world’s financial markets and the economy generally, and we do not expect these conditions to improve in the near future.
Our results of operations are materially affected by conditions in the global capital markets and the economy generally, both in Germany and elsewhere around the world. The stress experienced in the global capital markets that started in the second half of 2007 continued and substantially increased throughout 2008 and continues in 2009. The crisis in the mortgage market in the United States, triggered by a serious deterioration of credit quality, led to a revaluation of credit risks. These conditions have resulted in greater volatility, widening of credit spreads and overall shortage of liquidity and tightening of financial markets throughout the world. In addition, the prices for many types of asset-backed securities (ABS) and other structured products have significantly deteriorated. Some of those markets are not working any longer or have ceased to exist entirely. These concerns have since expanded to include a broad range of fixed-income securities, including those rated investment grade, the international credit and interbank money markets generally, and a wide range of financial institutions and markets, asset classes and sectors. As a result, the market for fixed-income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. Securities that are less liquid are more difficult to value and may be hard to dispose of. International equity markets have also been
experiencing heightened volatility and turmoil, with issuers, including ourselves, that have exposure to the real estate, mortgage and credit markets particularly affected. These events and the continuing market upheavals have had and may continue to have an adverse effect on us, in part, because our large investment portfolio and our former banking subsidiary, Dresdner Bank, had exposure to U.S. mortgage-related structured investment products, including subprime, midprime and prime residential mortgage-backed securities (RMBS), collateralized debt obligations (CDOs), monoline insurer guarantees, structured investment vehicles (SIVs) and other investments. As a result, we recorded significant negative revaluations in 2007 and 2008 on the investment portfolio of Dresdner Bank, and in connection with our sale of Dresdner Bank to Commerzbank, we have retained exposure to certain of these types of assets, including Dresdner Bank-related CDOs with a face value of €2 billion, which we acquired for approximately €1.1 billion. Accordingly, there can be no assurance that we will not incur further impairments of these assets. For details regarding the impact of the financial market crisis on the Allianz Group’s 2008 results and its ongoing exposure, please refer to “Operating and Financial Review and Prospects—Executive Summary—Impact of the financial markets turbulence.”
In addition, concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining real estate market in the United States and other regions have contributed to increased volatility and diminished expectations for the economy in general and the markets going forward. These factors, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have precipitated a substantial economic slowdown and fears of a potential global recession. Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our financial and insurance products could be adversely affected. In addition, we may
experience an elevated incidence of claims and lapses or surrenders of policies. Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Moreover, we are a significant writer of unit-linked and other investment-oriented products, for which sales have decreased due to customer concerns regarding their exposure to the financial markets. Adverse changes in the economy could affect our earnings negatively and could have a material adverse effect on our business, results of operations, financial condition and shareholders’ equity.
Interest rate volatility may adversely affect Allianz Group’s results of operations.
Changes in prevailing interest rates (including changes in the difference between the levels of prevailing short- and long-term rates) canmay adversely affect Allianz Group’s insurance, asset management, banking and corporate results.
Over the past several years and in particular during the recent global credit crisis, movements in both short- and long-term interest rates have affected the level and timing of recognition of gains and losses on securities held in Allianz Group’s various investment portfolios. An increase in interest rates could substantially decrease the value of Allianz Group’s fixed incomefixed-income portfolio, and any unexpected change in interest rates could materially adversely affect Allianz Group’s bond and interest rate derivative positions. Results of Allianz Group’s asset management business may also be affected by movements in interest rates, as management fees are generally based on the value of assets under management, which fluctuate with changes in the level of interest rates.
The short-term impact of interest rate fluctuations on Allianz Group’s life/health insurance business may be reduced in part by products designed to partly or entirely transfer Allianz Group’s exposure to interest rate movements to the policyholder. While product design reduces Allianz Group’s exposure to interest rate volatility, changes in interest rates will impact this business to the extent they result in changes to current interest income, impact the value of Allianz Group’s fixed incomefixed-income portfolio, and affect the levels of new product sales or surrenders of business in force. In addition,
reductions in the investment income below the rates
prevailing at the issue date of the policy, or below the regulatory minimum required rates in countries such as Germany and Switzerland, would reduce or eliminate the profit margins on the life/health insurance business written by Allianz Group’s life/health subsidiaries to the extent the maturity composition of the assets does not match the maturity composition of the insurance obligations they are backing.
In addition, the composition of Allianz Group’s banking assets and liabilities, and any mismatches resulting from that composition, cause the net income of Allianz Group’s banking operations to vary with changes in interest rates. Allianz Group is particularly impacted by changes in interest rates as they relate to different maturities of contracts and the different currencies in which Allianz Group holds interest rate positions. A mismatch with respect to maturity of interest-earning assets and interest-bearing liabilities in any given period can have a material adverse effect on the financial position or results of operations of Allianz Group’s banking business.
MarketWe are exposed to significant market risks that could impair the value of Allianz Group’s portfolio and adversely impact Allianz Group’s financial position and results of operations.
Allianz Group holds a significant equity portfolio, which represented approximately 19%9.1% of Allianz Group’s financial assets at December 31, 2006,2008, excluding financial assets and liabilities carried at fair value through income. FluctuationsVolatility in equity markets, which have reached unprecedented levels in recent months, affect the market value and liquidity of these holdings. Allianz Group also has real estate holdings in its investment portfolio, the value of which is likewise exposed to changes in real estate market prices and volatility.
Most of Allianz Group’s financial assets and liabilities are recorded at fair value, including trading assets and liabilities, financial assets and liabilities designated at fair value through income, and securities available-for-sale. Changes in the value of securities held for trading purposes and financial assets designated at fair value through income are recorded through Allianz Group’s consolidated income statement. Changes in the market value of
securities available-for-sale are recorded directly in Allianz Group’s consolidated shareholders’ equity. Available-for-sale equity and fixed incomefixed-income securities, as well as securities classified as held-to-maturity, are reviewed regularly for impairment, with write-downs to fair value charged to income if there is objective evidence that the cost may not be recovered. SeeRefer to “Operating and Financial Review—Critical Accounting Policies and Estimates” and Note 2 to the consolidated financial statements for further information concerning Allianz Group’s significant accounting and valuation policies.
Market As a result of the world financial crisis, which has been characterized by significant declines of market prices of securities and other factors could adversely affect goodwill, deferred policy acquisition costs and deferred tax assets; Allianz Group’s deferred taxfinancial assets, are also potentially impacted by changes in tax legislation.
Business and market conditions may impact the amount of goodwill Allianz Group carries in its consolidated financial statements. As of December 31, 2006, Allianz Group haswe have recorded goodwill in an aggregate amount of €12,007 million, of which €6,272 million relates to its asset management business, €3,965 million relates to its insurance business, €1,626 million relates to its banking business, and €144 million relates to its corporate segment.
As the value of certain parts of Allianz Group’s businesses, including in particular Allianz Group’s banking and asset management businesses, are significantly impacted by such factors as the state of financial markets and ongoing operating performance, significant declines in financial markets or operating performance could also result in impairment of other goodwill carried by us and result in significant write-downs, which could be material. Nosubstantial impairments, were recorded for goodwill in 2006.
The assumptions Allianz Group made with respect to recoverability of deferred policy acquisition costs (“DAC”) are also affected by such factors as operating performance and market conditions. DAC is incurred in connection with the production of new and renewal insurance business and is deferred and amortized generally in proportion to profits or to premium income expected to be generated over the life of the underlying policies, depending on the classification of the product. If the assumptions on which expected profits are based
prove to be incorrect, it may be necessary to accelerate amortization of DAC, even to the extent of writing down DAC through impairments, which could materially adversely affect results of operations. No impairments were recorded for DAC in 2006.
As of December 31, 2006, Allianz Group had a total of €4,727 million in net deferred tax assets and €4,618 million in net deferred tax liabilities. The calculation of the respective tax assets and liabilities is based on current tax laws and IFRS and depends on the performance of the Allianz Group as a whole and certain business units in particular. At December 31, 2006, €4,128 million of deferred tax assets depended on the ability to use existing tax-loss carry forwards.
Changes in German or other tax legislation or regulations or an operating performance below currently anticipated levels may lead to a significant impairment of deferred tax assets, in which case Allianz Group could be obligated to write-off certain tax assets. Tax assets may also need to be written-down if certain assumptions of profitability prove to be incorrect, as losses incurred for longer than expected will make the usability of tax assets more unlikely. Any such development may have a material adverse impact on Allianz Group’s results of operations.
Loss reserves for Allianz Group’s property-casualty insurance and reinsurance policies are based on estimates as to future claims liabilities. Adverse developments relating to claims could lead to further reserve additions and materially adversely impact Allianz Group’s results of operations.
In accordance with industry practice and accounting and regulatory requirements, Allianz Group established reserves for losses and loss adjustment expenses related to its property-casualty insurance and reinsurance businesses, including property-casualty business in run-off. Reserves are based on estimates of future payments that will be made in respect of claims, including expenses relating to such claims. Such estimates are made both on a case-by-case basis, based on the facts and circumstances available at the time the reserves are established, as well as in respect of losses that have been incurred but not reported (“IBNR”) to the Allianz Group. These reserves represent the
estimated ultimate cost necessary to bring all pending reportedwhich have adversely affected our results of operations, shareholders’ equity and IBNR claims to final settlement.
Reserves, including IBNR reserves, are subject to change due tofinancial position. We also hold interests in a number of variables that affectfinancial institutions as part of our portfolio, which have been particularly exposed to the ultimate cost of claims, such as changes inuncertain current market conditions affecting the legalfinancial services sector generally. Until the global economic environment results of litigation, changes in medical costs, costs of repairs and other factors such as inflation and exchange rates, and Allianz Group’s reserves for asbestos and environmental and other latent claims are particularly subject to such variables. Allianz Group’s results of operations depend significantly upon the extent to which Allianz Group’s actual claims experience is consistent with the assumptions Allianz Group uses in setting the prices for products and establishing the liabilities for obligations for technical provisions and claims. To the extent that Allianz Group’s actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, Allianz Group may be required to increase its reserves, which may materially adversely affect its results of operations.
Established loss reserves estimates are periodically adjusted in the ordinary course of settlement, using the most current information available to management, and any adjustments resulting from changes in reserve estimates are reflected in current results of operations. Allianz Group also conducts reviews of various lines of business to consider the adequacy of reserve levels. Based on current information available to us and on the basis of Allianz Group’s internal procedures, Allianz Group’s management considers that Allianz Group’s reserves are adequate at December 31, 2006. However, because the establishment of reserves for loss and loss adjustment expenses is an inherently uncertain process,improves, there can be no assurance that ultimate losseswe will not materially exceedcontinue to incur similar significant impairments on the established reserves for loss and loss adjustment expenses and have a material adverse effect on Allianz Group’s resultsvalue of operations.
Actuarial experiencethe securities and other factors could differ fromfinancial assets that assumed in the calculation of life/health actuarial reserves and pension liabilities.
The assumptions Allianz Group makes in assessing its life/health insurance reserves may differ from what we experience in the future. Allianz Group derive its life/health insurance reserves using “best estimate” actuarial practices and assumptions. These
assumptions include the assessment of the long-term development of interest rates, investment returns, the allocation of investments between equity, fixed income and other categories, policyholder bonus rates (some of which are guaranteed), mortality and morbidity rates, policyholder lapses and future expense levels. Allianz Group monitors its actual experience of these assumptions and to the extent that it considers that this experience will continue in the longer term it refines its long-term assumptions. Similarly, estimates of Allianz Group’s own pension obligations necessarily depend on assumptions concerning future actuarial, demographic, macroeconomic and financial markets developments. Changes in any such assumptions may lead to changes in the estimates of life/health insurance reserves or pension obligations.
We have a significant portfolio of contracts with guaranteed investment returns, including endowment and annuity products for the German market as well as certain guaranteed contracts in other markets. The amounts payable by us at maturity of an endowment policy in Germany and in certain other markets include a “guaranteed benefit,” an amount that, in practice, is equal to a legally mandated maximum rate of return on actuarial reserves. If interest rates decline to historically low levels for a long period, we could be required to provide additional funds to Allianz Group’s life/health subsidiaries to support their obligations in respect of products with higher guaranteed returns, or increase reserves in respect of such products, which could in turn have a material adverse effect on Allianz Group’s results of operations.
In the United States, we have a significant portfolio of contracts with guaranteed investment returns indexed to equity markets. We enter into derivative contracts as a means of mitigating the risk of investment returns underperforming guaranteed returns. However, there can be no assurance that the hedging arrangements will satisfy the returns guaranteed to policyholders, which could in turn have a material adverse effect on Allianz Group’s results of operations.
Allianz Group’s financial results may be materially adversely affected by the occurrence of catastrophes.
Portions of Allianz Group’s property-casualty insurance may cover losses from unpredictable
events such as hurricanes, windstorms, hailstorms, earthquakes, fires, industrial explosions, freezes, riots, floods and other man-made or natural disasters, including acts of terrorism. The incidence and severity of these catastrophes in any given period are inherently unpredictable.
Although the Allianz Group monitors its overall exposure to catastrophes and other unpredictable events in each geographic region, each of Allianz Group’s subsidiaries independently determines, within the Allianz Group’s limit framework, its own underwriting limits related to insurance coverage for losses from catastrophic events. We generally seek to reduce Allianz Group’s potential losses from these events through the purchase of reinsurance, selective underwriting practices and by monitoring risk accumulation. However, such efforts to reduce exposure may not be successful and claims relating to catastrophes may result in unusually high levels of losses and could have a material adverse effect on Allianz Group’s financial position or results of operations.hold.
We have significant counterparty risk exposure.exposure, which could adversely affect Allianz Group.
We are subject to a variety of counterparty risks, including:
General Credit Risks. Third-parties that owe us money, securities or other assets may not pay or perform under their obligations. These parties include the issuers whose securities we hold, borrowers under loans made, customers, trading counterparties, counterparties under swaps, credit default and other derivative contracts, clearing agents, exchanges, clearing houses and other financial intermediaries. TheseAs a result, defaults by one or more of these parties may default on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure or other reasons.reasons, or even rumors about potential defaults by one or more of these parties or regarding the financial services industry generally, could lead to losses or defaults by us or by other institutions. In addition, with respect to secured transactions, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure. We also have exposure to a number of financial institutions in the form of unsecured debt instruments, derivative transactions and equity investments. There is no assurance that losses on, or impairments to the carrying value of, these assets would not materially and adversely affect our business or results of operations.
Reinsurers. We transfer our exposure to certain risks in itsour property-casualty and life/health insurance business to others through reinsurance arrangements. Under these arrangements, other insurers assume a portion of Allianz Group’s losses and expenses associated with reported and unreported
losses in exchange for a portion of policy premiums. The availability, amount and cost of reinsurance depend on general market conditions and may vary significantly.significantly from time to time. Any decrease in the amount of Allianz Group’s reinsurance will increase its risk of loss.
When we obtain reinsurance, we are still liable for those transferred risks if the reinsurer cannot meet its obligations. Accordingly, we bear credit risk with respect to our reinsurers. Therefore, the inability or unwillingness of Allianz Group’s reinsurers to meet their financial obligations, or the insolvency of Allianz Group reinsurers, could materially affect Allianz Group’s results of operations. Although Allianz Group conducts periodic reviews of the financial statements and reputations of its reinsurers, including, and as appropriate, requiring letters of credit, deposits or other financial measurescollaterals to further minimize its exposure to credit risk, reinsurers may become financially unsound by the time they are called upon to pay amounts due.
ManyChanges in value relative to the Euro of non-Euro zone currencies in which we generate revenues and incur expenses could adversely affect our reported earnings and cash flow.
We prepare our consolidated financial statements in Euro. However, a significant portion of the revenues and expenses from our subsidiaries outside the Euro zone, including in the United States, Switzerland and the United Kingdom, originates in currencies other than the Euro. We expect this trend to continue as we expand our business into growing non-Euro zone markets. For the year ended December 31, 2008, approximately 38.6% of our gross premiums written in our property-casualty segment and 26.8% of our statutory premiums in our life/health segment originated in currencies other than the Euro. Furthermore, as of December 31, 2008, 59.0% of the third-party assets under management in the Asset Management segment are in the United States.
As a result, although our non-Euro zone subsidiaries generally record their revenues and expenses in the same currency, changes in the exchange rates used to translate foreign currencies into Euro may adversely affect our results of operations.
Risks arising from the nature of our business
Loss reserves for Allianz Group’s property-casualty insurance and reinsurance policies are based on estimates as to future claims liabilities. Adverse developments relating to claims could lead to further reserve additions and materially adversely impact Allianz Group’s results of operations.
In accordance with industry practice and accounting and regulatory requirements, Allianz Group establishes reserves for losses and loss adjustment expenses related to its property-casualty insurance and reinsurance businesses, including property-casualty business in run-off. Reserves are dependentbased on estimates of future payments that will be made in respect of claims, including expenses relating to such claims. Such estimates are made both on a case-by-case basis, based on the financial strengthfacts and credit ratings assignedcircumstances available at the time the reserves are established, as well as in respect of losses that have been incurred but not reported (IBNR) to usthe Allianz Group. These reserves represent the estimated ultimate cost necessary to bring all pending reported and our businesses by various rating agencies. Therefore,IBNR claims to final settlement.
Reserves, including IBNR reserves, are subject to change due to a downgradenumber of variables that affect the ultimate cost of claims, such as changes in our ratingsthe legal environment, results of litigation, changes in medical costs, costs of repairs and other factors such as inflation and exchange rates, and Allianz Group’s reserves for asbestos and environmental and other latent claims are particularly subject to such variables. Allianz Group’s results of operations depend significantly upon the extent to which Allianz Group’s actual claims experience is consistent with the assumptions Allianz Group uses in setting the prices for products and establishing the liabilities for obligations for technical provisions and claims. To the extent that Allianz Group’s actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, Allianz Group may be required to increase its reserves, which may materially adversely affect relationships with customersits results of operations.
Established loss reserves estimates are periodically adjusted in the ordinary course of settlement, using the most current information available to management, and intermediaries, negatively impact salesany adjustments resulting from changes in reserve estimates are reflected in current results of our productsoperations. Allianz
Group also conducts reviews of various lines of business to consider the adequacy of reserve levels. Based on current information available to us and increase our coston the basis of borrowing.Allianz Group’s internal procedures, Allianz Group’s management considers that Allianz Group’s reserves are adequate at December 31, 2008. However, because the establishment of reserves for loss and loss adjustment expenses is an inherently uncertain process, there can be no assurance that ultimate losses will not materially exceed the established reserves for loss and loss adjustment expenses and have a material adverse effect on Allianz Group’s results of operations.
Actuarial experience and other factors could differ from that assumed in the calculation of life/health actuarial reserves and pension liabilities.
Claims paying abilityThe assumptions Allianz Group makes in assessing its life/health insurance reserves may differ from what we experience in the future. Allianz Group derives its life/health insurance reserves using “best estimate” actuarial practices and assumptions. These assumptions include the assessment of the long-term development of interest rates, investment returns, the allocation of investments between equity, fixed-income and other categories, policyholder bonus rates (some of which are guaranteed), mortality and morbidity rates, policyholder lapses and future expense levels. Allianz Group monitors its actual experience of these assumptions and to the extent that it considers that this experience will continue in the longer term it refines its long-term assumptions. Similarly, estimates of Allianz Group’s own pension obligations necessarily depend on assumptions concerning future actuarial, demographic, macroeconomic and financial strength ratings are each a factormarkets developments. Changes in establishingany such assumptions may lead to changes in the competitive positionestimates of insurers. Our financial strength rating haslife/health insurance reserves or pension obligations.
We have a significant impactportfolio of contracts with guaranteed investment returns, including endowment and annuity products for the German market as well as certain guaranteed contracts in other markets. The amounts payable by us at maturity of an endowment policy in Germany and in certain other markets include a “guaranteed benefit,” an amount that, in practice, is equal to a legally mandated maximum rate of return on the individual ratingsactuarial reserves. If interest rates decline to historically low levels for a long period, we could be required to provide additional funds to
Allianz Group’s life/health subsidiaries to support their obligations in respect of key subsidiaries. Ifproducts with higher guaranteed returns, or increase reserves in respect of such products, which could in turn have a ratingmaterial adverse effect on Allianz Group’s results of certain subsidiaries falls below a certain threshold, the respective operating business may be significantly impacted. A ratings downgrade, or the potential for such a downgrade, of the Allianz Group or any of our insurance subsidiaries could, among other things, adversely affect relationships with agents, brokers and other distributors of our products and services, thereby negatively impacting new sales, adversely affect our ability to compete in our markets and increase our cost of borrowing. operations.
In particular, in those countries where primary distribution of our products is done through independent agents, such as the United States, future ratings downgrades could adversely impact salesin particular in our variable and fixed-indexed annuity products, and to a lesser extent in Europe and Asia we have a portfolio of our life insurance products. Any future ratings downgrades could also materially adversely affect our costcontracts with guaranteed investment returns tied to equity markets. We enter into derivative contracts as a means of raising capital, andmitigating the risk of investment returns underperforming guaranteed returns. However, there can be no assurance that the hedging arrangements will satisfy the returns guaranteed to policyholders, which could in addition, give rise to additional financial obligations or accelerate existing financial obligations which are dependentturn have a material adverse effect on maintaining specified rating levels.
Rating agencies can be expected to continue to monitorAllianz Group’s results of operations. For example, in 2008, our financial strengthUS variable annuity business experienced a negative impact of higher guarantee reserves, net of hedging and claims paying ability, and no assurances can be given that future
ratings downgrades will not occur, whether due to changes in our performance, changes in rating agencies’ industry views or ratings methodologies, or a combinationDAC amortization, of such factors.approximately USD -238mn.
If our asset management business underperforms, it may experience a decline in assets under management and related fee income.
While the assets under management in our asset management segment include a significant amount of funds related to our insurance operations, third-party assets under management represent the majority. Results of our asset management activities are affected by share prices, share valuation, interest rates and market volatility. In addition, third-party funds are subject to withdrawal in the event our investment performance is not competitive with other asset management firms. Accordingly, fee income from the asset management business might decline if the level of our third-party assets under management were to decline due to investment performance or otherwise.
Risks arising from the environment and the geopolitical situation
Allianz Group’s financial results may be materially adversely affected by the occurrence of catastrophes.
Portions of Allianz Group’s property-casualty insurance may cover losses from unpredictable events such as hurricanes, windstorms, hailstorms, earthquakes, fires, industrial explosions, freezes, riots, floods and other man-made or natural disasters,
including acts of terrorism. The incidence and severity of these catastrophes in any given period are inherently unpredictable.
Although the Allianz Group monitors its overall exposure to catastrophes and other unpredictable events in each geographic region, each of Allianz Group’s subsidiaries independently determines, within the Allianz Group’s limit framework, its own underwriting limits related to insurance coverage for losses from catastrophic events. We generally seek to reduce Allianz Group’s potential losses from these events through the purchase of reinsurance, selective underwriting practices and by monitoring risk accumulation. However, such efforts to reduce exposure may not be successful and claims relating to catastrophes may result in unusually high levels of losses and could have a material adverse effect on Allianz Group’s financial position or results of operations.
Increased geopolitical risks following the terrorist attack of September 11, 2001, and any future terrorist attacks, could have a continuing negative impact on our businesses.
After September 11, 2001, several terror insurance pools have been set up and reinsurers generally either put terrorism exclusions into their policies or drastically increased the price for such coverage. Although we have attempted to exclude terrorist coverage from policies we write, this has not been possible in all cases, including as a result of legislative developments such as the Terrorism Risk Insurance Act in the United States. Furthermore, even if terrorism exclusions are permitted in our primary insurance policies, we may still have liability for fires and other consequential damage claims that follow an act of terrorism itself. As a result we may have liability under primary insurance policies for acts of terrorism and may not be able to recover a portion or any of our losses from our reinsurers.
At this time, we cannot assess the future effects of terrorist attacks, potential ensuing military and other responsive actions, and the possibility of further terrorist attacks, on our businesses. Such matters have significantly adversely affected general economic, market and political conditions, increasing many of the risks in our businesses noted in the
previous risk factors. This may have a material negative effect on our businesses and results of
operations over time.time, in particular the value of our investments may be negatively affected by any market downturn after a terrorist attack.
Risks arising from legal and regulatory conditions
Changes in existing, or new, government laws and regulations, or enforcement initiatives in respect thereof, in the countries in which we operate may materially impact us and could adversely affect our business.
Our insurance, bankingasset management and asset managementbanking businesses are subject to detailed, comprehensive laws and regulationregulations as well as supervision in all the countries in which we do business. Changes in existing laws and regulations may affect the way in which we conduct our business and the products we may offer. Changes in regulations relating to pensions and employment, social security, financial services including reinsurance business, taxation, securities products and transactions may materially adversely affect our insurance, bankingasset management and asset managementbanking businesses by restructuring our activities, imposing increased costs or otherwise.
Regulatory agencies have broad administrative power over many aspects of the financial services business, which may include liquidity, capital adequacy and permitted investments, ethical issues, money laundering, “know your customer” rules, privacy, record keeping, and marketing and selling practices. Banking, insurance and other financial services laws, regulations and policies currently governing us and our subsidiaries may change at any time in ways which have an adverse effect on our business, and we cannot predict the timing or form of any future regulatory or enforcement initiatives in respect thereof. Also, bank regulators and other supervisory authorities in the European Union (“EU”),EU, the United States and elsewhere continue to scrutinize payment processing and other transactions under regulations governing such matters as money-laundering, prohibited transactions with countries subject to sanctions, and bribery or other anti-corruption measures. If we fail to address, or appear to fail to address, appropriately any of these changes or initiatives, our reputation could be harmed and we could be subject to additional legal risk, including to enforcement actions, fines and penalties. Despite our best efforts to comply with applicable regulations, there are a number of risks in areas where applicable
regulations may be unclear or where regulators revise their previous guidance or courts overturn previous
rulings. Regulators and other authorities have the power to bring administrative or judicial proceedings against us, which could result, among other things, in significant adverse publicity and reputational harm, suspension or revocation of our licenses, cease-and-desist orders, fines, civil penalties, criminal penalties or other disciplinary action that could materially harm our results of operations and financial condition.
Furthermore, in reaction to the crisis in the global financial markets, many countries’ governments and regulators have introduced various rescue schemes for the financial sector. As described further under “Item 4. Regulation and Supervision—Measures to Stabilize Financial Markets”, the impact of certain of these schemes may negatively affect the value of the securities of companies participating in these programs and thus have an adverse affect on Allianz as a holder of certain of these securities in its investment portfolio.
Effective January 2005, reinsurance companies in Germany such as Allianz SE are subject to specific legal requirements regarding the assets covering their technical reserves. These assets are required to be appropriately diversified to prevent a reinsurer from relying excessively on any particular asset. The introduction of these requirements had anticipated the implementation of EU Reinsurance Directive (2005/68/EC) which was adopted in November 2005. All of the directive’s provisions have finally beenwere implemented in Germany effective June 2, 2007. Although Allianz SE expects to meetcurrently meets the new requirements, there can be no assurances as to the impact on Allianz SE of any future amendments to or changes in the interpretation of the laws and regulations regarding assets covering technical reserves of reinsurance companies, which could require Allianz SE to change the composition of its asset portfolio covering its technical reserves or take other appropriate measures.
In addition, currently discussions on a new solvency regime for insurance companies in the EU (Solvency II) are ongoing. As those discussions are in a preliminary stage,not yet finalized, its potential future impact for capital requirements can not currently be assessed. For more information, see “Regulationrefer to “Item 11. Quantitative and Supervision.”Qualitative Disclosures about Market Risk—Outlook”.
In addition, changes to tax laws may affect the attractiveness of certain of our products that currently receive favorable tax treatment. Governments in jurisdictions in which we do business may consider changes to tax laws that could adversely affect such existing tax advantages, and if enacted, could result in a significant reduction in the sale of such products.
Our business may be negatively affected by adverse publicity, regulatory actions or litigation with respect to the Allianz Group, other well-known companies and the financial services industry generally.
Adverse publicity and damage to our reputation arising from failure or perceived failure to comply with legal and regulatory requirements, financial reporting irregularities involving other large and well-known companies, increasing regulatory and law enforcement scrutiny of “know your customer”, anti-money laundering and anti-terrorist-financing procedures and their effectiveness, regulatory investigations of the mutual fund, banking and insurance industries, and litigation that arises from the failure or perceived failure by the Allianz Group companies to comply with legal, regulatory and compliance requirements, could result in adverse publicity and reputational harm, lead to increased regulatory supervision, affect our ability to attract and retain customers, maintain access to the capital markets, result in law suits, enforcement actions, fines and penalties or have other adverse effects on us in ways that are not predictable.
Changes in value relative to the Euro of non-Euro zone currencies in which we generate revenues and incur expenses could adversely affect our reported earnings and cash flow.Other risks
We prepare our consolidated financial statements in Euro. However, a significant portion of the revenues and expenses from our subsidiaries outside the Euro zone, including in the United States, Switzerland and the United Kingdom, originates in currencies other than the Euro. We expect this trend to continue as we expand our business into growing non-Euro zone markets. For the year ended December 31, 2006, approximately 32.8%Many of our gross premiums writtenbusinesses are dependent on the financial strength and credit ratings assigned to us and our businesses by various rating agencies. Therefore, a downgrade in our property-casualty segmentratings may materially adversely affect relationships with customers and 31.5%intermediaries, negatively impact sales of our statutory premiums inproducts and increase our life/health segment originated in currencies other than the Euro.
As a result, although our non-Euro zone subsidiaries generally record their revenues and expenses in the same currency, changes in the exchange rates used to translate foreign currencies into Euro may adversely affect our resultscost of operations.
While our non-Euro assets and liabilities, and revenues and related expenses, are generally denominated in the same currencies, we do not generally engage in hedging transactions with respect to dividends or cash flows in respect of our non-Euro subsidiaries.
The share price of Allianz SE has been and may continue to be volatile.borrowing.
The share priceClaims paying ability and financial strength ratings are each a factor in establishing the competitive position of Allianz SEinsurers. Our financial strength rating has been volatile ina significant impact on the past andindividual ratings of key subsidiaries. If a rating of certain subsidiaries falls below a certain threshold,
the respective operating business may continue to be volatile due in part tosignificantly impacted. A ratings downgrade, or the high volatility in the securities markets generally, and in financial institutions’ shares in particular, as well as developments which impact our financial results. Factors other than our financial results that may affect our share price include but are not limited to: market expectations of the performance and capital adequacy of financial institutions generally; investor perception of as well as the actual performance of other financial institutions; investor perception of the success and impact of our strategy, including the acquisition of Assurances Générales de France S.A. (or “AGF”, and together with its subsidiaries, the “AGF Group”),potential for such a downgrade, or rumored downgrade of our credit ratings; potential litigation or regulatory action involving the Allianz Group or any of the industries we have exposure to through our insurance bankingsubsidiaries could, among other things, adversely affect relationships with agents, brokers and asset management activities; announcements concerningother distributors of our products and services, thereby negatively impacting new sales, adversely affect our ability to compete in our markets and increase our cost of borrowing. In particular, in those countries where primary distribution of our products is done through independent agents, such as the bankruptcyUnited States, future ratings downgrades could adversely impact sales of our life insurance and annuity products. Any future ratings downgrades could also materially adversely affect our cost of raising capital, and could, in addition, give rise to additional financial obligations or other similar reorganization proceedings involving,accelerate existing financial obligations which are dependent on maintaining specified rating levels.
Rating agencies can be expected to continue to monitor our financial strength and claims paying ability, and no assurances can be given that future ratings downgrades will not occur, whether due to changes in our performance, changes in rating agencies’ industry views or any investigations into the accounting practicesratings methodologies, or a combination of other insurance or reinsurance companies, banks or asset management companies; and general market volatility.such factors.
The benefits thatMarket and other factors could adversely affect goodwill, deferred policy acquisition costs and deferred tax assets; Allianz SE may realize from the completed merger with RAS S.p.A. and from Allianz AG’s conversion into a European Company (Societas Europaea)Group’s deferred tax assets are also potentially impacted by changes in connection therewith could be materially different from our current expectations.tax legislation.
Business and market conditions may impact the amount of goodwill Allianz Group carries in its consolidated financial statements. As of December 31, 2008, Allianz Group has recorded goodwill in an aggregate amount of €11,221 million, of which €6,325 million relates to its asset management business, €4,554 million relates to its insurance business, €199 million relates to its banking business, and €143 million relates to its corporate segment.
As the value of certain parts of Allianz Group’s businesses, including in particular Allianz Group’s asset management business, are significantly impacted by such factors as the state of financial markets and ongoing operating performance, significant declines in financial markets or operating performance could also result in impairment of other
goodwill carried by us and result in significant write-downs, which could be material. No impairments were recorded for goodwill in 2008.
The benefits thatassumptions Allianz SE may realize from the mergerGroup made with its Italian subsidiary, RAS S.p.A.,respect to recoverability of deferred policy acquisition costs (DAC) are also affected by such factors as operating performance and from Allianz AG’s conversion into a European Company (Societas Europaea, SE)market conditions. DAC is incurred in connection therewithwith the production of new and renewal insurance business and is deferred and amortized generally in proportion to profits or to premium income expected to be generated over the subsequent reorganizationlife of its European operationsthe underlying policies, depending on the classification of the product. If the assumptions on which expected profits are based prove to be incorrect, it may be necessary to accelerate amortization of DAC, even to the extent of writing down DAC through impairments, which could materially adversely affect results of operations. No material impairments were recorded for DAC in 2008.
As of December 31, 2008, Allianz Group had a total of €3,996 million in net deferred tax assets and €3,833 million in net deferred tax liabilities. The calculation of the respective tax assets and liabilities is based on current tax laws and IFRS and depends on the performance of the Allianz Group as a whole and certain business units in particular. At December 31, 2008, €1,863 million of deferred tax assets depended on the ability to use existing tax-loss carry forwards.
Changes in German or other tax legislation or regulations or an operating performance below currently anticipated levels or any circumstances which result in an expiration of tax losses may lead to a significant impairment of deferred tax assets, in which case Allianz Group could be materially different from our current expectations. For more information about this transaction and reorganization, see “Information on the Company—Legal Structure:
Conversion into Allianz SE Completed” and “Information on the Company—Important Group Organizational Changes—Simplification of European Structures.” We took these measuresobligated to implement a business plan creating strategic synergies and organizational efficiencies, however, our estimates of the benefits that wewrite-off certain tax assets. Tax assets may realize as a result of these measures involve subjective judgments that are subject to uncertainties. A variety of factors that are partially or entirely beyond our control could cause actual resultsalso need to be materially different from what we currently expect, and any synergies that we realize fromwritten- down if certain assumptions of profitability prove to be incorrect, as losses incurred for longer than expected will make the merger and conversion to an SE therefore could be materially different from our current expectations.usability of tax assets more unlikely. Any such development may have a material adverse impact on Allianz Group’s net income.
The benefits thatFollowing the sale of Dresdner Bank in January 2009, Allianz SE may realize fromretains the contemplated acquisitioncontingent obligation to indemnify, under certain circumstances, the Federal Association of full ownershipGerman Banks in AGF could be materially different from its current expectations.connection with Dresdner Bank for the period Allianz SE owned Dresdner Bank.
The benefits thatIn accordance with the Articles of Association of the Joint Fund for Securing Customer Deposits (“Einlagensicherungsfonds”), Allianz SE has undertaken to indemnify the Federal Association of German Banks (“Bundesverband deutscher Banken e.V.”), the deposit protection association of privately-held German banks, for any losses it may realize from the contemplated acquisitionincur by reason of full ownershipsupporting measures taken in its French subsidiary, AGF, could be materially different from its current expectations. Allianz SE’s estimatesfavor of Oldenburgische Landesbank AG (OLB), Münsterländische Bank Thie & Co.KG and Bankhaus W. Fortmann & Söhner KG, which remain part of the benefits that it may realize asAllianz Group following the sale of Dresdner Bank. For more general information on this deposit guarantee scheme, refer to “Item 4. Regulation and Supervision—Banking, Asset Management and Other Investment Services—Germany.”
With the sale of Dresdner Bank becoming effective on January 12, 2009, Allianz terminated its indemnification undertaking issued in 2001 in favour of the Federal Association of German Banks with respect to Dresdner Bank since the date of sale. As a result, Allianz’s on-going indemnification obligation relates to supporting measures in favour of Dresdner Bank that are based on facts that were already existing at the time of the full ownership involve subjective judgments that are subject to uncertainties. A variety of factors that are partially or entirely beyond Allianz SE’s control could cause actual results to be materially different from what it currently expects, and any synergies that it realizes from the full ownership therefore could, as a result, be materially different from its current expectations.termination.
ITEM 4. Information on the Company
ITEM 4. | Information on the Company |
Founded in 1890 and with 116over 100 years of experience in the financial services industry, the Allianz Group is committed to providing financial security to a broad base of customers ranging from private individuals to large multinational corporations.
Allianz SE (formerly Allianz Aktiengesellschaft, or Allianz AG) is a European Company (Societas Europaea, or SE) incorporated in the Federal Republic of Germany and organized under the laws of the Federal Republic of Germany and the European Union. Allianz SE is the ultimate parent of the Allianz Group. It was incorporated as Allianz Versicherungs-
Aktiengesellschaft in Berlin, Germany on February 5, 1890 and converted to a European Company on October 13, 2006. Our registered office is located at Koeniginstrasse 28, 80802 Munich, Germany, telephone +49(0)+49 (0) 89 3800-0.(1)
The Allianz Group’s Business Model
As an integrated and globally operating financial services provider we are ableseek to offer our clients considerable value by providing a wide range of insurance and financefinancial products as well as an extensive advisory capacity through our subsidiaries under strong and well-known brands. We operate and manage our activities primarily through four operating segments: Property-Casualty, Life/Health, Banking and Asset Management. We areconsider ourselves well-positioned to anticipate and successfully respond to competitive forces withinaffecting our various operations.
Property-Casualty and Life/Health Insurance Operations(2)operations
We are one of the leading insurance groups in the world and rank number one in the German property-casualty and life insurance markets based on gross premiums written and statutory premiums, respectively, in 2006.respectively.(3)(1) We are also among the largest insurance companies in a number of the other countries in which we operate.
Our product portfolio includes a wide array of property-casualty and life/health insurance products for both private and corporate customers.
In our Property-Casualty segment, our productProduct range consists of, among others, individual motor, injury, liability, homeowner and accident insurance. Furthermore, we are a leading provider of commercial and industrial coverage to enterprises of all sizes, including many of the world’s largest companies. Throughinsurance business
We conduct business in almost every European country, with Germany, Italy and France being our specialty lines of business,
we offer credit insurance, marine, aviationmost important markets. We also run operations in the United States and industrial transport insurance, international industrial risks reinsurance,in Central and Eastern Europe as well as travel insurancein Asia-Pacific. Our operations continue to be expanded worldwide. In 2008, for example, we developed our business operations in the Middle East, in Turkey and assistance services, which we manage on a world-wide basis.in South America with Brazil being one of the key markets(2).
Our Life/Health segment’s portfolio includes, among others, traditional life, endowment, annuity and term insurance products as well as unit-linked and investment-oriented products. Additionally we serve private customers with health, disability and related coverage and provide group life and pension products for employers.
We distribute our insurance productsare distributed via a broad network of self-employed full-time agents, part-time tied agents, brokers, banks and other channels. Increasingly, we distribute our insurance products in cooperation with car
(1) | Source: As published by Gesamtverband der deutschen Versicherungswirtschaft e.V. (or GDV) in 2008. The GDV is a private association representing the German insurance industry. |
(2) | For a more detailed description of the global diversification of our insurance business, please refer to“—Global Diversification of our Insurance Business”. |
manufacturers and dealers in Europe and Asia-Pacific and also have direct distribution operations in Central Europe, India and Australia. The particular distribution channels vary by product and geographic market.
Within our home market of Europe, Germany, France, Italy, the United Kingdom, Switzerland and Spain comprise our primary insurance markets, with Germany as our most important single market, although we operate in almost every European country. We also consider the United States and Asia-Pacific as two of our primary markets. Our more mature insurance markets (e.g. Germany, France, Italy and the United States) are highly competitive. In recent years, we have also experienced increasedincreasing competition in emerging markets, as large insurance companies and other financial servicesservice providers from more developed countries have entered these markets to participate in their high growth potential. In addition, local institutions have become more experienced and have established strategic relationships, alliances or mergers with our competitors.
Our global diversification inThe investments of most Allianz insurance companies are managed internally through specialists within the property-casualty business permits us to implement “cycle management”, whereby we seek to capitalize on growth opportunities that offer a profitable correlation between premium rates and risks and forego premium growth in markets with increasing pricing pressures. In our life insurance business, we view the expected increased demand for wealth accumulation and private retirement provisions in the face of underfunded social insurance systems as an opportunity for growth.
In order to further strengthen our market position and maintain profitable growth we have
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launched two comprehensive programs for our insurance segments: the Sustainability Program and the Customer Focus Initiative. Under our Sustainability Program, we systematically search for the best practices in product and service offerings, and processes across our organization. The highest standard is then made obligatory for all Allianz Group companies. The objective of our Customer Focus Initiative is to take a more customer-oriented approach towards our product and service offerings, and our flexibility awareness. In addition, we are undertaking various reorganization measures.(1)(Allianz Investment Management).
Allianz SE, the Allianz Group’s parent company, acts on an arm’s length basis as our reinsurer for most of our insurance operations other than international industrial risks reinsurance. Allianz SEand assumed 33.3%25.2%, 35.6%26.9% and 38.1%33.3% of all reinsurance business ceded by Allianz Group companies for the years ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively. Allianz SE also assumes a relatively small amount of reinsurance from external cedents. We also cedecedents and cedes risk to third-party reinsurers, of which Munich Re is our primary partner.
Allianz SE also provides advice to subsidiaries on structuring their own reinsurance programs and establishing lists of permitted reinsurers. In addition theThe Allianz Group has established a pooling concept via Allianz SE in place offeringarrangement that offers reinsurance covercoverage to the Allianz Group’s subsidiaries against natural catastrophes, which provides the benefit of internal Group internal diversification benefits.diversification.
Banking Operations(2)operations
Our BankingIn the past, our banking activities arewere primarily executed byconducted through the Dresdner Bank Group (or “Dresdner Bank”), through which we serve individual, corporate and governmental customers with a broad rangeaccounted for almost all of private, commercial and investment banking products.our Banking segment’s results of operations. Following the sale of Dresdner Bank hasAG (Dresdner Bank) to Commerzbank AG (Commerzbank)(1), we reduced our banking operations which now comprise Allianz Banking Germany as well as our existing banking operations in Italy, France and New Europe. Allianz Banking Germany is a strongdivision under the roof of Allianz Deutschland AG (ADAG) and well-known brand and is one of the largest banks in Germany.(3)contains
We distribute our banking products mainly through 952 (as of December 31, 2006) branch offices, of which 902 are located in Germany and 50 outside of Germany. Furthermore, the distribution of
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Oldenburgische Landesbank AG (Oldenburgische Landesbank) and the banking customers originally introduced to Dresdner Bank through the tied agents network. Oldenburgische Landesbank will become Allianz’s main banking product and service provider in Germany. The bank offers a wide range of products for corporate and retail clients with its main focus on the latter. In addition to our banking activities, the distribution of banking products through our German insurance agents network is increasingimportant and the banking agencies distribution network will be expanded to approximately 300 in importance. While Dresdner Bank focuses on selected geographic regions worldwide, Germany is its primary market, which,2009 (129 as of December 31, 2006, made up 73% of Dresdner Bank’s operating revenues. Similarly, on the same date, 61% of Dresdner Bank’s loan portfolio represented loans to German counterparties. The largest credit exposures to borrowers in Germany are loans to private individuals (including self-employed professionals) at 55%; this category represented 34% of total loans outstanding as of December 31, 2006.2008).
We are subject to competition from both bank and non-bank institutions that provide financial services and, in some of our activities, also from government agencies. Substantial competition exists among a large number of commercial banks, savings banks, other public sector banks, brokers and dealers, investment banking firms, insurance companies, investment advisors, mutual funds and hedge funds that provide the types of banking products and services that our banking operations offer.
For the purpose of strengthening our position as a leading bank in Germany, we started our “Neue Dresdner Plus” restructuring program in 2006 to further integrate our banking business model and to thereby enable us to increase efficiency and reduce complexity.(4)Asset Management operations
Asset Management OperationsWe are one of the four largest asset managers in the world.((3)5)
Our business activities in this segment consist of asset management products and services both for third-party investors and for the Allianz Group’s insurance operations. As of December 31, 2006, we managed €764 billion of third-party assets on a worldwide basis, which includes fixed income, equity, money market and sector products, as well as alternative investments. We are one of the five largest asset managers in the world.(6)
We conduct our retail asset management business primarily through our operating companies worldwide under the brand name, “Allianz Global
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Investors”. In our institutional asset management business, we operate under the brand names of our investment management entities; Allianz Global Investors serves as an endorsement brand.
We serve a comprehensive range of retail and institutional asset management clients. Our institutional customers include corporate and public pension funds, insurance and other financial services companies, governments and charities andas well as financial advisors.
Our retail asset management business is primarily conducted under the brand name Allianz Global Investors (AGI) through our operating companies worldwide. In our institutional asset management business, we operate under the brand names of our investment management entities, with AGI serving as an endorsement brand. With € 673 billion of third-party assets as of December 31, 2008, AGI managed 95.7% (2007: 94.8%) of our total third-party assets on a worldwide basis. The United
(2) | Including the banking customers introduced to Dresdner Bank through the tied agent network. |
(3) | Based on total assets under management as of December 31, 2008. |
States and Germany as well as France, Italy and the Asia-Pacific region arerepresent our primary asset management markets. We have recently expanded our engagement in China by increasing the participation in our joint venture, Guotai Allianz Finanz Management. Furthermore, effective January 12, 2009, we acquired cominvest, the former asset management division of Commerzbank AG, which will add approximately € 60 billion assets under management, predominantly domiciled in Germany, to our third-party assets under management.
AGI’s selected product range for retail and institutional customers
Our distribution channels vary by product and geographic market. In Europe and in the United States, Allianz Global InvestorsAGI markets and services its institutional products through specialized personnel located in Frankfurt, London, Munich, Paris, Milan, San Francisco, San Diegooperations and Newport Beach (California).personnel. Retail products in Europe are mostly distributed through proprietary Allianz Group channels such as branch bank advisors, full-time agents employed by affiliated companies and other Allianz Group financial planners and advisors. With the merger of Deutscher Investment-Trust Gesellschaft für Wertpapieranlagen mbH (or “dit”) and dresdner bank investment management Kapitalanlagegesellschaft mbH (or “dbi”) into Allianz Global Investors Kapitalanlagegesellschaft mbH, we combined our institutional business with our retail business in Germany in order to implement the existing integrated asset management business model into one entity.
channels. In the United States, Allianz Global Investor’sAGI’s local asset management operating entities also offer a wide range of retail products. WeIn addition we have committed substantial resources to the expansion of the third-party asset management business in the Asia-Pacific region with offices in Tokyo, Hong Kong, Shanghai, Singapore, Taipei, Seoul and Sydney. We expect this region to become an increasingly important market.region.
In the asset management business, we experience competition comes from all major international financial
institutions and peer insurance companies that also offer asset management products and services, and competecompeting for retail and institutional clients.
Corporate segment
Our competitiveCorporate segment’s activities include the management and support of Allianz Group’s businesses through its strategy, risk, corporate finance, treasury, financial control, communication, legal, human resources and technology functions. The Corporate segment also includes the Group’s alternative investment performance has resultedactivities coordinated by Allianz Alternative Assets Holding GmbH.
Structure of the Board of Management
Each member of the Board of Management of Allianz SE is responsible for a particular division within the Allianz Group. There are four corporate functions: the Chairman’s division, the Controlling/Reporting/Risk division, the Finance division and the Chief Operating Officer’s division.
The other divisions reflect business responsibilities, which are either regionally- or operationally-oriented: Europe I, Europe II, German Speaking Countries, Growth Markets, Anglo NAFTA Markets & Global Lines and Asset Management.
Main initiatives
Allianz continues to develop its business via a number of major initiatives. These are energetically pursued with the goal of establishing “Best of Allianz” as a trusted provider of insurance, asset management and other financial services.
We have in place a Sustainability Program for our insurance segments as well as for distribution. This program is designed to identify and redefine best practices for products, processes and services to make them common practice throughout the majorityGroup’s insurance operations. In an effort to optimize the management of our third-party assets outperforming their respective benchmarks in 2006.client segments and sales channels, we analyze the development of proprietary sales channels, brokers and market management. This includes a continuous focus on customers and on innovation.
The Allianz Group is modernizing its entire organization following a shared Target Operating
Model (TOM). In order to drive these change processes and to take best practice experience into account, an Operational Transformation Program has been established.
Legal Structure: Conversion into Allianz SE Completed
On September 11, 2005, Allianz AG (now Allianz SE)The objective of our Global Talent Management initiative is to systematically optimize global recruiting, development and Riunione Adriatica di Sicurtà S.p.A. (or “RAS”,reward processes to maximize talent quality and taken together with its subsidiaries, the “RAS Group”) announced their intention to merge RAS with and into Allianz AG in a cross-border merger. Effective with the registration of the mergerperformance in the commercial register of Allianz AG on October 13, 2006, Allianz AG changed its legal form to a European Company (Societas Europaea, or SE), and is now named Allianz SE.(1) The last step in connection with the transaction was the listing of the Allianz SE shares on the Italian Stock Exchange on October 16, 2006. Allianz SE is the first company in the Dow Jones EURO STOXX 50 to have become an SE.
Concurrent with the merger, and in order to provide the merger consideration to RAS shareholders, Allianz completed a capital increase involving the issuance of approximately 25.1 million new Allianz SE shares. In accordance with the merger plan, the remaining RAS shareholders received 3 new Allianz SE shares in exchange for 19 RAS shares. Prior to the merger date, Allianz AG had purchased in a voluntary cash tender offer certain of the RAS ordinary shares and RAS savings shares that were not already held by Allianz AG. The total consideration for the acquisition of the outstanding RAS shares amounted to approximately € 6.4 billion, which includes the approximately € 2.7 billion paid to acquire RAS shares in the voluntary cash tender offer.
The merger with RAS and the conversion of Allianz AG to Allianz SE was designed to simplify the Allianz Group’s management and organizational structures, thus reducing complexity and increasing efficiency. Our Allianz Group-wide objectives and programs on the basis of our “3+One” program(2) are expected to be achieved more consistently and moreGroup.
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efficiently with the implementation of the merger. Furthermore, the merger was designed to facilitate more efficient capital and liquidity management within the Allianz Group, to simplify accounting and reporting processes, and to increase the Allianz Group’s presence in the attractive Italian insurance market.
In addition to improving efficiency, the change in governance framework to an SE reflects the Allianz Group’s European and international dimension. As part of these changes, we reduced the size of the Supervisory Board and established an SE works council. Nevertheless, Allianz SE remains governed to a large extent by German Corporate Law.
Milestones of the Allianz-RAS Merger 2006
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Important Group Organizational Changes(1)
Simplification of European Structures
The Allianz-RAS merger provided the opportunity to streamline the Allianz Group’s structure in an effort to increase capital efficiency and to benefit from operational and strategic synergies.
As a consequence of the merger, Allianz SE now holds 100% of its property-casualty and life/health subsidiaries in Switzerland (Allianz Suisse Versicherungs-Gesellschaft and Allianz Suisse Lebensversicherungs-Gesellschaft) and in Austria (Allianz Elementar Versicherungs-Aktiengesellschaft
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and Allianz Elementar Lebensversicherungs-Aktiengesellschaft) through holding companies. These subsidiaries were formerly held jointly by Allianz AG (now Allianz SE) and RAS, with RAS holding the majority. Also due to implementation of the merger, Allianz SE now directly holds majority interests in the Portuguese insurance subsidiary, Compañhía de Seguros Allianz Portugal S.A., and in the Spanish insurance subsidiary, Allianz Compañía de Seguros y Reaseguros S.A.
The acquisition of the minority interest in AGF, which was announced on January 18, 2007, is also designed to further streamline our Group structure across regions and business units.(2)
Reorganization of German Insurance Operations
In 2006, we further consolidated our major German insurance subsidiaries (Allianz Versicherungs-Aktiengesellschaft, Allianz Lebensversicherungs-Aktiengesellschaft and Allianz Private Krankenversicherungs-Aktiengesellschaft) under the new holding company Allianz Deutschland AG (wholly-owned by Allianz SE). In the course of this reorganization, which we announced in September 2005, Frankfurter Versicherungs-AG and Bayerische Versicherungsbank AG were merged into Allianz Versicherungs-Aktiengesellschaft. The tied agent sales activities of the German property-casualty and life/health business, which previously were run by five different corporations, were consolidated into a separate sales company, Allianz Beratungs- und Vertriebs-AG, which is also a subsidiary of Allianz Deutschland AG. We have replaced the insurance operations’ previous regional structure with four sales and service regions.
The reorganizationGlobal Diversification of our German insurance operations is designed to simplify structures and reduce complexity within the Allianz Group, allowing us to react to changes in our markets with greater speed, focus and flexibility. Our goal is to create one joint presence of our insurance operations, with customers perceiving Allianz as one unit with comprehensive high quality services geared toward the customer’s needs. This process is part of our strategy to further develop our leading position in the German insurance market.
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We are continuing this reorganization plan and expect to have the new business model in place by 2008. The new business model will require approximately 5,700 fewer staff. In connection with this reorganization we took the following steps in 2006:
Created the German insurance holding company Allianz Deutschland AG.
Top management team in place.
Agreement on key points between the works councils and the management of Allianz Deutschland AG and its main subsidiaries.
Allianz Deutschland AG and its main subsidiaries committed not to make any compulsory redundancies until the end of 2009.
Districts organized into four regions.
Distribution centralized.
Property-Casualty companies merged.
We expect the reduced complexity to allow us to reduce costs in the long-term. As of December 31, 2006, Allianz Deutschland AG’s provisions for restructuring amounted to €455 million.(1)
Merger of Industrial Insurance Business within Allianz Global Corporate & Specialty
In the second half of 2006, we commenced the reorganization of the Allianz Group’s international corporate and specialty insurance business by creating Allianz Global Corporate & Specialty AG, a wholly-owned subsidiary of Allianz SE. This unit houses the activities of the former Allianz Global Risks Re and Allianz Marine & Aviation operating entities, the corporate customer business of Allianz Sach, as well as Allianz Risk Transfer in Switzerland, under the umbrella of one Munich-based company. In the future, we also plan to integrate other local corporate and specialty insurance activities in selected locations into Allianz Global Corporate & Specialty AG in order to offer a comprehensive range of risk management solutions and specialist expertise from one source. The new organization is designed to facilitate a clear client focus, while it reduces complexity, increases efficiency and promotes globally consistent management practices.
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“Neue Dresdner Plus” Reorganization Program
In 2006, Dresdner Bank launched the “Neue Dresdner Plus” reorganization program, by integrating its former four operating divisions into two operating divisions. As part of this restructuring, 2,480 full-time positions are to be cut at the Dresdner Bank Group in the period up to 2008. The Board of Management and the employee representatives have agreed on a social plan for implementing the reduction of the number of employees associated with the program as part of a reconcilement of interests. The final new business model of Dresdner Bank will consist of the following two new operating divisions:
Private & Corporate Clientscombines all banking activities formerly provided by the Personal Banking and Private & Business Banking divisions (including Private Wealth Management) as well as our activities with medium-sized business clients from our former Corporate Banking division.
Investment Banking, with Global Banking and Capital Markets, unites the activities formerly provided by the Dresdner Kleinwort Wasserstein division and the remaining activities of the former Corporate Banking division.
In addition, the Corporate Other division contains income and expense items that are not assigned to Dresdner Bank’s operating divisions.
The goal of the “Neue Dresdner Plus” program is to re-position Dresdner Bank to further develop its advisory services and sales activities for private clients as well as to create a single source for groups and institutional clients. As of December 31, 2006, Dresdner Bank Group’s provisions for restructuring amounted to €379 million. In 2006, Dresdner Bank Group recorded restructuring charges for all restructuring programs of €422 million.(2)
Reorganization in the United States
In order to capture the potential for regional synergies, the Allianz Group has commenced a reorganization of the business lines in the United States by strengthening the role of the Allianz of America Inc. holding company in an effort to create expense and distribution synergies between the
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different businesses in the United States. This regionalization is designed to allow our U.S. companies to leverage all of the available resources and assets and to enable Allianz Life United States and Fireman’s Fund to more effectively anticipate and deliver on customer needs. The respective management teams of each company will be able to
draw upon the resources of Allianz of America to provide customers with high-quality solutions, maximize cross-selling opportunities, simplify services, and leverage combined assets while driving a performance-based culture. The goal of the reorganization is to optimize the ability of both companies to improve their market positions.
As an integrated financial services provider we offer insurance, banking and asset management products and services from a single source to more
than 60approximately 75 million customers in overabout 70 countries. We are one ofWith respect to our insurance business, Allianz is the leading insurersmarket leader in Germany and financial services providers world-wide. Based on our market capitalizationhas a strong international presence.
(2) we are the largest financial institution in Germany.Allianz 2008 changes at a glance:
Europe is our home market. We consider property-casualty insurance in the region to be rather saturated. In life/health insurance, we see the characteristics of aging societies and their rising need for private retirement provision products and additional health insurance coverage as a growth opportunity.January
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Société Nationale d’Assurances s.a.l. (SNA) Lebanon rebranded Allianz SNA |
2006 in review:March
– | Allianz |
– | AGF Brazil Seguros S.A. rebranded Allianz Seguros S.A. |
April
– | Allianz |
– | Euler Hermes World Agency created with the purpose of serving multinational companies |
– | Allianz becomes the major shareholder of Koç Allianz Sigorta AŞ and Koç Allianz Hayat ve Emeklilik AŞ in Turkey; effective October 2008 the companies operate under the names Allianz Sigorta AŞ and Allianz Hayat ve Emeklilik AŞ. |
May
– | Allianz announced strategic partnership with HSBC at the Annual General Meeting |
– | ATF-Polis renamed Allianz Kazakhstan |
New Europe – We are committed to a region in transition: We are established in the most important insurance markets in the region and have leading market positions. New Europe offers substantial opportunities across all lines of business alongside rising living standards.June
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2006 in review:
Allianz China Life commenced business in |
– | Euler Hermes started operations in Qatar, Oman and Kuwait through fronting agreements with local insurers. |
July
– | Euler Hermes and |
– | Allianz |
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August
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– | Announcement of merging marine insurance business from Allianz Global Corporate & Speciality (AGCS) and Fireman’s Fund Insurance Company under the umbrella of AGCS to form the largest marine insurer in the world based on gross premiums. |
November
– | Allianz Life Sri Lanka started operations |
– | Allianz China Life has been granted a preliminary license to set up a branch in Shandong province. |
December
– | Mondial Assistance announced two new contracts for Europe and Asia with the car manufacturer Volvo. |
Further information on regions, countries and operations is available at www.allianz.com. (The information found at this website is not incorporated by reference into this document.)
(1) | Please |
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The Americas – We are well-positioned in the United States, the largest insurance market of the world. Overall, our American operations take place in attractive markets.
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2006 in review:
September 5: Standard & Poor’s affirmed its “A” counterparty and insurer financial strength ratings on Fireman’s Fund and rated subsidiaries. The rating outlook has been revised to positive from stable.
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Asia-Pacific and Africa – Asia-Pacific is the Allianz Group’s largest emerging region. Many markets in this part of the world are characterized by high growth rates.
2006 in review:
January 24: AlIianz is the first western joint-venture insurer to introduce insurance products in Indonesia, which comply with the rules of the Islamic law, Sharia.
January 27: AlIianz and Industrial and Commercial Bank of China Ltd. (or “ICBC”) announce strategic investment and partnership agreement. AlIianz acquires a 2.5% interest in ICBC.
April 1: Following the shareholder change in 2005, the former AlIianz Dazhong was renamed into AlIianz China Life.
Our Largest Insurance Markets and CompaniesGerman Speaking Countries
Property-Casualty Insurance Operations(1)Germany
Germany
OperationsWe operate in the German property-casualtyinsurance market mainly through operatingour insurance companies Allianz Versicherungs-AG (Allianz Sach), Allianz Lebensversicherungs-AG (Allianz Leben) and Allianz Private Krankenversicherungs-AG (Allianz Private Kranken). In addition, Allianz Beratungs- und Vertriebs-AG serves as a distribution company. All entities combinedare organized under the umbrella of the holding company Allianz Versicherungs-Aktiengesellschaft (or “Allianz Sach”).Deutschland AG. At the end of 2008, Allianz SachDeutschland AG had a total of 19.3 million customers. The results of our German operations also include property-casualty assumed reinsurance business, which is primarily attributable to Allianz SE.
As the market leader in Germany based on gross premiums written in 2006.2008((2)2) Our results of operations presented under Germany also include our property-casualty assumed reinsurance business, primarily attributable to, Allianz SE.
ProductsSach develops and Distributionprovides property-casualty. We offer a wide variety of insurance products of which ourfor private and business clients. Our main lines of business includeare motor (liabilityliability and own damage),damage, accident, general liability homeowner and accident. Allianz Sach distributes its products mainly throughproperty insurance. In addition we introduced a network of full-time tied agents. However, distribution through Dresdner Bank branches and the Internet is increasingnew pet health insurance product in relative importance.
Expected Developments With2008. For property-casualty business, we see Germany being a rather mature market with a high degree of competition, onecompetition. One of the key challenges is managing the trade-off between achieving growth while also maintaining an appropriate level of profitability. We are currently reorganizing our major German operating entities. The new structure is designed toTo deliver all-encompassing service in emergency cases we will further develop our leading position in the German insurance market by a joint presence, thus allowing us to provide an enhanced customer orientationassistance-services for individuals and improved service, while at the same time cutting costs in the long-term through reduced complexity.(3)
France
Operations Through the companies of AGF Group, we ranked third in the property-casualty market in France, based on gross premiums written in 2005.(4)
Products and Distribution The broad range of “AGF” brand products for both individuals and
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corporate customers, including property, injury and liability insurance, are distributed primarily through a network of general agents, brokers and other direct sales channels.
Expected Developments Operating in a market that has seen limited growth in recent years, we seek to focus on maintaining operating profitability while simultaneously implementing selective initiatives aimed to generate growth. One such initiative is the introduction of a new motor tariff at the end of 2006, which we expect will have a beneficial impact on our business development in the coming years.
The acquisition of the minority interest in AGF is expected to reduce the complexity of our organization and allows us to further implement Allianz Group-wide programs and initiatives, as well as to strengthen our market position in France.(5)
Italy
Operations We operate in the Italian market through our “RAS”, “Lloyd Adriatico” and “Allianz Subalpina” brands. Jointly, we continued to rank third in the Italian property-casualty market, based on gross premiums written in 2005.(6)
Products and Distribution The RAS Group operates in most major personal and commercial property-casualty lines in Italy, while Lloyd Adriatico S.p.A. underwrites mainly personal lines. The RAS Group’s most important business line is motor. Other important businesses include fire, general liability and personal accident.
Expected Developments The Italian non-motor market, which has a lower penetration rate for insurance products compared to other European markets, represents a potential market for growth. Among other channels, we also view distribution through direct operations as a growth channel.
RAS S.p.A., Lloyd Adriatico S.p.A. and Allianz Subalpina S.p.A. have launched the project to integrate the Allianz Group’s operations in Italy. The integration is designed to allow Allianz to serve the Italian market, its second largest based on premiums,
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with a broad range of insurance and financial products and with more effective customer service. We are also implementing this integration to seek to benefit from the announced deregulation of insurance distribution in Italy.
United Kingdom
Operations We serve the market in the United Kingdom primarily through our subsidiary Allianz Cornhill Insurance plc. (or “Allianz Cornhill”) and rank seventh based on gross premiums written in 2005.(1) In 2006, Allianz Cornhill further strengthened its market position in the United Kingdom through the acquisition of the remaining interest in Premier Line Direct Ltd. and the acquisition of Home & Legacy (Holdings) Ltd.
Products and Distribution We offer a broad range of property-casualty products, including a number of specialty products, which we offer through our personal, commercial and specialty lines and through a range of distribution channels, including affinity groups.
Expected Developments Operating in a highly competitive market, Allianz Cornhill has concentrated on active cycle management as a measure to support its operating profitability.
Effective April 30, 2007, Allianz Cornhill Insurance plc. changed its company name to Allianz Insurance plc. in order to benefit from the “Allianz” brand.
Switzerland
Operations In the Swiss market we are represented by the Allianz Suisse brand and Allianz Risk Transfer AG. Allianz Suisse acts as the umbrella brand for our four general property-casualty legal entities in Switzerland. Based on gross premiums written in 2005, Allianz Suisse ranks fourth in Switzerland.(2)
Products and Distribution While Allianz Suisse operates in the general property-casualty market in Switzerland, Allianz Risk Transfer AG offers conventional reinsurance and a variety of
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alternative risk transfer products. The most important line of business for Allianz Suisse is motor, comprising approximately 42% of its gross premiums written in 2006.
Expected Developments In the very competitive market environment in Switzerland, we will continue to put profitability first, while expecting to achieve attractive growth.
Spain
Operations We serve the Spanish market through our operating entities Allianz Compañía de Seguros y Reaseguros S.A. and Fénix Directo S.A. We currently rank third in the Spanish market, based on gross premiums written in 2006.(3)
Products and Distribution In Spain, we offer a wide variety of personal and commercial property-casualty insurance products, with an emphasis on motor business, comprising approximately two-thirds of our gross premiums written in Spain in 2006.
Expected Developments Market conditions in Spain are characterized by the continuation of intense price competition in motor business.
Western and Southern Europe
Operations We conduct property-casualty operations in most of the other Western and Southern European countries, of which, based on gross premiums written in 2006, the largest are our operations in the Netherlands, Austria and Ireland.
Products and Distribution The most important lines of business of Allianz Nederland Schadeverzekering N.V. in the Netherlands are motor and fire insurance. Our Dutch subsidiary distributes its products through independent agents and brokers.
Allianz Elementar Versicherungs-Aktiengesellschaft in Austria offers a broad range of products to individual and group customers primarily through salaried sales forces, tied agents and brokers.
Our subsidiary Allianz Irish Life Holdings p.l.c. offers a wide variety of products, mainly motor and property insurance for both commercial and private
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customers in Ireland, and distributes predominantly through brokers and banks as well as telephone- and internet-based direct sales channels.
Expected Developments The Dutch insurance market is characterized by intense competition. In the motor business with expected price decreases. In Ireland, we expect the market will become more favorable in 2007, both in commercial and in personal lines.
New Europe
Operations We are the leading international insurance company in Central and Eastern Europe, based on gross premiums written in 2005(1), which we believe is one of the fastest growing insurance markets in the world. We serve the market through our operating subsidiaries in Hungary, the Czech Republic, Slovakia, Poland, Bulgaria, Romania and Croatia. We also sell property-casualty insurance in Russia through our subsidiaries embraced under Allianz Russia and our participation in Russian People’s Insurance Society “Rosno”.
Products and Distribution The primary products sold in these countries are mandatory motor third-party liability and motor own damage coverage.
Expected Developments Motor business and increasingly other personal lines products continue to be the primary sources of our profitable growth, while we also expect to expand and further develop our sales network. We believe we are well-positioned to capture the opportunities from the expected growth in demand for property-casualty insurance products.
On February 21, 2007, the Allianz Group announced the purchase of further interest in Rosno, increasing our holding to approximately 97%. With this acquisition we are expanding our position as the number one insurer in Central and Eastern Europe.
United States
Operations Our operations in the United States are organized under the umbrella of Allianz of America Inc., which comprises a group of operating entities underwriting a wide, but focused, variety of lines of business.
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Products and Distribution Through Fireman’s Fund Insurance Company (or “Fireman’s Fund”), we underwrite personal, commercial and specialty lines. Fireman’s Fund’s business strategy focuses on specific markets. The personal lines address the needs of high net worth customers. The commercial business targets a core set of industries offering specialized products and services. Our specialty products are sold through local distribution channels, which allow us to tailor our products and services to our customer’s needs.
Expected Developments Fireman’s Fund expects to continue to grow in these target markets by enhancing customer solutions. We plan to upgrade customer service capabilities, introduce new products and services, and leverage cross-selling through strengthened distribution management.
In addition, we are currently undertaking certain reorganization measures in the United States. We expect these measures will help us to strengthen our market position.(2)
Asia-Pacific
Operations In Asia-Pacific, the large majority of our business is generated by Allianz Australia, which serves the markets of Australia and New Zealand. We also maintain operations in Malaysia, Indonesia, as well as other Asia-Pacific countries, including China, Thailand, Japan, Hong Kong, Singapore, Laos and India.
Products and Distribution Our Australian insurance operations include a variety of products and services, with particularly strong positions in the workers compensation market, as well as in rehabilitation and occupational health, safety and environment services. We also operate in certain niche markets, including premium financing and pleasure craft insurance. Allianz Australia markets our products through brokers and non-tied agents as well as directly to customers.
Expected DevelopmentsFor life insurance, Allianz Australia expects to continue to employLeben is market segmentation technique, which includes diversifying its portfolio outside of the traditionally cyclical areas.
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South America
Operations We conduct our property-casualty operations in Brazil through our subsidiary AGF Brasil Seguros S.A. Based on gross premiums written in 2006, we are the seventh-largest property-casualty insurance provider in Brazil.(1) We also sell property-casualty products in Colombia, Argentina and Venezuela.
Products and Distribution In Brazil, we write primarily automobile insurance, but also fire, transportation and other lines. Distribution is organized primarily through independent agents and brokers. In Colombia, Venezuela and Argentina we also market a broad range of products.
Expected Developments We expect growth to continue, primarily in Brazil and Argentina, mainly driven by the motor market.
Specialty Lines
Operations Through our subsidiary Euler Hermes, the largest credit insurer in the world, based on gross premiums written in 2005(2), we underwrite credit insurance in major markets around the world.
Allianz Global Corporate & Specialty primarily combines the Allianz Group’s international corporate insurance business.(3)
Through Mondial Assistance Group, we are among the world’s largest providers of travel insurance and assistance services based on gross premiums written in 2005.(4)
Products and Distribution Euler Hermes provides enterprises protection against the risk of non-payment of receivables and customer insolvency. Thereby, we help companies of all sizes, wherever they trade, to safeguard and grow their business. In addition, through Allianz Global Corporate & Specialty, we offer a variety of other specialty lines of business, namely marine, aviation and industrial
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transport insurance, international industrial risks reinsurance, and through Moncial Assistance Group, we offer travel insurance and assistance services. In contrast to our other insurance businesses, we manage and offer these services on a worldwide basis.
Expected Developments Through the recent combination of our international corporate business within Allianz Global Corporate & Specialty, which manages a diversified portfolio of risk management solutions and services, we expect to realize synergies and increase efficiency.
At Mondial Assistance Group, we seek to enter in new markets and develop new products. A variety of sales channels including the internet is used to achieve this goal.
Life/Health Insurance Operations(5)
Germany Life
Operations In our most important market, Allianz Lebensversicherungs-Aktiengesellschaft (or “Allianz Leben”) is the market leader for life insurance based on statutory premiums in 2006.2008((2)6). In addition to Allianz Leben, we operate through a variety of smaller operating entities in the German market. We are active
(1) | Banking activites are related to Dresdner Bank and will not be continued due to the sale of Dresdner Bank to Commerzbank. Please refer to “—Major transactions—Major disposals—Sale of Dresdner Bank AG” for further information. |
(2) | Source: Based on preliminary data provided by German Insurance Association, GDV |
Products and Distribution We are active both in the private and commercial markets and offer a comprehensive range of life insurance and related products on both an individual and a group basis. The main classes of coverage offered include annuity, endowment and term insurance. In our commercial lines, we offer group life insurance and provide companies with services and solutions in connection with pension schemesarrangements and defined contribution plans. Allianz Leben distributes itsIn 2008 we introduced a new variable annuities product. For our life business, we anticipate strong growth opportunities as we see an increasing demand for private retirement products mainly through a network of full-time tied agents, while distribution through Dresdner Bank branches and brokers is increasing.retirement provisions in general.
Expected Developments We are currently reorganizing our major German operating entities. The new structure is designed to further develop our
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leading position in the German insurance market by a joint presence, thus allowing us to provide an enhanced customer orientation and improved service, while at the same time cutting costs in the long-term through reduced complexity.
Germany Health
OperationsThrough Allianz Private Kranken-versicherungs-Aktiengesellschaft (or “Allianz Private Kranken”),Kranken, we are the third-largest private health insurer in Germany based on statutory premiums in 20052008(1)(2) with more than two million customers.
Products and Distribution Allianz Private Kranken provides. We provide a wide range of health insurance products, including full private healthcarehealth care coverage for salaried employees and the self-employed, supplementary insurance for individuals insured under statutory health insurance plans, supplementary care insurance as well asand foreign travel medical insurance. Allianz Private Kranken distributesOur health insurance business with its two basic products – full health care coverage and supplementary insurance – will be impacted by the German health care reform in the coming years. We believe that the demand for full health care coverage will grow only slightly. On the other hand, we believe that supplementary insurance will further increase, despite ongoing competition from statutory health insurers which have been allowed to offer special supplementary insurance (so called “Wahltarif”) from 2007 onwards.
We offer products not only for all three insurance lines but also with a clear focus on products combining coverage from life, health and property-casualty insurance to better serve customer needs. Sales of these combined products grew in 2008. In order to strengthen our market position, we intend to further develop our customer-focused organization and aim to provide our clients with more integrated products for every stage of their lives.
Our products are distributed mainly through a network of full-time tied agents.agents, while distribution through our new bankagencies and brokers is increasing. From 2010 onwards, Commerzbank will be a further sales channel for Allianz products.
Switzerland
We serve the Swiss property-casualty market through Allianz Suisse. Based on gross premiums
written in 2007, Allianz Suisse ranks fourth in Switzerland(1). In the property-casualty business, the most important line of business is motor, contributing almost 50% of gross premiums written in 2008. In 2008 we expanded our product portfolio for assistance products. In the very competitive property-casualty business in Switzerland, we will continue to focus on profitable growth. In order to further improve our efficiency and effectiveness, we are currently revising our processes and structure for claims handling and management.
Expected Developments The ongoing discussions about reforming the German statutory health insurance system causes uncertainty among customers. The demographic change combined with medical progress will cause rising expenses within the statutory health insurance system. Furthermore, benefit cuts will most likely occur. Private health insurers will benefit from this development in the long-run.
France
Operations In France, through the companies of AGF Group, we are the eighth-largest life insurance provider based on statutory premiums in 2005.(2)
Products and Distribution We provide a broad range of life and health insurance products, including short-term investment and savings products. An important portion of our life statutory premiums in France is generated through the sale of unit-linked policies.
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Expected Developments Life insurance is one of the fastest growing businesses of the AGF Group and we expect this strong growth to continue.
The acquisition of the minority interest in AGF is designed to allow us to reduce the complexity of our organizational and management structures, permitting us to further implement Allianz Group-wide programs and initiatives, as well as strengthen our market position in France.(3)
Italy
Operations We maintain a strong position in the Italian life insurance market through RAS Group, Lloyd Adriatico S.p.A. and Allianz Subalpina S.p.A. Jointly, on the basis of statutory premiums in 2005, our Italian subsidiaries ranked second.(4)
Products and Distribution In Italy, we offer individual life policies, primarily endowment policies, annuities and unit-linked products in addition to other products. Consistent with general trends in the Italian market, our business includes an increasing number of unit-linked policies, in which policyholders participate directly in the performance of policy-related investments. In 2006, two-thirds of our combined statutory premiums in Italy comprised unit-linked products. A large percentage of our contracts are marketed through our bancassurance channel.
Expected Developments RAS S.p.A., Lloyd Adriatico S.p.A. and Allianz Subalpina S.p.A. have launched the project to integrate the Allianz Group’s operations in Italy. The integration is designed to allow Allianz so serve the Italian market, its second largest based on premiums, with a broad range of insurance and financial products and with more effective customer service. We are also implementing this integration to seek to benefit from the announced deregulation of insurance distribution in Italy.
Switzerland
OperationsWe conduct our life/health operations in Switzerlandthis region primarily through Allianz
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Suisse Lebensversicherungs-Gesellschaft and Phénix Vie. In aggregate, these operating entities represent the sixth largest life insurance provider in Switzerland based on statutory premiums in 2005.2007((1)1)
Products and Distribution We. In the life/health market, we provide a wide range of individual and group life insurance products, including retirement, death and disability products.
Expected Developments Given the relatively higher market share we hold in our property-casualty business in Switzerland, we We believe there is potential for growth in our life/health business through enhancement of agent, broker networks and, given our relatively high market share in property-casualty, through cross-selling between our segments.
In addition to the traditional sales channels in 2008, we started to distribute our products through the new direct sales channel allianz24.ch and entered into a new retail cooperation with Migros.
SpainAustria
We operate in the Austrian insurance market mainly through our insurance companies Allianz Elementar Versicherungs-AG and Allianz Elementar Lebensversicherungs-AG. Via these companies we offer a broad range of property-casualty and life/health products to individual and group customers primarily through salaried sales forces, tied agents and brokers.
Based on gross premiums written in 2008, Allianz Elementar Versicherungs-AG, ranks fourth in the Austrian market in the property-casualty business(2). With approximately 45% of the portfolio, motor business is the most important line of business. In the very competitive property-casualty market, we
(1) | Source: Statistics of the Swiss Federal Office of Private Insurance (FOPI) |
(2) | Source: Based on preliminary data provided by Austrian Insurance Association (VVO) as of February 2009 |
continue our actuarial approach in tariffication in order to act against the expected ongoing weak price-cycle in motor business.
In the life/health business, Allianz Elementar Lebensversicherungs-AG represents the sixth largest life insurance provider in Austria based on statutory premiums in 2008(2). Besides the traditional life insurance business, we also offer government subsidized products as well as unit-linked products. For the life business, we anticipate potential for growth due to an increasing demand for retirement provisions.
OperationsEurope I
Italy
Since October 2007, Allianz serves the Italian market as a single company. Allianz S.p.A. (previously RAS S.p.A., Lloyd Adriatico S.p.A., Allianz Subalpina S.p.A.) is the second largest Italian insurance group based on gross premiums written and statutory premiums written in 2007(4). In addition, we distribute through Genialloyd (a leading company in “direct” via phone and web), Allianz Bank, with its associated Financial Advisors network (one of the top 3 in the market) and bancassurance channel (Unicredit plus others).
(3) | Banking activites are related to Dresdner Bank and will not be continued due to the sale of Dresdner Bank to Commerzbank. Please refer to “—Major transactions—Major disposals—Sale of Dresdner Bank AG” for further information. |
(4) | Source: Italian Insurers Association, ANIA. |
The most important line of business in property-casualty is motor. We conductalso have a strong presence in fire, general liability and personal accident insurance. In 2008, pricing in the motor market was under heavy pressure while distribution costs have increased considerably on account of recent regulatory changes (the so-called Bersani law). The negative impact of market developments has been mitigated by the savings, generated by the integration of the previously independent legal entities.
The life market has been declining since 2006, particularly in the bancassurance by far the predominant channel. While Allianz in the past had enjoyed robust growth, it suffered in 2008 primarily due to:
– | the heavy contraction of the bancassurance business channelled through Unicredit; |
– | the decline of the Antonveneta premiums in connection with the new shareholding of the bank, now part of the Monte dei Paschi Group; and |
– | the steep drop in unit and index-linked premiums due to the developments in the financial markets. |
We expect the Italian market to remain very challenging. However, we also expect to benefit from our technical knowhow, IT infrastructure and strong brand. We continue to focus on customer service, efficiency enhancement and adherence to profitable underwriting in property-casualty. In life/health operationsas well as in property-casualty, we will seek to deliver further product innovations to our customers.
Spain and Portugal
We serve the Spanish property-casualty market through our operating entities Allianz Compañía de Seguros y Reaseguros S.A. and Fénix Directo S.A. Life products are provided through Allianz Compania de Seguros y Reaseguros S.A. and Eurovida, our joint venture with Banco Popular. Our Portugese company is Allianz Companhia de Seguros.
Our Spanish company sets internal standards for efficiency and customer service. We have initiated a project to achieve synergies and economics of scale between the Spanish and Portugese operations.
Sales in motor insurance, our largest line of business both in Spain and Portugal, remained fairly stable despite a significant drop in new vehicle registration. Besides motor, we offer products for
property and liability protection, life and health coverage, as well as workers compensation in Portugal.
We distribute our products through more than 11,000 agents and brokers in Spain, and more than 5,000 in Portugal. In both countries, we also rely on bank distribution partners such as Banco Popular in Spain and BPI in Portugal.
Economic forecasts for Spain and Portugal are in line with other European countries affected by the economic downturn. We expect market growth to be rather limited. In Spain, we expect life risk products to be affected by the real estate crisis in the short term. Development of life investment products will depend to a significant degree on capital market developments.
South America
In South America, we are present in three countries: In Brazil with Allianz Brazil Seguros S.A., in Colombia with Aseguradora Colseguros S.A. and in Argentina with Allianz Argentina Compania de Seguros S.A.
In all three markets, Allianz is focused on property-casualty with motor generally being the largest individual line of business.
In Brazil, we are also one of the leading health insurers and in Columbia, we also offer life insurance. Our distribution is primarily based on the broker channel.
We believe that the markets in which we are present in South America offer the potential for future growth. We expect an increase in insurance demand.
Turkey
Since July 2008, we serve our Turkish customer base by our majority-owned entities Allianz Sigorta A.S. and Allianz Hayat ve Emeklilik A.S. Both entities have benefited from intensified ties with Allianz Group while maintaining our strong partnership with Koç Group.
We offer a wide variety of property and casualty products, both in retail markets (distributed mainly
via agents) and in commercial markets (distributed mainly via brokers). We also provide life and pension solutions to our customers.
We expect the Turkish insurance market to return to its growth path in the near future. We will seek to increase our distribution base and to provide innovative insurance solutions to our customers.
Europe II
France
ProductsIn France, we operate through the Assurances Générales de France (AGF) Group, a major participant in insurance and Distribution Our Spanishfinancial services. AGF is ranked fourth in the French property-casualty market and eighth in the life/health insurance subsidiaries offer a broad product portfolio, consisting primarily of traditional lifemarket, based on gross premiums written and statutory premiums, respectively, in 2007(2). AGF’s activities encompass several areas, including property-casualty insurance, annuities, pensionlife/health insurance, asset management and unit-linked products, which are mainly distributed by agents and through our bank channel.banking.
Expected Developments In 2006, income tax reforms were approved in Spain and became effective as of January 2007. Under the new tax law, most life insurance policies, except annuities, lose their tax privileges. It is still too early to finally assess the long-term impact of this income tax reform on our business. Nevertheless, we have analyzed our existing product range resulting in the development of new products and adaptation of the existing ones, in order to benefit through further profitable growth.
Western and Southern Europe
Operations We conduct life/health insurance operations in most of the other Western and Southern European countries, of which, based on statutory premiums 2006, the largest are in Belgium and the Netherlands.
Products and Distribution AGF Belgium Insurance S.A. markets a wide range of life insurance
| Banking activites are related to Dresdner Bank and will not be continued due to the sale of Dresdner Bank to Commerzbank. Please refer to “—Major transactions—Major disposals—Sale of Dresdner Bank AG” for further information. |
(2) | Source: |
In 2008, we introduced a plan in order to reduce costs by rationalizing the structure of the company by 2011.
The broad range of AGF-branded property-casulty and life/ health products mainlyfor both individuals and corporate customers, including property, injury and liability insurance as well as short-term investment and savings products, are distributed primarily through brokers.a network of tied agents, brokers, partnership channels and a salaried salesforce. We also market our products through AGF Banque. We plan to start our direct insurance business in France in 2009.
Operating in a property-casualty market that has seen limited growth in recent years, we seek to focus on maintaining operating profitability while simultaneously implementing selective initiatives aimed at generating growth.
We consider AGF’s life business to be a growth area.
Netherlands
The most important lines of property-casualty business in the Netherlands are motor and fire insurance. Our Dutch subsidiary distributes its products through brokers and a direct sales channel. We launched our new direct insurance business in 2008. In the Netherlands, we also offer a broad range of life insurance products and have a strong position inproducts.
The Dutch insurance market is characterized by intense competition. Here we expect continuing pressure on the unit-linked market.motor tariffs.
Expected DevelopmentsBelgium
In Belgium, we market a wide range of life and property-casualty insurance products, which have won several awards. The larger lifeproducts are mainly distributed through brokers.
Africa
In Africa we serve the market through AGF Afrique which is the specialist of the Allianz Group in sub-Saharan French-speaking Africa.
We offer property-casualty products in all countries within Africa where we are conducting business.
Life/health products are offered by our operating entities in Burkina Faso, Ivory Coast, Cameroon and Senegal.
We serve the African market through thirteen local subsidiaries in nine sub-Saharan countries, including 400 collaborators and partners in bordering countries. With this capacity, we provide insurance markets forming our Western and Southern European region are maturereinsurance coverage.
We sell contracts adapted to all kinds of risks in fire, auto, miscellaneous insurance, hull and provide limited growth opportunities.cargo, as well as life.
We intend to consider business opportunities in Africa when appropriate.
Credit Insurance(1)
Through our subsidiary Euler Hermes, the global leader in credit insurance, we underwrite credit insurance in major markets around the world.(2)
Euler Hermes provides enterprises with protection against the risk of non-payment of receivables and insolvency. Additionally, Euler Hermes has developed a comprehensive range of services for the management of companies’ accounts receivables.
For credit insurance, we see growth potential in Europe, North America and the emerging markets. By providing high quality services, maintaining a comprehensive information database, and high financial strength rating, Euler Hermes aims to consolidate its leadership.
New EuropeTravel Insurance and Assistance Services(1)
Operations WeThrough Mondial Assistance Group, we are present in all key markets in this regionamong the world’s largest providers of travel insurance and are one of the top four international life insurance providers,assistance services based on statutorygross premiums written in 2005.2007((3)2).
ProductsAt Mondial Assistance Group, we seek to enter new markets and DistributionIn 2006, we continued to expand our product range and sales capacity throughout New Europe. We follow a multi-channel distribution approach and sell both unit-linked and traditional life insurancedevelop new products. In the fourth quarter of 2006, our companies in the region launched a limited-edition index-linked life insurance product across six markets. In 2006, our Hungarian insurer, Allianz Hungária Biztositó Rt., opened its own retail bank and has become an integrated financial services provider.
Expected Developments Central and Eastern Europe represents one of the fastest growing life insurance markets of the world, as current penetration levels are low. In anticipation of the expected growth, we continuously strengthen our sales capacity and product range.
United States
Operations In the United States, we are represented by Allianz Life Insurance Company of North America (or “Allianz Life United States”) which is, as with our property-casualty business in the United States, also organized under the umbrella of Allianz of America Inc. In August 2006, Allianz Life United States sold its health insurance business to HCC Insurance Holdings Inc.
Products and Distribution Allianz Life United States is the market leader in fixed-indexed annuities, with approximately one-third of the market share based on statutory premiums in 2006.(1) On the same
| In contrast to our other geographically-focused insurance businesses, we manage and offer the services of Euler Hermes and Mondial Assistance Group on a worldwide basis. |
(2) | Source: Own estimate based on information from International Credit Insurance and Surety Association, ICISA. |
(3) | Source: Own estimate based on published annual reports. |
basis, Allianz Life United States holds a 10% share of the overall fixed annuity marketAnglo, NAFTA Markets and also has a 2% share of the large variable annuity market.(1) Its smaller but growing product lines include individual life and long-term care insurance.Global Lines
Expected Developments Allianz LifeUnited States
Our property-casualty insurance business in the United States is taking measuresconducted through Fireman’s Fund Insurance Company (Fireman’s Fund) as well as Allianz Global Corporate & Specialty (AGCS). Our life and annuity business is run through Allianz Life Insurance Company of North America (Allianz Life U.S.).
We announced the merger of the respective complementary marine operations of Fireman’s Fund and AGCS to form a comprehensive world leader in this line of business. At the same time, we brought our commercial and specialty operations under one umbrella in order to increase efficiency. With this reorganization we continued to support our U.S. companies to leverage all of their available resources and assets and to enable them to anticipate more effectively and deliver on customer needs.
Through Fireman’s Fund, we underwrite personal, commercial and specialty lines, selling these products primarily through independent agents and brokers. Our personal business unit focuses on affluent and high net worth individuals, while our commercial business unit offers specialized property and casualty coverage for small and medium-sized businesses. Our crop unit offers multiperil crop and hail insurance.
Enhancing customer solutions, introducing new products and services, addressing selected adjacent
(4) | Banking activites are related to Dresdner Bank and will not be continued due to the sale of Dresdner Bank to Commerzbank. Please refer to “—Major transactions—Major disposals—Sale of Dresdner Bank AG” for further information. |
market niches and leveraging cross-selling through strengthened distribution management continue to be our initiatives for the coming year in order to enable growth for Fireman’s Fund in its target markets.
Our life and annuity business primarily underwrites fixed, fixed-indexed and variable annuities, which are sold through independent distribution channels, as well as through large financial institutions.
After a year characterized by challenging financial market developments, Allianz Life U.S. will continue to focus on creating and offering products that help our customers address their financial needs, particularly regarding retirement. The company will seek to further grow its annuity products business by expanding distribution with broker-dealers, banks and wire-houses, designing channel-specific products and also reinforcing product development of fixed-indexed and variable products and fixed-indexed products. For example, since November 2006, Allianz Life
United States has entered into broker-dealer marketing agreements, having signed six in 2006 adding more than 10,000 agents. In addition, we are currently undertaking certain reorganization measuresKingdom
We serve the market in the United States. Kingdom primarily through our subsidiary Allianz Insurance plc. In 2008, we focused on building up the new retail division for personal and specialty products in order to better serve our customers.
We are confidentoffer a broad range of property-casualty products, including a number of specialty products, which we sell to retail and commercial customers through a range of distribution channels, including affinity groups.
Operating in a highly competitive market, Allianz Insurance plc continues to concentrate on active “cycle management” in order to support operating profitability. We seek to capitalize on growth opportunities that these measures will also help us to strengthen our market position.offer a profitable correlation between premium rates and risks and forego premium growth in areas with increasing pricing pressure.
(2)Australia
The large majority of our property-casualty business in Asia-Pacific is generated by Allianz Australia, which serves the Australian and New Zealand markets. Since 2006, Allianz has sold life insurance products in Australia under the company name Allianz Australia Life Insurance Ltd.
Our Australian insurance operations include a variety of products and services, with strong positions in the workers’ compensation market, as well as in rehabilitation and occupational health, safety and environment services. We also operate in certain niche markets, including premium financing and pleasure craft insurance. Allianz Australia markets products through brokers and non-tied agents, as well as directly to customers. In 2008, we began offering term life directly over the internet. Further, we expanded our premium financing business to include receivables financing.
In Australia, market conditions remain competitive as insurance margins have declined in recent years. All insurers have begun reacting to lower profitability and decreasing investment returns, resulting in increasing insurance rates across all classes of business. This pattern is expected to continue into 2009.
Asia-PacificIreland
OperationsThroughout Ireland we offer a wide variety of property-casualty products, for both commercial and private customers. The products are distributed predominantly through brokers and banks as well as telephone and internet-based direct sales channels. In 2008, two new direct products were introduced, equine insurance and taxi insurance.
In Ireland, we expect private motor and home rates, and to a lesser extent commercial lines, to slowly become more favorable in 2009. Risk volumes in the market, however, could be under pressure if the Irish economic downward movement is severe.
Allianz Global Corporate and Specialty(1)
Allianz Global Corporate & Specialty delivers solutions for corporate and specialty clients in many industries.
Through Allianz Global Corporate & Specialty, we offer property, liability and engineering solutions to large corporate clients as well as specialty coverage, like marine, aviation and directors & officers insurance.
(1) | In contrast to our other geographically-focused insurance businesses, we manage and offer these services of Allianz Global Corporate & Specialty on a worldwide basis. |
Through the combination of our international corporate and specialty business within Allianz Global Corporate & Specialty, managing a diversified portfolio of risk management solutions and services, we expect to realize synergies and increase efficiency.
Allianz Worldwide Care(1)
Allianz Worldwide Care is located in Ireland and offers expatriate health insurance products.
(1) | In contrast to our other geographically-focused insurance businesses, we manage and offer these services of Allianz Worldwide Care on a worldwide basis. Allianz Worldwide Care does not sell policies in the U.S.A. |
Growth Markets
Asia-Pacific
We consider Asia-Pacific to be one of our major growth regions. Allianz has been present in the region since 1917, when we began providing fire and marine insurance in the coastal cities of China.
(2) | Banking activites are related to Dresdner Bank and will not be continued due to the sale of Dresdner Bank to Commerzbank. Please refer to “—Major transactions—Major disposals—Sale of Dresdner Bank AG” for further information. |
Today, Allianz is active in all key markets of the region, offering its core businesses of property and casualty insurance, life and health insurance and asset management. With more than 13,000 staff, Allianz serves over 7.2 million customers in the region.
We offer a full suite of products through our distribution network of approximately 70,000 agents in the region. In most countries we operate through multiple distribution channels.
In the Asia-Pacific region we maintain property-casualty operations in Malaysia, Indonesia and other Asia-Pacific countries and key markets, including China, Thailand, Japan, Hong Kong, Singapore, Laos and India.
The majority of our operations arelife/health business in this region is conducted in South Korea through Allianz Life Insurance Co. Ltd. (or “Allianz(Allianz Life Korea”).Korea) and in Taiwan through Allianz Taiwan Life Insurance Company. Allianz Life Korea iswas the fifth-largestsixth-largest life insurance company in South Korea based on statutory premiums in 2005.2007((1)3). We are also represented in Taiwan by Allianz President Life Insurance Co. Ltd. (or “Allianz Life Taiwan”) and maintain operations in Malaysia, Indonesia, as well as other Asia-Pacific countries, includingin China, Thailand and India.since this year also in Japan.
Products and DistributionOur South Korean operations marketoperation markets a wide range of life and health insurance products. Due to the very low interest rate environment products—and in recent years developed a favorable equity marketleading position in South Korea, Allianz Life Korea has increasingly shifted its focus to variable lifeequity-indexed products. Allianz Taiwan Life Taiwan sells term life, whole life and endowment products. In addition, Allianz Life Taiwan increasingly offers investment-linked products.investment-oriented products especially through banks.
Expected DevelopmentsWe are seeking to expand in all of our selected markets in the region through
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internal further organic growth and selected acquisitions. For example,We will further strengthen our distribution capabilities and use the hub-and-spoke approach in January 2007, we agreed with our long-term joint venture partner in Taiwan, the Uni-President Group,order to acquire Uni-President’s shareholding in our joint venture Allianz Life Taiwan.
increase operational effectiveness. We view especially China isas a strategic growth market for the Allianz Group and ourAllianz. Our partnership with Industrial and Commercial Bank of China Ltd. emphasizes our long-term commitment to the market and also offers a platform for our strategic expansion in China.expansion.
Additionally, Bajaj Allianz Life Insurance Company Ltd. (or “Allianz Life India”),New Europe
Our presence in whichNew Europe dates back to the acquisition of the Hungarian state-run insurance company Hungaria Biztosito in 1989. Today, we held an interestoperate our business in this region through more than
(1) | Source: South Korean Life Insurance Association. |
25 companies in 10 countries, and we are the largest foreign insurer based on both statutory premiums and gross premiums written in 2007(2). We offer life, health, property and casualty insurance, as well as pension fund products and banking services.
For property-casualty we are the leading international insurance company in New Europe based on gross premiums written in 2007(2) and serve the market through our operating subsidiaries in Bulgaria, Croatia, the Czech Republic, Hungary, Kazakhstan, Poland, Russia, Romania, Slovakia and Ukraine.
The primary products sold in these countries are compulsory motor third-party liability, motor own damage coverage as well as industrial, commercial and private property lines. Motor business and, increasingly, other personal lines continue to be the primary source of 26.0% at December 31, 2006, has demonstrated strong growthour growth. Further expansion in the last several years, becomingmarket and development of our sales network will be in focus for the coming year. We believe we are well-positioned to capture the opportunities of the property-casualty market.
We are present in all key life and health markets in this region and are the fourth-ranked life insurance provider, based on statutory premiums in 2007(2). New Europe represents the third biggest health portfolio within the Allianz Group.
We continued to expand our life/health product range and sales capacity throughout New Europe by following a leading private insurermulti-channel distribution approach. We also continued to expand offerings of investment-oriented products in India,life business. In 2008, we also started to offer pension fund products in Romania. New Europe represents one of the fastest growing life insurance markets in the world, primarily resulting from the current low penetration levels. We see a trend in the rising ages of population, which we expect to continue.serve with a strong position in pension fund business. Following the capital market crisis, we expect a shift from investment-oriented to traditional life products.
South AmericaMiddle East and North Africa
To elevate our presence in the Middle East region and to set the course for further internal and
(2) | Source: Own estimate based on published statistics from regulatory bodies and insurance associations. |
external growth, we established the Middle East / North Africa (MENA) as our third major growth region. The regional unit comprises Allianz’s entities in Bahrain, Egypt, India, Lebanon, Pakistan, Saudi Arabia and Sri Lanka, and is directed from a central office in Bahrain.
OperationsOur largest life operationIndian joint-ventures contribute more than 90% to the region’s total gross premiums written. We also sell property-casualty products in this region mainly through Allianz Egypt and Allianz SNA (Lebanon). Both entities also offer life/health products. Allianz Life Egypt has experienced strong growth for some time and is ranked fourth in Colombia. We also operate a small life portfoliothe period 2007/2008, based on statutory premiums(1). Allianz SNA is among the top four companies in Brazil.Lebanon in both Life and property-casualty business based on gross premiums written and statutory premiums, respectively, in 2007(1).
ProductsIn Bahrain, we started to sell life and Distribution Our life insurance activitiesproperty-casualty products through our new entity Allianz Takaful. Bahrain will serve as a hub for future operations in Colombia include traditional group life insurance as well as investment-oriented products like savings, pensions and annuity products.other countries of the Middle East.
Expected DevelopmentsThroughout the region, more than 250,000 agents distribute our products. Furthermore, we sell products via banks. In property-casualty we also distribute via brokers and dealers, who are a vital part of our distribution force. In India we see the direct channel growing in importance. We estimate thatintend to further strengthen our distribution capabilities and use the hub-and-spoke approach in order to increase operational effectiveness.
We see the Middle Eastern region as a growth ratesmarket and are seeking to expand in all of our selected markets in the South American life insurance market will remain attractive over the coming years. Accordingly, we seek to expandregion through further organic growth and selected acquisitions. We are also targeting additional growth in India through our presence in life insurance beyond our Colombian subsidiary.joint venture with Bajaj Allianz Financial Distributors Ltd.
International PresenceMajor Transactions
Legal Structure and Significant Changes
Allianz SE is a European Company (Societas Europaea, or SE) incorporated in the Federal Republic of Germany and organized under the laws
(1) | Source: Own estimate based on published statistics from regulatory bodies and insurance associations. |
of the Federal Republic of Germany and the European Union. Allianz SE is the ultimative parent of the Allianz Group.
Squeeze-out of Allianz Lebensversicherungs-AG
The following table sets forth selectedsqeeze-out procedure of Allianz Group operating companiesLebensversicherungs-AG, which we announced on January 18, 2008, was completed in December 2008.
Major Disposals
Sale of Dresdner Bank AG
On August 31, 2008, Allianz SE (Allianz) and Commerzbank AG (Commerzbank) agreed on the sale of Dresdner Bank AG (Dresdner Bank) to Commerzbank, which was completed on January 12, 2009.
The consideration received by geographic region at December 31, 2006, including our ownership percentage. It does not contain all companiesAllianz comprised a cash component of € 3,215 million, 163.5 million Commerzbank shares, the asset manager cominvest and a 15-year exclusive sales partnership, whereby Commerzbank will distribute in Germany Allianz’s insurance and banking products (bancassurance and assurbanking) and asset management products. On January 8, 2009, Allianz announced to subscribe to a silent participation of € 750 million in Dresdner Bank after closing alongside a new equity tranche granted to Commerzbank by the German government’s Special Fund Financial Market Stabilization program (SoFFin). Like SoFFin, Allianz will receive a 9% coupon on this investment. In addition, Allianz acquired from Dresdner Bank Collateralized Debt Obligations (CDOs) with a face value of € 2 billion for a consideration of approximately € 1.1 billion. With SoFFin’s capital support to Commerzbank, Allianz’ stake in Commerzbank will be approximately 14%. Major financial impacts of the transaction are described in “—Executive Summary”.
Major Acquisitions
Acquisition of further stakes in Koç Allianz Sigorta AŞ and Koç Allianz Hayat ve Emeklilik AŞ
In April 2008, the Allianz Group nor does it indicate whether an interest is held directly or indirectly by Allianz SE. Further, the ownership percentage presentedsigned a share purchase agreement to acquire 47.1% of shares in the following table includes equity participations held by dependent enterprisesnon-life insurer Koç Allianz Sigorta AŞ, Istanbul, and 51.0% of the shares in the life-insurance and pension company Koç Allianz Hayat ve Emeklilik AŞ, Istanbul, for a total consideration of € 373 million. The transaction became effective on July 21, 2008 so that the Allianz Group in full, even if the Allianz Group’s ownership in the dependent enterprise is below 100%. Please see Notenow controls 84.2% and 89.0% of these companies, respectively.
54 to our consolidated financial statementsSince October 7, 2008, the companies operate under the name Allianz Sigorta AŞ and Allianz Hayat ve Emeklilik AŞ.
Capital investment in The Hartford
On October 6, 2008, Allianz SE announced a binding agreement providing for a more extensive listcapital investment of U.S. $ 2.5 billion in The Hartford, one of the largest insurance companies in the United States. We have purchased, for a consideration of U.S. $ 2.5 billion, 6 million preferred shares convertible into 24 million shares of common stock after receipt of applicable approvals, warrants for 69 million Hartford shares and junior subordinated debentures with a nominal value of U.S. $ 1.75 billion and a 10% interest coupon. Effective January 9, 2009, the preferred stock has been converted into common stock.
Reorganization
Reorganization of the German Insurance Operations
The reorganization of our German insurance operations was successfully completed by year-end 2008 . This process was part of our ongoing effort to simplify structures and reduce complexity within the Allianz Group with the aim to concentrate stronger on our clients’ needs as well as enabling us to react to changes in our markets with greater speed, focus and flexibility. Our goal was to create one joint presence of our insurance operations, with customers perceiving Allianz as one unit with comprehensive high quality services. The reorganization was part of our strategy to further develop our leading position in the German insurance market.
We believe that the reorganization program leads to reduced complexity and will allow us to reduce costs in the long-term.
In the framework of the reorganization, back office functions were lined up based on a shared services approach. This process was already started in 2006 and was implemented in autumn 2008 according to schedule. In the course of 2007, the Allianz north-east service region tested the functionality of the new business model in a pilot phase. In 2008, the remaining three areas were also successfully reorganized.
With effect from January 1, 2009, the newly created Banking division was grouped under the roof of Allianz Group companies.
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Business segments
(1) 99.99%Deutschland AG. It is headed by a former member of the voting share capital.
(2) ControlledBoard of Managing Directors of Dresdner Bank. The Banking division comprises the Oldenburgische Landesbank and the banking customers introduced by the Allianz Group.sales force within the last couple of years.
Allianz Deutschland AG is now organized according to the following business structure.
Business model of Allianz Deutschland AG
Property-Casualty Insurance Reserves
General
The Allianz Group establishes property-casualty loss reserves for the payment of losses and loss adjustment expenses (or “LAE”) on claims which have occurred but are not yet fully settled. Loss and LAE reserves fall into two categories: individual case reserves for reported claims and reserves for incurred but not reported (or “IBNR”) claims.
Case reserves are based on estimates of future loss and LAE payments on claims already reported. Such estimates are made on a case-by-case basis, based on the facts and circumstances available at the time the reserves are initially established. The estimates reflect the informed judgment of claims personnel based on general insurance reserving practices and knowledge of the nature and value of a specific type of claim. These case reserves are regularly re- evaluated in the ordinary course of the settlement process and adjustments are made as new information becomes available.
IBNR reserves are established to recognize the estimated cost of losses that have occurred but where the Allianz Group has not yet been notified (incurred but not yet reported, “IBNYR”), as well as additional development of claims relating toon case reserves (incurred but not enough reported, or “IBNER”). SimilarIBNR reserves, similar to case reserves for reported claims, IBNR reserves are established to recognize the estimated costs, including loss adjustment expenses,LAE, necessary to bring claims to final settlement. The Allianz Group relies on its past experience, adjusted for current trends and any other relevant factors, to estimate IBNR reserves.
IBNR reserves are estimates based on actuarial and statistical projections of the expected cost of the ultimate settlement and administration of claims. The analyses are based on facts and circumstances known at the time, predictions of future events, estimates of future inflation and other societal and economic factors. Trends regardingin claim frequency, severity and time lagtime-lag in reporting are examples of factors used in calculatingprojecting the IBNR reserves. IBNR reserves are reviewed and revised periodically as additional information becomes available.
The process of estimating loss and LAE reserves is by nature uncertain due to the large number of variables affecting the ultimate amount of claims.
Some of these variables are internal to the Allianz Group, such as changes in claims handling procedures, introduction of new information technology (IT)IT systems or company acquisitions and divestitures. Other factorsOthers are external, to the Allianz Group, such as inflation, judicial trends and changes in the applicable legallegislative and regulatory environment.changes. The Allianz Group attempts to reduce the uncertainty in reserve estimates through the use of multiple actuarial and reserving techniques and analysis of the assumptions underlying each technique.
Within the Allianz Group, loss and LAE reserves are estimated by local operating entity, and within each entity by line of business. Group-level actuaries at Allianz SE use a variety of methods to oversee and monitor reserve levels set by the local companies. The loss reserving process on a local entity level and the central oversight function are described in more detail below.
During 2006,2008, there were no significant changes in the mix of business written across Allianz Group. Moreover, there were no material changes to the amount and type of reinsurance placed in respect of the Group’s business.
On the basis of currently available information, management believes that the Allianz Group’s property-casualty loss and LAE reserves are adequate. However, the establishment of loss reserves is an inherently uncertain process, and accordingly, there can be no assurance that ultimate losses will not differ from these estimates. For more information, refer to “Risk Factors—Risks arising from the nature of our business—Loss Reserves for Allianz Group’s property-casualty insurance and reinsurance policies are based on estimates as to future claims liabilities. Adverse developments relating to claims could lead to further reserve additions and materially adversely impact Allianz Group’s results of operations.”
Overview of Loss Reserving Process
Within the Allianz Group, loss and LAE reserves are set locally by reserving actuaries, subject to central monitoring and oversight by the Allianz SE actuarial department (“Group Actuarial”). This two stage reserving process is designed so that reserves are set by those individuals most familiar with the underlying business, but in accordance with central standards and oversight. Our central standards are designed to provideensure that consistent reserving methodologies and assumptions to beare employed across the Allianz Group.
Local Reserving Processes
In each jurisdiction, reserves are calculated for individual lines of business, taking into consideration
a wide range of local factors. This local reserving
process begins with local reserving actuaries gathering data, to calculate estimates and reserves, with our companies typically dividingreservingdividing reserving data into the smallest possible homogeneous segments, while maintaining sufficient volume to form the basis for stable projections. For longer-tailed lines of business such as motor liability, development data going back for up to twenty years or more years is used, while for shorter-tailed lines such as property, data going back five to seventen years is typically considered sufficient. Once data is collected, we derivepatternsderive patterns of loss payment and emergence of claims based on historical data organized into development triangles arrayed by accident year vs.versus development year. Loss payment and reporting patterns are selected based on observed historical development factors and also on the judgment of the reserving actuary using an understanding of the underlying business, claims processes, data and systems as well as the market, economic, societal and legal environment.Weenvironment. We then develop expected loss ratios, which are derived from the analysis of historical observed loss ratios, adjusted for a range of factors such as loss development, claims inflation, changes in premium rates, changes in portfolio mix and change in policy terms and conditions.
Using the development patterns and expected loss ratios described above, local reserving actuaries produce estimates of ultimate loss and allocated loss adjustment expense (LAE) using several methods. The most commonly used local reserving methods are:
Loss Development (Chain-Ladder) Method, which estimates ultimate loss and LAE by applying loss development patterns directly to observed paid and reported losses.
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Bornhuetter-Ferguson Method, which estimates loss and LAE using development patterns, observed losses and prior expected loss estimates.
Frequency-Severity Methods, which produce separate estimates of the ultimate number and average size of claims. In addition, individual companies use a variety of other methods for certain lines of business.
Using the above estimate of ultimate loss and LAE, we directly estimate total loss and LAE
reserves by subtracting cumulative payments for claims and LAE through the relevant balance sheet date. Finally, local reserving actuaries calculate the relevant entities’ IBNR reserves as the difference between (i) the total loss and LAE reserves and (ii) the case reserves as established by claims adjusters on a case-by-case basis.
Because loss reserves represent estimates of uncertain future events, our local reservereserving actuaries determine a range of reasonably possible outcomes. To analyze the variability of loss reserve estimates, actuaries employ a range of methods and approaches, including simple sensitivity testing using alternative assumptions, as well as more sophisticated stochastic techniques. Group reserving standards require that each company’s local reserve committee meet quarterly to discuss and document these reserving decisions and to select the best estimate of the ultimate amount of reserves within thea range of possible outcomes and the rationale for that selection for the particular entity.
Central Reserve Oversight Process
Building on the local reserving process described above, Group Actuarial conducts a central process of reserve oversight. This process ensures that reserves are set at the local level in accordance with Group-wide standards of actuarial practice regarding methods, assumptions and data. The key components of this central oversight process are:
Minimum standards for actuarial loss reserving;
Regular central independent reviews by Group Actuarial of reserves of local operating entities;
Regular peer reviews by Group Actuarial of reserve reports provided by local operating entities; and
Regular quantitative and qualitative reserve monitoring.
Each of these components is described further below.
Minimum standards for actuarial loss reserving:Group-wide minimum standards of actuarial reserving define the reserving practices which must be conducted by each operating entity. These standards provide guidance regarding all relevant aspects of loss reserving, including organization and structure, data, methods, and
reporting. Group Actuarial monitors compliance with these minimum standards through a combination of
diagnostic review – reviews—i.e. standardized qualitative assessment of the required components in the reserving process – process—and local site visits. Group Actuarial informs the local operating entity of areas requiring immediate remediation as well as areas for potential improvement, and coordinates with the local operating entities to address the relevant issues and implement improvements.
Regular central independent reviews by Group Actuarial of reserves of local operating entities:Group Actuarial performs independent reviews of loss and LAE reserves for key local operating entities on a regular basis. This process is designed such that all significantthe largest entities are reviewed once every three years.a year. Such a review typically starts with site visits to ensure that Group Actuarial updates their knowledge of the underlying business as well as the issues related to data and organization. Group Actuarial then conducts an analysis of reserves using data provided by the operating entity. Preliminary conclusions are then discussed with the local operating entity prior to being finalized. Any material differences between Group Actuarial’s reserve estimates and those of the local operating entity are then discussed, and evaluated to determine if changes in assumptions are needed.
Regular peer reviews by Group Actuarial of reserve reports provided by local operating entities:Local operating entities are required to provide Group Actuarial with an annual reserve report, documenting the entity’s analysis of its loss and LAE reserves. The Allianz Group standard for these reports is that an independent actuary, by analyzing this report and discussing it with the entity, must be capable of forming an opinion regarding the appropriateness of the entity’s held reserves. In years when Group Actuarial does not perform a complete reserve review of an Allianz Group company, it will perform a peer review of the entity’s own analysis.
Regular quantitative and qualitative reserve monitoring: On a quarterly basis, Group Actuarial
monitors reserve levels, movements and trends across the Allianz Group. This monitoring is conducted on the basis of quarterly loss data submitted by local operating entities as well as through participation in local reserve committees and frequent dialogue with local actuaries of each operating entity. This quarterly loss data provides information about quarterly reserve movements, as the information is presented by accident year and line of business, as defined by the local operating entity.
The oversight and monitoring of the Group’s loss reserves culminate in quarterly meetings of the Group Reserve Committee, which monitors key developments across the Group affecting the adequacy of loss reserves.
Loss and LAE Composition by Region and Line of Business
The time required to learn of and settle claims is an important consideration in establishing reserves.
Short-tail claims, such as automobilemotor property damage claims, are typically reported within a few days or weeks and are generally settled within two to three years. Medium-tail claims such as personal and commercial motor liability claims generally take four to six years to settle, while long-tail claims, such as general liability, workers compensation, construction and professional liability claims take longer.
The following table breaks down the loss and LAE reserves of the Allianz Group, in total and separately by IBNR and case reserves, gross of reinsurance, by region and major line of business for the years ending December 31, 2004, 20052006, 2007 and 2006,2008, on an IFRS basis. The credit, travel and global corporate lines are written on a world-wide basis through multiple legal entities in several countries, and as a result, are not included in the regional totals.
The Allianz Group estimates that loss and LAE reserves consist of approximately 12%10% short-tail, 59%60% medium-tail and 29%30% long-tail business.
Allianz Group
Loss and LAE Reserves by Year Region and Line of Business, Gross of Reinsurance(1)
Automobile Insurance | General Liability | Property | Other Short-Tail Lines(2) | Other Medium-Tail Lines(2) | Other Long-Tail Lines(2) | Total | |||||||||||||||||||||||||||||||||||||||
As of December 31, | 2004 | 2005 | 2006 | 2004 | 2005 | 2006 | 2004 | 2005 | 2006 | 2004 | 2005 | 2006 | 2004 | 2005 | 2006 | 2004 | 2005 | 2006 | 2004 | 2005 | 2006 | ||||||||||||||||||||||||
€mn | €mn | €mn | €mn | €mn | €mn | €mn | €mn | €mn | €mn | €mn | €mn | €mn | €mn | €mn | €mn | €mn | €mn | €mn | €mn | €mn | |||||||||||||||||||||||||
Germany(3) | 4,806 | 4,696 | 4,681 | 1,714 | 1,826 | 1,875 | 732 | 748 | 556 | — | — | — | 2,165 | 2,731 | 2,454 | 2,219 | 2,051 | 2,017 | 11,637 | 12,053 | 11,583 | ||||||||||||||||||||||||
Case Reserves(1) | 4,663 | 4,579 | 4,555 | 1,127 | 1,251 | 1,300 | 597 | 592 | 452 | — | — | — | 1,503 | 1,984 | 1,631 | 640 | 679 | 695 | 8,530 | 9,085 | 8,632 | ||||||||||||||||||||||||
IBNR | 143 | 117 | 126 | 587 | 574 | 575 | 135 | 156 | 104 | — | — | — | 662 | 748 | 824 | 1,579 | 1,373 | 1,322 | 3,106 | 2,968 | 2,951 | ||||||||||||||||||||||||
France | 2,132 | 2,180 | 2,224 | 1,777 | 1,901 | 1,924 | 1,200 | 1,161 | 1,103 | 244 | 306 | 316 | 2,074 | 2,144 | 2,182 | 1,113 | 1,052 | 997 | 8,540 | 8,744 | 8,746 | ||||||||||||||||||||||||
Case Reserves(1) | 1,607 | 1,610 | 1,511 | 1,538 | 1,541 | 1,534 | 1,002 | 963 | 921 | 76 | 95 | 114 | 828 | 785 | 763 | 67 | 54 | 66 | 5,117 | 5,049 | 4,910 | ||||||||||||||||||||||||
IBNR | 525 | 571 | 713 | 238 | 359 | 390 | 198 | 197 | 182 | 169 | 211 | 202 | 1,246 | 1,359 | 1,419 | 1,046 | 997 | 931 | 3,423 | 3,695 | 3,836 | ||||||||||||||||||||||||
Italy | 3,920 | 4,175 | 4,192 | 1,495 | 1,579 | 1,716 | 445 | 449 | 521 | 152 | 142 | 134 | 425 | 430 | 459 | 9 | 12 | 14 | 6,446 | 6,786 | 7,035 | ||||||||||||||||||||||||
Case Reserves(1) | 2,626 | 2,927 | 3,091 | 1,025 | 1,023 | 1,067 | 401 | 422 | 510 | 131 | 119 | 110 | 379 | 385 | 407 | 8 | 11 | 13 | 4,571 | 4,886 | 5,197 | ||||||||||||||||||||||||
IBNR | 1,294 | 1,249 | 1,101 | 470 | 556 | 649 | 43 | 27 | 10 | 21 | 23 | 24 | 45 | 45 | 53 | 0 | 1 | 1 | 1,875 | 1,900 | 1,838 | ||||||||||||||||||||||||
United Kingdom | 964 | 1,029 | 1,005 | 342 | 418 | 503 | 465 | 615 | 485 | 66 | 73 | 77 | 305 | 194 | 259 | 897 | 927 | 935 | 3,038 | 3,257 | 3,265 | ||||||||||||||||||||||||
Case Reserves(1) | 789 | 836 | 847 | 256 | 306 | 356 | 305 | 456 | 356 | 27 | 30 | 29 | 191 | 116 | 179 | 613 | 607 | 577 | 2,180 | 2,350 | 2,344 | ||||||||||||||||||||||||
IBNR | 174 | 193 | 157 | 87 | 112 | 147 | 160 | 159 | 129 | 39 | 44 | 48 | 114 | 79 | 80 | 284 | 320 | 359 | 858 | 907 | 921 | ||||||||||||||||||||||||
Switzerland | 845 | 824 | 842 | 239 | 236 | 233 | 101 | 146 | 104 | 96 | 82 | 74 | 554 | 872 | 836 | 1,116 | 1,119 | 1,080 | 2,950 | 3,278 | 3,169 | ||||||||||||||||||||||||
Case Reserves(1) | 728 | 718 | 683 | 200 | 189 | 191 | 83 | 126 | 74 | 66 | 59 | 53 | 447 | 675 | 725 | 822 | 791 | 764 | 2,346 | 2,557 | 2,490 | ||||||||||||||||||||||||
IBNR | 117 | 106 | 159 | 39 | 47 | 42 | 18 | 20 | 29 | 30 | 24 | 22 | 107 | 197 | 111 | 294 | 328 | 315 | 604 | 721 | 679 | ||||||||||||||||||||||||
Spain | 915 | 1,036 | 1,134 | 210 | 264 | 280 | 120 | 135 | 142 | 2 | 2 | 3 | 35 | 69 | 82 | 135 | 189 | 183 | 1,417 | 1,695 | 1,824 | ||||||||||||||||||||||||
Case Reserves(1) | 861 | 992 | 1,072 | 177 | 219 | 208 | 110 | 117 | 117 | 2 | 2 | 2 | 29 | 51 | 64 | 116 | 168 | 151 | 1,294 | 1,550 | 1,614 | ||||||||||||||||||||||||
IBNR | 54 | 44 | 62 | 32 | 44 | 72 | 11 | 17 | 25 | 0 | 0 | 0 | 6 | 19 | 19 | 20 | 21 | 32 | 123 | 145 | 210 | ||||||||||||||||||||||||
Other Europe | 2,937 | 2,742 | 2,864 | 1,039 | 1,033 | 1,051 | 537 | 485 | 538 | 399 | 302 | 197 | 171 | 174 | 146 | 638 | 604 | 592 | 5,721 | 5,340 | 5,388 | ||||||||||||||||||||||||
Case Reserves(1) | 2,099 | 2,379 | 2,378 | 770 | 781 | 786 | 440 | 441 | 433 | 337 | 247 | 132 | 153 | 133 | 121 | 460 | 432 | 436 | 4,259 | 4,414 | 4,287 | ||||||||||||||||||||||||
IBNR | 838 | 363 | 486 | 269 | 252 | 265 | 97 | 44 | 104 | 62 | 54 | 65 | 18 | 41 | 25 | 178 | 172 | 157 | 1,462 | 926 | 1,102 | ||||||||||||||||||||||||
NAFTA Region(3) | 469 | 471 | 349 | 2,759 | 3,749 | 3,041 | 739 | 951 | 722 | 95 | 37 | 169 | 678 | 849 | 1,108 | 1,405 | 1,462 | 1,201 | 6,144 | 7,519 | 6,589 | ||||||||||||||||||||||||
Case Reserves(1) | 256 | 275 | 202 | 1,074 | 1,182 | 976 | 104 | 183 | 89 | 85 | 23 | 101 | 380 | 449 | 425 | 1,145 | 1,149 | 938 | 3,043 | 3,260 | 2,730 | ||||||||||||||||||||||||
IBNR | 213 | 196 | 147 | 1,685 | 2,568 | 2,065 | 635 | 768 | 632 | 10 | 14 | 68 | 298 | 401 | 683 | 259 | 313 | 263 | 3,101 | 4,260 | 3,859 | ||||||||||||||||||||||||
Asia -Pacific Region | 1,211 | 1,384 | 1,381 | 343 | 379 | 379 | 226 | 219 | 184 | 33 | 39 | 40 | 101 | 110 | 119 | 599 | 671 | 665 | 2,513 | 2,802 | 2,768 | ||||||||||||||||||||||||
Case Reserves(1) | 667 | 782 | 899 | 107 | 110 | 113 | 138 | 147 | 114 | 2 | 3 | 2 | 42 | 49 | 49 | 201 | 217 | 221 | 1,157 | 1,307 | 1,398 | ||||||||||||||||||||||||
IBNR | 543 | 602 | 483 | 237 | 270 | 266 | 88 | 72 | 70 | 32 | 36 | 38 | 59 | 61 | 70 | 398 | 454 | 444 | 1,356 | 1,495 | 1,371 | ||||||||||||||||||||||||
South America & other | 108 | 165 | 176 | 29 | 56 | 59 | 148 | 110 | 149 | — | — | — | 51 | 77 | 68 | — | — | — | 336 | 407 | 452 | ||||||||||||||||||||||||
Case Reserves(1) | 87 | 130 | 127 | 28 | 55 | 57 | 131 | 91 | 136 | — | — | — | 34 | 52 | 46 | — | — | — | 280 | 328 | 366 | ||||||||||||||||||||||||
IBNR | 21 | 34 | 48 | 1 | 1 | 2 | 16 | 19 | 13 | — | — | — | 18 | 25 | 22 | — | — | — | 56 | 80 | 86 | ||||||||||||||||||||||||
Subtotal of countries / regions | 18,304 | 18,702 | 18,849 | 9,947 | 11,440 | 11,061 | 4,713 | 5,019 | 4,502 | 1,088 | 984 | 1,009 | 6,558 | 7,652 | 7,714 | 8,130 | 8,086 | 7,684 | 48,741 | 51,882 | 50,818 | ||||||||||||||||||||||||
Case Reserves(1) | 14,382 | 15,228 | 15,365 | 6,303 | 6,656 | 6,588 | 3,311 | 3,538 | 3,204 | 725 | 578 | 543 | 3,986 | 4,678 | 4,409 | 4,072 | 4,107 | 3,859 | 32,778 | 34,785 | 33,968 | ||||||||||||||||||||||||
IBNR | 3,923 | 3,475 | 3,484 | 3,645 | 4,784 | 4,473 | 1,402 | 1,481 | 1,298 | 363 | 406 | 467 | 2,572 | 2,974 | 3,305 | 4,059 | 3,979 | 3,825 | 15,963 | 17,097 | 16,850 | ||||||||||||||||||||||||
Credit Insurance | — | — | — | — | — | — | — | — | — | 681 | 688 | 691 | 529 | 424 | 351 | — | — | — | 1,210 | 1,112 | 1,042 | ||||||||||||||||||||||||
Case Reserves(1) | — | — | — | — | — | — | — | — | — | 454 | 445 | 452 | 696 | 663 | 586 | — | — | — | 1,150 | 1,108 | 1,038 | ||||||||||||||||||||||||
IBNR | — | — | — | — | — | — | — | — | — | 228 | 243 | 239 | (168 | ) | (239 | ) | (235 | ) | — | — | — | 60 | 4 | 4 | |||||||||||||||||||||
Allianz Global Corporate & Specialty(3) | — | — | — | 1,577 | 1,632 | 1,399 | 1,252 | 1,930 | 1,594 | — | 72 | 131 | 1,912 | 2,819 | 2,921 | 706 | 685 | 616 | 5,448 | 7,137 | 6,662 | ||||||||||||||||||||||||
Case Reserves(1) | — | — | — | 713 | 713 | 719 | 976 | 1,305 | 966 | — | 33 | 78 | 1,290 | 1,622 | 1,463 | 408 | 441 | 408 | 3,387 | 4,114 | 3,633 | ||||||||||||||||||||||||
IBNR | — | — | — | 864 | 919 | 681 | 276 | 625 | 629 | — | 39 | 53 | 622 | 1,197 | 1,458 | 298 | 244 | 208 | 2,061 | 3,023 | 3,028 | ||||||||||||||||||||||||
Travel Insurance and Assistance Services | — | — | — | — | — | — | — | — | — | 130 | 128 | 143 | — | — | — | — | — | — | 130 | 128 | 143 | ||||||||||||||||||||||||
Case Reserves(1) | — | — | — | — | — | — | — | — | — | 103 | 108 | 117 | — | — | — | — | — | — | 103 | 108 | 117 | ||||||||||||||||||||||||
IBNR | — | — | — | — | — | — | — | — | — | 27 | 20 | 26 | — | — | — | — | — | — | 27 | 20 | 26 | ||||||||||||||||||||||||
Subtotal of specific business (global) | — | — | — | 1,577 | 1,632 | 1,399 | 1,252 | 1,930 | 1,594 | 811 | 888 | 964 | 2,440 | 3,243 | 3,272 | 706 | 685 | 616 | 6,788 | 8,377 | 7,846 | ||||||||||||||||||||||||
Case Reserves(1) | — | — | — | 713 | 713 | 719 | 976 | 1,305 | 966 | 557 | 586 | 647 | 1,986 | 2,285 | 2,049 | 408 | 441 | 408 | 4,640 | 5,330 | 4,789 | ||||||||||||||||||||||||
IBNR | — | — | — | 864 | 919 | 681 | 276 | 625 | 629 | 254 | 302 | 317 | 454 | 958 | 1,223 | 298 | 244 | 208 | 2,147 | 3,047 | 3,057 | ||||||||||||||||||||||||
Allianz Group Total | 18,304 | 18,702 | 18,849 | 11,525 | 13,072 | 12,460 | 5,965 | 6,949 | 6,096 | 1,899 | 1,872 | 1,973 | 8,998 | 10,894 | 10,986 | 8,837 | 8,770 | 8,300 | 55,528 | 60,259 | 58,664 | ||||||||||||||||||||||||
Case Reserves(1) | 14,382 | 15,228 | 15,365 | 7,016 | 7,369 | 7,307 | 4,287 | 4,843 | 4,169 | 1,282 | 1,164 | 1,190 | 5,972 | 6,963 | 6,458 | 4,480 | 4,548 | 4,267 | 37,418 | 40,115 | 38,757 | ||||||||||||||||||||||||
IBNR | 3,923 | 3,475 | 3,484 | 4,509 | 5,703 | 5,153 | 1,678 | 2,106 | 1,927 | 617 | 707 | 783 | 3,026 | 3,931 | 4,528 | 4,357 | 4,223 | 4,032 | 18,110 | 20,145 | 19,908 |
IFRS Basis
Euro in millions
2008 | 2007 | 2006 | |||||
Motor | 18,686 | 19,264 | 18,924 | ||||
Case Reserves | 15,196 | 15,943 | 15,401 | ||||
IBNR Reserves | 3,490 | 3,321 | 3,524 | ||||
General Liability | 11,286 | 11,306 | 11,578 | ||||
Case Reserves | 6,797 | 6,734 | 6,854 | ||||
IBNR Reserves | 4,488 | 4,571 | 4,724 | ||||
Workers Compensation / Employers Liability | 4,545 | 4,602 | 4,876 | ||||
Case Reserves | 2,150 | 2,103 | 2,262 | ||||
IBNR Reserves | 2,395 | 2,499 | 2,614 | ||||
Property | 3,893 | 3,989 | 3,910 | ||||
Case Reserves | 3,447 | 3,389 | 3,191 | ||||
IBNR Reserves | 445 | 600 | 720 | ||||
Inwards Reinsurance | 2,330 | 2,493 | 2,728 | ||||
Case Reserves | 1,388 | 1,364 | 1,755 | ||||
IBNR Reserves | 942 | 1,129 | 972 | ||||
Personal Accident | 1,264 | 1,297 | 1,289 | ||||
Case Reserves | 1,167 | 1,138 | 1,137 | ||||
IBNR Reserves | 98 | 159 | 152 | ||||
Construction Damage and Liability | 1,872 | 1,732 | 1,572 | ||||
Case Reserves | 534 | 533 | 557 | ||||
IBNR Reserves | 1,338 | 1,199 | 1,015 | ||||
Credit Insurance | 1,407 | 1,042 | 1,042 | ||||
Case Reserves | 1,315 | 1,045 | 1,038 | ||||
IBNR Reserves | 92 | (3 | ) | 4 | |||
AGCS(1) | 6,124 | 6,142 | 7,435 | ||||
Case Reserves | 3,629 | 3,591 | 4,293 | ||||
IBNR Reserves | 2,495 | 2,551 | 3,142 | ||||
Other(2) | 4,209 | 3,595 | 3,689 | ||||
Case Reserves | 2,066 | 1,897 | 2,027 | ||||
IBNR Reserves | 2,142 | 1,698 | 1,662 | ||||
Allianz Group Total(3) | 55,616 | 55,462 | 57,043 | ||||
Case Reserves | 37,690 | 37,737 | 38,516 | ||||
IBNR | 17,926 | 17,724 | 18,528 |
(1) |
|
|
|
| Allianz Global Corporate & Specialty was established in 2006 and combines reserves formerly presented as Marine & Aviation and as part of reserves for Germany, NAFTA Region and |
(2) | Other comprises primarily Package / Multiple Perils, Legal Protection, Aviation and Travel Insurance lines of business. |
(3) | In 2008, the accident and health unit of Allianz’s subsidiary, AGF IART and the health unit of Allianz’s subsidiary, AZ Belgium, were transferred for reporting purposes from the Property & Casualty segment to the Life/Health segment. Accordingly, data relating to these unit is not included in the 2008 information in the table above and has also been |
When reviewing the foregoing tables, caution should be used in comparing the split between case and IBNR reserves across country and line of business. The portion of IBNR on total loss reserves varies by line of business due to different reporting and settlement patterns. For short-tail lines of business, likesuch as property, claims are generally reported immediately
after occurrence and settled in a period of only a few years. For long-tail lines of business, likesuch as product liability, it is not unusual that a claim is reported years after its occurrence;occurrence and settlement can also take a significant length of time, in particular for bodily injury claims.
In addition, the portion of IBNR as a percentage of total loss reserves varies considerably across regions. IBNR reserves represent the amount which, together with reported case reserves, is needed to
fully provide for indemnity and claims cost until final settlement. As such, IBNR reserves are typically calculated as the difference between total reserves and known case reserves. The relative level of case reserves, however, differs significantly by country and company based on the regulatory environment and company practices and procedures on setting case reserves. In some jurisdictions, such as Germany, case reserves are set on a prudent basis based on local regulatory requirements, leading to relatively low (or negative) IBNR. While total reserves for loss and LAE are set on a best estimate level as required by IFRS, the split by case reserve and IBNR is strongly dependent on the jurisdiction and line of business. In particular a low (or negative) level of IBNR in a certain country does not indicate weak overall reserve levels.
Reconciliation of Beginning and Ending Loss and LAE Reserves
The following table reconciles the beginning and ending reserves of the Allianz Group, including the effect of reinsurance ceded, for the property-casualty insurance segment for each of the years in the three-year period ended December 31, 20062008 on an IFRS basis.
Reconciliation ofChanges in the reserves for Loss and LAE Reservesloss adjustment expenses for the Property-Casualty segment
2006 | 2005 | 2004 | |||||||||||||||||||||||||
Gross | Ceded | Net | Gross | Ceded | Net | Gross | Ceded | Net | |||||||||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | |||||||||||||||||||
Balance as of January 1, | 60,259 | (10,604 | ) | 49,655 | 55,528 | (10,049 | ) | 45,479 | 56,750 | (12,067 | ) | 44,683 | |||||||||||||||
Plus incurred related to: | |||||||||||||||||||||||||||
Current year | 28,214 | (2,572 | ) | 25,642 | 30,111 | (3,580 | ) | 26,531 | 28,693 | (2,965 | ) | 25,728 | |||||||||||||||
Prior years | (1,186 | ) | 217 | (969 | )(1) | (1,632 | ) | 433 | (1,199 | ) | (1,293 | ) | 836 | (457 | ) | ||||||||||||
Total incurred | 27,028 | (2,355 | ) | 24,673 | 28,479 | (3,147 | ) | 25,332 | 27,400 | (2,129 | ) | 25,271 | |||||||||||||||
Less paid related to: | |||||||||||||||||||||||||||
Current year | (12,436 | ) | 675 | (11,761 | ) | (12,742 | ) | 861 | (11,881 | ) | (12,290 | ) | 845 | (11,445 | ) | ||||||||||||
Prior years | (14,696 | ) | 2,455 | (12,241 | ) | (13,284 | ) | 2,568 | (10,716 | ) | (14,384 | ) | 2,576 | (11,808 | ) | ||||||||||||
Total paid | (27,132 | ) | 3,130 | (24,002 | ) | (26,026 | ) | 3,429 | (22,597 | ) | (26,674 | ) | 3,421 | (23,253 | ) | ||||||||||||
Effect of foreign exchange and other | (1,491 | ) | 496 | (995 | ) | 2,277 | (837 | ) | 1,440 | (1,132 | ) | 534 | (598 | ) | |||||||||||||
Effect of (divestitures)/acquisitions(2) | — | — | — | 1 | — | 1 | (816 | ) | 192 | (624 | ) | ||||||||||||||||
Balance as of December 31, | 58,664 | (9,333 | ) | 49,331 | 60,259 | (10,604 | ) | 49,655 | 55,528 | (10,049 | ) | 45,479 | |||||||||||||||
2008 | 2007 | 2006 | |||||||||||||||||||||||||
Gross | Ceded | Net | Gross | Ceded | Net | Gross | Ceded | Net | |||||||||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | |||||||||||||||||||
Balance as of January 1 | 56,943 | (8,266 | ) | 48,677 | 58,664 | (9,333 | ) | 49,331 | 60,259 | (10,604 | ) | 49,655 | |||||||||||||||
Plus incurred related to: | |||||||||||||||||||||||||||
Current year | 30,398 | (2,969 | ) | 27,429 | 29,839 | (2,994 | ) | 26,845 | 28,214 | (2,572 | ) | 25,642 | |||||||||||||||
Prior years(1) | (2,241 | ) | 798 | (1,443 | ) | (1,708 | ) | 348 | (1,360 | ) | (1,186 | ) | 217 | (969 | ) | ||||||||||||
Total incurred | 28,157 | (2,171 | ) | 25,986 | 28,131 | (2,646 | ) | 25,485 | 27,028 | (2,355 | ) | 24,673 | |||||||||||||||
Less paid related to: | |||||||||||||||||||||||||||
Current year | (14,049 | ) | 919 | (13,130 | ) | (13,749 | ) | 1,118 | (12,631 | ) | (12,436 | ) | 675 | (11,761 | ) | ||||||||||||
Prior years | (13,607 | ) | 1,602 | (12,005 | ) | (14,206 | ) | 1,952 | (12,255 | ) | (14,696 | ) | 2,455 | (12,241 | ) | ||||||||||||
Total paid | (27,655 | ) | 2,521 | (25,134 | ) | (27,955 | ) | 3,070 | (24,885 | ) | (27,132 | ) | 3,130 | (24,002 | ) | ||||||||||||
Effect of foreign exchange and other(2) | (497 | ) | 48 | (449 | ) | (2,022 | ) | 666 | (1,356 | ) | (1,491 | ) | 496 | (995 | ) | ||||||||||||
Effect of (divestitures)/acquisitions | 127 | (39 | ) | 88 | 125 | (23 | ) | 102 | 0 | 0 | 0 | ||||||||||||||||
Reclassifications(3) | (1,458 | ) | 87 | (1,371 | ) | ||||||||||||||||||||||
Balance as of December 31 | 55,616 | (7,820 | ) | 47,796 | 56,943 | (8,266 | ) | 48,677 | 58,664 | (9,333 | ) | 49,331 | |||||||||||||||
(1) | The |
(2) |
|
(3) | Since the first quarter of |
Changes in Loss and LAE Reserves During 20062008
As noted above, netprior year loss and LAE reserves of the Allianz Group at December 31, 2006 included a €969developed favorably during 2008 by €2,241 million reduction in incurred lossgross of reinsurance and LAE relating to favorable development on prior years,€1,443 million net of reinsurance, representing 24.0% of gross reserves and 3.0 % of net loss and LAE reserves at January 1, 2006.as of December 31, 2007. The following table provides a breakdown of this amountthese amounts by region.line of business.
Allianz Group
Changes in Loss and LAE Reserves During 20062008 Gross and Net of Reinsurance
IFRS Basis
Euros in millions
Net Reserves as of December 31, 2005 | Net Development in 2006 related to Prior Years | in %(1) | ||||||
€ mn | € mn | |||||||
Germany | 9,988 | (14 | ) | (0.1 | ) | |||
France | 7,485 | (142 | ) | (1.9 | ) | |||
Italy | 2,971 | (241 | ) | (8.1 | ) | |||
United Kingdom | 2,687 | (169 | ) | (6.3 | ) | |||
Switzerland | 3,053 | 117 | 3.8 | |||||
Spain | 1,499 | (70 | ) | (4.7 | ) | |||
Rest of Europe | 5,011 | (240 | ) | (4.8 | ) | |||
NAFTA Region | 6,348 | 9 | 0.1 | |||||
Asia-Pacific Region | 2,528 | (119 | ) | (4.7 | ) | |||
South America, Africa and Rest of World | 4,072 | (18 | ) | (0.4 | ) | |||
Subtotal of regions | 45,642 | (887 | ) | (1.9 | ) | |||
Credit insurance | 791 | (168 | ) | (21.3 | ) | |||
Allianz Global Corporate and Speciality | 3,098 | 104 | 3.3 | |||||
Travel insurance and assistance services | 124 | (17 | ) | (13.9 | ) | |||
Allianz Group Total | 49,655 | (968 | ) | (1.9 | ) | |||
Gross Reserves as of December 31, 2007 | Gross Development related to Prior Years | in %(1) | Net Reserves as of December 31, 2007 | Net Development related to Prior Years | in %(2) | |||||||||||
Motor | 19,264 | (530 | ) | (2.8 | )% | 17,096 | (510 | ) | (3.0 | )% | ||||||
General Liability | 11,306 | (337 | ) | (3.0 | )% | 9,021 | (269 | ) | (3.0 | )% | ||||||
Workers Compensation / Employers Liability | 4,602 | 18 | 0.4 | % | 4,500 | 57 | 1.3 | % | ||||||||
Property | 3,989 | (385 | ) | (9.7 | )% | 2,868 | (294 | ) | (10.3 | )% | ||||||
Inwards Reinsurance | 2,493 | (196 | ) | (7.9 | )% | 3,946 | (3 | ) | (0.1 | )% | ||||||
Personal Accident | 1,297 | (56 | ) | (4.3 | )% | 1,006 | (57 | ) | (5.7 | )% | ||||||
Construction Damage and Liability | 1,732 | 52 | 3.0 | % | 1,437 | 50 | 3.5 | % | ||||||||
Credit Insurance | 1,042 | (150 | ) | (14.4 | )% | 807 | (104 | ) | (12.9 | )% | ||||||
AGCS | 6,142 | (509 | ) | (8.3 | )% | 3,769 | (267 | ) | (7.1 | )% | ||||||
Other | 3,595 | (148 | ) | (4.1 | )% | 2,835 | (45 | ) | (1.6 | )% | ||||||
Allianz Group(3) | 55,462 | (2,241 | ) | (4.0 | )% | 47,285 | (1,442 | ) | (3.0 | )% | ||||||
(1) | In percent of gross reserves as of December 31, 2007. |
(2) | In percent of net reserves as of December 31, |
(3) | In 2008, the accident and health unit of Allianz’s subsidiary, AGF IART and the health unit of Allianz’s subsidiary, AZ Belgium were transferred from the Property & Casualty segment to the Life/Health segment. As a result, the historical data for these units was excluded on a retrospective basis from the 2007 information in the table above. |
Within each region, theseWe discuss below by line of business the major highlights of the reserve developments represent the sum of amounts for individual companies and lines of business.in 2008. Because of the multitude of these reviewed segments, it is not feasible, or meaningful, to provide detailed information regarding each segment (e.g., claim frequencies, severities and settlement rates). We discuss below the major highlights of the reserve developments during the past year as they are recognized at the operating entities. Most of these companies analyze loss and LAE reserves on a gross basis. Therefore, theThe discussion is based on grossnet loss and LAE reserves in the local currency of the companyrelevant local operating entity before consolidation and converted tointo Euro for uniform presentation. Consequently, individualIndividual explanations of amounts in the following discussion, which are based onincludes only significant developments offor our major operating entities, do not fully reconcile to thosethe line of business totals in the above table, which are based on net loss and LAE reserves and net developments during 2006.
table.
GermanyMotor
In Germany, grossFor Motor, net loss and LAE reserves developed favorably during 20062008 by approximately €45€510 million, or 0.4%3.0% of reserves at January 1, 2006.
At Allianz Sach the property-casualty insurance companyas of the Allianz Group in Germany, gross loss and LAE reserves developed unfavorably by €53 million.December 31, 2007. This development was the result of the following multiple effects.
Unfavorable developments included:
€9743 million at our U.S. subsidiary, driven mainly by the claims experience in its commercial motor liability line and to a lesser extent, in its personal motor liability line. The increase in the commercial auto
liability line was driven by significantly higher than anticipated claim emergence during late 2007, which was recognized during 2008 as a result of delays in the claims adjusting process. |
Favorable developments included:
€112 million at our Spanish entity, due in particular to the favorable development of bodily injury claims in the motor line. New legislation in Spain led to the revision of compensation amounts and compensation limits in 2008 which had retroactive effects;
€81 million on motor commercial and personal lines at our U.K. entity, due primarily to a favorable development in bodily injury claims. In 2008, we have continued to benefit from changes in motor claims patterns in terms of speed at which claims are notified, the improved manner in which reserves are handled by claims specialists and the savings realized on settlements, thus resulting in a surplus;
€78 million for motor third party liability onat our Italian entity, due to better than expected historical claims emergence and the basis ofimprovement in actuarial techniques as a more precise method of allocating loss adjustment expenses to origin periods. The increase in reserve represents a first indicationresult of the effectavailability of this reallocation on estimated ultimate losses, which will undergo further analysis in the future.higher quality of data;
€25 million for legal protection, as reserves were strengthened to reflect a change in the legislation concerning attorney fees and the increase of value added tax in Germany,
Offsetting favorable developments include:
€2671 million resulting from the transferat our Slovakian and Hungarian entities, due to an improvement of the corporate businessactuarial assumptions and better than expected claims emergence;
Approximately €60 million at our Australian subsidiary for motor third-party liability (TPL), primarily as a result of positive development in long-tail classes, where the impact of prior years’ legislative changes continued to Allianz Global Corporate and Specialty. In the past, corporate, commercial and personal business had been analyzedbe better than assumed in aggregate, but the separation has led to a reduction of reserves for the portfolio remaining with Allianz Sach;prior reporting years; and
€2321 million at our German entity, mainly because of an update of assumptions due to data improvements for the winter storm Dorian in December 2005. Early estimates of ultimate claims incurred from this storm were available as of end of 2005 and subsequent claims development has been favorable.LAE.
Also during 2006, Allianz SE, the Allianz Group company underwriting primarily intra-Allianz Group reinsurance, experienced €114 million of favorable reserve development. In many cases, these developments were the direct result of corresponding developments in reserves on the underlying business of the Allianz Group companies that were ceded to Allianz SE. The main drivers for the favorable development were:
€90 million for international corporate business resulting from an improved reserve calculation in property business. The new approach based on triangulations showed that the former approach based on benchmarks overestimated the ultimate loss for the portfolio.
€50 million on facultative business mainly due to a lower than expected number of late reported claims as well as case reserves being below average experience for these types of claims.
€12 million related to the settlement of World Trade Center claims.
These developments were partially offset by an increase of €17 million for IBNR claims in non-proportional motor and credit treaty business in Western Europe and an adverse development of €15 million for external business due to a increase of incurred losses by cedents.
FranceGeneral Liability
In France, grossFor General Liability, net loss and LAE reserves developed favorably during 2008 by €270approximately €269 million, or 3.1%3.0% of reserves as of December 31, 2007.
Favorable developments included:
€115 million at our French entity, mainly driven by changes in the claims settlement process and better than expected experience on older accident years.
€55 million at our UK entity. As in the case of the motor business, in 2008, we have continued to benefit from changes in claims patterns in terms of speed at which claims are notified, the improved manner in which reserves are handled by claims specialists and the savings realized on settlements, resulting in a surplus;
€36 million at January 1, 2006.our Australian subsidiary in its general liability business, primarily as a result of positive development in long-tail classes where the impact of prior years’ legislative changes continues to be better than assumed in the prior reporting years.
Property
At AGF IART, favorable reserve developmentsFor Property, net loss and LAE reserves developed favorably during 2008 by approximately €294 million, or 10.3% of €410 million were partially offset by €148 million unfavorable developments.reserves as of December 31, 2007.
Favorable developments at AGF IART included:
€159107 million at our French entity on its property business, mainly driven by reductions in the estimated ultimate loss for professional lines for recent accident yearscorporate business for which actual development has been less than expected and partly due to the settlement of older accident years;
€109 million on general liability business mainly driven by the international corporate business for professional liability due to reductions in the estimated ultimate loss for which actual development has been less than expected;
€78 million on health and group business mainly driven by accident claims on group contracts as a result of a detailed review of disability claims; and
€4942 million in aggregate for smaller developments in eight lines of business.
Offsetting unfavorable developments at AGF IART included:
€44 million for construction business mainly due to a reduction in recoveries and an increase for underdeveloped recent years, estimated on exposures that are trending higher than expected;
€35 million for motor third party liability in agents and overseas business for older prior years following the indication of a re-estimation;
€11 million for general liability mainly driven by participation in local pools;
€11 million for natural catastrophes, reflecting further adverse development during 2006 on claims arising from droughts in 2003; and
€24 millionour Italian entity as a result of aggregating smaller developments in several lines of business.
Italy
As a result of a combination of reserve developments at several operating entities, the gross loss and LAE reserves developed favorably in Italy by €248 million, or 8.2% of the reserves at January 1, 2006.
At RAS S.p.A., gross loss and LAE reserves developed favorably by €15 million. This was the result of favorable developments mainly attributable to the following factors:
€41 million in motor third party liability due to a reduction in claims frequency influenced by a change in law permitting the introduction and acceptance of deductibles and a punitive point system against traffic rule offences. At the same time, claim severity has been favorably impacted by a revised claims handling strategy that gives priority to the quality of the settlement above the pure speed in closing claim files; and
€33 million in fire and engineering due to favorable settlement of reported large claims.
These favorable developments were partially offset by adverse developments in general liability reserves, which were increased for coinsured business and business with public entities related to older accident years that were identified as being deficient after reviewing separately from the ordinary general liability book.
Allianz Subalpina, a consolidated subsidiary of RAS S.p.A., exhibited favorable development of €34 million during 2006, mainly due to motor third party liability, for the same reasons discussed above for RAS S.p.A.
Genialloyd, a consolidated subsidiary of RAS S.p.A. specializing in direct motor business, exhibited favorable development of €24 million during 2006. This development is a result of more robust and stable analyses based on a larger volume of business due to the significant growth of the company since its founding in 1997.
Lloyd Adriatico experienced favorable development of €181 million during 2006 mainly due to a reduction of €150 million in motor third party liability. This reflects several factors, including a further reduction of already historically low claims frequencies and a lower than anticipated impact on the severity of bodily injury claims resulting from legal changes in 2005. Furthermore, Lloyd Adriatico experienced favorable development of €20 million in its personal accident, property and motor own damage lines.
United Kingdom
In the United Kingdom, gross loss and LAE reserves developed favorably during 2006 by €150 million, or 4.6%, of the reserves at January 1, 2006.
At Allianz Cornhill, gross loss and LAE reserves developed favorably during 2006 by €178 million due primarily to the following factors:
€34 million on private lines primarily related to motor accounts. Private car has seen a surplus mainly as a result of changing claims development patterns due to claims process review changes, faster delivery of benefits from group-wide implementation of improved practice processes in the claims division, and lower than anticipated inflation on bodily injury claims. There was also a small release from the household account largely resulting from the precautionary bad weather reserves established to allow for delayed claims reporting during the 2005 year-end holiday season not being needed;
€107 million on commercial lines, €64 million of which related from the motor account largely for the same reasons as for the personal lines discussed above. There was an additional €33 million surplus from the Property accounts partly arising from precautionary bad weather reserves established to allow for delayed claims reporting during the 2005 year-end holiday season not being needed, but also from favourable development from a few individual large claims. There were also releases from the more recent years for the liability account, but these were partially offset by deterioration in older years. This
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€15 million on schemes where the improvement relates mainly to favourable experience on the creditor and all risks accounts; and
€21 million on marine where the surplus has arisen largely as a result of US asbestos related claims being settled, and a continuation of the recent trend of only a very low level of new claims being notified.
At AGF U.K., a company in run-off reserves for loss and loss adjustment expenses, developed unfavorably by €28 million as a result of higher number of mesothelioma claims received in 2006 than expected, and this being reflected in revised future expectations.
Switzerland
In Switzerland, gross loss and LAE reserves experienced unfavorable development of €110 million, or 3.3% of the reserves at January 1, 2006.
At Allianz Suisse Versicherungs-Gesellschaft, gross loss and LAE reserves developed favorably by €8 million. This development consists of a €21 million release in general liability, mainly a result of an improved database integrating all legal entities of Allianz Suisse allowing more robust review of claims. These favorable developments were partly offset by an increase of €14 million for allocation of interest to annuities.
Loss and LAE reserves of Allianz Risk Transfer, the Allianz Group company selling conventional reinsurance as well as a variety of alternative risk transfer products, developed unfavorably by €122 million. Reasons for this development were:
€37 million due to the unfavorable development on a large traditional quota-share reinsurance contract; and
€80 million negative run-off in the alternative risk transfer segment as a consequence of additional loss advices for 2005 U.S. Hurricanes.
Spain
Gross loss and LAE reserves for Allianz Seguros developed favorably by €82 million, or 4.8% of the reserves at January 1, 2006. This favorable development is mainly due to a change in methodology. Due to a limited history of data, in the past, estimates have been based on incurred loss development in prior reserve reviews. In 2006 sufficient history was available to rely on paid loss development allowing for a more stable analysis.
Rest of Europe
Loss and LAE reserves in other European Allianz Group companies developed favorably by €299 million, or 5.6% of reserves at January 1, 2006. This figure includes the result of unfavorable as well as favorable developments for numerous individual companies. As the business is written in different currencies, these developments were also affected by foreign exchange rate movements.
Allianz Irish Life Holdings p.l.c. experienced favorable development of €133 million for several reasons:
€32 million release for commercial and personal motor mainly a result of better than anticipated levels of savings following the introduction of the Personal Injury Assessment Board (PIAB);
€28 million for commercial and religious liability; again due to the effect of introducing PIAB;
€19 million on the property account consisting of €6 million in favorable claims development on outstanding claims in the commercial fire account during 2006. At the beginning of 2006, there was a release of a €13 million reserve established to cover delayed claims reporting from the 2005 year-end holiday period that was not needed; and
€25 million release on the PIAB reserve following the December 2006 review. The PIAB reserve is spread over motor, employers liability and public liability accounts. This reserve was set up to cover the risk of claims inflation as a result of the introduction of the PIAB in 2004. As exposure to this risk was reduced, the reserve is no longer required and was fully released in 2006.
Gross loss and LAE reserves for Allianz Nederland Schade experienced favorable development of €57 million in 2006, primarily due to:
€37 million for motor business as a result of improved practices in the claims settlement process implemented as part of a group-wide knowledge sharing initiative. Small bodily injury claims are settled quicker than in the past and at lower costs;
€24 million from property caused by less then expected large claims for accident year 2005. In particular, held IBNYR of €10 million were not needed and incurred amounts for accident years 2003 and 2004 developed favorably.
Gross loss and LAE reserves for Allianz Hungária Biztosító experienced favorable development of €29 million in 2006, including:
€14 million for property due to favorable court decisions regarding industrial claims;
€13 million for motor third party liability driven by the reduction in the estimated ultimate loss; and
€5 million for motor non third party liability due to an improved claims settlement process.
Gross loss and LAE reserves for Allianz Slovenská experienced favorable development of €15 million in 2006, due primarily to improved management of unallocated loss adjustment expenses, better than expected settlement of two large property claims and as a result of a re-estimation in due course for motor business.
NAFTA Region
For the entire NAFTA region, Allianz Group’s gross loss and LAE reserves developed unfavorably during 2006 by €187 million, or 2.5% of the reserves at January 1, 2006. The largest Allianz Group company in this region is Fireman’s Fund Insurance Company.
At Fireman’s Fund, prior period gross loss and LAE reserve estimates increased by €179 million primarily driven by the following factors:
€190 million for the 2005 U.S. hurricanes. Most of it is attributed to hurricane Katrina in particular due to the most recent court ruling regarding flood versus wind coverage; and
€72 million for Asbestos and Environmental claims (A&E) resulting from reviews of recent developments in claims and exposure.
These adverse developments were partially offset by favorable developments of €40 million for agribusiness due to unusually low occurrence of crop claims and of €33 million in workers compensation due to a continued larger than expected impact from recent cost-reducing system reforms. Favorable development of €20 million was also observed for marine third party liability driven by fewer than usually experienced large claims.
Asia-Pacific
Gross loss and LAE reserves for the Asia-Pacific region developed favorably during 2006 by approximately €133 million or 4.7% of reserves at January 1, 2006. The largest Allianz Group property-casualty insurer in the region is Allianz Australia, representing approximately 93% of the region’s total reserves.
Allianz Australia experienced favorable development of €120 million during 2006. This result arose from partially favorable developments from different lines of business:
€88 million from motor third party liability following favorable loss experience in Queensland and New South Wales due to the impact of prior years’ legislative changes;
€30 million in property, fire and engineering businesses. The surplus was a result of better than expected development across most accident years, but in particularly for the three most recent accidentclaims emergence on prior years. While the reserve as of December 31, 2005 assumed case reserves would develop further, the experience has shown that the case reserves development is actually negative. This portfolio is very volatile as a result of the size of risks being written, so unexpected movements from a few large claims can have significant impact.
€23 million for workers’ compensation. The release from this portfolio is a result of continuing positive development in workers compensation portfolios, in particular Western Australia, Australian Capital Territory (ACT) and Tasmania for prior accident years. Legislative changes in these jurisdictions and positive return to work outcomes as a result of the lowest Australian unemployment rate in 30 years have contributed to this development. These releases were offset partially by an increase in the estimate for asbestos related claims following a review of developing experience.
€21 million for general liability. There was significant legislative reform during 2002 affecting this class of business intended to reduce claim costs. Claim frequencies have reduced significantly and claim sizes to date are also lower.
€9 million release for motor first-party relating almost entirely to the 2005 accident year, for which the estimate of the final accident quarter’s incurred claims, was, in hindsight, too high.
Credit Insurance
Credit insurance is underwritten in the Allianz Group by Euler Hermes. During 2006,2008, Euler Hermes experienced favorable development of €223€104 million net of reinsurance, or 20.1%12.9% of the reserves at January 1, 2006.as of December 31, 2007. Of this amount, €77€35 million is attributable to Euler Hermes Germany, which experienced favorable loss trends and an unexpected loss recoveryimprovement in commercial credit.actuarial methodology. In France, the favorable development of €53
€52 million was mainly attributable to an increase in salvage and subrogation and decrease in declared guaranteed claims for the underwriting year 2007 in
the first half of average claim cost. Furthermore, in Italy, the2008. The remainder comprises favorable development of €28 million was partly the resultdevelopments of a release of reserves on two large claims, which developed better than expected as well as the lower than expected loss development on attachment year 2005. A favorable development of €38 millionlesser magnitude in our operations in the United Kingdom, was mainly attributable to a lower than anticipated numberBelgium, Italy, Spain, Greece, Hungary, Morocco, Mexico, The Netherlands and severity of corporate insolvencies in 2005.Sweden.
Allianz Global Corporate and Specialty
Allianz Global Corporate and Specialty (AGCS) was formed asis the result of the merger of the corporate business company Allianz Global Risks and the specialty carrier Allianz Marine and Aviation. The new entity is designed to be theGroup’s global carrier for corporate and specialty risks and also includes the corporate branch of the German business which was formerly part of the German general insurance company Sachgruppe Deutschland (SGD) now operating as Allianz Sach.
business. Overall, AGCS experienced €3€267 million of unfavorablefavorable development in 2006.2008 net of reinsurance, or 7.1% of the reserves as of December 31, 2007.
The increase was due primarily to improved actuarial analysis in our property line of business where higher quality data became available, resulting in a €154 million surplus. The aviation line of business recorded a release of €31 million across all countries and sub-lines of business due to a new assessment of the development pattern based on better than expected claims experience.
Workers Compensation / Employers Liability
The net loss and LAE reserves developed unfavorably during 2008 on Workers Compensation / Employers Liability line of business by approximately €57 million, or 1.3% of reserves as of December 31, 2007. This development was mainly caused by the following partly offsetting effects:result of multiple effects.
Unfavorable developments included:
Reserves held€83 million for workers compensation business at AGCS North-Americaour U.S. entity as a result of an improvement in actuarial assumptions and methodology.
Favorable developments included:
€50 million for employers liability business at our U.K. entity. As in the lossescase of the motor and general liability business, we continued to benefit in 2008 from 2005 U.S. hurricanes developed favorably. Year end 2005changes in claims patterns in terms of speed at which claims are notified, the improved manner in which reserves for these events were set very shortly after the occurrence and were therefore subject to increased uncertainty. During 2006, actual loss emergence from the hurricanes was below expectation. Thisare handled by claims specialists and the overall favorable loss reporting for U.S. property business during 2006 led tosavings realized on settlements, resulting in a release of €79 million of prior year reserves.surplus.
Reserves held by AGCS France especially for more recent underwriting years in cargo were reduced by €17 million due to better than expected development. Further favorable development of €25 million arose from marine UK business from underwriting years 2002Construction Damage and prior.Liability
The net loss and LAE reserves developed unfavorably during 2008 on the Construction and
AGCS Germany experienced unfavorable developmentLiability line of €128business by approximately €50 million, whichor 3.5% of reserves as of December 31, 2007. This was mainly driven by an increase in reserves of €235the €45 million unfavorable development for inwards marine excess of loss reinsuranceconstruction business at our French entity, mainly due to 2005 hurricanean underestimation of claims for prior years because of significant portfolio growth;
Personal Accident
The net loss and LAE reserves developed favorably during 2008 on the Personal Accident line of business by approximately €57 million, or 5.7% of reserves as of December 31, 2007. This was mainly driven by the €30 million favorable development for personal accident business at our Italian entity, mainly driven by reductions in the estimated ultimate losses caused by actual development being less than expected. |
Changes in Historical Loss and LAE Reserves
The following table illustrates the development of the Allianz Group’s loss and LAE reserves, on an IFRS basis and gross of reinsurance, over the past ten years. As the Allianz Group adopted IFRS in 1997, historical loss development data is available on an IFRS basis for the nine years 1997 to 2006 only.
Each column of this table shows reserves as of a single balance sheet date and subsequent development of these reserves. The top row of each column shows gross reserves as initially established at the end of each stated year. The next section, reading down, shows the cumulative amounts paid as of the end of the successive years with respect to the reserve initially established. The next section shows the retroactive re-estimation of the initially established gross reserves for loss and LAE as of the end of each successive year. This re-estimation results primarily from additional facts and circumstances that pertain to open claims.
The bottom section compares the latest re-estimated gross reserves for loss and LAE to the gross reserves, as initially established, and indicates the cumulative development of the initially established gross reserves through December 31, 2006.2008. The surplus (deficiency) shown in the table for each year represents the aggregate amount by which the original estimates of reserves at that year-end
have changed in subsequent years. Accordingly, the cumulative surplus (deficiency) for a year-end relates only to reserves at that year-end and such amounts are not additive. Caution should be exercised in evaluating the information shown on this table, as each amount includes the effects of all changes in
amounts for prior periods. For example, the development of 19971998 reserves during 20002001 is included in the cumulative surplus (deficiency) of the 19971998 through 19992000 columns.
ThisThe table below presents calendar year, not accident year, data. Conditions and trends that have affected development of liability in the past may or may not necessarily occur in the future, and accordingly, conclusions about future results may not be derived from information presented in this table.
Companies acquired or divested during the period shown in the table can lead to distortions in the cumulative surplus or deficiency. The table starts with the presentation of gross liabilities for unpaid
claims and claims expenses as accounted, as of the respective date of the balance sheet. Over time, these liabilities are re-estimated. In addition, these liabilities will change if, through either acquisition, or sale of a company or reclassification, entire new portfolios of claim payments and reserves are added to or subtracted from the data. In addition, changes in currency exchange rates can lead to distortions in the cumulative surplus or deficiency. At the end of this table, we quantify the effects of the change in the set of consolidated entities and of foreign exchange, and present the cumulative loss development excluding these two effects.
Prior year amounts have been reclassified to conform to the current year presentation.
Changes in Historical Reserves for Unpaid Loss and LAEAllianz Group:
Property-Casualty Insurance SegmentIFRS Basis
Gross of ReinsuranceEuro in Millions
As of December 31,(1) | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | |||||||||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | ||||||||||||||||||||
Gross liability for unpaid claims and claims expenses | 34,323 | 45,564 | 51,276 | 54,047 | 61,883 | 60,054 | 56,750 | 55,528 | 60,259 | 58,664 | |||||||||||||||||||
Paid (cumulative) as of: | |||||||||||||||||||||||||||||
One year later | 9,010 | 12,273 | 15,114 | 16,241 | 15,945 | 16,357 | 14,384 | 13,282 | 14,696 | ||||||||||||||||||||
Two years later | 14,113 | 18,847 | 22,833 | 23,077 | 24,567 | 24,093 | 21,157 | 20,051 | |||||||||||||||||||||
Three years later | 17,812 | 23,407 | 27,242 | 28,059 | 29,984 | 29,007 | 26,149 | ||||||||||||||||||||||
Four years later | 20,591 | 26,327 | 30,698 | 31,613 | 33,586 | 32,839 | |||||||||||||||||||||||
Five years later | 22,522 | 28,738 | 33,263 | 34,218 | 36,431 | ||||||||||||||||||||||||
Six years later | 24,233 | 30,550 | 35,194 | 36,317 | |||||||||||||||||||||||||
Seven years later | 25,536 | 32,051 | 36,930 | ||||||||||||||||||||||||||
Eight years later | 26,699 | 33,344 | |||||||||||||||||||||||||||
Nine years later | 27,670 | ||||||||||||||||||||||||||||
Liability re-estimated as of: | |||||||||||||||||||||||||||||
One year later | 40,651 | 46,005 | 52,034 | 55,200 | 58,571 | 56,550 | 54,103 | 56,238 | 57,932 | ||||||||||||||||||||
Two years later | 38,058 | 46,043 | 52,792 | 53,535 | 56,554 | 55,704 | 55,365 | 53,374 | |||||||||||||||||||||
Three years later | 37,909 | 46,780 | 51,265 | 52,160 | 56,056 | 57,387 | 53,907 | ||||||||||||||||||||||
Four years later | 38,530 | 45,307 | 49,929 | 52,103 | 57,640 | 56,802 | |||||||||||||||||||||||
Five years later | 37,342 | 44,196 | 50,058 | 53,675 | 57,006 | ||||||||||||||||||||||||
Six years later | 36,346 | 44,524 | 51,432 | 53,204 | |||||||||||||||||||||||||
Seven years later | 36,648 | 45,679 | 51,263 | ||||||||||||||||||||||||||
Eight years later | 37,696 | 45,478 | |||||||||||||||||||||||||||
Nine years later | 37,647 | ||||||||||||||||||||||||||||
Cumulative surplus (deficiency) | (3,324 | ) | 86 | 13 | 843 | 4,877 | 3,252 | 2,843 | 2,154 | 2,327 | |||||||||||||||||||
Effect of disposed/(acquired) portfolios(2) | (5,514 | ) | (2,147 | ) | (93 | ) | 540 | ||||||||||||||||||||||
Effect of foreign exchange | (482 | ) | (4,495 | ) | (1,155 | ) | 515 | 3,415 | 2,007 | (974 | ) | (1,544 | ) | 1,141 | |||||||||||||||
Excluding both effects | 2,672 | 6,728 | 1,168 | 328 | 1,155 | 1,245 | 3,277 | 3,698 | 1,186 | ||||||||||||||||||||
Percent | 7.8 | % | 14.8 | % | 2.3 | % | 0.6 | % | 2.5 | % | 2.1 | % | 5.8 | % | 6.7 | % | 2.0 | % |
As of December 31,(1) | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||||||||
Gross liability for unpaid claims and claims expense | 45,564 | 51,276 | 54,047 | 61,883 | 60,054 | 56,750 | 55,528 | 60,259 | 58,664 | 56,943 | 55,616 | |||||||||||||||||||||
Cumulative Paid as of | ||||||||||||||||||||||||||||||||
one year | 12,273 | 15,114 | 16,241 | 15,945 | 16,357 | 14,384 | 13,282 | 14,696 | 14,206 | 13,607 | ||||||||||||||||||||||
two years | 18,847 | 22,833 | 23,077 | 24,567 | 24,093 | 21,157 | 20,051 | 21,909 | 20,659 | |||||||||||||||||||||||
three years | 23,407 | 27,242 | 28,059 | 29,984 | 29,007 | 26,149 | 24,801 | 26,583 | ||||||||||||||||||||||||
four years | 26,327 | 30,698 | 31,613 | 33,586 | 32,839 | 29,847 | 28,206 | |||||||||||||||||||||||||
five years | 28,738 | 33,263 | 34,218 | 36,431 | 35,832 | 32,570 | ||||||||||||||||||||||||||
six years | 30,550 | 35,194 | 36,317 | 38,810 | 38,044 | |||||||||||||||||||||||||||
seven years | 32,051 | 36,930 | 38,123 | 40,618 | ||||||||||||||||||||||||||||
eight years | 33,344 | 38,382 | 39,466 | |||||||||||||||||||||||||||||
nine years | 34,544 | 39,463 | ||||||||||||||||||||||||||||||
ten years | 35,434 | |||||||||||||||||||||||||||||||
Gross liability re-estimated as of | ||||||||||||||||||||||||||||||||
one year | 46,005 | 52,034 | 55,200 | 58,571 | 56,550 | 54,103 | 56,238 | 57,932 | 55,266 | 52,931 | ||||||||||||||||||||||
two years | 46,043 | 52,792 | 53,535 | 56,554 | 55,704 | 55,365 | 53,374 | 54,437 | 51,809 | |||||||||||||||||||||||
three years | 46,780 | 51,265 | 52,160 | 56,056 | 57,387 | 53,907 | 51,895 | 52,676 | ||||||||||||||||||||||||
four years | 45,307 | 49,929 | 52,103 | 57,640 | 56,802 | 53,181 | 50,767 | |||||||||||||||||||||||||
five years | 44,196 | 50,058 | 53,675 | 57,006 | 56,148 | 52,356 | ||||||||||||||||||||||||||
six years | 44,524 | 51,432 | 53,204 | 56,527 | 55,553 | |||||||||||||||||||||||||||
seven years | 45,679 | 51,263 | 53,124 | 56,102 | ||||||||||||||||||||||||||||
eight years | 45,478 | 51,063 | 52,566 | |||||||||||||||||||||||||||||
nine years | 45,237 | 50,548 | ||||||||||||||||||||||||||||||
ten years | 45,120 | |||||||||||||||||||||||||||||||
Cumulative surplus (deficiency) | 444 | 728 | 1,481 | 5,781 | 4,501 | 4,394 | 4,761 | 7,583 | 6,855 | 4,012 | ||||||||||||||||||||||
effect of disposed/(acquired) portfolios(2) | (2,147 | ) | 0 | 0 | (93 | ) | 0 | 540 | 0 | 0 | 0 | 1,458 | ||||||||||||||||||||
effect of foreign exchange | (1,339 | ) | 875 | 2,213 | 4,944 | 3,390 | 877 | 18 | 2,391 | 1,474 | 313 | |||||||||||||||||||||
excluding both effects | 3,931 | (148 | ) | (732 | ) | 931 | 1,111 | 2,977 | 4,744 | 5,193 | 5,381 | 2,241 | ||||||||||||||||||||
Percent | 8.6 | % | (0.3 | )% | (1.4 | )% | 1.5 | % | 1.9 | % | 5.2 | % | 8.5 | % | 8.6 | % | 9.2 | % | 3.9 | % |
(1) | Reserves for loss and LAE of subsidiaries sold (or purchased) are excluded (or included) in the above table as of the date of the disposal (or acquisition). |
(2) |
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In 2006,2008, loss and LAE reserves decreased by €1,595 million. Important contributors€1,327 million or 2.3% to this decline were€55,616 million, resulting primarily from the positive development on prior years’ loss reserves primarilyimpact of reclassifications described in Italy, France, the United Kingdom and within the credit insurance business,table above as well as the weakening of the U.S. DollarBritish Pound and Australian Dollar relative to the Euro. A further
factor was the relative absence of natural catastrophe claims during 2006 compared to the unusually high reserves in 2005 for Hurricanes Katrina, Rita and Wilma in the United States. Reserve developments during 20062008 are described in further detail in the preceding section “—Changes“Changes in Loss and LAE Reserves During 2006”2008”.
The overall increase in loss and LAE reserves from 2004 to 2005 was caused in part by the unusually high frequency and severity of natural catastrophes in 2005, including an estimated net reserve of €1,090 million for the hurricanes Katrina, Rita and Wilma. An additional causative factor was the weakening of the Euro relative to U.S. Dollar and Australian Dollar during 2005.
The overall reduction in loss and LAE reserves from 2003 to 2004 is attributable to the then ongoing settlement and run-off of various U.S. business lines, and the appreciation of the Euro relative to U.S. Dollar during 2004.
Discounting of Loss and LAE Reserves
As of December 31, 2006, 20052008, 2007 and 2004,2006, the Allianz GroupGroup’s consolidated property-casualty reserves reflected discounts of €1,377€1,139 million, €1,326€1,100 million and €1,220€1,074 million respectively.
Reserves are discounted to varying degrees in the United States, United Kingdom, Germany, Hungary, Switzerland, Portugal France and Belgium. For the United States, the discount reflected in the reserves is related to structured settlements with fixed and determinable payments for certain long-tailed liabilities, primarily in workers’ compensation. For the other countries, theFrance. The reserve discounts relate to reserves for structured settlements in various classes of business. These classes include personal accident, general liability and motor liability in Germany and Hungary, workers’ compensation in the United States, Switzerland and Portugal individual and group health disability and motor liability in France, health disability in Belgium and claims from employers’ liability in the United Kingdom.France. All of the reserves that have been discounted have payment amounts that are fixed and timing that is reasonably determinable. The following table shows, by country,line of business, the carrying amounts of reserves for claims and claim adjustment expenses that have been discounted, and the interest rates used for discounting for the years ended December 31:
Discounted Reserves in | Amount of the Discount | Interest rate used for Discounting | ||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||
€ mn | € mn | € mn | € mn | |||||||||
France | 1,325 | 1,404 | 349 | 357 | 3.25% | 3.25% | ||||||
Germany | 504 | 445 | 346 | 298 | 2.75% to 4.00% | 2.75% to 4.00% | ||||||
Switzerland | 427 | 414 | 253 | 236 | 3.25% | 3.25% | ||||||
United States | 181 | 213 | 200 | 230 | 6.00% | 6.00% | ||||||
United Kingdom | 139 | 116 | 133 | 110 | 4.00% to 4.25% | 4.00% to 4.25% | ||||||
Belgium | 91 | 91 | 26 | 28 | 3.20% to 4.68% | 4.68% | ||||||
Portugal | 79 | 57 | 47 | 44 | 4.00% | 4.00% | ||||||
Hungary | 74 | 67 | 23 | 22 | 1.40% | 1.40% | ||||||
Total | 2,820 | 2,807 | 1,377 | 1,325 | ||||||||
Discounted Reserves € mn | Amount of Discount € mn | Interest Rate used for discounting(1) | ||||||||||||||||
2008 | 2007 | 2006 | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||
Motor—TPL | 632 | 589 | 569 | 446 | 414 | 396 | 1.40% - 5.25% | 1.40% - 5.25% | 1.40% - 6.00% | |||||||||
General Liability | 190 | 170 | 178 | 164 | 150 | 162 | 1.40% - 5.25% | 1.40% - 5.25% | 1.40% - 6.00% | |||||||||
Personal Accident | 325 | 293 | 267 | 201 | 182 | 170 | 2.25% - 4.00% | 2.25% - 4.00% | 2.75% - 4.00% | |||||||||
Workers Comp./Employers Liability | 539 | 520 | 537 | 309 | 335 | 333 | 3.00% - 5.25% | 3.00% - 5.25% | 3.25% - 6.00% | |||||||||
Other | 26 | 29 | 19 | 19 | 19 | 13 | 1.40% - 5.25% | 1.40% - 5.25% | 1.40% - 6.00% | |||||||||
Total | 1,712 | 1,601 | 1,570 | 1,139 | 1,100 | 1,074 | ||||||||||||
(1) | The wide range of interest rates is the result of the presentation of the above information by line of business thus each line reflecting interest rates used in various countries. |
Asbestos and Environmental (A&E) Loss Reserves
There are significant uncertainties in estimating A&Eloss and LAE reserves for loss and loss adjustment expenses.A&E. Reserves for asbestos-related illnesses and environmental clean up losses cannot be estimated using traditional actuarial techniques due to the long latency period and changes in the legal, socio-economic and regulatory environment. Case reserves are established when sufficient information is available to indicate the involvement of a specific insurance policy. In addition, IBNR reserves are established to cover additional exposures on both known and not yet reported claims. To the extent possible, A&E loss reserve estimates are based not only on claims reported to date, but also on a survey of policies that may be exposed to claims reported in the future (i.e., an exposure analysis).
In establishing liabilities for A&E claims, management considers facts currently known and the current state of the law and coverage litigation. However, given the expansion of coverage and liability by the courts and the legislatures in the past and the possibilities of similar interpretation in the future, there is significant uncertainty regarding the extent of remediation and insurer liability. As a result, the range of reasonable potential outcomes for A&E liabilities provided in these analyses is particularly large. Given this inherent uncertainty in estimating A&E liabilities, significant deviation from the currently carried A&E reserve position is possible. For more information, refer to “Operating and Financial Review and Prospects—Critical Accounting Policies—Reserves for loss and loss adjustment expenses—Variability of reserve estimates—Asbestos claims reserves.”
While the U.S. A&E claims still represent a majority of the total A&E claims reported to the Company,Allianz Group, the insurance industry is facing an increased prominence in exposuresexposed to A&E claims on a global basis. We have, as a result, increased our analysis ofcontinue to analyze these non-U.S. A&E exposures during 2006.exposures. The results of our regular analysis of non-U.S. A&E reserve analysis supportreserves confirm our prior and current level of carried A&E reserves without any need for additional reserve strengthening in 2006.2008.
The following table summarizes the gross and net loss and loss adjustment expensesLAE reserves for A&E claims.
As of | A&E Net Reserves | A&E Gross Reserves | As percentage of the Allianz Group’s Property-Casualty Gross Reserves | A&E Net Reserves | A&E Gross Reserves | As percentage of the Allianz Group’s Property-Casualty Gross Reserves | ||||||||
€ mn | € mn | € mn | € mn | |||||||||||
2004 | 3,161 | 3,638 | 6.6 | % | ||||||||||
2005 | 3,147 | 3,873 | 6.4 | % | ||||||||||
2006 | 2,990 | 3,636 | 6.2 | % | 2,990 | 3,636 | 6.2 | % | ||||||
2007 | 2,764 | 3,287 | 5.8 | % | ||||||||||
2008 | 2,618 | 3,140 | 5.6 | % |
The following table below shows total A&E loss activity for the past three years.
Years Ended December 31, | |||||||||
Total Asbestos and | 2004 | 2005 | 2006 | ||||||
€ mn | € mn | € mn | |||||||
Gross Loss and LAE Reserves as of January 1 | 3,797 | 3,638 | 3,873 | ||||||
Gross Loss and LAE Payments | (225 | ) | (312 | ) | (205 | ) | |||
Change in Loss and LAE Reserves | 66 | 547 | (32 | ) | |||||
Gross Loss and LAE Reserves as of December 31 | 3,638 | 3,873 | 3,636 | ||||||
Total Asbestos and Environmental: | Year Ended December 31, | ||||||||
2008 | 2007 | 2006 | |||||||
€ mn | € mn | € mn | |||||||
Loss + LAE Reserves as of January 1 | 3,287 | 3,636 | 3,873 | ||||||
Less Loss and LAE Payments | (199 | ) | (175 | ) | (205 | ) | |||
Plus Change in Loss and LAE Reserves | 52 | (175 | ) | (32 | ) | ||||
Loss + LAE Reserves as of December 31 | 3,140 | 3,287 | 3,636 | ||||||
Selected Statistical Information Relating to Our Banking Operations
For the purposes of presenting the following information, our banking operations include Dresdner Bank AG and its subsidiaries (“Dresdner Bank”), including its asset management operations, which are insignificant in size relative to Dresdner Bank’s banking operations, and certain other banking subsidiaries of the Allianz Group. This presentation differs from the presentation in “Operating and Financial Review and Prospects”, where the asset management operations of Dresdner Bank are included in our asset management segment and excluded from our banking segment. The following information has been derived from the financial records of our banking operations and has been prepared in accordance with IFRS; it does not reflect certain adjustments and consolidations to convert such information to the Allianz Group’s consolidated financial statements. In particular, the assets and liabilities of Dresdner Bank do not reflect the purchase accounting adjustments applied for the Allianz Group’s consolidated financial statements with respect to Dresdner Bank’s assets and liabilities at July 23, 2001, the date of the acquisition of Dresdner Bank by the Allianz Group. Further, the following information does not reflect adjustments necessary to convert such information to U.S. GAAP.
The information presented herein for the years ended December 2004, 2003 and 2002 was revised in 2005 to reflect the required retrospective application
of IAS 39 revised, which became effective January 1, 2005, as if IAS 39 revised had always been used.
Average Balance Sheet and Interest Rate Data
The following table sets forth the average balances of assets and liabilities and related interest earned from interest-earning assets and interest expensed on interest-bearing liabilities, as well as the resulting average interest yields and rates for the years ended December 31, 2006, 2005 and 2004. The average balance sheet and interest rate data is based on consolidated monthly average balances using month-end balances prepared in accordance with IFRS.
In accordance with IAS 39, the fair values of all derivative instruments are included within non-interest-earning assets or non-interest-bearing liabilities. Interest income and interest expense relating to qualifying hedge derivative instruments have been reported within the interest income and interest expense of the hedged item for each period.
The allocation between German and non-German components is based on the location of the office that recorded the transaction. Categories of loans and advances include loans placed on non-accrual status. For a description of our accounting policies on non-accrual loans see “—Risk Elements—Non-accrual Loans” and “Operating and Financial Review and Prospects—Critical Accounting Policies and Estimates.”
Our banking operations do not have a significant balance of tax-exempt investments. Accordingly, interest income on such investments has been included as taxable interest income for purposes of calculating the change in taxable net interest income.
Years Ended December 31, | ||||||||||||||||||||||||
2006 | 2005 | 2004 | ||||||||||||||||||||||
Average Balance | Interest Income/ Expense | Average Yield/ Rate | Average Balance | Interest Income/ Expense | Average Yield/ Rate | Average Balance | Interest Income/ Expense | Average Yield/ Rate | ||||||||||||||||
€ mn | € mn | % | € mn | € mn | % | € mn | € mn | % | ||||||||||||||||
Assets(1) | ||||||||||||||||||||||||
Financial assets carried at fair value through income | ||||||||||||||||||||||||
In German offices(2) | 37,181 | 1,228 | 3.3 | % | 88,194 | 2,626 | 3.0 | % | 110,316 | 3,299 | 3.0 | % | ||||||||||||
In non-German offices | 55,947 | 2,364 | 4.2 | % | 53,059 | 1,941 | 3.7 | % | 37,643 | 1,131 | 3.0 | % | ||||||||||||
Total | 93,128 | 3,592 | 3.9 | % | 141,253 | 4,567 | 3.2 | % | 147,959 | 4,430 | 3.0 | % | ||||||||||||
Loans and advances to banks | ||||||||||||||||||||||||
In German offices | 23,205 | 544 | 2.3 | % | 19,646 | 424 | 2.2 | % | 21,880 | 455 | 2.1 | % | ||||||||||||
In non-German offices | 20,838 | 668 | 3.2 | % | 14,276 | 564 | 4.0 | % | 8,653 | 210 | 2.4 | % | ||||||||||||
Total | 44,043 | 1,212 | 2.8 | % | 33,922 | 988 | 2.9 | % | 30,533 | 665 | 2.2 | % | ||||||||||||
Loans and advances to customers | ||||||||||||||||||||||||
In German offices | 76,642 | 4,058 | 5.3 | % | 77,873 | 4,313 | 5.5 | % | 83,950 | 4,058 | 4.8 | % | ||||||||||||
In non-German offices | 50,291 | 3,165 | 6.3 | % | 34,371 | 1,600 | 4.7 | % | 28,029 | 1,210 | 4.3 | % | ||||||||||||
Total | 126,933 | 7,223 | 5.7 | % | 112,244 | 5,913 | 5.3 | % | 111,979 | 5,268 | 4.7 | % | ||||||||||||
Securities purchased under resale agreements | ||||||||||||||||||||||||
In German offices | 91,242 | 3,622 | 4.0 | % | 83,614 | 2,690 | 3.2 | % | 110,439 | 2,896 | 2.6 | % | ||||||||||||
In non-German offices | 46,093 | 2,361 | 5.1 | % | 59,513 | 2,324 | 3.9 | % | 64,030 | 1,399 | 2.2 | % | ||||||||||||
Total | 137,335 | 5,983 | 4.4 | % | 143,127 | 5,014 | 3.5 | % | 174,469 | 4,295 | 2.5 | % | ||||||||||||
Investment securities(3) | ||||||||||||||||||||||||
In German offices | 8,585 | 307 | 3.6 | % | 7,304 | 237 | 3.2 | % | 5,720 | 207 | 3.6 | % | ||||||||||||
In non-German offices | 4,394 | 161 | 3.7 | % | 5,739 | 237 | 4.1 | % | 7,670 | 241 | 3.1 | % | ||||||||||||
Total | 12,979 | 468 | 3.6 | % | 13,043 | 474 | 3.6 | % | 13,390 | 448 | 3.3 | % | ||||||||||||
Total interest-earning assets | 414,418 | 18,478 | 4.5 | % | 443,589 | 16,956 | 3.8 | % | 478,330 | 15,106 | 3.2 | % | ||||||||||||
Non-interest-earning assets | ||||||||||||||||||||||||
In German offices | 50,312 | — | — | 45,974 | — | — | 45,760 | — | — | |||||||||||||||
In non-German offices | 46,644 | — | — | 43,714 | — | — | 38,008 | — | — | |||||||||||||||
Total non-interest-earning assets | 96,956 | — | — | 89,688 | — | — | 83,768 | — | — | |||||||||||||||
Total assets | 511,374 | — | — | 533,277 | — | — | 562,098 | — | — | |||||||||||||||
Percent of assets attributable to non-German offices | 43.8 | % | — | — | 39.5 | % | — | — | 32.7 | % | — | — |
Liabilities and shareholders’ equity(1) Financial liabilities carried at fair value through income In German offices In non-German offices Total Liabilities to banks(4) In German offices In non-German offices Total Liabilities to customers(4) In German offices In non-German offices Total Securities sold under repurchase agreements In German offices In non-German offices Total Subordinated liabilities In German offices In non-German offices Total Certificated liabilities(4) In German offices In non-German offices Total Profit participation certificates outstanding In German offices Total Total interest-bearing liabilities Non-interest-bearing liabilities In German offices In non-German offices Total non-interest-bearing liabilities Shareholders’ equity Total liabilities and shareholders’ equity Percent of liabilities attributable to non-German offices Years Ended December 31, 2006 2005 2004 Average
Balance Interest
Income/
Expense Average
Yield/
Rate Average
Balance Interest
Income/
Expense Average
Yield/
Rate Average
Balance Interest
Income/
Expense Average
Yield/
Rate € mn € mn % € mn € mn % € mn € mn % 387 22 5.7 % 215 16 7.4 % 184 15 8.2 % — — — 19 1 4.6 % — — — 387 22 5.7 % 234 17 7.2 % 184 15 8.2 % 60,759 1,913 3.1 % 67,698 1,869 2.8 % 86,796 1,989 2.3 % 28,438 1,804 6.3 % 25,374 1,414 5.6 % 21,784 1,066 4.9 % 89,197 3,717 4.2 % 93,072 3,283 3.5 % 108,580 3,055 2.8 % 57,860 2,211 3.8 % 60,254 1,720 2.9 % 57,877 1,576 2.7 % 39,131 2,002 5.1 % 39,057 1,139 2.9 % 32,792 1,043 3.2 % 96,991 4,213 4.3 % 99,311 2,859 2.9 % 90,669 2,619 2.9 % 60,896 2,629 4.3 % 60,471 2,382 3.9 % 75,091 2,019 2.7 % 60,904 2,359 3.9 % 59,113 2,226 3.8 % 52,942 1,105 2.1 % 121,800 4,988 4.1 % 119,584 4,608 3.9 % 128,033 3,124 2.4 % 3,342 180 5.4 % 3,244 163 5.0 % 3,433 164 4.8 % 2,734 174 6.3 % 3,062 181 5.9 % 3,707 220 5.9 % 6,076 354 5.8 % 6,306 344 5.5 % 7,140 384 5.4 % 16,539 814 4.9 % 18,441 758 4.1 % 16,651 604 3.6 % 31,959 1,436 4.5 % 32,258 1,205 3.7 % 28,392 779 2.7 % 48,498 2,250 4.6 % 50,699 1,963 3.9 % 45,043 1,383 3.1 % 1,892 128 6.8 % 1,520 110 7.3 % 1,517 111 7.3 % 1,892 128 6.8 % 1,520 110 7.3 % 1,517 111 7.3 % 364,841 15,672 4.3 % 370,726 13,184 3.6 % 381,166 10,691 2.8 % 77,271 — — 94,035 — — 116,286 — — 56,913 — — 56,582 — — 52,892 — — 134,184 — — 150,617 — — 169,178 — — 12,349 — — 11,934 — — 11,754 — — 511,374 — — 533,277 — — 562,098 — — 44.1 % — — 41.3 % — — 35.0 % — —
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Net Interest Margin
The following table sets forth the average total interest-earning assets, net interest earned and the net interest margin of our banking operations.
Years Ended December 31, | |||||||||
2006 | 2005(3) | 2004(3) | |||||||
€ mn | € mn | € mn | |||||||
Average total interest-earning assets | 414,418 | 443,589 | 478,330 | ||||||
Net interest earned(1) | 2,805 | 3,771 | 4,414 | ||||||
Net interest margin in %(2) | 0.68 | % | 0.85 | % | 0.92 | % |
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The following table sets forth an allocation of changes in interest income, interest expense and net interest income between changes in the average volume and changes in the average interest rates for the two most recent years. Volume and interest rate variances have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. Changes due to a combination of volume and rate are allocated proportionally to the absolute change in volume and rate. Interest income includes loan fees amounting to €181 million in 2006 (2005: €97 million).
Years Ended December 31, | ||||||||||||||||||
2006 over 2005 | 2005 over 2004 | |||||||||||||||||
Increase/(Decrease) due to Change in: | Increase/(Decrease) due to Change in: | |||||||||||||||||
Total Change | Average Interest Rate | Average Volume | Total Change | Average Interest Rate | Average Volume | |||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | |||||||||||||
Interest income(1) | ||||||||||||||||||
Financial assets carried at fair value through income | ||||||||||||||||||
In German offices | (1,398 | ) | 260 | (1,658 | ) | (673 | ) | (14 | ) | (659 | ) | |||||||
In non-German offices | 423 | 313 | 110 | 810 | 281 | 529 | ||||||||||||
Total | (975 | ) | 573 | (1,548 | ) | 137 | 267 | (130 | ) | |||||||||
Loans and advances to banks | ||||||||||||||||||
In German offices | 120 | 39 | 81 | (31 | ) | 17 | (48 | ) | ||||||||||
In non-German offices | 104 | (121 | ) | 225 | 354 | 174 | 180 | |||||||||||
Total | 224 | (82 | ) | 306 | 323 | 191 | 132 | |||||||||||
Loans and advances to customers | ||||||||||||||||||
In German offices | (255 | ) | (188 | ) | (67 | ) | 255 | 563 | (308 | ) | ||||||||
In non-German offices | 1,565 | 676 | 889 | 390 | 100 | 290 | ||||||||||||
Total | 1,310 | 488 | 822 | 645 | 663 | (18 | ) | |||||||||||
Securities purchased under resale agreements | ||||||||||||||||||
In German offices | 932 | 670 | 262 | (206 | ) | 580 | (786 | ) | ||||||||||
In non-German offices | 37 | 630 | (593 | ) | 925 | 1,030 | (105 | ) | ||||||||||
Total | 969 | 1,300 | (331 | ) | 719 | 1,610 | (891 | ) | ||||||||||
Investment securities | ||||||||||||||||||
In German offices | 70 | 26 | 44 | 30 | (23 | ) | 53 | |||||||||||
In non-German offices | (76 | ) | (25 | ) | (51 | ) | (4 | ) | 65 | (69 | ) | |||||||
Total | (6 | ) | 1 | (7 | ) | 26 | 42 | (16 | ) | |||||||||
Total interest income | 1,522 | 2,280 | (758 | ) | 1,850 | 2,773 | (923 | ) | ||||||||||
Increase/(Decrease) due to Change in: Increase/(Decrease) due to Change in: Interest expense(1) Financial liabilities carried at fair value through income In German offices In non-German offices Total Liabilities to banks In German offices In non-German offices Total Liabilities to customers In German offices In non-German offices Total Securities sold under repurchase agreements In German offices In non-German offices Total Subordinated liabilities In German offices In non-German offices Total Certificated liabilities In German offices In non-German offices Total Profit participation certificates outstanding In German offices Total Total interest expense Change in taxable net interest income Years Ended December 31, 2006 over 2005 2005 over 2004 Total
Change Average
Interest
Rate Average
Volume Total
Change Average
Interest
Rate Average
Volume € mn € mn € mn € mn € mn € mn 6 (4 ) 10 1 (1 ) 2 (1 ) (1 ) — — — — 5 (5 ) 10 1 (1 ) 2 44 247 (203 ) (120 ) 364 (484 ) 390 208 182 348 159 189 434 455 (21 ) 228 523 (295 ) 491 562 (71 ) 144 78 66 863 861 2 96 (92 ) 188 1,354 1,423 (69 ) 240 (14 ) 254 247 230 17 363 810 (447 ) 133 65 68 1,121 979 142 380 295 85 1,484 1,789 (305 ) 17 12 5 (1 ) 8 (9 ) (7 ) 13 (20 ) (39 ) (1 ) (38 ) 10 25 (15 ) (40 ) 7 (47 ) 56 139 (83 ) 154 85 69 231 242 (11 ) 426 309 117 287 381 (94 ) 580 394 186 18 (8 ) 26 (1 ) (1 ) — 18 (8 ) 26 (1 ) (1 ) — 2,488 2,566 (78 ) 2,492 2,697 (205 ) (966 ) (286 ) (680 ) (642 ) 76 (718 )
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Return on Equity and Assets
The following table sets forth the net income, average shareholders’ equity and selected financial information and ratios of our banking operations.
Years Ended December 31, | |||||||||
2006 | 2005 | 2004 | |||||||
€ mn | € mn | € mn | |||||||
Net income/(loss) | 909 | 1,768 | 343 | ||||||
Average shareholders’ equity | 12,349 | 11,934 | 11,754 | ||||||
Return on assets | 0.18 | % | 0.33 | % | 0.06 | % | |||
Return on equity | 7.36 | % | 14.81 | % | 2.92 | % | |||
Equity to assets ratio | 2.41 | % | 2.24 | % | 2.09 | % |
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Financial Assets Carried At Fair Value Through Income and Investment Securities
The following table sets forth the book value of financial assets carried at fair value through income (including trading securities) and investment securities held by our banking operations by type of issuer. The allocation between German and non-German components is based on the domicile of the issuer.
As of December 31, | |||||||
2006 | 2005 | 2004 | |||||
€ mn | € mn | € mn | |||||
Financial assets carried at fair value through income | |||||||
German: | |||||||
Federal and state government and government agency debt securities | 4,247 | 11,497 | 33,693 | ||||
Local government debt securities | 1,885 | 690 | 1,578 | ||||
Corporate debt securities | 10,135 | 18,972 | 31,189 | (2) | |||
Mortgage-backed securities | 162 | 139 | 112 | ||||
Equity securities | 2,627 | 2,656 | 2,853 | ||||
German total | 19,056 | 33,954 | 69,425 | ||||
As of December 31, | ||||||
2006 | 2005 | 2004 | ||||
€ mn | € mn | € mn | ||||
Non-German: | ||||||
U.S. Treasury and other U.S. government agency debt securities | 575 | 915 | 2,083 | |||
Other government and official institution debt securities | 12,163 | 25,534 | 51,636 | |||
Corporate debt securities | 30,940 | 39,425 | 26,557 | |||
Mortgage-backed securities | 21,673 | 13,601 | 7,059 | |||
Equity securities | 32,626 | 28,105 | 16,301 | |||
Non-German total | 97,977 | 107,580 | 103,636 | |||
Total financial assets carried at fair value through income | 117,033 | 141,534 | 173,061 | |||
Securities available-for-sale | ||||||
German(1): | ||||||
Federal and state government and government agency debt securities | 345 | 305 | 77 | |||
Local government debt securities | 1,347 | 1,777 | 2,083 | |||
Corporate debt securities | 4,068 | 5,195 | 5,865 | |||
Equity securities | 1,261 | 1,573 | 2,354 | |||
German total | 7,021 | 8,850 | 10,379 | |||
Non-German: | ||||||
U.S. Treasury and other U.S. government agency debt securities | 79 | 5 | — | |||
Other government and official institution debt securities | 1,401 | 1,245 | 1,430 | |||
Corporate debt securities | 5,536 | 3,180 | 3,061 | |||
Mortgage-backed and other debt securities | 111 | 721 | 424 | |||
Equity securities | 1,931 | 1,649 | 1,552 | |||
Non-German total | 9,058 | 6,800 | 6,467 | |||
Total securities available-for-sale | 16,079 | 15,650 | 16,846 | |||
Securities held-to-maturity | ||||||
Non-German: | ||||||
Other government and official institution debt securities | — | 41 | 103 | |||
Non-German total | — | 41 | 103 | |||
Total securities held-to-maturity | — | 41 | 103 | |||
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The Financial assets carried at fair value through income as shown above exclude derivative financial instruments held for trading.
The decrease in German federal and state government and government agency debt securities as well as non-German other government and official institution debt securities is primarily driven by the reduction of government and agency bonds and other fixed-income securities during 2006 and 2005 due to declined earnings prospects in this sector.
The increase in non-German AFS debt securities from 2005 to 2006 is due to the revision of the German covered bond (“Pfandbrief”) act that allowed us to purchase non-German covered bonds, as well as such German bonds. As a result of this development, we increased our purchase of covered bonds used to hedge positions within our savings business.
The increase in non-German mortgage-backed securities was driven largely by the increased volume of credit derivative trades during 2006 and 2005.
The increase in non-German equity securities reflects the positive developments within the stock markets and indices during 2006 and 2005.
At December 31, 2006, our banking operations held no ordinary shares with a book value in excess of ten percent of the shareholders’ equity of our banking operations.
Maturity Analysis of Debt Investment Securities
The following table sets forth an analysis of the contractual maturity and weighted average yields of our banking operations’ debt investment securities. Actual maturities may differ from contractual maturity dates because issuers may have the right to call or prepay obligations. The allocation between German and non-German components is based on the domicile of the issuer. We did not hold any securities held-to-maturity in 2006.
As of December 31, 2006 | |||||||||||||||
Due In One Year Or Less | Due After One Year Through Five Years | Due After Five Years Through Ten Years | Due After Ten Years | Total | |||||||||||
€ mn | € mn | € mn | € mn | € mn | |||||||||||
Securities available-for-sale | |||||||||||||||
German: | |||||||||||||||
Federal and state government and government agency debt securities | 17 | 187 | 133 | 8 | 345 | ||||||||||
Local government debt securities | 202 | 939 | 206 | — | 1,347 | ||||||||||
Corporate debt securities | 552 | 2,549 | 967 | — | 4,068 | ||||||||||
German total | 771 | 3,675 | 1,306 | 8 | 5,760 | ||||||||||
Non-German: | |||||||||||||||
U.S. Treasury and other U.S. government agency debt securities | — | 79 | — | — | 79 | ||||||||||
Other government and official institution debt securities | 170 | 444 | 725 | 62 | 1,401 | ||||||||||
Corporate debt securities | 651 | 2,591 | 2,077 | 217 | 5,536 | ||||||||||
Mortgage-backed and other debt securities | — | 2 | 109 | — | 111 | ||||||||||
Non-German total | 821 | 3,116 | 2,911 | 279 | 7,127 | ||||||||||
Total securities available-for-sale | 1,592 | 6,791 | 4,217 | 287 | 12,887 | ||||||||||
Weighted average yield in % | 4.1 | % | 4.0 | % | 3.9 | % | 3.8 | % | 4.0 | % |
Loan Portfolio
The following table sets forth an analysis of our loan portfolio, gross of allocated loan loss allowances and net of unearned income, according to the industry sector of borrowers, excluding reverse repurchase agreements and collateral paid for securities borrowing transactions, short-term investments and certificates of deposit, as well as other advances to banks and customers. The allocation between German and non-German components is based on the domicile of the borrower.
As of December 31, | |||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||
€ mn | € mn | € mn | € mn | € mn | |||||||
German: | |||||||||||
Corporate: | |||||||||||
Manufacturing | 6,024 | 4,953 | 6,487 | 8,042 | 9,728 | ||||||
Construction | 744 | 653 | 811 | 1,062 | 1,226 | ||||||
Wholesale and retail trade | 4,282 | 4,646 | 4,125 | 4,275 | 6,041 | ||||||
Financial institutions (excluding banks) and insurance companies | 4,675 | 3,144 | 2,005 | 2,958 | 2,810 | ||||||
Banks | 1,706 | 1,767 | 1,152 | 276 | 1,499 | ||||||
Service providers: | |||||||||||
Telecommunication | 471 | 599 | 362 | 58 | 611 | ||||||
Transportation | 1,339 | 1,242 | 1,068 | 877 | 847 | ||||||
Other Service Providers | 7,872 | 8,536 | 10,488 | 12,017 | 12,338 | ||||||
Total Service providers | 9,682 | 10,377 | 11,918 | 12,952 | 13,796 | ||||||
Other | 2,902 | 2,142 | 1,901 | 2,280 | 2,911 | ||||||
Corporate total | 30,015 | 27,682 | 28,399 | 31,845 | 38,011 | ||||||
Public authorities | 292 | 286 | 531 | 548 | 572 | ||||||
Private individuals (including self-employed professionals) | |||||||||||
Residential mortgage loans | 20,978 | 21,367 | 22,361 | 22,526 | 23,370 | ||||||
Consumer installment loans | 1,505 | 2,279 | 2,474 | 2,818 | 3,154 | ||||||
Other | 15,305 | 15,328 | 14,640 | 15,491 | 16,517 | ||||||
Total Private individuals (including self-employed professionals) | 37,788 | 38,974 | 39,475 | 40,835 | 43,041 | ||||||
German total | 68,095 | 66,942 | 68,405 | 73,228 | 81,624 | ||||||
Non-German: | |||||||||||
Corporate: | |||||||||||
Manufacturing(1) | 4,135 | 3,114 | 3,951 | 4,748 | 9,236 | ||||||
Construction(1) | 409 | 230 | 413 | 2,460 | 2,203 | ||||||
Wholesale and retail trade | 1,301 | 1,409 | 1,307 | 1,067 | 1,501 | ||||||
Financial institutions (excluding banks) and insurance companies(2) | 17,822 | 10,579 | 8,886 | 6,627 | 6,312 | ||||||
Banks | 6,000 | 5,392 | 5,095 | 3,704 | 3,348 | ||||||
Service providers: | |||||||||||
Telecommunication | 125 | 1,162 | 622 | 694 | 1,972 | ||||||
Transportation | 2,192 | 1,737 | 976 | 2,024 | 1,458 | ||||||
Other Service Providers | 4,617 | 2,915 | 1,839 | 3,377 | 5,476 | ||||||
Total Service Providers | 6,934 | 5,814 | 3,437 | 6,095 | 8,906 | ||||||
Other | 5,550 | 5,087 | 4,489 | 5,798 | 9,144 | ||||||
Corporate total | 42,151 | 31,625 | 27,578 | 30,499 | 40,650 | ||||||
Public authorities | 1,520 | 803 | 1,819 | 598 | 2,065 | ||||||
Private individuals (including self-employed professionals) | |||||||||||
Residential mortgage loans | 699 | 613 | 662 | 9,145 | 8,927 | ||||||
Consumer installment loans | 92 | 81 | 499 | 448 | 469 | ||||||
Other | 1,257 | 1,169 | 727 | 1,903 | 1,650 | ||||||
Total Private individuals (including self-employed professionals) | 2,048 | 1,863 | 1,888 | (3) | 11,496 | 11,046 | |||||
Non-German total | 45,719 | 34,291 | 31,285 | 42,593 | 53,761 | ||||||
Total loans | 113,814 | 101,233 | 99,690 | 115,821 | 135,385 | ||||||
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The following table sets forth our banking operations’ mortgage loans and finance leases that are included within the above analysis of loans.
As of December 31, | ||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||
€ mn | € mn | € mn | € mn | € mn | ||||||
Mortgage loans | 25,184 | 25,877 | 28,193 | 38,191 | 39,683 | |||||
Finance leases | 2,081 | 1,500 | 1,248 | 933 | 1,104 |
Loan Concentrations
Although our loan portfolio is diversified across more than 152 countries, at December 31, 2006 approximately 59.8% of our total loans were to borrowers in Germany. At December 31, 2006, our largest credit exposures to borrowers in Germany were loans to private individuals (including self-employed professionals) at 55.5%; this category represented 33.2% of our total loans outstanding at December 31, 2006. Approximately 55.5% of these loans are residential mortgage loans, which represent approximately 18.4% of our total loans outstanding at December 31, 2006. Our residential mortgage loans include owner-occupied, single- and two-family homes and apartment dwellings and investment properties. Our residential mortgage loans are well diversified across all German states. Our remaining loans to private individuals in Germany primarily include other consumer installment loans and loans to self-employed professionals, which are also geographically diversified across Germany. We have no other concentrations of loans to private individuals (including self-employed professionals) in Germany in excess of ten percent of our total loans.
Our German corporate customers are broadly diversified within the service providers’ category, however no one sector is individually significant to our domestic loan portfolio and we have no concentrations of loans to borrowers in any services industry in excess of ten percent of our total loans.
At December 31, 2006, approximately 8.5% of our total loans were to German corporate customers in various service industries, including utilities, media, transportation and other.
At December 31, 2006, approximately 16.1% of our total loans were to non-financial corporate borrowers outside Germany. These loans are well diversified across various commercial industries, including:
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We have no concentrations of loans to non-financial corporate borrowers in any industry in excess of ten percent of our total loans.
Maturity Analysis of Loan Portfolio
The following table sets forth an analysis of the contractual maturity of our loans at December 31, 2006. The allocation between German and non-German components is based on the domicile of the borrower.
As of December 31, 2006 | ||||||||
Due In One Year Or Less | Due After One Year Through Five Years | Due After Five Years | Total | |||||
€ mn | € mn | € mn | € mn | |||||
German: | ||||||||
Corporate: | ||||||||
Manufacturing | 3,301 | 1,751 | 972 | 6,024 | ||||
Construction | 472 | 189 | 83 | 744 | ||||
Wholesale and retail trade | 2,923 | 886 | 473 | 4,282 | ||||
Financial institutions (excluding banks) and insurance companies | 2,339 | 1,672 | 664 | 4,675 | ||||
Banks | 229 | 725 | 752 | 1,706 | ||||
Service providers: | ||||||||
Telecommunication | 448 | 19 | 4 | 471 | ||||
Transportation | 640 | 354 | 345 | 1,339 | ||||
Other service providers | 2,656 | 3,140 | 2,076 | 7,872 | ||||
Total service providers | 3,744 | 3,513 | 2,425 | 9,682 | ||||
Other | 1,237 | 878 | 787 | 2,902 | ||||
Corporate total | 14,245 | 9,614 | 6,156 | 30,015 | ||||
Public authorities | 194 | 62 | 36 | 292 | ||||
Private individuals (including self-employed professionals): | ||||||||
Residential mortgage loans | 2,095 | 3,744 | 15,139 | 20,978 | ||||
Consumer installment loans | 1,505 | — | — | 1,505 | ||||
Other | 2,275 | 4,395 | 8,635 | 15,305 | ||||
Total private individuals (including self-employed professionals) | 5,875 | 8,139 | 23,774 | 37,788 | ||||
German total | 20,314 | 17,815 | 29,966 | 68,095 | ||||
Non-German: | ||||||||
Corporate: | ||||||||
Manufacturing industry | 1,990 | 1,505 | 640 | 4,135 | ||||
Construction | 20 | 176 | 213 | 409 | ||||
Wholesale and retail trade | 590 | 665 | 46 | 1,301 | ||||
Service Providers: | ||||||||
Telecommunication | 64 | 53 | 8 | 125 | ||||
Transportation | 97 | 971 | 1,124 | 2,192 | ||||
Other service providers | 1,011 | 1,955 | 1,651 | 4,617 | ||||
Total service providers | 1,172 | 2,979 | 2,783 | 6,934 | ||||
Total manufacturing industry, construction, wholesale and retail trade and service providers | 3,772 | 5,325 | 3,682 | 12,779 | ||||
Financial institutions (excluding banks) and insurance companies | 10,556 | 5,083 | 2,183 | 17,822 | ||||
Banks | 4,135 | 1,761 | 104 | 6,000 | ||||
Other | 1,788 | 3,447 | 315 | 5,550 | ||||
Corporate total | 20,251 | 15,616 | 6,284 | 42,151 | ||||
Public authorities | 484 | 554 | 482 | 1,520 | ||||
Private individuals (including self-employed professionals): | ||||||||
Residential mortgage loans | 158 | 334 | 207 | 699 | ||||
Consumer installment loans | 44 | 46 | 2 | 92 | ||||
Other | 601 | 316 | 340 | 1,257 | ||||
Total private individuals | 803 | 696 | 549 | 2,048 | ||||
Non-German total | 21,538 | 16,866 | 7,315 | 45,719 | ||||
Total loans | 41,852 | 34,681 | 37,281 | 113,814 | ||||
The following table sets forth the total amount of loans due after one year with predetermined interest rates and floating or adjustable interest rates at December 31, 2006. Loans with predetermined interest rates are loans for which the interest rate is fixed for the entire term of the loan. All other loans are considered floating or adjustable interest rate loans. The allocation between German and non-German components is based on the domicile of the borrower.
As of December 31, 2006 | ||||||
Loans with Predetermined Interest Rates | Loans with Floating or Adjustable Interest Rates | Total | ||||
€ mn | € mn | € mn | ||||
German: | ||||||
Private individuals (including self-employed professionals) | 28,435 | 3,478 | 31,913 | |||
Corporate and public customers | 9,171 | 6,697 | 15,868 | |||
German total | 37,606 | 10,175 | 47,781 | |||
Non-German: | ||||||
Private individuals (including self-employed professionals) | 383 | 862 | 1,245 | |||
Corporate and public customers | 10,857 | 12,079 | 22,936 | |||
Non-German total | 11,240 | 12,941 | 24,181 | |||
Total | 48,846 | 23,116 | 71,962 | |||
Risk Elements
Non-performing Loans
The following table sets forth the outstanding balance of our non-performing loans. The allocation between German and non-German components is based on the domicile of the borrower.
As of December 31, | ||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||
€ mn | € mn | € mn | € mn | € mn | ||||||
Non-accrual loans(1): | ||||||||||
German | 1,570 | 1,855 | 4,774 | 6,459 | 7,355 | |||||
Non-German | 231 | 247 | 831 | 2,236 | 3,097 | |||||
Total non-accrual loans | 1,801 | 2,102 | 5,605 | 8,695 | 10,452 | |||||
Loans past due 90 days and still accruing interest(1): | ||||||||||
German | 176 | 251 | 390 | 477 | 644 | |||||
Non-German | 14 | 293 | 321 | 183 | 151 | |||||
Total loans past due 90 days and still accruing interest | 190 | 544 | 711 | 660 | 795 | |||||
Troubled debt restructurings(1): | ||||||||||
German | 27 | 31 | 17 | 26 | 65 | |||||
Non-German | 1 | 1 | 54 | 200 | 313 | |||||
Total troubled debt restructurings | 28 | 32 | 71 | 226 | 378 | |||||
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Non-accrual Loans
Non-accrual loans are those for which interest or other income are no longer recognized on an accrual basis. Loans are placed on non-accrual status in the event of being 90 days past due for interest or principal and/or in the event of recording a specific allowance against potential loss related to that loan.
Further, we place loans on non-accrual status when we determine, based on management’s judgment, that the payment of interest or principal is doubtful. Management’s judgment is applied based on our credit assessment of the borrower.
When a loan is placed on non-accrual status, any interest or other income received is recorded to the allowance for impairment of such loan and does not impact income while the loan remains impaired.
Loans Past Due 90 Days and Still Accruing Interest
Loans past due 90 days and still accruing interest are loans that are contractually past due 90 days or more as to principal or interest on which we continue to recognize interest income on an accrual basis.
Troubled Debt Restructurings
Troubled debt restructurings are loans that we have restructured due to a deterioration in the borrower’s financial position and in relation to which, for economic or legal reasons related to the borrower’s deteriorated financial position, we have granted a concession to the borrower that we would not have otherwise granted.
Interest Income on Non-performing Loans
The following table sets forth the gross interest income that would have been recorded during the year ended December 31, 2006 on non-accrual loans and troubled debt restructurings had such loans been current in accordance with their original contractual terms and the interest income on such loans that was
actually included in interest income during the year ended December 31, 2006.
Years Ended December 31, 2006 | ||||||
In German Offices | In non- German Offices | Total | ||||
€ mn | € mn | € mn | ||||
Interest income that would have been recorded in accordance with the original contractual terms | 79 | 8 | 87 | |||
Interest income actually recorded | 13 | 9 | 22 |
Potential Problem Loans
Potential problem loans are loans that are not classified as non-accrual loans, loans past due 90 days and still accruing interest or troubled debt restructurings, but where known information about possible credit problems causes us to have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may result in classifying the loans in one of the three categories of non-performing loans described above. The outstanding balance of our potential problem loans was €49 million at December 31, 2006, a decrease of €284 million, or 85.4% from €333 million at December 31, 2005. This decline (of potential problem loans) was primarily attributable to the fact that, during the course of 2005 and as a result of enhanced credit policies and processes, loans were categorized as non-performing loans earlier than in periods prior to 2005. This effect is also the cause for the decline in 2006. Moreover, we do not record potential problem loans within the homogeneous portfolio.
Each of our potential problem loans has been subject to our normal credit monitoring and review procedures. Effective January 1, 2005, in accordance with our policy on loan loss provisioning, no specific loan loss allowance was recorded on potential
problem loans. Hence, no potential problem loans were recorded for the homogeneous portfolio at December 31, 2006. For further information on the split between homogeneous and non-homogeneous loan portfolio see “—Summary of Loan Loss Experience.”
Approximately 22.7% of our potential problem loans are to private individuals in Germany. The remaining loans are to corporate borrowers in manufacturing, construction, wholesale and retail trade, telecommunication, transportation and other services, including media, utilities, natural resources and other services and other industry sectors. Our potential problem loans to corporate borrowers are diversified across the following geographic regions based on the domicile of the borrower:
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Foreign Outstandings
Cross-border outstandings consist of loans, net of allowances for loan losses, accrued interest receivable, acceptances, interest-bearing deposits
with other banks, other interest-earning investments and other monetary assets that either are recorded in an office that is not in the same country as the domicile of the borrower, guarantor, issuer or counterparty, or are denominated in a currency that is not the local currency of the borrower, guarantor, issuer or counterparty or are net local country claims. Net local country claims are domestic claims recorded in offices outside Germany that are denominated in local or foreign currency and that are not funded by liabilities in the same currency as the claim and recorded in the same office.
Our cross-border outstandings are allocated by country based on the country of domicile of the borrower, guarantor, issuer or counterparty of the ultimate credit risk. We set limits on and monitor actual cross-border outstandings on a country-by-country basis based on transfer, economic and political risks.
The following table sets forth our cross-border outstandings by geographic location for countries that exceeded 0.75% of the total assets of our banking operations. At December 31, 2006 there were no cross-border outstandings that exceeded 0.50% of the total assets of our banking operations in any country currently facing debt restructurings or liquidity problems that we expect would materially impact the borrowers’ ability to repay their obligations.
As of December 31, 2006 | |||||||||||||||
Government and Official Institutions | Banks and Financial Institutions | Other(1) | Net local Country Claims | Total Cross- border Outstandings | Percent of Total Assets(2) | Cross-border Commitments(3) | |||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | ||||||||||
Country | |||||||||||||||
United States | 45 | 3,194 | 13,320 | — | 16,559 | 3.29 | % | 22,751 | |||||||
United Kingdom | — | 4,512 | 7,178 | 55 | 11,745 | 2.34 | % | 22,104 | |||||||
France | 1,465 | 5,071 | 3,798 | — | 10,334 | 2.06 | % | 11,714 | |||||||
Italy | 1,257 | 1,413 | 1,510 | — | 4,180 | 0.83 | % | 9,965 | |||||||
Netherlands | — | 1,779 | 3,388 | — | 5,167 | 1.03 | % | 5,774 | |||||||
Switzerland | 23 | 4,046 | 1,790 | — | 5,859 | 1.17 | % | 6,463 | |||||||
Cayman Islands | — | 8 | 11,349 | 3 | 11,360 | 2.26 | % | 14,698 | |||||||
Ireland | 2 | 1,577 | 5,094 | — | 6,673 | 1.33 | % | 7,289 | |||||||
Belgium | 767 | 2,948 | 450 | — | 4,165 | 0.83 | % | 4,289 |
Government and Official Institutions Banks and Financial Institutions Net local Country Claims Total Cross- border Outstandings Percent of Total Assets(2) Cross-border Commitments(3) Country United States United Kingdom France Italy Netherlands Switzerland Cayman Islands As of December 31, 2005 Other(1) € mn € mn € mn € mn € mn € mn 60 1,849 16,704 — 18,613 3.97 % 3,325 — 2,672 6,665 84 9,421 2.01 % 9,423 3,443 3,082 3,611 14 10,150 2.17 % 2,765 1,826 1,682 1,665 543 5,716 1.22 % 6,428 1 1,452 2,255 — 3,708 0.79 % 913 75 2,005 1,420 — 3,500 0.75 % 857 9,656 87 1,114 — 10,857 2.32 % 2,370
As of December 31, 2004 | |||||||||||||||
Government and Official Institutions | Banks and Financial Institutions | Other(1) | Net local Country Claims | Total Cross- border Outstandings | Percent of Total Assets(2) | Cross-border Commitments(3) | |||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | ||||||||||
Country | |||||||||||||||
United States | 512 | 10,619 | 6,893 | — | 18,024 | 3.40 | % | 542 | |||||||
United Kingdom | 77 | 6,593 | 2,208 | 58 | 8,936 | 1.68 | % | 4,141 | |||||||
France | 5,361 | 4,252 | 2,369 | — | 11,982 | 2.26 | % | 4,051 | |||||||
Italy | 163 | 2,154 | 519 | 828 | 3,664 | 0.69 | % | 4,849 | |||||||
Netherlands | 4 | 3,193 | 1,623 | — | 4,820 | 0.91 | % | 1,049 | |||||||
Switzerland | 123 | 1,186 | 934 | 13 | 2,256 | 0.43 | % | 1,068 | |||||||
Cayman Islands | — | 2,262 | 1,146 | — | 3,408 | 0.64 | % | 5,974 |
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At December 31, 2006 and 2005, there were no material cross-border outstandings disclosed above that were also disclosed within the category of non-performing loans.
At December 31, 2006 and 2005, there were no material cross-border outstandings disclosed above that were also disclosed within the category of potential problem loans.
Summary of Loan Loss Experience
We determine an allowance for loan losses in our loan portfolio that represent management’s estimate of probable losses at the balance sheet date. An allowance is recorded when there is objective evidence of a loss event, and due to that loss event, it is probable that the obligor/counterparty/borrower will not be able to partly, or entirely, fulfill the contractually agreed-upon principal and interest terms.
The loan portfolio is divided into a homogenous and an non-homogeneous portion. The homogeneous
portion includes only loans in the domestic private banking business.
We calculate an allowance for each of the following risks that are allocable to identified loans or groups of loans in our portfolio:
a specific loan loss allowance for impaired loans within the non-homogeneous portfolio;
a portfolio loan loss allowance for loans within our homogeneous portfolio;
a general loan loss allowance for impairments that have been incurred but are not yet identified within the non-homogeneous portfolio; and
an allowance for transfer risk, or country risk allowances.
The loan loss allowance for the homogeneous portfolio is established on a portfolio basis, while the non-homogeneous portfolio is assessed both, on a single transaction and on a portfolio basis.
In order to avoid layering or double counting of specific, portfolio, general and country risk loan loss allowances, only those loans that have not been deemed impaired under International Accounting Standards Board’s International Accounting Standard (or “IAS”) 39,Financial Instruments: Recognition and Measurementand the Financial Accounting Standards Board’s Statement of Financial Accounting Standard (or “SFAS”) 114,Accounting by Creditors for Impairment of a Loan, or loans from countries for which no country risk allowance exists, are included as part of the portfolio used to establish the general loan loss allowance. We do not maintain any additional reserves.
Specific Loan Loss Allowance
We evaluate our loans based on portfolio segmentation, classified either as homogeneous or non-homogeneous. Loans included within our Corporate & Investment Banking division, as well as loans to borrowers within the Private & Business Clients division with gross risk equal to or greater than €1 million are classified as non-homogeneous, and are therefore evaluated individually. All remaining loans, i.e. loans to borrowers within the Private & Business Clients division with gross risk less than €1 million, form the homogeneous portfolio. These loans are evaluated on a portfolio-based approach. Prior to 2003, we evaluated each of our loans individually. Loans for which a specific loan loss allowance had been previously established were evaluated on an individual basis if the existing specific loan loss allowance was €0.5 million or more. Loans for which a specific loan loss allowance of less than €0.5 million had been previously established were aggregated into homogeneous portfolios by collateral types (portfolio approach) for evaluation under IAS 39 and SFAS 114.
A specific loan loss allowance is established to provide for specifically identified counterparty risks within the non-homogeneous loan portfolio. Loans are identified as impaired if there are serious doubts that borrowers will be able to make their contractually agreed-upon interest and principal payments. We calculate the specific loan loss allowance based on the guidance provided in IAS 39 and SFAS 114 according to which an impaired loan should be recorded at its estimated recoverable amount either directly, or through use of an allowance account by recording a charge to the income statement. The estimated recoverable amount
is the present value of expected future cash flows discounted at the loan’s original effective interest rate, or if the loan is secured by collateral and foreclosure on the loan is probable, the fair value of the collateral, or if there is an observable market for the loan, the market value of the loan.
Based on IAS 39 (AG 93), interest income on individually impaired loans is calculated by addition of accrued interest to the loan’s present value of future cash flows(unwinding). The interest rate that has been used to determine the impairment, i.e. the historical effective interest rate that has been used for calculating the specific loan loss provision, is applied to determine interest income. Income from unwinding is recorded as interest income, reducing the impairment amount only, and consequently gross loan amount remains unchanged.(1)
If the amount of the impairment subsequently increases or decreases due to an event occurring after the initial impairment measurement, including the recognition of interest in accordance with IAS 39, as discussed above, a change in the allowance is recognized in earnings by a charge or a credit to net loan loss provisions.
We use an internal credit rating system implemented in 2002, to assign ratings from 1 to 16 to each loan within our portfolio, on the basis of specific quantitative and qualitative customer criteria, including financial condition, historical earnings, management quality, and general industry data, among others. Loans that are classified in the rating categories 15 and 16 are loans that are impaired under IAS 39 and SFAS 114. In addition, loans that carry ratings of 13 and 14 are reviewed for potential impairment. See “Quantitative and Qualitative Disclosures about Market Risk—Risk Controlling in our Banking Business” for further information.
Portfolio Loan Loss Allowance
Beginning in 2005, we established loan loss allowances for all loans allocated to the homogeneous portfolio within our Private and Business Clients division (e.g. for mortgage loans and installment loans) with gross risk below €1 million by using the portfolio approach. This
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approach is based on historically derived loss rates for the corresponding sub-portfolio and is dependent upon the respective products as well as geared to the individual overdraft status. The continuous consideration of potential losses helps to ensure an ongoing recalibration of the underlying model. The resulting risk allowance embraces incurred but unidentified losses for loans, which are performing properly. Prior to 2005, we determined the impairment allowance on the homogeneous portfolios by applying a back-testing approach.
General Loan Loss Allowance
General loan loss allowances are established to provide for incurred but unidentified losses that are inherent in the non-homogeneous loan portfolio as of the relevant balance sheet date. General allowances for loan losses are established for loans that are impaired but not yet identified as impaired due to the time lag between the occurrence of an impairment event and the detection of that event by our credit risk monitoring systems and controls. Such a time lag may occur due to intervals between impairment tests, rating reviews and/or a borrower’s financial reporting.
The amount of the general loan loss allowance is based on historical loan loss experience, loss ratios as well as management’s assessment of current events and economic conditions when determining the general loan loss allowance. This approach includes the consideration of the average period for the identification of impaired loans (loss emergence period).
Country Risk Allowance
Country risk allowances are established for convertibility and transfer risk. Convertibility and transfer risk is a measure of the likely ability of a borrower in a certain country to repay its cross-border obligations. A cross-border transaction exists if the country of cash flow of the lender is not identical with the country of cash flow of the borrower. We establish a country risk allowance for loan exposures if serious doubts exist regarding a counterparty’s ability to comply with the payment terms due to the economic or political situation prevailing in the country of cash flow. We believe that this risk represents an additional risk above and beyond the normal counterparty risk.
Country risk allowances are based on our country rating system that incorporates current and historical economic, political and other data to categorize countries by risk profile. Using this system, we define country risk ratings from 1 to 16. Country risk allowances are established only for loans to borrowers in countries that are classified in country risk rating categories 10 to 16 and, in certain circumstances, country risk rating categories 8 and 9. See “Quantitative and Qualitative Disclosures about Market Risk—Risk Controlling in our Banking Business” for further information.
Country risk allowances apply to cross-border loan transactions, acceptances and various forms of import and export financing exceeding one year, such as guarantees and commercial letters of credit. Country risk allowances are not calculated for traded products or off-balance sheet products. We deduct specific loan loss allowances, if any, and the amount of collateral and guarantees provided by parties domiciled in countries for which no country risk allowances are assessed, and loans made in local currency, from the portfolio prior to determining the country risk allowance. In order to avoid layering or double counting of both specific loan loss allowances and country risk allowances, the amount of the specific loan loss allowances are also deducted from the portfolio prior to determining the country risk allowance.
Self-Correcting Mechanisms
The principal self-correcting mechanism used to reduce the difference between estimated and actual observed losses is our practice of basing loss estimates on our historical loss experience. Where actual observed losses differ from estimated losses, information relating to the actual observed losses is incorporated into the historical statistical data on which we base our estimates and is accordingly reflected in our subsequent estimated losses. Similarly, the credit default models that we use in calculating the general loan loss allowance are updated to incorporate newly available statistical evidence on impairment into the default calculations.
In addition, Dresdner Bank reviews its loss estimates on a quarterly basis, and, where such estimates differ from actual observed losses, makes appropriate adjustment to the general loan loss allowance and/or the country risk allowance.
Movements in Loan Loss Allowance
We record increases to our allowance for loan losses as an expense to our P&L. Releases have a positive impact on income, whereas write-offs of loan balances do not affect income. We write-off loan balances only if all economically sensible means of recovery have been exhausted. Charge-offs directly deduct the total loan amount and reduce income immediately. Recoveries are collections of amounts previously written off, and have direct impact on income.
Our total loan portfolio increased by €12,581 million, or 12.4%, to €113,814 million at December 31, 2006 from €101,233 million at December 31, 2005. As a result of the wind-down of our non-strategic loan portfolio, non-performing loans and potential problem loans have been significantly reduced since 2004. Our non-performing loans decreased by €660 million, or 24.6%, while our potential problem loans were reduced by €284 million, or 85.4%, from December 31, 2005 to December 31, 2006. Likewise, our specific loan loss provisions decreased by €321 million, or 42.7% from €752 million to €431 million at December 31, 2006.
As previously discussed, when we establish a specific loan loss allowance in relation to a particular loan in the non-homogeneous loan portfolio, that loan is removed from the portfolio of loans that is used as a basis for calculating the general loan loss allowance and the country risk allowance. The establishment of
a specific loan loss allowance may therefore result indirectly in a decrease in the general loan loss allowance and the country risk allowance, but no direct reallocation of allowances occurs.
Following the repayment of loans made to borrowers domiciled in countries involving convertibility and transfer risk, country risk allowances decreased by €134 million, or 58.8% to €94 million at December 31, 2006.
Our general loan loss allowance diminished by €132 million, or 21.3 %, during 2006 to €487 million at December 31, 2006, compared to €619 million at December 31, 2005.
The significant reduction of allowances in 2006 compared to 2005 is due to improved loan processes, leading to reduced non-performing and potential problem loans as previously discussed.
The average credit rating of loans in our portfolio based on our internal rating system has shown steady improvement in recent years. Due to the accelerated reduction of highly provisioned, mainly non-strategic loans, our total loan loss allowance as a percentage of total loans has decreased to 0.9% at December 31, 2006, compared to 1.6% at December 31, 2005, and 4.1% at December 31, 2004.
We believe the level of our total loan loss allowance is adequate in comparison to our historical net loan loss experience.
The following table sets forth an analysis of the loan loss allowances established for our recognized loan volume as of the dates specified. It differentiates by industry sector and geographic category of the borrowers, and the percentage of our total loan portfolio accounted for by those industry and geographic categories. The allocation between German and non-German components is based on the domicile of the borrower.
As of December 31, | |||||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||||
Amount | Percent of total loans in each category to total loans | Amount | Percent of total loans in each category to total loans | Amount | Percent of total loans in each category to total loans | Amount | Percent of total loans in each category to total loans | Amount | Percent of total loans in each category to total loans | ||||||||||||||||
€ mn | € mn | € mn | € mn | € mn | |||||||||||||||||||||
German: | |||||||||||||||||||||||||
Corporate: | |||||||||||||||||||||||||
Manufacturing | 70 | 5.3 | % | 105 | 4.9 | % | 447 | 6.5 | % | 687 | 6.9 | % | 884 | 7.2 | % | ||||||||||
Construction | 39 | 0.7 | % | 63 | 0.6 | % | 230 | 0.8 | % | 256 | 0.9 | % | 301 | 0.9 | % | ||||||||||
Wholesale and retail trade | 29 | 3.8 | % | 63 | 4.6 | % | 271 | 4.1 | % | 382 | 3.7 | % | 426 | 4.5 | % | ||||||||||
Financial institutions (excluding banks) and insurance companies | 9 | 4.1 | % | 21 | 3.1 | % | 83 | 2.0 | % | 94 | 2.6 | % | 171 | 2.1 | % | ||||||||||
Banks | — | 1.5 | % | 1 | 1.7 | % | 2 | 1.2 | % | 1 | 0.2 | % | 7 | 1.1 | % | ||||||||||
Service providers | |||||||||||||||||||||||||
Telecommuni-cation | — | 0.4 | % | — | 0.6 | % | 4 | 0.4 | % | 7 | 0.1 | % | 64 | 0.5 | % | ||||||||||
Transportation | 2 | 1.2 | % | 4 | 1.2 | % | 30 | 1.1 | % | 34 | 0.8 | % | 45 | 0.6 | % | ||||||||||
Other Service Providers | 67 | 6.9 | % | 183 | 8.4 | % | 503 | 10.5 | % | 726 | 10.4 | % | 718 | 9.1 | % | ||||||||||
Total Service Providers | 69 | 8.5 | % | 187 | 10.3 | % | 537 | 12.0 | % | 767 | 11.2 | % | 827 | 10.2 | % | ||||||||||
Other | 14 | 2.5 | % | 41 | 2.1 | % | 34 | 1.9 | % | 39 | 2.0 | % | 108 | 2.2 | % | ||||||||||
Corporate total | 230 | 26.4 | % | 481 | 27.3 | % | �� | 1,604 | 28.5 | % | 2,226 | 27.5 | % | 2,724 | 28.1 | % | |||||||||
Public authorities | — | 0.3 | % | — | 0.3 | % | — | 0.5 | % | — | 0.5 | % | — | 0.4 | % | ||||||||||
Private individuals (including self-employed professionals) | 76 | 33.2 | % | 115 | 38.5 | % | 1,211 | 39.6 | % | 1,409 | 35.3 | % | 1,702 | 31.8 | % | ||||||||||
German total | 306 | 59.8 | % | 596 | 66.1 | % | 2,815 | 68.6 | % | 3,635 | 63.2 | % | 4,426 | 60.3 | % | ||||||||||
Non-German: Corporate: Manufacturing, service providers Construction Wholesale and retail trade Financial institutions (excluding banks) and insurance companies Banks Service providers Telecommuni-cation Transportation Other Service Providers Total Service Providers Other Corporate total Public authorities Private individuals (including self-employed professionals) Non-German total Total specific loan loss allowances Country risk allowances General loan loss allowances Total loan loss allowances As of December 31, 2006 2005 2004 2003 2002 Amount Percent of
total loans
in each
category to
total loans Amount Percent of
total loans
in each
category to
total loans Amount Percent of
total loans
in each
category to
total loans Amount Percent of
total loans
in each
category to
total loans Amount Percent of
total loans
in each
category to
total loans € mn € mn € mn € mn € mn 13 3.6 % 9 3.1 % 53 4.0 % 105 4.1 % 242 6.8 % 15 0.4 % 16 0.2 % 19 0.4 % 67 2.1 % 104 1.6 % 9 1.1 % 3 1.4 % 93 1.3 % 98 0.9 % 78 1.1 % 11 15.6 % 12 10.4 % 133 8.9 % 262 5.7 % 33 4.7 % 3 5.3 % 59 5.3 % 14 5.1 % 175 3.2 % 244 2.5 % — 0.1 % — 1.1 % 19 0.6 % 61 0.6 % 119 1.5 % 5 1.9 % 10 1.7 % 16 1.0 % 81 1.7 % 8 1.1 % 11 4.1 % 13 2.9 % 6 1.8 % 80 2.9 % 108 4.0 % 16 6.1 % 23 5.7 % 41 3.4 % 222 5.3 % 235 6.6 % 44 4.9 % 8 5.0 % 77 4.5 % 157 5.0 % 321 6.8 % 111 37.0 % 130 31.2 % 430 27.7 % 1,086 26.3 % 1,257 30.0 % — 1.3 % — 0.8 % — 1.8 % 8 0.5 % 14 1.5 % 14 1.8 % 26 1.8 % 47 1.9 % 143 9.9 % 182 8.2 % 125 40.2 % 156 33.9 % 477 31.4 % 1,237 36.8 % 1,453 39.7 % 431 100.0 % 752 100.0 % 3,292 100.0 % 4,872 100.0 % 5,879 100.0 % 94 225 252 259 340 487 (1) 619 (1) 565 589 747 1,012 1,596 4,109 5,720 6,966
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The following table sets forth the movements in the loan loss allowance according to the industry sector and geographic category of the borrower. The allocation between German and non-German components is based on the domicile of the borrower.
Years Ended December 31, | ||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||
€ mn | € mn | € mn | € mn | € mn | ||||||
Total allowances for loan losses at beginning of the year | 1,596 | 4,109 | 5,720 | 6,966 | 8,038 | |||||
Gross charge-offs: | ||||||||||
German: | ||||||||||
Corporate: | ||||||||||
Manufacturing | 69 | 366 | 217 | 146 | 314 | |||||
Construction | 33 | 193 | 53 | 72 | 138 | |||||
Wholesale and retail trade | 53 | 233 | 169 | 113 | 206 | |||||
Financial institutions (excluding banks) and insurance companies | 22 | 87 | 31 | 28 | 74 | |||||
Banks | — | — | — | 7 | 11 | |||||
Service providers | ||||||||||
Telecommunication | — | 2 | — | 41 | — | |||||
Transportation | 6 | 24 | 11 | 13 | 7 | |||||
Other Service Providers | 84 | 414 | 475 | 180 | 320 | |||||
Total Service Providers | 90 | 440 | 486 | 234 | �� | 327 | ||||
Other | 5 | 21 | 21 | 53 | 117 | |||||
Corporate total | 272 | 1,340 | 977 | 653 | 1,187 | |||||
Private individuals (including self-employed professionals) | 229 | 1,156 | 404 | 590 | 348 | |||||
German total | 501 | 2,496 | 1,381 | 1,243 | 1,535 | |||||
Non-German: | ||||||||||
Corporate: | ||||||||||
Manufacturing | — | 51 | 51 | 41 | 132 | |||||
Construction | 4 | 2 | 3 | 13 | 12 | |||||
Wholesale and retail trade | 1 | 31 | 21 | 80 | 20 | |||||
Financial institutions (excluding banks) and insurance companies | 51 | 28 | 46 | 9 | 12 | |||||
Banks | 43 | 1 | 70 | 52 | 6 | |||||
Service providers | ||||||||||
Telecommunication | — | 24 | 29 | 44 | 71 | |||||
Transportation | 1 | 23 | 26 | 9 | 3 | |||||
Other Service Providers | — | 26 | 98 | 45 | 31 | |||||
Total Service Providers | 1 | 73 | 153 | 98 | 105 | |||||
Other | 8 | 22 | 107 | 391 | 29 | |||||
Corporate total | 108 | 208 | 451 | 684 | 316 | |||||
Public authorities | — | — | 4 | 1 | — | |||||
Private individuals (including self-employed professionals) | 5 | 22 | 14 | 43 | 38 | |||||
Non-German total | 113 | 230 | 469 | 728 | 354 | |||||
Total gross charge-offs | 614 | 2,726 | 1,850 | 1,971 | 1,889 | |||||
Recoveries: | ||||||||||
German(1): | ||||||||||
Corporate: | ||||||||||
Manufacturing | 11 | — | 3 | 1 | — | |||||
Construction | 4 | — | — | — | — | |||||
Wholesale and retail trade | 6 | — | 2 | — | — | |||||
Financial institutions (excluding banks) and insurance companies | 2 | — | — | — | — | |||||
Service providers(2) | ||||||||||
Transportation | — | 1 | — | 1 | — | |||||
Other Service providers | 15 | 26 | 4 | 3 | — | |||||
Total Service providers | 15 | 27 | 4 | 4 | — | |||||
Other | — | — | 1 | — | 1 | |||||
Corporate total | 38 | 27 | 10 | 5 | 1 | |||||
Private individual (including self-employed professionals) | 109 | 61 | 34 | 24 | 28 | |||||
German total | 147 | 88 | 44 | 29 | 29 | |||||
Non-German: Corporate: Manufacturing Construction Wholesale and retail trade Financial institutions (excluding banks) and insurance companies Banks Service providers Telecommunication Transportation Other Service Providers Total Service Providers Other Corporate total Public authorities Private individuals (including self-employed professionals) Non-German total Total recoveries Net charge-offs(3) Additions to allowances charged to operations (Decreases)/Increases in allowances due to (dispositions)/acquisitions of Allianz Group companies and other increases/(decreases) Foreign exchange translation adjustments Total allowances for loan losses at end of the year(6) Ratio of net charge-offs during the year to average loans outstanding during the year Years Ended December 31, 2006 2005 2004 2003 2002 € mn € mn € mn € mn € mn — — 1 15 57 — — — 2 — — 2 — 4 — — 1 1 — 1 2 — 7 — — 1 — 1 3 — — — 4 — — — — 3 — — 1 — 8 3 — 19 8 44 20 32 22 11 61 44 90 9 — 5 — — 2 4 5 — 56 33 15 71 44 146 180 103 115 73 175 434 2,623 1,735 1,898 1,714 (2 ) (49 ) 272 979 1,902 (134 ) 122 (106 )(4) (55 ) (1,085 )(5) (14 ) 37 (42 ) (272 ) (175 ) 1,012 1,596 4,109 5,720 6,966 0.25 % 1.79 % 1.23 % 1.22 % 0.93 %
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When we determine that a loan is uncollectible, the loan is charged off against any existing specific loss allowance or directly recognized as expense in the income statement. Subsequent recoveries, if any, are recognized in the income statement as a credit to the net loan loss provisions. Since 2000, we have charged-off loans when, based on management’s judgment, all economically sensible means of recovery have been exhausted. Our determination considers information such as the age of specific loss allowances and expected proceeds from liquidation of collateral and other repayment sources. Prior to 2000, we charged-off loans only when all legal means of recovery had been exhausted, for example only after completion of bankruptcy proceedings.
The change in practice has affected both, the timing and amount of charge-offs in the years 2001 to 2003, as well as the level of our non-accrual loans in 2002 and 2003. See “—Risk Elements—Non-performing Loans.”
Deposits
The following table sets forth the average balances and the average interest rates on deposit categories in excess of ten percent of average total deposits of our banking operations. The allocation between German and non-German components is based on the location of the office that recorded the transaction.
Years Ended December 31, | |||||||||||||||
2006 | 2005 | 2004 | |||||||||||||
Average Balance | Average Rate | Average Balance | Average Rate | Average Balance | Average Rate | ||||||||||
€ mn | € mn | € mn | |||||||||||||
German: | |||||||||||||||
Non-interest-bearing demand deposits | 27,389 | 26,805 | 29,979 | ||||||||||||
Interest-bearing demand deposits | 35,789 | 3.5 | % | 36,274 | 2.7 | % | 21,004 | 4.1 | % | ||||||
Savings deposits | 4,726 | 2.5 | % | 4,768 | 2.5 | % | 4,732 | 2.7 | % | ||||||
Time deposits | 78,104 | 3.3 | % | 86,911 | 2.7 | % | 118,936 | 2.1 | % | ||||||
German total | 146,008 | 154,758 | 174,651 | ||||||||||||
Non-German: | |||||||||||||||
Non-interest-bearing demand deposits | 7,529 | 7,310 | 8,334 | ||||||||||||
Interest-bearing demand deposits | 14,657 | 4.5 | % | 11,769 | 5.0 | % | 7,927 | 4.5 | % | ||||||
Savings deposits | 490 | 2.3 | % | 513 | 2.1 | % | 594 | 1.9 | % | ||||||
Time deposits | 52,417 | 5.3 | % | 52,113 | 3.7 | % | 45,903 | 3.6 | % | ||||||
Non-German total | 75,093 | 71,705 | 62,758 | ||||||||||||
Total deposits | 221,101 | 226,463 | 237,409 | ||||||||||||
The aggregate amount of deposits by foreign depositors in our German offices was €49,190 million, €48,675 million and €42,272 million at December 31, 2006, 2005 and 2004, respectively.
Time Deposits
The following table sets forth the balance of time certificates of deposit and other time deposits in the amount of €100,000 or more issued by our German offices by time remaining to maturity at December 31, 2006.
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The amount of time deposits of €100,000 or more issued by our non-German offices was €43,447 million at December 31, 2006.
Short-term Borrowings
Short-term borrowings are borrowings with an original maturity of one year or less. Short-term borrowings are included within liabilities to customers, liabilities to banks and certificated liabilities.
Securities sold under agreements to repurchase and negotiable certificates of deposit are the only significant categories of short-term borrowings within our banking operations.
The following table sets forth certain information relating to the categories of our short-term borrowings.
Years Ended December 31, | |||||||||
2006 | 2005 | 2004 | |||||||
€ mn | € mn | € mn | |||||||
Securities sold under repurchase agreements(1): | |||||||||
Balance at the end of the year | 117,588 | 89,389 | 121,474 | ||||||
Monthly average balance outstanding during the year | 121,800 | 119,584 | 128,033 | ||||||
Maximum balance outstanding at any period end during the year | 134,627 | 148,231 | 157,576 | ||||||
Weighted average interest rate during the year | 4.1 | % | 3.9 | % | 2.4 | % | |||
Weighted average interest rate on balance at the end of the year | 4.0 | % | 2.4 | % | 1.9 | % | |||
Negotiable certificates of deposit: | |||||||||
Balance at the end of the year | 23,733 | 25,353 | 23,037 | ||||||
Monthly average balance outstanding during the year | 23,686 | 25,125 | 21,002 | ||||||
Maximum balance outstanding at any period end during the year | 25,689 | 27,289 | 23,155 | ||||||
Weighted average interest rate during the year | 4.9 | % | 1.9 | % | 1.9 | % | |||
Weighted average interest rate on balance at the end of the year | 4.6 | % | 3.0 | % | 2.5 | % |
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General
Our insurance, banking and asset management businesses are subject to detailed, comprehensive regulation and supervision in all countries in which we do business. In addition, certain EU regulations, which are directly applicable in the EU member states and EU directives, that need to be implemented through local legislation, have had and will continue to have a significant impact on the regulation of the insurance, banking and asset management industries in EU member states. The following discussion addresses significant aspects of the regulatory schemes to which our businesses are subject.
Allianz SE
Allianz SE operates as a reinsurer and holding company for our insurance, banking and asset
management operating entities. As such, Allianz SE is supervised and regulated by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, defined above as BaFin). The BaFin monitors and enforces regulatory standards for banks, financial services institutions and insurance companies by supervising their activities in the financial markets. The BaFin is also responsible for the supervision of the Allianz Group as a financial conglomerate.
Effective January 2005, reinsurance companies in Germany such as Allianz SE are subject to specific legal requirements regarding assets covering their technical reserves. These assets are required to be appropriately diversified to prevent a reinsurer from relying excessively on any particular asset. The introduction of these requirements anticipated the implementation of the EU Reinsurance Directive (2005/68/EC) which was adopted in November 2005. All of the directive’s provisions have finally been implemented in Germany effective June 2, 2007.
Although Allianz SE expects to meet the newcurrently meets these requirements, there can be no assurances as to the impact on Allianz SE of any future amendments to or changes in the interpretation of the laws and regulations regarding assets covering technical reserves of reinsurance companies, which could require Allianz SE to change the composition of its asset portfolio covering its technical reserves or take other appropriate measures.
Allianz SE is required to submit annual and interim reports, including certain accounting documents, to the BaFin. The BaFin also reviews transactions between Allianz SE and its subsidiaries, including reinsurance relationships and cost sharing agreements.
Regulations for Financial Conglomerates
In December 2004, Germany adopted a law implementing the EU Financial Conglomerates Directive (2002/87/EC). The law provides for additional supervision of financial conglomerates in the following five areas: (i) assessment of capital requirements of financial conglomerates on a group level, (ii) supervision of risk concentration, (iii) supervision of intra-group transactions, (iv) assessment of the good repute and professional competence of the management of a financial conglomerate’s holding company and (v) establishment of appropriate internal controls to ensure compliance with the aforementioned components of supervision. The Allianz Group is a financial conglomerate with inwithin the scope of the directive and the related German law.
In the United States, the Gramm-Leach-Bliley Financial Modernization Act of 1999 (“Gramm-Leach-Bliley Act”) substantially eliminated barriers separating the banking, insurance and securities industries in the United States. The law allows the formation of diversified financial services firms that can provide a broad array of financial products and services to their customers. In addition, the law permits insurers and other financial services companies to acquire banks. On June 30, 2004, Allianz SE acquired “financial holding company” status pursuant to the Gramm-Leach-Bliley Act.
Regulation by Sector
Financial services providers operating in the insurance, banking or asset management sectors are subject to supplementary supervision specific to their respective sectors. The regulatory framework is established by local law which is in part harmonized as a result of EU directives regulating specific areas.
Insurance
European Union
The EU has adopted a series of insurance directives on life insurance and direct insurance other than life insurance, which have resulted in significant deregulation of the EU insurance markets. Under the directives, the regulation of insurance companies, including insurance operations outside their respective home countries (whether direct or through branches), is the responsibility of the home country insurance regulatory authority. This home country control principle permits an insurance company licensed in any jurisdiction of the EU to conduct insurance business, directly or through branches, in all other jurisdictions of the EU, without being subject to additional licensing requirements in these countries.
In EU member states, insurance contracts will beare subject to laws and regulations implementing the so-called anti-discrimination EU directives. In the insurance industry,According to a newly proposed directive, differences in premiums and benefits of polices willshall not be permitted unless they are based on relevant and accurate actuarial or statistical data. TheSuch requirement could have a relevant impact ofon the directives
whole industry. Consultations on Allianz Group companies in EU member states depends on how the directives will be implemented by member statesnew proposal are not yet finished and how courts will interpret the provisions. Consequently, at this stage,consequently, we cannot assess the potentialfinal impact of the directives.new directive on our business.
Germany
German insurance companies are subject to a comprehensive system of regulation under the German Insurance Supervision Act (Versicherungsaufsichtsgesetz). The BaFin monitors and enforces compliance with German insurance laws, applicable accounting standards, technical administrative regulations, and investment and solvency provisions. Under the Insurance
Supervision Act, German insurance companies are subject to detailed requirements with respect to the administration of their assets and liabilities. In general, the actuarial and claims reserves of each insurer must be adequate to allow the insurer to fulfill its contractual commitments to pay upon receipt of claims. To that end, insurers must maintain a certain solvency margin (own funds). This solvency margin is monitored by the BaFin, which has the authority to order the company to take certain action if it considers the available solvency margin inadequate to assure the company’s sound financial position.
On January 15, 2003, the EU Insurance Mediation Directive (2002/92/EC) became effective. The directive introduces obligations regarding information of the customers and the documentation of sales of insurance policies and was implemented in Germany onin May 22, 2007. The regulations lead to higher costs of administration and may increase the risk of litigation concerning selling practices.
Furthermore, insurance companies that form part of an insurance group, as defined by the German law implementing the EU Insurance Groups Directive (1998/78/EC), are subject to regulatory requirements, including the following three components: (i) the supervision of intra-group transactions, (ii) the monitoring of solvency on a consolidated basis and (iii) the establishment of appropriate internal controls for providing the BaFin with information as part of its monitoring of the first two components.
In addition, in the life and health sectors, German insurance companies are required to disclose to the BaFin the principles they use to set premium rates and establish actuarial provisions and are
required to appoint a chief actuary responsible for reviewing and ensuring the appropriateness of actuarial calculation methods. In addition, restrictions apply to the investment of German life and health insurance companies’ assets. The BaFin closely monitors the calculation of actuarial reserves and the allocation of assets covering actuarial reserves. German law also requires
As part of the health care reform of 2008, each private health insurer must from January 1st 2009 on, provide a new tariff that covers a basic medical treatment equal to the statutory health insurance (so called “basic tariff”). The access to this tariff must not be restricted by a medical risk assessment. The premiums may not exceed the premiums paid for the statutory health insurance. To meet these specifications the new basic tariff must be subsidized by the private health insurers. This has led to a rise in premiums for traditional private health insurance companies offer certain kinds of health insurance, including private compulsory long-term care insurance, to policyholders with substitutive health insurance.products.
Other European Countries
In other European jurisdictions where our insurance operations are located, insurance
companies are subject to laws and regulations relating to, among other things, statutory accounting principles, asset management, the adequacy of actuarial and claims reserves, solvency margins, minimum capital requirements, internal governance and periodic reporting requirements. The compliance with these laws and regulations, which are in part based on EU directives providing a certain level of harmonization, is enforced by the relevant regulatory and supervisory authority in each jurisdiction in which we operate, including, among others, the Autorité de Contrôle des Assurances et des Mutuelles in France, the Institute for the Supervision of Private and Collective Interest Insurance in Italy, the Swiss Federal Office of Private Insurance in Switzerland and the Financial Services Authority in the United Kingdom. These regulators have supervisory as well as disciplinary authority over our insurance operations in these jurisdictions.
United States
Our insurance subsidiaries in the United States are subject to comprehensive and detailed regulation of their activities under U.S. state and federal laws.
In addition, U.S. property-casualty and life insurance companies are subject to insurance regulation and supervision in the individual states in which they
transact business. Supervisory agencies in each state have broad powers to grant or revoke licenses to transact business, regulate trade practices, license agents, approve insurance policy terms and certain premium rates, set standards of solvency and reserve requirements, determine the form and content of required financial reports, examineperform insurance companiescompany market conduct examinations and prescribe the type, concentration, and amount of investments permitted. Insurance companies are subject to a mandatory financial audit every three to five years by state regulatory authorities, depending on the state of domicile, and every year by independent auditors. In addition, state Attorneys General have broad authority to investigate business practices within their respective states and to initiate legal action as they deem appropriate.
Although the federal government generally does not directly regulate the insurance business, many federal laws affect the insurance business in a variety of ways, including the Federal Fair Credit Reporting Act relating to the privacy of information used in consumer reports, the “Do Not Call” laws and the
USA U.S.A. PATRIOT Act of 2001 relating to, among other things, the establishment of anti-money laundering programs. In addition, our property-casualty operations are subject to the National Associationrequirements of the Terrorism Risk Insurance Act of 2002 (commonly referred to as TRIA), which is administered by the U.S. Department of Treasury and provides for reinsurance from the U.S. government for major acts of terrorism.
Variable annuity insurance is subject to the jurisdiction of the U.S. Securities Dealers, Inc. (“NASD”)and Exchange Commission (SEC), including SEC requirements pertaining to registration and marketing of products. Variable annuity contracts are registered with the SEC as securities, and the issuing insurance companies are registered with the SEC as investment companies. Variable annuities are also subject to the jurisdiction of the Financial Industry Regulatory Authority (FINRA), a self regulatoryself-regulatory organization that is under oversight of the U.S. Securities and Exchange Commission (“SEC”),SEC. FINRA regulates the sales practices associated with variable annuities and is currently seeking comments on a variety of proposed new rule,rules, which would impose specific sales practice standards and supervisory requirements on NASDFINRA members for transactions in deferred variable annuities. During
In December 2008, the past year,SEC adopted Rule 151A, which will have the NASDeffect of causing most fixed index annuities (FIAs) to be categorized as “securities” subject to SEC jurisdiction, and also to be subject to the jurisdiction of FINRA. The Rule has also soughtbeen structured to expand itsbecome effective in January 2011. Several insurance companies issuing FIAs have filed a lawsuit challenging the validity of Rule 151A. As a result, there is not complete certainty as to whether, when, or in what form Rule 151A will finally become effective.
Federal and state regulators are investigating various selling practices in the annuity industry, including suitability reviews, product exchanges, and sales to seniors. Such investigations can lead to regulatory authorityenforcement proceedings. Furthermore, Allianz Life is subject to include fixed indexed annuities, a major product line ofongoing market conduct examinations by several state insurance regulators that may lead to enforcement proceedings which could result in modifications to Allianz Life.Life’s business processes, remediation, and/or penalties. State regulatory changes will likely continue to be focused around suitability and sales practices, but these proposals are still in the discussion stage and the potential impact on our operations, if any, is presently unknown.
There are a number of proposals for regulation that may significantly affect the U.S. market, such as proposals relating to the establishment of an optional federal charter for insurance and reinsurance companies; proposals to create a systemic risk regulator that would bring insurance regulation under the supervision of either the Department of Treasury or the Federal Reserve, employee benefits regulations; changes to pension and retirement savings laws; asbestos litigation; taxation; disclosure requirements; establishment of a federal reinsurance mechanism for natural catastrophes, legislation allowing bankruptcy judges to recalculate the terms and condition of residential mortgages, and a proposal allowing the creationautomatic enrollment of private accounts withinemployees for Income Retirement Accounts for small employers. While we anticipate the Federal social security system. All offederal government to undertake significant regulatory reforms, the proposals related to these matters are very much in a preliminary stage and the impact upon our operations in the United States remains unknown. In addition, the impact of two recentother new federal laws, the Class Action Fairness Act of 2005 and the Pension Protection Act of 2006, upon our
U.S. operations will become clearer with time.
Pursuant However, positive results appear to industry-wide investigations, several of our U.S. subsidiaries have received requests for information from state insurance regulatory authorities and attorneys general relating to contingent commissions and other industry practices. These activities have led to joint actions and inquiries by these governmental agencies, in the course of which carriers and intermediaries have entered into settlements that may signal a shift in the industry towards more transparency with respect to intermediary compensation. Our U.S. subsidiaries are cooperating fully in these inquiries.
Asbeen realized as a result of one market conduct examination, the California Department of Insurance (DOI) has pending an Order to Show Cause against Allianz Life Insurance Company of North America (Allianz Life). Allianz Life is in discussions with the DOI regarding the possible resolutionadoption of the issues raised inClass Action Fairness Act of 2005. At the Orderstate level, asbestos litigation reform efforts continue, while legislation and court decisions continue to Show Cause, including with respect to
certain marketingexpand property casualty tort liability and sales practices of deferred annuity products. The potential outcome and exposure in this matter is currently uncertain. See Note 46 to the consolidated financial statements for information regarding certain class action lawsuits in California related to the marketing and sale of deferred annuity products.bad faith exposure.
Other Countries
Our insurance operations in countries other than those discussed above are also subject to detailed regulation and supervision by authorities in the relevant jurisdictions, including but not limited to such matters as corporate governance, solvency, minimum capital, policy forms and rates, reserving, investment and financial practices, as well as marketing, distribution and sales activities.
Banking, Asset Management and Other Investment Services
European Union
The supervision of banking, asset management and other investment services in the EU member states is primarily the responsibility of national authorities within the individual member states. However, the rules governing the regulation and supervision of these financial services have been harmonized by a number of EU directives, which have been or will be implemented in the member states. Most importantly, the national implementation of the EU Markets in Financial Instruments Directive (2004/39/EC) (“MiFID”)(MiFID) increased the level of harmonization for the operational structures and code of conduct rules for European investment firms. The MiFID is currently expected to become effective throughout the EU by November 1, 2007. The EU Capital Requirements Directive (2006/48/EC and 2006/49/EC) primarily focuses on establishing harmonized minimum capital requirements for financial institutions and the EU Undertakings for Collective Investments in Securities Directive (1985/611/EEC), as amended from time to time, provides a European standard for the core asset management product in Europe. As a result of this harmonization, banking, asset management or investment service licenses granted in one EU member state are to be recognized in all other member states. Further, the directive on payment services in the internal market (2007/64/EC) represents the legal framework for the realization of the Single Euro Payments Area (SEPA).
Under the MiFID, investment firms can operate branches in all EU member states and also engage in
cross-border services based on their existing home country license. For cross-border business without local presence, the MiFID will introduceintroduces the relevance of home country code of conduct rules only. Moreover, EU member states must ensure that financial institutions that are members of a securities exchange in one member state are eligible for admission to trading on the exchanges of all other member states. Another field of harmonization is the offering and the trading of securities. The EU Prospectus Directive (2003/71/EC), which came into force on December 31, 2003, provides for harmonized rules with respect to the contents and filing of prospectuses for publicly traded securities. In addition, the EU Transparency Directive (2004/109/EC) harmonizes the rules for disclosure of financial and other information that publicly traded companies have to provide. The EU Market Abuse Directive (2003/6/EC) sets forth certain rules against market manipulation and insider dealing. The EU Anti Money Laundering Directive (2005/60/EC) introduces new rules on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing to be implemented by the EU member states. There are also EU directives harmonizing investor protection.
There are currently various proposals for regulatory reforms and initiatives, in particular regarding the EU Capital Requirements Directive, the Deposit Guarantee Scheme, credit rating agencies and hedge funds. It is difficult to predict at this time whether changes resulting from new regulations in these areas will affect the asset management industry, our investment management businesses, or our banking businesses, and, if so, to what degree.
Germany
Our banking and other financial services activities in Germany are extensively supervised and regulated by the BaFin and the German Central Bank (Deutsche Bundesbank, “Bundesbank”) in accordance with the German Banking Act (Kreditwesengesetz). The BaFin monitors compliance with, among other things, capital adequacy and liquidity requirements, lending limits, restrictions on certain activities imposed by the German Banking Act and coverage by adequate capital of market risk and counterparty risk associated with securities and foreign exchange transactions of banks. The BaFin
has the authority to request information and documentation on business matters from the banks and requires banks to file periodic reports. If the BaFin discovers irregularities, it has a wide range of enforcement powers.
In June 2004, the Basle Committee released the “Revised Framework” (“Basle II”) to replace the 1988 capital accord with a new capital accord. The two principal objectives of Basle II for measuring risk are (i) to align capital requirements more closely with the underlying risks; and (ii) to introduce a capital charge for operational risk (including, among other things, risks related to certain external factors, as well as to technical errors and errors of employees). Basle II is to be implemented by the
creditCredit institutions in the various countries that participate in the Basle Committee bybegan implementing Basle II in the beginning of 2007 at the earliest.2007. In Germany, the Solvability Regulation (Solvabilitätsverordnung) implementsimplemented Basle II and includesincluded the new capital requirements. A bank must report its large credits to the Bundesbank and must notify the BaFin and the Bundesbank if it exceeds certain ceilings. Credits exceeding these ceilings may only be granted with the approval of the BaFin, and the amount exceeding these ceilings must be covered by capital of the bank.
In accordance with the German Deposit Guarantee Act (Einlagensicherungs- und Anlegerentschädigungsgesetz), the Bundesverband deutscher Banken, the association of the German private sector commercial banks, established a company known as the Compensation Institution (Entschädigungseinrichtung deutscher Banken GmbH) to carry out and ensure the deposit guarantee scheme of the German private sector commercial banks. The Deposit Guarantee Act provides certain guarantees for depositors and for claims resulting from securities transactions by customers. In addition, the banking industry has voluntarily set up various protection funds for the protection of depositors such as the Einlagensicherungsfonds, a deposit protection association with a fund which covers most liabilities to the majority of creditors up to a certain amount, as described by the fund’s Articles of Association.
Other European Countries
In other European countries, our banking, asset management and other investment services
operations are subject to laws and regulations relating to, among other things, listed financial instruments, capital adequacy requirements, shareholdings in other companies, rules of conduct and limitation of risk. Our operations are also subject to ongoing disclosure obligations and may be subject to regulatory audits.
United States
Allianz Investment Company,Global Investors Fund Management LLC, Allianz Global Investors of America L.P.,Solutions LLC, Allianz Global Investors Management Partners LLC, Allianz Global Investors Managed Accounts LLC, Allianz Alternative Asset Management U.S. LLC, Pacific Investment Management Company LLC, Oppenheimer Capital LLC, NFJ Investment Group LLC, Nicholas-Applegate Capital Management LLC, RCM Capital Management LLC and other financial services subsidiaries of Allianz SE in the United States are registered as investment advisers under the
Investment Advisers Act of 1940. Many of the investments managed by these financial services subsidiaries, including a variety of mutual funds and other pooled investment vehicles, are registered with the SEC under the Investment Company Act of 1940. The investment advisory activities of these financial services subsidiaries are subject to various U.S. federal and state laws and regulations. These laws and regulations relate to, among other things, limitations on the ability of investment advisers to charge performance-based or non-refundable fees to clients, requirements to adopt Codes of Ethics governing personal securities transactions and other activities of employees, custody and safekeeping of clients assets, record-keeping and reporting requirements, disclosure requirements, limitations on principal transactions between an adviser or its affiliates and advisory clients, as well as general anti-fraud provisions.
Federal and state regulators have focusedcontinue to focus on the mutual fund and variable insurance product industries. As a result of publicity relating to widespread perceptions of industry abuses and the “subprime” crisis in 2007 and 2008, there have been numerous proposals for legislative and regulatory reforms, including, without limitation, mutual fund governance, new disclosure requirements, concerning mutual fund share classes, compensation arrangements, commission breakpoints, revenue sharing, advisory fees, market timing, late trading, portfolio pricing, annuity products, hedge funds, regulation and distribution of equity index products, and other
issues. It is difficult to predict at this time whether changes resulting from new laws and regulations will affect the industriesU.S. asset management industry, or our investment management businesses, and, if so, to what degree.
Some U.S. financial services subsidiaries of Allianz SE are also registered with the SEC as broker-dealers under the Securities Exchange Act of 1934 and are subject to extensive regulation. In addition, some of these subsidiaries are members of, and subject to regulation by, self-regulatory organizations such as the NASD and, in the case of Dresdner Kleinwort Securities LLC, also the New York Stock Exchange.FINRA. The scope of broker-dealer regulation covers matters such as capital requirements, the use and safekeeping of customers’ funds and securities, advertising and other communications with the public, sales practices, record-keeping and reporting requirements, supervisory and organizational procedures intended to assure compliance with securities laws and rules of the self-regulatory organizations and to prevent improper trading on material non-public information,
employee-related matters, limitations on extensions of credit in securities transactions, and clearance and settlement procedures.
Dresdner Bank provides commercial banking services in the Unites States through its New York and Grand Cayman Branches. Dresdner Bank’s U.S. banking activities are accordingly subject to regulation, supervision and examination by the Federal Reserve Board under the U.S. Bank Holding Company Act of 1956, as amended (“BHCA”), and the International Banking Act of 1978, as amended (“IBA”). The New York branch of Dresdner Bank is licensed, supervised and examined by the New York State Banking Department and is also supervised and examined by the Federal Reserve Bank of New York.
The Gramm-Leach-Bliley Act substantially eliminated barriers separating the banking, insurance and securities industries in the United States. According to this law, a bank holding company that has effectively elected to become a financial holding company under the applicable regulation may conduct business activities either directly or through its subsidiaries that were previously prohibited for bank holding companies. Dresdner Bank became a financial holding company under the Gramm-Leach-Bliley Act in 2000. To qualify as a financial holding company, a bank is required to meet the criteria of being well-managed and well-capitalized. See Note 23 to the consolidated financial statements. As a result of its ownership of Dresdner Bank, Allianz SE is also subject to the supervision of the Federal Reserve Board under the BHCA and the IBA and since June 30, 2004, Allianz SE has elected to be treated asthe status of a financial holding company. Allianz SE’s status as a financial holding company became effective on June 30, 2004.
Other Countries
Our financial services businesses in countries other than those discussed above are also subject to detailed regulation and supervision by authorities in the relevant jurisdictions, including, but not limited to such matters as corporate governance, anti-corruption, capital adequacy, investment advisory and securities trading activities, and mutual fund management and distribution activities.
ITEM 4A. Unresolved Staff CommentsMeasures to Stabilize Financial Markets
None.In reaction to the crisis in the global financial markets, many countries have introduced rescue schemes for the financial sector. These schemes may include the granting of subsidies in form of guarantees facilitating the refinancing of the respective business, the infusion of liquidity (in form of voting or non-voting equity interests, senior or subordinated loans) or the acquisition of so-called “toxic” assets. Companies participating in these
schemes are typically subject to various restrictions, e.g. with respect to dividend payments and executive remuneration. Details vary from country to country.
ITEM 5. Operating and Financial Review and ProspectsAlthough no member of Allianz Group has applied for such subsidies, there may be an impact on Allianz’ business results, e.g. as a result of depreciation in the value of instruments issued by companies participating in rescue programs. Limitation on their ability to pay dividends may reduce the return of those Allianz portfolios which invested into such companies. Further, certain jurisdictions, such as the United Kingdom have recently introduced draft legislation pursuant to which the terms of certain capital market instruments may be amended (Banking Bill 2009). National legislation may also provide for the nationalization of financial services providers.
ITEM 4A. | Unresolved Staff Comments |
None
ITEM 5. | Operating and Financial Review and Prospects |
You should read the following discussion in conjunction with our consolidated financial statements including the notes thereto. We prepare ourThe consolidated financial statements of the Allianz Group have been prepared in conformity with International Financial Reporting Standards (IFRS), as adopted under European Union (EU) regulations in accordance with section 315a of the German Commercial Code (HGB). The consolidated financial statements of the Allianz Group have also been prepared in accordance with IFRS which differas issued by the International Accounting Standard Board (IASB). The Allianz Group’s application of IFRSs results in certain significant respects from U.S. GAAP. For a description of the significantno differences between IFRS as adopted by the EU and U.S. GAAP and a reconciliation of net income and shareholders’ equity under IFRS to U.S. GAAP, you should read Note 53 toas issued by the consolidated financial statements. Unless otherwise indicated, the financial information we have included in this annual report is presented on a consolidated basis under IFRS.IASB. Unless otherwise indicated, we have obtained data regarding the relative size of various national insurance markets from annual reports prepared by SIGMA, an independent organization which publishes market research data on the insurance industry. In addition, unless otherwise indicated, insurance market share data are based on gross premiums written and statutory premiums for our Property-Casualty and Life/Health segments, respectively. Data on position and market share within particular countries are based on various third partythird-party and/or internal sources as indicated herein.
Critical Accounting Policies and Estimates
Goodwill
Goodwill resulting from business combinations represents the difference between the acquisition cost of the business combination and the Allianz Group’s proportionate share of the net fair value of identifiable assets, liabilities and certain contingent liabilities. Goodwill resulting from business combinations is not subject to amortization. It is initially recorded at cost and subsequently measured at cost less accumulated impairments. For impairment testing purposes, goodwill is allocated to the cash generating units that are expected to benefit from the synergies of the business combination as of the acquisition date. Significant judgment is involved in this estimate, and the actual resulting synergies of the business combination may not reflect the original estimate. During 2006,2008, the Allianz Group realigned its cash generating units in the Property-Casualty and Life/Health segments to ensure consistency with the management responsibilities of the Board of Management. As a result, the Allianz Group has
allocated goodwill to nine cash generating units in the Property-Casualty segment, six cash generating units in the Life/Health segment, threeone cash generating unitsunit in the Banking segment, one cash generating unit in the Asset Management segment and one cash generating unit in the Asset ManagementCorporate segment.
The Allianz Group conducts an annual impairment test of goodwill on October 1, or more frequently if there is an indication that goodwill is not recoverable. The impairment test includes comparing the recoverable amount to the carrying amount, including goodwill, of all relevant cash generating units. A cash generating unit is not impaired if the recoverable amount is greater than the carrying amount. A cash generating unit is impaired if the carrying amount is greater than the recoverable amount. Judgment is involved in applying valuation techniques when estimating the recoverable amount. The valuation techniques include discountedrecoverable amounts of cash flows analyses, which rely upon estimatesgenerating units generally are determined on the basis of value in use calculations.
The Allianz Group utilizes the amountscapitalized earnings method to derive the value in use for all cash generating units in the Property-Casualty, Banking and timing of future cash flows,Asset Management segments, as well as for the Germany Health and Private Equity cash generating units. Generally, the basis for the determination of the capitalized earnings value is the business plan (“detailed planning period”) as well as the estimate of the sustainable returns which can be assumed to be realistic on a long term basis (“terminal value”) of the companies included in the
cash generating units. The capitalized earnings value is calculated by discounting the future earnings using an appropriate discount rate.
The business plans applied in the value in use comprise a planning horizon of three years. The terminal values are largely based on the expected profits of the final year of the detailed planning period. Where necessary, the planned profits are adjusted so that long term sustainable earnings are reflected. The financing of the assumed growth in the terminal values is accounted for by appropriate profit retention.
The discount rate is based on the capital asset pricing model and appropriate eternal growth rates. The assumptions, including the risk free interest rate, market conditions, interestrisk premium, segment beta and leverage ratio, used to calculate the discount rates are consistent with the parameters used in the Allianz Group’s planning and controlling process.
For all cash generating units in the Life/Health segment, with the exception of U.S. the fair value is based on an Appraisal Value which is derived from the Market Consistent Embedded Value and a multiple of the Market Consistent Value of New Business to reflect the companies ability to continue to write new business. The Market Consistent Embedded Value is an industry-specific valuation method and is in compliance with the general principles of the discounted earnings methods. The Market Consistent Embedded Value approach utilized is based on the Allianz Group’s Market Consistent Embedded Value guidelines.
The value in use calculations are sensitive to the assumptions used in selecting the appropriate discount rates. rates, as well as the key value drivers of the business plans. For example, the capitalized earnings values of Property-Casualty cash generating units depend on the application of long term sustainable combined ratios, and Banking and Asset Management cash generating units are sensitive to changes in assumptions regarding cost income ratios. Moreover, a severe or prolonged period of global or regional economic weakness could adversely affect our business plans and result in the need for the impairment of goodwill at one or more cash generating units. Should an impairment occur, the resulting impairment loss could be material to the Allianz Group’s results of operations.
During 2006,2008, the Allianz Group’s annual impairment tests did not indicate a need to reduce the carrying value of goodwill. Should an impairment occur,Sensitivity analyses with regards to discount rates and / or key value drivers of the resulting impairment loss could be material to the Allianz Group’s results of operations.business plans were performed.
Fair Value of Financial Instruments
The Allianz Group holds a number of financial instruments that are required to be measured at fair value under IFRS. These include trading assets and liabilities, financial assets and liabilities designated as carried at fair value through income, available-for-sale debt and equity securities, and derivative instruments, qualifyingfinancial assets and liabilities for hedge accounting treatment.unit-linked contracts and financial liabilities for puttable equity instruments. For most of these financial instruments, changes in fair value are included in net income. For others, such as available-for-sale securitiesinvestments and certain derivatives under hedge accounting rules, the changes in fair value are included in equity.
The fair values of financial instruments that are traded in active markets are based on quoted market prices or dealer price quotations on the last exchange trading day prior to and including the balance sheet date. The quoted market price used for a financial assetsasset held by the Allianz Group is the current bid price; the quoted market price used for financial liabilities is the current ask price.
The fair values of financial instruments that are not traded in an active market are determined by
using valuation techniques. Valuation techniques are used which are based on market observable inputs when available. Such market inputs include references to recently quoted prices for identical instruments from an active market, quoted prices for identical instruments from an inactive market, quoted prices for similar instruments from active markets, quoted prices for similar instruments from inactive markets. Market observable inputs also include interest rate yield curves, option volatilities and foreign currency exchange rates. Where observable market prices are not available, fair value is based on appropriate valuation techniques using non-market observable inputs. Valuation techniques include net present value techniques, the discounted cash flow method, comparison to similar instruments for which observable market prices exist and other valuation models. Depending on the method used, different adjustments may be required for market, liquidity, credit or other risks in order to estimate the price at which an orderly transaction would take place between market participants at the measurement date.
The fair value of a financial instrument is determined using quoted prices for an identical instrument in active markets (Level I). If quoted prices for an identical instrument in active markets are not available, the fair value is determined using valuation-techniques based on observable market data (Level II). Otherwise valuation-techniques are used, for which any significant input is not based on observable market data (Level III).
The following table presents the fair value hierarchy for financial instruments carried at fair value in the consolidated balance sheet as of December 31, 2008.
As of December 31, | 2008 | 2007 | ||||||||
Level I Quoted prices in active markets | Level II Valuation technique- market observable inputs | Level III Valuation technique- non market observable inputs | Total fair value | Total fair value(1) | ||||||
€ mn | € mn | € mn | € mn | € mn | ||||||
Financial assets | ||||||||||
Financial assets held for trading | 1,020 | 1,550 | 54 | 2,624 | 163,541 | |||||
Financial assets designated at fair value through income | 7,295 | 4,129 | 192 | 11,616 | 21,920 | |||||
Available-for-sale investments | 190,820 | 46,710 | 4,569 | 242,099 | 268,001 | |||||
Financial assets for unit-linked contracts | 47,171 | 3,279 | — | 50,450 | 66,060 | |||||
Derivative financial instruments used for hedging that meet the criteria for hedge accounting and firm commitments | 365 | 736 | — | 1,101 | 344 | |||||
Total financial assets | 246,671 | 56,404 | 4,815 | 307,890 | 519,866 | |||||
Financial liabilities | ||||||||||
Financial liabilities held for trading | 63 | 1,018 | 5,163 | 6,244 | 124,083 | |||||
Financial liabilities designated at fair value through income | — | — | — | — | 1,970 | |||||
Investment contracts with policyholders(2) | 35,117 | 1,037 | 174 | 36,328 | 35,841 | |||||
Financial liabilities for unit-linked contracts | 47,171 | 3,279 | — | 50,450 | 66,060 | |||||
Derivative financial instruments used for hedging that meet the criteria for hedge accounting and firm commitments | 19 | 189 | — | 208 | 2,210 | |||||
Financial liabilities for puttable equity instruments | 2,718 | — | — | 2,718 | 4,162 | |||||
Total financial liabilities | 85,088 | 5,523 | 5,337 | 95,948 | 234,326 | |||||
(1) | Includes as of December 31, 2007 financial assets with a fair value of €201.8 bn and financial liabilities with a fair value of €140.6 bn related to the disposal group Dresdner Bank. |
(2) | Excludes Universal Life-Type contracts under US GAAP SFAS 97. |
For the vast majority of Allianz Group’s financial instruments carried at fair value in the consolidated balance sheet as of December 31, 2008, the fair value is determined using quoted prices in active markets for the identical instrument (Level I).
Available-for-sale investments assigned to Level II included corporate bonds of €23 bn and ABS-related instruments of €16 bn as of December 31, 2008 for which valuation techniques with observable market inputs are used.
The fair value of certain financial instruments is determined using valuation techniques with non market observable input parameters (Level III). Within financial assets designated at fair value through income these instruments comprise
investments in private equity of €184 mn. Within available-for-sale investments these instruments relate to investments in private equity of €2.1 bn, investments in corporate bonds of €1.7 bn and corporate asset-backed-securities of €133 mn. Financial liabilities held for trading include €5.2 bn of embedded derivative financial instruments relating to annuity products.
Due to the sale of Dresdner Bank to Commerzbank on January 12, 2009 the table above does not include certain CDOs that Allianz Group has repurchased from Dresdner Bank after the completion of the sale to Commerzbank. The amount of these assets as of December 31, 2008 was €1.1 bn and is presented in non-current assets and assets from disposal groups classified as held for sale.
Due to the worldwide financial market crisis, some markets faced a significant shortage of liquidity, which affected the valuation techniques used by the Allianz Group to measure fair value. For certain financial instruments, the market has been completely illiquid and market prices were no longer available. In addition, the market prices of certain ABS-based products declined significantly.
For ABS-based products, the availability of price quotations from a functioning market was limited during 2008 and as of December 31, 2008. Therefore, the valuation of these financial instruments is mainly based on quoted market prices or current market values of substantially the same financial instruments. The market values used were taken from other market participants that management believes are representative of the market. In all other cases, Allianz used model-based valuation techniques. Regardless of the valuation technique used, such techniques reflect current market conditions and appropriate risk adjustments that management believes market participants would make. For more information on Allianz Group’s ABS exposure, please refer to “—Executive Summary—Impact of the Financial Markets Turbulence—Asset-backed securities exposure”.
The Allianz Group usescurrently cannot provide a varietysensitivity analysis of methods and makesthe assumptions used in the fair value measurement of financial instruments. To the extent that financial instruments for which fair market values are determined using valuation techniques that are not based on observable market conditions existing at each balance sheet date. Such assumptions include estimates of market prices, discount and volatility rates, as well as market depth and liquidity. Indata are considered significant to Allianz’s consolidated financial statements in the process, appropriate adjustments are made for credit and measurement risks. Wherefuture, Allianz intends to provide such factors are not market observable, changesa sensitivity analysis in assumptions could affectfuture annual reports on Form 20-F to the reported fair value of financial instruments.extent applicable.
Impairments of Investments
Investments include held-to-maturity investments, available-for-sale debt and equity investments, investments in associates and joint ventures, and real estate held for investment.
Held-to-maturity securities are recorded at amortized cost using the effective interest method over the life of the security, less any impairment losses.losses (“incurred loss model”). Available-for-sale securities are recorded at fair value, and changes in fair value are recorded within a separate component of equity; impairment losses are recorded in the income statement.
A held-to-maturity or available-for-sale debt security is impaired if there is objective evidence that a loss event has occurred, which has impaired the expected cash flows, i.e. all amounts due according to the contractual terms of the security are not considered collectible. Typically the impairment is due to deterioration in the creditworthiness of the issuer. Factors considered include industry risk factors, financial condition, liquidity position and near-term prospects of the issuer, credit rating declines from a recognized credit rating agency and a breach of contract. A decline in fair value below amortized cost due to changes in risk free interest rates does not necessarily represent objective evidence of a loss event. Allianz Group’s policy considers for available-for-sale debt investments a significant decline to be one in which the fair value is 20% below the amortized cost for more than six months. This is applied individually by all subsidiaries.
An available-for-sale equity securityinvestment is considered to be impaired if there is objective evidence that the cost may not be recovered. Objective evidence that the cost may not be recovered, in addition to qualitative impairment
criteria, includes a significant or prolonged decline in the fair value below cost. The Allianz Group’s policy considers a significant decline to be one in which the fair value is below the weighted-average cost by more than 20% and a prolonged decline to be one in which fair value is below the weighted-average cost for greater than nine months. This policy is applied individually by all subsidiaries.
If an available-for-sale equity securityinvestment is impaired based upon the Allianz Group’s qualitative or quantitative impairment criteria, any further declines in the fair value at subsequent reporting dates are recognized as impairments. Therefore, at each reporting period, for an equity security that is determined to be impaired based upon the Allianz Group’s impairment criteria, an impairment is recognized for the difference between the fair value and the original cost basis, less any previously recognized impairments.
In a subsequent period, if the amount of the impairment previously recorded on a debt security decreasesdecrease and the decrease can be objectively related to an event occurring after the impairment, such as an improvement in the debtor’s credit rating, the impairment is reversed through other income from
investments. Reversals of impairments of available-for-sale equity securities are not recorded.
There are several risks and uncertainties related to the monitoring of investments to determine whether an impairment exists. These risks include the risk that the Allianz Group identifies loss events in a timely manner, that Allianz’s assessment of an issuer’s ability to meet its contractual obligation will change based on the issuer’s credit worthiness, and that the issuer’s economic outlook will be worse than expected.
Total unrealized losses on available-for-sale debt securitiesinvestments and held-to-maturity investments were €1,959€9,898 million and €811€4,264 million as of December 31, 20062008 and 2005,2007, respectively. Total unrealized losses on available-for-sale equity securitiesinvestments were €159€851 million and €188€467 million as of December 31, 20062008 and 2005,2007, respectively.
Impairments on investments in associates and joint ventures amounted to €72 million and €2 million as of 31 December, 2008 and 2007, respectively. Impairments on real estate held for investment, amounted to €128 million and €23 million as of 31 December, 2008 and 2007, respectively.(1)
Loan impairmentsImpairments and provisionsProvisions
The loan loss allowance represents management’s estimate of losses from impaired loans within the loan portfolio and other lending related
commitments. The loan loss allowance is reported in the Allianz Group balance sheet as a reduction of “Loans and advances to banks and customers”, and the provisions for contingent liabilities such as guarantees, loan commitments and other obligations are reported as “Other liabilities”. Changes in the loan loss allowance are reported in the Allianz Group income statement under the caption “Loan loss provisions”.
A loan is considered to be impaired when there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the loan, and that loss event has an impact on the estimated future cash flows of the loan that can be reasonably estimated.estimated (“incurred loss
(1) | These expenses are excluding the discontinued operations of Dresdner Bank that have been reclassified and presented in a separate line item “Net income (loss) from discontinued operations, net of income taxes and minority interests in earnings”. |
model”). If there is objective evidence that a loan is impaired, the amount of thea loan loss allowance is measuredrecognized as the difference between the loan’s carrying amount and the present value of estimated future cash flows, which includes all contractual interest and principal payments, discounted at the loan’s original effective interest rate. The amount of the lossrate and a corresponding impairment charge is recognized in the income statement.
Loans with an outstanding balance greater than €1 million are considered to be individually significant, and they are assessed individually to determine whether an impairment exists. Individually significant loans that are not impaired are grouped with loans evidencing similar credit characteristics and are collectively assessed for impairment.
At our banking subsidiary, Dresdner Bank, and its subsidiaries (the “Dresdner Bank Group”), the loan portfolio for which loan loss allowances are to be established is separated into a homogeneous and a non-homogeneous portfolio. The homogeneous portfolio consists of loans made by the Dresdner Bank’s Private & Business Clients division with a gross exposure less than €1 million, for which the degree of risk has been calculated at the portfolio-level resulting in collectively evaluated loan loss provisions. All other loans are allocated to the non-homogeneous portfolio, with a distinction made with respect to loan loss allowances between the measurement of individual loans in default (specific loan loss allowances) and allowances for impairments that have incurred but have not been identified (general loan loss allowances / country risk allowance).
The loan loss allowance comprises the following four categories:
Specific allowances
For all individually significant loans, counterparty relationships are periodically reviewed on a case-by-case basis. We consider various factors in this review including, but not limited to, the borrower’s financial strength, resources and payment record, the present value of the expected future cash flows, including any net realizable value that may result from the foreclosure of collateral and the likelihood of support from any guarantors.
General allowances
Individually significant loans that do not have specific allowances are segmented into groups of loans with similar risk characteristics, and loan loss allowances for incurred but not identified impairments are calculated using statistical methods of credit risk measurement. Factors that are used in these methods include our internal credit rating results, historical loss experience and a “loss emergence period”, which adjusts for the time lag between the occurrence of a loss and its identification by a lender. Other qualitative factors considered by management include: levels and trends in delinquencies, levels and trends in recoveries of prior charge-offs, trends in volumes and terms of loans, effects of changes in lending policies and procedures, current national and local economic trends and conditions, and credit concentrations.
Country risk allowances
A country risk allowance is calculated to estimate losses due to transfer risk. Transfer risk is a measure of the likely ability of a borrower in a certain country to repay its foreign currency-denominated debt in light of the economic or political situation prevailing in that country. We establish country risk allowances based on historical loss experience and a country risk rating system that incorporates current and historical economic, political and other data to categorize countries by risk profile.
In order to avoid duplication, specific allowances are excluded from general and country risk allowance calculations. Moreover, countries for
which a country risk allowance is maintained are excluded from the determination of the transfer risk component of the general allowances.
Portfolio allowances
Loans that are not considered individually significant are not individually assessed but are instead segmented into portfolios of homogeneous loans to assess for impairment. Portfolio loan loss allowances are calculated using the delinquency flow model, which involves separating the homogeneous loan portfolios into distinct groups of loans evidencing similar loss behavior. We consider various factors in defining such portfolio groups, including consistency of underwriting practices, transaction terms and conditions, customer segmentation, product type, existence and types of collateral, similarity in size and number of loans, and loss behavior.
The delinquency flow model provides an estimate of the loss inherent in the portfolio by measuring the historical loss experience of the actual portfolio or a portfolio with similar risk characteristics. The delinquency flow model produces this estimate based on historical loan/commitment volume and loss data. The model also estimates the balance of loans with a delinquency status and the average loss experienced for loans in each delinquency grouping within a given portfolio.
Once an individual loan within a portfolio is identified as impaired, a specific loan loss allowance is recorded, and the loan is removed from the relevant portfolio.
The process for evaluating each of the foregoing categories comprising the total loan loss allowance involves significant judgment and estimates. In our evaluation process, we consider the additional following factors for each applicable allowance category, including the frequency of default, risk ratings, loss recovery rates, the forecasted financial strength of individual large accounts, and the ability of borrowers with foreign currency obligations to obtain the foreign currency necessary for orderly debt servicing. If actual results differ from our estimates or if economic changes occur after the date of our estimation, we may need to adjust our estimates. Significant changes in estimates could materially affect our loan loss provision and could result in a change in the loan loss allowance.
Changes in the loan loss provision on an Allianz Group level totaled €36 million, €(109) million and €354 million for the years ended December 31, 2006, 2005 and 2004, respectively. The total loan loss allowance as of December 31, 2006 and 2005 amounted to €1,315 and €1,764 million, respectively.
Deferred Policy Acquisition Costs
DAC and PVFP amortization schedules are determined on a decentralized basis by our local operating entities. The assumptions used (e.g., investment yields, lapses, expenses and demographics) vary not only by geographical market and operating entity but also by line of business and sometimes even generation of business.
With respect to our major life business units, which comprise approximately 90%95% of reserves, DAC and PVFP, a central control process has been established at the Allianz Group-level in order to ensure that assumptions and calculations used to determine DAC and PVFP are reasonable, and to monitor potential loss recognition issues.
One method used to monitor trends and sensitivities to changes in assumptions is to compare the recoverability ratio over time and using different levels of inputs. The recoverability ratio provides information regarding the percentage of future profits from the current portfolio that is needed to support the amortization of policy acquisition costs previously capitalized. The recoverability ratio is defined as DAC and PVFP, net of unearned revenue liabilities, divided by a best estimate of present value of future profits. Using best estimate operating assumptions, the recoverability ratio for the Allianz Group amounted to 55.2 %51.5% as of December 31, 20062007 and 61.4 %increased to 88.8% as of December 31, 2005.2008 driven by the crisis in the financial markets, especially in the United States. Please note that these ratios are derived using risk-free interest rates; the corresponding figures with best estimate interest rates used in accordance with Allianz Group’s current accounting policy for insurance contracts, which is U.S. GAAP, are 48.4% as of December 31, 2007 and 51.4% as of December 31, 2008. As the recoverability ratio approaches 100%, it indicates that there is an increased risk of loss. A recoverability ratio of 100% or greater would result in a charge to the Allianz Group’s net income, as the deferred acquisition costs would not be recoverable.
The recoverability ratio is most sensitive to changes in the investment yield, which is the rate of return earned on the investment of net cash inflows. The investment yield is generally estimated in determining the recoverability of DAC and PVFP by increasing the relevant yield curves by the expected credit spread net of default risk. The relevant yield
curves represent the risk free rate of return expected to be earned based upon the risk free interest rate in the country where the insurance contracts were issued (generally referenced by government issued debt instruments). This sensitivity is more pronounced for our local operating entities with significant older portfolios with relatively higher guaranteed interest rates (e.g., Switzerland, Belgium, South Korea and Taiwan).
The following table shows a sensitivity analysis of the impact in Euro that reasonably likely changes of 1% in the relevant yield curve would have on the DAC and PVFP amounts in the major geographical markets of the Allianz Group, which could have a material effect on the Allianz Group’s results of operations. The impact of these changes would be recorded in the Allianz Group’s net income.
Country | Carrying amount of DAC/PVFP, net of unearned revenue liabilities | Effect of +1% change in the yield curve | Effect of -1% change in the yield curve | Carrying amount of DAC/PVFP, net of unearned revenue liabilities | Effect of +1% change in the yield curve | Effect of -1% change in the yield curve | ||||||||
€ mn | € mn | € mn | ||||||||||||
Germany | 6,410 | — | — | 6,802 | — | — | ||||||||
France | 339 | — | — | 508 | 7 | (11 | ) | |||||||
Italy | 689 | — | (1 | ) | 578 | — | — | |||||||
US | 4,241 | 28 | (86 | ) | ||||||||||
U.S. | 4,416 | 63 | (76 | ) | ||||||||||
South Korea | 737 | 1 | (2 | ) | 544 | — | 1 | |||||||
Belgium | 108 | 6 | (14 | ) | 97 | — | (1 | ) | ||||||
Switzerland | 256 | 67 | (161 | ) | 227 | 16 | (35 | ) | ||||||
Austria | 212 | 7 | (10 | ) | 233 | 55 | (21 | ) |
Movements in equity values would mainly have an impact on our variable annuity business in the United States. In all other major local operating units, such movements would not trigger any material loss recognition.
Sensitivities to persistency, expense levels and demographic assumptions are also monitored, but deviations within reasonable limits would not trigger a material loss recognition event for any of the operating entities due to the offsetting effects of changes to policyholder participation rates.
For many of Allianz’s Life/Health operating entities within Europe, a large part of such adverse developments can be offset by adjustments to the policyholder participation rates. Therefore, the relevant estimates and as a consequence, the results of operations of operating entities within Europe are relatively insensitive to the effects of changes in assumptions.
Reserves for insuranceInsurance and investment contractsInvestment Contracts and Financial liabilitiesLiabilities for unit linked contractsUnit-Linked Contracts
The major components of reserves for insurance and investment contracts are aggregate policy reserves and reserves for premium refunds. Financial liabilities for unit linkedunit-linked contracts includes unit linkedinclude unit-linked insurance contracts and unit linkedunit-linked investment contracts.
Contracts issued by insurance subsidiaries of the Allianz Group are classified according to IFRS 4 as insurance or investment contracts. Contracts under which the Allianz Group accepts significant insurance risk from a policyholder are classified as insurance contracts. Contracts under which the Allianz Group does not accept significant insurance risk are classified as investment contracts. Certain insurance and investment contracts include discretionary participation features.
The aggregate policy reserves for long-duration insurance contracts, such as traditional life and health products, are computed in accordance with SFAS 60 using the net level premium method, which represents the present value of estimated future policy benefits to be paid less the present value of estimated future net premiums to be collected from policyholders. The method uses best estimate assumptions adjusted for a provision for adverse deviation for mortality, morbidity, expected investment yields, surrenders and expenses at the policy inception date, which remain locked-in thereafter. DAC and present value of future profits (“PVFP”)PVFP for traditional life and health products are amortized over the premium paying period of the related policies in proportion to the earned premium using assumptions consistent with those used in computing the aggregate policy reserves.
The aggregate policy reserves for traditional participating insurance contracts are computed in accordance with SFAS 120 using the net level premium method. The method uses assumptions for
mortality, morbidity and interest rates that are guaranteed in the contract or are used in determining the policyholder dividends. Deferred policy acquisition costs and PVFP for traditional participating products are amortized over the expected life of the contracts in proportion to estimated gross margins (“EGMs”)(EGMs) based upon historical and anticipated future experience, which is
determined on a best estimate basis and evaluated regularly. The present value of EGMs is computed using the expected investment yield. EGMs include premiums, investment income including realized gains and losses, insurance benefits, administration costs, changes in the aggregate reserves and policyholder dividends. The effect of changes in EGMs are recognized in net income in the period revised.
The aggregate policy reserves for universal life-type insurance contracts and unit linkedunit-linked insurance contracts in accordance with SFAS 97 is equal to the account balance, which represents premiums received and investment return credited to the policy less deductions for mortality costs and expense charges. Deferred policy acquisition costs and PVFP for universal life-type and investment contracts are amortized over the expected life of the contracts in proportion to estimated gross profits (“EGPs”)(EGPs) based upon historical and anticipated future experience, which is determined on a best estimate basis and evaluated regularly. The present value of EGPs is computed using the interest rate that accrues to the policyholders, or the credited rate. EGPs include margins from mortality, administration, investment income including realized gains and losses and surrender charges. The effects of changes in EGPs are recognized in net income in the period revised.
Current and historical client data, as well as industry data, are used to determine the assumptions. Assumptions for interest reflect expected earnings on assets, which back the future policyholder benefits. The information used by the Allianz Group’s qualified actuaries in setting such assumptions includes, but is not limited to, pricing assumptions, available experience studies, and profitability analyses.
The interest rate assumptions used in the calculation of aggregate policy reserves and the deferred acquisition costs were as follows:
Long- duration Insurance Contracts (SFAS 60) | Traditional participating insurance Contracts (SFAS 120) | |||||
Aggregate policy reserves | 2.5–6 | % | % | |||
Deferred acquisition costs | % | % |
Aggregate policy reserves include liabilities for guaranteed minimum death and similar mortality and morbidity benefits related to non-traditional contracts, annuitization options, and sales inducements. These liabilities are calculated based on contractual obligations using actuarial assumptions. Contractually agreed sales inducements to contract holders include persistency bonuses and are accrued over the period in which the insurance contract must remain in force to qualify for the inducement.
The aggregate policy reserves for unit linkedunit-linked investment contracts is equal to the account balance, which represents premiums received and investment return credited to the policy less deductions for mortality costs and expense charges. The aggregate policy reserves for non unit linkedunit-linked investment contracts is equal to amortized cost, or account balance less deferred policy acquisition costs. Deferred policy acquisition costs and PVFP for unit linkedunit-linked and non unit linkedunit-linked investment contracts are amortized over the expected life of the contracts in proportion to revenues.
Aggregate policy reserves for insurance contracts are computed based on relevant U.S. GAAP standards, except for contracts under which the Allianz Group does not accept significant insurance risk, which are classified as investment contracts. All insurance policies are classified appropriately under U.S. GAAP, and the corresponding valuation methodology is applied accordingly. Aggregate policy reserves are determined based on policyholder data and by applying various projections and reserving systems, either on a policy-by-policy basis or on a model point basis whereby policies are grouped by generation and similar risk and benefit profiles. These systems are also used to DAC, unearned revenue liabilities (URL) and PVFP in a consistent manner.
Local actuaries of each Allianz Group operating entity are responsible for setting aggregate policy reserves and carrying out recoverability and loss
recognition tests. The Allianz Group reviews the locally-derived policy reserves, DAC, URL, PVFP and loss recognition tests.
The table below provide a breakdown of the Allianz Group’s aggregate policy reserves by country of our major Life/Health local operating entities as of December 31, 20062008 (in millions of euros):
Aggregate Policy Reserves | Other Reserves | |||||||||||||||||
Country (€ mn) | Long- duration insurance contracts | Universal- Life type insurance contracts | Traditional participating insurance contracts | Non-Unit- Linked | Unit- Linked Reserves | Market Value of Liability Options1 | Total | % of Allianz Group | ||||||||||
German Life | — | 2,866 | 109,106 | — | 1,095 | — | 113,067 | 35,0 | % | |||||||||
German Health | 12,070 | — | — | — | — | — | 12,070 | 3,7 | % | |||||||||
France | 6,981 | 34,642 | — | — | 12,430 | — | 54,053 | 16,8 | % | |||||||||
Italy | 8,032 | 11,529 | — | 79 | 24,779 | — | 44,419 | 13,8 | % | |||||||||
United States | 1,183 | 31,471 | — | 108 | 15,063 | 4,252 | 52,077 | 16,2 | % | |||||||||
Switzerland | 171 | 1,952 | 3,584 | — | 558 | — | 6,265 | 1,9 | % | |||||||||
Spain | 4,107 | 389 | — | 141 | 114 | — | 4,751 | 1,5 | % | |||||||||
Netherlands | 964 | — | — | — | 3,171 | — | 4,135 | 1,3 | % | |||||||||
Austria | — | — | 3,047 | — | 194 | — | 3,241 | 1,0 | % | |||||||||
Belgium | 4,109 | 925 | — | — | 325 | — | 5,359 | 1,7 | % | |||||||||
South Korea | 4,687 | 1,160 | — | — | 970 | — | 6,817 | 2,1 | % | |||||||||
Taiwan | 673 | 1,210 | — | — | 1,868 | — | 3,751 | 1,2 | % | |||||||||
Other countries | 2,265 | 561 | 1,002 | 99 | 1,297 | — | 5,224 | 1,6 | % | |||||||||
Life/Health Total | 45,242 | 86,705 | 116,739 | 427 | 61,864 | 4,252 | 315,229 | 97,8 | % | |||||||||
Other Segment/Consolidation | 148 | (24 | ) | 7,096 | — | — | — | 7,220 | 2,2 | |||||||||
Allianz Group Total | 45,390 | 86,681 | 123,835 | 427 | 61,864 | 4,252 | 322,449 | 100 | % | |||||||||
Aggregate Policy Reserves | Other Reserves | Total | % of Allianz Group | |||||||||||||||
Country | Long- duration insurance contracts | Universal- Life type insurance contracts | Traditional participating insurance contracts | Non-Unit-Linked Reserves | Unit- Linked Reserves | Market Value of Liability Options(1) | ||||||||||||
(€ mn) | ||||||||||||||||||
German Life | 24 | 6,436 | 114,645 | — | 1,660 | 1 | 122,765 | 36.7 | % | |||||||||
German Health | 14,160 | — | — | — | — | — | 14,160 | 4.2 | % | |||||||||
France | 7,138 | 38,283 | — | — | 11,021 | — | 56,442 | 16.9 | % | |||||||||
Italy | 7,359 | 11,456 | — | 139 | 20,340 | — | 39,294 | 11.8 | % | |||||||||
United States | 1,583 | 36,891 | — | 153 | 8,473 | 5,104 | 52,204 | 15.6 | % | |||||||||
Switzerland | 127 | 2,666 | 3,842 | — | 512 | — | 7,147 | 2.1 | % | |||||||||
Spain | 3,991 | 815 | — | 260 | 47 | — | 5,112 | 1.5 | % | |||||||||
Netherlands | 883 | 81 | — | — | 2,771 | — | 3,735 | 1.1 | % | |||||||||
Austria | — | — | 3,232 | — | 347 | — | 3,579 | 1.1 | % | |||||||||
Belgium | 4,200 | 1,432 | — | — | 235 | — | 5,866 | 1.8 | % | |||||||||
South Korea | 3,338 | 1,443 | — | — | 499 | 8 | 5,288 | 1.6 | % | |||||||||
Taiwan | 646 | 963 | — | 8 | 2,419 | — | 4,036 | 1.2 | % | |||||||||
Other countries | 3,330 | 620 | 549 | 278 | 2,125 | 50 | 6,954 | 2.1 | % | |||||||||
Life/Health Total | 46,779 | 101,085 | 122,268 | 839 | 50,450 | 5,163 | 326,583 | 97.7 | % | |||||||||
Other Segment/Consolidation | 165 | (25 | ) | 7,590 | — | — | — | 7,730 | 2.3 | % | ||||||||
Allianz Group Total | 46,943 | 101,059 | 129,858 | 839 | 50,450 | 5,163 | 334,313 | 100.0 | % | |||||||||
| “Market Value of Liability Options” represents mainly the value of the derivatives embedded in the equity-indexed annuity products of Allianz Life. |
Assumptions made at the local operating entity level regarding variables affecting aggregate policy reserves such as expense, lapse and mortality are based on best estimates derived from annually performed experience studies based on company data and are regularly validated by the Allianz Group.
The most significant assumption for deriving Life/Health reserves is the expected investment yields (i.e., the expected return on assets purchased with net cash inflows), as investment rates determine both the expected cash flow as well as the reserve discount factors. This is particularly true for our operations in Belgium, South Korea and Switzerland because certain policies previously sold in these countries included guaranteed interest rates on existing and future premiums. Investment rates are based on the available capital market information, the asset mix and the long term expected yields as set by the management of the local operating entity.
The reserves for premium refunds include the amounts allocated under the relevant local statutory or contractual regulations to the accounts of the policyholders and the amounts resulting from the differences between these IFRS based financial statements and the local financial statements (“latent reserve for deferred premium refunds”), which will reverse and enter into future profit participation calculations. Unrealized gains and losses recognized in connection with the valuation of securities available-for-sale are recognized in the latent reserve for deferred premium refunds to the extent that policyholders will participate in such gains and losses on the basis of statutory or contractual regulations when they are realized. The profit participation allocated to participating policyholders or disbursed to them reduces the reserve. Any dividends allocated or disbursed over and above the reserve are recorded in other expenses.
Methods and corresponding percentages for participation in profits by the policyholders are set out below for the most significant countries for latent reserves:
Country | Base | Percentage | ||
Germany | ||||
Life | 90% | |||
Health | All sources of Profit | 80% | ||
France | ||||
Life | 80% | |||
Italy | ||||
Life | Investments | 85% | ||
Switzerland | ||||
Group Life | All sources of Profit | 90% | ||
Individual Life | All sources of Profit | 100% |
(1) | Additionally, 75% of risk result and 50% of all other results. |
Liability adequacy tests are performed for each insurance portfolio on the basis of estimates of future claims, costs, premiums earned and proportionate investment income. For short duration contracts, a premium deficiency is recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs, and maintenance expenses exceeds related unearned premiums while considering anticipated investment income. For long duration contracts, if actual experience regarding investment yields, mortality, morbidity, terminations or expense indicate that existing contract liabilities, along with the present value of future gross premiums, will not be sufficient to cover the present value of future benefits and to recover deferred policy acquisition costs, then a premium deficiency is recognized.
Aggregate policy reserves totaled €256,333€278,700 million and €249,012€264,243 million as of December 31, 20062008 and 2005,2007, respectively. Reserves for premium refunds totaled €30,689€17,195 million and €28,510€27,225 million as of December 31, 20062008 and 2005,2007, respectively. For further information regarding reserves for insurance and investment contracts, seerefer to Note 18 to our consolidated financial statements.
Reserves for Loss and Loss Adjustment Expenses
Within the Allianz Group, loss and LAE reserves are set locally by qualified individuals close to the business, subject to central monitoring and
oversight by the actuarial department in Allianz SE (“Group Actuarial”). For a detailed description of the methods and approaches commonly used within the
Allianz Group to determine reserves for loss and loss adjustment expenses, please seerefer to “Overview of Loss Reserving Process” within the “Property and Casualty Reserves” section of the business description within this document. This central oversight process ensures that reserves are set at the local level in accordance with Group-wide standards of actuarial practice regarding methods, assumptions and data. The key components of this central oversight process are:
Minimum standards for actuarial loss reserving;
Regular central independent reviews by Group Actuarial of reserves of local operating entities;
Regular peer reviews by Group Actuarial of reserve reports provided by local operating entities; and
Quarterly quantitative and qualitative reserve monitoring.
Each of these components is described further below.
Group-wide minimum standards of actuarial reserving define the reserving practices which must be conducted by each operating entity. These standards provide guidance regarding all relevant aspects of loss reserving, including organization and structure, data, methods, and reporting. Group Actuarial monitors compliance with these minimum standards through a combination of diagnostic review—review – i.e. formal qualitative assessment of the required components in the reserving process—process – and local site visits. Group Actuarial then communicates the results of this quality review to the local operating entity.
In addition, Group Actuarial performs independent reviews of loss and LAE reserves for key local operating entities on a regular basis. This process is designed such that all significant entities are reviewed once every three years.year. Such a review typically starts with site visits to ensure that Group Actuarial updates their knowledge of the underlying business as well as the issues related to data and organization. Group Actuarial then conducts an analysis of reserves using data provided by the operating entity. Preliminary conclusions are then discussed with the local operating entity prior to
being finalized. Any material differences between
Group Actuarial’s reserve estimates and those of the local operating entity are then discussed, and evaluated to determine if changes in assumptions are needed.
Local operating entities are required to provide Group Actuarial an annual reserve report, documenting the entity’s analysis of its loss and LAE reserves. The Allianz Group standard for these reports is that an independent actuary, by analyzing this report and discussing it with the entity, must be capable of forming a similar opinion regarding the appropriateness of the entity’s held reserves. In years when Group Actuarial does not perform a complete reserve review of an Allianz Group company, it will perform a process that constitutes a “peer review” of the entity’s own analysis.
In addition, on a quarterly basis, Group Actuarial monitors reserve levels, movements and trends across the Allianz Group. This monitoring is conducted on the basis of quarterly loss data submitted by local operating entities as well as through participation in local reserve committees and frequent dialogue with local actuaries of each operating entity. This quarterly loss data provides information about quarterly reserve movements, as the information is presented by accident year and line of business, as defined by the local operating entity.
The oversight and monitoring of the Group’s loss reserves culminate in quarterly meetings of the Group Reserve Committee. This committee, which consists of the Group Chief Executive Officer, Group Chief Financial Officer, Head of Group Financial Reporting, Group Chief Accountant and the Group Chief Actuary, monitors key developments across the Group affecting the adequacy of loss reserves.
There is no adequate statistical data availableAppropriate provisions have been made for some risk exposures in liability insurance, such as environmental and asbestos claims and large-scale individual liability claims because some aspects of these types of claims are becoming generally known very slowly and are still evolving. Appropriate provisions have been made for such cases based on the Allianz Group’s judgment and an analysis of the portfolios in which such risks occur. These provisions represent the Allianz Group’s best estimate. The current reserves for loss and loss adjustment expenses for
asbestos claims in the United States reflect the best estimate of local actuaries based on their assessment of current developments and trends in these claims.
Variability of Reserve Estimates
Loss reserves are estimates and are based on the expected outcome of future events (e.g., court decisions, medical rehabilitation and property damage repair). As such, reserve estimates are subject to uncertainty, particularly for longer-tail lines of business. Our reserving actuaries estimate loss reserves separately by line of business based on many detailed assumptions. Given the small segments of business for which reserve estimates are calculated, and that material accumulations across classes will tend to be offset by those in other independent classes, deviations from assumptions are generally not expected to have a material effect on the loss reserves of the Group.
There are, however, two reserving segments which, due to their volume and/or uncertainty, for which changes in assumptions could have a material impact on the Group:Group due to their volume and/or uncertainty:
German motor liability and
Asbestos claims reserves.
German Motor Liability
As a longstanding market leader in German motor insurance, Allianz holds a significant balance of motor liability reserves (€4,5004,533 million gross as of December 31, 2006)2008). Moreover, German motor liability claims are particularly long-tailed in nature. We estimate that approximately 62% of claims are paid after one year and 90% after eight years from the occurrence of the claim. Actuaries must rely on long data histories, but data from older accident years may be less predictive for current developments. Furthermore, sufficient data for extremely long development of bodily injury claims for 40 and more years are not available and, therefore, we extrapolate the ultimate loss amounts. As a result, changes in assumptions such as loss development patterns have a significant effect on estimated reserves.
In order to gauge the sensitivity of German motor liability loss reserve estimates to alternative assumptions, we applied statistical methods that allow for both the natural variability in the reserving
process (i.e., process volatility) as well as the potential variability in estimating reserving assumptions (i.e., parameter volatility) and provide quantitative insights into reserve volatility. This analysis provides that it is reasonably likely that future German motor liability loss payments will be €300 million higher or lower than carried reserves.
Asbestos Claims Reserves
Loss reserves for asbestos claims worldwide are subject to greater than usual uncertainty. Asbestos claims have a long latency period, sometimes emerging several decades after the underlying policy was written. Claim emergence is subject to a broad range of legal, epidemiological and socio-economic factors such as court decisions, corporate bankruptcy proceedings and medical advances. Asbestos claim reserves are not amenable to traditional actuarial analysis and are instead based upon an extensive analysis of exposure.
In order to quantify the potential variability of asbestos claim reserves, we calculate a point best estimate reserve and a range of reasonable estimates of asbestos loss reserves for U.S. and non-U.S. asbestos in aggregate. This range is calculated by testing the sensitivity of reserve estimates to alternative assumptions. We would consider any estimate within the range to be reasonable. The range does not represent lower and upper bounds, and does not contain all of the possible loss results. Our best estimate represents the expected unpaid loss resulting from assumptions that we consider neither optimistic nor pessimistic. The lower and upper ends of the range represent unpaid losses that would result from optimistic and pessimistic, but reasonable, assumptions. It should be noted that there is a reasonable possibility that the actual loss amounts will fall outside that range. As of December 31, 2006,2008, the high end of this range is €800€820 million higher than the best estimate; the low end of the range is €800€550 million lower than the best estimate.
The following alternative assumptions lead to the high end of the range of the reserve estimate:
The projected level of future claims filings increase compared to the level as predicted by the epidemiological-based models;
Future values of claims settlements by disease type increase compared to the inflation-adjusted projections;
The proportion of claims filings leading to claims payments increases compared to the projections;
The legal interpretation of insurance policies and the outcome of coverage litigation is on the whole adverse to our expectations;
Claims from coverages not yet affected by asbestos claims and not reflected in our projections emerge;
The projected level of new policyholders being brought into asbestos litigation increases compared to our estimates in addition to an increase over our estimate of the average cost to settle all future asbestos claims for these policyholders.
The following alternative assumptions lead to the low end of the range of the reserve estimate at:
The projected level of future claims filings for each policyholder decrease compared to the level as predicted by the epidemiological-based models;
Future values of claims settlements by disease type are lower than the inflation adjusted projections;
The proportion of claims filings leading to claims payments decrease compared to the projections;
The legal interpretation of insurance policies and the outcome of coverage litigation is on the whole favorable to our expectations;
The projected level of new policyholders being brought into asbestos litigation is lower than our estimates in addition to a decrease in our estimate of the average cost to settle all future asbestos claims for these policyholders.
Total Loss Reserves
Total reserves for loss and loss adjustment expenses amounted to €65,464€63,924 million and €67,005€63,706 million as of December 31, 20062008 and 2005,2007, respectively. For further information regarding reserves for loss and loss adjustment expenses, seerefer to Note 1719 to our consolidated financial statements.
Deferred Taxes
Deferred taxes are recognized on temporary differences between the tax bases and the carrying
amounts of assets and liabilities in the Allianz Group’s IFRS consolidated balance sheet and tax losses carried forward as of the balance sheet date. Deferred taxes are calculated based on the current income tax rates enacted in the respective country. Changes in tax rates that have already been substantially adopted prior to or as of the date of the consolidated balance sheet are taken into consideration.
Deferred tax assets are recognized if sufficient future taxable income, including income from the reversal of existing taxable temporary differences and available tax planning strategies, are available for realization. The realization of deferred tax assets on temporary differences depends on the generation of
sufficient taxable profits in the period in which the underlying asset or liability is recovered or settled. The realization of deferred tax assets on tax losses carried forward requires that sufficient taxable profits are available prior to the expiration of such tax losses carried forward. As of each balance sheet date, management evaluates the recoverability of deferred tax assets, whereby projected future taxable profits and tax planning strategies are considered. If management considers it is more likely than not that all or portion of a deferred tax asset will not be realized, a corresponding valuation allowance is taken.
The accounting estimates related to the valuation allowance are based on management’s judgmentjudgements and currently available information, primarily with regards to projected taxable profits. Assumptions about matters which are uncertain and partly beyond management’s control are taken into account. Furthermore, these assumptions may change from period to period.
Pension and Similar Obligations
The Allianz Group has a number of defined benefit pension plans covering a significant number of its domestic and international employees, and in Germany, agents, too. The calculation of the expense and liability associated with these plans requires the extensive use of assumptions, which include the discount rate, expected rate of return on plan assets, rate of long-term compensation increase, post- retirementpost-retirement pension increase and mortality tables as determined by the Allianz Group. Management
determines these assumptions based upon currently available market and industry data and historical performance of the plans and their assets. The actuarial assumptions used by the Allianz Group may differ materially from actual experience, due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of the participants. Any such differences could have a significant impact on the amount of pension expense recorded in future years.
We are required to estimate the expected rate of return on plan assets, which is then used to compute pension cost recorded in the consolidated statements of income. Estimating future returns on plan assets is particularly subjective as the estimate requires an assessment of possible future market returns based on
the plan asset mix and observed historical returns. In 2006,2008, we adjusted the weighted average expected rate of return on plan assets from 5.8%5.3% to 5.3%5.5%; in 2005, we adjusted2007, the rate from 6.4% to 5.8%weighted average expected return on plan assets was 5.3%.
Changes to Accounting and Valuation Policies
SeeRefer to Note 3 to our consolidated financial statements. Prior year amounts have been reclassified to conform to current year presentation.
The following analysis is based on our consolidated financial statements and should be read in conjunction with those statements. We evaluate the results of our Property-Casualty, Life/Health, Banking, Asset Management and Corporate segments using a financial performance measure we refer to herein as “operating profit”. We define our segment operating profit as income from continuing operations before income taxes and minority interests in earnings, excluding, as applicable for each respective segment, all or some of the following items: income from financial assets and liabilities held for trading (net), realized gains/losses (net), impairments of investments (net), interest expense from external debt, amortization of intangible assets, acquisition-related expenses and restructuring charges.
While these excluded items are significant components in understanding and assessing our
consolidated financial performance, we believe that
the presentation of operating results enhances the
understanding and comparability of the performance of our segments by highlighting net income attributable to ongoing segment operations and the underlying profitability of our businesses. For example, we believe that trends in the underlying profitability of our segments can be more clearly identified without the fluctuating effects of the realized gains/losses or impairments of investments, as these are largely dependent on market cycles or issuer specific events over which we have little or no control, and can and do vary, sometimes materially, across periods. Further, the timing of sales that would result in such gains or losses is largely at our discretion. Operating profit is not a substitute for income from continuing operations before income taxes and minority interests in earnings or net income
(loss) as determined in accordance with International Financial Reporting Standards as adopted by the EU and as issued by the IASB (or “IFRS”). Our definition of operating profit may differ from similar measures used by other companies, and may change over time. For further information on operating profit, as well as the particular reconciling
items between operating profit and net income see(loss), refer to Note 56 to our consolidated financial statements.
Operating profit should be viewed as complementary to, and not a substitute for, income from continuing operations before income taxes and minority interests in earnings or net income (loss) as determined in accordance with IFRS.
The Allianz Group uses total revenues in its analysis and discussion of the consolidated results of operations. Total revenues is a “non-GAAP financial measure” as defined by the rules of the SEC, which management uses to assess and measure the top line results of the core businesses within the Allianz Group. Total revenues comprise Property-Casualty segment’s gross premiums written, Life/Health segment’s statutory premiums, Banking segment’s operating revenues and Asset Management segment’s operating revenues. With the classification of Dresdner Bank as discontinued operations, the Banking segment’s operating revenues consist of continuing banking activities in Germany, France, Italy and Central and Eastern Europe. By providing a top line measure of sales revenues from the insurance products and financial services provided by all of the various core businesses of the Allianz Group, total revenues provide useful information to the investor. The following table reconciles total revenues to premiums written, the most comparable IFRS measure.
PC | LH | Banking | AM | Cons | Group | |||||||||||
2008 | ||||||||||||||||
Premiums written | 43,387 | 22,809 | — | — | (25 | ) | 66,171 | |||||||||
Add: Deposit premium for FAS 97 products | — | 22,806 | — | — | 140 | 22,946 | ||||||||||
Total revenues P-C and L/H | 43,387 | 45,615 | — | — | 115 | 89,117 | ||||||||||
Add: Interest and similar income | — | — | 989 | 98 | — | 1,087 | ||||||||||
Less: Interest expense | — | — | (677 | ) | (36 | ) | — | (713 | ) | |||||||
Add: Fee and commission income | — | — | 430 | 4,032 | — | 4,462 | ||||||||||
Less: Fee and commission expense | — | — | (193 | ) | (1,158 | ) | — | (1,351 | ) | |||||||
Income from financial assets and liabilities designated at fair value through income (net) | — | — | (5 | ) | (77 | ) | — | (82 | ) | |||||||
Other income | — | — | — | 28 | — | 28 | ||||||||||
Total revenues Banking and Asset Management | — | — | 544 | 2,887 | — | 3,431 | ||||||||||
Total revenues | 43,387 | 45,615 | 544 | 2,887 | 115 | 92,548 | ||||||||||
PC | LH | Banking | AM | Cons | Group | |||||||||||
2007 | ||||||||||||||||
Premiums written | 44,289 | 21,522 | — | — | (23 | ) | 65,788 | |||||||||
Add: Deposit premium for FAS 97 products | — | 27,845 | — | — | 167 | 28,012 | ||||||||||
Total revenues P-C and L/H | 44,289 | 49,367 | — | — | 144 | 93,800 | ||||||||||
Add: Interest and similar income | — | — | 883 | 135 | — | 1,018 | ||||||||||
Less: Interest expense | — | — | (558 | ) | (54 | ) | — | (612 | ) | |||||||
Add: Fee and commission income | — | — | 528 | 4,403 | — | 4,931 | ||||||||||
Less: Fee and commission expense | — | — | (233 | ) | (1,270 | ) | — | (1,503 | ) | |||||||
Income from financial assets and liabilities designated at fair value through income (net) | — | — | 2 | 31 | — | 33 | ||||||||||
Other income | — | — | — | 14 | — | 14 | ||||||||||
Total revenues Banking and Asset Management | — | — | 622 | 3,259 | — | 3,881 | ||||||||||
Total revenues | 44,289 | 49,367 | 622 | 3,259 | 144 | 97,681 | ||||||||||
PC | LH | Banking | AM | Cons | Group | |||||||||||
2006 | ||||||||||||||||
Premiums written | 43,674 | 21,614 | — | — | (13 | ) | 65,275 | |||||||||
Add: Deposit premium for FAS 97 products | — | 25,807 | — | — | 143 | 25,950 | ||||||||||
Total revenues P-C and L/H | 43,674 | 47,421 | — | — | 130 | 91,225 | ||||||||||
Add: Interest and similar income | — | — | 734 | 112 | — | 846 | ||||||||||
Less: Interest expense | — | — | (443 | ) | (41 | ) | — | (484 | ) | |||||||
Add: Fee and commission income | — | — | 503 | 4,186 | — | 4,689 | ||||||||||
Less: Fee and commission expense | — | — | (235 | ) | (1,262 | ) | — | (1,497 | ) | |||||||
Income from financial assets and liabilities designated at fair value through income (net) | — | — | 45 | 38 | — | 83 | ||||||||||
Other income | — | — | 0 | 11 | — | 11 | ||||||||||
Total revenues Banking and Asset Management | — | — | 604 | 3,044 | — | 3,648 | ||||||||||
Total revenues | 43,674 | 47,421 | 604 | 3,044 | 130 | 94,873 | ||||||||||
We further believe that an understanding of our total revenue(1)(1) performance is enhanced when the effects of foreign currency translation as well as acquisitions and disposals (or “changes in scope of consolidation”) are excluded. Accordingly, in addition to presenting “nominal growth”, we also present “internal growth”, which excludes the effects of foreign currency translation and changes in scope of consolidation.
The following table sets forth the reconciliation of nominal total revenue growth to internal total revenue growth for each of our segments(2)(2) and the Allianz Group as a whole for the years ended December 31, 20062008 and 2005.2007.
Nominal total revenue growth | Changes in scope of consolidation | Foreign currency translation | Internal total revenue growth | |||||||||
% | % | % | % | |||||||||
2008 | ||||||||||||
Property-Casualty | (2.0 | ) | (1.8 | ) | (1.9 | ) | 1.7 | |||||
Life/Health | (7.6 | ) | 2.1 | (1.4 | ) | (8.3 | ) | |||||
Banking | (12.5 | ) | 0.5 | — | (13.0 | ) | ||||||
Asset Management | (11.4 | ) | (0.5 | ) | (5.2 | ) | (5.7 | ) | ||||
thereof: Allianz Global Investors | (11.5 | ) | 0.1 | (5.6 | ) | (6.0 | ) | |||||
Allianz Group | (5.3 | ) | 0.3 | (1.7 | ) | (3.9 | ) | |||||
2007 | ||||||||||||
Property-Casualty | 1.4 | 1.3 | (1.0 | ) | 1.1 | |||||||
Life/Health | 4.1 | 0.1 | (2.3 | ) | 6.3 | |||||||
Banking | 2.6 | — | — | 2.6 | ||||||||
Asset Management | 7.1 | 0.8 | (7.0 | ) | 13.3 | |||||||
thereof: Allianz Global Investors | 6.3 | — | (7.5 | ) | 13.8 | |||||||
Allianz Group | 3.0 | 0.7 | (1.8 | ) | 4.1 |
| Total revenues comprise Property-Casualty segment’s gross premiums written, Life/Health segment’s statutory premiums, continuing Banking segment’s operating revenues and Asset Management segment’s operating revenues. |
| Segment growth rates are presented before the elimination of transactions between Allianz Group subsidiaries in different segments. |
2006 Property-Casualty Life/Health Banking thereof: Dresdner Bank Asset Management thereof: Allianz Global Investors Allianz Group 2005 Property-Casualty Life/Health Banking thereof: Dresdner Bank Asset Management thereof: Allianz Global Investors Allianz Group Nominal total
revenue growth Changes in scope
of consolidation Foreign currency
translation Internal total
revenue growth % % % % (0.1 ) (0.2 ) (0.2 ) 0.3 (1.8 ) — (0.2 ) (1.6 ) 12.2 — (0.1 ) 12.3 12.8 — (0.1 ) 12.9 11.8 (0.7 ) (0.9 ) 13.4 11.7 (0.7 ) (0.9 ) 13.3 0.2 (0.1 ) (0.2 ) 0.5 1.8 (1.2 ) 0.4 2.6 6.7 — 0.5 6.2 (3.9 ) — (0.1 ) (3.8 ) (5.0 ) — (0.1 ) (4.9 ) 21.2 1.9 0.2 19.1 19.5 1.9 0.2 17.4 4.1 (0.5 ) 0.4 4.2
Year ended December 31, 20062008 compared to year ended December 31, 20052007
2006 was a year of success.
Property-Casualty underwriting profitability stands out with a combined ratio of 92.9%.Underlying fundamentals remained strong despite difficult market environment.
Operating profitRevenues fell by €5,133 million as sales in Life/Health grewinvestment-oriented products were seriously impacted by 23%.
Milestone achieved for cost-income ratio of below 80% in Banking.
Asset Management performed strongly again, further improving operating profit to €1.3 billion.the financial markets crisis.
Net income grew by 60% to €7.0 billion.from continuing operations of €3,967 million in spite of net capital losses.
Shareholders’ equity stands at €50.5 billion, up almost 28%Sale of Dresdner Bank completed.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
We exceeded our targets for 2005 andStrong earnings with net income increased by 31% to €4.4 billion.
All segments surpassed their 2005 objectives.
Property-Casualty achieved a strong combined ratiofrom continuing operations of 94.3%.
Operating profit in Life/Health was €2.1 billion.
Dresdner Bank increased its operating profit by 38.8% to €630 million.
Asset Management operating profit grew by 34.9%, more than three times our objective.
Total revenues reached €101€7.3 billion.
Our continuing operations maintained their sustainable underlying profitability.
The turbulences in the financial markets hit our discontinued banking operations.
High quality asset base and a strong capitalization with shareholders’ equity increased 31.6% to €39.5of €47.8 billion.
Total revenues
in€ bn2008 at a Glance
Net income
in€ mnDifficult economic environment
The year under review was marked by the global financial and economic crisis that started in mid-2007 with the collapse of the housing market in the United States. The crisis that was initially observed within the banking sector accelerated in 2008 and spilled- over to various other sectors of the financial industry.
Serious disruptions in the global financial system led to deteriorating economic conditions and investors became much more risk averse. In September, the global financial system almost collapsed: large financial institutions faltered, leading to changes in business models, failures, mergers and nationalizations. Some economies were even on the verge of national bancruptcy. In consequence, the weak situation in the financial markets that was observable from falling stock markets and volatile credit spreads became even more intense in the fourth quarter of the year.
Equity markets extremely volatile
in %
(1) | The Allianz Group operates and manages its activities primarily through four operating segments: Property-Casualty, Life/Health, Banking and Asset Management. Effective January 1, 2006, in addition to our four operating segments and with retrospective application, we introduced a fifth business segment named Corporate. On August 31, 2008 the Allianz Group and Commerzbank AG agreed on the sale of Dresdner Bank AG (“Dresdner Bank”) to Commerzbank AG. Following the announcement of the sale, Dresdner Bank qualified as disposal group held-for-sale and discontinued operations. Therefore, results from these operations have been eliminated from our results of Banking operations and are now presented in a separate line item “net income from discontinued operations, net of income taxes and minority interests in earnings”. In addition to our continuing banking business, our Banking operations also reflect the results from those parts of Dresdner Bank that were not sold to Commerzbank: Oldenburgische Landesbank (OLB) and the banking clients that were introduced through our tied agents channel. Prior year figures have been restated respectively. For detailed information on the Allianz Group, our activities and structures, as well as the environment in which we operate please refer to “Information on the Company”. |
Credit spreads at all time high
in bps
Interest rates at historic low levels
in %
Shareholders’ equityUnprecedented levels of volatility
in %
Sale of Dresdner Bank completed
On August 31, 2008, Allianz SE (“Allianz”) and Commerzbank AG (“Commerzbank”) agreed on the sale of almost all of Dresdner Bank AG (“Dresdner Bank”) to Commerzbank. Following the announcement, Dresdner Bank qualified as held-for-sale and discontinued operations. Therefore, results from these operations have been eliminated from our results of Banking operations and are now presented in a separate line item “net income from discontinued operations, net of income taxes and minority interests in earnings”. In addition to our continuing banking business, our Banking operations also reflect the results from those parts of Dresdner Bank that were not sold to Commerzbank: Oldenburgische Landesbank (OLB) and the banking clients that were introduced through our tied agents channel.(1)
Overall, the loss from operations and the sale of Dresdner Bank for 2008 amounts to €6.4 billion. In addition, our results for the first quarter of 2009 will be burdened by another €0.4 billion stemming from unrealized gains and losses and foreign exchange movements which, according to IFRS 5, can only be taken after the completion of the transaction.(2)
in€ mn
(1) |
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(2) |
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Allianz Group’s Consolidated Results of Operations
Total revenuesYear ended December 31, 2008 compared to Year ended December 31, 2007
Total revenues – Segments
In common with the industry, Allianz was affected by the difficult economic environment, which impacted both results and asset values to varying degrees across our business segments. Initially, the effects were only seen within our banking segment’s results with the major impact stemming from the investment banking activities of Dresdner Bank. In contrast, our other business segments proved to be resilient in€ mn
the early part of the year. However, the worsening of the crisis progressively affected other segments. Sales of investment-oriented products slowed significantly, depressing results from our Life/Health and Asset Management businesses and we recorded a decline in our asset base driven by lower asset values. Furthermore, soaring impairments and decreased harvesting led to a decline in net income from continuing operations of 45.8% to €3,967 million. The situation in the financial markets had a strong impact on the results and the sale of Dresdner Bank.
Year ended December 31, 20062007 compared to year ended December 31, 20052006
Our total revenues remained stable at €101.1 billion. This result reflectsThe turbulences in the net effectfinancial markets also impacted our business development. However, the impact varied depending on the different business segments. Most of substantial operating revenue growth in our Banking andinsurance operations were not affected by these developments. Similarly, the impact on our Asset Management segments, flat Property-Casualty gross premiums written, combinedsegment and continuing banking operations were marginal. In contrast, we had to record a significant impact of this crisis within the discontinued banking operations of Dresdner Bank, with a decline in Life/Health statutory premiums. Total internal revenue growth amountedthe substantial portion being attributable to 0.5%.
Property-Casualty Gross premiums written were flat at €43.7 billion reflecting average constant prices and a slightly increased sales volume. On an internal growth basis, premium volume was up marginally by 0.3%. We continued to manage local market cycles and to write profitablesome business while market conditions varied considerably around the world. Our operations in South America, Spain, New Europe and the United States recorded increases in gross premiums written.units of Dresdner Bank’s investment banking activities.
Life/HealthTotal revenues(1) Most of our operations worldwide continued to record statutory premium growth, such as in Germany, France, Asia-Pacific, New Europe and Spain. In 2006, our growth markets of Asia-Pacific and New Europe, in aggregate, contributed 9.6% of our total Life/Health statutory premium volume. However, due to considerable decreases in the United States and Italy, total Life/Health statutory premiums were down slightly by 1.8% to €47.4 billion. We believe we will regain growth momentum in these markets. Based on internal growth, statutory premiums decreased by 1.6%.
Banking OperatingTotal revenues were up substantially by 12.2%
in € mn
Year ended December 31, 2008 compared to €7.1 billion in 2006. All income categories contributed to this strong development, with double-digit growth rates in Dresdner Bank’s net interest income and net trading income. Both operating divisions at Dresdner Bank recorded considerably higher revenues than a year ago.ended December 31, 2007
On an internal basis(3), total revenues decreased by 3.9%. Whereas we recorded slight growth within our Property-Casualty operations, sales of investment-oriented products within our Life/Health and Asset Management Based businesses suffered materially from the difficult market conditions. Foreign currency exchange effects were also a significant feature, lowering revenues by €1,690 million whereas deconsolidation effects only accounted for €325 million of the reduction. At €92,548 million, revenues were down by 5.3% on the consistent strong investment performance we achieve, we again ranked in the top quartile based on net inflows in 2006 compared to our peer companies. With net inflows of €36 billion and market-related appreciation of €43 billion, we achieved our growth target for third-party assets of above 10%, excluding currency conversion effects. Overall, our third-party assets amounted to €764 billion as of December 31, 2006, up 2.8% from a year earlier, after unfavorable exchange rate effects of €57 billion. Our strong asset base was a key factor in repeating double-digit operating revenue growth while facing a challenging market environment.nominal basis.
Year ended December 31, 20052007 compared to year ended December 31, 2004
During 2005, led by our Life/Health and Asset Management operations, our total revenues increased by 4.1% to €101.0 billion. Internal growth was 4.2%.
Property-Casualty While we continued to focus on profitable growth, we succeeded in growing gross premiums written by €757 million to €43.7 billion, and achieved internal growth of 2.6%. Particularly strong increases were experienced within the United States, Germany, Switzerland and Australia.
Life/Health Statutory premiums increased by 6.7% to €48.3 billion, originating principally from investment-oriented and single-premium products. Strong growth rates were achieved in our core European life markets, particularly in Germany,
France and Italy, with growth rates in Germany and France well above 10%. In the United States, statutory premiums remained strong. Internal growth was 6.2%.
BankingOperating revenues from our banking operations declined by 3.9% to €6.3 billion primarily due to the faster than planned close of Dresdner Bank’s Institutional Restructuring Unit and the negative accounting impacts from IAS 39. In contrast, operating revenues from Dresdner Bank’s operating divisions increased.
Asset Management We achieved record net inflows of third-party assets of €65 billion, particularly from our fixed income institutional funds business within the United States and Germany. Market-related appreciation of third-party assets amounted to €33 billion. Overall, third-party assets increased by 27.0% to €743 billion at December 31, 2005. These positive developments led to significant operating revenue growth of 21.2% to €2.7 billion. Internal growth was 19.1%.
Operating profit
Year ended December 31, 2006 compared to year ended December 31, 2005
Property-Casualty Operating profit increasedOur total revenues were up 3.0% to €6.3 billion, reflecting our strong underwriting profitability. Our combined ratio improved again from an already very competitive level€97.7 billion. Foreign currency translation effects were a significant feature of fiscal year 2007, depressing total revenues by €1.7 billion. Total internal revenue growth(3) amounted to 92.9% in 2006, 1.4 percentage points better than a year ago. Both lower severity4.1%. While Life/Health and frequency of claims contributed to this development. In particular, the exceptionally heavy damages in 2005 from major natural catastrophes in the United States, Central Europe and Asia were not repeated in 2006. In addition, our Sustainability Program has helped us improve the effectiveness and efficiency of workstreams.Asset
Life/Health We were again successful in growing our operating profit which increased in 2006 by 22.5% to €2.6 billion. While continuing to grow our asset base, we further improved our investment, expense and technical margins. Our policyholders also benefit from profit growth as, in 2006, we were able to credit them with a higher participation amount than last year. Our Sustainability Program was also an important contributing factor to operating profit growth in Life/Health.
Banking Our Banking segment’s operating profit more than doubled to €1.4 billion in 2006. Operating revenue growth was achieved at the same
time as accomplishing improvements in productivity and efficiency, reflected in decreased operating expenses. Thereby, we achieved our milestone for a cost-income ratio of below 80%.
Asset Management We continued to deliver double-digit operating profit growth and improved our cost-income ratio to 57.6% from an already competitive level in 2005. While at the same time making substantial investments in our distribution network and human resources development, key drivers for these developments were our strong and further growing asset base, and effective cost management.
Year ended December 31, 2005 compared to year ended December 31, 2004
Property-Casualty We achieved a strong combined ratio of 94.3%. We continued to adhere to our disciplined underwriting and pricing practices worldwide, thereby successfully improving our combined ratio by 60 basis points compared to 2004. These positive developments were achieved despite the negative impacts of various natural catastrophes, including one of the worst hurricane seasons on record. The combined effects of losses from natural catastrophes produced estimated claims of €1.1 billion, net of reinsurance. Offsetting these losses were decreases in loss estimates for previous underwriting years. Overall, we achieved an increase in operating profit of 6.6% to €5.1 billion.
Life/Health Operating profit strengthened by 17.1% and reached €2.1 billion, exceeding our 2005 target. Improved margins on new business and the increased business volume from the strong growth rates in recent years were important factors in this development. Our statutory expense ratioremained almost stable at 8.4%, down 0.1 percentage point from 2004.
Banking In 2005, Dresdner Bank increased its operating profit by 38.8% to €630 million. This growth was principally due to a favorable development within Dresdner Bank’s net loan loss provisions, resulting in a net release of €113 million (2004: net charge of €337 million), driven predominantly by the reductions in our portfolios within our non-strategic Institutional Restructuring Unit and the improved risk profile of Dresdner Bank’s strategic loan portfolio.
Asset Management Operating profit grew by 34.9% to €1.1 billion, thereby significantly
surpassing our 2005 target. Commensurate with this development, we succeeded in consistently reducing our cost-income ratio during the course of 2005 to 58.4%, a marked improvement of 4.2 percentage points. These achievements demonstrated our strong market position and performance as the overwhelming majority of the third-party assets we managed outperformed their respective benchmarks in 2005.
Net income
Year ended December 31, 2006 compared to year ended December 31, 2005
We grew net income by 60.3% to €7.0 billion. This development was primarily driven by our segment’s operating profit growth, reflecting the high quality of our earnings. In addition, increased restructuring charges were offset by higher realized gains.
The most significant capital gains resulted from the sale of our shareholdings in Schering AG and in Eurohypo AG in the first half of 2006, as well as from the disposal of Four Seasons Health Care Ltd. in the second half.
Restructuring charges amounted to €964 million, €864 million more than last year. This increase primarily reflects the reorganization of our German insurance operations and the “Neue Dresdner Plus” reorganization program.(1)
Net expenses from financial assets and liabilities held for trading was down significantly, as, in the prior year, heavy negative impacts stemmed from derivatives from an equity-linked loan which was issued as a component of financing the cash tender offer for the outstanding RAS shares.
Income tax expenses of €2.0 billion benefited from the tax-exemption of the significant capital gains and the capitalization of the Allianz Group’s total
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corporate tax credits as a consequence of the new German Reorganization Tax Act (SEStEG) which entered into force in December 2006. Following this tax law change, current income tax expenses were reduced by €571 million. Please see Note 41 to our consolidated financial statements for further information. As a result of the above, our effective tax rate declined to 19.5% from 26.3%.
Minority interests in earnings were down €97 million to €1.3 billion. This was primarily a result of the acquisition of the minority interest in RAS.
Year ended December 31, 2005 compared to year ended December 31, 2004
Net income increased significantly to €4.4 billion from €2.3 billion. The increase in our segment’s operating profit drove the continued strengthening of our earnings power with income before income taxes and minority interests in earnings reaching €7.8 billion.
Net income also benefited from the discontinuance of goodwill amortization due to a change in accounting under IFRS. In 2004, goodwill amortization amounted to €1.2 billion. This led to a decrease in amortization of intangible assets from €1.4 billion to €50 million.
The aggregate income from realized gains/losses and impairments of investments (net) was up significantly, driven by the favorable capital markets conditions in 2005 compared to 2004.
During 2005, restructuring charges declined by 71.2% to €100 million, due primarily to the absence of significant charges at Dresdner Bank.
Our income tax expenses increased by 28.1% to €2.1 billion, representing an overall effective tax rate of 26.3% (2004: 31.9%). In 2005, our effective tax rate benefited from preferable tax treatment on dividend income and realized capital gains at various operating entities, as well as the discontinuation of non-tax deductible goodwill amortization.
Minority interests in earnings increased by 18.7% to €1.4 billion, primarily due to increased earnings at our Italian and French Life/Health operating entities.
Our strong net income growth translates into continuously significantly increasing earnings per
share. The following graph presents our basic and diluted earnings per share for the years ended December 31, 2006, 2005 and 2004.
Earnings per share(1)
in€
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The following table summarizes the total revenues, operating profit and net income for each of our segments for the years ended December 2006, 2005 and 2004, as well as IFRS consolidated net income of the Allianz Group.
Property- Casualty | Life/ Health | Banking | Asset Management | Corporate | Consolidation adjustments | Allianz Group | |||||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | € mn | |||||||||||||||
2006 | |||||||||||||||||||||
Total revenues(1) | 43,674 | 47,421 | 7,088 | 3,044 | — | (98 | ) | 101,129 | |||||||||||||
Operating profit (loss) | 6,269 | 2,565 | 1,422 | 1,290 | (831 | ) | — | — | |||||||||||||
Non-operating items | 1,291 | 135 | (147 | ) | (555 | ) | (156 | ) | — | — | |||||||||||
Income (loss) before income taxes and minority interests in earnings | 7,560 | 2,700 | 1,275 | 735 | (987 | ) | (960 | ) | 10,323 | ||||||||||||
Income taxes | (2,075 | ) | (641 | ) | (263 | ) | (278 | ) | 824 | 420 | (2,013 | ) | |||||||||
Minority interests in earnings | (739 | ) | (416 | ) | (94 | ) | (53 | ) | (16 | ) | 29 | (1,289 | ) | ||||||||
Net income (loss) | 4,746 | 1,643 | 918 | 404 | (179 | ) | (511 | ) | 7,021 | ||||||||||||
2005 | |||||||||||||||||||||
Total revenues(1) | 43,699 | 48,272 | 6,318 | 2,722 | — | (44 | ) | 100,967 | |||||||||||||
Operating profit (loss) | 5,142 | 2,094 | 704 | 1,132 | (881 | ) | — | — | |||||||||||||
Non-operating items | 1,024 | 177 | 822 | (707 | ) | (1,118 | ) | — | — | ||||||||||||
Income (loss) before income taxes and minority interests in earnings | 6,166 | 2,271 | 1,526 | 425 | (1,999 | ) | (560 | ) | 7,829 | ||||||||||||
Income taxes | (1,804 | ) | (488 | ) | (387 | ) | (129 | ) | 741 | 4 | (2,063 | ) | |||||||||
Minority interests in earnings | (827 | ) | (425 | ) | (102 | ) | (52 | ) | (10 | ) | 30 | (1,386 | ) | ||||||||
Net income (loss) | 3,535 | 1,358 | 1,037 | 244 | (1,268 | ) | (526 | ) | 4,380 | ||||||||||||
2004 | |||||||||||||||||||||
Total revenues(1) | 42,942 | 45,233 | 6,576 | 2,245 | — | (47 | ) | 96,949 | |||||||||||||
Operating profit (loss) | 4,825 | 1,788 | 447 | 839 | (870 | ) | — | — | |||||||||||||
Non-operating items | 475 | (175 | ) | (539 | ) | (1,114 | ) | (172 | ) | — | — | ||||||||||
Income (loss) before income taxes and minority interests in earnings | 5,300 | 1,613 | (92 | ) | (275 | ) | (1,042 | ) | (460 | ) | 5,044 | ||||||||||
Income taxes | (1,751 | ) | (458 | ) | 302 | 52 | 263 | (18 | ) | (1,610 | ) | ||||||||||
Minority interests in earnings | (681 | ) | (333 | ) | (101 | ) | (52 | ) | (28 | ) | 27 | (1,168 | ) | ||||||||
Net income (loss) | 2,868 | 822 | 109 | (275 | ) | (807 | ) | (451 | ) | 2,266 | |||||||||||
(1) | Total revenues comprise Property-Casualty segment’s gross premiums written, Life/Health segment’s statutory premiums Banking segment’s operating revenues and Asset Management segment’s operating revenues. Please refer to “—Introduction” for a reconciliation of total revenues to premiums written of the Allianz Group. |
(2) | Compound annual growth rate (CAGR) is the year-over-year growth rate over a multiple-year period. |
(3) | Internal total revenue growth excludes the effects of foreign currency translation as well as acquisitions and disposals. Please refer to “—Introduction” for a reconciliation of nominal total revenue growth to internal total revenue growth for each of our segments and the Allianz Group as a whole. |
Management grew strongly, with revenues increasing by 6.3% and 13.3% respectively, on an internal basis, Property-Casualty and Banking grew modestly.
Total revenues – Segments
in € mn
Year ended December 31, 2008 compared to year ended December 31, 2007
At €43,728 million, gross premiums written fromProperty-Casualty operations were up 1.7% on an internal basis, as we achieved selective growth in mixed pricing environments. Premium growth was largely driven by increased revenues from the United States. Activities in the emerging markets(2) also contributed to growth. On a nominal basis, gross premiums written decreased by 2.0% to €43,387 million. Gross premiums written for 2007 include €1,134 million of premiums relating to AGF’s health business. In 2008, this business was transferred to the Life/Health segment (comparatives not restated).
Statutory premiums fromLife/Health insurance amounted to €46,297 million on an internal basis representing an 8.3% decline. Whereas sales
remained solid in countries where traditional life business is strong, we recorded significantly lower revenues from unit-linked products and from bancassurance sales channels. On a nominal basis, revenues dropped by 7.6% to €45,615 million. This premium figure contains €1,199 million relating to AGF health business in 2008 (comparatives not restated).
Operating revenues fromBanking(3) operations decreased by 12.5% to €544 million with all revenue components contributing to this development.
Despite the negative impact the crisis had on the fair value of our assets under management, we still generated positive net inflows in the first nine months of 2008. In contrast, we saw large outflows in the fourth quarter as a consequence of increased investment risk aversion of customers. Net inflows for the year as a whole were nil. Due to significant market-related depreciation, third-party assets under management declined by 8.0% to €703 billion at year end 2008. With this lower asset base, fee and commission income fromAsset Management was down by 8.4% to €4,032 million. Other revenue components also contributed to the decline.
Year ended December 31, 2007 compared to year ended December 31, 2006
Property-Casualty Gross premiums written of €44.3 billion were up 1.4% on a nominal basis and 1.1% on an internal basis. With €635 million, our acquisitions in Russia and Kazakhstan contributed significantly to revenue growth. Foreign currency translation effects had a negative impact of €448 million.
We maintained our selective underwriting policy, focusing on diligent risk selection and profitable growth. In several of our core European markets, pricing trends were flat or negative, limiting the growth opportunities. Conversely, we were able to take advantage of strong profitable growth opportunities in emerging markets(2) which now make up more than 9% of total gross premiums written.
(1) | Total revenues include €115 mn, €144 mn and €130 mn from consolidation for 2008, 2007 and 2006, respectively. |
(2) | New Europe, Asia-Pacific, South America, Mexico, Middle East, Africa. |
(3) | Following the sale of almost all of Dresdner Bank to Commerzbank, our Banking segment reflects our existing banking operations as well as the Oldenburgische Landesbank and the banking clients from Dresdner Bank introduced through our tied agents channel. |
Life/Health At €49.4 billion, statutory premiums were up by 4.1%, ahead of expectations. Based on internal growth, revenues were up 6.3%. We achieved double-digit growth rates in most of our markets worldwide, with substantial contributions from emerging markets in New Europe and Asia-Pacific. While the situation in the United States remained challenging, other established markets such as France and Italy also experienced dynamic growth, while Germany, though at lower growth rates, outperformed the market.
The considerable growth in statutory premiums added to our asset base, which increased by €8.7 billion to €350.0 billion, despite negative impacts from foreign currency translation, higher interest rates and the weakening stock market towards year-end.
Banking(1) Operating revenues in our Banking segment were up by 3.0% to €622 million. Net interest income and net fee and commission income grew strongly by 11.7% and 10.1%, respectively. The development of net trading income was significantly impacted by the turbulences in the financial markets resulting in a gain of €2 million compared to €45 million in the previous year.
Asset Management In asset management we again outperformed the vast majority of our performance benchmarks. Operating revenues were up 7.1%, before negative foreign currency translation effects of €0.2 billion.
At €765 billion, third-party assets under management recorded net inflows and positive market effects totalling €62 billion. Offsetting this was €59 billion of negative foreign currency translation effects. As a result, the asset base remained flat, though it experienced internal growth of 8.1%.
Operating Profit
Year ended December 31, 2008 compared to year ended December 31, 2007
At €5,649 million, theProperty-Casualty segment continued to deliver solid returns in
operating profit although 10.3% lower than in the previous year. This decline was mainly attributable to a lower underwriting result. Our combined ratio increased to 95.1%.
Operating profit from theLife/Health business amounted to €1,206 million. The 59.7% decline was mainly due to weak equity markets and widening credit spreads which strongly impacted our net investment result.
In our continuingBanking(1) business, we recorded an operating loss of €31 million, after a profit of €32 million in 2007. Lower operating revenues and higher loan loss provisions were only partially outweighed by reduced operating expenses. The cost-income ratio increased by 6.3 percentage points to 100.4 %.
At €926 million, the operating profit from ourAsset Management segment declined by 31.9% after a strong year in 2007. This development was mainly driven by reduced revenues following lower third-party assets and higher expenses.
The operating loss fromCorporate Activities decreased by 42.2% to €188 million mainly as result of lower administrative and investment expenses in the Holding Function.
Year ended December 31, 2007 compared to year ended December 31, 2006
Property-Casualty At €6.3 billion, operating profit growth was relatively flat compared to the prior year period. Claims from natural catastrophes were €0.6 billion higher than in 2006, a year that was marked by exceptionally low claims from natural catastrophes. Higher current investment income compensated for the high losses incurred in connection with windstorm Kyrill, the floods in the United Kingdom and severe storms in several parts of the world.
Life/Health Operating profit grew by 16.8% to almost €3.0 billion with most operations contributing to this growth. The key drivers behind this improvement were strong revenue growth, especially
(1) | Following the sale of almost all of Dresdner Bank to Commerzbank, our Banking segment reflects our existing banking operations as well as the Oldenburgische Landesbank and the banking clients from Dresdner Bank introduced through our tied agents channel. |
in the second half of the year. Our investment result also contributed significantly based on a higher asset base that led to higher dividend and investment payments. Furthermore the expense result and the technical result improved as well.
Banking(1) Operating profit nearly halved to €32 million, after €63 million in the prior year. Mainly higher administrative expenses at €589 million (2006: €550 million) driven by an increase in our non-personnel expenses led to this result. Our cost-income ratio was 94.1% (2006: 90.1%).
Asset Management Operating profit increased by 5.3% to €1.4 billion as we continued to benefit from a growing asset base and tight cost control. Investments in business expansion and infrastructure projects to secure future growth resulted in operating expenses increasing at a slightly higher rate than operating revenues. This is reflected in a 0.7 percentage point increase in our cost-income ratio, which is still at a very competitive level of 58.3%.
Corporate Segment Due to higher investment income and lower expenses, the operating loss was significantly reduced to €0.3 billion.
Net income from continuing operations
Net income from continuing operations
in € mn
Year ended December 31, 2008 compared to year ended December 31, 2007
Income from continuing operations before income taxes and minority interests in earnings was
(1) | Following the sale of almost all of Dresdner Bank to Commerzbank, our Banking segment reflects our existing banking operations as well as the Oldenburgische Landesbank and the banking clients from Dresdner Bank introduced through our tied agents channel. |
(2) | Compound annual growth rate (CAGR) is the year-over-year growth rate over a multiple-year period. |
almost halved to €5,473 million. Tax expenses were also reduced by 50.0% to €1,287 million. Against this background the effective tax rate was almost stable, down 0.8 percentage points to 23.5%. Consequently, net income from continuing operations was down by 45.8% to €3,967 million.
Income tax expenses were reduced to €1,287 million due to lower taxable income as well as tax-exempted capital gains and dividends that were only partly offset by trade tax and similar taxes.
Due to the lower pre-tax income and the AGF minority buy-out in 2007, minority interests in earnings decreased by 67.6% to €219 million.
Year ended December 31, 2007 compared to year ended December 31, 2006
Net income from continuing operations increased by 10.2% to €7.3 billion.
Compared to 2006, the balance of non-operating net realized gains and impairments was lower, and interest expense from external debt was higher. These negative impacts were partially compensated by lower restructuring charges.
Realized gains (net) which are not shared with policyholders, were €434 million lower than last year, albeit still at a high level of €2,379 million. This was mainly driven by large harvesting transactions in the first quarter of 2007, when we took advantage of market conditions. With write-downs amounting to €294 million, impairments on investments were €148 million higher compared to 2006.
The remaining balance of unrealized gains on equity securities amounted to €11.0 billion as of December 31, 2007, net of tax and policyholder participation.
Interest expense from external debt increased by €276 million to €1,051 million, mainly in connection with bridge financing for the acquisition of the outstanding minority interests in AGF.
Restructuring charges amounted to €166 million, €236 million less than last year. In 2006, restructuring charges stemmed primarily from our restructuring plan for the Allianz Group’s insurance operations in Germany. The charges in
2007 related mainly to the restructuring of our local subsidiaries in Italy, and the set-up of a shared IT services infrastructure in Europe.(1)
The tax charge of €429 million in 2006 was related to reclassification of policyholder participation in tax benefits arising in connection with tax-exempt income in the Life/Health segment. In the segment reporting, this effect is represented within operating items.
Our effective tax rate of 24.3% and income tax expense of €2,572 million were significantly higher than in 2006, where the one-off benefit of €521 million from capitalization of corporate tax credits in Germany significantly reduced the effective tax rate. Furthermore, a higher income before income taxes and minority interests in earnings of €10,563 million (2006: €9,563 million) contributed to this development. The German corporate tax reform 2008 (“Unternehmensteuergesetz 2008”) led to a reduction of income tax rates for German corporations from fiscal year 2008. The resulting revaluation of deferred tax positions resulted in a positive effect on net income in 2007 of €291 million.
Minority interests were €528 million lower, primarily due to the RAS minority buy-out completed in 2006 and the AGF minority buy-out in 2007.
Net income (loss) from discontinued operations
Year ended December 31, 2008 compared to year ended December 31, 2007
Due to the structure of the sale of Dresdner Bank, Allianz ceased to be exposed to changes in the results of Dresdner Bank Group from the signing date of the transaction. Instead Allianz is exposed to changes in the fair value of its stake in Commerzbank. Therefore, the loss from discontinued operations is mainly subject to changes in the fair value of the consideration received.
As disclosed in our interim report for the third quarter of 2008, the loss from discontinued operations amounted to €3.5 billion, stemming from
(1) | Please refer to Note 49 to our consolidated financial statements for further information on our restructuring plans. |
Dresdner Bank’s net loss of €2.1 billion until the change in ownership and an impairment charge of €1.4 billion, reflecting the difference between the fair value of considerations agreed (€7.8 billion) and the historical carrying value of Dresdner Bank of €9.2 billion. Between October 1, 2008 and the date of completion of the transaction on January 12, 2009, the fair value of the agreed consideration declined by €2.7 billion.
Changes in consideration and fair value
in € bn
Including other charges of €0.2 billion the overall result from discontinued operations for 2008 amounted to €6,411 million coming from a gain of €650 million.
€ bn | |||
Dresdner Bank’s net loss until the change in ownership | (2.1 | ) | |
Impairment charge | (1.4 | ) | |
Net loss from discontinued operations 1/1/2008 – 9/30/2008 | (3.5 | ) | |
Change in fair value of the agreed consideration | (2.7 | ) | |
Other | (0.2 | ) | |
Net loss from discontinued operations 1/1/2008 – 12/31/2008 | (6.4 | ) | |
First quarter 2009 | (0.4 | ) | |
Total | (6.8 | ) | |
(2) | €0.25 bn cash received in exchange for cancellation of trust fund valued at €0.1 bn. |
(3) | €1.4 bn cash received as compensation for reduction in number of Commerzbank shares by 152 mn valued at €2.4 bn. |
(4) | Marked-to-market as of January 12, 2009. |
Year ended December 31, 2007 compared to year ended December 31, 2006
Net income from discontinued operations increased by 70.6% to €650 million.
Operating revenues from discontinued operations of Dresdner Bank amounted to €4,918 million, down 21.4% compared to the previous year. This development resulted mainly from the effects of the financial markets turbulence which heavily impacted net trading income. Operating expenses, at €4,447 million, were 12.1% lower and loan loss provisions showed net releases of €131 million in 2007, after net additions of €31 million last year. The positive impacts from lower operating expenses and the development of loan loss provisions, however, could not compensate for the drop in operating revenues. As a result, operating profit nearly halved to €602 million. Higher net realized gains, and lower net impairments as well as restructuring charges led to a gain from non-operating items of €403 million in 2007, compared to a loss of €407 million in the previous year. As the favorable change of non-operating items of €810 million more than offset the drop in operating profit of €565 million, the result from discontinued operations before income taxes and minority interests in earnings was up by €245 million to €1,005 million. Income tax expenses and minority interests in earnings remained stable.
Net income (loss)
Year ended December 31, 2008 compared to year ended December 31, 2007
The net loss for 2008 amounted to €2,444 million compared to a net income of €7,966 million a year ago.
Year ended December 31, 2007 compared to year ended December 31, 2006
Net income grew by 13.5% to almost €8.0 billion.
Earnings per share
The following graph presents our basic and diluted earnings per share for the years ended December 31, 2008, 2007 and 2006.
Earnings per share(1)
in €
Year ended December 31, 2008 compared to year ended December 31, 2007
The net loss translates into negative basic earnings per share of €5.43 (diluted: €(5.47)). Taking only net income from continuing operations into account, basic earnings per share were €8.81 (diluted: €8.59).
Year ended December 31, 2007 compared to year ended December 31, 2006
The net income translates into basic earnings per share of €18.00 (diluted: €17.71). Taking only net income from continuing operations into account, basic earnings per share were €16.53 (diluted: €16.26).
(1) | Refer to Note 50 to our consolidated financial statements for further details. |
Shareholders’ equity
The following graph presents our shareholders’ equity as of December 31, 2008, 2007 and 2006.
Shareholders’ equity(1)
in € mn
Year ended December 31, 2008 compared to year ended December 31, 2007
As of December 31, 2008, shareholders’ equity amounted to €33,684 million, down €14,069 million from previous year. Main drivers for the decline were net unrealized losses from investments of €8,459 million, the dividend payment of €2,472 million and the net loss amounting to €2,444 million.
(1) | Does not include minority interests. |
(2) | Compound annual growth rate (CAGR) is the year-over-year growth rate over a multiple-year period. |
Year ended December 31, 2007 compared to year ended December 31, 2006
As of December 31, 2007, shareholders’ equity amounted to €47,753 million, down €1,897 million from the previous year. Additions to the shareholders’ equity were primarily the 2007 net income of €7,966 million and a capital increase of €2,765 million for the execution and financing of the AGF minority buy-out. The goodwill related to the minority buy-outs of AGF and Allianz Leben amounting to €6,966 million was recorded as a reduction of shareholders’ equity. Together with the transfer on disposal of unrealized gains and losses to realized of €2,484 million were these the largest downward movements. Furthermore, foreign currency translation effects of €1,446 million and the dividend payment of €1,642 million contributed to the overall reduction in shareholders’ equity.
The following table summarizes the total revenues, operating profit and net income for each of our segments for the years ended December 31, 2008, 2007 and 2006, as well as the IFRS consolidated net income of the Allianz Group.
Property- Casualty | Life/ Health | Banking | Asset Management | Corporate | Consolidation | Group | |||||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | € mn | |||||||||||||||
2008 | |||||||||||||||||||||
Total revenues | 43,387 | 45,615 | 544 | 2,887 | — | 115 | 92,548 | ||||||||||||||
Operating profit (loss) | 5,649 | 1,206 | (31 | ) | 926 | (188 | ) | — | — | ||||||||||||
Non-operating items | 287 | (533 | ) | (130 | ) | (293 | ) | (1,156 | ) | — | — | ||||||||||
Income (loss) from continuing operations before income taxes and minority interests in earnings | 5,936 | 673 | (161 | ) | 633 | (1,344 | ) | (264 | ) | 5,473 | |||||||||||
Income taxes | (1,489 | ) | (260 | ) | 54 | (249 | ) | 631 | 26 | (1,287 | ) | ||||||||||
Minority interests in earnings | (112 | ) | (86 | ) | (7 | ) | (5 | ) | (12 | ) | 3 | (219 | ) | ||||||||
Net income (loss) from continuing operations | 4,335 | 327 | (114 | ) | 379 | (725 | ) | (235 | ) | 3,967 | |||||||||||
Net income (loss) from discontinued operations, net of income taxes and minority interests in earnings | — | — | (6,304 | ) | — | — | (107 | ) | (6,411 | ) | |||||||||||
Net income (loss) | 4,335 | 327 | (6,418 | ) | 379 | (725 | ) | (342 | ) | (2,444 | ) | ||||||||||
2007 | |||||||||||||||||||||
Total revenues | 44,289 | 49,367 | 622 | 3,259 | — | 144 | 97,681 | ||||||||||||||
Operating profit (loss) | 6,299 | 2,995 | 32 | 1,359 | (325 | ) | — | — | |||||||||||||
Non-operating items | 962 | 107 | 13 | (494 | ) | (29 | ) | — | — | ||||||||||||
Income (loss) from continuing operations before income taxes and minority interests in earnings | 7,261 | 3,102 | 45 | 865 | (354 | ) | (356 | ) | 10,563 | ||||||||||||
Income taxes | (1,656 | ) | (897 | ) | 10 | (342 | ) | 217 | 96 | (2,572 | ) | ||||||||||
Minority interests in earnings | (431 | ) | (214 | ) | — | (25 | ) | (21 | ) | 16 | (675 | ) | |||||||||
Net income (loss) from continuing operations | 5,174 | 1,991 | 55 | 498 | (158 | ) | (244 | ) | 7,316 | ||||||||||||
Net income (loss) from discontinued operations, net of income taxes and minority interests in earnings | — | — | 322 | — | — | 328 | 650 | ||||||||||||||
Net income (loss) | 5,174 | 1,991 | 377 | 498 | (158 | ) | 84 | 7,966 | |||||||||||||
2006 | |||||||||||||||||||||
Total revenues | 43,674 | 47,421 | 604 | 3,044 | — | 130 | 94,873 | ||||||||||||||
Operating profit (loss) | 6,269 | 2,565 | 63 | 1,290 | (831 | ) | — | — | |||||||||||||
Non-operating items | 1,291 | 135 | 13 | (555 | ) | (156 | ) | — | — | ||||||||||||
Income (loss) from continuing operations before income taxes and minority interests in earnings | 7,560 | 2,700 | 76 | 735 | (987 | ) | (521 | ) | 9,563 | ||||||||||||
Income taxes | (2,075 | ) | (641 | ) | (1 | ) | (278 | ) | 824 | 451 | (1,720 | ) | |||||||||
Minority interests in earnings | (739 | ) | (416 | ) | (6 | ) | (53 | ) | (16 | ) | 27 | (1,203 | ) | ||||||||
Net income (loss) from continuing operations | 4,746 | 1,643 | 69 | 404 | (179 | ) | (43 | ) | 6,640 | ||||||||||||
Net income (loss) from discontinued operations, net of income taxes and minority interests in earnings | — | — | 849 | — | — | (468 | ) | 381 | |||||||||||||
Net income (loss) | 4,746 | 1,643 | 918 | 404 | (179 | ) | (511 | ) | 7,021 | ||||||||||||
Total revenues comprise Property-Casualty segment’s gross premiums written, Life/Health segment’s statutory premiums, Banking segment’s operating revenues and Asset Management segment’s operating revenues. Please refer to “—Introduction” for a reconciliation of total revenues to premiums written of the Allianz Group.
Impact of the Financial Markets Turbulence
The financial markets crisis had its root cause in the subprime crisis, when rising defaults on subprime mortgages in the United States resulted in significant deterioration of prices for securitized assets. Primarily, this affected collateralized debt obligations (CDOs) and residential mortgage-backed securities especially those originating in the United States (U.S. RMBS). The revaluation of these assets resulted in massive write-downs in the industry. Subsequently, uncertainty about the extent and distribution of losses arose and the interbank market started to freeze. This prompted central banks to take concerted action and provide the capital markets with additional liquidity.
In 2008, the crisis that started as a subprime mortgage crisis, broadly spilled over to other sectors of the financial industry and ultimately also hit the real economy. The year has been characterized by weak equity markets, volatile credit spreads and further declines in U.S. house and mortgage prices. The downgrading of monoline insurers (“monoliners”) led to further writedowns on derivatives contracts banks held with the insurers. Investors faced further downgrades and market losses on insured bonds. In September, the global financial system almost collapsed: large financial institutions faltered, leading to changes in business models, failures, mergers and nationalization. Furthermore, some economies were on the verge of national bancruptcy. These developments led to continuously deteriorating market sentiments and falling stock markets worldwide. Ultimately, governments took coordinated actions and announced rescue plans and guarantees for distressed institutions.
In common with the industry, Allianz was affected by the turbulence in the financial markets, which impacted both results and asset values. However, the impact varied across our business segments.
Our operations were significantly impacted by impairments on equity and fixed-income securities as well as lower sales of investment-oriented life insurance and asset management products. In addition, credit spread widening, higher volatility and lower interest rates impacted our trading and fair value option (FVO) result significantly.
Impact on the assets of our continuing operations
2008 | 2007 | |||||
€ mn | € mn | |||||
Operating | ||||||
Equities | (5,924 | ) | (882 | ) | ||
Fixed-income | (261 | ) | (1 | ) | ||
Real estate | (14 | ) | (8 | ) | ||
Impairments | (6,199 | ) | (891 | ) | ||
Fair value option / Trading | (733 | ) | (782 | ) | ||
Non-operating | ||||||
Equities | (2,882 | ) | (276 | ) | ||
Fixed-income | (354 | ) | (11 | ) | ||
Real estate | (60 | ) | (7 | ) | ||
Impairments | (3,296 | ) | (294 | ) | ||
Fair value option / Trading | 47 | (35 | ) |
Asset-backed securities exposure
Of our Property-Casualty asset base, asset-backed securities (ABS) made up €4.4 billion as of December 31, 2008, which is around 5% of our asset-base. CDOs accounted for €0.1 billion of this amount.
Within our Life/Health asset base, ABS amounted to €15.3 billion as of December 31, 2008, which is less than 5% of total Life/Health assets. Of these, €0.3 billion are CDOs. Unrealized losses on CDOs of €10 million were recorded in our shareholders’ equity.
Subprime exposures within CDOs of the insurance portfolio were negligible.
As part of the transaction with Commerzbank on January 12, 2009, Allianz committed to purchase certain CDOs with a notional value of approximately €2 billion for consideration of €1.1 billion. The CDOs were purchased at fair value and the transaction was executed in February 2009.
Monoline Exposure
As of December 31, 2008, Allianz’s monoline exposure amounted to €547 million (December 31, 2007: €405 million), which mainly relate to bond insurance on U.S. municipal bonds.
Breakdown of exposure by rating class
in %
Bond insurer exposure as of December 31, 2008 (in € mn)
Monoliner 1 | Monoliner 2 | Monoliner 3 | Monoliner 4 | Other | Total | |||||||
Underlying Rating/Insurer Rating | BAA | CAA | AA | BAA | ||||||||
AAA | 2 | 0 | 0 | 35 | 0 | 37 | ||||||
AA | 60 | 2 | 93 | 239 | 0 | 394 | ||||||
A | 10 | 0 | 33 | 55 | 3 | 101 | ||||||
BAA | 14 | 1 | 1 | 1 | 0 | 16 | ||||||
Total | 85 | 3 | 126 | 330 | 3 | 547 | ||||||
Bond insurer exposure as of December 31, 2007 (in € mn)
Monoliner 1 | Monoliner 2 | Monoliner 3 | Monoliner 4 | Other | Total | |||||||
Underlying Rating/Insurer Rating | AAA | AAA | AAA | AAA | ||||||||
AAA | 1 | 0 | 0 | 0 | 0 | 1 | ||||||
AA | 39 | 85 | 67 | 95 | 0 | 286 | ||||||
A | 9 | 12 | 30 | 36 | 0 | 86 | ||||||
BAA | 19 | 0 | 1 | 11 | 0 | 32 | ||||||
Total | 68 | 97 | 98 | 142 | 0 | 405 | ||||||
Impact on discontinued operations of Dresdner Bank
Dresdner Bank was engaged in various business activities involving structured products. As presented in the table below, these comprise ABS, credit enhancements, conduits, leveraged buy-out commitments (LBO) and structured investment vehicles (SIV). Furthermore, Dresdner Bank has sold credit protection for third-party ABS and has re-insured these positions with monoliners. With the
sale of Dresdner Bank in January 2009, Allianz’s exposure to these structured products was transferred to Commerzbank, with the exception of the aforementioned CDOs repurchased by Allianz in February 2009, as well as a continuing minority interest in a Dresdner Bank-sponsored SPE with assets of €40 million as of December 31, 2008, as further described under “Balance Sheet Review—Consolidated Special Purpose Entities” and “Balance Sheet Review—Off-Balance Sheet Arrangements”.
Area of focus | Exposure definition | Exposure | Negative impact on operating profit | |||||||
12/31/2007 | 12/31/2008 | 4Q 2008 | 2008 | |||||||
€ bn | € bn | € mn | € mn | |||||||
1. LBO commitments | Gross exposure | 4.5 | 3.4 | 572 | 662 | |||||
2. Conduits business | Drawn and funded amounts | 4.0 | 4.6 | — | — | |||||
3. ABS | ||||||||||
a. CDOs(1) | Net exposure(2) | 1.5 | 2.3 | 511 | 1,510 | |||||
b. U.S. RMBS | Net exposure(2) | 1.4 | 0.6 | 134 | 714 | |||||
c. Other ABS | Net exposure(2) | 6.3 | 2.2 | 232 | 356 | |||||
4. Credit enhancements | Gap risk/second loss | 2.9 | 1.6 | 24 | 61 | |||||
5. Monolines | Net counterparty risk(3) | 0.8 | 2.4 | 694 | 1,007 | |||||
6. K2 | Gross exposure | 16.4 | 4.7 | 542 | 693 |
(1) | In January 2009, Allianz repurchased certain CDOs from Dresdner Bank. For further information please refer to “—Impact on Balance Sheet Review—Off-Balance Sheet Arrangements”. |
(2) | After markdowns |
(3) | Gross counterparty risk after counterparty default adjustments (CDA) |
Recently Adopted and Issued Accounting Pronouncements and Changes in the Presentation of the Consolidated Financial Statements
For information on recently adopted and issued accounting pronouncements please seerefer to Note 3 to our consolidated financial statements.
Effective January 1, 2006, we implemented certain revisions to our consolidated financial statements to enhance the reader’s understanding of our financial results and to use a more consistent presentation with that of our peers. These revisions reflect certain reclassifications in our consolidated balance sheet and consolidated income statement, changes to our segment reporting, changes to operating profit methodology and changes to our consolidated statements of cash flows. We applied these revisions to all three years of the Allianz
Group’s consolidated financial statements presented in this Annual Report on Form 20-F. As a result, we have retrospectively applied these revisions to the Allianz Group’s consolidated financial statements as of and for the years ended December 31, 2005 and 2004, as previously issued in connection with our Annual Report on Form 20-F for the year ended December 31, 2005, without any impact on our consolidated net income and shareholders’ equity for these years. See Note 3 to our consolidated financial statements for detailed information on the changes of our consolidated financial statements and the impact of these revisions.
Events After the Balance Sheet Date
SeeRefer to “—Recent and Expected Developments—Significant Expected Investments”Economic Outlook” and Note 52 to the consolidated financial statements.
Property-Casualty Insurance Operations
Year ended December 31, 20062008 compared to year ended December 31, 20052007
Underwriting performance drivesStrong operating profitability.
Very competitive combined ratioprofit of 92.9%.€5,649 million largely unaffected by financial market crisis.
Further operating profitSelective growth of 22% to €6.3 billion after an already strong yearachieved in 2005.mixed pricing environments.
We sustainedCombined ratio of 95.1% close to our successful strategy of selective use of market opportunities.
Net income increased 34.3% to €4.7 billion.target.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
Combined ratio further improvedEmerging markets contributed more than €4 billion to 94.3%.
Although we continued to focus on profitable growth, we succeeded in increasing gross premiums written by 2.6%, excluding the effects of exchange rate movements and disposals and acquisitions.steadily growing premiums.
We achieved a combined ratio of 94.3%—60 basis points better than a year earlier—despiteProfitability sustained throughout the effects of natural catastrophes.cycle.
Our operating profit grew by 6.6%, reaching €5.1 billion.Combined ratio of 93.6%.
Net income grew by 23.3% to €3.5 billion, through our robust operating profitability as well as increased non-operating items.
Earnings Summary
Gross premiums written
Gross premiums written-Internal growth rates(1)
in %
(1) | Before elimination of transactions between Allianz Group companies in different geographic regions and different segments. |
Year ended December 31, 2008 compared to year ended December 31, 2007
Gross premiums written(2)
At €43,728 million, gross premiums written were 1.7% ahead of the previous year on an internal basis. Despite a slightly negative pricing impact of approximately 0.5% for the segment, which stemmed from ongoing soft markets in many countries, we achieved selective growth. Premiums increased in the United States and organic growth was evident in South America, France, Poland and our Travel Insurance and Assistance Services business, among others. On a nominal basis, premium growth was impacted by the transfer of AGF’s health business to the Life/Health segment in 2008 (respective premiums in 2007: €1,134 million). Furthermore, negative currency translation effects amounted to €821 million. Overall, gross premiums written were down by 2.0% to €43,387 million.
Gross premiums written at Allianz Sach in Germany decreased—both on an internal and on a nominal basis—by region0.9% or €81 million, in particular due to the soft pricing conditions in the motor insurance market.
In the United States, gross premiums written grew by 11.1% or €480 million on an internal basis. In the face of continued pricing pressure, we observed declining revenues in many lines of business. We estimate the negative price effect on premiums written in 2008 to be 3.2%. Excluding the contribution from crop insurance business, internal premiums were down by 5.2%. A negative foreign currency translation effect also impacted growth by €366 million. Nominal growth in the United States was 2.6%.
In Italy, premiums declined by €471 million or 9.0% on an internal basis. This shortfall was mainly due to a significant decrease in motor insurance business, driven by a lower number of new car registrations and our rigorous underwriting approach.
(2) | We comment on the development of our gross premiums written on an internal basis; meaning adjusted for foreign currency translation and (de-)consolidation effects in order to provide more comparable information. Please refer to “—Introduction” for a reconciliation of nominal total revenue growth to internal total revenue growth for each of our segments and the Allianz Group as a whole. |
Furthermore, prices were impacted by the Bersani law, which resulted in a market-wide price reduction. The negative pricing impact on our Italian business is estimated to be 2.8%. On a nominal basis, premiums declined by 9.3%.
On an internal basis, revenues in France were up by 1.2% or €48 million, supported by a positive price effect of approximately 1.9%. On a nominal basis, the €1,156 million decrease in revenues was mainly due to the transfer of AGF’s health business to the Life/Health segment.
In South America, premiums increased by €181 million or 20.6%, mainly driven by Brazil where all lines of business experienced growth, motor insurance in particular. On a nominal basis, premiums were up by 14.3%.
Adjusted for the consolidation of ROSNO and Progress Garant in Russia as well as ATF-Polis in Kazakhstan, internal revenue growth in New Europe amounted to €99 million or 3.6%. The main driver of this development was motor insurance business in Poland and increased property business in Slovakia. On a nominal basis, revenues in New Europe grew by 11.6%.
Nominal growth in the emerging markets(1) in total amounted to 12.8%. Together, these markets contributed €4,835 million (2007: €4,286 million) or 11.1% (2007: 9.7%) to total gross premiums written.
Travel Insurance and Assistance Services recorded an increase in %gross premiums written of €89 million or 7.8%, on both an internal and nominal basis.
Year ended December 31, 2007 compared to year ended December 31, 2006
Gross premiums written were 1.4% ahead of previous year at €44,289 million. Our acquisitions in Russia and Kazakhstan contributed significantly to premium volume, while large foreign currency translation effects of €448 million almost offset this increase. Therefore, on an internal basis, premiums grew by 1.1%. Furthermore, in 2007, our strategy of selective underwriting proved to be again successful as we were able to limit pricing impacts while at the same time achieving slight organic growth.
(1) | New Europe, Asia-Pacific, South America, Mexico, Middle East, Africa. |
The revenue development remained mixed across our different regions. We recorded strong premium growth of €962 million in our emerging markets which compensated for flat or even negative revenue trends in the more mature markets. This shows that our strategy of expansion into emerging markets is paying off. Together, these markets contributed €4,286 million (2006: €3,324 million) or 9.7% (2006: 7.6%) to total gross premiums written.
Increases in gross premiums written were primarily achieved in New Europe and Spain as well as in the global travel and assistance business at Mondial and credit insurance at Euler Hermes. In contrast, as we intentionally forewent premium growth in order to protect our underwriting profitability, revenues were down in the United States and in Italy.
With €838 million additional premium volume, New Europe contributed the highest portion to revenue growth. The first time consolidation of ROSNO and Progress Garant in Russia and ATF-Polis in Kazakhstan were the main drivers for this development. Additionally, motor insurance business in Poland and Romania added to the increase in gross premiums.
In Spain, revenues increased by €123 million. Here, our operations outperformed the market in all lines of business despite the weak situation in the motor market. Main contributions came from industrial and personal lines.
Increase in gross premiums written in our Travel and Assistance business by €95 million was driven by growth in most regions coming mainly from e-commerce partnerships in travel insurance.
Premium growth within the credit insurance business was due to higher business volume. Despite the weak U.S. Dollar compared to the Euro and price declines which are due to high competition and very low claims ratios in the market, total revenues were up by €90 million.
At Allianz Sach within Germany, we closely monitored pricing developments in order to maintain profitability. Due to a weak market environment and higher no claims bonuses in motor insurance, revenues declined by €114 million. Furthermore, internal reinsurance business at Allianz SE, which we
also show within Germany, was significantly reduced as we optimized internal reinsurance arrangements in the year under review. Overall premiums in Germany were down by €681 million.
In the United States we recorded revenues of €4,306 million. At Fireman’s Fund Insurance Company (Fireman’s Fund) we saw a decline of €206 million from the prior year, primarily reflecting the decline in the U.S. Dollar compared to the Euro. On a U.S. Dollar basis, growth amounted to 3.8% and we saw a satisfying business performance, coming predominantly from crop insurance business and personal lines.
Our operations in Italy showed a decline in gross premiums written of €167 million mainly due to stagnation in the motor market and the impact from a new regulation, the so-called Bersani law, which resulted in an overall price reduction.
In the United Kingdom the decrease of €160 million in revenues was due to the internal transfer of large risk business to Allianz Global Corporate & Specialty (AGCS). Otherwise, premium volume increased by €185 million mainly coming from personal motor and commercial lines.
Gross premiums written by region as of December 31, 2008 (December 31, 2007)(1)
in %
(1) | After elimination of transactions between Allianz Group companies indifferent geographic regions and different segments. Gross premiums written from our specialty lines have been allocated to the respective geographic regions. |
Gross premiums written – Growth rates(1)
in %
|
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Operating profit
Year ended December 31, 2006 compared to year ended December 31, 2005Operating profit
in € mn
In 2006, our underwriting strategy of putting profitability ahead of volume was again successful. Gross premiums written were flat at €43,674 million reflecting average constant prices and a slightly increased sales volume, with considerably varying developments across our different markets. Increases in gross premiums written were primarily achieved within Spain (+ €140 million) and the United States (+ €115 million), as well as our emerging markets of New Europe (+ €117 million) and South America (+ €153 million). Lower gross premiums written were recorded within Germany, in Switzerland at Allianz Risk Transfer (or “ART”) and within our specialty lines at Allianz Global Corporate & Specialty. On an internal growth basis, gross premiums written grew marginally by 0.3%.
We continued to benefit from our global diversification and the measures implemented as part of our Sustainability Program which allow us to take selective advantage of market opportunities and to perform local market cycle management.
At Allianz Sach within Germany, we closely monitored pricing development in order to maintain profitability. Premiums in our motor business were down, reflecting largely lower prices. The development in our casualty lines primarily due to increased sales of accident insurance products with premium refunds, however, compensated partially for the decline in motor. An additional factor contributing to the lower premiums within Germany was that the Allianz Group’s Property-Casualty subsidiaries outside of Germany reduced their internal reinsurance cessions to Allianz SE.
In some markets, such as the United States and Spain, we recorded increasing volumes while being able to maintain stable, profitable prices. Two lines of business contributing to the increased business volume at Fireman’s Fund Insurance Company (or “Fireman’s Fund”) in the United States were the crop insurance business and specialty casualty lines. The positive development in Spain was attributable to higher sales across all lines of business.
The decrease of €207 million in Switzerland reflected an increase in gross premiums written at Allianz Suisse due to a favorable development in our motor business and lower premium volume at ART. At ART, in 2005, we benefited from a large single premium multi-year contract.
Within New Europe, the increase in gross premiums written took place in a well-performing economy. Our distribution network captured a significant part of the growing market potential. The expanded sales capacity in Poland was the key driver for the growth of our property-casualty portfolio. In contrast, in Hungary, we were willing to forego volume for better prices and thereby protected our profitability.
In South America, our operations benefited predominantly from growth in our Brazilian motor business driven by a continued good performance of the fleet business and an increase of new car sales.
At Allianz Global Corporate & Specialty gross premiums written were down €142 million to €2,802 million. This development was to a large extent brought about by foregoing business volume as a result of declining prices mainly in Europe.
Year ended December 31, 20052008 compared to year ended December 31, 20042007
Capitalizing on growth opportunities in markets that offered a profitable correlation between premium
rates and risks meant, we were successful in growing gross premiums written from €42,942Despite the challenging market conditions, the segment delivered another solid operating profit of €5,649 million, to €43,699 million, despitealbeit 10.3% below previous year’s value. This is the disposalresult of our Taiwanese, Chileandisciplined underwriting approach, cost control and Canadian operationsa stable investment income. The decline was mainly attributable to a lower underwriting result, the majority of which related to credit insurance and the U.S. crop insurance business. The overall higher claims level was partly compensated by a reduction in expenses.
The combined ratio of 95.1% was close to our target level albeit 1.5 percentage points above 2007, mainly impacted by a 2.2 percentage points increase in the second halfaccident year loss ratio, to 71.8%. In our Credit Insurance business at Euler Hermes, we observed an increase in payment delays, which are the industry’s lead indicator for future defaults. In addition, the number of 2004. Based on internal growth, gross premiums written increased by 2.6%.
Growth varied considerably across our different operations. Positive developments were primarily experiencedinsolvencies—such as the large retailer Woolworths—started to increase. As a result, the accident year loss ratio for credit insurance was 85.0%, after 57.1% in 2007. Following a slump in commodity prices in the United States and within Germany, as well as at our Swiss and Australian operations with additional gross premiums writtenthe end of €298September, we experienced a lower underwriting result from crop insurance amounting to €(7) million, (7.3%), €274down from €79 million (2.4%), €196 million (10.8%), and €145 million (11.0%), respectively. At Fireman’s Fund in the United States, increases across all lines of business were achieved, namely2007.
In 2008, an increase in our personal, commercial and specialty lines withoverall claims severity was partly compensated by a constant focus on disciplined underwriting and increased sales effectiveness in our chosen markets. The higher gross premiums written within Germany resulted primarily from our property-casualty assumed reinsurance business at Allianz SE whichslightly lower claims
frequency. We benefited from a lower self-retention level at Allianz Global Corporate & Specialty,of natural catastrophe claims, which accounted for €667 million compared to €774 million in 2007. Major claims in 2008 were the windstorm Emma and the hailstorm Hilal as well as hurricane Ike with €168 million, €135 million and €159 million net impact on the Group, respectively. In contrast to natural catastrophe claims, the impact of other large claims was higher compared to the prior year. There was a favourable net development in prior years’ loss reserves was of 3.8%. Overall, the calendar year loss ratio increased assumed business from Munich Re. Revenues at Allianz Sach were stable as we remained committedby 1.9 percentage points to our policy of focusing on profitability rather than volume of business. In Switzerland, growth68.0%.
Acquisition and administrative expenses decreased by 2.4% to €10,356 million. This was driven primarily by Allianz Risk Transfer AG (or “ART”). The increase at Allianz Australia resulted from its broker and agency channels as well as its financial institutions and direct divisions due to intensified customer relationship management and positive exchange rate effects.a significant reduction in adminstrative expenses, partly driven by further efficiency improvements contributing savings of €120 million. As a result, our expense ratio improved by 0.4 percentage points to 27.1%.
Further increases, albeitInterest and similar income was stable at €4,477 million. Higher interest income on debt securities due to a lesser degree, were also experienced in South America, Spain and Italy with gross premiums written increasing by €117 million (19.5%), €110 million (6.2%) and €98 million (1.9%), respectively. The growth in South America, specifically from our operations in Brazil, stemmed from, among other factors, our motor business as a result of increased sales of new cars. The beneficial development in Spain at Allianz Compañía de Seguros y Reaseguros S.A. was driven by all lines of business, which includes motor, personal and industrial lines. In Italy, thean increase in gross premiums written at RAS Groupinvestment volume was mainly drivenoffset by the development of our non-motor business, anddecline in particular by the significant growth of personal lines and business with small and
medium enterprises. The motor business at RAS Group increased marginally,dividend income due to an equity reduction program. Our net outflows from equity investments amounted to €5.0 billion in line with the market growth in Italy, partially compensated by the development of the direct channel, Genialloyd.2008.
Within our specialty lines, growth within credit insuranceNet investment income decreased by €562 million. While interest and similar income was stable, we recorded shortfalls in other investment income, such as the negative market performance of special funds (fair value option, FVO) mainly at Euler Hermes of €95 million (5.8%) resultedAGF, amounting to a large extentapproximately €(0.2) billion. Additionally, expenses from our French, Italian and United States operations, as our customers in these regions increased their sales, producing increased receivables. Similarly, within travel insurance and assistance services, Mondial Assistance Group saw an increase of €91 million (10.1%), primarily driven by increased sales throughforeign exchange hedges contributed to the internet as well as stronger sales through airline partners.
These increases were offset by decreases primarily in the United Kingdom and France, where gross premiums written declined by €183 million (7.0%) and €178 million (3.4%), respectively.
In the United Kingdom at Allianz Cornhill Insurance plc., this decrease was primarily related to lower premiums in our motor and household lines, a development that was significantly driven by our cycle management efforts, through which we endeavor to balance volume and margin criteria. Our French subsidiary, AGF IART, as result of a more competitive environment, experienced lower gross premiums written especially through its brokerage business with large accounts.
Operating profit
Operating profit
in€ mn
decrease.
Year ended December 31, 20062007 compared to year ended December 31, 20052006
Operating profit showed a strong increase of 21.9% to €6,269 million. The top three contributing operations to our operating profit growth were
Allianz Global Corporate & Specialty at €658At €6,299 million the United States at €328 million and France at €193 million. In Italy and Switzerland we also experienced strong increases of €75 million each. The decrease within Germany by € 286 million stemmed from declines of a similar magnitude at both Allianz Sach and Allianz SE. Lower gross premiums written, previously described, were the primary factor for the decline in operating profit at Allianz Sach. At Allianz SE, operating profit was down mainly dueabove the targeted level. Compared to lower premium income as a result of decreased internal cessions from Allianz Group companies outside of Germany, as well as increased loss estimates for Hurricane Katrina in the United States in 2005.
Our significantly improved underwriting profitability was the main driver behind these strong developments, with excellent combined ratios across all markets. Driven by the improvement of our loss ratio, our combined ratio was down to 92.9%, 1.4 percentage points better than2006, a year earlier. Thereby, we surpassed our target of 95% and further solidified our competitive position within the property-casualty market.
In 2006, we recorded both lower severity and frequency of claims. Thethat was characterized by exceptionally highlow losses from natural catastrophes, operating profit growth was relatively flat at 0.5%.
Claims and insurance benefits incurred were up by 3.3% to €25,485 million and the calendar year loss ratio was up by 1.1 percentage points to 66.1%. Of the total claims €774 million (2006: €211 million), or 2.0 percentage points of the loss ratio, were attributable to severe losses from natural
catastrophes such as windstorm Kyrill, the floods in the prior yearUnited Kingdom and storms in several parts of the world. Also contributing to the increase were not repeated. In addition,higher large claims incurred at AGCS as well as our motor business experienced severity increases which were clearly lower than inflation. Accordingly, ournewly consolidated entities in Russia and Kazakhstan.
The accident year loss ratio improvedincreased by 2.82.0 percentage points to 67.6%69.6%.
Overall, claims and insurance benefits incurred (net), at €24,672 million in 2006, were down 2.6% from a year ago. As a result, our calendar year Furthermore, previous year’s loss ratio improved by 2.2 percentage points to 65.0%. The difference between the improvement of our loss ratio basedwas on accident year compared to that based on calendar year is due toa generally lower run-offs in 2006 compared to 2005. We continued to deliver positive net development on prior years’ loss reserves primarily in Italy, France, the United Kingdom and within our credit insurance business. Partially, we attribute this positive development to the measures we are undertaking in the context of our Sustainability Program, such as improved claims management processes in many companies.level.
Acquisition and administrative expenses (net), at €10,590 millionwere almost stable, up 0.2% to €10,616 million. These expenses also contain significant investments in 2006, were €374 milliongroup initiatives. Our administrative costs came down, showing that our tight cost control and efficiency measures have started to pay-off. Slightly higher than last year. This droveacquisition costs stem from an increase in profitable, higher-commission business and the acquisition of our Russian subsidiaries. In total, our expense ratio upof 27.5% was down 0.4% on the previous year.
Our combined ratio increased by 80 basis0.7 percentage points to 27.9%93.6%.
However, in the amount of €109 million, these developments resulted from the inclusion of additional net expenses in acquisition and administrative expenses, previously not included in this item. Further important factors were strategic project-related expenses associated with our initiatives for future profit growth, such as our Sustainability Program, as well as increased accruals for retirements in Germany and additional pension accruals. Increased accruals for retirements arose, among other factors, from the facilitation of the use of early retirement schemes due to pension law changes in Germany, of which many employees at Allianz Sach took advantage.
Interest and similar income rosewas up by €3499.2% to €4,473 million, to €4,096 million, reflectingas the higher asset base resulted in a rise in dividends received improved yields from debt securities due to slightly higher coupon payments, and our growing asset base. Realized gains/losses (net) from investments, shared with policyholders, declined by €227 million to €46 million. In 2005, realizations from available-for-sale equity investments in connection with accident insurance products with premium refunds in Germany were exceptionally high due to a strategy change at the fund managing these assets. This had an impact of a similar, but opposite, magnitude on changes in reserves for insurance and investment contracts (net), which amounted to a net expense of €425 million in 2006 compared to a net expense of €707 million a year earlier.
Year ended December 31, 2005 compared to year ended December 31, 2004
Driven by further improvement of our combined ratio to 94.3%, our operating profit grew by 6.6% to €5,142 million, a growth rate stronger than that of our gross premiums written. The strongest improvements occurred within Germany (€241 million), at Fireman’s Fund in the United States (€146 million), at Allianz Australia (€101 million), and at our Credit Insurance operations through Euler Hermes (€70 million).
In a year that saw a large number of global catastrophes and one of the worst hurricane seasons on record, the insurance and reinsurance markets as a whole incurred multi-billion Euros in damages. Our units most affected by the natural catastrophes included Allianz Global Corporate & Specialty and Allianz SE.
Total estimated claims from natural catastrophes, net of reinsurance, were €1.1 billion in 2005, increasing our accident year loss ratio to 70.4% (2004: 68.8%). These natural catastrophe losses were mitigated by positive net development on prior years’ loss reserves largely in the United Kingdom, Italy, Slovakia and within our specialty lines. Consequently, our calendar year loss ratio decreased to 67.2% (2004: 67.6%). In the United States, the planned external review of the asbestos & environmental (or “A&E”) liability reserves at Fireman’s Fund had no net impact at the Allianz Group level as a result of already sufficient reserves, except a USD 65 million loss caused by the increase in provisions for uncollectible reinsurance recoverables and unallocated loss adjustment expenses.
Our expense ratio declined by 20 basis points to 27.1% (2004: 27.3%), due to relatively stable acquisition and administrative expenses (net), and a small increase in premiums earned (net).
Realized gains/losses (net) from investments, shared with policyholders, was up from €58 million to €273 million, primarily resulting from higher realizations from available-for-sale equity investments in connection with German accident insurance products with premium refunds. Interest and similar income increased to €3,747 million, €132 million higher than the previous year, mainly as a result of higher income from debt securities. Other income declined by €235 million compared to the 2004 level of €288 million due to Allianz Sach’s sale of real estate used for own use in 2004. Higher investment expenses, up €129 million, resulted principally from increased foreign currency losses. Fee and commission income as well as fee and commission expenses both grew by a similar magnitude (€207 million and €245 million, respectively), stemming from the reclassification of certain income and expense items related to our credit insurance business from other income/expenses to fee and commission income/expenses.interest income.
Non-operating itemsresult
Year ended December 31, 20062008 compared to year ended December 31, 20052007
The non-operating result decreased by €675 million to €287 million, primarily as a result of higher impairments of investments. These impairments more than offset higher net realized gains.
Net realized gains from investments increased by €916 million to €2,349 million mainly due to forward sales of participations in RWE, Linde and Siemens which were already locked-in in 2007.
Non-operating impairments on investments increased by €1,736 million to €2,012 million, reflecting the overall weakness in the financial markets.
Year ended December 31, 2007 compared to year ended December 31, 2006
In total, non-operating items in aggregate, resulted indecreased by 25.5% to €962 million mainly coming from lower net realized gains, a gainnegative trading result and higher impairments of €1,291 million, up €267investments. These effects could not be balanced by lower restructuring charges.
Net realized gains from investments decreased significantly by 17.9% to €1,433 million from a year ago. This improvement is principally theearlier largely as a result of increased realized gains which were only partially
offset by higher impacts from impairments of investments and restructuring charges.
Realized gains/losses (net) from investments, not shared with policyholders, amounted to €1,746 million, €598 million higher than last year. The transactions contributing most to this increase were the sale of Allianz Sach’sour participation in Schering AG and the disposal of oura real estate portfolio in Austria at that time. Conversely, no major single sales transactions were recorded in June 2006, as well as the sale of Lloyd Adriatico’s shareholding in Banca Antoniana Popolare Veneta S.p.A. in April 2006, which together accounted for €726 million of the increase.2007.
Non-operating net impairments of investments (net) rose by €98increased to €276 million, to €175 million, to a large extent brought about byreflecting impairments of available-for-sale equity securities in the second quarter of 2006 at Allianz Sach following at that time the downward trend in the equity capital markets.securities.
Restructuring charges were up €294down by two thirds to €122 million to €362 million, stemming primarilyas the prior year’s figure reflected the impact from the reorganization of our German insurance operations.(1)operations that was not repeated in 2007.
Year ended December 31, 2005 compared to year ended December 31, 2004
Non-operating items, in the aggregate, generated a net positive impact of €1,024 million compared to €475 million in 2004.
Realized gains/losses (net) from investments, not shared with policyholders, were up 15.1% to €1,148 million. This increase stemmed primarily from higher realizations from available-for-sale equity investments.
Amortization of intangible assets was reduced to €11 million from €403 million in 2004 due to the elimination of goodwill amortization brought about by a change in accounting under IFRS.
Restructuring charges of €68 million were incurred during 2005, of which €52 million were attributable to the AGF Group in connection with an early retirement program.
|
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Net income
Year ended December 31, 20062008 compared to year ended December 31, 20052007
Net income increased 34.3% to €4,746 million, driven both by our significantly improvedThe lower operating profitabilityprofit and the higher gain fromdecrease in non-operating items.items were the main drivers of the 16.2% reduction in net income to €4,335 million.
Income tax expenses rose by 15.0% and amounteddecreased to €2,075€1,489 million. OurThe effective tax rate declinedincreased from 29.3%22.8% to 27.4%, largely25.1%. The low tax rate in 2007 was mainly driven by tax benefits due to the capitalization of corporate tax creditsreform in Germany.Germany and tax rate changes in Italy and France.
Minority interests in earnings decreased by 10.6% to €739of €112 million primarily asshowed a result ofdecline on the prior year following the minority buyoutbuy-out at RAS in Italy.AGF.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
Net income roseincreased by 23.3%9.0% to €3,535 million, driven by our robust operating profitability and€5,174 million. Our effective tax rate further declined from the improvement in non-operating results as discussed above.
27.4% to 22.8%. Income tax expenses increased by 3.0%were down significantly to €1,804 million, which was a smaller increase than for income before income taxes and€1,656 million. This development benefited particularly from the German tax reform. Additionally lower minority interests in earnings which was up 16.3%.contributed €308 million to income growth. This is reflectedresulted primarily from the minority buy-out at RAS in a decline in our effective tax rate to 29.3% (2004: 33.0%), largely driven by the discontinuation of non-tax-deductible goodwill amortization.
Minority interests in earnings increased by 21.4% to €827 million, primarily as a result of higher income after income taxes in France, Italy and at Euler Hermes.AGF in France.
The following table sets forth our Property-Casualty insurance segment’s income statement, loss ratio, expense ratio and combined ratio for the years ended December 31, 2006, 20052008, 2007 and 2004.2006.
2006 | 2005 | 2004 | |||||||
€ mn | € mn | € mn | |||||||
Gross premiums written(1) | 43,674 | 43,699 | 42,942 | ||||||
Ceded premiums written | (5,415 | ) | (5,529 | ) | (5,299 | ) | |||
Change in unearned premiums | (309 | ) | (485 | ) | (258 | ) | |||
Premiums earned (net) | 37,950 | 37,685 | 37,385 | ||||||
Interest and similar income | 4,096 | 3,747 | 3,615 | ||||||
Income from financial assets and liabilities designated at fair value through income | 106 | 132 | 5 | ||||||
Realized gains/losses (net) from investments, shared with policyholders(3) | 46 | 273 | 58 | ||||||
Fee and commission income | 1,014 | 989 | 782 | ||||||
Other income | 69 | 53 | 288 | ||||||
Operating revenues | 43,281 | 42,879 | 42,133 | ||||||
Claims and insurance benefits incurred (net) | (24,672 | ) | (25,331 | ) | (25,271 | ) | |||
Changes in reserves for insurance and investment contracts (net) | (425 | ) | (707 | ) | (611 | ) | |||
Interest expense | (273 | ) | (339 | ) | (417 | ) | |||
Loan loss provisions | (2 | ) | (1 | ) | (7 | ) | |||
Impairments of investments (net), shared with policyholders(4) | (25 | ) | (18 | ) | (37 | ) | |||
Investment expenses | (300 | ) | (333 | ) | (204 | ) | |||
Acquisition and administrative expenses (net) | (10,590 | ) | (10,216 | ) | (10,192 | ) | |||
Fee and commission expenses | (721 | ) | (775 | ) | (530 | ) | |||
Other expenses | (4 | ) | (17 | ) | (39 | ) | |||
Operating expenses | (37,012 | ) | (37,737 | ) | (37,308 | ) | |||
Operating profit | 6,269 | 5,142 | 4,825 | ||||||
Income from financial assets and liabilities held for trading (net) (2) | 83 | 32 | 20 | ||||||
Realized gains/losses (net) from investments, not shared with policyholders(3) | 1,746 | 1,148 | 997 | ||||||
Impairments of investments (net), not shared with policyholders(4) | (175 | ) | (77 | ) | (107 | ) | |||
Amortization of intangible assets | (1 | ) | (11 | ) | (403 | ) | |||
Restructuring charges | (362 | ) | (68 | ) | (32 | ) | |||
Non-operating items | 1,291 | 1,024 | 475 | ||||||
Income before income taxes and minority interests in earnings | 7,560 | 6,166 | 5,300 | ||||||
Income taxes | (2,075 | ) | (1,804 | ) | (1,751 | ) | |||
Minority interests in earnings | (739 | ) | (827 | ) | (681 | ) | |||
Net income | 4,746 | 3,535 | 2,868 | ||||||
Loss ratio(5) in % | 65.0 | 67.2 | 67.6 | ||||||
Expense ratio(6)in % | 27.9 | 27.1 | 27.3 | ||||||
Combined ratio(7) in % | 92.9 | 94.3 | 94.9 |
Property-Casualty segment information(1)
2008 | 2007 | 2006 | |||||||
€ mn | € mn | € mn | |||||||
Gross premiums written(2) | 43,387 | 44,289 | 43,674 | ||||||
Ceded premiums written | (4,972 | ) | (5,320 | ) | (5,415 | ) | |||
Change in unearned premiums | (202 | ) | (416 | ) | (309 | ) | |||
Premiums earned (net) | 38,213 | 38,553 | 37,950 | ||||||
Interest and similar income | 4,477 | 4,473 | 4,096 | ||||||
Operating income from financial assets and liabilities carried at fair value through income (net)(3) | (158 | ) | 144 | 106 | |||||
Operating realized gains/losses (net)(4) | 37 | 46 | 46 | ||||||
Fee and commission income | 1,247 | 1,178 | 1,014 | ||||||
Other income | 271 | 122 | 69 | ||||||
Income from fully consolidated private equity investments | 3 | — | — | ||||||
Operating revenues | 44,090 | 44,516 | 43,281 | ||||||
Claims and insurance benefits incurred (net) | (25,986 | ) | (25,485 | ) | (24,672 | ) | |||
Changes in reserves for insurance and investment contracts (net) | 3 | (339 | ) | (425 | ) | ||||
Interest expenses | (295 | ) | (402 | ) | (273 | ) | |||
Loan loss provisions | (17 | ) | (6 | ) | (2 | ) | |||
Operating impairments of investments (net)(5) | (437 | ) | (67 | ) | (25 | ) | |||
Investment expenses | (207 | ) | (322 | ) | (300 | ) | |||
Acquisition and administrative expenses (net) | (10,356 | ) | (10,616 | ) | (10,590 | ) | |||
Fee and commission expenses | (1,141 | ) | (967 | ) | (721 | ) | |||
Other expenses | (2 | ) | (13 | ) | (4 | ) | |||
Expenses from fully consolidated private equity investments | (3 | ) | — | — | |||||
Operating expenses | (38,441 | ) | (38,217 | ) | (37,012 | ) | |||
Operating profit | 5,649 | 6,299 | 6,269 | ||||||
Non-operating income from financial assets and liabilities carried at fair value through income (net)(3) | 42 | (59 | ) | 83 | |||||
Non-operating realized gains/losses (net)(4) | 2,349 | 1,433 | 1,746 | ||||||
Non-operating impairments of investments (net)(5) | (2,012 | ) | (276 | ) | (175 | ) | |||
Amortization of intangible assets | (17 | ) | (14 | ) | (1 | ) | |||
Restructuring charges | (75 | ) | (122 | ) | (362 | ) | |||
Non-operating items | 287 | 962 | 1,291 | ||||||
Income before income taxes and minority interests in earnings | 5,936 | 7,261 | 7,560 | ||||||
Income taxes | (1,489 | ) | (1,656 | ) | (2,075 | ) | |||
Minority interests in earnings | (112 | ) | (431 | ) | (739 | ) | |||
Net income | 4,335 | 5,174 | 4,746 | ||||||
Loss ratio(6) in % | 68.0 | 66.1 | 65.0 | ||||||
Expense ratio(7) in % | 27.1 | 27.5 | 27.9 | ||||||
Combined ratio(8) in % | 95.1 | 93.6 | 92.9 |
(1) | Since 2008, health business in Belgium and France is shown within Life/Health segment. Prior year balances have not been adjusted. |
(2) | For the Property-Casualty segment, total revenues are measured based upon gross premiums written. |
| The total of these items equals income from financial assets and liabilities carried at fair value through income (net) in the segment income statement included in Note |
| The total of these items equals realized gains/losses (net) in the segment income statement included in Note |
| The total of these items equals impairments of investments (net) in the segment income statement included in Note |
| Represents claims and insurance benefits incurred (net) divided by premiums earned (net). |
| Represents acquisition and administrative expenses (net) divided by premiums earned (net). |
| Represents the total of acquisition and administrative expenses (net) and claims and insurance benefits incurred (net) divided by premiums earned (net). |
Property-Casualty Operations by Geographic RegionBusiness Division
The following tables settable sets forth our property-casualtyProperty-Casualty gross premiums written, premiums earned (net), combined ratio, loss ratio, expense ratio and operating profit by geographic regionbusiness division for the years ended December 31, 2006, 20052008, 2007 and 2004.2006. Consistent with our general practice, these figures are presented before consolidation adjustments, representing the elimination of transactions between Allianz Group companies in different geographic regions and different segments.
Gross premiums written € mn Premiums earned (net) € mn Combined ratio % Germany(1) France Italy United Kingdom Switzerland Spain Netherlands Austria Ireland Belgium Portugal Luxembourg(2) Greece Western and Southern Europe Hungary Slovakia Czech Republic Poland Romania Bulgaria Croatia Russia New Europe Other Europe United States(1) Canada(3) Mexico NAFTA Australia Other Asia-Pacific South America Other Specialty Lines Credit Insurance Allianz Global Corporate & Specialty(1) Travel Insurance and Assistance Services Subtotal Consolidation adjustments(4) Total 2006 2005 2004 2006 2005 2004 2006 2005 2004 11,427 11,647 11,373 9,844 10,048 9,702 92.9 89.4 93.0 5,110 5,104 5,282 4,429 4,375 4,484 99.2 102.0 100.5 5,396 5,369 5,271 4,935 4,964 4,840 91.8 93.6 94.4 2,396 2,449 2,632 1,874 1,913 2,012 95.7 96.2 95.7 1,805 2,012 1,816 1,706 1,708 1,659 92.8 97.8 93.4 2,013 1,873 1,763 1,675 1,551 1,454 90.3 91.4 91.1 926 930 981 813 823 835 88.7 91.3 99.2 922 935 926 782 773 710 98.4 98.3 100.6 704 733 792 622 653 734 74.4 76.9 77.8 356 352 351 298 293 282 104.5 104.1 108.2 287 304 315 258 275 271 91.2 92.8 98.8 — — 108 — — 106 — — 79.7 74 71 73 46 46 47 92.4 82.0 119.2 3,269 3,325 3,546 2,819 2,863 2,985 90.2 91.2 94.7 576 599 533 499 523 472 97.0 101.6 103.2 289 301 326 251 251 266 86.4 74.5 100.3 253 242 234 179 160 140 82.6 85.7 83.7 284 235 196 200 160 104 92.8 93.3 94.8 292 220 169 132 125 95 92.0 94.8 94.2 96 92 78 70 37 34 80.2 66.6 51.6 71 60 48 53 45 36 95.6 97.7 98.5 30 25 24 4 12 4 88.5 22.9 42.6 1,891 1,774 1,608 1,388 1,313 1,151 91.2 90.9 96.8 5,160 5,099 5,154 4,207 4,176 4,136 90.5 91.1 95.3 4,510 4,395 4,097 3,523 3,478 3,392 88.6 96.0 97.7 — — 464 — — 354 — — 91.9 192 175 260 100 88 155 102.5 104.8 32.1 4,702 4,570 4,821 3,623 3,566 3,901 88.9 96.2 94.5 1,452 1,469 1,324 1,195 1,159 1,081 96.2 95.2 101.0 310 280 348 141 121 162 93.8 94.5 93.7 1,762 1,749 1,672 1,336 1,280 1,243 95.9 95.2 100.0 869 716 599 623 510 378 101.2 100.8 102.7 68 58 63 32 30 33 — (5) — (5) — (5) 1,672 1,725 1,630 1,113 997 901 77.6 67.0 76.0 2,802 2,944 2,885 1,545 1,633 1,779 92.2 122.4 99.7 1,044 991 900 1,008 934 863 101.8 93.3 95.5 46,226 46,306 45,861 37,950 37,685 37,385 — — — (2,552 ) (2,607 ) (2,919 ) — — — — — — 43,674 43,699 42,942 37,950 37,685 37,385 92.9 94.3 94.9
Gross premiums written | Premiums earned (net) | Operating profit | |||||||||||||||||||||||||||||||
2008 | 2007 | 2006 | 2008 internal(1) | 2007 internal(1) | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | |||||||||||||||||||||||
Germany(2) | 9,358 | 9,446 | 9,558 | 9,358 | 9,446 | 7,367 | 7,223 | 7,258 | 1,365 | 1,411 | 1,233 | ||||||||||||||||||||||
Switzerland(2) | 1,241 | 1,804 | 1,805 | 1,210 | 1,188 | 1,190 | 1,595 | 1,706 | 145 | 218 | 228 | ||||||||||||||||||||||
Austria | 900 | 915 | 922 | 900 | 896 | 734 | 748 | 782 | 79 | 86 | 82 | ||||||||||||||||||||||
German Speaking Countries | 11,499 | 12,165 | 12,285 | 11,468 | 11,530 | 9,291 | 9,566 | 9,746 | 1,589 | 1,715 | 1,543 | ||||||||||||||||||||||
Italy | 4,741 | 5,229 | 5,396 | 4,741 | 5,212 | 4,647 | 4,902 | 4,935 | 690 | 719 | 816 | ||||||||||||||||||||||
Spain | 2,156 | 2,136 | 2,013 | 2,156 | 2,136 | 1,863 | 1,820 | 1,675 | 286 | 253 | 252 | ||||||||||||||||||||||
South America | 1,049 | 918 | 869 | 1,061 | 880 | 764 | 692 | 623 | 82 | 55 | 47 | ||||||||||||||||||||||
Portugal | 298 | 283 | 287 | 298 | 283 | 247 | 246 | 258 | 36 | 38 | 36 | ||||||||||||||||||||||
Turkey(3) | 180 | — | — | — | — | 128 | — | — | 9 | — | — | ||||||||||||||||||||||
Greece | 83 | 79 | 74 | 83 | 79 | 55 | 50 | 46 | 10 | 9 | 10 | ||||||||||||||||||||||
Europe I incl. South America | 8,507 | 8,645 | 8,639 | 8,339 | 8,590 | 7,704 | 7,710 | 7,537 | 1,113 | 1,074 | 1,161 | ||||||||||||||||||||||
France(4) | 3,930 | 5,086 | 5,110 | 3,930 | 3,882 | 3,281 | 4,422 | 4,429 | 280 | 486 | 420 | ||||||||||||||||||||||
Credit Insurance | 1,804 | 1,762 | 1,672 | 1,804 | 1,762 | 1,360 | 1,268 | 1,113 | 144 | 496 | 442 | ||||||||||||||||||||||
Travel Insurance and Assistance Services | 1,228 | 1,139 | 1,044 | 1,228 | 1,139 | 1,196 | 1,093 | 1,008 | 106 | 97 | 90 | ||||||||||||||||||||||
Netherlands | 913 | 927 | 926 | 913 | 927 | 800 | 809 | 813 | 72 | 108 | 150 | ||||||||||||||||||||||
Belgium(4) | 335 | 374 | 356 | 335 | 325 | 261 | 301 | 298 | 40 | 40 | 30 | ||||||||||||||||||||||
Africa | 62 | 55 | 47 | 62 | 55 | 37 | 32 | 27 | 9 | 8 | 7 | ||||||||||||||||||||||
Europe II incl. Africa | 8,272 | 9,343 | 9,155 | 8,272 | 8,090 | 6,935 | 7,925 | 7,688 | 677 | (5) | 1,257 | (5) | 1,151 | (5) | |||||||||||||||||||
United States | 4,420 | 4,306 | 4,510 | 4,786 | 4,306 | 3,297 | 3,341 | 3,523 | 273 | 651 | 810 | ||||||||||||||||||||||
Mexico(6) | 205 | 201 | 192 | 222 | 201 | 83 | 86 | 100 | �� | 20 | 12 | 15 | |||||||||||||||||||||
NAFTA | 4,625 | 4,507 | 4,702 | 5,008 | 4,507 | 3,380 | 3,427 | 3,623 | 293 | 663 | 825 | ||||||||||||||||||||||
Reinsurance PC | 3,470 | 3,191 | 4,035 | 3,493 | 3,548 | 2,824 | 2,022 | 2,585 | 500 | 217 | 245 | ||||||||||||||||||||||
Allianz Global Corporate & Specialty | 2,859 | 2,811 | 2,802 | 2,859 | 2,896 | 1,813 | 1,800 | 1,545 | 431 | 414 | 404 | ||||||||||||||||||||||
AZ Insurance plc | 1,925 | 2,236 | 2,396 | 2,237 | 2,236 | 1,769 | 1,989 | 1,874 | 243 | 206 | 288 | ||||||||||||||||||||||
Australia | 1,484 | 1,543 | 1,452 | 1,575 | 1,543 | 1,171 | 1,245 | 1,195 | 265 | 296 | 225 | ||||||||||||||||||||||
Ireland | 672 | 691 | 704 | 672 | 691 | 597 | 614 | 622 | 114 | 180 | 222 | ||||||||||||||||||||||
ART | 350 | — | — | 271 | 208 | 168 | — | — | 55 | — | — | ||||||||||||||||||||||
Anglo Broker Markets/Global Lines | 15,385 | 14,979 | 16,091 | 16,115 | 15,629 | 11,722 | 11,097 | 11,444 | 1,901 | 1,976 | 2,209 | ||||||||||||||||||||||
Russia(7) | 857 | 678 | 30 | 688 | 678 | 705 | 574 | 4 | 41 | 7 | 1 | ||||||||||||||||||||||
Hungary | 546 | 580 | 575 | 547 | 580 | 471 | 502 | 499 | 80 | 73 | 68 | ||||||||||||||||||||||
Poland | 460 | 367 | 283 | 426 | 367 | 337 | 246 | 200 | 38 | 24 | 20 | ||||||||||||||||||||||
Romania | 346 | 341 | 291 | 383 | 341 | 135 | 155 | 132 | 10 | 11 | 11 | ||||||||||||||||||||||
Slovakia | 348 | 319 | 288 | 323 | 319 | 296 | 273 | 251 | 90 | 112 | 52 | ||||||||||||||||||||||
Czech Republic | 278 | 249 | 253 | 251 | 249 | 208 | 183 | 179 | 44 | 41 | 29 | ||||||||||||||||||||||
Bulgaria | 110 | 103 | 95 | 110 | 103 | 81 | 70 | 70 | 19 | 16 | 16 | ||||||||||||||||||||||
Croatia | 95 | 86 | 70 | 94 | 86 | 78 | 63 | 53 | 6 | 2 | 4 | ||||||||||||||||||||||
New Europe(8) | 3,040 | 2,723 | 1,885 | 2,822 | 2,723 | 2,312 | 2,067 | 1,388 | 300 | 256 | 184 | ||||||||||||||||||||||
Asia-Pacific (excl. Australia) | 425 | 349 | 310 | 413 | 349 | 226 | 170 | 141 | 23 | 16 | 19 | ||||||||||||||||||||||
Middle East | 54 | 40 | 20 | 57 | 40 | 25 | 21 | 8 | 3 | 2 | 2 | ||||||||||||||||||||||
Growth Markets | 3,519 | 3,112 | 2,215 | 3,292 | 3,112 | 2,563 | 2,258 | 1,537 | 326 | 274 | 205 | ||||||||||||||||||||||
Consolidation(9) | (3,795 | ) | (3,955 | ) | (4,712 | ) | (3,758 | ) | (3,953 | ) | (2 | ) | (3 | ) | (2 | ) | 43 | 3 | — | ||||||||||||||
Total | 43,387 | 44,289 | 43,674 | 43,728 | 42,998 | 38,213 | 38,553 | 37,950 | 5,649 | 6,299 | 6,269 | ||||||||||||||||||||||
(1) |
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(2) |
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(3) |
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(4) | Effective 1Q 2008, health business in France and Belgium is shown within Life/Health segment. Prior year balances have not been adjusted. |
(5) | Contains €16 mn, €21 mn and €20 mn for 2008, 2007 and 2006, respectively, from a former operating entity located in Luxembourg and also €10 mn, €1 mn and €(8) mn for 2008, 2007 and 2006, respectively, from AGF UK. |
To be continued on page 81.
Germany(2) Switzerland(2) Austria German Speaking Countries Italy Spain South America Portugal Turkey(3) Greece Europe I incl. South America France(4) Credit Insurance Travel Insurance and Assistance Services Netherlands Belgium(4) Africa Europe II incl. Africa United States Mexico(6) NAFTA Reinsurance PC Allianz Global Corporate & Specialty AZ Insurance plc Australia Ireland ART Anglo Broker Markets/Global Lines Russia(7) Hungary Poland Romania Slovakia Czech Republic Bulgaria Croatia New Europe(8) Asia-Pacific (excl. Australia) Middle East Growth Markets Consolidation(9) Total Combined ratio Loss ratio Expense ratio 2008 2007 2006 2008 2007 2006 2008 2007 2006 % % % % % % % % % 95.0 91.0 92.0 69.5 64.9 64.9 25.5 26.1 27.1 92.8 95.1 92.8 70.2 69.5 69.3 22.6 25.6 23.5 93.7 95.8 98.4 70.1 73.1 73.1 23.6 22.7 25.3 94.6 92.0 92.7 69.6 66.3 66.4 25.0 25.7 26.3 96.7 94.8 91.8 73.1 71.2 68.8 23.6 23.6 23.0 90.4 91.4 90.3 69.9 71.6 71.0 20.5 19.8 19.3 98.5 99.0 101.2 65.1 62.9 64.8 33.4 36.1 36.4 92.5 91.6 91.2 65.0 65.9 64.4 27.5 25.7 26.8 109.5 — — 85.6 — — 23.9 — — 90.4 88.7 92.4 59.9 58.2 57.7 30.5 30.5 34.7 95.4 94.2 92.2 71.4 70.3 68.7 24.0 23.9 23.5 97.2 97.3 99.2 69.3 70.9 71.0 27.9 26.4 28.2 104.3 76.5 77.6 77.6 47.9 49.7 26.7 28.6 27.9 93.3 93.7 101.8 57.6 58.1 58.7 35.7 35.6 43.1 97.7 94.1 88.7 67.4 62.0 57.1 30.3 32.1 31.6 96.7 102.3 104.5 60.2 65.7 66.9 36.5 36.6 37.6 91.7 92.7 89.1 48.8 53.2 39.8 42.9 39.5 49.3 98.0 93.5 95.8 68.3 64.5 64.8 29.7 29.0 31.0 101.2 91.1 88.6 74.4 61.3 57.9 26.8 29.8 30.7 94.4 95.0 102.5 70.0 71.6 78.8 24.4 23.4 23.7 101.0 91.2 88.9 74.3 61.6 58.4 26.7 29.6 30.5 87.9 94.1 95.6 62.0 64.6 65.8 25.9 29.5 29.8 89.5 96.0 92.2 62.3 67.9 62.5 27.2 28.1 29.7 94.7 98.7 94.3 60.4 65.4 63.0 34.3 33.3 31.3 97.1 95.7 96.2 72.7 70.8 70.3 24.4 24.9 25.9 91.9 95.1 74.4 67.0 69.6 50.2 24.9 25.5 24.2 81.3 — — 31.3 — — 50.0 — — 94.0 94.6 91.7 66.3 65.3 62.1 27.7 29.3 29.6 101.1 104.2 88.5 59.7 64.7 34.7 41.4 39.5 53.8 93.3 96.7 97.0 61.2 67.1 64.8 32.1 29.6 32.2 93.3 94.4 92.8 60.7 58.6 57.4 32.6 35.8 35.4 102.0 101.2 92.0 73.1 79.7 72.4 28.9 21.5 19.6 77.5 66.8 86.4 46.1 38.2 55.4 31.4 28.6 31.0 80.8 79.5 82.6 60.5 56.7 61.4 20.3 22.8 21.2 77.8 85.5 80.2 48.0 43.6 41.7 29.8 41.9 38.5 97.7 100.1 95.6 64.8 65.1 63.8 32.9 35.0 31.8 92.7 94.3 92.0 59.0 60.8 61.1 33.7 33.5 30.9 96.9 98.6 93.8 63.0 60.2 55.7 33.9 38.4 38.1 127.2 105.3 101.9 66.0 60.2 33.0 61.2 45.1 68.9 93.4 94.7 92.1 59.4 60.7 60.4 34.0 34.0 31.7 — — — — — — — — — 95.1 93.6 92.9 68.0 66.1 65.0 27.1 27.5 27.9
Continuing footnotes from page 80.
(6) | Effective 1Q 2007, life business in Mexico is shown within the Life/Health segment. Prior year balances have not been adjusted. |
(7) | Effective February 21, 2007, Russian People’s Insurance Society “Rosno” was consolidated following the acquisition of approximately 49.2% of the shares in ROSNO by the Allianz Group, increasing our holding to approximately 97%. Effective May 21, 2007, we consolidated Progress Garant for the first time. |
(8) | Contains income and expense items from a management holding. |
(9) | Represents elimination of transactions between Allianz Group companies in different geographic regions. |
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Loss ratio % Expense ratio % Operating profit € mn Germany(1) France Italy United Kingdom Switzerland Spain Netherlands Austria Ireland Belgium Portugal Luxembourg(2) Greece Western and Southern Europe Hungary Slovakia Czech Republic Poland Romania Bulgaria Croatia Russia New Europe Other Europe United States(1) Canada(3) Mexico NAFTA Australia Other Asia-Pacific South America Other Specialty Lines Credit Insurance Allianz Global Corporate & Travel Insurance and Assistance Subtotal Consolidation adjustments(4) Total 2006 2005 2004 2006 2005 2004 2006 2005 2004 65.1 63.0 66.6 27.8 26.4 26.4 1,479 1,765 1,524 71.0 74.0 73.5 28.2 28.0 27.0 420 227 245 68.8 69.3 69.4 23.0 24.3 25.0 816 741 686 64.1 65.4 65.1 31.6 30.8 30.6 281 268 276 69.3 74.9 72.9 23.5 22.9 20.5 228 153 148 71.0 71.4 72.2 19.3 20.0 18.9 252 217 197 57.1 60.5 68.4 31.6 30.8 30.8 150 135 81 73.1 72.4 72.2 25.3 25.9 28.4 82 92 55 50.2 53.8 55.9 24.2 23.1 21.9 222 204 217 66.9 66.1 68.9 37.6 38.0 39.3 30 24 23 64.4 67.0 70.2 26.8 25.8 28.6 36 32 16 — — 76.6 — — 3.1 20 (4 ) 51 57.7 49.7 87.9 34.7 32.3 31.3 10 11 (9 ) 61.7 63.2 67.0 28.5 28.0 27.7 550 494 434 64.8 70.7 72.1 32.2 30.9 31.1 68 63 54 55.4 43.2 72.6 31.0 31.3 27.7 52 82 17 61.4 63.8 63.3 21.2 21.9 20.4 29 27 27 57.4 59.7 61.2 35.4 33.6 33.6 20 12 13 72.4 75.8 71.1 19.6 19.0 23.1 11 11 13 41.7 27.0 12.5 38.5 39.6 39.1 16 14 18 63.8 63.0 58.7 31.8 34.7 39.8 4 2 2 34.7 5.8 14.0 53.8 17.1 28.6 1 2 2 61.0 61.6 67.7 30.2 29.3 29.1 201 213 146 61.5 62.7 67.2 29.0 28.4 28.1 751 707 580 57.9 66.8 66.7 30.7 29.2 31.0 810 482 336 — — 62.6 — — 29.3 — — 57 78.8 81.2 19.3 23.7 23.6 12.8 15 13 13 58.4 67.1 64.4 30.5 29.1 30.1 825 495 406 70.3 69.1 75.1 25.9 26.1 25.9 225 235 134 55.7 57.2 57.1 38.1 37.3 36.6 19 17 20 68.7 68.0 72.7 27.2 27.2 27.3 244 252 154 64.8 64.5 64.7 36.4 36.3 38.0 47 61 8 — (5) — (5) — (5) — (5) — (5) — (5) (7 ) 7 10 49.7 41.3 40.8 27.9 25.7 35.2 442 420 350
Specialty(1) 62.5 91.1 70.5 29.7 31.3 29.2 404 (254 ) 178
Services 58.7 60.3 59.7 43.1 33.0 35.8 90 77 59 — — — — — — 6,272 5,136 4,821 — — — — — — (3 ) 6 4 65.0 67.2 67.6 27.9 27.1 27.3 6,269 5,142 4,825
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Life/Health Insurance Operations
Year ended December 31, 20062008 compared to year ended December 31, 20052007
Strong operating profit growth sustained, while revenues were nearly flat.
Statutory premium growth held back by Italy andDifficult market environment heavily impacted sales of investment-oriented products especially through the United States.bancassurance channel.
Dynamic operating profit growth continued.Traditional business held firm.
Higher investment, expense and technical margins drive operating profit.
Driven by the higher operatingOperating profit net income rose by 21.0% to €1.6 billion.of €1,206 million despite financial markets turmoil.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
Strong profitable growth.statutory premium development showed double-digit growth rates in many countries.
Overall, 6.7% increaseStrong operating profit growth continued resulting in statutory premiums, driven by our key European markets of Germany, France and Italy.almost €3 billion.
Operating profit grew even stronger by 17.1%, reaching €2.1 billion, and exceeding our target, reflecting stronger product margins andasset base increased realized gains.to €350.0 billion.
Net income reached €1.4 billion, a 65.2% increase over 2004, as a result of strong improvements in both operating profit and income from non-operating items.
Earnings Summary
The global financial and economic crisis accelerated in the fourth quarter of the year leading to further equity market downturns, unprecedented volatility, widening credit spreads and declining interest rates. As a result, we recorded significantly higher impairments, losses in the fair value option stemming from credit spread widening, trading losses from derivatives, and lower results from harvesting. The impact on operating investment income was a decline of €6,403 million.
As customers became increasingly cautious about bearing investment risk, we recorded significantly lower sales in investment-oriented products. In consequence, internal revenues were down by €4,204 million. Overall, operating profit decreased by €1,789 million, and net income was €1,664 million lower.
The turbulences in the fourth quarter seriously affected most of Life/Health businesses, of which the biggest impact was recorded in the United States.
Statutory premiums(1)
Statutory premiums – Internal growth rates(2)
in %
Year ended December 31, 2008 compared to year ended December 31, 2007
At €46,297 million, statutory premiums were down 8.3 % on an internal basis mainly driven by the significant slowdown in sales of unit-linked and other investment-oriented products. In addition, bancassurance partners promoted deposit products rather than unit-linked contracts driven by their own liquidity concerns. On a nominal basis, statutory premiums were down 7.6% to €45,615 million, notwithstanding €1,199 million of premiums in 2008 relating to the AGF health business transferred from the Property-Casualty segment (comparatives not restated).
(1) | A reconciliation of premiums written to statutory premiums for the years ended December 31, 2008, 2007 and 2006 can be found within the total revenues table on page 60. |
(2) | Before elimination of transactions between Allianz Group companies in different geographic regions and different segments. |
Premium growth deteriorated significantly in Italy, Asia-Pacific and the United States. In contrast, sales remained solid in countries where traditional life business is strong such as France, Switzerland and Spain.
In Italy, revenues dropped by 39.0% or €3,813 million. A continuing weak bancassurance market and lower sales of unit-linked products were the main reasons for this downturn. In addition, sales were impacted as one of our local bancassurance partners withdrew from cooperation following a change in ownership.
The financial market conditions left its mark on our operations in the United States, where we recorded lower sales of both fixed index and variable annuity products, which resulted in a statutory premium decline of 8.5% or €590 million.
A premium decline was also recorded in Asia-Pacific amounting to 15.3% or €711 million. In Taiwan, the market situation and new regulations with regards to unit-linked products suppressed growth. In South Korea, sales of equity-related products, especially single premium products, suffered. The long-lasting strike that only ended in September contributed to this development.
We recorded premium growth in France of 4.8% or €367 million, primarily benefiting from two major group life contracts. However, due to the current market environment, sales from unit-linked contracts decreased. On a nominal basis, that includes the effect from the already mentioned reclassification of AGF’s health business, revenue growth amounted to 22.0%.
In Switzerland, we recorded an 18.3% or €182 million revenue increase stemming mainly from single premium products, especially in group business.
Our business in Spain grew by 14.2% or €105 million. Here we benefited from higher tax free transfers of pension products from banks to insurance companies. Furthermore, short-term investment products and group life business contributed to the increase.
Year ended December 31, 2007 compared to year ended December 31, 2006
At €49,367 million statutory premiums increased by 4.1% over the prior year, despite impacts from unfavorable foreign currency movements of €1,062 million. On an internal basis, statutory premiums were up by 6.3%.
Most of our operating entities worldwide, especially our emerging markets(1) but also some of the more mature markets, showed high double-digit growth rates. For the emerging markets growth came to 22.6%. Asia-Pacific and New Europe contributed €5,677 million or 11.4% to total statutory premiums.
The highest absolute growth was achieved in Italy, where revenues increased from €8,555 million to €9,765 million in spite of poor market conditions. This resulted mainly from a sound sales performance of our bancassurance channel at CreditRAS. Additionally, we successfully launched new products during 2007.
In Asia-Pacific, premiums increased by €905 million or 24.2%. We recorded dynamic growth all over the region. In Taiwan, which, with €476 million, contributed the most to premium growth in this region, we recorded dynamic sales of unit-linked products. Furthermore, our local bancassurance channel continued to perform well. Within South Korea, we saw a further strong increase in single premium business, adding to the rise of €134 million. In China, revenue increase amounted to €168 million. Furthermore, we expanded our sales network in China, benefiting from our strategic partnership with Industrial and Commercial Bank of China Limited (ICBC).
Total revenues in France were up 13.1% or €758 million mostly driven by group insurance business and increased sales of individual life insurance policies. Unlike in the past, the highest share of new business came from proprietary sales channels in 2007.
Statutory premium volume in our German life insurance business grew by 3.9% or €503 million mainly coming from a significant increase in single premium business. While growth during the first quarters of 2007 was weak due to a difficult market
(1) | New Europe, Asia-Pacific, South America, Mexico, Middle East, Africa. |
environment, we experienced a very strong fourth quarter growing by more than 20% through a pick-up in single premium business.
In the United States, statutory premium development still reflected the legal and regulatory environment limiting our sale of indexed annuity products. However, during the last months of 2007 we made progress in closing pending litigations. Year over year, revenues declined by 20.9% or €1,827 million. In addition, business was affected by the weakening of the U.S. Dollar compared to the Euro. On a local currency basis, the decline amounted to 13.2% or USD 1,445 million.
Statutory premiums by regionregions as of December 31, 2008 (December 31, 2007)(1)
in %
Operating profit
Year ended December 31, 2008 compared to year ended December 31, 2007
Operating profit
in € mn
(1) | After elimination of transactions between Allianz Group companies in different geographic regions and different segments. |
Statutory premiums – Growth rates(1)
in %
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Year ended December 31, 2006We achieved an operating profit of €1,206 million. The sharp drop of 59.7% compared to year ended December 31, 2005
Many of our operating entities worldwide, especiallyprevious year’s figure reflects the impacts from the financial market crisis as already described. The large negative effects recorded in the growth markets of Asia-Pacific and New Europe, increased their statutory premiums with high double-digit growth rates. In 2006, these two markets,fourth quarter led to a decline in aggregate, contributed 9.6% ofoperating profit for the full year. The highest negative impacts on operating profit were recorded in our total statutory premiums, compared to 7.8% in 2005. But also most of our established markets continued to grow dynamically, such as Germany Life at 6.4% and France at 9.6%. However, these increases were offset by marked declines particularlyoperations in the United States, France, South Korea, Italy and Italy of 21.2% and 8.1%, respectively. Overall, our statutory premiums, at €47,421 million in 2006, were slightly down 1.8% on a nominal basis and 1.6% on an internal basis compared to 2005. Our new business mix showed an increase in recurring premium products and a decrease in single premium business compared to last year. Given that in the year of sale, a recurring premium contract only contributes a fraction of a single premium contract to annual premiums, this change in new business mix had a negative impact on statutory premium growth year-on-year in 2006. The new recurring premium
contracts will however increase premiums in subsequent years.Germany.
WithinNet impairments on investments increased by €4,923 million to €5,747 million mainly due to weak equity markets. These impairments were almost entirely attributable to our available-for-sale equity portfolio. The highest impairments were recorded in Germany Life, statutory premiums excelled to €13,009 million, primarily a result of strong new business production in both our individual(€3,012 million) and group life business.France (€1,096 million).
At our life operating entities€874 million, net realized gains dropped by 75.6% mainly owing to lower realizations compared to 2007 when higher levels of AGF Group in France, we generated statutory premium growthrealized gains from equity and real estate were harvested. Furthermore, higher realized losses triggered by the weak capital markets contributed to €5,792 million. This positive development was brought about by strong sales of unit-linked contracts, particularly related to several newly-launched products. Growth was achieved both through our proprietary financial advisors network and partnerships with independent advisors.this development.
Within Asia-Pacific, statutory premiums in South Korea increased to €2,054 million as we recorded strong sales of equity-indexed annuity products and in our variable annuity business. In China, growth was also significant, albeit starting from a low base. Here, we began to benefit from our strategic partnership with Industrial and Commercial Bank of China Ltd. We have received further sales licenses and expanded our branch network.
Within New Europe—our growth markets in Central and Eastern Europe—our Polish operations recorded a strong increase in statutory premiums from a very successful sales campaign for unit-linked contracts with a bank partner. In addition, in Slovakia, we generated considerable new business production through our tied agents network. In the fourth quarter of 2006, our companies in the region launched a limited-edition index-linked life insurance product across six markets. Overall, our operations within New Europe recorded statutory premiums of €828 million in 2006, 72.9% up from a year earlier.
Conversely, in the United States, statutory premiums declined significantly by 21.2% to €8,758 million. This development is primarily attributable to challenges faced by our sales channels in response to the NASD’s(1) notice in late 2005 to members regarding the sale of equity-indexed annuities. However, despite the decrease in statutory premiums, our Life/Health asset base in the United States grew. In Italy, statutory premiums were down considerably by 8.1% to €8,555 million, principally negatively influenced by a difficult market environment which was characterized by, among other factors, decreased overall private demand for life insurance products in
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the bancassurance channel. In addition, at RAS Group, our share in the total life production of our joint venture partner UniCredit Group decreased. (1)
Year ended December 31, 2005 compared to year ended December 31, 2004
Our statutory premiums rose by 6.7% to €48,272 million, with particularly strong growth in our key European markets resulting from our solid market positions, our ability to reach our customers through a variety of distribution channels and increasing demand for retirement products. Based on internal growth, our statutory premiums increased by 6.2%.
The strongest growth was achieved within Germany Life at 11.8% (+ €1,293 million), France at 12.0% (+ €567 million), Italy at 6.6% (+ €575 million) and the Asia-Pacific region at 29.8% (+ €759 million). In Switzerland, statutory premiums remained relatively unchanged at €1,058 million. Likewise, in the United States, statutory premiums remained strong at €11,115 million. Conversely, in Spain, statutory premiums declined by 19.1% to €547 million primarily due to a large pension contract we acquired in the first quarter of 2004.
Through Allianz Lebensversicherungs-Aktiengesellschaft (or “Allianz Leben”), Germany Life’s 11.8% growth reflected the success it had achieved in the context of the 2004 German “Retirement Revenue Act” (“Alterseinkünftegesetz”), resulting in a considerable increase in recurring premiums which began in the fourth quarter of 2004 and continued over the course of 2005. Additionally, and equally as important, growth from single premium products, namely our corporate pension solutions business and short-term renewals, were contributing factors to the underlying growth at Allianz Leben.
In France, at AGF Vie, the increase was driven by strong sales of unit-linked products through our well-performing partnership and brokers as well as our agent channels. Additionally, the acquisition of
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AVIP and Martin Maurel Vie on December 31, 2004 from Dresdner Bank was a contributing factor to France’s growth in 2005.
Our Italian operating entities experienced considerable growth of 6.6% from the sale of unit-linked and index-linked products through all distribution channels, particularly through representative agencies and financial planners. In addition, statutory premiums from the bancassurance channel grew, reflecting increased sales at CreditRas Vita. Within Italy, 69% of our total statutory premiums consisted of investment oriented products in 2005 (2004: 65%).
Our Asia-Pacific markets excelled, experiencing an increase of 29.8% to €3,309 million, mainly in South Korea and Taiwan, thus highlighting the strategic importance of this region. The growth at Allianz Life Insurance Co. Ltd. (or “Allianz Life Korea”) in South Korea was the result of strong sales of variable-life products, a product line which had been launched in 2004.
In the United States, at Allianz Life Insurance Company of North America (or “Allianz Life United States”), we experienced a 4.6% increase in statutory premiums related to core business lines, led by strong fixed-annuity sales. The overall 1.1% decline in statutory premiums, however, was due to a novation (sale) of a non-core portfolio of reinsurance business in 2005.
Operating profit
Operating profit
in€ mn
Year ended December 31, 2006 compared to year ended December 31, 2005
We again delivered growth in operating profit which increased to €2,565 million, up 22.5% from a year ago. Key factors in this strong development
were the growth of our Life/Health asset base, our improved margins both from our new and in-force business, as well as efficiency gains in many operating entities following the implementation of our Sustainability Program and other initiatives. Furthermore, in 2006, we increased the shareholders’ share in our gross earnings while at the same time we credited a higher amount to our policyholders.
Most of our life operating companies exhibited operating profit growth, with the highest absolute increases at our operations in Germany, the United States, South Korea, France and Spain. In addition, we experienced a solid increase in aggregate operating profit within New Europe.
Our improved investment margin was brought about by significantly higher interest and similar income, and the growth in aggregate realized gains/losses and impairments of investments (net). Interest and similar income increased primarily due to higher dividends received from available-for-sale equity investments in Germany and France. In addition, our U.S. operations benefited from higher yields on bonds and growth in asset base. Significant realized gains resulted from the sale of our shareholdings in Schering AG and the disposal of Four Seasons Health Care Ltd. Partially offsetting was the unfavorable net development in our incomeNet loss from financial assets and liabilities carried at fair value through income mainly as Germany Life exhibited significant negative effectsstood at €235 million compared to €945 million a year earlier. This stemmed primarily from higher write-ups and lower write-downs on derivatives in the accounting treatment for certain derivative instruments. InGerman life business, which were partly compensated by unfavorable changes in fair value driven by the financial market trends in France and the United States, an increase in market interest rates had an additional negative impact. Furthermore, increased investment expenses stemmed predominantly fromStates.
Interest and similar income remained stable and on a high level, at €13,772 million.
As of December 31, 2008, our asset base amounted to €331.2 billion. Despite net inflows to debt securities of €17.1 billion, the weaker U.S. Dollarreduction of €18.8 billion compared to the Euro.year-end 2007 was to a large extent attributable to poor equity markets.
Asset base(1)
fair values(2) in € bn
Acquisition and administrative expenses (net) rose by €464 million to €4,437 million, partly triggered by adjustments recorded for the unlocking of deferred acquisition costs at various operating entities after the regular review of assumptions for the calculation of our deferred acquisition costs asset. In addition, higher commissions due to the strong new business production within Germany Life, previously mentioned, also contributed to increased acquisition and administrative expenses (net).
Consequently, together with the decline in statutory premiums (net), our statutory expense ratio increased to 9.6% from 8.4% a year ago. Excluding
the adjustments described above, our statutory expense ratio would only have increased 70 basis points from 8.7% in 2005 to 9.4% in 2006.
ClaimsNet claims and insurance benefits incurred (net)were up 11.5%, andamounting to €19,673 million including the reclassification of AGF’s health business from the Property-Casualty segment. In 2007 we benefited from an extraordinary reserve release in South Korea amounting to €170 million.
Net changes in reserves for insurance and investment contracts (net), in aggregate, resulted in charges of €28,150 million, up 1.0% over 2005. While premiums werehalved, amounting to €5,122 million. This was mainly driven by lower than in 2005, this development in particular reflects the investment income on our assets which benefits our policyholders.provisions for premium refunds due to negative market impacts.
Overall charges of €140 million were recorded for operating restructuring charges in 2006. These charges were incurred in connection with the reorganization of our German insurance operations.(1)Our statutory expense ratio increased by 0.3 percentage points to 9.7%.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
OurYear over year, operating profit increased significantly by 17.1%16.8% to €2,094€2,995 million surpassingbenefiting from top-line growth and improvements in all sources of profit. Most of our target for 2005. Improved marginslife insurance companies, with the notable exception of the U.S. business, worldwide contributed to this development.
Our income from investments again provided the largest absolute contributor to operating profit growth. It improved based on new business brought abouta higher asset base resulting from inflows of funds. These inflows more than compensated the impact from unfavorable foreign currency movements, higher interest rates
(1) | For further information on the composition of our Life/Health asset base please refer to “—Balance Sheet Review—Assets and liabilities of the Life/Health segment”. |
(2) | Loans and advances to banks and customers, held-to-maturity investments, and real estate held for investment are stated at amortized cost. Investments in associates and joint ventures are stated at either amortized cost or equity, depending upon, among other factors, our ownership percentage. For further information refer to Note 2 to the consolidated financial statements. |
and a stock market that weakened towards the end of 2007. Thus, interest and similar income increased by enhanced risk management providing a better basis for pricing3.4% due to higher interest payments on debt securities as well as higher dividend payments on equity securities.
Net realized gains on investments improved by €492 million coming from an already high level in the year 2006 that was marked by a major single transaction namely the disposal of our participation in Schering AG. In 2007, gains stemmed from several transactions that mostly generated higher realized gains on equities and real estate. However, these gains were offset by net impairments on investments due to write-downs on public stock shares. The considerably increased business volumenet loss from financial assets and liabilities carried at fair value through income of €584 million stemmed largely from freestanding derivatives in connection with our German life insurance business.
Furthermore, we benefited from an extraordinary reserve release of €170 million in South Korea. In the strong growth ratespast we had formed a reserve due to uncertainty in recent years, were important factorsrespect of data accuracy in our operating profit growth.
Strong improvementsold actuarial systems. The introduction of operating profit occurred at our French, German and Italian operations, specifically AGF Vie (+ €110 million), Allianz Leben (+ €85 million), Allianz Private Krankenversicherungs-Aktiengesellschaft (+ €22 million) and RAS Group (+ €36 million).
Interest and similar income developed favorably with an increase of 4.9%a new system did not reveal any issues. Hence, the reserve had to €12,057 million, despite lower interest rates in the Euro zone. The main contributors were Allianz Leben (+ €181 million) and Allianz Life United States (+ €171 million), driven predominantly by an increased investment base resulting primarily from significant inflows of funds from new business underwritten. Higher dividend yields on equity investments also had a beneficial impact. Interest expense remained unchanged at €452 million.
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Realized gains/losses (net) from investments, shared with policyholders, increased to €2,523 million. The gains primarily resulted from favorable capital markets conditions, which we sought to leverage to yield increased realizations, with our sale of Gecina S.A. (France) in the first quarter of 2005 being the most significant. Impairments of investments (net), shared with policyholders, also decreased to €199 million.
Claims and insurance benefits incurred (net) were relatively stable at €17,439 million, whereas net expenses from changes in reserves for insurance and investment contracts increased by 19.4% to €10,443 million. This increase was largely attributable to additional aggregate policy reserves mirroring the development in net premiums earned and an overall increase in expenses for premium refunds, attributable to policyholders, due to improved results of operations at Allianz Leben. This effect overcompensated for a slight reduction in the policyholder participation rate, which itself had a positive effect on operating profit.be released.
Acquisition and administrative expenses (net) increased by 7.1% to €3,973 million. This was the net result3.4% or €151 million and thus slightly less than growth of a decline in acquisition costs compared to the 2004 level, resulting from the German Retirement Revenue Act in the fourth quarter 2004 and the regular review of assumptions within our deferred acquisitionstatutory premiums. Administrative expense included integration costs in 2005 combined with an increase of administrative expenses (net), resulting from, among other factors, the commutation of an intra-Allianz Group reinsurance contract between Allianz LebenItaly and Allianz SE (formerly Allianz AG).
As a result of the strong growth of our statutory premiums (net)further investments in operations in Asia-Pacific (China and the increase in acquisition and administrative expenses (net) of a similar magnitude, ourJapan). Our statutory expense ratio remained almost unchanged at 8.4%, down 0.1improved slightly by 0.2 percentage point from 2004.points to 9.4%.
Non-operating itemsresult
Year ended December 31, 20062008 compared to year ended December 31, 20052007
Non-operating items, in aggregate, resulted inThe non-operating loss amounted to €533 million coming from a gain of €135 million after a gain of €177€107 million a year ago. Thisearlier. Similar to the development largely mirrorswithin operating profit, the major drivers for this development were higher non-operating restructuring charges, at €34 million in
2006, mainly in connection with the reorganization of our German insurance operations.(1)impairments and higher net realized losses.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
Realized gains/losses (net) from investments,In aggregate non-operating items were down by €28 million driven by lower net realized gains not to be shared with policyholders were up to €208 million from €17 million a year ago. Similar toin the development of realized gains, shared with policyholders, previously described, the increase was primarily a result of favorable capital markets conditions.United States.
Amortization of intangible assets was positively affected by the elimination of the amortization of goodwill resulting from a change in accounting under IFRS (2004: charge of €159 million).
Non-operating restructuring charges of €18 million in 2005 resulted from an early retirement program at AGF Vie in France.
Net income
Year ended December 31, 20062008 compared to year ended December 31, 20052007
Driven by the higher operating profit,We recorded net income rose by 21.0% to €1,643of €327 million, a large decline of €1,664 million.
With income Income tax expenses of €641decreased by €637 million in 2006, up €153to €260 million from a year ago, ourwith an effective tax rate increased to 23.7% (2005: 21.5%of 38.6% (2007: 28.9%). Both in 2006 and 2005, ourThe relatively high effective tax rate benefited from significant tax-exempt income. However, based on a higher income before income taxes, the tax-exempt income in 2006 had a lower impact on our effective tax rate than a year ago. Additional significant one-time factors contributing to the relatively low effective tax rates in both years were the capitalization of corporate tax credits in Germany in 2006 and a beneficial tax settlement in the United States in 2005.is mainly driven by non-tax-deductible impairments.
Minority interests in earnings remained stable at €416 million. Higher minority interests in earnings at AGF Group in France,declined by 59.8% to €86 million, mainly reflecting its increased earnings after income taxes, were offset bythe lower minority interests in earnings at RAS Group in Italy, stemming from its decreased earnings after income taxes and the acquisition of the minority interest in RAS.income.
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Year ended December 31, 20052007 compared to year ended December 31, 20042006
DrivenNet income increased by strong improvements in both21.2% to €1,991 million driven by the higher operating profit and non-operating items net income grew significantly by 65.2% to €1,358 million.
With €488 million, our incomeprofit. Income tax expenses remained relatively stable comparedof €897 million, were up €256 million year on year. The higher tax expense in 2007 is a result of the higher pre-tax income. Additionally, the benefit from tax-exempt income was lower than in 2006, leading to €458 million in 2004. However, oura higher effective tax rate declined considerably to 21.5% from 28.4%, largely due to tax-exempt income at various operating entities, including tax-exempt income from securities at Allianz Leben, a beneficial tax settlement at Allianz Life United States, the discontinuation of non-tax-deductible goodwill amortization, as well as from the write-down of deferred tax assets at Allianz Life Korea in 2004.28.9% (2006: 23.7%).
Minority interests in earnings increasedwere almost halved to €425€214 million primarily due to improved earningsreflecting the minority buy outs at our ItalianRAS in Italy and French Life entities.at AGF in France.
The following table sets forth our
Life/Health insurance segment’s income statement and statutory expense ratio for the years ended December 31, 2006, 2005 and 2004.segment information(1)
2006 | 2005 | 2004 | |||||||
€ mn | € mn | € mn | |||||||
Statutory premiums(1) | 47,421 | 48,272 | 45,233 | ||||||
Ceded premiums written | (840 | ) | (942 | ) | (1,309 | ) | |||
Change in unearned premiums | (221 | ) | (168 | ) | (69 | ) | |||
Statutory premiums (net) | 46,360 | 47,162 | 43,855 | ||||||
Deposits from SFAS 97 insurance and investment contracts | (25,786 | ) | (27,165 | ) | (24,451 | ) | |||
Premiums earned (net) | 20,574 | 19,997 | 19,404 | ||||||
Interest and similar income | 12,972 | 12,057 | 11,493 | ||||||
Income from financial assets and liabilities carried at fair value through income (net) | (361 | ) | 258 | 198 | |||||
Realized gains/losses (net) from investments, shared with policyholders(2) | 3,087 | 2,523 | 1,990 | ||||||
Fee and commission income | 630 | 507 | 224 | ||||||
Other income | 43 | 45 | 44 | ||||||
Operating revenues | 36,945 | 35,387 | 33,353 | ||||||
Claims and insurance benefits incurred (net) | (17,625 | ) | (17,439 | ) | (17,535 | ) | |||
Changes in reserves for insurance and investment contracts (net) | (10,525 | ) | (10,443 | ) | (8,746 | ) | |||
Interest expense | (280 | ) | (452 | ) | (452 | ) | |||
Loan loss provisions | (1 | ) | — | (3 | ) | ||||
Impairments of investments (net), shared with policyholders | (390 | ) | (199 | ) | (281 | ) | |||
Investment expenses | (750 | ) | (567 | ) | (649 | ) |
2006 | 2005 | 2004 | |||||||
€ mn | € mn | € mn | |||||||
Acquisition and administrative expenses (net) | (4,437 | ) | (3,973 | ) | (3,711 | ) | |||
Fee and commission expenses | (223 | ) | (219 | ) | (145 | ) | |||
Other expenses | (9 | ) | (1 | ) | (43 | ) | |||
Operating restructuring charges(3) | (140 | ) | — | — | |||||
Operating expenses | (34,380 | ) | (33,293 | ) | (31,565 | ) | |||
Operating profit | 2,565 | 2,094 | 1,788 | ||||||
Realized gains/losses (net) from investments, not shared with policyholders(2) | 195 | 208 | 17 | ||||||
Amortization of intangible assets | (26 | ) | (13 | ) | (168 | ) | |||
Non-operating restructuring charges(3) | (34 | ) | (18 | ) | (24 | ) | |||
Non-operating items | 135 | 177 | (175 | ) | |||||
Income before income taxes and minority interests in earnings | 2,700 | 2,271 | 1,613 | ||||||
Income taxes | (641 | ) | (488 | ) | (458 | ) | |||
Minority interests in earnings | (416 | ) | (425 | ) | (333 | ) | |||
Net income | 1,643 | 1,358 | 822 | ||||||
Statutory expense ratio(4) | 9.6 | 8.4 | 8.5 | ||||||
2008 | 2007 | 2006 | |||||||
€ mn | € mn | € mn | |||||||
Statutory premiums(2) | 45,615 | 49,367 | 47,421 | ||||||
Ceded premiums written | (588 | ) | (644 | ) | (840 | ) | |||
Change in unearned premiums | (54 | ) | (61 | ) | (221 | ) | |||
Statutory premiums (net) | 44,973 | 48,662 | 46,360 | ||||||
Deposits from SFAS 97 insurance and investment contracts | (22,742 | ) | (27,853 | ) | (25,786 | ) | |||
Premiums earned (net) | 22,231 | 20,809 | 20,574 | ||||||
Interest and similar income | 13,772 | 13,417 | 12,972 | ||||||
Operating income from financial assets and liabilities carried at fair value through income (net)(3) | (235 | ) | (945 | ) | (361 | ) | |||
Operating realized gains/losses (net)(4) | 874 | 3,579 | 3,087 | ||||||
Fee and commission income | 571 | 701 | 630 | ||||||
Other income | 140 | 182 | 43 | ||||||
Income from fully consolidated private equity investments | 18 | — | — | ||||||
Operating revenues | 37,371 | 37,743 | 36,945 | ||||||
Claims and insurance benefits incurred (net) | (19,673 | ) | (17,637 | ) | (17,625 | ) | |||
Changes in reserves for insurance and investment contracts (net) | (5,122 | ) | (10,268 | ) | (10,525 | ) | |||
Interest expenses | (283 | ) | (374 | ) | (280 | ) | |||
Loan loss provisions | (13 | ) | 3 | (1 | ) | ||||
Operating impairments of investments (net)(5) | (5,747 | ) | (824 | ) | (390 | ) | |||
Investment expenses | (673 | ) | (833 | ) | (750 | ) | |||
Acquisition and administrative expenses (net) | (4,375 | ) | (4,588 | ) | (4,437 | ) | |||
Fee and commission expenses | (253 | ) | (209 | ) | (223 | ) | |||
Operating restructuring charges(6) | 1 | (16 | ) | (140 | ) | ||||
Other expenses | (7 | ) | (2 | ) | (9 | ) | |||
Expenses from fully consolidated private equity investments | (20 | ) | — | — | |||||
Operating expenses | (36,165 | ) | (34,748 | ) | (34,380 | ) | |||
Operating profit | 1,206 | 2,995 | 2,565 | ||||||
Non-operating income from financial assets and liabilities carried at fair value through income (net)(3) | (26 | ) | 5 | — | |||||
Non-operating realized gains/losses (net)(4) | (39 | ) | 137 | 195 | |||||
Non-operating impairments of investments (net)(5) | (414 | ) | (3 | ) | — | ||||
Amortization of intangible assets | (3 | ) | (3 | ) | (26 | ) | |||
Non-operating restructuring charges(6) | (51 | ) | (29 | ) | (34 | ) | |||
Non-operating items | (533 | ) | 107 | 135 | |||||
Income before income taxes and minority interests in earnings | 673 | 3,102 | 2,700 | ||||||
Income taxes | (260 | ) | (897 | ) | (641 | ) | |||
Minority interests in earnings | (86 | ) | (214 | ) | (416 | ) | |||
Net income (loss) | 327 | 1,991 | 1,643 | ||||||
Statutory expense ratio(7) in % | 9.7 | 9.4 | 9.6 | ||||||
| Since 2008, our health business in Belgium and France is shown within Life/Health segment. Prior year balances have not been adjusted. |
| For the Life/Health segment, total revenues are measured based upon statutory premiums. Statutory premiums are gross premiums written from sales of life insurance policies, as well as gross receipts from sales of unit-linked and other investment-oriented products, in accordance with the statutory accounting practices applicable in the insurer’s home jurisdiction. |
| The total of these items equals income from financial assets and liabilities carried at fair value through income (net) in the segment income statement included in Note 6 to the consolidated financial statements. |
| The total of these items equals realized gains/losses (net) in the segment income statement included in Note |
| The total of these items equals impairments of investments (net) in the segment income statement included in Note 6 to the consolidated financial statements. |
| The total of these items equals restructuring charges in the segment income statement included in Note |
| Represents acquisition and administrative expenses (net) divided by statutory premiums (net). |
Life/Health Operations by Geographic RegionBusiness Division
Statutory premiums(1) | Premiums earned (net) | ||||||||||||||||||||
2008 | 2007 | 2006 | 2008 internal(2) | 2007 internal(2) | 2008 | 2007 | 2006 | ||||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | ||||||||||||||
Germany Life | 13,487 | 13,512 | 13,009 | 13,503 | 13,512 | 10,313 | 10,381 | 10,543 | |||||||||||||
Germany Health(3) | 3,119 | 3,123 | 3,091 | 3,119 | 3,123 | 3,119 | 3,123 | 3,091 | |||||||||||||
Switzerland | 1,205 | 992 | 1,005 | 1,174 | 992 | 478 | 432 | 455 | |||||||||||||
Austria | 461 | 396 | 380 | 461 | 396 | 277 | 288 | 283 | |||||||||||||
German Speaking Countries | 18,272 | 18,023 | 17,485 | 18,257 | 18,023 | 14,187 | 14,224 | 14,372 | |||||||||||||
Italy | 5,996 | 9,765 | 8,555 | 5,952 | 9,765 | 930 | 1,006 | 1,098 | |||||||||||||
Spain | 843 | 738 | 629 | 843 | 738 | 394 | 399 | 400 | |||||||||||||
Portugal | 130 | 115 | 98 | 130 | 115 | 80 | 73 | 66 | |||||||||||||
Greece | 109 | 105 | 98 | 109 | 105 | 72 | 65 | 62 | |||||||||||||
South America | 190 | 78 | 147 | 199 | 61 | 183 | 40 | 42 | |||||||||||||
Turkey(4) | 18 | — | — | — | — | 17 | — | — | |||||||||||||
Europe I incl. South America | 7,286 | 10,801 | 9,527 | 7,233 | 10,784 | 1,676 | 1,583 | 1,668 | |||||||||||||
France(5) | 7,991 | 6,550 | 5,792 | 8,019 | 7,652 | 2,887 | 1,760 | 1,436 | |||||||||||||
Belgium(5) | 681 | 664 | 597 | 681 | 713 | 345 | 310 | 302 | |||||||||||||
Netherlands | 371 | 399 | 424 | 371 | 399 | 133 | 137 | 146 | |||||||||||||
Luxembourg | 82 | 83 | 58 | 82 | 83 | 26 | 26 | 30 | |||||||||||||
Africa | 40 | 35 | 32 | 40 | 35 | 17 | 15 | 16 | |||||||||||||
Europe II incl. Africa | 9,165 | 7,731 | 6,903 | 9,193 | 8,882 | 3,408 | 2,248 | 1,930 | |||||||||||||
United States | 6,036 | 6,931 | 8,758 | 6,341 | 6,931 | 771 | 636 | 533 | |||||||||||||
Mexico(6) | 75 | 37 | — | 82 | 37 | 31 | 36 | — | |||||||||||||
NAFTA | 6,111 | 6,968 | 8,758 | 6,423 | 6,968 | 802 | 672 | 533 | |||||||||||||
AZ Reinsurance LH | 294 | 313 | 339 | 294 | 313 | 291 | 293 | 317 | |||||||||||||
United Kingdom | — | — | — | — | — | — | — | — | |||||||||||||
Anglo Broker Markets/Global Lines | 6,405 | 7,281 | 9,097 | 6,717 | 7,281 | 1,093 | 965 | 850 | |||||||||||||
South Korea | 1,580 | 2,188 | 2,054 | 1,971 | 2,188 | 709 | 975 | 986 | |||||||||||||
Taiwan | 997 | 1,812 | 1,336 | 1,035 | 1,812 | 148 | 72 | 107 | |||||||||||||
Malaysia | 142 | 126 | 107 | 147 | 126 | 121 | 104 | 88 | |||||||||||||
Indonesia | 214 | 224 | 115 | 243 | 224 | 75 | 49 | 38 | |||||||||||||
Other | 532 | 288 | 121 | 531 | 288 | 125 | 18 | 37 | |||||||||||||
Asia-Pacific | 3,465 | 4,638 | 3,733 | 3,927 | 4,638 | 1,178 | 1,218 | 1,256 | |||||||||||||
Hungary | 181 | 141 | 96 | 181 | 141 | 79 | 80 | 75 | |||||||||||||
Slovakia | 290 | 235 | 183 | 269 | 235 | 175 | 157 | 135 | |||||||||||||
Czech Republic | 101 | 96 | 76 | 91 | 96 | 60 | 56 | 54 | |||||||||||||
Poland | 428 | 431 | 367 | 401 | 431 | 192 | 121 | 96 | |||||||||||||
Romania | 32 | 30 | 25 | 34 | 30 | 15 | 12 | 12 | |||||||||||||
Bulgaria | 33 | 35 | 25 | 33 | 35 | 29 | 28 | 23 | |||||||||||||
Croatia | 59 | 58 | 48 | 58 | 58 | 42 | 40 | 36 | |||||||||||||
Russia | 17 | 13 | 8 | 18 | 13 | 16 | 12 | 7 | |||||||||||||
New Europe | 1,141 | 1,039 | 828 | 1,085 | 1,039 | 608 | 506 | 438 | |||||||||||||
Middle East | 88 | 70 | 68 | 92 | 70 | 81 | 65 | 60 | |||||||||||||
Growth Markets | 4,694 | 5,747 | 4,629 | 5,104 | 5,747 | 1,867 | 1,789 | 1,754 | |||||||||||||
Consolidation(8) | (207 | ) | (216 | ) | (220 | ) | (207 | ) | (216 | ) | — | — | — | ||||||||
Total | 45,615 | 49,367 | 47,421 | 46,297 | 50,501 | 22,231 | 20,809 | 20,574 | |||||||||||||
The following tables set forth our life/health statutory premiums, premiums earned (net), statutory expense ratio and operating profit by geographic region for the years ended December 31, 2006, 2005 and 2004. Consistent with our general practice, these figures are presented before consolidation adjustments, representing the elimination of transactions between Allianz Group companies in different geographic regions and different segments.
Statutory premiums(1) € mn Premiums earned (net) € mn Germany Life Germany Health(2) Italy France(3) Switzerland Spain Netherlands Austria Belgium Portugal Luxembourg Greece United Kingdom(4) Western and Southern Europe Hungary Slovakia Czech Republic Poland Romania Bulgaria Croatia Russia Cyprus New Europe Other Europe United States South Korea Taiwan Malaysia Indonesia Other Asia-Pacific South America Other(5) Subtotal Consolidation adjustments(6) Total 2006 2005 2004 2006 2005 2004 13,009 12,231 10,938 10,543 10,205 8,936 3,091 3,042 3,020 3,091 3,042 3,019 8,555 9,313 8,738 1,098 1,104 1,088 5,792 5,286 4,719 1,436 1,420 1,545 1,005 1,058 1,054 455 470 504 629 547 676 400 350 576 424 381 430 146 144 154 380 343 335 283 262 272 597 601 532 302 327 337 98 83 85 66 60 56 58 47 87 30 25 25 98 91 82 62 54 59 — — 198 — — 79 1,655 1,546 1,749 889 872 982 96 89 77 75 73 61 183 149 134 135 129 123 76 64 53 54 50 43 367 99 75 96 53 36 25 18 11 12 7 3 25 19 14 23 19 9 48 41 25 36 33 24 8 — — 7 — — — — 2 — — 1 828 479 391 438 364 300 2,483 2,025 2,140 1,327 1,236 1,282 8,758 11,115 11,234 533 522 428 2,054 1,752 1,370 986 972 961 1,336 1,347 988 107 136 64 107 106 111 88 73 58 115 69 59 38 31 28 121 35 22 37 10 20 3,733 3,309 2,550 1,256 1,222 1,131 147 141 64 42 36 29 439 455 911 393 390 866 47,641 48,522 46,044 20,574 19,997 19,404 (220 ) (250 ) (811 ) — — — 47,421 48,272 45,233 20,574 19,997 19,404
(1) | Statutory premiums are gross premiums written from sales of life insurance policies as well as gross receipts from sales of unit-linked and other investment-oriented products, in accordance with the statutory accounting practices applicable in the insurer’s home jurisdiction. |
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To be continued on |
€ mn € mn € mn % % Germany Life Germany Health(3) Switzerland Austria German Speaking Countries Italy Spain Portugal Greece South America Turkey(4) Europe I incl. South America France(5) Belgium(5) Netherlands Luxembourg Africa Europe II incl. Africa United States Mexico(6) NAFTA AZ Reinsurance LH United Kingdom(7) Anglo Broker Markets/Global Lines South Korea Taiwan Malaysia Indonesia Other Asia-Pacific Hungary Slovakia Czech Republic Poland Romania Bulgaria Croatia Russia New Europe Middle East Growth Markets Consolidation(8) Total Operating profit Statutory expense ratio 2008 2007 2006 2008 2007 2006 % 620 695 521 8.5 5.8 9.1 112 164 184 9.0 9.8 9.3 71 66 50 9.9 10.6 9.9 17 40 29 8.8 11.8 12.1 820 965 784 8.7 6.9 9.2 206 372 339 8.9 5.8 6.4 103 104 92 8.8 9.2 9.3 1 25 25 24.6 26.5 15.1 2 6 13 22.9 20.7 22.6 10 — 1 10.3 32.6 16.9 5 — — 38.5 — — 327 507 470 9.4 6.6 7.0 128 632 582 14.9 15.4 12.6 53 68 62 9.9 10.1 12.5 (1 ) 44 50 24.1 9.8 18.4 3 4 5 10.3 10.8 12.2 3 2 2 13.4 16.5 19.6 186 750 701 14.9 14.6 13.0 (232 ) 380 418 (0.2 ) 11.9 8.0 4 5 — 9.8 13.8 — (228 ) 385 418 (0.1 ) 11.9 8.0 9 29 41 19.6 21.0 27.8 (2 ) (3 ) (2 ) — — — (221 ) 411 457 0.8 12.3 8.7 96 286 64 13.6 14.4 13.9 11 26 14 11.8 2.9 5.0 9 12 10 15.8 17.2 19.9 12 6 3 15.7 12.7 19.3 (87 ) (30 ) (10 ) 17.2 17.0 18.4 41 300 81 13.8 10.1 11.2 16 13 12 15.9 20.4 25.7 29 29 16 15.5 16.8 18.2 4 10 9 14.2 18.0 20.1 6 10 6 32.6 19.7 17.6 2 — — 31.9 33.8 39.3 2 4 3 17.7 15.0 14.2 4 2 4 22.5 17.1 20.4 (15 ) (7 ) — 132.2 99.5 28.1 48 61 50 24.4 20.0 19.6 11 6 5 27.5 24.6 30.4 100 367 136 16.6 12.1 13.0 (6 ) (5 ) 17 — — — 1,206 2,995 2,565 9.7 9.4 9.6
Continuing footnotes from page 88. |
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(6) | Effective 2007, life business in Mexico is shown within the Life/Health segment. Prior year balances have not been adjusted. |
(7) | Contains run-off of €(2) mn, €(3) mn and €(2) mn for 2008, 2007 and 2006, respectively, from our former life insurance business in the United Kingdom which we sold in December 2004. |
(8) | Represents elimination of transactions between Allianz Group companies in different geographic regions. |
Statutory expense ratio % Operating profit € mn Germany Life Germany Health(1) Italy France(2) Switzerland Spain Netherlands Austria Belgium Portugal Luxembourg Greece United Kingdom(3) Western and Southern Europe Hungary Slovakia Czech Republic Poland Romania Bulgaria Croatia Russia Cyprus New Europe Other Europe United States South Korea Taiwan Malaysia Indonesia Other Asia-Pacific South America Other(4) Subtotal Consolidation adjustments(5) Total 2006 2005 2004 2006 2005 2004 9.1 8.1 9.9 521 347 262 9.3 9.1 9.6 184 159 137 6.4 5.4 3.0 339 334 276 12.6 15.1 17.8 582 558 359 9.9 8.7 10.2 50 55 35 9.3 7.4 5.9 92 71 66 18.4 13.5 17.5 50 41 32 12.1 9.4 14.3 29 35 39 12.5 12.1 15.4 62 76 102 15.1 19.1 20.4 25 13 11 12.2 14.4 8.5 5 5 12 22.6 25.9 26.3 13 7 7 — — 34.7 (2 ) (11 ) 3 14.8 13.3 17.6 182 166 206 25.7 26.9 25.3 12 10 5 18.2 24.4 27.5 16 8 3 20.1 21.5 24.0 9 6 4 17.6 33.3 29.1 6 3 2 39.3 28.0 13.1 – 1 – 14.2 10.5 13.7 3 3 4 20.4 22.7 39.4 4 3 5 28.1 — (6) — — — — — — 17.9 — — — 19.6 25.7 27.0 50 34 23 16.4 16.3 19.4 232 200 229 8.0 4.8 2.4 418 257 376 13.9 16.6 20.3 64 20 60 5.0 4.3 0.1 14 11 2 19.9 14.0 6.8 10 2 8 19.3 25.0 36.1 3 1 (4 ) 18.4 36.9 39.5 (10 ) (7 ) (4 ) 11.2 12.0 12.6 81 27 62 16.9 17.7 26.6 1 2 4 — (6) — (6) — (6) 74 92 (8 ) — — — 2,574 2,102 1,798 — — — (9 ) (8 ) (10 ) 9.6 8.4 8.5 2,565 2,094 1,788
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Year ended December 31, 2006 comparedDue to year ended December 31, 2005
Ambitious 2006 targets surpassed.
Strong growththe sale of operating revenues and operating profit, outperforming our expectations.Dresdner Bank the commentary on the banking segment only refers to the continuing banking operations of the Group.
Milestone for cost-income ratio of below 80% achieved.Oldenburgische Landesbank and banking customers introduced by Allianz tied agents are included.
BothContinuing banking operations recorded an operating divisions improved strongly.
Net income amounted to €918 million.
Year ended December 31, 2005 compared to year ended December 31, 2004
Dresdner Bank increased itsloss of €31 million (2007: operating profit by 38.8% to €630 million.
Operating revenues from our Banking segment decreased by 3.9% to €6.3 billion, primarily due to the close of our non-strategic Institutional Restructuring Unit and negative impacts from IAS 39 at Dresdner Bank.
In line with our expectations, operating profit increased by 57.5% to €704 million, of which Dresdner Bank contributed €630 million, an increase of 38.8%€32 million).
Operating profit and high realized gains resulted in net income of €1.0 billion.
Earnings Summary
The results of operations of our Banking segment are almost exclusively represented by Dresdner Bank, accounting for 96.1% of our total Banking segment’s operating revenues for the year ended December 31, 2006 (2005: 95.6%, 2004: 96.7%). Accordingly, the discussion of our Banking segment’s results of operations relates solely to the operations of Dresdner Bank.
Operating revenues
Year ended December 31, 20062008 compared to year ended December 31, 20052007
Dresdner Bank’s operatingOperating revenues strongly increaseddecreased by 12.5% to €6,811€544 million up 12.8% from a year ago. All income categories contributedwith all revenue components contributing to this
development, with double-digit growth rates in net interest income and net trading income. Both operating divisions, Private & Business Clients (or “PBC”) and Corporate & Investment Banking (or “CIB”) development. The biggest downward movement was recorded higher operating revenues compared to 2005.
Net interest income was €2,645 million, an increase of 19.3%, with significant growth from CIB, largely driven by its increased loan book from structured finance and syndicated loan transactions. PBC recorded stable net interest income, as higher revenues in the deposit business were offset by lower net interest income from the loan business. The increase in our net interest income was aided by the development of the impact from the accounting treatment for derivative financial instruments which do not qualify for hedge accounting, amounting to a positive effect of €66 million in 2006 compared to a negative effect of €346 million in 2005.
At €2,841 million, we grew net fee and commission income by 5.5% over the 2005 level. This development was mainly a result of our growing securities business in PBC which benefited from both higher turnover-related commissions and increased assets under management. In addition, PBC’s positively developing life and pension insurance business contributed, with particularly strong sales of “Riester” pension products. Net fee and commission income from CIB also improved. Here, our advisory business benefited from increased merger and acquisition activities. In contrast, our Corporate Other division experienced a decline in net fee and commission income principally impacted by the closure of our Institutional Restructuring Unit (or “IRU”) in September 2005.
Trading income (net), at €1,248 million in 2006 and up 11.1% compared to a year ago, benefited from a growth momentum across all product groups, particularly within the derivatives and the foreign exchange business. Contrary to the development of net interest income, net trading income was negatively affected by the impact from the accounting treatment for derivative instruments which do not qualify for hedge accounting, amounting to a negative effect of €113 million in 2006, after a positive effect of €132 million in 2005.
Year ended December 31, 2005 compared to year ended December 31, 2004
Strategic Business(1) Operating revenues improved in our two operating divisions, PBC and CIB.
In PBC, operating revenues increased by 2.0% to €3,033 million. Our Business Models 2 and 3, which consist of the sale of banking products through insurance agents, were successfully implemented with an improvement in revenues and growing client base. In 2005, we acquired approximately 360,000 new bank clients through this sales channel, which was well above our target of 300,000. Additionally, PBC benefited from the improved securities business, specifically from closed-end funds.
Operating revenues in CIB increased slightly by €33(down €58 million to €3,038 million. This increase resulted primarily from favorable developments within our client business, with an improvement in our capital markets and mergers & acquisitions business more than offsetting the substantial decrease in trading income (net), largely€237 million) mainly due to the difficult capital market conditionslower third-party assets in April and May. In the second half of 2005, CIB’s trading income (net) increased significantly, driven primarilyItaly caused by its strong client and customer business.
In our Corporate Other division, operating revenues were strongly negatively affected by the adverse development of the impact from the accounting treatment for derivative instruments which do not qualify for hedge accounting. In aggregate, this impact resulted in a negative effect of €214 million (2004: positive effect of €7 million). On
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September 30, 2005, the remaining risk assets of our former IRU, of which we have reclassified the 2005 and 2004 results of operations into our Corporate Other division, amounted to €1.4 billion. As of that date, the IRU closed. During the fourth quarter of 2005, the majority of these remaining risk assets were sold, resulting in a decrease to approximately one-third at December 31, 2005. The remaining portfolios were transferred to the operating divisions.
Operating Revenues by Typemarket-related effects. Net interest income remained relatively stabledecreased by 4.0% to €312 million, as lower at-equity results of investments at €2,218 million. Positive developments were primarily recordedBanque AGF(2) outweighed the positive performance in our structured finance business.
Net fee and commission income grew by 4.6% to €2,693 million, principally driven by the securities business in PBC. In CIB, client business also contributed to our increased net fee and commission income.
Trading income (net) declined by 26.3% to €1,123 million, largely due to the difficult capital market conditions in April and May, as well as the negative impacts from IAS 39.
In summary, despite the revenue growth experienced by our operating divisions, the faster than planned completion of the wind-down of our non-strategic IRU, which was closed effective September 30, 2005, as well as the negative impacts from IAS 39 of €214 million, resulted in a decrease in operating revenues by 5.0% to €6,039 million at Dresdner Bank.
Operating profit
Operating profit – Dresdner Bank
in€ mn
Year ended December 31, 2006 compared to year ended December 31, 2005
We more than doubled our operating profit, up 116.0% to €1,361 million in 2006, primarily resulting from the positive revenue development previously described. With our higher operating revenues and lower operating expenses, our cost-income ratio improved significantly to 79.6% in 2006, down 11.8 percentage points compared to 2005.
Operating expenses, at €5,423 million, were down 1.8% from a year earlier due to decreased administrative expenses. Administrative expenses amounted to €5,384 million, of which personnel expenses were €3,400 million, up 3.8%, and non-personnel expenses were €1,984 million, down 8.9%.
Higher personnel expenses were entirely driven by increased performance-related bonuses, reflecting the strong growth of our operating revenues. On the other hand, further staff reductions and efficiency gains, helped to decrease both non-performance-related personnel expenses and non-personnel expenses. The decline in non-personnel expenses stemmed from materially lower office space expenses.
Within our loan loss provisions we continued to benefit from the improved quality of our loan portfolio. In aggregate, loan loss provisions experienced moderate net additions of €27 million, compared to net releases of €113 million a year ago. Net releases in the prior year were driven by recoveries and substantial releases in connection with the wind-down of the IRU. Our coverage ratio(1) improved to 61.5% as of December 31, 2006 from 56.8% a year ago.banking entities.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
Dresdner Bank’s operating profit significantly improved by 38.8% to €630 million. However, given lowerThe operating revenues and an almost unchanged expense base,for our cost-income ratio increased from 87.6%Banking segment amounted to 91.4%, substantially burdened by the negative impact from the application of the IAS 39 hedge accounting rules on derivative financial instruments.
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€622 million (2006: €604 million). The increase in operating profitof €18 million was driven by the positive developments withindevelopment in net interest income and net fee and commission income, which could outweigh the sharp decrease in our net loan loss provisions, resulting in atrading income.
Net interest income developed favorably, up 11.7% to €325 million. Oldenburgische Landesbank’s net releaseinterest income was steady.
Our net fee and commission income also showed good performance with an increase of €113€27 million (2004: net chargeto €295 million mainly driven by the results of €337 million). While gross releases and recoveries decreased, the decline in gross new additions was even stronger. Gross releases and recoveries reached €849 million (2004: €1,061 million), stemming principally from exits from large debtors, mainly within our former IRU. Gross new additions to allowances of €736 million were significantly lower compared to €1,398 million in 2004, predominantly due to the reductions in our non-strategic business within the former IRUBanque AGF(2) and the banking clients introduced through the tied agents channel.
The development in net trading income was significantly improved risk profile of Dresdner Bank’s strategic loan portfolio. The net releaseimpacted by the turbulence in loan loss provisions, together with the reduction of our non-performing loan portfolio by approximately 58%,financial markets and led to a coverage ratio at December 31, 2005result of 56.8% (2004: 60.4%).
Both personnel and non-personnel expenses remained stable at €3,275€2 million, (2004: €3,244 million) and €2,177coming from €45 million (2004: €2,171 million), despite focused investments in certain growth areas, such as infrastructure established for our Business Models 2 and 3.
PBC experienced a strong improvement in 2005. Operating revenues increased 2.0% to €3,033 million and operating profit was more than twice as high as compared to 2004, reaching €470 million. These positive developments primarily reflect strict cost control while loan loss provisions reached normal levels. Our cost-income ratio strengthened by 6.5 percentage points to 80.0%.
Conversely, CIB’s cost-income ratio rose to a 83.6% from 81.1%, primarily reflecting decreased trading income (net) and increased operating expenses. Operating profit remained almost stable at €513 million.the previous year.
Non-operating itemsOperating profit (loss)
Year ended December 31, 20062008 compared to year ended December 31, 20052007
In aggregate, the impact from non-operating items declined from €825 million profit to aWe recorded an operating loss of €146€31 million as expected.
Realized gains/losses (net)coming from a profit in 2007 of almost the same magnitude. Lower operating revenues and higher loan loss provisions (net additions of €29 million in 2008 compared to net additions of €5 million in the previous year) were only partially offset by reduced operating expenses. Operating expenses decreased by €5296.7% to €546 million to €491 million, primarily due to a
reduced number of significant sale transactions compared to a year ago. Realized gains in 2006 included a tax-exempt gain from the sale of Dresdner Bank’s remaining 2.3% shareholdings in Munich Re to Allianz SE (formerly Allianz AG) as well as a gain from the disposal ofwhereas our remaining participation in Eurohypo AG.
Impairments of investments (net) was up 17.5% to €215 million, largely attributable to write-downs on real estate properties used by third-parties.
Restructuring chargescost-income ratio increased by €410 million6.3 percentage points to €422 million, mainly reflecting the “Neue Dresdner Plus” reorganization program.(1)100.4%.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
Realized gains/losses (net) of Dresdner Bank roseOperating profit nearly halved to €32 million (2006: €63 million). Our cost-income ratio was 94.1% (2006: 90.1%).
Operating expenses, increased by €4877.5% to €585 million. This increase resulted principally from the transfer of 5% of Dresdner Bank’s 7.3% shareholding in Munich ReAdministrative expenses amounted to Allianz SE (formerly Allianz AG) in the first quarter of 2005, the complete sale of our shareholding in Bilfinger Berger in the second quarter of 2005, the sale of 7.35% of our 28.48% shareholding in Eurohypo AG to Commerzbank AG, as well as the sale of the majority of our real estate portfolio in the forth quarter of 2005, most€589 million, of which was subsequently leased backpersonnel expenses made up for €252 million, down 0.8%, and non-personnel expenses amounted to Dresdner Bank. The sales of various assets in 2005 was in line with Dresdner Bank’s focus on its core business.
Further, net impairments of investments decreased heavily from €505€337 million, to €183 million, primarily due to improved capital market conditions.up 13.9%.
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(2) | On January 1, 2009 Banque AGF was re-branded in Allianz Banque. |
The absenceLoan loss provisions showed gross releases and recoveries of significant restructuring charges€84 million and gross additions of €89 million, leading to net additions of €5 million coming from a net release of €3 million in the discontinuation of goodwill amortization under IFRS (2004: charge of €244 million) also benefited our non-operating items.previous year.
Net incomeNon-operating result
Year ended December 31, 20062008 compared to year ended December 31, 20052007
Net income amountedThe non-operating result was negative at €130 million compared to a strong €895positive result of €13 million evidencingin 2007. This is primarily due to significantly higher net impairments of investments, up €117 million to €120 million, which were mainly caused by write-downs on structured products in France. In addition, net realized losses of €6 million (2007: gains of €18 million), largely from the high qualitysale of our earnings. Our significantly improved operating profit almost compensated for the expected declineinvestments in non-operating items.
With income tax expenses down 35.9%, our effective tax rate decreased from 25.6%France contributed to 19.7%. This development was mainly attributable to higher tax exempt income and the capitalization of corporate tax credits in Germany, while income before income taxes was lower in 2006.this development.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
Net income increased significantlyThe non-operating result amounted to €1,000€13 million including a tax-exempt gainin both periods. Higher net realized gains of €343€18 million from the aforementioned transferin 2007 (2006: €15 million) were partly offset by net impairments of Munich Re shareholdingsinvestments amounting to Allianz SE.€3 million (2006: no impairments were incurred). In addition, to the positive operating profit development, the growthwe recorded restructuring charges of €2 million in net income was attributable to our improved non-operating results.2007 and 2006, respectively.
These developmentsNet income (loss) from continuing operations
Year ended December 31, 2008 compared to year ended December 31, 2007
The net loss from our continuing operations before income taxes and minority interests in earnings amounted to €161 million (2007: income of €45 million). Due to the loss, we recorded an income tax credit of €54 million which led to an effective tax rate of 33.5% and therefore was comparable to the expected tax rate of 33%. The effective tax rate last year was (22.2)% due to a positive effect from the German tax reform.
After tax and minority interests, we recorded a net loss from continuing operations of €114 million, coming from a gain of €55 million a year earlier.
Year ended December 31, 2007 compared to year ended December 31, 2006
The net income from our continuing banking operations amounted to €55 million and therefore was €14 million lower than the same period a year ago.
Although we recorded €45 million income from continuing operations before income taxes and minority interests in earnings we received an income tax expensescredit of €373 million€10 million. This was a result of the German tax rate reform in 2005, compared2007, which led to a tax benefit from revaluation of €296 million in the previous year, including a one-off tax benefit. Accordingly, ourdeferred taxes. The effective tax rate was 25.6%(22.2)%. In 2006 income from continuing operations before income taxes and minority interests in 2005.earnings amounted to €76 million. The income tax charge was €1 million leading to an effective tax rate of 1.3%.
Banking segment information
2008 | 2007 | 2006 | |||||||
€ mn | € mn | € mn | |||||||
Net interest income(1) | 312 | 325 | 291 | ||||||
Net fee and commission income(2) | 237 | 295 | 268 | ||||||
Trading income (net)(3) | (5 | ) | 2 | 45 | |||||
Income from financial assets and liabilities designated at fair value through income (net)(3) | — | — | — | ||||||
Operating revenues(4) | 544 | 622 | 604 | ||||||
Administrative expenses | (552 | ) | (589 | ) | (550 | ) | |||
Investment expenses | 9 | 6 | 6 | ||||||
Other expenses | (3 | ) | (2 | ) | — | ||||
Operating expenses | (546 | ) | (585 | ) | (544 | ) | |||
Loan loss provisions | (29 | ) | (5 | ) | 3 | ||||
Operating profit (loss) | (31 | ) | 32 | 63 | |||||
Realized gains/losses (net) | (6 | ) | 18 | 15 | |||||
Impairments of investments (net) | (120 | ) | (3 | ) | — | ||||
Amortization of intangible assets | (2 | ) | — | — | |||||
Restructuring charges | (2 | ) | (2 | ) | (2 | ) | |||
Non-operating items | (130 | ) | 13 | 13 | |||||
Income (loss) from continuing operations before income taxes and minority interests in earnings | (161 | ) | 45 | 76 | |||||
Income taxes | 54 | 10 | (1 | ) | |||||
Minority interests in earnings | (7 | ) | — | (6 | ) | ||||
Net income (loss) from continuing operations | (114 | ) | 55 | 69 | |||||
Cost-income ratio(5) in % | 100.4 | 94.1 | 90.1 |
Banking Operations by Geographic Region
The following table sets forth the income statementsour banking operating revenues, operating profit and cost-income ratios for both our Banking segment as a whole and Dresdner Bankratio by geographic region for the years ended December 31, 2006, 20052008, 2007 and 2004.2006. Consistent with our general practice, these figures are presented before consolidation adjustments, representing the elimination of transactions between Allianz Group companies in different segments.
2006 | 2005 | 2004 | ||||||||||||||||
Banking Segment(1) | Dresdner Bank | Banking Segment(1) | Dresdner Bank | Banking Segment(1) | Dresdner Bank | |||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | |||||||||||||
Net interest income(2) | 2,720 | 2,645 | 2,294 | 2,218 | 2,356 | 2,264 | ||||||||||||
Net fee and commission income(3) | 3,008 | 2,841 | 2,850 | 2,693 | 2,707 | 2,574 | ||||||||||||
Trading income (net)(4) | 1,282 | 1,248 | 1,170 | 1,123 | 1,518 | 1,524 | ||||||||||||
Income from financial assets and liabilities designated at fair value through income (net)(4) | 53 | 53 | (7 | ) | (6 | ) | (9 | ) | (9 | ) | ||||||||
Other income | 25 | 24 | 11 | 11 | 4 | 4 | ||||||||||||
Operating revenues(5) | 7,088 | 6,811 | 6,318 | 6,039 | 6,576 | 6,357 | ||||||||||||
Administrative expenses | (5,605 | ) | (5,384 | ) | (5,661 | ) | (5,452 | ) | (5,643 | ) | (5,416 | ) | ||||||
Investment expenses | (47 | ) | (53 | ) | (30 | ) | (37 | ) | (25 | ) | (32 | ) | ||||||
Other expenses | 14 | 14 | (33 | ) | (33 | ) | (117 | ) | (118 | ) | ||||||||
Operating expenses | (5,638 | ) | (5,423 | ) | (5,724 | ) | (5,522 | ) | (5,785 | ) | (5,566 | ) | ||||||
Loan loss provisions | (28 | ) | (27 | ) | 110 | 113 | (344 | ) | (337 | ) | ||||||||
Operating profit | 1,422 | 1,361 | 704 | 630 | 447 | 454 | ||||||||||||
Realized gains/losses (net) | 492 | 491 | 1,020 | 1,020 | 543 | 533 | ||||||||||||
Impairments of investments (net) | (215 | ) | (215 | ) | (184 | ) | (183 | ) | (509 | ) | (505 | ) | ||||||
Amortization of intangible assets | — | — | (1 | ) | — | (281 | ) | (281 | ) | |||||||||
Restructuring charges | (424 | ) | (422 | ) | (13 | ) | (12 | ) | (292 | ) | (290 | ) | ||||||
Non-operating items | (147 | ) | (146 | ) | 822 | 825 | (539 | ) | (543 | ) | ||||||||
Income (loss) before income taxes and minority interests in earnings | 1,275 | 1,215 | 1,526 | 1,455 | (92 | ) | (89 | ) | ||||||||||
Income taxes | (263 | ) | (239 | ) | (387 | ) | (373 | ) | 302 | 296 | ||||||||
Minority interests in earnings | (94 | ) | (81 | ) | (102 | ) | (82 | ) | (101 | ) | (60 | ) | ||||||
Net income | 918 | 895 | 1,037 | 1,000 | 109 | 147 | ||||||||||||
Cost-income ratio(6) in % | 79.5 | 79.6 | 90.6 | 91.4 | 88.0 | 87.6 |
Operating revenues | Operating profit (loss) | Cost-income ratio | ||||||||||||||||||||
2008 | 2007 | 2006 | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | ||||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | % | % | % | ||||||||||||||
Germany | 325 | 326 | 320 | 4 | (12 | ) | (4 | ) | 92.8 | 104.1 | 102.6 | |||||||||||
Italy | 176 | 219 | 201 | 55 | 76 | 47 | 66.7 | 64.0 | 75.1 | |||||||||||||
France | — | 46 | 64 | (58 | ) | (21 | ) | 18 | — | (6) | 145.2 | 74.1 | ||||||||||
New Europe | 43 | 31 | 19 | (32 | ) | (11 | ) | 2 | 164.8 | 126.4 | 86.2 | |||||||||||
Total | 544 | 622 | 604 | (31 | ) | 32 | 63 | 100.4 | 94.1 | 90.1 | ||||||||||||
(1) |
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| Represents interest and similar income less interest |
| Represents fee and commission income less fee and commission |
| The total of these items equals income from financial assets and liabilities carried at fair value through income (net) in the segment income statement included in Note |
| For the Banking segment, total revenues are measured based upon operating revenues. |
| Represents operating expenses divided by operating revenues. |
Banking Operations by Division
The following table sets forth our banking operating revenues, operating profit and cost-income ratio by division for the years ended December 31, 2006, 2005 and 2004. Consistent with our general
practice, these figures are presented before consolidation adjustments, representing the elimination of transactions between Allianz Group companies in different segments.
Operating revenues | Operating profit (loss) | Cost income ratio | ||||||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | ||||||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | % | % | % | ||||||||||||||||
Private & Business Clients(1) | 3,204 | 3,033 | 2,974 | 653 | 470 | 187 | 76.6 | 80.0 | 86.5 | |||||||||||||||
Corporate & Investment Banking(1) | 3,525 | 3,038 | 3,005 | 692 | 513 | 515 | 80.0 | 83.6 | 81.1 | |||||||||||||||
Corporate Other(2) | 82 | (32 | ) | 378 | 16 | (353 | ) | (248 | ) | — | (3) | — | (3) | — | (3) | |||||||||
Dresdner Bank | 6,811 | 6,039 | 6,357 | 1,361 | 630 | 454 | 79.6 | 91.4 | 87.6 | |||||||||||||||
Other Banks(4) | 277 | 279 | 219 | 61 | 74 | (7 | ) | 76.0 | 72.4 | 100.0 | ||||||||||||||
Total | 7,088 | 6,318 | 6,576 | 1,422 | 704 | 447 | 79.5 | 90.6 | 88.0 | |||||||||||||||
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Banking Operations by Geographic Region
The following table sets forth our banking operating revenues and operating profit by geographic region for the years ended December 31, 2006, 2005 and 2004. Consistent with our general
practice, these figures are presented before consolidation adjustments, representing the elimination of transactions between Allianz Group companies in different segments.
Operating revenues | Operating profit (loss) | |||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | |||||||||
Germany | 4,312 | 4,340 | 4,290 | 853 | 814 | 38 | ||||||||
Rest of Europe | 2,006 | 1,620 | 1,557 | 237 | (105 | ) | (27 | ) | ||||||
NAFTA | 560 | 176 | 603 | 251 | (78 | ) | 411 | |||||||
Rest of World | 210 | 182 | 126 | 81 | 73 | 25 | ||||||||
Total | 7,088 | 6,318 | 6,576 | 1,422 | 704 | 447 | ||||||||
Year ended December 31, 20062008 compared to year ended December 31, 20052007
Another year of substantial improvement across all key performance indicators.
Strong net inflows of €36 billion despite challenging capital market environment.Solid asset base ensures profitability even under extreme conditions.
Further double-digit operatingOperating profit growth to €1.3 billion.of €926 million.
Very competitive cost-income ratio at 57.6%.
Net income reached €404 million, up 65.6%.Fixed-income business continued to deliver robust results, while equity business suffered from the difficult market environment.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
Record net inflows toInternal growth of 8.1% in third-party assets under management of €65 billion.
Inclusive of record net inflows of €65 billion, our third-party assets under management rose by 27.0% to €743 billion.management.
Commensurate with the marked 4.2 percentage point improvement of our cost-income ratio, which reached 58.4%, our operating profit grew by 34.9% to €1.1 billion.Strong profitability based on growing asset base and tight cost control.
Net income experienced strong growth of €519 million, reaching €244 million.Cost-income ratio at a very competitive 58.3%.
Third-Party Assets Under Management of the Allianz Group
Year ended December 31, 20062008 compared to year ended December 31, 20052007
In 2006,The severe turbulences in the financial markets influenced the development of our third-party assets under management. At €703 billion, these were €62 billion below the level of year-end 2007.
Development of third-party assets under management
in € bn
Despite the negative impact the crisis had on the fair value of our assets under management, we faced a volatile and challenging capital market environment. Whereasstill generated positive net inflows in the first third andnine months of 2008. In contrast, we saw large outflows in the fourth quarter as a consequence of increased risk aversion of investors. The twelve month net inflow figure was zero, as full year inflows of €11 billion from fixed-income products was entirely offset by outflows from equity capital markets developed favorably worldwide, the second quarter showed substantial declinesproducts. Following a sharp decline in market values. Invalues, market-related depreciation amounted to €86 billion; thereof €58 billion and €27 billion related to equity and fixed-income products, respectively. Deconsolidation effects of €5 billion were to a large extent due to the fixed income capital markets, substantial decreasesdisposal of our former real estate fund company, DEGI. The strengthening U.S. Dollar versus the Euro resulted in fixed income indices occurred throughout the first halfa positive currency translation effect of the year, following the increases in market interest rates, and values only recovered slowly during the second half of the year.€29 billion.
This capital market environment led to mixed developments Third-party assets under management by geographic region as of December 31, 2008 (December 31, 2007)(1)
in the asset%
The regional allocation of assets under management industry. For example, net flows in the fixed income mutual fund
marketmoved slightly towards investments originated in the United States, turned negative duringdriven by the second quarterappreciation of 2006. In Germany,the U.S. Dollar. Strong outflows from the equity business combined with this foreign exchange impact led to a shift from equity to fixed-income products, which made up 15% and fixed income mutual fund markets recorded net outflows in 2006, whereas balanced and money market products saw net inflows of a similar magnitude.
Despite this challenging environment and also dampened private demand for third-party asset management products and services, we achieved net inflows to third-party assets of €36 billion, primarily stemming from the United States and Europe, compared to €65 billion in 2005. Both fixed income and equity products contributed to net inflows in 2006, which again affirms our strong position as one85% of the largest asset managers worldwide, based on total assets under management.(1management, respectively, at year-end 2008. The proportion of institutional (74%)
A key success factor continued to be our competitive investment performance. The overwhelming majority of the third-party assets we manage again outperformed their respective benchmarks in 2006. Market-related appreciation was €43 billion. Net inflows and positive market effects were partly offset by negative currency conversion effects of €57 billion, resulting primarily from a weaker U.S. Dollar versus the Euro. Overall, on a Euro-basis, our third-party assets increased by €21 billion(2) to €764 billion as of December 31, 2006, compared to €743 billion as of December 31, 2005.
Year ended December 31, 2005 compared to year ended December 31, 2004
The growth in third-party assets under management to €743 billion as of December 31, 2005, up €158 billion(3) from a year earlier includes record net inflows of €65 billion (2004: €36 billion). Net inflows were particularly strong in our fixed income institutional business in the United States at PIMCO and in Germany at AGI Germany. Of the total increase in our third-party assets, market-related appreciation amounted to €33 billion, primarily attributable to favorable equity capital markets and, to a lesser extent, bond capital markets. These achievements continued to strengthen our position as
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one of the world’s largest asset managers, based on total assets under management. A major success factor has been our competitive performance, as the overwhelming majority of the third-party assets we manage outperformed their respective benchmarks in 2005. Further, we benefited from positive effects of €66 billion from exchange rate movements, resulting primarily from the strengthening of the U.S. Dollar compared to the Euro.
We operate our third-party asset management business primarily through Allianz Global Investors (or “AGI”). As of December 31, 2006, AGI managed
approximately 94.6% (December 31, 2005: 95.2%) of the Allianz Group’s third-party assets. The remaining third-party assets are managed by Dresdner Bank (approximately 2.7% and 2.3% as of December 31, 2006 and December 31, 2005, respectively) and other Allianz Group subsidiaries (approximately 2.7% and 2.5% as of December 31, 2006 and December 31, 2005, respectively).
The following graphs present the third-party assets managed by the Allianz Group by geographic region, investment category and investor class as of December 31, 2006 and 2005.
Third-party assets under management – Fair values by geographic region(1)
in€ bn
(1) | Based on the origination of |
(2) | Consists of third-party assets managed by |
to retail customers (26%) increased following stronger outflows from retail products and a shift in investments towards the United States, which has a strong institutional customer base.
Third-partyRolling investment performance of Allianz Global Investors(1)
in %
For equity products, 62% of our assets under management – Fair valuesoutperformed their respective benchmarks. Fixed-income markets were severely hit by investment category
unprecedented and unforeseeable market disruptions in€ bn the second half of the year, which had a negative impact on our performance track record, driving outperformance down to 48%.
(1) | AGI account-based, asset-weighted 3-year investment performance of 3rd party assets vs. benchmark including all accounts managed on a discretionary basis by equity and fixed-income managers of AGI (including direct accounts, Spezialfonds and CPMs of Allianz with AGI Germany). For some retail funds the net of fee performance is compared to the median performance of an appropriate peer group (Micropal or Lipper; 1st and 2nd quartile mean out-performance). For all other retail funds and for all institutional accounts performance is calculated gross of fees using closing prices (revaluated) where appropriate and compared to the benchmark of each individual fund or account. Other than under GIPS, the performance of closed funds/accounts is not included in the analysis. Also not included: AGI Taiwan, AGI Singapore, GTJA Allianz China, AGI Korea, AGI France, AGI Netherlands and AGI Italy. |
Third-party assets underMajor awards received during the year in the asset management – Fair values by investor class
in€ bn
United States
Third-party assets under management – Composition of fair value development
in€ bn
Year ended December 31, 2006 compared to year ended December 31, 2005
Our major achievementsbusiness in 2006 included:2008 include:
Allianz/PIMCO Funds were namedAllianz RCM Global EcoTrends Fund was announced joint winner of “Best MutualClimate Change Fund Family” in the 2006 Lipper/Barron’s Fund Families Survey.2008”, awarded by Holden & Partners Incisive Media.
Particularly strong net inflowsAllianz RCM-managed Charter European Trust was awarded “Best European Trust 2008” at Investment Weeks’s Investment Trust of approximately €7 billion at our equity fund manager NFJ Investment Group.the Year awards.
PIMCO CommodityRealReturn Funds began trading on June 29, 2006Nicholas Applegate Capital Management was named “130/30 Manager of the Year” at Professional Pensions’ Specialist and already successfully raised USD 773 million in assets to December 31, 2006.Alternative Investment Manager Awards 2008.
PIMCO was named “InvestorA total of the Year” in the 2006 Securitization News survey.24 Lipper Awards have been awarded to group funds across Asia and Europe.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
Our major achievements in 2005 included:The majority of our third-party assets under management outperformed their respective benchmarks. Operating profit grew 5.3% to €1,359 million. Excluding negative foreign currency translation effects of €96 million operating profit grew 12.8% at constant exchange rates.
PIMCO,In the fixed-income business, especially in the second half of 2007, we again generated a very strong overall investment performance, showing that our entity specializinglong-term approach pays off. We also further improved our investment performance in fixed income investments, significantly increased third-party assets by 36.8% to €468 billion, with record high net inflows of €60 billion, market-related appreciation of €12 billion and a positive foreign currency effect of €54 billion.
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Germanythe equity business.
Third-party assets under management – Compositionincreased by 8.1% on an internal basis. This growth was driven by net inflows and positive market effects, which in aggregate contributed €62 billion. However, the continuing decline of fair value development
in€ bnthe U. S. Dollar outweighed most of that asset growth.
Of the net inflows, €12.4 billion are attributable to fixed-income investments, whereas there were outflows of €2.4 billion from equity investments.
Year ended December 31, 2006 comparedThere were no major movements in the geographic origination of third-party assets under management in the year. The allocation between retail and institutional clients also remained almost
unchanged. Roughly two thirds were made up by institutional clients with a majority thereof coming from the United States. The same applied to year ended December 31, 2005retail clients. With regards to investment categories, the proportion between fixed-income and equity did not reflect any major movements either. The majority were fixed-income investments mainly from the United States. On the equity side the allocation between the United States, Germany and other countries was fairly balanced.
Our major achievementsMajor awards received during the year reflect our success in 2006 included:the asset management business in 2007:
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Deutscher Investment-Trust Gesellschaft für Wertpapieranlagen mbH (or “dit”) rankedMorningstar has named PIMCO’s Bill Gross and team the “2007 Fixed-Income Fund Manager of the year”. Bill Gross is the first infund manager ever to receive three Morningstar Fund Manager of the “Most Improved Group” of Standard & Poor’s German Fund Awards 2006.year awards.
ditPIMCO was awarded “Best Third-Party Provider of Fixed-Income Portfolio Management Services in Asia” from Euromoney Private Banking Survey 2007.
Allianz Global Investors Germany was awarded with five stars by the German financialagain according to “Capital” magazine “Capital”, the highest possible score.ranking.
Effective January 1, 2007, our German retail fund company dit and our German special fund company dresdnerbank investment management Kapitalanlagegesellschaft mbH (or “dbi”) were merged to form Allianz Global Investors Kapitalanlagegesellschaft mbH. In connection with this merger, the new brand image of the combined company will focus on the global expertise and presence of AGI.
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Year ended December 31, 2005 compared to year ended December 31, 2004
Our major achievements in 2005 included:
Record high net inflows, primarily in our fixed income institutional business at AGI Germany.
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Net inflows from mutual funds through both third-party distributors, as well as the Allianz Group’s tied agents network and Dresdner Bank’s branch offices, increased significantly to €13.8 billion (2004: €2.3 billion), largely resulting from fixed income products. These numbers include net inflows from mutual funds at PIMCO Europe Ltd.
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Earnings Summary(1)
The results of operations of our Asset Management segment are almost exclusively represented by AGI, accounting for 98.2% of our total Asset Management segment’s operating revenues for the year ended December 31, 2006 (2005: 98.3%, 2004: 99.8%). Accordingly, the discussion of our Asset Management segment’s results of operations relates solely to the operations of AGI.
Operating revenues
Year ended December 31, 20062008 compared to year ended December 31, 20052007
At €2,989Operating revenues decreased by 6.0% to €2,813 million on an internal basis. The decline in the asset base resulted in lower net fee and commission income. In addition, we recorded a net loss from financial assets and liabilities carried at fair value through income. On a nominal basis, operating revenues reflect a solid growth of 11.7% at stable revenue margins, primarily attributable to strict pricing discipline and a further improved responsiveness to our clients’were 11.5% lower.
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needs. Net fee and commission income was up €277 million to €2,874 million, predominantly due to higher management feesdeclined by 8.1% as a resultthe lower level of the growing third-party assetassets under management base, as previously discussed. Internal operating revenue growthled to decreasing management fees. The unprecedented market disruptions were reflected in the volatility of 13.3% was even stronger, as nominal operating revenue growth was impacted by the weaker U.S. Dollar comparedperformance fees, which more than halved.
2008 | 2007 | 2006 | |||||||
€ mn | € mn | € mn | |||||||
Management fees | 3,244 | 3,496 | 3,368 | ||||||
Loading and exit fees | 250 | 307 | 334 | ||||||
Performance fees | 82 | 202 | 107 | ||||||
Other income | 364 | 292 | 309 | ||||||
Fee and commission income | 3,940 | 4,297 | 4,118 | ||||||
Commissions(2) | (770 | ) | (931 | ) | (949 | ) | |||
Other expenses(2) | (358 | ) | (306 | ) | (295 | ) | |||
Fee and commission expenses | (1,128 | ) | (1,237 | ) | (1,244 | ) | |||
Net fee and commission income | 2,812 | 3,060 | 2,874 | ||||||
Net loss from financial assets and liabilities carried at fair value through income amounted to the Euro.€80 million coming from a gain of €29 million in 2007. The swing stemmed to a large extent from €74 million negative mark-to-market valuations of seed money investments.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
Our operatingOperating revenues increased 19.5%amounted to €2,677 million. This positive development reflects favorable business developments worldwide, as previously discussed, namely resulting in significant increases of management and loading fees as well as performance fees. Management and loading fees, net of commissions, and performance fees rose by 17.2% to €2,462€3,178 million, and 117.9% to €122 million, respectively. Overall, netup 6.3% from a year ago. Operating revenue grew 13.5% on an internal basis.
Net fee and commission income improvedwas up €186 million to €3,060 million driven by 19.3% to €2,597 million.higher management fees resulting from our growing asset base, as well as by increased performance fees. In contrast, loading and exit fees decreased reflecting the development in mutual fund sales.
The following table sets forth the composition of AGI’s net fee and commission income for the years ended December 31, 2006, 2005 and 2004.
2006 | 2005 | 2004 | |||||||
€ mn | € mn | € mn | |||||||
Management fees | 3,368 | 2,941 | 2,491 | ||||||
Loading and exit fees | 334 | 333 | 315 | ||||||
Performance fees | 107 | 122 | 56 | ||||||
Other income | 309 | 294 | 228 | ||||||
Fee and commission income | 4,118 | 3,690 | 3,090 | ||||||
Commissions | (895 | ) | (812 | ) | (706 | ) | |||
Other expenses | (349 | ) | (281 | ) | (208 | ) | |||
Fee and commission expenses | (1,244 | ) | (1,093 | ) | (914 | ) | |||
Net fee and commission income | 2,874 | 2,597 | 2,176 | ||||||
(2) | €54 million have been reclassified from other expenses to commission expenses each for the years ended December 31, 2007 and 2006. |
Operating profit
Operating profit – Allianz Global Investors
in€ mn
Year endedEnded December 31, 2006 compared2008 Compared to year endedYear Ended December 31, 20052007
In a difficult market environment, operating profit was down 27.9% on an internal basis. At €904 million, it was 31.6% lower than the previous year’s result. This was mainly driven by lower net fee and commission income, negative mark-to-market valuation of seed money investments together with a slight increase in operating expenses.
Administrative expenses of €1,909 million, were 2.8% higher than the prior year level mainly as non-personnel expenses showed a double-digit increase driven by business expansions in the fixed-income business and in U.S. distribution units. In addition, expenses increased following higher costs for further improvements of compliance and risk management infrastructures. Personnel expenses declined due to lower bonus costs, partly offset by associated non-bonus related staff costs due to an increase in headcount.
At 67.9%, the cost-income ratio was up 9.5 percentage points.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Operating profit grewincreased by 14.2%3.5% to €1,276€1,321 million.
Administrative expenses, excluding acquisition-related expenses at €1,713 million in 2006, were up 9.8%, representing a considerably less than proportionate increase compared8.4% to that in our operating revenues due to effective cost control. As a result, our cost-income ratio decreased by 1.0 percentage point to 57.3%.
This success was achieved despite substantial investments in our distribution network and human resources development.
Year ended December 31, 2005 compared to year ended December 31, 2004
Operating profit increased significantly by 33.9% to €1,117€1,857 million primarily resulting from the aforementioned growth in our operating revenues. Operating profit development was particularly strong in the United States and Germany.
Due in large part to strict cost management, the increase of our operating expenses was proportionally smaller compared to that of our operating revenues. As a result, our cost-income ratio improved considerably to 58.3% (2004: 62.8%). The 10.9% rise in operating expenses to €1,560 million was largely due to increased performance-related
compensation in the United States and Germany as a result of our strong business developments.expansion and structured investments to secure future growth. In line with new business generation, compensation-related expenses were also up. At 58.4%, our cost-income remained at a very competitive level.
Non-operating itemsresult
Year endedEnded December 31, 2006 compared2008 Compared to year endedYear Ended December 31, 20052007
In aggregate, the net loss from non-operating items decreased significantly from €708 million to €556 million. Thereof, at €532 million, acquisition relatedAcquisition-related expenses declined 22.6%significantly to €278 million (2007: €491 million). This decrease was mainly driven byalmost exclusively due to a lower number of outstanding PIMCO LLC Class B Units (or “Class B Units”) in 2006 as compared to 2005.(B Units). As of December 31, 2006,2008, the Allianz Group had acquired 21,76271,743 of the 150,000 units originally outstanding.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
The aggregate net loss from non-operating items declined to €492 million, down €64 million compared to the prior year period. Acquisition related expenses declined by 7.7% to €491 million. This was mainly driven by a positive foreign exchange effect of €48 million. Excluding foreign exchange impacts, acquisition related expenses grew 1.2%, mainly due to valuation effects of PIMCO LLC Class B Units (B Units) as a result of increased operating performance at PIMCO. This outweighed the lower number of outstanding Class B Units in 2007 as compared to 2006. As of December 31, 2007, the Allianz Group had acquired 43,917 of the 150,000 Class B Units originally outstanding. Going forward, we expect acquisition-related expenses to be mainly driven by the number of Class B Units outstanding and our operating profit development at PIMCO. Please see Note 48 to our consolidated financial statements
There was no charge in 2007 for further information on the Class B Units. Amortizationamortization of intangible assets compared to a charge in the prior year of €23 million in 2006that was related to the mergerimpairment of dit and dbi to Allianz Global Investors Kapitalanlagegesellschaft mbH, previously mentioned. Thereby, our dita brand was fully written off in 2006.name.
Year ended December 31, 2005 compared to year ended December 31, 2004
Acquisition-related expenses increased by 10.6% to €687 million. Thereof, €677 million, up 35.1%, was due to the deferred purchases of interests in PIMCO related to the PIMCO LLC Class B Unit Purchase Plan (or “Class B Plan”). The increase was commensurate with the strong profit development at PIMCO in 2005 and the higher number of vested units according to the vesting schedule of the purchase plan. The Class B Plan was agreed upon at the time this company was acquired. Of the total acquisition-related expenses, a further €10 million was incurred due to retention payments for the management and employees of PIMCO and Nicholas Applegate. These retention payments were down €110 million as they largely expired in 2005.
During 2005, a subsidiary of Allianz SE purchased a total of approximately USD 250 million of the remaining minority interest in Allianz Global Investors of America L.P. (or “AGI L.P.”), with
payment therefore made in April 2005. Following this transaction, the remaining ownership interest that is held by AGI L.P.’s former parent company, Pacific Life, was reduced to approximately 2% at December 31, 2005 (December 31, 2004: 6%). Further, and also during 2005, a subsidiary of Allianz AG called 5,427 Class B equity units from former and current members of the management of PIMCO under the Class B Plan. The total amount paid related to the call of the Class B equity units was €71 million. Under the plan, participants acquired Class B equity units annually through 2004 for a total of 150,000 units. Please see Note 48 to our consolidated financial statements for further information on the Class B Units.
Amortization of intangible assets benefited from the elimination of goodwill amortization under IFRS, effective January 1, 2005 (2004: charge of €380 million), and from the expiration of amortization charges relating to capitalized bonuses for PIMCO management in 2005.
Net income
Year ended December 31, 20062008 compared to year ended December 31, 20052007
NetWe recorded net income reached €395of €369 million, exceeding previous year’s levela 21.5% decline compared to a year ago.
Tax charges were reduced by 68.8%. Primarily as a result of higher taxable income in the United States income tax expenses increased 117.3%27.0% amounting to €276 million, representing a rise of our€246 million. The effective tax rate from 31.1%was 39.9% and remained almost unchanged compared to 38.3%the prior year level of 40.7%.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
NetIncome before income reached €234taxes and minority interests increased by €109 million, giving rise to a €513 million improvement from prior year’s net loss of €279 million. Incomehigher tax expenses amounted to €127 million, resulting in ancharge. Our effective tax rate of 31.1%increased by 2.4 percentage points to 40.7%, comparedprimarily due to a tax benefit of €53 million in 2004. Income tax expenses increased due predominantly to improved operating profitability, inclusive of higherhighter taxable income in the United States, partially offsetStates.
Due to the minority buy-outs of AGF and RAS, minority interests in earnings reduced by a one-off deferred tax credit of €37€27 million related to tax deductible goodwill amortization.€22 million.
Net income therefore grew by 19.0% to €470 million in 2007.
The following table sets forth the income statements and cost-income ratios for both our Asset Management segment as a wholeinformation and AGI for the years ended December 31, 2006, 2005 and 2004.
2006 | 2005 | 2004 | ||||||||||||||||
Asset Management Segment | Allianz Global Investors | Asset Management Segment | Allianz Global Investors | Asset Management Segment | Allianz Global Investors | |||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | |||||||||||||
Net fee and commission income(1) | 2,924 | 2,874 | 2,636 | 2,597 | 2,178 | 2,176 | ||||||||||||
Net interest income(2) | 71 | 66 | 56 | 51 | 42 | 41 | ||||||||||||
Income from financial assets and liabilities carried at fair value through income (net) | 38 | 37 | 19 | 18 | 11 | 10 | ||||||||||||
Other income | 11 | 12 | 11 | 11 | 14 | 14 | ||||||||||||
Operating revenues(3) | 3,044 | 2,989 | 2,722 | 2,677 | 2,245 | 2,241 | ||||||||||||
Administrative expenses, excluding acquisition-related expenses(4) | (1,754 | ) | (1,713 | ) | (1,590 | ) | (1,560 | ) | (1,405 | ) | (1,406 | ) | ||||||
Other expenses | — | — | — | — | (1 | ) | (1 | ) | ||||||||||
Operating expenses | (1,754 | ) | (1,713 | ) | (1,590 | ) | (1,560 | ) | (1,406 | ) | (1,407 | ) | ||||||
Operating profit | 1,290 | 1,276 | 1,132 | 1,117 | 839 | 834 | ||||||||||||
Realized gains/losses (net) | 7 | 5 | 6 | 5 | 17 | 17 | ||||||||||||
Impairments of investments (net) | (2 | ) | (2 | ) | — | — | — | — | ||||||||||
Acquisition-related expenses, thereof:(4) | ||||||||||||||||||
Deferred purchases of interests in PIMCO | (523 | ) | (523 | ) | (677 | ) | (677 | ) | (501 | ) | (501 | ) | ||||||
Other acquisition-related expenses(5) | (9 | ) | (9 | ) | (10 | ) | (10 | ) | (120 | ) | (120 | ) | ||||||
Subtotal | (532 | ) | (532 | ) | (687 | ) | (687 | ) | (621 | ) | (621 | ) | ||||||
Amortization of intangible assets(6) | (24 | ) | (23 | ) | (25 | ) | (25 | ) | (510 | ) | (510 | ) | ||||||
Restructuring charges | (4 | ) | (4 | ) | (1 | ) | (1 | ) | — | — | ||||||||
Non-operating items | (555 | ) | (556 | ) | (707 | ) | (708 | ) | (1,114 | ) | (1,114 | ) | ||||||
Income (loss) before income taxes and minority interests in earnings | 735 | 720 | 425 | 409 | (275 | ) | (280 | ) | ||||||||||
Income taxes | (278 | ) | (276 | ) | (129 | ) | (127 | ) | 52 | 53 | ||||||||
Minority interests in earnings | (53 | ) | (49 | ) | (52 | ) | (48 | ) | (52 | ) | (52 | ) | ||||||
Net income (loss) | 404 | 395 | 244 | 234 | (275 | ) | (279 | ) | ||||||||||
Cost-income ratio(7) in % | 57.6 | 57.3 | 58.4 | 58.3 | 62.6 | 62.8 |
2008 | 2007 | 2006 | ||||||||||||||||
Asset Management Segment | Allianz Global Investors | Asset Management Segment | Allianz Global Investors | Asset Management Segment | Allianz Global Investors | |||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | |||||||||||||
Net fee and commission income(1) | 2,874 | 2,812 | 3,133 | 3,060 | 2,924 | 2,874 | ||||||||||||
Net interest income(2) | 62 | 54 | 81 | 75 | 71 | 66 | ||||||||||||
Income from financial assets and liabilities carried at fair value through income (net) | (77 | ) | (80 | ) | 31 | 29 | 38 | 37 | ||||||||||
Other income | 28 | 27 | 14 | 14 | 11 | 12 | ||||||||||||
Operating revenues(3) | 2,887 | 2,813 | 3,259 | 3,178 | 3,044 | 2,989 | ||||||||||||
Administrative expenses, excluding acquisition-related expenses(4) | (1,961 | ) | (1,909 | ) | (1,900 | ) | (1,857 | ) | (1,754 | ) | (1,713 | ) | ||||||
Operating expenses | (1,961 | ) | (1,909 | ) | (1,900 | ) | (1,857 | ) | (1,754 | ) | (1,713 | ) | ||||||
Operating profit | 926 | 904 | 1,359 | 1,321 | 1,290 | 1,276 | ||||||||||||
Realized gains/losses (net) | 5 | 5 | 2 | 4 | 7 | 5 | ||||||||||||
Impairments of investments (net) | (19 | ) | (13 | ) | (1 | ) | (1 | ) | (2 | ) | (2 | ) | ||||||
Acquisition-related expenses(4), thereof: | ||||||||||||||||||
Deferred purchases of interests in PIMCO | (278 | ) | (278 | ) | (488 | ) | (488 | ) | (523 | ) | (523 | ) | ||||||
Other acquisition-related expenses | — | — | (3 | ) | (3 | ) | (9 | ) | (9 | ) | ||||||||
Subtotal | (278 | ) | (278 | ) | (491 | ) | (491 | ) | (532 | ) | (532 | ) | ||||||
Amortization of intangible assets | (1 | ) | (1 | ) | — | — | (24 | ) | (23 | ) | ||||||||
Restructuring charges | — | — | (4 | ) | (4 | ) | (4 | ) | (4 | ) | ||||||||
Non-operating items | (293 | ) | (287 | ) | (494 | ) | (492 | ) | (555 | ) | (556 | ) | ||||||
Income before income taxes and minority interests in earnings | 633 | 617 | 865 | 829 | 735 | 720 | ||||||||||||
Income taxes | (249 | ) | (246 | ) | (342 | ) | (337 | ) | (278 | ) | (276 | ) | ||||||
Minority interests in earnings | (5 | ) | (2 | ) | (25 | ) | (22 | ) | (53 | ) | (49 | ) | ||||||
Net income | 379 | 369 | 498 | 470 | 404 | 395 | ||||||||||||
Cost-income ratio(5) in % | 67.9 | 67.9 | 58.3 | 58.4 | 57.6 | 57.3 |
(1) | Represents fee and commission income less fee and commission |
(2) | Represents interest and similar income less interest |
(3) | For the Asset Management segment, total revenues are measured based upon operating revenues. |
(4) | The total of these items equals acquisition and |
(5) |
|
|
|
| Represents operating expenses divided by operating revenues. |
Effective January 1, 2006, in addition to our four operating segments Property-Casualty, Life/Health, BankingOperating loss declined by €137 million mainly driven by foreign currency gains.
Net loss heavily affected by increased impairments and Asset Management, and with retrospective application, the Allianz Group introduced a fifth segment named Corporate. The activities included in the Corporate segment were previously reported in the Property-Casualty segment. Generally, the Corporate segment includes all Group activities that are not allocated to one of our operating segments. In particular, it includes the following activities:lower realized gains.
Holding Function Comprises Group Center functions carried out by the Allianz Group’s holding company Allianz SE, as well as regional management companies and special investment vehicles. In particular, the Holding Function works with the operating entities to guide the Allianz Group towards effective operation using a common set of values and corporate governance processes. It supports the growth of the Allianz Group’s businesses through its risk, corporate finance, treasury, financial control, communication, legal, human resources strategy and technology functions.
Private Equity Includes the income and expense items associated with the private equity investments held in particular by Allianz Capital Partners GmbH and Allianz Private Equity Partners GmbH.
Earnings Summary
Year ended December 31, 20062008 compared to year ended December 31, 20052007
WhileThe aggregate operating loss down €50decreased by 42.2% to €188 million due to €831lower administrative and investment expenses in the Holding Function.
At €725 million, the net loss was €567 million higher than in 2006, remained relatively stable, net expenses from non-operating items declinedthe prior year reflecting higher impairments and significantly by €962 million. As a result, loss before income taxes and minority interestslower realized gains in earnings was down €1,012 million to €987 million.the Holding Function.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
In 2005,The operating loss remained relatively stable. However, net expense from non-operating items, at €1,118 million in 2005, was updeclined significantly from the prior yeardue to higher current investment income and lower expenses. This improvement along with a positive trading result and a further increased level of €172 million. Asrealized gains led to a result,
much lower loss before taxes, whereas the negative tax effects almost off-set these positive developments. Net income taxes and minority interests in earnings increasedthus slightly improved by €957€21 million to €1,999a net loss of €158 million.
The following table sets forth Corporate’s operating profit and non-operating items by activity for the years ended December 31, 2006, 2005 and 2004. Consistent with our general practice, these figures are presented before consolidation adjustments, representing the elimination of transactions between Allianz Group companies in different segments. See Note 5 to the consolidated financial statements for our Corporate segment’s income statement for the years ended December 31, 2006, 2005 and 2004.
Operating profit (loss) | Non-operating items | |||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | |||||||||||||
Holding Function | (838 | ) | (923 | ) | (618 | ) | (455 | ) | (1,109 | ) | (649 | ) | ||||||
Private Equity | 7 | 42 | (252 | ) | 299 | (9 | ) | 477 | ||||||||||
Total | (831 | ) | (881 | ) | (870 | ) | (156 | ) | (1,118 | ) | (172 | ) | ||||||
Holding Function
Year ended December 31, 20062008 compared to year ended December 31, 20052007
Operating profit (loss) At €318 million the operating loss in the holding function was 28.7% lower than in 2007 largely due to a decline in administrative and investment expenses. The considerablelatter benefited from increased foreign currency gains of €111 million. Revenues declined slightly, as higher interest income was more than offset by a decrease in operating loss stemmed primarily from higher interest and similar income due to higher dividends received from equity investments. Further key operating items included within Holding Function are administrative expenses to run our Group Center, expenses associated with our pension plans, and expenses for certain Allianz Group-wide growth initiatives.all other revenue positions.
Non-operating itemsresult Net expenses fromThe non-operating items decreased by €654loss amounted to €1,154 million predominantly from higher realized gains brought about by various sales transactions. With net realized gains of €434 million the sale of our shareholding in Schering AG in June 2006 contributed most. In addition, non-operating items benefitedcoming from a gain of €37 million in the prior year. Due to the weak market conditions impairments increased significantly by €638 million and capital gains were €838 million
lower compared to the prior year. Trading income improved and expenses for external debt decreased mostly driven by the redemption of the bridge loan for the minority buy-out at AGF.
Net income (loss)We recorded a net loss from financial assets and liabilities held for trading in comparisonof €812 million, or a €644 million larger loss compared to 2005 when the effectsprior year’s level. The lower non-operating result described above was partially compensated by higher tax income of derivatives from an equity-linked loan issued in connection with financing the cash tender offer for the outstanding RAS shares made a significant
negative impact. Interest€662 million. In 2007 tax income was lower due to tax expense from external debt, at €775 million in 2006, remained relatively constant.the German tax reform.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
Operating profit OperatingAt €446 million, the operating loss was nearly halved, a considerable improvement as compared to a year earlier. On the revenue side, in line with a higher asset base and an increase in yields, the main driver was interest and similar income which was up 74.5%, reaching €745 million, driven by a high liquidity accumulated to pay back liabilities. Additionally, operating expenses declined by 6.9%, primarily dueattributing to higherlower investment expenses stemming from unfavorable movements of foreign currency exchange rates.which reflect declined banking and investment transaction costs.
Non-operating itemsresult InThe non-operating result turned into an aggregate non-operating items amountedprofit of €37 million compared to aan aggregate loss of €1,109 million in 2005, after a loss of €649€455 million in the prior year. This increase was mainly attributable to significantly decreased realized gains. In 2004, we particularly benefited from a gain fromThe non-operating trading result driven by the reduction of our shareholdings in Munich ReBITES exchangeable bond, which was not repeatedpartially repaid in 2005. Furthermore, in 2005, we recorded a2007, and higher net losscapital gains contributed to this development and therefore more than compensated for the higher interest expense from financial assets and liabilities held for trading. To a large extent this was a result of negative changes in fair values of certain derivatives issued in connection with our “All-in-One” capital market transactions in January 2005. Additionally, the effects of embedded derivatives from the equity-linked loan which was issuedexternal debt in connection with the Allianz-RAS merger contributed signficantly to the higher net loss.minority buy-out at AGF.
Partially offsetting were lower impairments of investments (net) and declined interest expense from external debt. Impairments of investments (net) were down, as, in 2004, this line item was impacted byNet income Due to high write-downs of real estate. Interest expense from external debt benefited to a large extentnegative tax impacts stemming primarily from the maturation of two bond issues.German tax reform our net loss came to €168 million.
Private Equity
Year ended December 31, 20062008 compared to year ended December 31, 20052007
Operating profitOperating profit decreased €35 million from the 2005 level. In August 2006, the Allianz Group acquired 100.0% of MAN Roland Druckmaschinen AG. The full consolidation of this private equity investment had impacts ofincreased by 7.4% to €130 million. This development was driven
by a similar magnitude both on operating revenues and operating expenses, namely income and expenseshigher margin from fully consolidated private equity investments.investments and a rise in net fee and commission income, whereas interest and similar income declined due to higher profits from private equity fund investments in the prior year when the market environment was friendlier than in 2008.
Non-operating itemsresult Non-operating items improvedThe non-operating loss declined from a loss of €9€66 million to a gain of €299 million. The disposal of Four Seasons Health Care Ltd. (or “Four Seasons”) in August 2006 contributed €287€2 million, stemming from higher net capital gains.
Net income (loss) Net income increased by €77 million to this development.€87 million most as a consequence of the reduced non-operating loss. Income tax expenses amounted to €31 million compared to €25 million in 2007.
Year ended December 31, 20052007 compared to year ended December 31, 20042006
Operating profit Income and expenses from fully consolidated private equity investments were each up by a similar magnitudeAt €121 million, the operating result turned positive after an operating loss of €7
million in the acquisitionprevious year reflecting profit participation of Four Seasons in August 2004.€65 million.
Non-operating itemsresult Non-operating itemsresult turned negative and amounted to aan aggregate loss of €9€66 million, in 2005 afterfollowing a gain of €477€299 million in 2004 primarilythe previous year, as the high level of realized gains/losses (net)gains from disposals in the prior year period—mainly in connection with the sale of Four Seasons Health Care Limited—was not repeated.
Net income Net income decreased to €10 million. This development was mainly attributable to the non-operating loss. Furthermore, net income was impacted by higher taxes and increased minority interests in earnings.
Holding Function | Private Equity | Total | |||||||||||||||||||||||||
2008 | 2007 | 2006 | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | |||||||||||||||||||
Operating profit (loss) | (318 | ) | (446 | ) | (824 | ) | 130 | 121 | (7 | ) | (188 | ) | (325 | ) | (831 | ) | |||||||||||
Non-operating items | (1,154 | ) | 37 | (455 | ) | (2 | ) | (66 | ) | 299 | (1,156 | ) | (29 | ) | (156 | ) | |||||||||||
Income (loss) before income taxes and minorities | (1,472 | ) | (409 | ) | (1,279 | ) | 128 | 55 | 292 | (1,344 | ) | (354 | ) | (987 | ) | ||||||||||||
Income taxes | 662 | 242 | 827 | (31 | ) | (25 | ) | (3 | ) | 631 | 217 | 824 | |||||||||||||||
Minority interests in earnings | (2 | ) | (1 | ) | (8 | ) | (10 | ) | (20 | ) | (8 | ) | (12 | ) | (21 | ) | (16 | ) | |||||||||
Net income (loss) | (812 | ) | (168 | ) | (460 | ) | 87 | 10 | 281 | (725 | ) | (158 | ) | (179 | ) | ||||||||||||
Discontinued Operations of Dresdner Bank(1)
Year ended December 31, 2008
Discontinued operations of Dresdner Bank continued to suffer from weak markets.
Net loss from discontinued operations amounted to €6,411 million.
Year ended December 31, 2007
Operating profit at €602 million despite financial markets turbulence.
Net trading loss of €463 million.
In the full year results of 2008, we show results from operating activities only until September 30, 2008. In the discussion below, we do not present operating revenues and operating profit for the period between October 1, 2008 and December 31, 2008 because the value of the Dresdner Bank activities is not measured by their operating performance during this period but rather by the value of Dresdner Bank reflected in the agreements to sell this entity to Commerzbank, as discussed below under “Net income (loss) from discontinued operations for the year ended December 31, 2008”. Accordingly, operating revenues and operating profit for 2008 and 2007 are not comparable because the figures are based on a nine month period for 2008 and on a full year calendar period for 2007.
Earnings Summary
Operating revenues
Nine months ended September 30, 2008
Operating revenues decreased significantly and amounted to €1,910 million with all revenue components contributing to this development. The net dealing loss, which comprises net trading loss and net income (loss) from financial assets and liabilities designated at fair value through income, at €1,439 million, had the biggest impact on revenues. This income category was heavily affected by the credit crisis. Additionally, we recognized declines in net interest income and net fee and commission income.
Year ended December 31, 2007 compared to year ended December 31, 2006
Dresdner Bank’s operating revenues were down significantly. In 2004,by 21.4% to €4,918 million compared to the previous
year. This development resulted mainly from the effects of the financial markets turbulence which heavily impacted our net trading income ending up in a negative result of €463 million (2006: income of €1,257 million). However, the net interest income grew by 17.5% to €2,821 million and the net fee and commission income improved slightly by 0.3% to €2,527 million.
Operating profit (loss)
Nine months ended September 30, 2008
As the massive decline in operating revenues could not be outweighed by reductions in operating expenses, we benefitedrecorded an operating loss of €1,797 million, which included loan loss provisions of €(327) million.
Year ended December 31, 2007 compared to year ended December 31, 2006
At €602 million, operating profit was down 48.4%, mainly caused by the above mentioned weak revenue situation. Expense savings of €610 million partly compensated this development. Operating expenses, at €4,447 million, were down 12.1%. Administrative expenses were down by 11.7% to €4,430 million. Loan loss provisions showed gross releases and recoveries of €593 million and at the same time new provisions of €462 million leading to net releases of €131 million in 2007 (2006: net additions of €31 million). As the savings could not outweigh the decline in revenues, our cost-income ratio increased by 9.6 percentage points to 90.4%.
��
(1) | Following the announcement of the sale of Dresdner Bank to Commerzbank in the third quarter 2008, Dresdner Bank qualified as held-for-sale and discontinued operations since the third quarter 2008. Therefore, Dresdner Bank’s financial results have been eliminated from our Banking operation’s results and are now presented as “Discontinued Operations of Dresdner Bank”. Please refer to Note 4 to the consolidated financial statements for further information. All numbers are stated on a consolidated basis. |
Result from considerableoperating activities of discontinued operations
Nine months ended September 30, 2008
We recorded non-operating items of €164 million. Despite the negative pre-tax income of €1,633 million, we recorded an income tax charge of €398 million. Therefore, we recorded a result from operating activities of discontinued operations of € (2,074) million.
Year ended December 31, 2007 compared to year ended December 31, 2006
The non-operating result amounted to €403 million in 2007 and was therefore €810 million above the prior year. This resulted mainly from significantly lower restructuring charges of €50 million (down 88.2%), as in 2006, higher charges were incurred in connection with the “New Dresdner Plus” reorganization programme, and higher realized gains brought aboutof €540 million compared to €230 million in 2006. In addition, impairments of investments amounted to €87 million which was a decrease of 59.5%. The prior year’s figure included higher write-downs on real estate properties used by third-parties.
We recorded a numbertax charge of private equity transactions,€282 million (2006: €293 million). This led to a result from operating activities of whichdiscontinued operations of €650 million in 2007 (2006: €381 million).
Net income (loss) from discontinued operations
Year ended December 31, 2008
The net loss from discontinued operations amounted to €6,411 million. This comprised the most significant was Allianz Capital Partner’s salenegative result from operating activities of its interest€2,074 million, plus an impairment loss recognized as of September 30, 2008 of €1,409 million representing the remeasurement of assets of disposal group to fair value less costs to sell—together with the result of transaction between September 30, 2008 and December 31, 2008 of €(2,928) million mainly reflecting the change in Messer Griesheim.fair value of the considerations agreed.
Year ended December 31, 2007 compared to year ended December 31, 2006
The net income from discontinued operations amounted to €650 million, up 70.1%.
Information on discontinued operations of Dresdner Bank
2008(1) | 2007 | 2006 | |||||||
€ mn | € mn | € mn | |||||||
Net interest income(2) | 1,856 | 2,821 | 2,400 | ||||||
Net fee and commission income(3) | 1,493 | 2,527 | 2,520 | ||||||
Trading income (net)(4) | (1,362 | ) | (463 | ) | 1,257 | ||||
Income from financial assets and liabilities designated at fair value through income (net)(4) | (77 | ) | 33 | 53 | |||||
Other income | — | — | 25 | ||||||
Operating revenues(5) | 1,910 | 4,918 | 6,255 | ||||||
Administrative expenses | (3,326 | ) | (4,430 | ) | (5,018 | ) | |||
Investment expenses | (2 | ) | (20 | ) | (53 | ) | |||
Other expenses | (52 | ) | 3 | 14 | |||||
Operating expenses | (3,380 | ) | (4,447 | ) | (5,057 | ) | |||
Loan loss provisions | (327 | ) | 131 | (31 | ) | ||||
Operating profit (loss) | (1,797 | ) | 602 | 1,167 | |||||
Realized gains/losses (net) | 285 | 540 | 230 | ||||||
Impairments of investments (net) | (102 | ) | (87 | ) | (215 | ) | |||
Amortization of intangible assets | (2 | ) | — | — | |||||
Restructuring charges | (17 | ) | (50 | ) | (422 | ) | |||
Non-operating items | 164 | 403 | (407 | ) | |||||
Result from discontinued operations before income taxes and minority interests in earnings | (1,633 | ) | 1,005 | 760 | |||||
Income taxes | (398 | ) | (282 | ) | (293 | ) | |||
Minority interests in earnings | (43 | ) | (73 | ) | (86 | ) | |||
Result from operating activities of discontinued operations | (2,074 | ) | 650 | 381 | |||||
Impairment loss recognized on remeasurement of assets of disposal group to fair value less costs to sell as of September 30, 2008(6) | (1,409 | ) | — | — | |||||
Result of transaction between September 30, 2008 and December 31, 2008(6) | (2,928 | ) | — | — | |||||
After-tax loss on remeasurement of assets of disposal group to fair value less costs to sell | (4,337 | ) | — | — | |||||
Net income (loss) from discontinued operations | (6,411 | ) | 650 | 381 | |||||
Cost-income ratio(7) in % | 177.0 | 90.4 | 80.8 |
(1) | For the year ended December 31, 2008, the result from operating activities of discontinued operations represents the nine months ended September 30, 2008. Previous year figures represent 12 months ended December 31 of the relevant year. |
(2) | Represents interest and similar income less interest expenses. |
(3) | Represents fee and commission income less fee and commission expenses. |
(4) | The total of these items equals income from financial assets and liabilities carried at fair value through income (net) included in Note 4 to the consolidated financial statements. |
(5) | For the discontinued operations of Dresdner Bank, total revenues are measured based upon operating revenues. |
(6) | No income taxes were related to the impairment loss of September 30, 2008 and to the result from transaction between September 30, 2008 and December 31, 2008. |
(7) | Represents operating expenses divided by operating revenues. |
Another yearShareholders’ equity of strong growth in shareholders’ equity.€33.7 billion.
Asset allocation of Allianz is well diversified and of high quality.
Consolidated Balance Sheets
The following table sets forth the Allianz Group’s consolidated balance sheets as of December 31, 2006 and 2005.
As of December 31, | 2008 | 2007 | ||
€ mn | € mn | |||
ASSETS | ||||
Cash and cash equivalents | 8,958 | 31,337 | ||
Financial assets carried at fair value through income(2) | 14,240 | 185,461 | ||
Investments(3) | 260,147 | 286,952 | ||
Loans and advances to banks and customers | 115,655 | 396,702 | ||
Financial assets for unit-linked contracts | 50,450 | 66,060 | ||
Reinsurance assets | 14,599 | 15,312 | ||
Deferred acquisition costs | 22,563 | 19,613 | ||
Deferred tax assets | 3,996 | 4,771 | ||
Other assets | 34,004 | 38,025 | ||
Non-current assets and assets of disposal groups classified as held-for-sale | 419,513 | 3,503 | ||
Intangible assets | 11,451 | 13,413 | ||
Total assets | 955,576 | 1,061,149 | ||
As of December 31, | 2008 | 2007 | ||
€ mn | € mn | |||
LIABILITIES AND EQUITY | ||||
Financial liabilities carried at fair value through income | 6,244 | 126,053 | ||
Liabilities to banks and customers | 18,451 | 336,494 | ||
Unearned premiums | 15,233 | 15,020 | ||
Reserves for loss and loss adjustment expenses | 63,924 | 63,706 | ||
Reserves for insurance and investment contracts | 296,557 | 292,244 | ||
Financial liabilities for unit-linked contracts | 50,450 | 66,060 | ||
Deferred tax liabilities | 3,833 | 3,973 | ||
Other liabilities | 32,930 | 48,031 | ||
Liabilities of disposal groups classified as held-for-sale | 411,816 | 1,293 | ||
Certificated liabilities | 9,544 | 42,070 | ||
Participation certificates and subordinated liabilities | 9,346 | 14,824 | ||
Total liabilities | 918,328 | 1,009,768 | ||
Shareholders’ equity | 33,684 | 47,753 | ||
Minority interests | 3,564 | 3,628 | ||
Total equity | 37,248 | 51,381 | ||
Total liabilities and equity | 955,576 | 1,061,149 | ||
As of December 31, | 2006 | 2005 | ||
€ mn | € mn | |||
ASSETS | ||||
Cash and cash equivalents | 33,031 | 31,647 | ||
Financial assets carried at fair value through income | 156,869 | 180,346 | ||
Investments | 298,134 | 285,015 | ||
Loans and advances to banks and customers | 408,278 | 336,808 | ||
Financial assets for unit linked contracts | 61,864 | 54,661 | ||
Reinsurance assets | 19,360 | 22,120 | ||
Deferred acquisition costs | 19,135 | 18,141 | ||
Deferred tax assets | 4,727 | 5,299 | ||
Other assets | 38,893 | 42,293 | ||
Intangible assets | 12,935 | 12,958 | ||
Total assets | 1,053,226 | 989,288 | ||
As of December 31, | 2006 | 2005 | ||
€ mn | € mn | |||
LIABILITIES AND EQUITY | ||||
Financial liabilities carried at fair value through income | 79,699 | 86,842 | ||
Liabilities to banks and customers | 361,078 | 310,316 | ||
Unearned premiums | 14,868 | 14,524 | ||
Reserves for loss and loss adjustment expenses | 65,464 | 67,005 | ||
Reserves for insurance and investment contracts | 287,697 | 278,312 | ||
Financial liabilities for unit linked contracts | 61,864 | 54,661 | ||
Deferred tax liabilities | 4,618 | 5,324 | ||
Other liabilities | 49,764 | 51,315 | ||
Certificated liabilities | 54,922 | 59,203 | ||
Participation certificates and subordinated liabilities | 16,362 | 14,684 | ||
Total liabilities | 996,336 | 942,186 | ||
Shareholders’ equity | 50,481 | 39,487 | ||
Minority interests | 6,409 | 7,615 | ||
Total equity | 56,890 | 47,102 | ||
Total liabilities and equity | 1,053,226 | 989,288 | ||
(1) | Due to the disposal of almost all of Dresdner Bank AG to Commerzbank AG, all assets and liabilities that are part of the disposal group have been reclassified and presented in separate line items “Non-current assets and assets from disposal groups classified as held-for-sale” and “Liabilities of disposal groups classified as held-for-sale”, respectively, on the face of the consolidated balance sheet as of December 31, 2008. Certain prior period amounts have been reclassified to conform to the current period presentation. For further information please refer to Note 4 to our consolidated financial statements. |
(2) | As of December 31, 2008, €101 mn are pledged to creditors and can be sold or repledged (2007: €23,163 mn). |
(3) | As of December 31, 2008, €826 mn are pledged to creditors and can be sold or repledged (2007: €7,384 mn). |
(4) | For further information on our segment reporting please refer to Note 6 to our consolidated financial statements. |
TotalShareholders’ Equity(1)
In 2006, we again significantly increased our shareholders’Shareholders’ equity which increased to €50.5 billion as of December 31, 2006, up 27.8% from a year earlier, primarily driven by our strong net income.
in € mn
The following graph sets forth the development of our shareholders’ equity.
Shareholders’ equity(1)
in€ mn
Shareholders’ equity | |||
€ mn | |||
Balance as of December 31, 2007 | 47,753 | ||
Foreign currency translation adjustments | (388 | ) | |
Available-for-sale investments | |||
Unrealized gains and losses (net) arising during the year(3) | (9,170 | ) | |
Transferred to net income on disposal or impairment(4) | 697 | ||
Cash flow hedges | 30 | ||
Miscellaneous | (65 | ) | |
Total income and expense recognized directly in shareholders’ equity | (8,896 | ) | |
Net loss | (2,444 | ) | |
Total recognized income and expense for the year | (11,340 | ) | |
Paid-in capital | 248 | ||
Treasury shares | 25 | ||
Transactions between equity holders | (530 | ) | |
Dividends paid | (2,472 | ) | |
Balance as of December 31, 2008 | 33,684 | ||
(1) | Does not include minority |
(2) |
|
(3) | During the year ended December 31, 2008 unrealized gains and losses (net) arising during the year included in shareholders’ equity are net of deferred tax benefit of €1,690 mn (2007: €720 mn; 2006: €478 mn). |
(4) | During the year ended December 31, 2008, realized gains/losses (net) transferred to net income on disposal or impairment are net of income tax benefit of €755 mn (2007: income tax charge of €206 mn; 2006: income tax charge of €308 mn). |
Regulatory Capital Adequacy
Paid-inFor information on the conglomerate solvency of Allianz Group as of December 31, 2008, please refer to “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Capital Management— Regulatory capital increased mainly due to the issuance of approximately 25.1 million new Allianz SE shares from the capital increase in October 2006 for the execution of the merger of RAS with and into Allianz AG (now Allianz SE)adequacy”.
Net income was the key driver of the growth in revenue reserves. Partially offsetting were negative effects from the acquisition cost of the additional interest in RAS. This transaction was accounted for as a transaction between equity holders. Therefore, the Allianz Group recorded a decrease in both shareholders’ equity and minority interests. In addition, higher negative foreign currency translation adjustments, included in revenue reserves in the graph above, stemmed primarily from a weaker U.S. Dollar compared to the Euro.
The growth of unrealized gains/losses (net) was brought about by significantly increased unrealized gains from available-for-sale equity investments, largely as a result of the general upward trends in equity capital markets worldwide. In contrast, higher market interest rates and, as a result, downward trends in fixed income indices, had a partially offsetting negative effect on the values of our fixed income securities and their corresponding unrealized gain or loss.
Total Assets and Total Liabilities
Total assets and total liabilities increaseddecreased by €63.9€105.6 billion and €54.2€91.4 billion, respectively.
For detailed information on Allianz SE issued debt outstanding as of December 31, 2008, please refer to the section “—Liquidity and Capital Resources” and Note 23 and 24 to our consolidated financial statements.
In the following sections, we analyze important developments within the balance sheets of our Property-Casualty, Life/Health Property-Casualty and Banking segments.segments as presentedunder “Notes to the Allianz Group’s Consolidated Financial Statements—Business Segment Information—Consolidated Balance Sheets”. Relative to the Allianz Group’s total assets and total liabilities, we consider the total assets and total liabilities from our Asset Management segment as immaterial and have, accordingly, excluded these assets and liabilities from the following discussion. Our Asset Management segment’s results of operations stem primarily from its business withmanagement of third-party assets. See “—Asset Management Operations—Third-Party Assets Under Management(1)
Due to timing differences between premium payments and the claim or contractual fulfillment, insurers need to invest the money they collected from their clients. Therefore, insurance assets, including financial assets and liabilities carried at fair value through income, investments, loans and advances to banks and customers, and for the Life/Health segment financial assets for unit-linked contracts, account for the most part of the Allianz Group” for a discussion of our Asset Management segment’s third-party assets. See “—Liquidity and Capital Resources” for information on the development of Allianz SE’s issued debt, andassets in our consolidated cash and cash equivalents.balance sheet.
Insurance Assets and LiabilitiesAsset allocation
Investment assets from our Property-Casualty, Life/Health insurance operations Life/Health reserves for insurance and investment contracts were up €9.3 billionCorporate segments amounted to €278.7 billion, primarily stemming from higher aggregate policy reserves for long-duration insurance contracts. Similarly, the assets backing these reserves also grew, in particular reflected in increased investments. Life/Health investments, at €187.8€358.2 billion as of December 31, 2006, were €7.52008. Thereof, the fixed-income portfolio which comprised bonds and
(1) | For further information on the development of these third-party assets please refer to“—Asset Management Operations—Third-Party Assets Under Management of the Allianz Group”. |
loans(2) accounted for €315.8 billion, higher thanequities for €33.8 billion and other investment categories for €8.6 billion.(3)
Fixed-income portfolio of €315.8 billion by investment country
in %
From a year ago, excluding affiliates. Thereof, equity investments amounted to €42.2 billion, €9.2 billion higher than a year ago, primarily from upward trends in equity capital markets. In contrast,regional perspective our portfolio of debt securities were down slightlyis well diversified.
Fixed-income portfolio of €315.8 billion by €1.8 billiontype of issuer
in %
We consider our fixed-income portfolio to €138.8 billion principally duebe both of high quality and well diversified. A share of more than 60% relate to increased market interest ratesgovernments and as a result, downward trendscovered bonds that help mitigate against possible future deteriorations in fixed income indices. Financial liabilities and assets for unit-linked contracts each increased €7.2 billion to 61.9 billion,the credit markets.
(2) | Excluding internal loans. |
(3) | As part of the transaction with Commerzbank Allianz committed to purchase certain CDOs. For further information please refer to “—Executive Summary—Impact of the Financial Markets Turbulence”. |
(4) | 5%-p are mainly seasoned self-originated German Private Retail Mortgage Loans and 3%-p are short-term loans. |
(5) | Includes €7 bn U.S. Agency MBS. |
(6) | Type of covered bond issued in Germany. |
reflecting our sales successes with unit-linked insurance and investment contracts. In aggregate, premiums collected for unit-linked insurance and investment contracts amounted to €14.3 billion.Government exposures of €110.4 billion
in %
The following graph sets forth the development
Nearly 80% of our Life/Health asset base.government exposure was attributable to the Eurozone.
Life/HealthPfandbrief and covered bond portfolio of €85.2 billion
in %
69%of covered bonds are German Pfandbriefe backed by either public sector loans or mortgage loans. On these as well as on all other covered bond exposures, minimum required security buffers as well as voluntary over-collateralization offer a substantial cushion for house price deterioration and payment defaults.
Assets and liabilities of the Property-Casualty segment
Property-Casualty assets
Property-Casualty asset base
fair values(1) in€ bn bn
Our Property-Casualty asset base decreased by €13.2 billion, which was almost entirely attributable to the decline in equity investments. These were down by €4.9 billion due to reduced equity values following the weak capital markets and by €5.0 billion due to net divestments stemming from equity realizations. Furthermore, €2.7 billion stemmed from capital upstreaming from Allianz Sach in Germany to Allianz SE.
(1) | Loans and advances to banks and customers, held-to-maturity investments, and real estate held for investment are stated at amortized cost. Investments in associates and joint ventures are stated at either amortized cost or equity, depending upon, among other factors, our ownership percentage. For further information please refer to Note 2 to the consolidated financial statements. |
Composition of the Property-Casualty asset base
fair values(1)
As of December 31 | 2008 | 2007 | ||
€ bn | € bn | |||
Financial assets and liabilities carried at fair value through income | ||||
Equity | 0.2 | 0.4 | ||
Debt | 1.5 | 2.7 | ||
Other | 0.2 | 0.1 | ||
Subtotal | 1.9 | 3.2 | ||
Investments(2) | ||||
Equities | 6.4 | 16.5 | ||
Debt securities | 51.6 | 50.3 | ||
Other | 6.9 | 6.9 | ||
Subtotal | 64.9 | 73.7 | ||
Loans and advances to banks and customers | 17.6 | 20.7 | ||
Property-Casualty asset base | 84.4 | 97.6 | ||
Of our Property-Casualty asset base, ABS made up €4.4 billion as of December 31, 2008, which is around 5% of our asset-base. CDOs accounted for €0.1 billion of this amount. Subprime exposures within CDOs were negligible.
Rating structure of the Property-Casualty fixed-income portfolio(3)
in %
(1) | Loans and advances to banks and customers, held-to-maturity investments, and real estate held for investment are stated at amortized cost. Investments in associates and joint ventures are stated at either amortized cost or equity, depending upon, among other factors, our ownership percentage. For further information |
(2) |
|
(3) |
|
Property-Casualty liabilities
Development of reserves for loss and loss adjustment expenses(1)
in € bn
In 2008, the segment’s gross reserves for loss and loss adjustment expenses decreased by 2.3 % to €55.6 billion. Main contributors for this development were the reclassification of AGF’s health insurance business from the Property-Casualty segment to the Life/Health segment and foreign currency translation effects.
(1) | After group consolidation. For further information about changes in the reserves for loss and loss adjustment expenses for the Property-Casualty segment please refer to Note 19 to the consolidated financial statements. |
| Includes |
Assets and liabilities of the Life/Health segment
Property-Casualty insurance operationsLife/Health assets Property-Casualty
Life/Health asset base
fair values(3) in € bn
Our Life/Health asset base declined by 5.4% to €331.2 billion. Equity investments were reduced by €19.0 billion as the weak market environment led to market-related effects of €14.4 billion and €4.5 billion of equity securities were disposed of. Furthermore, assets for unit-linked contracts declined by €15.6 billion of which €15.3 billion were attributable to market effects.
(3) | Loans and advances to banks and customers, held-to-maturity investments, and real estate held for investment are stated at amortized cost. Investments in associates and joint ventures are stated at either amortized cost or equity, depending upon, among other factors, our ownership percentage. For further information please refer to Note 2 to the consolidated financial statements. |
Composition of the Life/Health asset base
fair values(1)
As of December 31 | 2008 | 2007 | ||||
€ bn | € bn | |||||
Financial assets and liabilities carried at fair value through income | ||||||
Equity | 2.5 | 3.3 | ||||
Debt | 7.7 | 9.3 | ||||
Other | (4.3 | ) | (4.5 | ) | ||
Subtotal | 5.9 | 8.1 | ||||
Investments(2) | ||||||
Equities | 22.2 | 41.2 | ||||
Debt securities | 154.4 | 137.6 | ||||
Other | 7.7 | 5.8 | ||||
Subtotal | 184.3 | 184.6 | ||||
Loans and advances to banks and customers | 90.6 | 91.2 | ||||
Financial assets for unit-linked contracts(3) | 50.4 | 66.1 | ||||
Life/Health asset base | 331.2 | 350.0 | ||||
Within our Life/Health asset base, ABS amounted to €15.3 billion as of December 31, 2008, which is less than 5% of total Life/Health assets. Of these, €0.3 billion are CDOs. Unrealized losses on CDOs of €10 million were recorded in our shareholders’ equity. Subprime exposures within CDOs were negligible.
Rating structure of the Life/Health fixed-income portfolio(4)
in %
Life/Health liabilities
Life/Health reserves for lossinsurance and loss
adjustment expenses decreased by €1.6investment contracts were up 1.7 % to €287.9 billion to €58.7 billion. Important contributors to this decline were the positive net development on prior years’ lossincluding an increase of €14.2 billion in aggregate policy reserves primarily in Italy, France,mainly from the United KingdomStates, Germany and within our credit insurance business, as well asFrance. These were partly offset by major reductions in provisions for premium refunds in Germany and France which were down by €9.2 billion due to negative market impacts. Foreign currency effects increased liabilities by €1.4 billion including €2.1 billion and €0.7 billion from the weakening of therising U.S. Dollar and Australian Dollar relative toSwiss Franc respectively, counteracted by €(1.6) billion from the Euro. The assets backing our property-casualty insurance reserves grew modestly. In the segment’s investments, excluding affiliates, we recorded a slight decline to €79.3 billion, of which debt securities amounted to €52.3 billion and equity investments to €19.1 billion.declining Korean Won.
The following graph sets forth the development of our Property-Casualty asset base.
Property-Casualty asset base
fair values(1) in€ bn
(1) | Loans and advances to banks and customers, held-to-maturity investments, and real estate held for investment are stated at amortized cost. Investments in associates and joint ventures are stated at either amortized cost or equity, depending upon, among other factors, our ownership percentage. For further information |
(2) |
|
|
|
(3) | Financial assets for unit-linked contracts represent assets owned by, and managed on the behalf of, policyholders of the Allianz Group, with all appreciation and depreciation in these assets accruing to the benefit of policyholders. As a result, the value of financial assets for unit-linked contracts in our balance sheet corresponds to the value of financial liabilities for unit-linked contracts. |
(4) | Includes loans and debt securities. |
Banking Assets and Liabilitiesliabilities of the Banking segment
Loans and advances to banks and customers in our Banking segment amounted to €313.7 billion as of December 31, 2006. This reflects an increase of €64.5 billion from a year earlier, particularly driven by higher volumes of collateralized refinancing activities at Dresdner Bank, commensurate with the overall market trend, which led to higher balances of reverse repurchase agreements and collateral paid for securities borrowing transactions. A key factor in these developments was the continuously tightened interest rate policy executed by the European Central Bank (or “ECB”) which has encouraged to more long-term oriented refinancing activities. These activities predominantly take part in the repurchase market. Our loan business with corporate customers also contributed to the increase in loans and advances to banks and customers. This development was largely driven by the increased loan book from structured finance and syndicated loan transactions within Dresdner Bank’s Corporate & Investment Banking division.
The following graph sets forth the development of our Banking segment’s loans and advances to banks and customers.
Banking loans and advances to banks and customers
in€ bn
Banking loans and advances to banks and customers
in € bn
In our continuing Banking operations, loans and advances to banks and customers amounted to €13.9 billion.
Banking liabilities to banks and customers
Liabilities to banks and customers amounted to €16.3 billion. Thereof, term deposits and certificates of deposit accounted for €4.5 billion, liabilities payable on demand for €4.2 billion, savings deposits for €1.6 billion and repurchase agreements for €1.3 billion.
(1) | Includes loan loss allowance |
The developments within our collateralized refinancing activities atAssets and liabilities of discontinued operations
Dresdner Bank’s loans and advances to banks and customers
Dresdner Bank’s loans and advances to banks and customers
in € bn
In the discontinued operations of Dresdner Bank, previously described, also ledloans and advances to an increase in ourbanks and customers amounted to €169.6 billion.
Dresdner Bank’s liabilities to banks and customers namely in the form of
Liabilities to banks and customers amounted to €195.7 billion. Thereof, liabilities payable on demand accounted for €78.5 billion, repurchase agreements for €24.3 billion, term deposits and collateralcertificates of deposit for €45.9 billion, collaterals received from securities lending transactions.transactions for €5.9 billion and savings deposits for €3.4 billion.
Our Banking segment’s financial assets and liabilities carried at fair value through income, in aggregate, declined to €67.3 billion from €83.8 billion, as we reduced the volume of our debt securities trading business.
(2) | Includes loan loss allowance of €(1.9) bn as of December 31, 2008. |
Consolidated Special Purpose Entities (SPEs)
The Allianz Group is engaged in a variety of SPEs including asset securitization entities, investment funds and investment conduits. In providing these services, the Allianz Group may in some instances have a financial interest in such financing structures. However, the risk of financial loss may be mitigated through participations in such losses by other third-party investors.
The Allianz Group also engages in establishing and managing investment fund SPEs with a goal of developing, marketing and managing these funds. During the establishment phase of these funds, Allianz Group may provide initial capital for the SPEs to acquire securities until either sufficient third-party investors purchase participations in the funds or the SPEs are terminated. Certain of these SPE’s funds’ obligations may include capital maintenance and/or performance guarantees given to the investors. The guarantees Allianz Group provides differ both in terms of amount and duration according to the relevant arrangements. Allianz Group receives fee and commission income from investors for the management of these SPEs.
As required under IFRS, the Allianz Group consolidates an SPE when the substance of the relationship between Allianz and the SPE indicates that the SPE is controlled by Allianz. The following information focuses on SPEs that are controlled by Allianz by means other than a majority voting interest. It excludes consolidated SPEs where Allianz Group consolidates the SPEs under IFRS and holds the majority of the voting rights.
With the announcement of the sale of Dresdner Bank from Allianz to Commerzbank as of August 31, 2008, Dresdner Bank was classified as a disposal group held-for-sale and discontinued operations. Following this classification, SPEs consolidated by Dresdner Bank (including a former SPE named “K2” which was consolidated on March 18, 2008) are presented as part of the disposal group held-for-sale and discontinued operations.
The consolidated SPE of continuing operations of Allianz Group relate to asset-backed securities (ABS) transactions. The conclusion to consolidate was primarily based on the fact that the Allianz Group has the majority of the benefits and retains the majority of the risks. Compared to the prior year, the
set-up of an SPE led to consolidation. Total assets of the consolidated SPE as of December 31, 2008, for continuing operations of the Allianz Group amounted to €734 million. The amount of consolidated assets which represent collateral for the SPE’s obligations are €734 million, and the creditor’s recourse to the Allianz Group assets is €0. Consolidated assets include loans to corporate customers and cash.
In addition to the Allianz Group’s engagement in a variety of SPEs including asset securitization entities, investment funds and investment conduits, the Allianz Group through its subsidiary Dresdner Bank was involved in asset securitization entities through arranging, facilitating, and in certain cases, managing investment conduits for banking customers. The consolidated SPEs that formed part of the disposal group classified as held-for-sale as of December 31, 2008, included asset-backed securities transactions, structured finance transactions, derivatives transactions and investment funds. The ABS transactions comprise mainly commercial paper conduits, securitizations and CDO structures. Structured finance transactions are primarily related to tax efficient structures for different kind of transactions. Total assets of consolidated SPEs that formed part of the disposal group classified as held-for-sale and discontinued operations amounted to €33,306 million as of December 31, 2008. These SPEs were transferred to Commerzbank in connection with the sale of Dresdner Bank and accordingly have been deconsolidated from Allianz Group’s consolidated financial statements. Allianz Group will only continue to be involved with one SPE that was transferred to Commerzbank with a continuing Allianz interest of 40% in subordinated loans. This SPE was consolidated as of December 31, 2008, because an Allianz Group entity and Dresdner Bank held interests in this SPE and, thus, Allianz Group retained the majority of risks at such time. Total assets of this SPE amounted to €40 million as of December 31, 2008.
Off-Balance Sheet Arrangements
In the ordinary course of business, the Allianz Group enters into arrangements that, under IFRS, are not recognized on the consolidated balance sheet and do not affect the consolidated income statement. Such arrangements remain off-balance sheet as long as the Allianz Group does not incur an obligation
from them or becomebecomes entitled to an asset itself. As soon as an obligation is incurred, it is recognized on the Allianz Group’s consolidated balance sheet, with the corresponding loss recorded in the consolidated income statement. However, in such cases, the amount recognized on the consolidated balance sheet may or may not, in many instances, represent the full loss potential inherent in such off-balance sheet arrangements. The importance of such arrangements to the Allianz Group as it concerns liquidity, capital resources or market and credit risk support, is not significant. Additionally, the Allianz Group does not rely on off-balance sheet arrangements as a significant source of revenue. Similarly, theIn order to provide a comprehensive analysis of Allianz Group has not incurred significant expensesGroup’s off-balance sheet arrangements and to enable an assessment of our risk exposure arising from such arrangements and does not reasonably expect to do so ingoing-forward we discuss below the future.
Distinct areas in which thetypes of off-balance sheet arrangements that Allianz Group is involved in, distinguishing between continuing and discontinued operations.
Types of off-balance sheet arrangements as of December 31, 2006, which are all conducted through
Commitments and Guarantees
In the normal course of our business, includewe enter into various irrevocable loan commitments, leasing commitments, purchase obligations and various other commitments. Additionally, weWe also extend market value guarantees to customers, as well as execute indemnification contracts under existing service, lease or acquisition transactions. See Note 46Fee income from issuing guarantees is not a significant part of our total income, and 53losses incurred under guarantees and income from the release of related provisions were insignificant for each of the last three years.(1)
Non-consolidated SPEs
As described above, Allianz Group is engaged in a variety of SPEs. The methodologies used for determining that Allianz Group has no control over the SPEs and, thus, has not to consolidate the SPEs were those according to the IFRS interpretation SIC-12. The conclusion not to consolidate certain SPEs was mainly based on the fact that Allianz Group does not have to bear the majority of the risks. Compared to the prior year, the conclusion to not consolidate has not changed for the continuing operations. In 2008, Allianz Group did not provide any financial or other support to the SPEs forming part of continuing operations that Allianz Group was not previously required to provide.
The following table sets forth the total assets of non-consolidated SPEs in which the Allianz Group has a significant beneficial interest and that form part of the continuing operations, associated liabilities reported in the consolidated balance sheet, the Allianz Group’s maximum exposure to loss associated with these SPEs and further information regarding the Allianz Group’s involvement as of December 31, 2008. A significant beneficial interest is considered to be either an investment greater than €100 million in an SPE, or a smaller investment in an SPE that leads to expected losses greater than €5 million. The non-consolidated SPEs are aggregated based on principal business activity, as reflected in the first column. The nature of the Allianz Group’s interest in these SPEs can take different forms, as described in the second column.
As of December 31, 2008 | ||||||||
Type of SPE | Nature of Allianz Group’s | Total assets | Liabilities reported in the consolidated balance sheet | Allianz Group’s maximum exposure to loss | ||||
€ mn | € mn | € mn | ||||||
Investment funds | Guarantee obligations | 1,202 | — | 1,160 | ||||
Investment funds | Investment manager and/or equity holder | 196 | 55 | 55 | ||||
Other | Client financing transaction | 651 | 1 | 13 | ||||
Total | 2,049 | 56 | 1,228 | |||||
(1) | For further information please refer to Note 46 to our consolidated financial statements. |
Allianz Group has various types of interests in certain non-consolidated SPEs including equity interests, fund investment interests and loans. For certain mutual funds, Allianz Group has guaranteed a portion of the investors’ principal.
Allianz Group’s maximum exposure to loss comprises the total amount of investment, including note positions, or guarantee notionals. It describes a worst case scenario without considering the asset rating, available collateral, other types of protection or hedging activities that can and do significantly reduce the economic exposure of these SPEs to the Allianz Group. The maximum exposure to loss for investment funds related to guarantee obligations includes capital maintenance guarantees that are summarized with a maturity of less than one year. The maximum exposure to loss for investment funds related to investment manager and/or equity holder comprise loans with a maturity of more than five years. For all other SPEs, the maximum exposure to loss consists of equity of €12 million and loans of €1 million with a maturity of one to three or more than five years. The difference between the liabilities recorded and Allianz Group’s maximum exposure to loss is due to the fact that only in extremely rare cases, the redemption price might be lower than the guaranteed price at the balance sheet date. Only in this case would a provision be recognized in the consolidated financial statementsstatements.
In addition to the SPEs that are part of continuing operations, Allianz Group through its subsidiary Dresdner Bank held significant beneficial interests in SPEs. These non-consolidated SPEs that formed part of discontinued operations included ABS transactions, special investment vehicles, investment and hedge funds. Total assets of these non-consolidated SPEs that formed part of discontinued operations amounted to €11,871 million as of December 31, 2008. With the completion of the sale of Dresdner Bank to Commerzbank, Allianz Group no longer has exposure to these SPEs, except for certain CDOs held in vehicles used for the issuance of CDOs, securitization and credit derivative transactions that Allianz Group has repurchased from Dresdner Bank after the completion of the sale to Commerzbank. The fair value of these assets repurchased by Allianz was €1,115 million with a notional amount of approximately €2 billion, and is presented in assets of a disposal group classified as held-for-sale as of
December 31, 2008. The source of maximum exposure to loss is the investment in the issued notes. Due to the fact that these are investments in SPEs with a static funding structure, consolidation would only be necessary if the structure is changed. For these SPEs, no financial support was provided in 2008 and there are no further information.
Liquidity and Capital Resources
The Allianz Group and its subsidiaries continued to be well capitalized.
During the course of 2006, our strengthened capital base has been recognizedNet cash flow provided by rating agencies.operating activities amounted to €25.3 billion in 2008.
Organization
Liquidity planning is an integral part of the overall financial planning and capital allocation process and is based on strategic decisions which include solvency planning, our dividend target, and expected merger and acquisition activities. The Board of Management of Allianz SE, the holding and ultimate parent company of the Allianz Group, decides after consultation with local management of the Allianz Group companies, on how to allocate capital amongin the Group.
Liquidity Resources
In order to fund liquidity needs, Allianz Group’s financial management is centrally operated by Allianz SE, coordinating and executing external debt financing, for instance through securities issues and other capital raising transactions.
Our liquidity resources result predominantly from the operating activitiesoperations of our Property-Casualty, Life/Health, Banking and Asset Management segments, as well as from capital raising activities. In the contextCommercial paper, medium-term notes and other credit facilities serve as additional sources of liquidity. As of December 31, 2008, we had access to unused, committed and long-term credit lines as a source of further liquidity with different banks. As a financial services company, where our working capital is largely representative of our liquidity, weliquidity. We believe our working capital is sufficient for our present requirements. For information on(1)
(1) | For further information regarding the management of our liquidity risk and our ratings, please refer to“Item 11. Quantitative and Qualitative Disclosures about Market Risk”. |
Allianz executes external debt financing and other corporate financing purposes primarily through two finance companies: Allianz Finance B.V. and Allianz Finance II B.V., both incorporated in the management of our liquidity risk please see “Quantitative and Qualitative Disclosures About Market Risk—Management of Other Risks—Liquidity Risks”.Netherlands.
Insurance Operations The principal sources of liquidity for our operating activities within our insurance operations include primary and reinsurance premiums collected (primarily from our operating entities), collected reinsurance receivables, as well as investment income and proceeds generated from the sale of investments. Our major uses of funds within our insurance operations include paying property-casualty claims and related claims expenses, providing life policy benefits, paying surrenders and cancellations, as well as other operating costs.
We generate substantial cash flow from our insurance operations as a result of most premiums being received in advance of the time when claim payments or policy benefits are required, thereby allowing us to invest these funds in the interim to generate investment income and realized gains.
However, the liquidity of our insurance operations is impacted by, among other factors, the duration of our investments, development of equity capital markets, interest rate environment and our ability to realize the carrying value of our investment portfolio to meet insurance claims and policyholder benefits as they become due.
Additionally, the liquidity of our property-casualty insurance operations is affected by the frequency and severity of losses under its policies, as well as by policy renewal rates.
The liquidity needs of our life operations are generally affected by trends in actual mortality experience compared to the related assumptions included in the pricing of our life insurance policies, by the extent to which minimum returns or crediting rates are provided in connection with our life insurance products, as well as by the level of surrenders and withdrawals.
Banking and Asset Management Operations For our banking operations, our primary sources of liquidity include customer deposits and interest and similar income from our lending transactions, while our major uses of funds are for the issuance of new
loans and advances to banks and customers, and the payment of interest on deposits and other operating costs.
The liquidity of our banking operations is largely subject to the ability of individual customers and enterprises to which we extend credit, to make payments to us based on their outstanding commitments.commitments as well as the ability of our banking operations to retain the individual customers’ and enterprises’ deposits. Therefore liquidity could be negatively affected by unforeseeable losses due to problem loans.
Within our asset management operations, our primary sources of liquidity include fees generated from asset management activities, while the principal use of these funds is for the payment of operating costs.
Capital Raising ActivitiesAs outlined in more detail in the financial statements of Allianz SE coordinates and executes external debtGroup companies contribute to the financing securities issues and other capital raising transactions forof the Allianz Group in order to fund any liquidity need which cannot fully be covered by our operating or investment cash flows. We also have access to commercial paper, medium-term notes and other credit facilities as additional sources of liquidity. As
of December 31, 2006, we had access to unused, committed and long-term credit lines as a source of further liquidity with different banks.holding activity.
Debt and Capital Funding
As of December 31, 2006,2008, the majority of Allianz SE’s external debt financing was in the formmade up of debenturesbonds and money market securities. Our totalThereof, approximately one half was applicable to certificated liabilities, outstanding asand the other half was made up of December 31, 2006 and 2005 were €54,922 million and €59,203 million, respectively. Of the certificated liabilities outstanding as of December 31, 2006, €33,542 million are due within one year. See Note 21 to our consolidated financial statements for further information. Our total participation certificates and subordinated liabilities outstanding as of December 31, 2006 and 2005 were €16,362 million and €14,684 million, respectively. Of the participation certificates and subordinated liabilities as of December 31, 2006, €1,481 million are due within one year. See Note 22 to our consolidated financial statements for further information. Additionally, see Note 43 to our consolidated financial statements for information regarding how we use certain derivatives to hedge our exposure to interest rate and foreign currency risk related to certificated and subordinated liabilities.
As of December 31, | 2008 | 2007 | ||
€ mn | € mn | |||
Total certificated liabilities outstanding | 9,544 | 42,070 | ||
thereof: due within one year(1) | 5,191 | 28,523 | ||
Total participation certificates and subordinated liabilities outstanding | 9,346 | 14,824 | ||
thereof: due within one year(2) | — | 1,476 |
Allianz SE owns several finance companies. Among those, primarily Allianz Finance B.V. and Allianz Finance II B.V., both incorporated in the Netherlands, are used from time to time for external debt financing and other corporate financing purposes.
In addition, in December 2003, Allianz SE (then Allianz AG) establishedimplemented a Medium Term Note (or “MTN”) program which is used from time to timewas established for the
(1) | Please refer to Note 23 to our consolidated financial statements for further information. |
(2) | Please refer to Note 24 to our consolidated financial statements for further information. Additionally, refer to Note 43 to our consolidated financial statements for information regarding how we use certain derivatives to hedge our exposure to interest rate and foreign currency risk related to certificated and subordinated liabilities. |
purposes of external and internal debt issuance. The aggregate volume of debt issued by Allianz Finance B.V. and Allianz Finance II B.V. for the years ended December 31, 20062008 and 20052007 was €2.3€1.5 billion and €2.7€0.3 billion, respectively.
Short-term financingAs of December 31, 2006,2008, Allianz SE had money market securities outstanding with a carrying value of €870 million.
On December 20, 2006, we repaid the RWE exchangeable bond issued in 2001. The issue amount of €1,075€4,103 million, was repaid in shares as the share price of RWE AG was above the exercise price. Additionally, on May 2, 2006, we repaid the €1,446 million equity-linked loan issuedrepresenting an increase in the third quarter of 2005 in connection with financing the
Allianz-RAS merger. Our use of commercial paper as a short-term financing instrument was reduced by 18.2% to €0.9 billion in 2006 from €1.1 billion in 2005. However, interestof €1,174 million compared with 2007. Interest expense on commercial paper increasedrose to €47.0€125.0 million (2005: €31.3(€87.0 million) due to increasing interest rates on such financing in 20062008, and higher annual average usage. In 2008 there were no difficulties with the roll-over
of commercial papers. The average maturity of commercial papers is three months.
InMiddle and long-term financing At the final maturity date of February 18, 2008, the Allianz Group redeemed the remaining 35.65% of the BITES index-linked bond with Munich Re shares.
On March 2006,6, 2008, Allianz Finance II B.V. issued €800 million€1.5 billion of subordinated perpetualsenior bonds, guaranteed by Allianz SE, with a coupon rate of 5.375%5.0%. Allianz Finance II B.V. has the right to call the bonds after five years.The maturity of this bond is March 6, 2013.
Under our MTN program,On June 10, 2008, Allianz Finance II B. V.SE issued €1.5USD 2.0 billion of seniorsubordinated perpetual bonds on November 23, 2006, guaranteed by Allianz SE, with a coupon rate of 4.00%8.375%. The maturity of the bond is November 23, 2016.
On January 29, 2007, the Allianz Group announced its intention to make an early redemption of 64.35% of the BITES exchangeable bond issued in February 2005 as part of the Allianz Group’s “All-in-One” capital market transactions. See Note 52 to our consolidated financial statements for further information on this early redemption.
Due to the All-in-One capital market transactions in 2005, previously mentioned, Dresdner Bank accomplished a further step in its strategy of reducing its non-strategic equity holdings. Dresdner Bank sold 17,155,008 no-par value registered shares of Allianz SE to a third party financial institution. On February 3, 2005, the financial institution issued through its Luxembourg subsidiary a “mandatory exchangeable” debt instrument to investors that is exchangeable into the Allianz SE shares purchased from Dresdner Bank. The debt instrument has a notional value of approximately €1.6 billion, matures in three years from the issuance date and carries an interest rate of 4.5% plus 90% of the distributed dividends allocated to the sold Allianz SE shares. Upon maturity of the debt instrument, the financial institution is obligated to deliver to the investors a variable number of Allianz SE shares.
In accordance with IFRS, Allianz derecognized the sold Allianz SE shares as a financial asset upon definitively transferring full control of the shares to the financial institution. Allianz had no continuing involvement with the shares and forfeited its contractual rights to receive cash flows from the Allianz SE shares. The financial institution has the
right to receive the dividends distributed in respect of the Allianz SE shares and bears the risk and rewards of changes in the market price of the shares.
In addition, Allianz purchased from the third party financial institution for a premium paid of €173 million a derivative instrument, or “call spread”, referenced to the market price of Allianz SE’s ordinary shares. With this call spread, Allianz has the possibility to participate in the price increase of Allianz SE shares above the market price at inception (i.e., the market price at the time the parties entered into the derivative instrument), but limited to a price appreciation of 20% above such price. The term of
the call spread is three years, and the instrument will be cash settled at the end of the term, with the net cash being paid on any appreciation of the Allianz SE shares.
This derivative transaction does not affect the derecognition treatment of the sold Allianz SE shares mentioned above. Allianz does not retain, through the call spread or otherwise, substantially all of the risk and rewards of the transferred Allianz SE shares, since the call spread permits Allianz to participate only in a price appreciation of up to 20% above the market price at inception.
The following table sets forth Allianz SE’s issued debt as of December 31, 2006 and 2005.(1)
As of December 31, | 2006 | 2005 | ||||||||||
Nominal value | Carrying value | Interest expense | Nominal value | Carrying value | Interest expense | |||||||
€ mn | € mn | € mn | € mn | € mn | € mn | |||||||
Senior bonds(2) | 6,232 | 6,201 | 258.9 | 4,732 | 4,696 | 250.3 | ||||||
Subordinated bonds | 7,079 | 6,883 | 404.6 | 6,324 | 6,220 | 355.7 | ||||||
Exchangeable bonds | 1,262 | 1,262 | 14.8 | 2,337 | 2,326 | 103.1 | ||||||
Total | 14,573 | 14,346 | 678.3 | 13,393 | 13,242 | 709.1 | ||||||
2008 | 2007 | |||||||||||
as of December 31, | Nominal value | Carrying value | Interest expense | Nominal value | Carrying value | Interest expense | ||||||
€ mn | € mn | € mn | € mn | € mn | € mn | |||||||
Senior bonds | 4,186 | 4,135 | 185.7 | 4,306 | 4,279 | 209.3 | ||||||
Subordinated bonds | 8,489 | 8,197 | 470.5 | 7,043 | 6,853 | 407.1 | ||||||
Exchangeable bonds | — | — | — | 450 | 450 | 8.3 | ||||||
Total | 12,675 | 12,332 | 656.2 | 11,799 | 11,582 | 624.7 | ||||||
(1) |
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Allianz SE’s outstanding bonds as of December 31,(2)
nominal value in € bn
Maturity structure of Allianz SE’s certificated liabilities and subordinated bonds as of December 31, 2008(2)
nominal value in € bn
(2) | Excludes |
Certificated liabilities and subordinated bonds(1) by maturity – OverviewAllianz SE issued debt outstanding as of December 31, 20062008(1)
in€ bn
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The following table describes Allianz SE’s issued debt outstanding as of December 31, 20062008 at nominal values. For further information see Note 21refer to Notes 23 and 2224 to our consolidated financial statements.
Allianz SE Issued Debt(1)
Interest expense in 2008 | ||||||
1. Senior bonds(2) | ||||||
Volume | ||||||
Year of issue | ||||||
Maturity date | ||||||
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ISIN | ||||||
Interest expense | € | |||||
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5.625% bond issued by Allianz Finance II B.V., Amsterdam | ||||||
Volume | €0.9 bn | |||||
Year of issue | 2002 | |||||
Maturity date | 11/29/2012 | |||||
| ||||||
ISIN | XS 015 879 238 1 | |||||
Interest expense | € | |||||
5.0% bond issued by Allianz Finance II B.V., Amsterdam | ||||||
Volume | €1.5 bn | |||||
Year of issue | 2008 | |||||
Maturity date | 3/6/2013 | |||||
ISIN | DE 000 A0T R7K 7 | |||||
Interest expense | €63.1mn | |||||
4.00% bond issued by Allianz Finance II B.V., Amsterdam | ||||||
Volume | €1.5 bn | |||||
Year of issue | 2006 | |||||
Maturity date | 11/23/2016 | |||||
| ||||||
ISIN | XS 027 588 026 7 | |||||
Interest expense | € | |||||
Total interest expense for senior bonds | € | |||||
2. Subordinated bonds(3) | ||||||
6.125% bond issued by Allianz Finance II | ||||||
Volume | € | |||||
Year of issue | 2002 | |||||
Maturity date | 5/31/2022 | |||||
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ISIN | XS 014 888 756 4 | |||||
Interest expense | € | |||||
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6.5% bond issued by Allianz Finance II | ||||||
Volume | € | |||||
Year of issue | 2002 | |||||
Maturity date | 1/13/2025 | |||||
| ||||||
ISIN | XS 015 952 750 5 | |||||
Interest expense | € |
|
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Volume | ||||||||
Year of issue | ||||||||
Maturity date | Perpetual Bond | |||||||
| ||||||||
Interest expense | €25.6 mn | |||||||
5.5% bond issued by Allianz SE | ||||||||
Volume | €1.5 bn | |||||||
Year of issue | 2004 | |||||||
Maturity date | Perpetual Bond | |||||||
ISIN | XS 018 716 232 5 | |||||||
Interest expense | € | |||||||
4.375% bond issued by Allianz Finance II | ||||||||
Volume | €1.4 bn | |||||||
Year of issue | 2005 | |||||||
Maturity date | Perpetual Bond | |||||||
| ||||||||
ISIN | XS 021 163 783 9 | |||||||
Interest expense | € | |||||||
5.375% bond issued by Allianz Finance II | ||||||||
Volume | €0.8 bn | |||||||
Year of issue | 2006 | |||||||
Maturity date | Perpetual Bond | |||||||
| ||||||||
Interest expense | €46.2 mn | |||||||
8.375% bond issued by Allianz SE | ||||||||
Volume | USD 2.0 bn | |||||||
Year of issue | 2008 | |||||||
Maturity date | Perpetual Bond | |||||||
ISIN | ||||||||
Interest expense | € | |||||||
Total interest expense for subordinated bonds |
| € | ||||||
3. | ||||||||
| ||||||||
| ||||||||
Volume | € | |||||||
ISIN | DE 000 840 405 4 | |||||||
Interest expense | €9.9 mn | |||||||
Total interest expense for participation certificates | €9.9 mn | |||||||
4. Issues that matured in 2008 | ||||||||
5.0% bond issued by Allianz Finance B.V., Amsterdam | ||||||||
Volume | €1.6 bn | |||||||
Year of issue | 1998 | |||||||
Maturity date | 3/25/2008 | |||||||
ISIN | DE 000 230 600 8 | |||||||
Interest expense | €19.9 mn | |||||||
0.75% Basket Index Tracking Equity Linked Securities (BITES) issued by Allianz Finance II B.V., Amsterdam | ||||||||
Underlying | DAX | ® | ||||||
Volume | €0.5 bn | |||||||
Year of issue | 2005 | |||||||
Maturity date | 2/18/2008 | |||||||
| ||||||||
ISIN | XS 021 157 635 9 | |||||||
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Interest expense | € | |||||||
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Total interest expense for matured issues |
| € | ||||||
Total interest expense | € |
(1) | Bonds and exchangeable bonds issued or guaranteed by Allianz SE in the capital market. |
(2) | Senior bonds and commercial papers provide for early termination rights in case of non-payment of amounts due under the bond (interest and principal) as well as in case of insolvency of the relevant issuer or, if applicable, the relevant garantor (Allianz SE). The same applies to two subordinated bonds issued in 2002. |
(3) | The terms of the subordinated bonds (except for the two subordinated bonds mentioned in footnote 1 above) do not provide for early termination rights in favor of the bond holder. Interest payments are subject to certain conditions which are linked, inter alia, to our net income, and |
Capital Requirements and Ratings
Certain of the operating entities within the Allianz Group are subject to legal restrictions on the amount of dividends they can pay to their shareholders. Furthermore, regulators impose minimum capital rules on the level of both the Allianz Group’s operating entities and the Allianz Group as a whole. SeeRefer to Note 2325 to our consolidated financial statements for detailedmore information on our capital requirements. In addition to regulatory requirements and our internal risk capital model, rating agencies use distinct methodologies to determine if our capital base is adequate. During the course of 2006, “Standard & Poor’s” has recognized the considerable strengthening of our capital base and revised the outlook for our rating accordingly. As of December 31, 2006, Allianz SE had the following ratings with the major rating agencies:
ALLIANZ SE RATINGS AS OF DECEMBER 31, 2006(1)
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Allianz Group Consolidated Cash Flows
Change in cash and cash equivalents for the years ended December 31, 2006, 2005 and 2004
in€ mn €mn
Net cash flow provided by operating activitiesamounted €25.3 billion in 2008, up €13.8 billion compared to the prior year. This increase resulted primarily from a higher net inflow from both collateralized refinancing activities mainly in the context of Dresdner Bank and from financial assets and liabilities designated at fair value through income of Dresdner Bank. Additionally, we recorded lower net inflows from financial assets and liabilities held for trading also driven by Dresdner Bank.
Net cash outflow used in investing activities, increased by €3.9 billion to €6.2 billion in 2008
compared to an outflow of €2.4 billion in the prior year, which was mainly attributable to a net cash outflow from available-for-sale investments driven by (Special funds Life/Health, Allianz Life U.S., Dresdner Bank, AGF Vie) and higher net outflows from loans and advances to banks and customers, particularly at Dresdner Bank. These effects were partially compensated by net cash inflows during the fourth quarter 2008 from assets and liabilities of disposal groups classified as held-for-sale.
Net cash outflow provided by financing activities increased by €0.5 billion to €11.3 billion in 2008. The main contributing factors were net cash outflows from liabilities to banks and customers, mainly attributable to the redemption of a bridge loan at Allianz France Holding, offset by lower net cash outflows from certificated liabilities, participation certificates and subordinated liabilities mainly due to Dresdner Bank as well as lower outflows from transactions bet-ween equityholders (in 2008 mainly Allianz Leben).
Overall,cash and cash equivalents increased by €7.9 billion to €39.2 billion as of December 31, 2008.
Cash and cash equivalents
As of December 31, | 2008 | 2007 | ||
€ mn | € mn | |||
Balances with banks payable on demand | 7,760 | 23,848 | ||
Balances with central banks | 456 | 6,301 | ||
Cash on hand | 169 | 918 | ||
Treasury bills, discounted treasury notes, similar treasury securities, bills of exchange and checks | 573 | 270 | ||
Cash and cash equivalents of continuing operations | 8,958 | 31,337 | ||
Cash and cash equivalents reclassified to assets of disposal groups held-for-sale | 30,238 | — | ||
Total | 39,196 | 31,337 | ||
Dresdner Bank’s cash and cash equivalents increased significantly compared to last year. However, as Dresdner Bank was reclassified to assets of disposal groups held-for-sale we recorded a decline in the cash position of our continuing operations as well as an increase in the cash position
(1) | Includes effect of exchange rate changes on cash and cash equivalents of |
Net cash flow provided by operating activities was €20.3 billionof our discontinuing operations. The overall increase in 2006, down €27.0 billion from a year ago. This decline resulted primarily from higher volumes of collateralized refinancing activities at Dresdner Bank, previously discussed under “Balance Sheet Review—Banking Assets and Liabilities”.
Higher net cash flow used in investing activities, at €34.5 billion in 2006 compared to €22.9 billion in the prior year, was mainly attributable to an increased balance of loans and advances to banks and customers.
Net cash flow provided by financing activities rose by €24.1 billion to €15.6 billion in 2006. The primary contributing factor were net inflows from liabilities to banks and customers included within financing cash flow of €13.5 billion, compared to net outflows of €19.2 billion in 2005.
Overall, cash and cash equivalents increasedwas partially offset by €1.4 billion in 2006 to €33.0 billion asour German entities scaling back securities lendings.
As of December 31, 2006.
The Allianz Group holds cash and cash equivalents in more than 30 different currencies, although such cash and cash equivalents are held primarily in Euros, U.S. Dollars and Swiss Francs. See Note 62008, compulsory deposits on accounts with national central banks under restrictions due to our consolidated financial statements for additional information onrequired reserves from the Allianz Group’s cash and cash equivalents.European Central Bank totaled € 363 million (2007: €5,473 million).(1)
Investment Portfolio Impairments, Depreciation and Unrealized Losses
For information concerning the valuation of available-for-sale securities, and held-to-maturity securities, seerefer to “—Critical Accounting Policies and Estimates—ImpairmentsFair Values of Investments.Financial Assets and Liabilities.”
Impairment Charges and Depreciation
For the year ended December 31, 2006,2008, net realized gains, losses (net) totaled €6,151€3,603 million, of which €1,344€3,530 million related to realized losses. Of the total amount of realized losses in 2006, €1,1372008, €3,397 million related to available-for-sale securities, €15€7 million related to investments in joint ventures, €57€28 million related to loans to banks and customers, and €135€98 million to real estate held for investment. Impairments (net)Net impairments totaled €775€9,495 million, of which €82€139 million were reversalsreversal of net impairments. Of the total
amount of impairments (net) €584€9,434 million related to available for saleavailable-for-sale securities, €7 million related to held to maturity investments, €12€72 million related to investments in associates and joint ventures and €172€128 million related to real estate held for investments. Of the available-for-sale impairments (net) we recorded in 2006, €4792008, €8,736 million related to equity securities and €105€698 million to debt securities.
For the year ended December 31, 2005,2007, net realized gains, losses (net) totaled €4,978€6,008 million, of which €1,045€1,885 million related to realized losses. Of the total amount of realized losses in 2005, €8982007, €1,697 million related to available-for-sale securities, €32€84 million related to investments in associates and joint ventures, €93€58 million related to loans to banks and customers, and €22€46 million to real estate held for investment. Impairments (net)Net impairments totaled €540€1,185 million, of which €7€19 million were reversalsreversal of impairments. Of the total amount of impairments (net) €252€1,179 million related to available for saleavailable-for-sale securities, €(1) million related to held to maturity investments, €50€2 million related to investments in associates and joint ventures and €239€23 million related to real estate held for
investments. Of the available-for-sale impairments (net) we recorded in 2005, €2452007, €1,153 million related to equity securities and €7€26 million to debt securities.
Unrealized Losses
As of December 31, 2006,2008, unrealized losses from available-for-sale securities totaled €2,114€10,721 million, of which €159€851 million were attributable to equity securities, €862€8,830 million to corporate bonds, €1,075€1,022 million to government bonds and €18 million to other securities.
As of December 31, 2005,2007, unrealized losses from available-for-sale securities totaled €999€4,711 million, of which €188€467 million were attributable to equity securities, €267€2,549 million to corporate bonds, €542€1,591 million to government bonds and €2€104 million to other securities.
The following tables set forth further details regarding the duration and amount below amortized cost of the Allianz Group’s unrealized loss positions for equity securities and debt securities as of December 31, 20062008 and 2005,2007, respectively. The length of time criterion reflects the period of time over which a security had continually been in the actual percentage decline category it was in on December 31, 20062008 and December 31, 2005,
2007, respectively. We believe the following tables provide meaningful disclosure, as they capture the actual percentage decline category and related time period applicable at December 31, 20062008 and December 31, 2005,2007, respectively.
Effective January 1, 2005, the Allianz Group adopted IAS 39 revised, which required a change to our impairment criteria for available-for-sale equity securities. An equity security is considered to be impaired if there is objective evidence that the cost of the equity security may not be recovered. IAS 39 revised requires that a significant or prolonged decline in the fair value of an equity security below cost is considered to be objective evidence of
impairment. In addition to the existing qualitative criteria, the Allianz Group established new quantitative impairment criteria for equity securities to define significant or prolonged decline. To satisfy the “significant” criterion, the Allianz Group has established a policy that an equity security is considered impaired if the fair value is below the weighted-average cost by more than 20%. To satisfy the “prolonged” criterion, the Allianz Group established a policy that an equity security is considered impaired if the fair value is below the weighted-average cost for greater than nine months. Each of these policies is applied independently at the subsidiary level.
Equity Securities Aging Table: Duration
(1) | Refer to Note 7 to our consolidated financial statements for additional information on the Allianz Group’s cash and cash equivalents. |
Once an investment is classified as being impaired a further reduction in market value will be charged immediately as an additional impairment charged to the profit and Amountloss account (“once
impaired always impaired”). Subsequent increases of Unrealized Losses asmarket values of December 31, 2006impaired securities are credited to other comprehensive income (OCI).
0-6 months | 6-9 months | >9 months | Total | |||||||||
€ mn | € mn | € mn | € mn | |||||||||
Less than 20% | ||||||||||||
Market Value | 3,327 | 66 | 79 | 3,472 | ||||||||
Amortized Cost | 3,416 | 76 | 84 | 3,576 | ||||||||
Unrealized Loss | (89 | ) | (10 | ) | (5 | ) | (104 | ) | ||||
20% to 50% | ||||||||||||
Market Value | 135 | — | — | 135 | ||||||||
Amortized Cost | 190 | — | — | 190 | ||||||||
Unrealized Loss | (55 | ) | — | — | (55 | ) | ||||||
Greater than 50% | ||||||||||||
Market Value | — | — | — | — | ||||||||
Amortized Cost | — | — | — | — | ||||||||
Unrealized Loss | — | — | — | — | ||||||||
Total | ||||||||||||
Market Value | 3,462 | 66 | 79 | 3,607 | ||||||||
Amortized Cost | 3,606 | 76 | 84 | 3,766 | ||||||||
Unrealized Loss | (144 | ) | (10 | ) | (5 | ) | (159 | ) |
Equity Securities Aging Table: Duration and Amount of Unrealized Losses as of December 31, 20052008
0-6 months | 6-9 months | >9 months | Total | 0-6 months | 6-9 months | >9 months | Total | |||||||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | |||||||||||||||||
Less than 20% | ||||||||||||||||||||||||
Market Value | 3,499 | 24 | 86 | 3,609 | 7,718 | 342 | 145 | 8,205 | ||||||||||||||||
Amortized Cost | 3,650 | 26 | 89 | 3,765 | 8,454 | 402 | 159 | 9,015 | ||||||||||||||||
Unrealized Loss | (151 | ) | (2 | ) | (3 | ) | (156 | ) | (736 | ) | (60 | ) | (14 | ) | (810 | ) | ||||||||
20% to 50% | ||||||||||||||||||||||||
Market Value | 49 | — | 2 | 51 | 49 | — | 23 | 72 | ||||||||||||||||
Amortized Cost | 71 | — | 3 | 74 | 74 | — | 31 | 105 | ||||||||||||||||
Unrealized Loss | (22 | ) | — | (1 | ) | (23 | ) | (25 | ) | — | (8 | ) | (33 | ) | ||||||||||
Greater than 50% | ||||||||||||||||||||||||
Market Value | 7 | — | — | 7 | 3 | — | — | 3 | ||||||||||||||||
Amortized Cost | 15 | — | 1 | 16 | 10 | 1 | — | 11 | ||||||||||||||||
Unrealized Loss | (8 | ) | — | (1 | ) | (9 | ) | (7 | ) | (1 | ) | — | (8 | ) | ||||||||||
Total | ||||||||||||||||||||||||
Market Value | 3,555 | 24 | 88 | 3,667 | 7,770 | 342 | 168 | 8,280 | ||||||||||||||||
Amortized Cost | 3,736 | 26 | 93 | 3,855 | 8,538 | 403 | 190 | 9,131 | ||||||||||||||||
Unrealized Loss | (181 | ) | (2 | ) | (5 | ) | (188 | ) | (768 | ) | (61 | ) | (22 | ) | (851 | ) |
Debt Securities Aging Table: Duration and Amount of Unrealized Losses as of December 31, 20062008
0-6 months | 6-12 months | >12 months | Total | 0-6 months | 6-12 months | >12 months | Total | |||||||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | |||||||||||||||||
Less than 20% | ||||||||||||||||||||||||
Market Value | 50,459 | 25,509 | 22,927 | 98,895 | 15,808 | 18,247 | 32,471 | 66,526 | ||||||||||||||||
Amortized Cost | 50,995 | 26,144 | 23,704 | 100,843 | 16,598 | 19,597 | 34,931 | 71,126 | ||||||||||||||||
Unrealized Loss | (536 | ) | (635 | ) | (777 | ) | (1,948 | ) | (790 | ) | (1,350 | ) | (2,460 | ) | (4,600 | ) | ||||||||
20% to 50% | ||||||||||||||||||||||||
Market Value | — | — | 24 | 24 | 1,111 | 2,801 | 5,864 | 9,776 | ||||||||||||||||
Amortized Cost | — | — | 31 | 31 | 1,540 | 3,872 | 8,566 | 13,978 | ||||||||||||||||
Unrealized Loss | — | — | (7 | ) | (7 | ) | (429 | ) | (1,071 | ) | (2,702 | ) | (4,202 | ) | ||||||||||
Greater than 50% | ||||||||||||||||||||||||
Market Value | — | — | — | — | 36 | 132 | 565 | 733 | ||||||||||||||||
Amortized Cost | — | — | — | — | 94 | 323 | 1,384 | 1801 | ||||||||||||||||
Unrealized Loss | — | — | — | — | (58 | ) | (191 | ) | (819 | ) | (1,068 | ) | ||||||||||||
Total | ||||||||||||||||||||||||
Market Value | 50,459 | 25,509 | 22,951 | 98,919 | 16,955 | 21,180 | 38,900 | 77,035 | ||||||||||||||||
Amortized Cost | 50,995 | 26,144 | 23,735 | 100,874 | 18,232 | 23,792 | 44,881 | 86,905 | ||||||||||||||||
Unrealized Loss | (536 | ) | (635 | ) | (784 | ) | (1,955 | ) | (1,277 | ) | (2,612 | ) | (5,981 | ) | (9,870 | ) |
Equity Securities Aging Table: Duration and Amount of Unrealized Losses as of December 31, 2007
0-6 months | 6-9 months | >9 months | Total | |||||||||
€ mn | € mn | € mn | € mn | |||||||||
Less than 20% | ||||||||||||
Market Value | 7,150 | 52 | 82 | 7,284 | ||||||||
Amortized Cost | 7,549 | 61 | 91 | 7,701 | ||||||||
Unrealized Loss | (399 | ) | (9 | ) | (9 | ) | (417 | ) | ||||
20% to 50% | ||||||||||||
Market Value | 159 | — | — | 159 | ||||||||
Amortized Cost | 207 | — | — | 207 | ||||||||
Unrealized Loss | (48 | ) | — | — | (48 | ) | ||||||
Greater than 50% | ||||||||||||
Market Value | 37 | — | — | 37 | ||||||||
Amortized Cost | 39 | — | — | 39 | ||||||||
Unrealized Loss | (2 | ) | — | — | (2 | ) | ||||||
Total | ||||||||||||
Market Value | 7,346 | 52 | 82 | 7,480 | ||||||||
Amortized Cost | 7,795 | 61 | 91 | 7,947 | ||||||||
Unrealized Loss | (449 | ) | (9 | ) | (9 | ) | (467 | ) |
Debt Securities Aging Table: Duration and Amount of Unrealized Losses as of December 31, 20052007
0-6 months | 6-12 months | >12 months | Total | 0-6 months | 6-12 months | >12 months | Total | |||||||||||||||||
€ mn | € mn | € mn | € mn | € mn | € mn | € mn | € mn | |||||||||||||||||
Less than 20% | ||||||||||||||||||||||||
Market Value | 40,838 | 4,566 | 4,404 | 49,808 | 41,695 | 33,829 | 46,137 | 121,661 | ||||||||||||||||
Amortized Cost | 41,425 | 4,659 | 4,530 | 50,614 | 42,257 | 35,141 | 48,453 | 125,851 | ||||||||||||||||
Unrealized Loss | (587 | ) | (93 | ) | (126 | ) | (806 | ) | (562 | ) | (1,321 | ) | (2,316 | ) | (4,190 | ) | ||||||||
20% to 50% | ||||||||||||||||||||||||
Market Value | 8 | 6 | 1 | 15 | 14 | 70 | — | 84 | ||||||||||||||||
Amortized Cost | 10 | 8 | 2 | 20 | 20 | 99 | — | 119 | ||||||||||||||||
Unrealized Loss | (2 | ) | (2 | ) | (1 | ) | (5 | ) | (6 | ) | (29 | ) | —�� | (35 | ) | |||||||||
Greater than 50% | ||||||||||||||||||||||||
Market Value | — | — | — | — | 11 | — | — | 11 | ||||||||||||||||
Amortized Cost | — | — | — | — | 30 | — | — | 30 | ||||||||||||||||
Unrealized Loss | — | — | — | — | (19 | ) | — | — | (19 | ) | ||||||||||||||
Total | ||||||||||||||||||||||||
Market Value | 40,846 | 4,572 | 4,405 | 49,823 | 41,720 | 33,899 | 46,137 | 121,756 | ||||||||||||||||
Amortized Cost | 41,435 | 4,667 | 4,532 | 50,634 | 42,307 | 35,240 | 48,453 | 126,000 | ||||||||||||||||
Unrealized Loss | (589 | ) | (95 | ) | (127 | ) | (811 | ) | (587 | ) | (1,341 | ) | (2,316 | ) | (4,244 | ) |
Reversals of Impairment
Pursuant to IAS 39 revised, we no longer record reversals of impairment in our consolidated income statement for available-for-sale equity securities.
For fixed incomefixed-income securities, if, in a subsequent period, the amount of the impairment previously recorded on a security decreases and the decrease can
be objectively related to an event occurring after the impairment, such as an improvement in the debtor’s credit rating, the impairment is reversed through other income for investments in the Allianz Group’s consolidated income statement. Such reversals do not
result in a carrying amount of a security that exceeds what would have been, had the impairment not been recorded, at the date of the impairment is reversed.
For the years ended December 31, 2006, 20052008, 2007 and 20042006 we recorded reversals of impairments of €85 million (available-for-sale securities: €85 million; held-to-maturity securities: €0 million), €13 million (available-for-sale securities: €13 million; held-to-maturity securities: €0 million) and €2 million (available-for-sale securities: €1 million; held-to-maturity securities: €1 million), €6 million (available-for-sale securities: €3 million; held-to-maturity securities: €3 million) and €12 million (available-for-sale securities: €12 million; held-to-maturity securities: €0 million), respectively.
Tabular Disclosure of Contractual Obligations
Payments Due By Period at December 31, 2006(1) | ||||||||||
Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | ||||||
€ mn | € mn | € mn | € mn | € mn | ||||||
Long-term debt obligations(2) | 71,284 | 35,023 | 13,591 | 4,857 | 17,813 | |||||
Interest on long-term debt obligations(3) | 1,665 | 520 | 487 | 89 | 569 | |||||
Operating lease obligations(4) | 3,909 | 544 | 914 | 680 | 1,771 | |||||
Purchase obligations(5) | 1,125 | 724 | 146 | 56 | 199 | |||||
Liabilities to banks and customers(6) | 361,078 | 341,252 | 5,389 | 5,748 | 8,689 | |||||
Reserves for insurance and investment contracts(7) | 669,220 | 29,599 | 58,299 | 54,653 | 526,669 | |||||
Reserves for loss and loss adjustment expenses(8) | 58,664 | 18,439 | 15,619 | 7,760 | 16,846 | |||||
Other long-term liabilities(9) | 8,052 | 694 | 1,446 | 1,549 | 4,363 | |||||
Total contractual obligations | 1,174,997 | 426,795 | 95,891 | 75,392 | 576,919 | |||||
|
The table sets forth the Allianz Group’s contractual obligations as of December 31, 2008. Contractual obligations do not include contingent liabilities or commitments. Only transactions with parties outside the Allianz Group are considered. With the announcement of the sale of Dresdner Bank from Allianz to Commerzbank as of August 31, 2008, Dresdner Bank was classified as a disposal group held for sale and discontinued operations. Following this classification, contractual obligations of Dresdner Bank are presented as part of the disposal group held for sale and discontinued operations. The following table includes only continuing operations. The table includes only liabilities that represent fixed and determinable amounts. The table excludes interest on floating rate long-term debt obligations and interest on money market securities, as the contractual interest rate on floating rate interest is not fixed and determinable. The amount and timing of interest on money market securities is not fixed and determinable since these instruments have a daily maturity. For further information, refer to Notes 23 and 24 to the consolidated financial statements. Furthermore, reserves for insurance and investment contracts presented in the table include contracts where the timing and amount of payments are considered fixed and determinable and contracts which have no specified maturity dates and may result in a payment to the contract holder depending on mortality and morbidity experience and the incidence of surrenders, lapses, or maturities. For contracts which do not have payments that are fixed and determinable, the Allianz Group has made assumptions to estimate the undiscounted cash flows of contractual policy benefits including mortality, morbidity, interest crediting rates, policyholder participation in profits, and future lapse rates. These assumptions represent current best estimates, and may differ from the estimates originally used to establish the reserves for insurance and investment contracts as a result of the lock-in of assumptions on the issue dates of the contracts as required by the Allianz Group’s established accounting policy. For further information, refer to Note 2 to the consolidated financial statements. Due to the uncertainty of the assumptions used, the amount presented could be materially different from the actual incurred payments in future periods. Furthermore, these amounts do not include premiums and fees expected to be received, investment income earned, expenses incurred to parties other than the policyholders such as agents, or administrative expenses. In addition, these amounts are presented net of reinsurance expected to be received as a result of these cash flows. The amounts presented in this table are undiscounted and therefore exceed the reserves for insurance and investment contracts presented in the consolidated balance sheet. For further information on reserves for insurance and investment contracts, refer to Note 20 to the consolidated financial statements. As of December 31, 2008, the income tax obligations amounted to €1,446 million. Thereof €1,106 million the Allianz Group expects to pay within the twelve months after the balance sheet date. For the remaining amount of €340 million an estimate of the timing of cash outflows is not reasonably possible. The income tax obligations are not included in the table below.
Reconciliation of future policy benefits The following table presents a reconciliation of future policy benefits to the total balance sheet positions, which include reserves for insurance and investment contracts and financial liabilities for unit-linked contracts, as presented in the consolidated balance sheet:
Reconciling items related to the effect of discounting and differences between locked-in and best estimate assumptions occur because future policy benefits are presented on an undiscounted basis, while reserves for insurance and investment contracts in the consolidated balance sheet reflect the time value of money. Furthermore, future policy benefits are based on current best estimate assumptions such as mortality, morbidity, interest rates, policyholder participation in profits and future lapse rates. For certain contracts (SFAS 60 and SFAS 97), current best estimate assumptions may differ from the locked-in estimates required to be used to establish the reserves for insurance and investment contracts in the consolidated balance sheet, which also include provisions for adverse deviations as required by the Allianz Group’s established accounting policy. Reconciling items related to expected future premiums and expenses occur because future policy benefits take into account best estimates of future premiums expected to be received and future expenditures expected to be incurred. Future policy benefits implicitly include embedded derivatives or market value liability options (“MVLO”) of our equity indexed annuity business that are accounted for as derivatives and are presented within financial liabilities carried at fair value through income in our consolidated balance sheet. Deferred acquisition costs comprise deferred acquisition costs for our Life/Health segment, present value of future profits and deferred sales inducements. Refer to Note 12 to our consolidated financial statements for more information. Ceded reserves to reinsurers are presented within reinsurance assets in our consolidated balance sheet. Recent and Expected Developments
In
We believe that, following an expansion of a good 2% last year, the The performance in the emerging markets, however, will be very uneven. Asia remains the most dynamic region, with gains of 3%. China leads the way here, although it is expected to turn in its lowest growth rate since 1990. We estimate growth in Eastern Europe at 1%, primarily because recent growth in many Eastern European countries has been financed by the rapid expansion of credit, partly in foreign currencies. These countries have been hit so hard by the financial crisis that some of them have already turned to the International Monetary Fund and the European Union for support. Latin America (with the exception of Mexico) seems to be handling the crisis somewhat better; we expect growth of 2% there in 2009. The gross national product in all the industrialized countries will shrink in 2009. We estimate the drop in Japan at 2%. Although the Japanese economy itself has been relatively untouched by the financial crisis, its dependence on export demand will have a noticeable impact on the economy’s performance, given the current environment. The same will hold true for Germany, where we expect economic
The a rapid normalization of the markets is not foreseen, but we expect investor confidence to return if the economy picks up during the year. Given the rapid increase in government indebtedness, the focus will likely shift to inflation and rising interest rates. An economic recovery should have a positive impact on the equity markets. Challenging environment for financial
confidence. It is imperative that providers restore their customers’ faith in a reliable long-term partnership. Property-Casualty will likely see new business slowing because of the weak economy; individual sectors such as credit insurance are being directly affected by
The Asset Management operations once again have a solid long-term growth and profit outlook, too. First, however, the fund industry will need to provide convincing arguments to customers wary of highly volatile markets. 2009 will clearly be an extremely difficult year for
General
The Board of Management is responsible for managing the day-to-day business of Allianz SE in accordance with the European SE-Regulation, the German Stock Corporation Act, the Statutes (Satzung) of Allianz SE as well as its internal rules of procedure (Geschäftsordnung). The Board of Management represents Allianz SE in its dealings with third parties. The Supervisory Board oversees the management. It is also responsible for appointing and removing the members of the Board of Management and representing Allianz SE in its transactions with members of the Board of Management. The Supervisory Board is not permitted to make management decisions, but as established by the Statutes or determined by the Supervisory Board,
In carrying out their duties, the members of the Board of Management and the Supervisory Board must exercise the standard of care of a diligent and prudent business person. In complying with this standard of care, the members of both boards must take into account a broad range of considerations in their decisions, including the interests of Allianz SE, its shareholders, employees and creditors. Additionally, the Board of Management is required to respect the rights of shareholders to equal treatment and equal information.
Members of either board who violate their duties may be personally liable for damages to Allianz SE. The company may only waive these damages or settle these claims if at least three years have passed from the date of their origination and if the General Meeting approves the waiver or settlement with a simple majority. No approval of a waiver or settlement by the General Meeting will be effective if opposing shareholders who hold, in the aggregate, one-tenth or more of the share capital of Allianz SE have their opposition formally noted in the minutes recorded by a German notary. As a general rule under German law, a shareholder has no direct recourse against the members of the Board of Management or the Supervisory Board in the event that they are believed to have breached a duty to Allianz SE.
The Supervisory Board has comprehensive monitoring functions. To ensure that these functions are carried out properly, the Board of Management must regularly report to the Supervisory Board with regard to current business operations and future business planning (including financial, investment and personnel planning). The Supervisory Board is also entitled to request at any time special reports regarding the affairs of Allianz SE, the legal or business relations of Allianz SE to its subsidiaries and the affairs of any of its subsidiaries to the extent these may have a significant impact on Allianz SE. The Board of Management is required to ensure that adequate risk management and internal monitoring systems exist within Allianz SE to detect risks relating to Allianz Group’s business activities at the earliest possible stage.
Upon the transformation of Allianz into an SE in 2006, Allianz SE was required to establish an SE works council that represents the European Allianz employees. The Allianz SE works council currently consists of employee representatives from initiate cross-border measures in the areas of equal opportunity, worker safety and health protection, data protection and basic and further training. Details of the SE works council are contained in the Agreement concerning the Participation of Employees in Allianz SE (“Employee Involvement
Applicable Corporate Governance Rules
Principal sources of enacted corporate governance standards for a European Company with its registered seat in Germany
In addition, the German Corporate Governance Code (Deutscher Corporate Governance Kodex, “Code”), originally published by the German Ministry of Justice (Bundesministerium der Justiz) in 2002, as amended in its June 2008 version, presents essential statutory regulations for the corporate governance of German listed companies. The aim of the Code is to make the German corporate governance rules related to German listed stock corporations transparent for national and international investors. As an SE with a registered office and listed in Germany, Allianz SE is subject to the Code.
The Code comprises a set of best-practice guidelines. In addition to restating various corporate governance-related provisions of German law, the Code contains “recommendations”, which reflect widely recognized standards of corporate governance. Listed companies can deviate from the recommendations, but are then required to disclose this annually. Furthermore, the Code contains “suggestions”, which incorporate additional standards for the sound and responsible management and supervision of a company. Companies can deviate from the Code’s suggestions without disclosure. Topics covered by the German Corporate Governance Code include:
The composition and responsibilities of the Board of Management, the compensation of Board of Management members, and rules for avoiding and resolving conflicts of interest;
The composition and responsibilities of the Supervisory Board and committees of the Supervisory Board, the compensation of Supervisory Board members, and rules for avoiding and resolving conflicts of interest;
The relationship between the Board of Management and the Supervisory Board;
Transparency and disclosure in periodic reports; and
Reporting on, and auditing of, the company’s annual financial statements.
Although the Code does not have the force of law, it has a legal basis through the declaration of compliance required by Section 161 of the German Stock Corporation Act, which entered into force in 2002 and requires that the Board of Management and the Supervisory Board of a listed company declare annually
(i) that the company has complied, and
(ii) which recommendations the company has not complied, and / or
On December 18,
“1. Allianz SE will comply with all recommendations made by the Government Commission on the German Corporate Governance Code (Code version as of 2. Since the last Declaration of Compliance as of
The
General Meeting General Meetings of the shareholders are called by the Board of Management. In exceptional cases, the Supervisory Board can call a General Meeting. Shareholders holding an aggregate of at least 5% of Allianz SE’s issued share capital may request that a General Meeting be called. The right to participate in and vote at a General Meeting is only given to those shareholders who have timely notified Allianz SE of their attendance at the General Meeting and whose respective shares are registered in the share register.
The Board of Management (Vorstand) of Allianz SE currently consists of
Under the Statutes of Allianz SE, the Supervisory Board determines the size of the Board of Management, although it must have at least two members. The Statutes furthermore provide that Allianz SE may be legally represented by two members of the Board of Management or by one member of the Board of Management together with one
The Supervisory Board appoints the members of the Board of Management. The initial term of the members of the Board of Management is generally between three and five years. Under the Statutes of Allianz SE, the term of the members of the Board of Management is limited to a maximum of five years. Each member may be reappointed or have his term extended by the Supervisory Board for one or more terms of up to five years each. As a general rule, the Supervisory Board limits the initial appointment or the reappointment of members of the Board of Management attaining the age of 60 to terms of one year. Members of the Board of Management must further resign from office at the end of the fiscal year in which they attain the age of 65. There is no share ownership requirement to qualify for or to remain a member of the Board of Management. The Supervisory Board may remove a member of the Board of Management prior to the expiration of his term for good cause, for example in the case of a serious breach of duty or a bona fide vote of no confidence by the General Meeting. A member of the Board of Management may not deal with, or vote on, matters relating to proposals, arrangements or contractual agreements between himself and Allianz SE and may be liable to Allianz SE if he has a material interest in any contractual agreement between Allianz SE and a
The Board of Management regularly reports to the Supervisory Board on the business of Allianz SE. According to the German Stock Corporation Act, the Board of Management requires the consent of the Supervisory Board Further, the Statutes of Allianz SE contain a catalogue of transactions requiring consent of the Supervisory Board, namely (i) acquisition of companies, the individual case the
The current members of the Board of Management of Allianz SE,
The following is a summary of the business experience of the current members of the Board of Management:
Michael Diekmann: Joined the Allianz Group in 1988. From 1996 to 1998 he was chief executive officer of Allianz Insurance Management
Dr. Paul Achleitner: Joined the Board of Management
Oliver Bäte: Joined the Board of Management of Allianz SE on January 1, 2008. He worked with McKinsey&Company from 1993 on. At McKinsey&Company, he was head of the German Insurance Sector from 1998-2003, and director and head of the European Insurance and Asset Management Sector from 2003 to 2007. Clement B. Booth: Joined the Board of Management
Enrico Cucchiani: Joined the Board of Management
Dr. Joachim Faber: Joined the Allianz Group in 1997 after holding various positions at Citibank AG, Frankfurt/Main, Germany (1984-1992), including chairman of the Board of Management, and Citibank International PLC, London (1992-1997), including head of capital markets. He was a member of the Board of Management of Allianz Versicherung from 1997 to 1999 and became a member of the Board of Management
Dr. Helmut Perlet: Joined the Allianz Group in 1973. He has been head of the foreign tax department since 1981, head of corporate finance since 1990 and head of accounting and controlling since 1992. He became a deputy member in July 1997 and a full member of the Board of Management
Dr. Gerhard Rupprecht: Joined the Allianz Group in 1979. In January 1989, he became a deputy member, and in January 1991 a full member, and in October 1991 was appointed chairman, of the Board of Management of Allianz Leben. He became a member of the Board of Management
Jean-Philippe Thierry: Joined the Board of Management
Dr. Werner Zedelius: Joined the Allianz Group in 1987. After various positions in branch offices and in the headquarters of Allianz AG, he was General Manager Finance and member of the board of directors of Cornhill Insurance PLC in London from 1996 until 1999. Dr. Zedelius became a member of the Board of Management
The members of the Board of Management may be contacted at the business address of Allianz SE.
In accordance with the Statutes of Allianz SE, the Supervisory Board (Aufsichtsrat) of Allianz SE consists of twelve members, six of whom are shareholder representatives and six of whom are employee representatives. According to applicable law and the Statutes of Allianz SE the members of the Supervisory Board are appointed by the General Meeting, however, as to the appointment of the employee representatives, the General Meeting is bound to the proposals of the employees. There is no share ownership requirement to qualify for or remain a member of the Supervisory Board. With the exception of Karl Grimm, the current members of the Supervisory Board of Allianz SE were elected by the General Meeting of Allianz SE on May 2, 2007. After the completion of the sale of Dresdner Bank to Commerzbank on January 12, 2009, Claudia Eggert–Lehmann resigned from her position as an employee representative for Dresdner Bank on the Supervisory Board. On January 29, 2009, Karl Grimm was appointed by the local district court of Munich as a substitute member and employee representative to replace Claudia Eggert-Lehmann until the next General Meeting of Allianz SE, which is scheduled to take place on April 29, 2009. The employee representatives are no longer representatives of the German employees only, but also representatives of employees of Allianz Group in certain other European countries. Among the employee representatives, there may also be representatives of the trade unions represented in the Allianz Group in Europe.
The General Meeting may remove any Supervisory Board member it has elected without having been bound by a proposal for the election by a simple majority of the votes cast. As regards the removal of members of the Supervisory Board that have been elected in accordance with a proposal by the employees, the Employee Involvement Agreement provides for the application of the respective statutory framework for the removal enacted in the respective member states. In the event no such provisions exist, Section 37 of the German Act on Employee Participation in a SE (SE-Beteiligungsgesetz, SEBG) shall apply accordingly. Under such provision, the employee representatives from Germany may be removed by the General Meeting upon a respective request by (i) the works councils (Arbeitnehmervertretungen) that have formed the electoral college (Wahlgremium), i.e., in the present case, Allianz SE’s Group Works Council (Konzernbetriebsrat), with a 75% majority of the votes cast,
The Supervisory Board of Allianz SE has elected a chairman, who
Except where a different majority is required by law or the Statutes of Allianz SE, the Supervisory Board acts by simple majority of the votes cast. In the case of
to monitor the management of Allianz SE;
to appoint the members of the Board of Management; and
to approve matters in areas where such approval is required by German law or by the Statutes or Rules of Procedure or which the Supervisory Board has made generally or in the individual case subject to its approval.
In addition, Supervisory Boards of German insurance companies are tasked with the appointment of the external auditor.
Committee a Risk Committee, and a
Standing Committee. The Standing Committee, which comprises the chairman of the Supervisory Board, and four additional members elected by the Supervisory Board (two members upon proposal of the shareholders representatives and two upon proposal of the employee representatives), may approve or disapprove certain transactions of Allianz SE to the extent that such transactions do not fall under the competency of any other committee or are not required to be decided by plenary meeting of the Supervisory Board.
Audit Committee. The Audit Committee comprises five members elected by the Supervisory Board (three members upon proposal of the shareholders representatives and two upon proposal of the employee representatives). The Audit Committee prepares the decisions of the Supervisory Board about the Allianz Group’s annual financial statements, the consolidated financial statements and the appointment of the auditors and ascertains the independence of the auditors. Furthermore, the Audit Committee assigns the mandate to the auditors, sets priorities for the audit and determines the compensation of the auditors. In addition, it examines the quarterly reports. After the end of the fiscal year, the Audit Committee examines the Allianz Group’s annual financial statements and the consolidated financial statements, examines the risk monitoring system, are Dr.
Personnel Committee. The Personnel Committee consists of the chairman of the Supervisory Board and two other members elected by the Supervisory Board (one member upon proposal of the shareholders representatives and one upon proposal of the employee representatives). It prepares the appointment of members of the Board of
Risk Committee. The Risk Committee consists of five members elected by the Supervisory Board (three members upon proposal of the shareholders representatives and two upon proposal of the employee representatives). The Risk Committee was established in December 2006 by the newly constituted Supervisory Board of Allianz SE. The Risk Committee monitors the Nomination Committee. The Nomination Committee was established in December 2007 and consists of the chairman of the Supervisory Board and two further shareholder representatives (elected by the shareholder representatives of the Supervisory Board). With the establishment of the Nomination Committee, Allianz SE is following a new recommendation of the German Corporate Governance Code to establish this type of committee. The Nomination Committee is responsible for drawing up selection criteria for shareholder representatives on the Supervisory Board, seeking suitable candidates for the election of shareholder representatives to the Supervisory Board and proposing suitable candidates to the Supervisory Board for its election proposal to the General Meeting. The Nomination Committee held no meetings in 2008. The members of the Nomination Committee are Dr. Henning Schulte-Noelle as chairman, Dr. Gerhard Cromme and Dr. Franz B. Humer. The current members of the
The members of the Supervisory Board may be contacted at the business address of Allianz SE. Compensation of Directors and Officers
The key principles of the remuneration strategy are: Total remuneration is set at a level appropriate to attract and retain highly qualified executives. Incentive plans are structured to operate effectively throughout the business cycle. Incentive awards are earned through the achievement of the financial and strategic goals of the Allianz Group and are consistent with shareholder interests. An appropriate balance is maintained between short-term and long-term remuneration components. The overall remuneration for individual Board Members is dependent upon their designated role, accountability and performance. To achieve these objectives, a significant portion of the overall remuneration of the members of the Board of Management is variable. It comprises a three-tier incentive system which includes short- and mid-term cash bonus plans and equity-related long-term incentives. The remuneration components of the
Fixed salary Base salary is a fixed amount, paid in twelve monthly installments. It is normally reviewed every 3 years by the Supervisory Board and reflects the individual’s role as well as the market context. The 2008 base pay levels of the Board of Management are shown on page 135. Performance-based remuneration
The
Short-term and mid-term bonus plans All members of the Board of Management are eligible to participate in the annual (short-term) and three-year (mid-term) bonus plans. Annual bonus The annual bonus is a variable pay component that is dependent on the achievement of annual goals, as set out in the table above. The goals are specified at the beginning of the performance period. Performance against these goals is then assessed at the end of the period, with the amount of bonus payable in the beginning of the following year and dependent on the extent to which targets and objectives have been met. The Supervisory Board sets the target bonus level for members of the Board of Management. For 2008, the target bonus amounts to 150.0% of base salary. The maximum achievement is set at 165.0% of target performance. Details of the annual bonus amounts to be paid in March 2009 to each member of the Board of Management in respect of the performance year 2008 are shown in the remuneration table on page 135. Three-year bonus The three-year or mid-term bonus plan was purposely designed to make the value of the company a priority concern of executive management across the Group. Plan participants include the Board of Management and approximately 100 top managers globally. Bonus payouts under the plan depend on the attainment of financial and strategic goals over the defined three-year performance period, as set out in the table above. The mid-term bonus is paid after completion of the defined three-year performance period, with the amount based on the extent to which goals have been achieved. Certain exceptions apply, for example in the event of retirement. Although an interim assessment of the objectives occurs once a year, these projections are only provisional and informative in nature. Mid-term bonus target levels for members of the Board of Management are set by the Supervisory Board. For the 2007 – 2009 plan, the target bonus amounts to approximately 128.0% of the 2007 base salary over the three-year performance period. The maximum achievement is set at 140.0% of target performance. Details of the mid-term bonus amounts accrued for each member of the Board of Management are shown on page 135. In exceptional circumstances, the Supervisory Board can decide to award bonuses moderately above maximum level. It can also decide to reduce bonuses where warranted and, in exceptional circumstances, could reduce them to zero. Any material exercise of discretion outside the maximum range will be explained in the Remuneration Report. Equity-related remuneration The Board of Management and approximately 800 top managers and high performing prospective future leaders worldwide participate in the Group Equity Incentives (GEI) program. This consists of “virtual stock options”, known as Stock Appreciation Rights (SAR) and “virtual stock” awards, known as Restricted Stock Units (RSU). The number of SAR and RSU awarded to the members of the Board of Management is dependent upon the discretionary decision of the Supervisory Board based on their designated role as well as the performance of the Group and their respective business division. The value of the GEI program granted in any year cannot exceed the sum of base salary and the annual target bonus. The SAR have a vesting period of two years and subject to the performance conditions mentioned below, they may be exercised during the following five years, as set out in the plan conditions. They lapse unconditionally at the end of the seven-year term. To align the interests of management with those of shareholders the Supervisory Board has established two performance conditions for the exercise of the SAR, applicable to all plan participants. These are directly linked to the performance of Allianz SE stock. The conditions consist of a relative measure linked to the Dow Jones EURO STOXX Price Index (600) and an absolute measure requiring a set increase in the price of Allianz SE stock over the period between grant and exercise. Also, the program has a cap of 150.0% of the grant price on the potential payout from SAR exercises in recognition of the leverage profile. To encourage long-term value creation the RSU normally have a vesting period of five years, at the end of which they are automatically released as set out in the plan conditions. Miscellaneous
The members of the Board of Management also receive certain perquisites. These
The following table sets
The total remuneration of the Board of Management for fiscal year
The following table sets out the details of the awards made to the Board of Management under the GEI program of equity–related remuneration in 2008 and their outstanding holdings at the end of the fiscal year.
The GEI awards are accounted for as cash-settled plans and the fair value of the awards is accrued as compensation expense over the relevant vesting period. Upon vesting, any changes in the fair value of the outstanding SAR are recognized as compensation expense. The fair value at the end of fiscal year 2008 was below prior year. Therefore, no additional compensation expense was recognized. SAR can be exercised once the two-year vesting period has expired on the condition that the Allianz SE stock price is at least 20.0% above the price at which the SAR were granted (strike price). Also, the share price of the Allianz SE stock must have exceeded the Dow Jones EURO STOXX Price Index (600) over a period of five consecutive trading days at least once during the plan period. The RSU are released on the first trading day after the end of a five-year vesting period. Remuneration for Allianz Group
If a member of the Board of Management
Pensions and similar
The pension agreements for members of the Board of Management up to 2004 defined benefit arrangement to a reserves for pensions rights as well as the contribution payments for the new
When a mandate of a member of the Board of Management ends,
The following table sets
2008. The
Termination of service
If service is terminated as a result of a so-called “change of control”, the following separate regulation
A change of control requires that a Supervisory Board as a result of such a change of control within a period of twelve months after the
correspond to a term of three years. If the
For other cases of Since their introduction in June 2007, Allianz SE complies with the provisions of rule 4.2.3 sections 4 and 5 of the German Corporate Governance Code setting out suggestions and – later on – recommendations on severance payment caps in case of premature termination of Board of Management contracts without serious cause. Thus, for the appointment of new Board of Management members or for extensions of the existing mandates, the service contract provides that payments for early termination shall neither exceed the value of two times annual compensation (severance payment cap) nor the payments due for the remaining term of the contract. In case of early termination due to a change of control payments shall not exceed 150.0% of the severance payment cap.
Benefits to retired
In
Remuneration of the Supervisory Board
Remuneration system
The remuneration of the Supervisory Board is The key principles of the Supervisory Board Total remuneration is set at an appropriate level based on the scale and scope of the An appropriate balance is maintained between fixed remuneration and short-term and long-term performance based components in order to adhere to the principles of The remuneration conforms to the individual functions and responsibilities of the Supervisory Board members, such as chair or vice-chair or committee mandates.
Three components make up the The fixed remuneration amounts to €50,000 per fiscal year. The first performance-based The second performance-based component of remuneration depends on the Maximum regular remuneration
Compliance with German Corporate Governance Code The Chair and committees, limits and attendance fees The Chairperson and Deputy Chairpersons of the Supervisory Board as well as the remuneration. Members of the Audit Committee are entitled to a fixed sum of €30,000 per year and the Audit Committee
There is
The members of the Supervisory Board receive a €500 attendance fee for each Supervisory Board or committee meeting that they
The Group’s earnings-per-share were negative in 2008. The performance-based remuneration of the Supervisory Board
Remuneration of the Supervisory Board of Allianz SE
Total remuneration including attendance fees
Remuneration for mandates in other Allianz Group subsidiaries, agent commissions As member of the Supervisory Board of Dresdner Bank AG Claudia Eggert-Lehmann received €45,000. Peter Kossubek received €13,333.33 as member of the Supervisory Board of Allianz
Versicherungs-AG. One member of the Supervisory Board
Loans to Members of the Board of Management and Supervisory Board
Loans granted by The loans and overdrafts mentioned above (1) were made in the ordinary course of business, (2) were granted on conditions that are comparable to those of loans and overdrafts granted to people in peer groups and (3) did not involve more than the normal risk of
Allianz SE has entered into service contracts with members of the
As of
As of December 31,
The following table shows the number of employees of the Allianz Group by region as of December 31,
Stock-based Compensation Plans
Group Equity
The Allianz Group Equity Incentives (GEI) support the orientation of senior management, and in particular the Board of Management, key component of performance related pay, supports this goal through its direct link to the Participation in these
Awards were granted by the respective companies in accordance with uniform group-wide conditions. The grant price for SAR and RSU
The number of SAR and RSU offered is set individually for each participant and is determined on the basis of the grant price, the economic respective
For additional information on the Group Equity Incentive Plans
The purpose of the Allianz Employee Stock Purchase Plan (ESPP) is to promote share ownership among employees as well as to increase their financial awareness and interest in the company’s performance. The ESPP gives employees the opportunity to acquire shares of Allianz SE
For additional information on our Employee Stock Purchase Plans,
The outstanding capital stock of Allianz SE consists of ordinary shares without par value that are issued in registered form. Under our generally required when registering to indicate their respective names, addresses and, in the case of legal entities, whether they hold on behalf of a
Under the German Securities Trading Act, holders of voting securities of a listed German company are required to notify the German Federal Financial Supervisory Authority
As of
As of
For a description of related party transactions,
Consolidated Statements and Other Financial Information
For a description of legal proceedings,
Allianz SE normally declares dividends at the annual general meeting and pays these dividends once a year. Under applicable German law, dividends may be declared and paid only from approves the annual financial statements and submits them to the Supervisory Board with its proposal as to the appropriation of the annual profit. This proposal will set forth what amounts of the annual profit should be paid out as dividends, transferred to capital reserves, or carried forward to the next fiscal year. Upon approval by the Supervisory Board, the Board of Management and the Supervisory Board submit their combined proposal to the shareholders at the annual general meeting. The general meeting ultimately determines the appropriation of the annual profits, including the amount of the annual dividends. Shareholders generally participate in distributions of any dividends in proportion to the number of their ordinary shares. Any dividends declared by Allianz SE will be paid in Euro.
For information regarding annual dividends declared in 2008 and paid from
For a description of significant developments since the date of the annual financial statements included in this annual report,
The principal trading market for the ordinary shares is the Frankfurt Stock Exchange. The ordinary shares also trade on the following other German stock exchanges: Berlin-Bremen, Düsseldorf, Hamburg, Hanover, Munich and Stuttgart, as well as the stock exchanges in London, Paris, Milan and Zurich. The ADSs of Allianz SE, each representing one-tenth of an ordinary share, trade on the New York Stock Exchange under the symbol “AZ.”
The table below sets forth, for the periods indicated, the high and low closing sales prices on the Frankfurt Stock Exchange for the ordinary shares of Allianz SE as reported by XETRA. The table also shows, for the periods indicated, the highs and lows of the DAX.
On
Based on turnover statistics supplied by Bloomberg, the average daily volume of the ordinary shares of Allianz SE traded on the Frankfurt Stock Exchange (XETRA) between January 2, 3,824,451. Trading on the New York Stock Exchange
Official trading of Allianz SE ADSs on the New York Stock Exchange commenced on November 3, 2000. Allianz SE ADSs trade under the symbol “AZ.” The following table sets forth, for the periods indicated, the high and low closing sales prices per Allianz SE ADS as reported on the New York Stock Exchange Composite Tape:
On
Articles of Association (Statutes)
Allianz SE’s current statutes are filed as an exhibit to this annual report. Refer also to “Directors, Senior Management and Employees” for a description of our corporate governance structure.
Organization and Share Capital
Allianz SE is a Stock Corporation in the form of a European Company (Societas Europaea or SE) and is organized under the laws of the Federal Republic of Germany and the European Union. It is registered in the Commercial Register in Munich, Germany, under the entry number HRB 164232.
The share capital of Allianz SE consists of ordinary shares without par value. As of
Objects and Purposes
Pursuant to article 1, paragraph 2 of our statutes the corporate purpose of the Company is the direction of an international group of companies,
Copies of the statutes are publicly available from the Commercial Register in Munich. German- and English-language versions are available at our Conditions Governing Changes in Capital
Allianz SE has several categories of authorized capital, which are set forth in its statutes. At the Extraordinary General Meeting on February 8, 2006, the shareholders approved the following authorized capital for issuance of new registered shares by the Board of Management, upon the approval of the Supervisory Board: Up to €450,000,000 in the aggregate on one or more occasions on or before February 7, 2011 by issuing new registered no-par value shares against contributions in cash and/or in kind (Authorized Capital 2006/
(i) for fractional amounts;
(ii)
(iii) if the issue price is not substantially lower than the market price, subject to certain additional limitations in accordance with the German Stock Corporation Act.
Furthermore, the Board of Management is authorized, upon the approval of the Supervisory Board, to exclude shareholders’
Up to
(i) to exclude shareholders’
(ii) to exclude
(iii) to determine the additional rights of
With respect to purchases of our own ordinary shares,
For information regarding capital increases,
In connection with the sale of Dresdner Bank to Commerzbank, Allianz and Commerzbank entered into a transaction agreement dated August 31, 2008, as supplemented by an amended agreement dated November 27, 2008, which are attached hereto as exhibits 4.1 and 4.2, respectively. For more information on Dresdner Bank AG.”
Germany does not generally restrict capital movements between Germany and other countries, institutions or persons.
For statistical purposes, subject to certain exceptions, each company or person domiciled in Germany is required to report to the German Bundesbank each payment received from or made to a company or person not domiciled in Germany in excess of €12,500 (or an equivalent amount in a foreign currency). Moreover, all claims and liabilities of a company or person domiciled in Germany against or towards a company or person not domiciled in Germany in excess of €5 million (or an equivalent amount in a foreign currency) are required to be reported monthly to the German Bundesbank.
Other than as described above, there is no limitation on the right of non-resident or foreign owners to receive dividends or other payments relating to the ordinary shares or the ADSs permitted or granted by German law. Various national, state and other laws relating to the acquisition of “control” of Allianz SE’s insurance and banking subsidiaries may impose limitations on the ability to acquire ordinary shares or ADSs beyond specified thresholds. In addition, some national laws may authorize investigation of certain money transfers.
The following discussion is a summary of the material German tax effective management and control is not located in Germany) and (ii) whose shares do not form part of the business property of a permanent establishment or fixed base in Germany.
The
This summary is based on the relevant German tax laws in 2008 and 2009 respectively in force and typical tax treaties to which Germany is a party, as they are applied on the date hereof and are subject to changes in German tax laws or respective treaties. Taxation of the Company in Germany
German corporations, In the course of the reform of business taxation, implemented by the Business Tax Reform Act 2008, the income tax rate for corporations has been reduced to 15% as of the fiscal year 2008; including the solidarity surcharge, the aggregate rate amounts to 15.825%.
In addition, German corporations are subject to profit-related trade tax on income,
Tax losses carried forward can be used to offset against taxable profits of a period for an amount not exceeding €1 million. Taxable profits exceeding €1 million may only be set off by 60% with tax losses brought forward from prior periods. Unutilized tax losses can be carried forward without any time limitation.
Taxation of Dividends
Germany has a classic corporate tax If the Shares or ADS’s are held as private assets (Privatvermögen) by an individual German resident private investor, dividends are taxed as investment income (Einkünfte aus Kapitalvermögen). Till 2008, only 50% of the dividends received were included in the tax basis. However, income related expenses (e.g. custody fees or interest for a debt financed portfolio) were also deductible by only 50% (half-income system). The amount of such payments after deduction of related expenses was subject to progressive income tax plus solidarity surcharge thereon. Since 2007, a personal annual exemption (Sparer-Freibetrag) of €750 (€1,500 for married couples filing their tax return jointly) was available for the If the shares are held as business assets (Betriebsvermögen) by
If the shares were held as business assets (Betriebsvermögen) by a natural person (via a German In the course of the reform of business taxation the taxation of dividends has been changed for individuals private investors and for business assets by a natural persons. From January 1, 2009 onwards a final flat-rate tax (Abgeltungsteuer) amounting to 25% (plus a 5.5% solidarity surcharge) on all types of investment income (including dividends) has been established. This withholding tax levied on the income from capital investment is generally final for private investors and will only be included in the relevant tax assessment for individuals upon application, especially if the personal income tax rate falls below 25%. In addition, from January 1, 2009, the half-income system for dividends received by private investors has been abolished. For dividends received from shareholdings held as business assets by a natural person, the half-income system has changed to a partial-income system. Under this system, 60% of the dividends will be taxable For German non-residents (individuals and corporate investors) the dividends received are basically subject to income taxes and therefore to withholding tax (see next section).
Imposition of Withholding Tax
As part of the reform of business taxation, from January 2009 1, onwards the withholding tax amounts to 25% (plus a 5.5% solidarity surcharge) on all types of investment income, including dividends.
From January 1, 2009 onwards two-fifths of the withholding tax can in some circumstances be refunded to Non-German corporate investors upon application at the German Federal Tax Office, which finally results in a withholding tax of 15% (plus solidarity surcharge), leaving the entitlement for further reductions under an applicable income tax treaty unaffected. Refund Procedure for U.S. Shareholders
For shares and ADSs kept in custody with The Depository Trust Company in New York or one of its participating banks, the German tax authorities have introduced a collective procedure for the refund of German dividend withholding tax and the solidarity surcharge thereon on a trial basis. Under this procedure, The Depository Trust Company may submit claims for refunds payable to eligible U.S. holders (as defined below) under the income tax convention between Germany and the United States, as currently in effect (the “Treaty”) collectively to the German tax authorities on behalf of these eligible U.S. holders. The German Federal Tax Office will pay the refund amounts on a preliminary basis to The Depository Trust Company, which will redistribute these amounts to the eligible U.S. holders according to the regulations governing the procedure. The German Federal Tax Office may review whether the refund was made in accordance with the law within four years after making the payment to The Depository Trust Company. Details of this collective procedure are available from The Depository Trust Company.
You are an “eligible U.S. holder” if you are a U.S. holder (as defined below under “—United States Taxation”) that:
is a resident of the United States for purposes of the Treaty;
does not maintain a permanent establishment or fixed base in Germany to which the ordinary shares or ADSs are attributable and through which you carry on or have carried on business (or, in the case of an individual, perform or have performed independent personal services); and
is otherwise eligible for benefits under the Treaty with respect to income and gain from the ordinary shares or ADSs.
Individual claims for refunds may be made on a special German form which must be filed with the German Federal Tax Office at the address noted above. Copies of such form may be obtained from the German Federal Tax Office at the same address or from the Embassy of the Federal Republic of Germany, 4645 Reservoir Road, N.W., Washington, D.C. 20007-1998. Claims must be filed within a four-year period from the end of the calendar year in which the dividend was received.
As part of the individual refund claim, an eligible U.S. holder must submit to the German tax authorities the original bank voucher (or a certified copy thereof) issued by the paying agent documenting the tax withheld, and an official certification on IRS Form 6166 of its last United States federal income tax return. IRS Form 6166 may be obtained by filing a request, via IRS form 8802, with the Internal Revenue Service Center in Philadelphia, Pennsylvania, P.O. Box 42530, Philadelphia, PA 19101-2530. Requests for certification must include the eligible U.S. holder’s name, Social Security or Employer Identification Number, tax return form number, and tax period for which the certification is requested. Requests for certifications can include a request to the Internal Revenue Service to send the certification directly to the German tax authorities. If no such request is made, the Internal Revenue Service will send a certification on IRS Form 6166 to the eligible U.S. holder, who then must submit this document with his refund claim.
Taxation of Capital Gains
If the shares are held as business assets (Betriebsvermögen) by a corporate investor or by a natural person (via a German partnership or an individual enterprises), the capital gains are treated as the dividends. Till 2008, for private investors, a 50% tax exemption on realized gains on the disposal of shares arised only if they sold shares of a corporation of which they hold at least 1% of the outstanding shares of the company at any time within the five years prior to the sale. Shares with less than 1% of the outstanding shares of the company were only subject to taxation within the 12 month speculative period. Due to the Business Tax Reform Act 2008 capital gains from private investors are subject to taxation irrespective of any holding period with a 25% withholding tax plus a 5.5% solidarity surcharge. There are some transition rules regarding the change in the taxation of capital gains. Under German domestic tax law, capital gains derived
U.S. holders that qualify for benefits under the Treaty are exempt in Germany under the Treaty on capital gains derived from the sale or disposition of shares or ADSs.
Inheritance and Gift Tax
Under German law, German gift or inheritance tax will be imposed on transfers of shares or ADSs by a Non-German Holder at death or by way of gift, if
(i) the decedent or donor, or the heir, donee or other transferee has his residence in Germany at the time of the transfer or with respect to German citizens who are not resident in Germany, if the decedent or donor, or the heir, donee or other transferee has not been continuously outside of Germany for a period of more than five years; or
(ii) the shares or ADSs subject to such transfer form part of a portfolio which represents 10% or more of the registered share capital of the company and has been held, directly or indirectly, by the decedent or donor, respectively, himself or together with related parties.
The right of the German government to impose inheritance or gift tax on a Non-German Holder may be further limited by an applicable estate tax treaty (such as the U.S.-German Inheritances and Gifts Tax Treaty of December 14, 1998).
Other Taxes
No German transfer, stamp or similar taxes apply to the purchase, sale or other disposition of shares or ADSs by a Non-German Holder. Currently, net worth tax is not levied in Germany.
This section describes the principal United States federal income tax consequences of owning ordinary shares or ADSs. It applies to you only if you hold your ordinary shares or ADSs as capital assets for tax purposes. This section does not address all material tax consequences of owning ordinary shares or ADSs. It does not address special classes of holders, some of whom may be subject to other rules, including:
dealers in securities or currencies;
tax-exempt entities;
life insurance companies;
broker-dealers;
traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;
investors liable for alternative minimum tax;
investors that actually or constructively own 10% or more of the voting stock of Allianz investors that hold ordinary shares or ADSs as part of a straddle or a hedging or conversion transaction; or
This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, and published rulings and court decisions, all as currently in effect, as well as on the Treaty. These laws are subject to change, possibly on a retroactive basis.
In addition, this section is based in part upon the representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms. In general, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the ordinary shares represented by those ADSs. Exchanges of ordinary shares for ADRs, and ADRs for ordinary shares, generally will not be subject to United States federal income tax.
You are a “U.S. holder” if you are a beneficial owner of ordinary shares or ADSs and you are, for United States federal income tax purposes:
a citizen or resident of the United States;
a domestic corporation;
an estate whose income is subject to United States federal income tax regardless of its source; or
a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.
If a partnership holds our ordinary shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. If you hold our ordinary shares as a partner in a partnership, you should consult your tax advisor with regard to the U.S. federal income tax treatment of an investment in our ordinary shares. You should consult your own tax advisor regarding the United States federal, state, local, foreign and other tax consequences of owning and disposing of ordinary shares or ADSs in your particular circumstances. In particular, you should confirm whether you qualify for the benefits of the Treaty and the consequences of failing to do so.
Taxation of Dividends
earnings and profits, as determined for United States federal income tax purposes, will be treated as a return of capital to the extent of your basis in the ordinary shares or ADSs and thereafter as capital gain.
Subject to certain limitations, the German tax withheld in accordance with German law or the Treaty and paid over to Germany will be creditable against your United States federal income tax liability. To the extent a refund of the tax withheld is available to you under German law or under the Treaty, the amount of tax withheld that is refundable will not be eligible for credit against your United States federal income tax liability.
Taxation of Capital Gains
Passive Foreign Investment Company Status We believe that our ordinary shares and ADSs should not be treated as stock of a passive foreign investment company (PFIC), for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. If we were to become a PFIC, the tax treatment of distributions on our ordinary shares or ADSs and of any gains realized upon the disposition of our ordinary shares or ADSs may be less favorable than as described herein. You should consult your own tax advisors regarding the PFIC rules and their effect on you if you hold ordinary shares or ADSs.
Allianz SE is subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, Allianz SE files reports and other information with the Securities and Exchange Commission. These materials, including this annual report and the exhibits thereto, may be inspected and copied at the Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Copies of the materials may be obtained from the Commission’s Public Reference Room at prescribed rates. The public may obtain information on the operation of the Commission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330. The Commission also maintains a web site at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the Commission. Allianz SE’s annual reports and some of the other information submitted by Allianz SE to the Commission may be accessed through this web site. In addition, material filed by Allianz SE can be inspected at the offices of the New York Stock Exchange at
As a provider of financial services, we consider risk management to be one of our core competencies. It is therefore an integrated part of our business processes. The key elements of our risk management framework are: Promotion of a strong risk management culture supported by a robust risk governance structure.
The Board of Management of Allianz SE formulates business objectives and allocates capital resources across the Allianz Group, with the objective of balancing return on investment and risk. The Supervisory Board Risk Committee of Allianz SE meets on a regular and ad-hoc basis to monitor the risk profile of the Allianz Group based on risk reports presented by the Chief Financial Officer and Chairman of the Group Risk Committee. Two additional Board of Management level committees focus on the Group’s risk exposure. The Group Risk Committee monitors the Allianz Group’s risk profile and availability of capital in an effort to maintain an adequate relationship between return on investment and risk. Its role is to provide for comprehensive risk awareness within the Allianz Group and to continually improve risk control. It also defines risk standards and establishes risk limits. Furthermore, it is responsible for recommending and coordinating measures to mitigate risk. The Group Finance Committee makes decisions about investments and market risks, while complying with the Allianz Group’s risk framework. The Group Risk department (“Group Risk”), which reports to the Chief Financial Officer, develops methods and processes for identifying, assessing and monitoring risks across the Allianz Group based on systematic qualitative and quantitative analysis and regularly informs management concerning the Allianz Group’s risk profile. Group Risk develops the Allianz risk framework and oversees the operating Local operating entities assume
The risk governance structure is further complemented by Group Audit, Group Compliance and Group Legal Services. On a periodic basis, Group Audit independently reviews the risk governance implementation, performs quality reviews of risk processes and tests adherence to business standards. Group Legal Services seek to mitigate legal risks with support from other departments. Legal risks include legislative changes,
Internal Risk Capital Framework
Value-at-Risk approach We use an internal risk capital model a Value-at-Risk
insurance and To calculate internal risk capital
Diversification and correlation assumptions Our internal risk capital model considers both concentration and correlation when aggregating results on the Allianz
The Scope
Our internal risk capital
Our internal risk capital model covers: Substantially all of our major insurance and banking operations. Substantially all of our assets (including bonds, mortgages, investment funds, loans, floating rate notes, equities and real estate) and liabilities (including the cash flow profile of all technical reserves as well as deposits and issued securities). For the Life/
Substantially all of our derivatives (options, swaps and futures), in particular if they form part of the operating entity’s regular business model (e.g., at Allianz Life
For smaller insurance operating entities that have an immaterial impact on the Group risk profile, and for the Asset Management segment, we assign internal risk capital requirements based on an approach similar to Standard & Poor’s standard model. This uses the same risk categories as our internal risk capital model, thereby allowing us to consistently aggregate internal risk capital for all segments at the Group level. More specifically, approximately 99% of the investments managed by the Asset Management segment are held for the benefit of either third parties or Allianz Group insurance entities and, therefore, do not result in significant market and credit risk for the Asset Management segment. As a result, the internal risk capital requirements for the Asset Management segment only reflect business risk. However, the evaluation of market risk and credit risk on the account of third parties is an integral part of the risk management process of our local operating entities. Applying an approach based on risk weighted assets, and following the sale of our former banking subsidiary, Dresdner Bank, to Commerzbank, our continuing banking operations in Germany, Italy, France and New Europe represent only an insignificant amount of approximately 1.3% of total non-diversified internal risk capital. Therefore, risk management with respect to banking operations is not discussed below in detail. The Allianz Group’s policy is to require each operating entity to match the currency of their material assets and liabilities or to otherwise hedge foreign currency risk. As a result, our residual foreign currency risk results primarily from the fair value of the net asset value of our non-Euro operating entities and certain exposures to non-Euro denominated assets and liabilities held at the Group level. This currency risk is monitored and managed centrally at the Allianz Group level by Group Corporate Finance & Treasury and is, therefore, mostly allocated to the Corporate segment. Following the announcement of the sale of Dresdner Bank to Commerzbank in August 2008, Dresdner Bank qualified as held-for-sale and discontinued operations. For the purpose of this discussion on risk management, we refer to “discontinued operations” to mean the assets and liabilities held by Dresdner Bank upon its sale by Allianz to Commerzbank on January 12, 2009. Certain former assets and liabilities of Dresdner Bank, which Allianz retained and which were not transferred to Commerzbank, were not classified as discontinued operations. We generally present figures as of December 31, 2008 excluding discontinued operations, although we also provide certain information regarding the total Group including discontinued operations for the purpose of comparison. When excluding discontinued operations from internal risk capital calculations, we also take into account, that the discontinuation of certain banking operations results in a smaller diversification effect. Limitations Our internal risk capital model expresses the potential “worst case” amount in economic value that we might lose at a certain level of confidence. However, there is a statistically low probability of 0.03% that actual losses could exceed this threshold. We assume that model parameters derived from historical data can be used to characterize future possible risk events; if future market conditions differ substantially from the past, as in the case of the 2008 financial crisis for which there was no precedent, then our VaR approach may be too conservative or too liberal in ways that can not be predicted. Our ability to back-test the model’s accuracy is limited because of the high confidence level of 99.97% and one-year holding period. Furthermore, as historical data is used to calibrate the model, it cannot be used for validation. Instead, we validate the model and parameters through external reviews by independent consulting firms focusing on methods for selecting parameters and control processes. Overall, we believe that our model adequately assesses the risks to which we are exposed. As our internal risk capital model considers the change in economic fair value of our assets and liabilities, it is crucial to accurately estimate the fair market value of each item. For some assets and liabilities, it has become increasingly difficult in today’s financial markets, if not impossible, to obtain either a current market price or to apply a mark-to-market approach. For certain assets and liabilities, where a current market price for that instrument or similar instruments is not available, we apply a mark-to-model approach. For some of our liabilities, the accuracy of fair values depends on the quality of the actuarial cash flow estimates. Despite these limitations, we believe the estimated fair values are appropriately assessed. We apply customized derivative valuation tools which are suitable to our business to reflect substantially all of our derivatives in internal risk capital. Our integrated internal risk capital model for insurance operations currently only allows for the modeling of common derivatives such as equity calls, puts, forwards and interest rate swaps. For internal risk capital calculations, non-standardized instruments, such as derivatives embedded in structured financial products, are represented by the most comparable standard derivative types. The volume of non-standard instruments is not material on either the local or the Allianz Group level, but a more precise modeling of these instruments might impact the fair value and resulting internal risk capital for these derivatives. However, we believe that any such change would not be material. The Allianz internal risk capital model plays a significant role in solvency management and capital allocation. Our aim is to ensure that the Allianz Group is adequately capitalized at all times, even following a significant adverse event, and that all operating entities meet their respective capital requirements. In addition, we employ a value-based approach (Economic Value Added or “EVA”®), among other approaches, to measure and manage our business activities as well as to optimize capital allocation across the Allianz Group. Internal risk capital is a key parameter of our EVA®-approach. In managing our capital position, we also consider additional external requirements of regulators and rating agencies. While meeting rating agencies’ capital requirements forms a strategic business objective of the Allianz Group, capital requirements imposed by regulators constitute a binding constraint. Regulators and rating agencies impose minimum capital rules on the level of both the Allianz Group’s operating entities and on the Allianz Group as a whole. Internal capital adequacy Our objective is to maintain available capital at the Group level in excess of the minimum requirements that are determined by our internal risk capital model according to a solvency probability of 99.97% over a holding period of one year. In support of this objective, we require each of our local operating entities to hold available capital resources allowing them to remain solvent at a lower confidence level of 99.93% over the same one-year holding period. This approach is designed to ensure a consistent capital standard across the Group that helps mitigate potential constraints of capital fungibility—i.e., by requiring our local operating entities to hold such levels of capital resources, the Group is less likely to be required to allocate capital to a local operating entity that may have incurred a loss, and accordingly the Group is less likely to encounter constraints inherent in moving capital across the many different jurisdictions in which the Group conducts business. In addition, we take into account the benefits of a single operating entity being part of a larger, diversified Group. The Allianz Group’s available capital is based on the Group’s shareholders’ equity as adjusted to reflect the full economic capital base available to absorb any unexpected volatility in results of operations. For example, the present value of future profits in the Life/Health segment and hybrid capital are added to shareholders’ equity, whereas goodwill and other intangible assets are subtracted. Available capital and internal risk capital in € bn Based on pro-forma calculations assuming the completion of the Dresdner Bank transaction prior to year-end of 2008(1), our available capital at December 31, 2008 amounted to €42.5 billion (2007: €63.8 billion), while our corresponding internal risk capital at December 31, 2008 amounted to €30.3 billion (2007: €33.4 billion), resulting in a capital ratio of 140% at December 31, 2008, compared to 191% at December 31, 2007(2). The decrease of 33% in available capital was primarily driven by a decrease in shareholders’ equity and a decline in the present value of future profits in the Life/Health segment. Including discontinued operations, the Allianz Group-wide internal risk capital after Group diversification and before minority interests of €32.9 billion at December 31, 2008 reflects a realized diversification benefit on the Group level of approximately 56%. Non-diversified and Group diversified internal risk capital are broken down as follows:
Allocated internal risk capital by risk category (total portfolio before minority interest) in € mn Allocated internal risk capital by segment(3) (total portfolio before minority interest) in € mn
Taking into account discontinued operations as of December 31, 2008, total internal risk capital is still at a comparable level as at December 31, 2007 due to offsetting effects across the different risk categories (e.g., interest rate risk increased while equity risk decreased). The discontinued operations contributed 12% to total internal risk capital as of December 31, 2008. More detailed discussions of movements are provided in the sections specifically related to the risk categories. Regulatory capital adequacy Under the EU Financial Conglomerates Directive, a supplementary European Union directive, a financial conglomerate is defined as any financial parent holding company that, together with its subsidiaries, has significant cross-border and cross-sector activities. The Allianz Group is a financial conglomerate within the scope of the Directive and related German law. The law requires that a financial conglomerate calculates the capital needed to meet its solvency requirements on a consolidated basis, which we refer to below as “available funds”. Financial conglomerate solvency in € bn Based on pro-forma calculations assuming the completion of the Dresdner Bank transaction prior to year-end of 2008(1), our available funds for the solvency margin, required for our insurance segments and our banking and asset management business, is €32.7 billion (2007: €46.5 billion) at December 31, 2008 including off-balance sheet reserves(2), surpassing the minimum legally stipulated level by €12.4 billion (2007: €17.6 billion). This margin results in a preliminary pro-forma cover ratio(3) of 161% at December 31, 2008 (2007: 161%)(4). The decrease of 30% in available funds was primarily driven by a decrease in shareholders’ equity. Rating agency capital adequacy Rating agencies apply their own models to evaluate the relationship between the required risk capital of a company and its available capital resources. Assessing capital adequacy is usually an integral part of the rating process. At December 31, 2008, the financial strength of Allianz SE was rated by Standard & Poor’s as “AA” (stable outlook), by A. M. Best as “A+” (stable outlook), and by Moody’s as “Aa3” (stable outlook).
In addition to its long-term financial strength rating, Standard & Poor’s determines a separate rating for “Enterprise Risk Management” (ERM). As of September 2008, Standard & Poor’s has assigned Allianz a “Strong” rating for the ERM capabilities of our insurance operations. This rating indicates that Standard & Poor’s regards it “unlikely that Allianz SE will experience major losses outside its risk tolerance”. Standard & Poor’s stated that the assessment is based on the Allianz Group’s strong risk management culture, strong controls for the majority of key risks and strong strategic risk management. Supplementary stress test analysis In addition to our internal risk capital analysis, we perform regular stress tests that act as early-warning indicators in monitoring the Allianz Group’s regulatory solvency capital ratios and its capital position required by rating agencies. We also apply regular stress tests on a local operating entity level in order to monitor capital requirements imposed by local regulators and rating agencies. For example, stress test results on a Group level indicated that a 10% price decline in our available-for-sale equity securities as of December 31, 2008 would have resulted in a €1.7 billion decline in shareholders’ equity before minority interests. An increase in the interest rate by 100 basis points would have decreased shareholders’ equity before minority interests by €3.5 billion, if available-for-sale fixed-income securities are taken into account as of December 31, 2008. As we are an integrated financial service provider offering a variety of products across different business segments and geographic regions, diversification is key to our business model. Diversification helps us to manage our risks efficiently by limiting the economic impact of any single event and by contributing to relatively stable results and risk profile in general. As discussed above, the degree to which the diversification effect can be realized depends not only on the correlation between risks but also on the level of relative concentration of those risks. Therefore, our aim is to maintain a balanced risk profile without any one or more disproportionately large risks. Disproportionately large risks that might accumulate and have the potential to produce substantial losses (e.g., natural catastrophes or credit events) are closely monitored on a standalone basis (i.e., before the diversification effect) and are subject to a global limit framework. For example, the Management Board of Allianz SE has implemented a framework of natural catastrophe limits at both the operating entity and Group levels in an effort to reduce potential earnings volatility and restrict potential losses from events having an occurrence probability of once in 250 years. Group limits are linked to the planned operating profit and the limits on operating entity level are based on the Property-Casualty net asset value. Traditional reinsurance coverage and dedicated financial transactions on Group level are examples of two instruments to mitigate the peak risks and to limit the impact of adverse conditions on our financial results and shareholders’ equity. Similarly, the Group monitors and limits credit exposures to single obligors and groups using its overall limit-setting framework to ensure that Allianz Group’s credit and counterparty risk profile is appropriately controlled. As a fundamental principle underlying the limit system, several risk criteria of a counterparty have to be taken into account: financial statements, creditworthiness, country and industry assignment, the current Allianz Group’s portfolio composition and the concentration a particular counterparty introduces within the portfolio. Counterparty limits serve not only to restrict the exposure, but also to identify open investment opportunities for the operating entities while at the same time taking into consideration the current portfolio structure at the Group level. In general, we identify and measure risk concentrations in terms of non-diversified internal risk capital in line with the risk categories covered in our internal risk capital model. In the subsequent sections all risks are presented before and after diversification and concentrations of single sources of risk are discussed accordingly. In the following table, we present our Group-wide internal risk capital related to market risks. Allocated Internal Market Risk Capital by Business Segment and Source of Risk (Total Portfolio Before Minority Interests)
Internal equity risk capital decreased in the aggregate mainly driven by the worldwide market drop in 2008 and an active reduction of exposure throughout the year. In our insurance segments, parts of the equity exposure were re-invested in fixed-income resulting in an increase in internal interest rate risk capital. Furthermore, the drop in interest rates across the world raised internal interest rate risk capital as well, in particular in our Life/Health segment which suffered from diminishing “buffers” (e.g., a decrease in unrealized gains in equity investments) that would otherwise help mitigate the impact of adverse developments. In this segment, internal risk capital additionally increased significantly due to the model change for which more details are provided in the following section. The decline in internal equity risk capital allocated to the Corporate segment was also due to the market developments experienced in 2008, supported by the sale of some strategic participations which were offset in part by the transfer of strategic participations from Dresdner Bank to the Corporate segment. As previously discussed, we and
Average, High and Low Allocated Internal Market Risk Capital by Business Segment and Source of Risk
In addition to the information given in the following paragraphs, the quantitative contributions of the non-trading and trading positions to the overall internal risk capital for market risk is presented at the end of this section.
The Allianz Group’s non-trading portfolios contain segments as well as all non-trading activities of the Banking segment. The Allianz Group holds and uses many different financial instruments in managing its businesses. Grouped according to our internal risk
Property-Casualty and Life/Health
The interest rate risk to which the Property-Casualty and Life/Health segments are exposed in the Property-Casualty segment are typically shorter in We have allocated a significant part of the Life/Health to these arrangements, we must credit minimum rates for individual In 2008, we enhanced our internal risk capital model for the purpose of quarterly risk reporting and risk related-performance measurement (EVA®) in the Life/Health Banking and Asset Management segments Following the sale of Dresdner Bank, we do not consider market risk related to our continuing Banking operations to be significant at the Group level. Although the internal risk capital requirements for the Asset Management segment only reflect business risk, the evaluation of market risk and credit risk on the account of third parties is an integral part of the risk management process of our local operating entities. Our Asset Management operating entities monitor market risks using VaR models, sensitivity analyses and stress tests that estimate the potential loss under extreme market conditions. All underlying models are regularly reviewed by the risk departments of the respective local operating entities. Corporate segment The primary Corporate risks are interest rate,
in our asset portfolio. Some of the securities issued qualify as eligible capital for existing regulatory solvency requirements to the extent they constitute subordinated debt or are perpetual in nature.
The For accounting purposes and from a management perspective, financial instruments are typically classified as held-for-trading if they are financial assets or financial liabilities that are acquired or incurred for the purpose of selling or repurchasing them in the near term. For accounting purposes, however, all derivative instruments must be classified as trading regardless of their specific use within the business or of whether management intends to sell or repurchase them in the near term, and as such, their accounting classification may differ from Allianz Group’s management view. The market risk Trading activities in the Asset Management segment
The following Allocated Internal Market Risk Capital
Allocated Internal Market Risk Capital By Business Segment and Source of Risk (Trading
Credit risk is defined as the potential loss in portfolio value over a given time horizon due to changes in the credit quality of exposures in the portfolio. Credit risk arises from claims against various obligors
Group Risk’s obligor credit risk management framework is comparable to those widely used in the industry and is based on internal ratings, estimates of exposure at default (EAD) and loss given default (LGD). These measurements are all estimated using statistical analysis and professional judgment. Our aggregation methodology is comparable to
We monitor and manage credit risks and concentrations within the portfolio based on a counterparty limit system that is applied across the entire Allianz Group. Counter-party limits are calculated taking into account the main risk drivers of credit risk and aim to cut off peak concentrations by industry and counterparty name in the portfolio. For monitoring the credit risk profile of our operating entities’ portfolios and the whole Allianz Group portfolio, credit reports for portfolio analysis are provided within a web-based limit system application. Our internal credit risk capital increased in 2008 mainly due to rating downgrades of some of our counterparties following the financial turmoil throughout 2008. The high credit quality of our investment and reinsurance portfolio mitigated the impact that the broad credit deterioration had on Allianz Group’s credit risk profile. In response to the financial crisis, we have initiated a number of actions, for example, weekly review and adjustment of limit settings for the major financial institutions as a temporary measure to assess systemic risks of the financial industry and to recommend short-term actions to our operating entities in light of this severe market volatility. Allocated Internal Credit Risk Capital by Business Segment and Source of Risk
As previously discussed, we determine internal risk capital figures on a quarterly basis. The table below presents the average internal risk capital for credit risk calculated over the four quarters of 2008 and 2007, as well as the high and low quarterly internal risk capital amounts calculated in both years. All figures include discontinued operations. Average, High and Low Allocated Internal Credit Risk Capital by Source of Risk (Total Portfolio Before Minority Interests,
Property-Casualty, Life/Health and Corporate
In the Property-Casualty and Life/Health Credit risk—reinsurance and credit insurance
We take steps to limit our liability from insurance business by ceding part of the risks we assume to the international reinsurance market. As of December 31, 2008, 9% of our
in€ bn
Credit risk—investment As of December 31, 2008, our operating entities in the U.S. and Germany accounted for 40% of the non-diversified internal risk capital allocated to our Property-Casualty, Life/ Health and Corporate segments for investment credit risk.
fair values in
Banking and Asset Management segments Following the sale of Dresdner
As part of the investment management process, the Asset Management segment’s
Actuarial risks consist of premium and reserve risks in the Property-Casualty segment as well as Allocated Internal Actuarial Risk Capital by Business Segment and Source of Risk(1) (Total Portfolio Before Minority Interests)
In general, Group-diversified internal actuarial risk capital increased, as the discontinuation of certain banking operations results in less diversified insurance operations and a smaller diversification effect. Before Group diversification, internal premium CAT risk capital remained relatively stable compared to 2007, while it increased after Group diversification additionally driven by a shift in contributions from other risk categories, mainly due to the decline in internal market risk capital. As previously discussed, we determine internal risk capital figures on a quarterly basis. The table below presents the average internal risk capital calculated for actuarial risks over the four quarters of 2008 and 2007, as well as the high and low quarterly internal risk capital amounts calculated in both years. All figures include discontinued operations. Average, High and Low Allocated Internal Actuarial Risk Capital by Source of Risk (Total Portfolio Before Minority Interests, After Group Diversification and Including Discontinued Operations)
Property-Casualty segment A substantial portion of the Property-Casualty segment’s non-diversified internal actuarial risk capital is assigned to our operating entities in Germany, Italy, France and the U.S. (49% as of December 31, 2008).
Premium risk represents risk that, during a one-year time horizon, underwriting profitability is Natural disasters such as earthquakes, storms and floods represent a special challenge for risk
Californian earthquakes. Our loss potential net of
Reserve risk Reserve risk represents the risk of
Life/Health
We consider mortality and longevity risks which can cause variability in policyholder benefits resulting from the unpredictability of the
Due to the offsetting effects of mortality risk and longevity risk inherent in the combined portfolios 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 biometric risk.
Business risks consist of operational risks and cost risks. Operational whereas strategic risk and reputational Cost Allocated Internal Business Risk Capital by Business Segment
Allianz has developed responsibilities, risk processes and methods and has been implemented at the major Allianz Group companies. Local risk managers
There are certain risks that cannot be fully quantified across the Group using our internal risk capital model. For these risks, we also pursue a systematic approach with respect to identification, analysis, assessment and monitoring.
Liquidity
Liquidity risk is the risk that short-term current or future payment obligations cannot be met or can only be met on the basis of altered conditions, along with the risk that in the event of a company liquidity crisis, refinancing is only possible at higher interest rates or that assets may have to be liquidated at a discount. This risk can arise primarily if there are mismatches in the timing of cash payments and funding obligations. Liquidity risk does not include the risk of a change in market prices due to a worsening of the market liquidity of assets, as this is a component of market risk analyzed through our internal risk capital
Corporate segment On the Group level, liquidity risks arise mainly from capital requirements of subsidiaries and necessary refinancing of expiring strategic financial liabilities. The liquidity position of Allianz SE is monitored on a daily basis and reported to the Board of Management regularly. The main tools to limit unforeseen liquidity requirements are committed credit lines from banks, commercial paper facilities, medium-term debt issuance programs, access to the market of sale and repurchase agreements (the so-called “Repo market”) as well as internal resources in the form of intra-Group loans and an international cash pooling infrastructure. Property-Casualty and Life/Health segments Our insurance operating entities manage liquidity risk locally, using local asset-liability management systems designed to ensure that assets and Liquidity risk in our insurance segments is a secondary risk following external events, such as natural disasters, that are generally reflected in The quality of our investments also provides comfort that we can meet high liquidity requirements in unlikely events. Furthermore, in the case of an extraordinary event, a portion of the applicable payments may usually be made with a certain time lag, which reduces the risk that short-term current payment obligations cannot be met. We employ actuarial methods for estimating our liabilities arising from insurance contracts. In the course of standard liquidity planning we reconcile the cash flows from our investment portfolio with Banking and Asset Management segments
In the Asset Management Reputational
Reputational risk is the risk of direct loss or loss in future business caused by a decline in the reputation of the Allianz Group one or more of its specific operating
Our operating entities identify and assess reputational risks within their business processes. In addition, Group Risk identifies and assesses
Strategic
Strategic risk is the risk of an unexpected negative change in the company value, arising from the adverse effect of management decisions on both business strategies and their implementation. This risk is a function of the compatibility between strategic goals, the business strategies
These risks are evaluated and analyzed quarterly in the same way as reputational risk.
We plan to continue to strengthen our risk management
internal risk based performance measurement. This platform will help us establish a framework that fulfills the quantitative Pillar I requirements under the Solvency II project after internal model approval for regulatory purposes. In addition to the key objectives defined by the Solvency II umbrella project for all risk types, the credit risk implementation project aims to streamline the existing credit risk data submission process and to develop a new web-based Credit Risk Reporting Platform for comprehensive and flexible portfolio analyses as well as for a more powerful limit-setting framework including monitoring and management processes. This reporting tool will support all operating entities and the Group in their decisions regarding asset management and strategic portfolio optimization. As part of the Solvency II umbrella project, a subproject has been launched to roll-out a new operational risk management platform to all operating entities which will automate the operational risk management process, complemented by a refined risk and control self-assessment based on scenarios.
Not applicable.
None.
For its fiscal year ending December 31, Allianz in achieving its objectives, in determining the risks that are considered acceptable to bear, in assessing the likelihood of the risks concerned materializing, in identifying its ability to reduce the incidence and impact
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated Allianz’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, in light of the judgments noted above as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that these disclosure controls and procedures provided reasonable assurance as to effectiveness as of December 31,
Management’s Annual Report on Internal Control Over Financial Reporting
The management of Allianz is responsible for establishing and maintaining adequate internal control over financial reporting. Allianz’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Allianz; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS,
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Allianz’s internal control over financial reporting as of December 31,
Report of Independent Registered Public Accounting Firm
To the Board of Management and Supervisory
We have audited
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, exists, and testing and evaluating the design and operating effectiveness of internal control
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion,
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Allianz Group as of December 31, consolidated income statements, consolidated statements of changes in equity and consolidated statements of cash flows for each of the years in the three-year period ended December 31, dated
March 31, 2009 KPMG
Wirtschaftsprüfungsgesellschaft Munich, Germany
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft) Changes in Internal Control Over Financial Reporting There have been no changes in the Company’s internal control over financial reporting that occurred during fiscal year 2008, which have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Our Supervisory Board has determined that Dr. Franz B. Humer, Dr. Wulf H. Bernotat and Igor Landau meet the criteria of an audit committee financial expert, as that term is defined in Item 16A(b) of Form 20-F. Dr. Franz B. Humer, Dr. Wulf H. Bernotat and Igor Landau are “independent” members of the Supervisory Board in accordance with NYSE listing standards applicable to Allianz SE.
In response to Section 406 of the Sarbanes-Oxley Act of 2002, we have adopted a specific Code of Ethics in addition to our general Code of Conduct that applies to all members of our Board of Management, including persons performing the functions of a principal executive officer, principal financial officer, principal accounting officer and controller and senior employees performing similar functions. A copy of this code of ethics is available on our Internet website www.allianz.com/corporate-governance. (Reference to this “uniform resource locator” or “URL” is made as an inactive textual reference for informational purposes only. The information found at this website is not incorporated by reference into this document). There have been no amendments or waivers to this code of ethics since its adoption. Information regarding any future amendments or waivers will be published on the aforementioned website.
KPMG AG Wirtschaftsprüfungsgesellschaft (or “KPMG AG”) serves as the external auditing firm for the Allianz Group. The table set forth below contains aggregate fees billed for each of the last two fiscal years by KPMG AG or KPMG AG and the world wide member firms of KPMG International (or “KPMG”) in the following categories: (i) Audit fees, which comprise fees billed for services rendered for the audit of the Allianz Group’s consolidated financial statements, the statutory audits of the financial statements of Allianz SE and its subsidiaries or services the are normally provided in connection with statutory and regulatory filings or engagements; (ii) Audit-related fees, which comprise fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the financial statements and which are not reported under (i); (iii) Tax fees, which comprise fees billed for professional services rendered for tax advice and tax compliance; and (iv) All other fees, which comprise fees billed for all other products and services provided other than the services reported under (i) through (iii). Fees billed
Audit fees KPMG billed the Allianz Group an aggregate of €50.5 million (2007: €49.0 million) in connection with professional services rendered for the audit of our annual consolidated financial statements and services normally provided by KPMG in connection with statutory and regulatory filings or engagements. These services consisted mainly of periodic review engagements and the annual audit. Audit-related fees KPMG billed the Allianz Group an aggregate of €6.1 million (2007: €9.8 million) for assurance and related services. These services consisted primarily of advisory and consulting services related to accounting and financial reporting standards and financial due diligence services. Tax fees KPMG billed the Allianz Group an aggregate of €3.3 million (2007: €4.2 million) for professional services, primarily for tax advice. All other fees KPMG billed the Allianz Group an aggregate of €7.5 million (2007: €4.1 million) for other services, which consisted primarily of services under the guidance of Allianz Group management and general consulting services. All services provided by KPMG to Allianz Group companies must be approved by the Audit Committee of the Allianz SE Supervisory Board. Services other than audit services must be pre-approved by the Audit Committee. The Audit Committee pre-approval process is based on the use of a “Positive List” of activities decided by the Audit Committee and, in addition, a “Guiding Principles and User Test” is applied. Group Compliance and KPMG report to the Audit Committee periodically with respect to services performed. In 2008, the percentage of the total amount of revenue we paid to our principal accountants represented by non-audit services subject to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X was less than 5%.
Our Audit Committee consists of three shareholder representatives and two employee representatives, one of whom is employed by the Allianz Group. With respect to the employee representative employed by the Allianz Group, Allianz SE relies on the exemption afforded by Rule 10A-3(b)(1)(iv)(C) under the Securities Exchange Act of 1934. We believe that such reliance does not materially adversely affect the ability of the Audit Committee to act independently or to satisfy the other requirements of Rule 10A-3.
The table below sets forth the information with respect to purchases made by or on behalf of Allianz SE or any “affiliated purchaser”, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, of Allianz SE shares for the year ended December 31, 2008.
The following summarizes the significant differences between the corporate governance standards set forth by the New York Stock Exchange (NYSE) for U.S. companies listed on the NYSE and German and European corporate governance practices as Allianz SE has implemented them. General Allianz SE is a European Company, incorporated in the Federal Republic of Germany (“Germany”) and organized under the laws of Germany and the European Union. It has a dual board system, consisting of the Board of Management (Vorstand) and the Supervisory Board (Aufsichtsrat). The two boards are separate and no individual may serve simultaneously on both boards. The Board of Management is responsible for managing the day-to day business of the Company and the Supervisory Board advises and oversees the Board of Management. This dual board system of Allianz SE contrasts with the unitary board system of U.S. companies and therefore also with some of the corporate governance standards set forth by the NYSE, which refer to the unitary board of directors of U.S. companies. German Corporate Governance Rules The primary source for the corporate governance of German listed companies, such as Allianz SE, is the German Stock Corporation Act (Aktiengesetz), a Federal Act of Parliament which is in effect since 1965 and was amended several times. In addition, Allianz as a European Company is subject to specific provisions regarding the SE (such as the Council Regulation (EC) 2157/2001 (“SE-Regulation”), the German Act on the SE-Implementation (SE-Ausführungsgesetz, SEAG), the German Act on the SE-Employee Involvement (SE-Beteiligungsgesetz, SEBG) as well as the Agreement concerning the Participation of Employees in Allianz SE of September 20, 2006 (Vereinbarung über die Beteiligung der Arbeitnehmer in der Allianz SE)). Additional best practice rules are provided by the German Corporate Governance Code (the “Code”), that was enacted on February 26, 2002 by a Government Commission appointed by the German Justice Minister, and which is widely acknowledged by all German listed companies which are subject to it. The Code was amended several times and the current version is available in several languages on the internet at www.corporate-governance-code.de. It describes essential statutory regulations for the management and supervision of German listed companies and contains standards for good and responsible governance. The Code aims at making the corporate governance practices of German listed companies more transparent and understandable and to promote the trust of international and national investors as well as the general public in the management and supervision of German listed companies. It contains requirements which are also covered by the German Stock Corporation Act and in addition addresses new corporate governance rules in terms of recommendations and suggestions. The Code has an extensive area of application which covers substantially the same topics as the NYSE corporate governance rules. Main topics are the annual general meeting, the cooperation between the Board of Management and the Supervisory Board, special rules concerning tasks, responsibilities, composition and compensation of both boards as well as rules regarding conflicts of interest of board members. With respect to the Supervisory Board, the Code also establishes certain rules regarding the composition of board committees, in particular the audit committee. Another important area covered by the Code is the audit of the Annual Financial Statements and related reporting requirements. In consideration of the extensive area of corporate governance which is covered by the Code, Allianz SE is broadly regulated in the area of corporate governance. To ensure that German listed companies comply with the Code to the broadest extent, the Code is linked with the German Stock Corporation Act. Pursuant to Section 161 of the German Stock Corporation Act, German listed Companies have to declare annually their compliance with the recommendations contained in the Code or to disclose any exception. This declaration is to be made permanently available for all investors. Thus, the Code has a legal basis and each German listed company’s compliance with the Code is transparent for all investors. Allianz SE´s declaration of compliance is available at our website www.allianz.com/corporate-covernance. (Reference to this “uniform resource locator” or “URL” is made as an inactive textual reference for informational purposes only. The information found at this website is not incorporated by reference into this document). Independence Requirements NYSE corporate governance standards contain specific independence requirements for members of the board of directors and certain committees. These requirements are, in part, a consequence of the potential risks which result from the composition of the board of directors as the single executive body of U.S. companies. Therefore, they may only apply in a limited way to Supervisory Boards of German stock corporations, because the dual board system and the consequential task sharing between the Board of Management as decision-making body and the Supervisory Board as advisory and supervisory body, creates a unique system of “checks and balances” which are not directly comparable with a unified board system. The Supervisory Board of German stock corporations is a separate board beside the Board of Management and no person may concurrently serve on the Board of Management and the Supervisory Board of the same company. Consequently, the Supervisory Board members are not involved in the day-to-day business decisions, which are taken by the Board of Management. This assures a certain degree of independence of Supervisory Board members from the management of the company. In addition, the Code recommends that proposals for the election of Supervisory Board members ensure that, at any time, the Supervisory Board as a whole is composed of members who are “sufficiently independent”. Furthermore, German law and the Code establish a number of principles that are designed to strengthen the independence of board members and to avoid conflicts of interests. For example, the Code recommends that not more than two former members of the Board of Management shall be members of the Supervisory Board, that Supervisory Board members shall not exercise directorships or similar positions or advisory tasks for important competitors of the company and that candidates for the election for the Supervisory Board shall be-among others-sufficiently independent. Additionally, the Code contains special recommendations with respect to the handling of conflicts of interest. Allianz SE complies with all of these recommendations. Committees The Supervisory Board of Allianz SE has-among others-established an audit committee, a personnel committee and a nominating committee. These committees are comparable to the audit committee, the compensation committee and the nominating/corporate governance committee as required by the NYSE corporate governance standards. Differing from the NYSE corporate governance standards, Allianz SE’s committees do not consist solely of independent directors, which is a consequence of the fact that employee representatives are members of the Supervisory Board. German companies were granted an exemption by the SEC from the independence requirements for audit committee members as established by the SEC pursuant to section 301 of the Sarbanes-Oxley Act of 2002. Furthermore, former members of the Board of Management may serve on the Supervisory Board of the company as well as on Supervisory Board committees without passing through a “black out period” as required to some extent by the NYSE rules. However, the Code requires that the chairman of the audit committee should not be a former member of the Board of Management of the company. Allianz SE complies with this requirement. Allianz SE’s audit committee was created in accordance with the audit committee rules established by the German Corporate Governance Code, which contains to some extent similar topics as the respective NYSE standards. Allianz SE’s audit committee has a written charter which addresses the goals and purposes required by the Code. These are similar to the NYSE requirements. According to German Law, the Supervisory Board of German insurance companies is responsible for electing and dismissing the auditor. In preparing this decision, a proposal is submitted to it by the audit committee. The audit committee, in turn, is responsible for engaging the auditor, setting the terms of the engagement and reviewing reports by the auditor according to IFRS rules and regulations. Disclosure of Corporate Governance Guidelines Allianz SE discloses a substantial amount of information with respect to its corporate governance on its website. In particular, information about the German Corporate Governance Code, Allianz SE’s current declaration of compliance with the Code, the composition of the Supervisory Board and the Board of Management of Allianz SE, the functions of both boards, the curriculum vitae of the board members, information with respect to the general meeting, the statutes of Allianz SE and information about Allianz SE’s external auditor and director’s dealings, are disclosed at our website www.allianz.com/corporate- covernance. (Reference to this “uniform resource locator” or “URL” is made as an inactive textual reference for informational purposes only. The information found at this website is not incorporated by reference into this document). PART III
Not applicable.
Refer to page F-1 forward for the consolidated financial statements required by this item.
The following exhibits are filed as part of this annual report:
Report of Independent Registered Public Accounting Firm To the Board of Management and Supervisory Board of Allianz SE: We have audited the accompanying consolidated balance sheets of Allianz SE and subsidiaries (collectively, “the Allianz Group”) as of December 31, 2008 and 2007, and the related consolidated income statements, consolidated statements of changes in equity and consolidated statements of cash flows for each of the years in the three-year period ended December 31, 2008 including the disclosures provided in the Qualitative and Quantitative Disclosures about Market Risk on pages 153 to 175. In connection with our audits of the consolidated financial statements we have also audited the accompanying financial statement schedules I to IV. These consolidated financial statements and financial statement schedules are the responsibility of the Allianz Group’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Allianz Group as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with International Financial Reporting Standards, as issued by the IASB and as adopted by the EU. Also in our opinion, the related financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Allianz Group’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 31, 2009, expressed an unqualified opinion on the effectiveness of the Allianz Group’s internal control over financial reporting. March 31, 2009 KPMG AG Wirtschaftsprüfungsgesellschaft Munich, Germany
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft) Consolidated Balance Sheets
Consolidated Income Statements
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows—(Continued)
The net cash flows provided by (used in) discontinued operations for the first nine months of 2008 contribute to the net cash flows of the operating, investing, and financing activities. Only the net cash flows of discontinued operations of the fourth quarter 2008 are shown on a net basis in one single line within the investing activities. Allianz Group Consolidated Statements of Cash Flows—(Continued) The following table shows the net cash flows provided by (used in) discontinued operations for the year ended December 31, 2008, 2007 and 2006 that are included in the consolidated statement of cash flows above.
Notes to the Allianz Group’s Consolidated Financial Statements
1 Nature of operations and basis of presentation
Nature of operations
Allianz SE and its subsidiaries (“the Allianz Group”) have global Property-Casualty insurance, Life/Health insurance, Banking and Asset Management operations in more than 70 countries, with the largest of its operations in Europe. The Allianz Group’s headquarters are located in Munich, Germany. The parent company of the Allianz Group is Allianz SE, Munich. Allianz SE is a stock corporation in the form of a European Company (Societas Europaea) and is listed on all German stock exchanges and the stock exchanges in London, Paris, Zurich, Milan and New York. The consolidated financial statements of the Allianz Group for the year ended December 31, 2008 were authorized for issue by the Board of Management on February 23, 2009.
Basis of presentation
The consolidated financial statements of the Allianz Group have been prepared in conformity with International Financial Reporting Standards
IFRS does not provide specific guidance concerning all aspects of the recognition and measurement of insurance contracts, reinsurance contracts and The accounting policies adopted are consistent with those of the previous financial year except for recently adopted IFRSs effective January 1, The consolidated financial statements are prepared as of and for the year ended December 31, and presented in millions of Euro (€)
2 Summary of significant accounting policies
Principles of consolidation Scope of consolidation
The consolidated financial statements of the Allianz Group include those of Allianz SE, its subsidiaries and certain investment funds and special purpose entities Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) subsidiaries whose fiscal year is other than December 31, but not exceeding a lag of three months. Adjustments are then made for the effects of significant transactions or events that occur between that date and the date of the Allianz Group’s financial statements. The Allianz Group transfers financial assets to certain SPEs in revolving securitization of commercial mortgage or other loan portfolios. The Allianz Group consolidates these SPEs as the Allianz Group continues to control the financial assets transferred and retains the servicing of such loans. Third-party assets held in an agency or fiduciary capacity are not assets of the Allianz Group and are not presented in these consolidated financial statements. Accounting policies of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Allianz Group. The effects of intra-Allianz Group transactions have been eliminated. Business combinations including acquisitions and disposals of minority interests
A business combination occurs when the Allianz Group obtains control over a business. Business combinations are accounted for
Any adjustments to those provisional amounts as a result of completing the initial accounting are contingent liabilities as well as the measurement of the cost of the combination and recognises immediately in profit or loss any excess remaining after that assessment. Acquisitions and disposals of minority interests are treated as transactions between equity holders. Therefore, any difference between the acquisition cost or sale price of the minority interest and the carrying amount of the minority interest is recognized as an increase or decrease of equity. For business combinations with an agreement date before March 31, 2004, minority interests are recorded at the minority’s proportion of the pre-acquisition carrying amounts of the identifiable assets and liabilities. Associated enterprises and joint ventures Associated enterprises are entities over which the Allianz Group can exercise significant influence and which are not joint ventures. Significant influence is the power to participate in, but not to control, the financial and operating policies within an enterprise. Significant influence is presumed to exist where the Allianz Group has at least 20% but not more than 50% of the voting rights unless it can be clearly demonstrated that this is not the case. If the investor holds less than 20% of the voting power of the investee, it is presumed that the investor does not have significant influence unless such influence can be clearly demonstrated. Joint ventures are entities over which the Allianz Group and one or more other parties have joint control. Investments in associated enterprises and joint ventures are generally accounted for using the equity method of accounting, in which the results and the carrying amount of the investment represent the Allianz Group’s proportionate share of the entity’s net income and net assets, respectively. The Allianz Group accounts for all material investments in associates on a time lag of no more than three Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
months. Income from investments in associated enterprises and joint ventures is included in interest and similar income. The positive difference between the cost of the investment and the Allianz
Foreign currency translation Translation from any foreign currency into functional currency
The individual financial statements of each of the Allianz Group’s subsidiaries are prepared in the prevailing currency in the environment where the subsidiary conducts its ordinary activities (its functional currency). Transactions recorded in currencies other than the functional currency (foreign currencies) are recorded at the exchange rate
Translation to the presentation currency
For purposes of the consolidated financial statements, the results and financial position of each of the Allianz Group’s subsidiaries are expressed in Euro, the functional currency of the Allianz Group. Assets and liabilities of subsidiaries not reporting in Euro are translated at the closing rate on the balance sheet date and income and expenses are translated at the quarterly average exchange rate. Any foreign currency translation differences, including those arising from the equity method, are recorded directly in shareholders’ equity, as foreign currency translation adjustments.
Use of estimates and assumptions
The preparation of consolidated financial statements requires the Allianz Group to make estimates and assumptions that affect items reported in the consolidated balance sheets and consolidated income statements, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The most significant accounting estimates are associated with the reserves for loss and loss adjustment expenses, reserves for insurance and investment contracts, loan loss allowance, fair value and impairments of financial instruments, goodwill, deferred acquisition costs, deferred taxes and reserves for pensions and similar obligations.
Cash and cash equivalents
Cash and cash equivalents include balances with banks payable on demand, balances with central banks, cash on hand, treasury bills to the extent they are not included in financial assets held for trading, checks and bills of exchange which are eligible for refinancing at central banks, subject to a maximum term of three months from the date of acquisition.
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Classification, recognition and initial measurement Financial assets within the scope of IAS 39 are either classified as financial assets carried at fair value through income, available-for-sale investments, held-to-maturity investments, loans and advances to banks and customers or as derivative financial instruments used for hedging. Furthermore financial assets comprise funds held by others under reinsurance contracts assumed and financial assets for unit-linked contracts. Financial liabilities within the scope of IAS 39 are either classified as financial liabilities carried at fair value through income, liabilities to banks and customers, investment contracts with policyholders, derivative financial instruments used for hedging, financial liabilities for puttable equity instruments, certificated liabilities or participation certificates and subordinated liabilities. Furthermore financial liabilities comprise financial liabilities for unit-linked contracts. The classification depends on the nature and purpose of the financial instrument and is determined at initial recognition. Financial instruments are initially recognized at fair value plus, in the case of financial instruments not carried at fair value through income, directly attributable transaction costs. Financial instruments are generally recognized and derecognized on trade date, when the Allianz Group has entered into contractual arrangements with counterparties to purchase or sell securities or incur a liability. Fair value of financial instruments The Allianz Group applies the IAS 39 fair value hierarchy to determine the fair value of financial instruments. Active markets—quoted market price The fair values of financial instruments that are traded in active markets are based on quoted market prices or dealer price quotations on the last exchange trading day prior to and including the balance sheet date. The quoted market price used for a financial asset held by the Allianz Group is the current bid price; the quoted market price used for financial liabilities is the current ask price. The impact of the Allianz Group´s own credit spread on financial liabilities carried at fair value is calculated by discounting future cash flows at a rate which incorporates the Allianz Group´s observable credit spread. No active markets—valuation techniques If the market for a financial instrument is not active, the fair value is determined by using valuation techniques. The valuation techniques used are based on market observable inputs when available. Such market inputs include references to recently quoted prices for identical instruments from an active market, quoted prices for identical instruments from an inactive market, quoted prices for similar instruments from active markets, quoted prices for similar instruments from inactive markets. Market observable inputs also include interest rate yield curves, option volatilities and foreign currency exchange rates. Where observable market prices are not available, fair value is based on appropriate valuation techniques using non-market observable inputs. Valuation techniques include net present value techniques, the discounted cash flow method, comparison to similar instruments for which observable market prices exist and other valuation models. In the process, appropriate adjustments are made for credit and measurement risks. Due to the worldwide financial market crisis, some markets faced a significant shortage of liquidity, which affected the valuation techniques used by the Allianz Group to measure fair value. For certain financial instruments, the market has been completely illiquid and market prices were no longer available. In addition, the market prices of certain asset-backed securities (ABS)-based products declined significantly. For ABS-based products the availability of price quotations from a functioning market was limited during 2008 and as of December 31, 2008. Therefore the valuation of these financial instruments is mainly based on quoted market prices or current market values of very similar same financial instruments. The market values used were taken from other Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) market participants that are representative of the market. In all other cases Allianz Group used model-based valuation techniques. Regardless of the valuation technique used, that technique reflects current market conditions and appropriate risk adjustments that market participants would make. No active market—equity instruments If the fair value cannot be measured reliably, unquoted equity instruments and derivatives linked to such instruments are stated at cost until a fair value can be measured reliably. These financial instruments are subject to the normal impairment procedures. Amortized cost of financial instruments The amortized cost of a financial instrument is the amount at which the financial instrument is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest rate method of any difference between that initial amount and the maturity amount, and minus any reduction for impairment or uncollectability. Recognition of a day one profit or loss If the fair value of a financial instrument differs from its initial transaction price (i.e. by comparing it to other observable current market transactions or by using a technical valuation model incorporating only observable market data), it is required that the recognition of a “day one profit or loss” is consistent with the subsequent measurement of the financial instrument with all the other requirements regarding the calculation of fair value. A profit or loss should be recognized after initial recognition only to the extent that it arises from a change in a factor that market participants would consider in setting a price. Subsequent measurement of financial instruments The subsequent measurement of financial instruments depends on their classification as follows: Financial assets and liabilities carried at fair value through income Financial assets and liabilities carried at fair value through income include financial assets and liabilities held for trading and financial assets and liabilities designated at fair value through income. Financial assets and liabilities are classified as held for trading if they have been principally acquired Financial assets consist of debt and equity securities, promissory notes and derivative financial instruments with positive fair values that do not meet the criteria for hedge accounting. Financial liabilities held for trading primarily consist of derivative financial instruments with negative fair values that do not meet the criteria for hedge accounting and obligations to deliver assets arising from short sales of securities, which are carried out in order to benefit from short-term price fluctuations. The securities required to close out short sales are obtained through securities borrowing or reverse repurchase agreements. This treatment is also applicable for bifurcated embedded derivatives of hybrid financial instruments. Financial assets and liabilities held for trading are
Financial assets and liabilities designated at fair value through income are
Available-for-sale investments Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) customers, or financial assets carried at fair value through income. Available-for-sale
Available-for-sale equity securities include investments in limited partnerships. The Allianz Group records its investments in limited partnerships at cost, where the ownership interest is less than 20%, as the limited partnerships do not have a quoted market price and fair value cannot be reliably measured. The Allianz Group accounts for its investments in limited partnerships with ownership interests of 20% or greater using the equity method due to the rebuttable
Held-to-maturity investments Held-to-maturity investments are debt securities with fixed or determinable payments and fixed maturities for which the Allianz Group has the positive intent and ability to hold to maturity. These securities are recorded at amortized cost using the effective interest method over the life of the security, less any impairment losses. Amortization of premium or discount is included in interest and similar income.
Loans and advances to banks and customers
Loans and advances to banks and customers are non-derivative financial assets with fixed investments or held-to-maturity investments, financial assets held for trading, or financial assets designated at fair value through income. Loans to banks and customers are initially recorded at fair value plus transaction costs, and subsequently recorded at amortized cost using the effective interest rate method. Interest income is accrued on the unpaid principal balance, net of charge-offs. Using the effective interest method, net deferred fees and premiums or discounts are recorded as an adjustment of interest income yield over the lives of the related loans.
Loans are placed on non-accrual status when the payment of principal or interest is doubtful based on the credit assessment of the borrower. Non-accrual loans consist of loans on which interest income is no longer recognized on an accrued basis, and loans for which a specific provision is recorded for the entire amount of accrued interest receivable. When a loan is placed on non-accrual status, any accrued interest receivable is reversed against interest and similar income. Loans can only be restored to accrual status when interest and principal payments are made current (in accordance with the contractual terms), and future payments in accordance with those terms are reasonably assured. When there is a doubt regarding the ultimate collectibility of the principal of a loan placed in non-accrual status, all cash receipts are applied as reductions of principal. Once the recorded principal amount of the loan is reduced to zero, future cash receipts are recognized as interest income.
Loans and advances to banks and customers include reverse repurchase (“reverse repo”) agreements and collateral paid for securities borrowing transactions. Reverse repo transactions involve the purchase of securities by the Allianz Group from a counterparty, subject to a simultaneous obligation to sell these securities at a certain later date, at an agreed upon price. If control of the securities remains with the counterparty over the entire lifetime of the agreement of the transaction, the securities concerned are not recognized as assets. The
amounts of cash disbursed are recorded under loans and advances to banks and customers. Interest income on reverse repo agreements is accrued over the duration of the agreements and is reported in interest and similar income. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Securities borrowing transactions generally require the Allianz Group to deposit cash with the security’s lender. Fees paid are reported as interest expense.
Loans and advances to customers include the Allianz Group’s gross investment in leases, less unearned finance income, related to lease financing transactions for which the Allianz Group is the lessor. The gross investment in leases is the aggregate of the minimum lease payments and any unguaranteed residual value accruing to the Allianz Group. Lease financing transactions include direct financing leases and leveraged leases. The unearned finance income is amortized over the period of the lease in order to produce a constant periodic rate of return on the net investment outstanding with respect to finance leases. Funds held by others under reinsurance contracts Funds held by others under reinsurance contracts assumed relate to cash deposits to which the Allianz Group is entitled, but which the ceding insurer retains as collateral for future obligations of the Allianz Group. The cash deposits are recorded at face value, less any impairments for balances that are deemed to be not recoverable. Financial assets for unit-linked contracts Financial assets for unit-linked contracts are recorded at fair value with changes in fair value recorded in net income together with the offsetting changes in fair value of the corresponding financial liabilities for unit-linked contracts. Liabilities to banks and customers Liabilities to banks and customers are subsequently measured at amortized cost. Herein included are repurchase (“repo”) agreements and securities lending transactions. Repo transactions involve the sale of securities by the Allianz Group to a counterparty, subject to the simultaneous agreement to repurchase these securities at a certain later date, at an agreed price. If control of the securities remains with the Allianz Group over the entire lifetime of the transaction, the securities concerned are not derecognized by the Allianz Group. The proceeds of the sale are reported under liabilities to banks or customers. Interest expense from repo transactions is accrued over the duration of the agreements and reported in interest and similar expenses. In securities lending transactions the Allianz Group generally receives cash collateral which is recorded as liabilities to banks or customers. Fees received are recognized as interest income. Investment contracts with policyholders Fair value for investment and annuity contracts are determined using the cash surrender values of policyholders’ and contract holders’ accounts. Financial liabilities for unit-linked contracts The fair value of financial liabilities for unit-linked contracts is equal to the fair value of the financial assets for unit-linked contracts. Financial liabilities for puttable equity instruments Financial liabilities for puttable equity instruments include the minority interests in shareholders’ equity of certain consolidated investment funds. These minority interests qualify as a financial liability of the Allianz Group, as they give the holder the right to put the instrument back to the Allianz Group for cash or another financial asset (“puttable instrument”). These liabilities are required to be recorded at redemption amount with changes recognized in income. Certified liabilities, participation certificates and subordinated liabilities Certified liabilities, participation certificates and subordinated liabilities are subsequently measured at amortized cost, using the effective interest method to amortize the premium or discount to the redemption value over the life of the liability. Financial guarantee contracts Financial guarantee contracts issued by the Allianz Group are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts which Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) are not accounted for as insurance contracts are recognized initially at fair value. Subsequently, unless the financial guarantee contract was designated at inception as at fair value through income, the issuer measures it at the higher of the best estimate of the expenditure required to settle the present obligation and the amount initially recognized less cumulative amortization when appropriate. Impairment of financial assets Impairment of available-for-sale and held-to-maturity investments A held-to-maturity or available-for-sale debt security is impaired if there is objective evidence that a loss event has occurred, which has impaired the expected cash flows, i.e. all amounts due according to the contractual terms of the security are not considered collectible. Typically this is due to deterioration in the creditworthiness of the issuer. A decline in fair value below amortized cost due to changes in risk free interest rates does not by itself represent objective evidence of a loss event. If there is objective evidence that the cost may not be recovered, an available-for-sale equity security is considered to be impaired. Objective evidence that the cost may not be recovered, in addition to qualitative impairment criteria, includes a significant or prolonged decline in the fair value below cost. The Allianz Group’s policy considers a significant decline to be one in which the fair value is below the weighted average cost by more than 20% or a prolonged decline to be one in which fair value is below the weighted average cost for greater than nine months. This policy is applied by all subsidiaries at the individual security level. If an available-for-sale equity security is impaired based upon the Allianz Group’s qualitative or quantitative impairment criteria, any further declines in the fair value at subsequent reporting dates are recognized as impairments. Therefore, at each reporting period, for an equity security that is determined to be impaired based upon the Allianz Group’s impairment criteria, an impairment is recognized for the difference between the fair value and the original cost basis, less any previously recognized impairments. In a subsequent period, if the fair value of an available-for sale debt security instrument increases and the increase can be objectively related to an event occurring after the recognition of an impairment loss, such as an improvement in the debtor’s credit rating, the impairment is reversed through impairments of investments (net). Reversals of impairments of available-for-sale equity securities are not recorded through the income statement. Impairment of loans
Loan loss allowance is recognized for loans for which there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the loan, and that loss event has an impact on the estimated future cash flows of the loan that can be reasonably estimated. If there is objective evidence that a loan is impaired, a loan loss allowance is recognized as the difference between the loan’s carrying amount and the present value of future cash flows, which includes all contractual interest and principal payments, discounted at the loan’s original effective interest rate. The loan loss allowance is reported as a reduction of loans and advances to banks and customers. Provisions for contingent liabilities, such as guarantees, loan commitments and other obligations are reported as other liabilities.
Loans with an outstanding balance greater than €1 mn are considered to be individually significant, and they are assessed individually to determine whether an impairment exists. Individually significant loans that are not impaired, as well as loans that are not individually significant, are grouped with loans evidencing similar
Specific allowances are established to provide for specifically identified counterparty risks. Specific allowances are established for impaired loans. The amount of the impairment is based on the present value of expected future cash flows or based on the fair value of the collateral if the loan is collateralized Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) and foreclosure is probable. If the amount of the impairment subsequently increases or decreases due to an event occurring after the initial measurement of impairment, a change in the allowance is recognized in earnings by a charge or a credit to the loan loss provisions.
General allowances are established to provide for incurred but unidentified losses for individually significant loans that do not have a specific allowance. Loans are segmented into groups of loans with similar risk characteristics and general allowances are calculated using statistical methods of credit risk measurement based on historical loss experience and the evaluation of the loan portfolio under current events and economic conditions.
Portfolio allowances are established for all loans that are not considered individually significant and have not been individually assessed. These loans are segmented into portfolios of homogeneous loans exhibiting similar loss characteristics, and allowances are calculated using statistical methods based upon historical loss rates which are regularly updated. Portfolio allowances are presented within the specific allowance category.
Country risk allowances are established for transfer risk. Transfer risk is a measure of the likely ability of a borrower in a country to repay its foreign currency-denominated debt in light of the economic or political situation prevailing in the country. Country risk allowances are based on a country risk rating system that incorporates current and historical economic, political and other data to categorize countries by risk profile. Loans with specific allowances are excluded from the country risk rating system, and countries provided for within the country risk allowance are excluded from the determination
of the transfer risk component of the general allowance. Country risk allowances are presented within the specific or general risk category, as appropriate.
Loans are charged-off when all economically sensible means of recovery have been exhausted. At the point of charge-off, the loan, as well as any specific allowance associated with the loan, is removed from the consolidated balance sheet or a charge may be recorded to directly charge-off the loan. A charge-off may be full or partial. Subsequent to a charge-off, recoveries, if any, are recognized as a credit to the loan loss provisions.
The loan loss provisions are the amount necessary to adjust the loan loss allowance to a level determined through the process described above.
Once a financial instrument has been classified into a particular category at initial recognition, transfers into or out of that category from or to another category are impossible for Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. Derecognition of financial instruments A financial asset is derecognized when the contractual rights to the cash flows from the financial asset expire or the Allianz Group transfers the asset and substantially all of the risks and rewards of ownership or transfers the asset and loses control of the asset. A financial liability is derecognized when it is extinguished. Derivative financial instruments The Allianz Group’s Property-Casualty and Life/Health segments use derivative financial instruments such as swaps, options and futures to hedge against changes in market prices or interest rates in their investment portfolios. In the Allianz Group’s Banking segment, derivative financial instruments are used both for Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Derivative financial instruments that do not meet the criteria for hedge accounting are reported at fair value as financial assets held for trading or financial liabilities held for trading. Gains or losses from these derivative financial instruments arising from valuation at fair value are included in income from financial assets and liabilities held for trading. This treatment is also applicable for bifurcated embedded derivatives of hybrid financial instruments. For derivative financial instruments used in hedge transactions that meet the criteria for hedge accounting (“accounting hedges”), the Allianz Group designates the derivative financial instrument as a fair value hedge, cash flow hedge, or hedge of a net investment in a foreign entity. The Allianz Group documents the hedge relationship, as well as its risk management objective and strategy for entering into various hedge transactions. The Allianz Group assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative financial instruments that are used for hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items. Derivative financial instruments used in accounting hedges are recognized as follows: Fair value hedges Fair value hedges are hedges of a change in the fair value of a recognized financial asset or liability or a firm commitment due to a specified risk. Changes in the fair value of a derivative financial instrument, together with the share of the change in fair value of the hedged item attributable to the hedged risk are recognized in net income. Cash flow hedges Cash flow hedges offset the exposure to variability in expected future cash flows that is attributable to a particular risk associated with a recognized asset or liability or a forecasted transaction. Changes in the fair value of a derivative financial instrument that represent an effective hedge are recorded in unrealized gains and losses (net) in shareholders’ equity, and are recognized in net income when the offsetting gain or loss associated with the hedged item is recognized. Any ineffectiveness of the cash flow hedge is recognized directly in net income. Hedges of a net investment in a foreign entity Hedge accounting may be applied to derivative financial instruments used to hedge the foreign currency risk associated with a net investment in a foreign entity. The proportion of gains or losses arising from valuation of the derivative financial instrument, which is determined to be an effective hedge, is recognized in unrealized gains and losses (net) in shareholders’ equity, while any ineffectiveness is recognized directly in net income. For all fair value hedges, cash flow hedges, and hedges of a net investment in a foreign entity, the derivative financial instruments are included in other assets or other liabilities. The Allianz Group discontinues hedge accounting prospectively when it is determined that the derivative financial instrument is no longer highly effective, when the derivative financial instrument or the hedged item expires, or is sold, terminated or exercised, or when the Allianz Group determines that designation of the derivative financial instrument as a hedging instrument is no longer appropriate. After a fair value hedge is discontinued, the Allianz Group continues to report the derivative financial instrument at its fair value with changes in fair value Derivative financial instruments are netted when there is a legally enforceable right to offset with the same counter-party and the Allianz Group intends to settle on a net basis. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Disclosures relating to financial instruments IFRS 7 requires to group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. The scope of IFRS 7 includes recognized and unrecognized financial instruments. Recognized financial instruments are those financial assets and financial liabilities within the scope of IAS 39. Unrecognized financial instruments are financial instruments that are outside of the scope of IAS 39 but within the scope of IFRS 7. The classes of financial instruments within Allianz Group are mainly in line with the categories according to IAS 39. The enlarged risk disclosure requirements of IFRS 7 are reflected in the Quantitative and Qualitative Disclosures about Market Risk (ITEM 11) on pages 153 to 175 in this 20-F. The requirements of IAS 1 with regard to capital disclosures are also incorporated in ITEM 11. ITEM 11, with the exception of the “Outlook” section on page 176, is an integral part of the audited consolidated financial statements. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) The following table summarizes the relations between balance sheet positions, classes according to IFRS 7 and categories according to IAS 39.
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Insurance, investment and reinsurance contracts Insurance and investment contracts Contracts issued by insurance subsidiaries of the Allianz Group are classified according to IFRS 4 as insurance or investment contracts. Contracts under which the Allianz Group accepts significant insurance risk from a policyholder are classified as insurance contracts. Contracts under which the Allianz Group does not accept significant insurance risk are classified as investment contracts. Certain insurance and investment contracts include discretionary participation features. All insurance contracts and investment contracts with discretionary participating features are accounted for
Reinsurance contracts The Allianz Group’s consolidated financial statements reflect the effects of ceded and assumed reinsurance contracts. Assumed reinsurance refers to the acceptance of certain insurance risks by Allianz that other companies have underwritten. Ceded reinsurance refers to the transfer of insurance risk, along with the respective premiums, to one or more reinsurers who will share in the risks. When the reinsurance contracts do not transfer significant insurance risk according to SFAS 113, deposit accounting is applied as required under SOP 98-7. Assumed reinsurance premiums, commissions and claim settlements, as well as the reinsurance element of technical provisions are accounted for in accordance with the conditions of the reinsurance contracts and with consideration of the original contracts for which the reinsurance was concluded.
Premiums ceded for reinsurance and reinsurance recoveries on benefits and claims incurred are deducted from premiums earned and insurance and investment contract benefits. Assets and liabilities related to reinsurance are reported on a gross basis. Amounts ceded to reinsurers from reserves for insurance and investment contracts are estimated in a manner consistent with the claim liability associated with the reinsured risks.
To the extent that the assuming reinsurers are unable to meet their obligations, the Group remains liable to its policy-holders for the portion reinsured. Consequently, allowances are made for receivables on reinsurance contracts which are deemed uncollectible. Deferred acquisition costs
Deferred acquisition costs
DAC generally consist of commissions, underwriting expenses and policy issuance costs, which vary with and are directly related to For short and long duration traditional products (SFAS 60) and limited payment products (SFAS 97), DAC is amortized in proportion to premium revenue recognized. For universal life, participating life, and investment-type products (SFAS 97 and SFAS 120), DAC is amortized over the contract life of
For investment contracts, acquisition costs are only deferred if the costs are incremental. Acquisition costs are incremental if the costs would not have been incurred if the related contracts would not have been issued.
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) policy liability rate or contract rate. Interest accrues on PVFP at rates between
Deferred sales inducements on insurance contracts that meet the following criteria are deferred and amortized using the same methodology and assumptions used
recognized as part of reserves for insurance and investment contracts,
explicitly identified in the contract at inception,
incremental to amounts the Allianz Group credits on similar contracts without sales inducements, and
higher than the contract’s expected ongoing crediting rates for periods after the inducement.
Shadow accounting Shadow accounting is applied to insurance and investment contracts with discretionary participating features, and SFAS 97 universal life type insurance contracts and SFAS 97 investment contracts. Shadow accounting is applied to DAC, PVFP, deferred sales inducements, unearned premium liabilities and the reserves for insurance and investment contracts to take into account the effect of unrealized gains or losses on insurance liabilities or assets in the same way as it is done for a realized gain or loss. These assets or liabilities are adjusted with corresponding charges or credits recognized directly to shareholders’ equity as a component of the related unrealized gains and losses. Unearned premiums For short-duration insurance contracts, such as property-casualty contracts, in accordance with SFAS 60, premiums written to be earned in future years are recorded as unearned premiums. These premiums are earned in subsequent years in relation to the insurance coverage provided. For long-duration insurance contracts, in accordance with SFAS 97, amounts charged as consideration for origination of the contract (i.e. initiation or front-end fees) are reported as unearned premium. These fees are recognized using the same methodology as DAC amortization. Unbundling The deposit component of an insurance contract is unbundled when both of the following conditions are met:
Currently, the Allianz Group has no in-force insurance contracts for which all of the rights and obligations related to such contracts have not been recognized. As a result, the Allianz Group has not recognized an unbundled deposit component in respect of any of its insurance contracts, and accordingly the Allianz Group has not recorded any related provisions in its consolidated financial statements. Bifurcation Certain of the Allianz Group’s universal life-type insurance contracts include options to replicate a market index (market value liability options or “MVLO”). These options are bifurcated from the insurance contracts and accounted for as derivatives. Reserves for loss and loss adjustment expenses Reserves are established for the payment of losses and loss adjustment expenses (LAE) on claims which have occurred but are not yet settled. Reserves for loss and loss adjustment expenses fall into two categories: case reserves for reported claims and incurred but not reported reserves (IBNR). Case reserves for reported claims are based on estimates of future payments that will be made with respect to claims, including LAE relating to such claims. Such estimates are made on a case-by-case Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) basis, based on the facts and circumstances available at the time the reserves are established. The estimates reflect the informed judgment of claims personnel based on general insurance reserving practices and knowledge of the nature and value of a specific type of claim. These case reserves are regularly reevaluated in the ordinary course of the settlement process and adjustments are made as new information becomes available. IBNR reserves are established to recognize the estimated cost of losses that have occurred but where the Allianz Group has not yet been notified. IBNR reserves, similar to case reserves for reported claims, are established to recognize the estimated costs, including expenses, necessary to bring claims to final settlement. The Allianz Group relies on its past experience, adjusted for current trends and any other relevant factors to estimate IBNR reserves. IBNR reserves are estimates based on actuarial and statistical projections of the expected cost of the ultimate settlement and administration of claims. The analyses are based on facts and circumstances known at the time, predictions of future events, estimates of future inflation and other societal and economic factors. Trends in claim frequency, severity and time lag in reporting are examples of factors used in projecting the IBNR reserves. IBNR reserves are reviewed and revised periodically as additional information becomes available and actual claims are reported. The process of estimating loss and LAE reserves is by nature uncertain due to the large number of variables affecting the ultimate amount of claims. Some of these variables are internal, such as changes in claims handling procedures, introduction of new IT systems or company acquisitions and divestitures. Others are external, such as inflation, judicial trends, and legislative changes. The Allianz Group reduces the uncertainty in reserve estimates through the use of multiple actuarial and reserving techniques and analysis of the assumptions underlying each technique. There is no adequate statistical data available for some risk exposures in liability insurance, such as environmental and asbestos claims and large-scale individual claims, because some aspects of these types of claims become known very slowly and continue to evolve. Appropriate provisions have been made for such cases based on the Allianz Group’s judgment and an analysis of the portfolios in which such risks occur. These provisions represent the Allianz Group’s best estimate. The reserves for loss and loss adjustment expenses for asbestos claims in the United States were reviewed by independent actuaries during the year-end of 2005; current reserves reflect subsequent loss developments and reestimation of initial reserves. Reserves for insurance and investment contracts and financial liabilities for unit-linked contracts Reserves for insurance and investment contracts include aggregate policy reserves, reserves for premium refunds and other insurance reserves. Aggregate policy reserves for long-duration insurance contracts, such as traditional life and health products, are computed in accordance with SFAS 60 using the net level premium method, which represents the present value of estimated future policy benefits to be paid less the present value of estimated future net premiums to be collected from policyholders. The method uses best estimate assumptions adjusted for a provision for adverse deviation for mortality, morbidity, expected investment yields, surrenders and expenses at the policy inception date, which remain locked in thereafter unless a premium deficiency occurs. DAC and PVFP for traditional life and health products are amortized over the premium paying period of the related policies in proportion to the earned premium using assumptions consistent with those used in computing the aggregate policy reserves. The aggregate policy reserves for traditional participating insurance contracts are computed in accordance with SFAS 120 using the net level premium method. The method uses assumptions for mortality, morbidity and interest rates that are guaranteed in the contract or used in determining the policyholder dividends (or “premium refunds”). DAC and PVFP for traditional participating insurance products are amortized over the expected life of the contracts in proportion to EGMs based upon historical and anticipated future experience, which is determined on a best estimate basis and evaluated regularly. The present value of EGMs is computed using the expected investment yield. EGMs include premiums, investment income including realized gains and losses, insurance benefits, administration costs, changes in the Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) aggregate reserves and policyholder dividends. The effect of changes in EGMs are recognized in net income in the period revised. The aggregate policy reserves for universal life-type insurance contracts and unit-linked insurance contracts in accordance with SFAS 97 are equal to the account balance, which represents premiums received and investment return credited to the policy less deductions for mortality costs and expense charges. DAC and PVFP for universal life-type and investment contracts are amortized over the expected life of the contracts in proportion to EGPs based upon historical and anticipated future experience, which is determined on a best estimate basis and evaluated regularly. The present value of EGPs is computed using the interest rate that accrues to the policyholders, or the credited rate. EGPs include margins from mortality, administration, investment income including realized gains and losses and surrender charges. The effect of changes in EGPs are recognized in net income in the period revised. Current and historical client data, as well as industry data, are used to determine the assumptions. Assumptions for interest reflect expected earnings on assets, which back the future policyholder benefits. The information used by the Allianz Group’s actuaries in setting such assumptions includes, but is not limited to, pricing assumptions, available experience studies, and profitability analyses. The interest rate assumptions used in the calculation of deferred acquisition costs and aggregate policy reserves were as follows:
Aggregate policy reserves also include liabilities for guaranteed minimum death, and similar mortality and morbidity benefits related to non-traditional contracts, annuitization options, and sales inducements. These liabilities are calculated based on contractual obligations using actuarial assumptions. Contractually agreed sales inducements to contract holders include persistency bonuses, and are accrued over the period in which the insurance contract must remain in force to qualify for the inducement. The aggregate policy reserves for unit-linked investment contracts are equal to the account balance, which represents premiums received and investment returns credited to the policy less deductions for mortality costs and expense charges. The aggregate policy reserves for non unit-linked investment contracts are equal to amortized cost, or account balance less DAC. DAC for unit-linked and non unit-linked investment contracts are amortized over the expected life of the contracts in proportion to revenues. Reserves for premium refunds include the amounts allocated under the relevant local statutory or contractual regulations to the accounts of the policyholders and the amounts resulting from the differences between these IFRSs based financial statements and the local financial statements (“latent reserve for premium refunds”), which will reverse and enter into future profit participation calculations. Unrealized gains and losses recognized for available-for-sale investments are recognized in the latent reserve for premium refunds to the extent that policyholders will participate in such gains and losses on the basis of statutory or contractual regulations when they are realized. The profit participation allocated to participating policyholders or disbursed to them reduces the reserve for premium refunds. Methods and corresponding percentages for participation in profits by the policyholders are set out below for the most significant countries for latent reserves:
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Liability adequacy tests are performed for each insurance portfolio on the basis of estimates of future claims, costs, premiums earned and proportionate investment income. For short duration contracts, a premium deficiency is recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, un-amortized acquisition costs, and maintenance expenses exceeds related unearned premiums while considering anticipated investment income. For long duration contracts, if actual experience regarding investment yields, mortality, morbidity, terminations or expense indicate that existing contract liabilities, along with the present value of future gross premiums, will not be sufficient to cover the present value of future benefits and to recover deferred policy acquisition costs, then a premium deficiency is recognized. Other assets
Other assets primarily consist of receivables, prepaid expenses, derivative financial instruments used for hedging that meet the criteria for hedge accounting, and firm commitments, property and equipment Receivables are generally recorded at face value less any payments received, net of valuation allowances.
Property and equipment includes real estate held for own use, equipment and software.
Real estate held for own use (e.g., real
Equipment is carried at cost less accumulated depreciation and impairments. Depreciation is generally computed using the straight-line method over the estimated useful lives of the assets. The estimated useful life of equipment ranges from 2 to 10 years, except for purchased information technology equipment, which is 2 to 8 years.
Software, which includes software purchased from third parties or developed internally, is initially recorded at cost and is amortized on a straight-line basis over the estimated useful service lives or contractual terms, generally over 3 to 5 years.
Costs for repairs and maintenance are expensed as incurred, while improvements, if they extend the useful life of the asset or provide additional functionality, are capitalized.
Non-current assets and disposal groups classified as held-for-sale and discontinued operations Non-current assets or disposal groups are classified as held-for-sale if their carrying amounts will be principally recovered through a sale transaction rather than through continuing use. This requires that the asset or disposal group must be available for immediate sale in its present condition and its sale must be highly probable. The appropriate level of management must be committed to a plan to sell the asset or disposal group and the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets or disposal groups classified as held-for-sale are measured at the lower of carrying amount and fair value less costs to sell. Any subsequent increases in fair value less costs shall be recognized as a gain but not in excess of the cumulative impairment loss that has been recognized either in accordance with IFRS 5 or IAS 36. A non-current asset shall not be depreciated while classified as held-for-sale. A gain or loss not previously recognized by the date of the sale shall be recognized at the date of derecognition. A discontinued operation is defined as a component of an entity that either has been disposed of or is classified as held-for-sale and represents a major line of business or geographical area of operations, Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) is part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale. In the consolidated income statement of the reporting period and the comparable period of the previous years, income and expenses from discontinued operations are reported separately from income and expenses from continuing operations. Intangible assets
Intangible assets include goodwill, brand names and other intangible assets.
Goodwill resulting from business combinations represents the difference between the acquisition cost of the business combination and the Allianz Group’s proportionate share of the net fair value of identifiable assets acquired and liabilities and certain
The Allianz Group conducts an annual impairment test of goodwill during the 4th quarter or more frequently if there is an indication that goodwill is not recoverable. For the purpose of impairment testing, goodwill is allocated to each of the Allianz Group’s cash generating units that is expected to benefit from the business combination. The impairment test includes comparing the recoverable amount to the carrying amount, including goodwill, of all relevant cash generating units. A cash generating unit is impaired if the carrying amount is greater than the recoverable amount. The impairment of a cash generating unit is equal to the difference between the carrying amount and recoverable amount and is allocated to reduce any goodwill, followed by allocation to the carrying amount of any remaining assets. Impairments of goodwill are not reversed. Gains or losses realized on the disposal of subsidiaries include any related goodwill.
Intangible assets acquired in business combinations are initially recorded at fair value on the acquisition date if the intangible asset is separable or arises from contractual or other legal rights. Intangible assets with
Similar to goodwill, an intangible asset with an indefinite useful life is subject to an annual impairment test, or more frequently if there is an indication that it is not recoverable. The impairment test includes comparing the recoverable amount to the carrying amount. Where it is not possible to identify separate
cash flows for estimating the recoverable amount of an individual asset, the Allianz Group estimates the recoverable amount of the cash generating unit to which the intangible asset belongs. An intangible asset is impaired if the carrying amount is greater than the recoverable amount. The impairment of an intangible asset is equal to the difference between the carrying amount and recoverable amount.
Other liabilities
Other liabilities include payables, unearned income, provisions, deposits retained for reinsurance ceded, derivative financial instruments for hedge accounting purposes that meet the criteria for hedge accounting and firm commitments, financial liabilities for puttable equity instruments
Tax payables are calculated in accordance with relevant local tax regulations.
Equity
Issued capital represents the mathematical per share value received from the issuance of shares.
Capital reserves represent the premium, or additional paid in capital, received from the issuance of shares.
Revenue reserves include the retained earnings of the Allianz Group and treasury shares. Treasury Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) shares are deducted from shareholders’ equity. No gain or loss is recognized on the sale, issuance, acquisition or cancellation of these shares. Any consideration paid or received is recorded directly in shareholders’ equity.
Unrealized gains and losses (net) include unrealized gains and losses from available-for-sale investments and derivative financial instruments used for hedge purposes that meet the criteria for hedge
accounting, including cash flow hedges and hedges of a net investment in a foreign entity.
Minority interests represent the proportion of equity that is attributable to minority shareholders.
Premiums earned
Property-casualty insurance premiums are recognized as revenues over the period of the contract in proportion to the amount of insurance protection provided.
Health insurance premiums for long-duration contracts such as non-cancelable and guaranteed renewable contracts that are expected to remain in force over an extended period of time are recognized as earned when due. Premiums for short-duration health insurance contracts are recognized as revenues over the period of the contract in proportion to the amount of insurance protection provided.
Life insurance premiums from traditional life insurance policies are recognized as earned when due. Premiums from short-duration life insurance policies are recognized as revenues over the period of the contract in proportion to the amount of insurance protection provided. Benefits are recognized when incurred. Unearned premiums for Property-Casualty and Life/Health contracts are calculated separately for each individual policy to cover the unexpired portion of written premiums.
Revenues for universal life-type and investment contracts, such as universal life and variable annuity contracts, represent charges assessed against the policyholders’ account balances for the front-end loads, net of the change in unearned revenue liability, cost of insurance, surrenders and policy administration and are included within premiums earned (net). Benefits charged to expense include benefit claims incurred during the period in excess of policy account balances and interest credited to policy account balances.
Interest and similar income/expense
Interest income and interest expense are recognized on an accrual basis. Interest income is recognized using the effective interest method. This line item also includes dividends from available-for-sale equity securities, interest recognized on finance leases and income from investments in associated entities and joint ventures. Dividends are recognized in income when declared. Interest on finance leases is recognized in income over the term of the respective lease so that a constant period yield based on the net investment is attained.
Income from investments in associated entities and joint ventures (net) represents the share of net income from entities accounted for using the equity method.
Income from financial assets and liabilities carried at fair value through income (net)
Income from financial assets and liabilities carried at fair value through income includes all investment income, and realized and unrealized gains and losses from financial assets and liabilities carried at fair value through income. In addition, commissions attributable to trading operations and related interest expense and transaction costs are included in this line item.
Fee and commission income and expenses
In addition to traditional commission income received on security transactions, fee and commission income in the securities business also includes commissions received in relation to private placements, syndicated loans and financial advisory services. Other fees reflect fees from underwriting Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) business (new issues), commissions received for trust and custody services, for the brokerage of insurance policies, and fees related to credit cards, home loans, savings contracts and real estate. Fee and commission income is recognized in Allianz Group’s Banking segment when the corresponding service is provided.
Assets and liabilities held in trust by the Allianz Group in its own name, but for the account of third parties, are not reported in its consolidated balance
sheet. Commissions received from such business are shown in fee and commission income.
Investment advisory fees are recognized as the services are performed. Such fees are primarily based on percentages of the market value of the assets under management. Investment advisory fees receivable for private accounts consist primarily of accounts billed on a quarterly basis. Private accounts may also generate a fee based on investment performance, which is recognized at the end of the respective contract period if the prescribed performance hurdles have been achieved.
Distribution and servicing fees are recognized as the services are performed. Such fees are generally based on percentages of the market value of assets under management.
Administration fees are recognized as the services are performed. Such fees are generally based on percentages of the market value of assets under management.
Income and expenses from fully consolidated private equity investments
All of the income from fully consolidated private equity investments and all of the expenses from fully consolidated private equity investments are presented in separate income and expense line items. Revenue from fully consolidated private equity investments is recognized upon customer acceptance of goods delivered and when services have been rendered.
Income taxes
Income tax expense consists of the current taxes on profits actually charged to the individual Allianz Group subsidiaries and changes in deferred tax assets and liabilities.
The calculation of deferred tax is based on temporary differences between the Allianz Group’s carrying amounts of assets or liabilities in its consolidated balance sheet and their tax bases. The tax rates used for the calculation of deferred taxes are the local rates applicable in the countries concerned; changes to tax rates already adopted prior to or as
Leases
Payments made under operating leases to the lessor are charged to administrative expenses using
the straight-line method over the period of the lease. When an operating lease is terminated before the lease period has expired, any penalty is recognized in full as an expense at the time when such termination takes place.
Pensions and similar obligations
The Allianz Group uses the projected unit credit actuarial method to determine the present value of its defined benefit plans and the related service cost and, where applicable, past service cost. The principal assumptions used by the Allianz Group are included in Note 47. The census date for the primary pension plans is October or November, with any significant changes through December 31, taken into account.
For each individual defined benefit pension plan, the Allianz Group recognizes a portion of its actuarial gains and losses in income or expense if the unrecognized actuarial net gain or loss at the end of the previous reporting period exceeds the greater of: a) 10% of the projected benefit obligation at that date; or b) 10% of the fair value of any plan assets at that date. Any unrecognized actuarial net gain or loss exceeding the greater of these two values is generally recognized in net periodic benefit cost in the consolidated income statement over the expected average remaining working lives of the employees participating in the plans.
The share-based compensation plans of the Allianz Group are required to be classified as equity Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) settled or cash settled plans. Equity settled plans are measured at fair value on the grant date and recognized as an expense, with an increase in shareholders’ equity, over the vesting period. Equity settled plans include a best estimate of the number of equity instruments that are expected to vest in determining the amount of expense to be recognized. For cash settled plans, the Allianz Group accrues the fair value of the award as compensation expense over the vesting period. Upon vesting, any change in the fair value of any unexercised awards is recognized as compensation expense.
Restructuring plans
Provisions for restructuring are recognized when the Allianz Group has a detailed formal plan for
3 Recently adopted and issued accounting pronouncements and changes in the presentation of the consolidated financial statements
Recently adopted accounting pronouncements (effective January 1
In October 2008, the IASB issued amendments to IAS 39, Financial Instruments: Recognition and Measurement, and IFRS 7, Financial Instruments: Disclosures, titled “Reclassification of financial assets”. The amendments to IAS 39 permit an entity to reclassify certain non-derivative financial assets out of the “held for trading” (“at fair value through income”) category and out of the “available-for-sale” category if the following specific conditions are met. Debt instruments, classified as “held for trading” (“at fair value through income”) or “available-for-sale” may be reclassified to the “loans and receivable” category, if they meet the definition of loans and receivables at the reclassification date and where the Allianz Group has now the intent and ability to hold the assets for the foreseeable future or until maturity. Any other debt instrument and any other equity instrument, classified as “held for trading” (“at fair value through income”) may be reclassified to the “held-to-maturity” category (debt instruments) or to the “available-for-sale” category in rare circumstances and where the Allianz Group has no longer the intention to sell or trade the assets in the short term. The IASB acknowledged, that the deterioration of the world’s financial markets, that has occurred during the third quarter of 2008 is a possible example of a “rare circumstance”. The amendments to IAS 39 and IFRS 7 are effective July 1, 2008 and should be accounted for on a prospective basis from the date of reclassification. For reclassifications made before November 1, 2008, the amended IAS 39 permits an entity to use fair values as of July 1, 2008 instead of the prevailing fair value at the date of reclassification. At the reclassification date non-derivative financial assets have to be reclassified at their fair value, which becomes the new cost or amortized cost of the financial asset, as applicable. Previously recognized gains and losses cannot be reversed. After the reclassification date the existing requirements of IAS 39 for measuring financial assets at cost or at amortized cost apply. Any reclassifications under the new requirements of the amended IAS 39 trigger additional extensive disclosure requirements specified in the amendments to IFRS 7. Allianz Group adopted the amended IAS 39 and IFRS 7 in the third quarter 2008. The adoption of Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
IFRIC 11, Group and Treasury Share Transactions In November 2006, the IFRIC issued IFRIC 11, Group and Treasury Share Transactions. IFRIC 11 addresses the application of IFRS 2 to share-based payment arrangements in three cases. When an entity chooses or is required to buy its own equity instruments to settle the IFRIC 12, Service Concession Arrangements In November 2006, the IFRIC issued IFRIC 12, Service Concession Arrangements. IFRIC 12 addresses how service concession operators should apply existing IFRSs to account for the obligations they undertake and periods beginning on or after January 1, 2008. The interpretation has not yet been endorsed by the EU but does not have an impact on the Allianz Group’s consolidated financial statements. IFRIC 14, IAS In July 2007, IFRIC issued IFRIC 14, IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. IFRIC 14 addresses how entities should determine the limit placed by IAS 19, Employee Benefits, on the amount
Recently issued accounting pronouncements (effective on or after January 1,
In November 2006, the IASB issued IFRS 8, Operating Segments. IFRS 8 requires the identification of operating segments on the basis of internal reports that are regularly reviewed by the entity’s chief operating decision maker in order to allocate resources to the segment and assess its performance Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) IAS 23, Borrowing Costs—amended
In IAS 1, Presentation of Financial Statements—revised In September 2007, the IASB issued the revised IAS 1, Presentation of Financial Statements. The revised standard requires information in financial statements to be aggregated on the basis of shared characteristics and introduces a statement of comprehensive income. The revised standard gives preparers of financial statements the option of presenting items of income and expense and components of other comprehensive income either in a single statement of comprehensive income with subtotals, or in two separate statements. The revisions also include changes in the titles of some of the financial statements to reflect their function more clearly. The new titles will be used in accounting standards, but are not mandatory for use in financial statements. Revised IAS 1 applies to annual financial statements for periods beginning on or after January 1, 2009. The Allianz Group is currently evaluating the potential impact, if any, that the adoption of revised IAS 1 will have on the presentation of the Group’s financial statements. IFRS 3, Business Combinations—revised and In January 2008, the IASB issued a revised version of IFRS 3, Business Combinations, and an amended version of IAS 27, Consolidated and Separate Financial Statements. The revised version of IFRS 3 and the amended version of IAS 27 include the following changes: The scope of IFRS 3 has been extended and applies now also to combinations of mutual entities and to combinations achieved by contract alone. In partial acquisitions, non-controlling interests are measured as their proportionate interest in the net identifiable assets or at fair value of the interests. Under the current IFRS 3, if control is achieved in stages, it is required to measure at fair value every asset and liability at each step for the purpose of calculating a portion of goodwill. The revised version requires that goodwill is measured as the difference at acquisition date between the fair value of any investment in the business held before the acquisition, the consideration transferred and the net assets acquired. Acquisition-related costs are generally recognized as expenses and are not included in goodwill. Contingent consideration must be recognized and measured at fair value at the acquisition date. Subsequent changes in fair value are recognized in accordance with other IFRSs, usually in profit and loss. Goodwill is no longer adjusted for those changes. Transactions with non-controlling interests, i.e., changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control, are accounted for as equity transactions. The revised standards apply to annual financial statements for periods beginning on or after July 1, 2009. The carrying amounts of any assets and liabilities that arose under business combinations prior to the application of the revised IFRS 3 are not adjusted. The amendments to IAS 27 need to be applied retrospectively with certain exceptions. Earlier application is permitted under certain conditions. The Allianz Group is currently evaluating Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) the potential impact that the adoption of the standards will have on the Group’s financial statements. IFRS 2, Share-based Payment—amended In January 2008, the IASB issued an amendment to IFRS 2, Share-based Payment. The amendment clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. It also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The amendment applies to annual financial statements for periods beginning on or after January 1, 2009. Earlier application is permitted. The Allianz Group is currently evaluating the potential impact, if any, that the adoption of the amendment of IFRS 2 will have on the Group’s financial statements. IAS 32, Financial Instruments: Presentation, and IAS 1, Presentation of Financial Statements—amended In February 2008, the IASB issued amendments to IAS 32, Financial Instruments: Presentation, and IAS 1, Presentation of Financial Statements. IAS 32 requires a financial instrument to be classified as a liability if the holder of that instrument can require the issuer to redeem it for cash. The consequence is that some financial instruments that would usually be considered equity allow the holder to “put” the instrument and are, therefore, considered liabilities rather than equity. The amendments to IAS 32 address this issue and require entities to classify the following types of financial instruments as equity provided they have particular features and meet specific conditions: puttable financial instruments (e.g., some shares issued by cooperative entities) instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation (e.g., some partnership interests and some shares issued by limited life entities). The amendments apply to annual financial statements for periods beginning on or after January 1, 2009. Earlier application is permitted. The amendments are expected to have no material impact on the Allianz Group’s consolidated financial statements. Improvements to IFRSs In May 2008, the IASB issued Improvements to IFRSs. The improvements to IFRS project is an annual process that the IASB has adopted to deal with non-urgent but necessary amendments to IFRS (the ‘annual improvements process’). The amendments are divided in two parts and include 34 amendments. Part I deals with changes the IASB identified resulting in accounting changes. Part II deals with terminology and editorial amendments that have a minimal impact. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Voluntary presentation of improved disclosure requirements for IFRS In October 2008, the IASB released an exposure draft: Improving Disclosures about Financial Instruments, proposed amendments to the the fair value measurements resulting from the use of significant unobservable inputs to valuation techniques. For these measurements, the disclosures include a reconciliation from the beginning balances to the ending balances. the movements between different levels of the fair value hierarchy, and the reasons for those movements. According to the exposure draft an entity shall apply the amendments for annual periods beginning on or after 1 July 2009. Earlier application is permitted. An earlier adoption is allowed. In anticipation of the new standard the Allianz Group disclosed voluntarily amendments regarding the fair value hierarchy in the Annual Report 2008. Please refer to Note 44 for details. IFRIC 13, Customer Loyalty Programmes In June 2007, the IFRIC issued IFRIC 13, Customer Loyalty Programmes. IFRIC 13 addresses how companies, that grant their customers loyalty award credits (often called “points”) when buying goods or services, should account for their obligation to provide free or discounted goods or services if and when the customers redeem the points. Customers are implicitly paying for the points they receive when they buy other goods or services. Some revenue should be allocated to the points. Therefore, IFRIC 13 requires companies to estimate the value of the points to the customer and defer this amount of revenue as a liability until they have fulfilled their obligations to supply awards. IFRIC 13 is mandatory for annual periods beginning on or after July 1, 2008. Earlier application is permitted. The interpretation is expected to have no material impact the Allianz Group’s consolidated financial IFRIC 15, Agreements for the In July 2008, the
IFRIC 16, Hedges of a Net Investment in a Foreign Operation In July 2008, the IFRIC issued IFRIC 16, Hedges of a Net Investment in a Foreign Operation. IFRIC 16 provides guidance on: identifying the foreign currency risks that qualify as a hedged risk in the hedge of a net investment in a foreign operation; Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) where, within a group, hedging instruments that are hedges of a net investment in a foreign operation can be held to qualify for hedge accounting; and how an entity should determine the amounts to be reclassified from equity to profit or loss for both the hedging instrument and the hedged item. IFRIC 16 concludes that the presentation currency does not create an exposure to which an entity may apply hedge accounting. Consequently, a parent entity may designate as a hedged risk only the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation. In addition, the hedging instrument(s) may be held by any entity or entities within the group. While IAS 39 must be applied to determine the amount that needs to be reclassified to profit or loss from the foreign currency translation reserve in respect of the hedging instrument, IAS 21 must be applied in respect of the hedged item. IFRIC 16 is effective for annual periods beginning on or after 1 October 2008 and is to be applied prospectively. The amendments are expected to have no material impact on Allianz Group’s consolidated financial statements. IFRIC 17, Distributions of Non-cash Assets to Owners In November 2008, the IFRIC issued IFRIC 17, Distributions of Non-cash Assets to Owners. IFRIC 17 clarifies that: a dividend payable should be recognized when the dividend is appropriately authorized and is no longer at the discretion of the entity. an entity should measure the dividend payable at the fair value of the net assets to be distributed. an entity should recognize the difference between the dividend paid and the carrying amount of the net assets distributed in profit or loss. The Interpretation also requires an entity to provide additional disclosures if the net assets being held for distribution to owners meet the definition of a discontinued operation. IFRIC 17 applies to pro rata distributions of non-cash assets except for common control transactions. IFRIC 17 is effective for annual periods beginning on or after 1 July 2009 and is to be applied prospectively. Earlier application is permitted. The Allianz Group is currently evaluating the potential impact, if any, that the adoption of IFRIC 17 will have on the Group’s consolidated financial statements. IFRIC 18, Transfers of Assets from Customers In January 2009, the IFRIC issues IFRIC 18, Transfers of Assets from Customers. IFRIC 18 is particularly relevant for the utility sector. It clarifies the requirements of IFRS for agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods and services. The entity might in certain cases receive cash from a customer which must be used only to acquire or construct the item of property, plant and equipment in order to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services or both. IFRIC 18 includes a clarification with regard to the circumstances in which the definition of an asset is met, the recognition of the asset and measurement of its cost on initial recognition, the identification of the separately identifiable services, the recognition of revenue, the accounting for transfers of cash from customers. IFRIC 18 is effective for annual periods beginning on or after 1 July 2009 and applies prospectively. Limited retrospective application is permitted. IFRIC 18 is expected to have no material impact on Allianz Group’s consolidated financial statements. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Changes in the presentation of the consolidated financial statements
On August 31, 2008, Allianz Thus, almost all assets and liabilities of Dresdner Bank have been reclassified and presented as separate line items “Non-current assets and assets of disposal groups classified as held-for-sale” and “Liabilities of disposal groups classified as held-for-sale”, respectively, on the All income and
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
The
For a detailed description of the transaction agreement see Note 4. Notes to
Allianz Group discloses the acquisition costs and Administrative expenses include personnel expenses, operating expenses, and other administrative expenses. Few of Allianz Group’s subsidiaries have incorrectly allocated some of the costs into acquisition costs and administrative expenses in the past. These incorrect allocations have been corrected in the notes to the consolidated financial statements. This reclassification from administrative expenses to acquisition costs affects only the Property-Casualty segment. The change in presentation has had no effect on consolidation, reported earnings or equity. The following table summarizes the impact that this reclassification has had on the previously reported financial statements:
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. 4 Assets and liabilities of disposal groups classified as held-for-sale and discontinued operations Impact of the sale of Dresdner Bank AG to Commerzbank AG On August 31, 2008, Allianz SE (“Allianz”) and Commerzbank AG (“Commerzbank”) agreed on the sale of Dresdner Bank AG (“Dresdner Bank”) to Commerzbank. The transaction was planned to take place in two steps. In the first step, Commerzbank would acquire 60.2% of the shares in Dresdner Bank from Allianz. In exchange Allianz would receive cash, the Asset Manager cominvest, a long-term distribution agreement and 163.5 mn new shares in Commerzbank generated from a capital increase against contribution in kind which was equivalent to a share of On November 27, 2008, Allianz and Commerzbank agreed to accelerate the change in ownership of Dresdner Bank. According to the new agreement, Commerzbank will also immediately take ownership of the 39.8% share, which was originally contemplated in the second step, in exchange for an additional cash payment of €1.4 bn at the beginning of 2009. The trust fund agreed upon in the original transaction agreement will be foregone. In exchange, Allianz will receive a compensation payment of €250 mn in cash. Other agreements remain unchanged. According to the agreement in November 2008, Allianz will receive a total of €3.215 bn in cash and 163.5 mn Commerzbank shares equal to an 18.4% stake in Commerzbank’s share capital as well as the Asset Manager cominvest and a long-term distribution agreement in exchange for Dresdner Bank. With this new agreement, Dresdner Bank and Commerzbank should be able to merge approximately six to nine months earlier than originally planned. Additionally, the Special Fund Financial Market Stabilization (SoFFin), Allianz and Commerzbank agreed on January 9, 2009, to strengthen the new Commerzbank’s core capital ratio with a silent participation of €750 mn from
With the agreement of the sale transaction Dresdner Bank qualifies as disposal group held-for-sale and
All income and expenses relating to the discontinued operations of Dresdner Bank have been reclassified and presented in a separate line item “Net Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) income (loss) from discontinued operations, net of income taxes and minority interests in earnings” in the consolidated income The following tables shows the
Net income (loss) from discontinued operations Due to the structure of the transaction, Allianz ceased to be exposed to changes in the results of Dresdner Bank from the signing date. Instead Allianz is exposed to changes in the fair value of its stake in Commerzbank. Therefore, the loss from discontinued operations is mainly subject to changes in the fair value of the consideration received. As disclosed in our interim report for the third quarter of 2008, the loss from discontinued operations amounted to €3.5 bn, stemming from Dresdner Bank’s net loss of €2.1 bn until the change in ownership and
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Scope of
All subsidiaries, joint ventures and associated enterprises are individually listed in the disclosure of equity investments that will be published together with the consolidated financial statements in the German Electronic Federal Gazette as well as on the Company’s Website. The disclosure of equity investments includes individually listed commercial partnerships which are exempt from preparing single financial statements in accordance with section 264b of the German Commercial Code Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
In April 2008, the Allianz Group signed a share purchase agreement to acquire 47.1% of shares in the non-life insurer Allianz Sigorta AŞ, Istanbul, and 51.0% of the shares in the life-insurance and pension company Allianz Hayat ve Emeklilik AŞ, Istanbul, for a total consideration of €373 mn. The transaction has been approved by the relevant regulatory and competition board on July 21, 2008 so that Allianz Group now holds 84.2% and 89.0% of shares, respectively. The impact of the acquisition, net of cash acquired, on the consolidated statement of cash flows for the year ended December 31, 2008 was:
Components of costs
The impact of Allianz Sigorta AŞ and Allianz Hayat ve Emeklilik AŞ on the Allianz Group’s net income for the year ended December 31, 2008 was €8.3 mn. The amounts recognized for major classes of assets and liabilities are as follows:
At the date of acquisition the goodwill reflects mainly the market position and growth potential of the turkish insurance market. The premiums written and premiums earned (net) of the combined entity (Allianz Group including Allianz Hayat and Allianz Sigorta) for the year ended December 31, 2008 would have been €66,417 mn and €60,660 mn, respectively, if the acquisition date had been on January 1, 2008. The net loss of the combined entity for the year ended December 31, 2008 would have been €2,415 mn if the acquisition date had been on January 1, 2008. 2007 Significant acquisitions Russian People’s Insurance Society “ROSNO”, Moscow On February 21, 2007, the Allianz Group acquired additional 49.8% of Russian People´s Insurance Society “ROSNO”, Moscow (“ROSNO”) at a purchase price of €572 mn. ROSNO is the second largest insurance company in Russia which offers products in the business segments Property-Casualty, Life/Health and Asset Management. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) The impact of the acquisition of ROSNO net of cash acquired, on the consolidated statement of cash flows for the year ended December 31, 2007 was:
Components of costs
The impact on the Allianz Group’s net income for the year ended December 31, 2007 was €(11) mn. The amounts recognized for major classes of assets and liabilities are as follows:
At the date of acquisition the goodwill reflects mainly the market position and growth potential of the Russian insurance market. The revenues of the combined entity (Allianz Group including ROSNO) for the year ended December 31, 2007 would have been €102,785 mn, if the acquisition date had been on January 1, 2007. The net income of the combined entity for the year ended December 31, 2007 would have been €7,969 mn if the acquisition date had been on January 1, 2007. Selecta AG, Muntelier On July 3, 2007, the Allianz Group acquired 100.0% of Selecta AG, Muntelier at a purchase price of €1,126 mn. Selecta AG, Muntelier is the leading vending operator in Europe. The impact of the acquisition of Selecta AG, Muntelier, net of cash acquired, on the consolidated statement of cash flows for the year ended December 31, 2007 was:
Components of costs
The impact on the Allianz Group’s net income for the year ended December 31, 2007 was €(11) mn. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) The amounts recognized for major classes of assets and liabilities are as follows:
The revenues of the combined entity (Allianz Group including Selecta AG) for the year ended December 31, 2007 would have been €102,978 mn if the acquisition date had been on January 1, 2007. The net income of the combined entity for the year ended December 31, 2007 would have been €8,013 mn if the acquisition date had been on January 1, 2007. During the fourth quarter ended December 31, 2007, Selecta AG, Muntelier was reclassified to disposal groups held-for-sale. 2006 Significant acquisitions manroland AG, Offenbach
On July 18, 2006, the Allianz Group acquired 100.0% (Group share through indirect holder Roland Holding GmbH, Munich at the date of The impact of the acquisition of
Components of costs
The revenues of the Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Acquisitions and disposals of significant minority interests
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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Transfer prices between business segments are set on an arm’s length basis in
Property-Casualty
Life/Health
Banking
of the products for corporate and retail clients with its main focus on the latter.
Asset Management
The
Corporate The Corporate segment Operating Profit The Allianz Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
are excluded because the timing of the restructuring charges are largely within the control of the Allianz Group, and accordingly their exclusion provides additional insight into the operating trends of the underlying business. This differentiation is not made if the profit sources are shared with policyholders. Operating profit Notes to the Allianz Group’s Allianz Group Business Segment Information—Consolidated Balance Sheets
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz
Allianz Group Business Segment
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Allianz Group Business Segment Information—Insurance
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Allianz Group Business Segment Information—Banking
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) [THIS PAGE INTENTIONALLY LEFT BLANK] Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Allianz Group Business Segment Information—Total revenues and reconciliation of Operating profit (loss) to Net income (loss)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Property-Casualty Segment1)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Life/Health Segment1)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Banking Segment
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Asset Management Segment
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Corporate Segment
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Supplementary Information to the Consolidated Balance Sheets
As of December 31,
Debt and equity securities included in financial assets held for trading
Equity and debt securities
Credit risk exposure of loans to banks and customers designated at fair value through income As of December 31, 2008 all of the loans to banks and customers designated at fair value through income related to the discontinued operations of Dresdner Bank and thus have been reclassified and presented as “Non-current assets and assets from disposal groups held-for-sale” in accordance with IFRS 5.
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Available-for-sale investments
Held-to-maturity investments
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Unrealized losses on available-for-sale investments and held-to-maturity investments
The following table sets forth gross unrealized losses on available-for-sale investments and held-to-maturity investments and the related fair value, segregated by investment category and length of time such investments have been in a continuous unrealized loss position as of December 31,
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Government and agency mortgage-backed securities (residential and commercial)
Total unrealized losses amounted to Corporate mortgage-backed securities (residential and commercial) Total unrealized losses amounted to €1,418 mn as of December 31, 2008. The unrealized loss positions primarily stem from issues in the US-American security market, which are mostly held be Allianz Group’s North American entities. The largest part of these issues is backed by mortgages on commercial rather than residential real estate. The unrealized losses of these mortgage-backed securities were mostly caused by the increased volatility in credit spreads. This effect is characterized by a general market trend and does not allow direct conclusions on the quality of these securities. Based on a detailed analysis of the underlying securities and collaterals the Allianz Group does not consider these investments to be impaired at December 31, 2008.
Government and government agency bonds
Total unrealized losses amounted to and Development). Given the fact that the issuers of these bonds are backed by the fiscal capacity of the issuers and the issuers typically hold an “investment grade” country- and/or issue-rating, credit risk is not a significant factor. Hence, the unrealized losses on Allianz Group’s investment in government bonds were mainly caused by interest rate increases between the purchase date of the individual securities and the balance sheet date. In 2008, interest rates decreased and thereby induced a positive effect on unrealized losses on government and government agency bonds by €469 mn. Because the
Corporate bonds
Total unrealized losses amounted to
Equity securities
As of December 31, Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Contractual term to maturity
The amortized cost and estimated fair value of available-for-sale debt securities and held-to-maturity debt securities as of December 31,
Actual maturities may deviate from the contractually defined maturities, because certain security issuers have the right to call or repay certain obligations ahead of schedule, with or without redemption or early repayment penalties. Investments that are not due at a single maturity date are, in general, not allocated over various maturity buckets, but are shown within their final contractual maturity dates.
Equity investments carried at cost
As of December 31,
Investments in associates and joint ventures
As of December 31,
Real estate held for investment
As of December 31,
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) 10 Loans and advances to banks and customers
Loans and advances to banks and customers by contractual maturity
Loans and advances to banks and customers by geographic region
Loans and advances to customers by type of customer
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Loans and advances to customers (prior to loan loss allowances) by economic sector
Finance lease receivables As of December 31, 2008 all finance lease receivables included in loans to banks and customers related to the discontinued operations of Dresdner Bank and thus have been reclassified and presented as “Non-current assets and assets from disposal groups held-for-sale” in accordance with IFRS 5. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
As of December 31,
Reconciliation of allowances for credit losses by specific and general allowance
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
The following tables present information relating to the Allianz Group’s impaired and non-accrual loans:
As of December 31,
Changes in aggregate policy reserves ceded to reinsurers are as follows:
The Allianz Group reinsures a portion of the risks it underwrites in an effort to control its exposure to losses and events and protect capital resources.
Reinsurance involves credit risk and is subject to aggregate loss limits. Reinsurance does not legally discharge the Allianz Group from primary liability under the reinsured policies. Although the reinsurer is liable to the Allianz Group to the extent of the reinsurance ceded, the Allianz Group remains primarily liable as the direct insurer on all risks it underwrites, including the portion that is reinsured. The Allianz Group monitors the financial condition of its reinsurers on an ongoing basis and reviews its reinsurance arrangements periodically in order to evaluate the reinsurer’s ability to fulfill its obligations to the Allianz Group under existing and planned reinsurance contracts. The Allianz Group’s evaluation criteria, which includes the credit risk claims-paying and debt ratings, capital and surplus levels, and
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Deferred acquisition costs
Present value of future profits
As of December 31,
Deferred sales inducements
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Other assets due within one year amounted to €29,490 mn (2007: €30,229 mn), and those due after more than one year totaled €4,514 mn (2007: €7,796 mn).
As of December 31, Notes to Software
14 Non-current assets and
Dresdner Bank Group
As
Amortization expense of intangible assets with finite useful lives is estimated to be €42 mn in
Goodwill
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Additions include goodwill from
increasing the interest in
increasing the interest in
The reclassification affects the 2007 The reclassification affects the goodwill of Selecta AG, Muntelier, which was reclassified to “Non-current assets and assets of disposal groups classified as held-for-sale”.
2006
The reclassification affects intangible assets of Allianz-Slovenská poist’ovna a.s., Bratislava, as they were reclassified to goodwill due to a change in the accounting treatment.
Impairment tests for goodwill and intangible assets with indefinite useful lives
For purposes of impairment testing, the Allianz Group has allocated goodwill to cash generating units. These cash generating units represent the lowest level at which goodwill is monitored for internal measurement purposes. disposal groups classified as held-for-sale. The goodwill for Oldenburgische Landesbank AG is allocated to the cash generating unit Banking.
German Speaking Countries, Europe I, including Italy, Spain, Portugal, Europe II, including France, Netherlands, Belgium, South Asia & Middle East, New Europe including Bulgaria, Croatia, Czech Republic, Hungary, Slovakia, Poland, Romania and Russia, Anglo Broker Markets Specialty Lines I, including Allianz Global Corporate & Specialty, Specialty Lines II, including Credit Insurance, Travel Insurance and Assistance Services.
German Speaking Countries, Health Germany, Europe I, including Italy, Spain, Portugal, Europe II, including France, Netherlands, Belgium, Asia & Middle East, Anglo Broker Markets
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) The Allianz Group applies generally acknowledged valuation principles to determine the value in use. In this regard, the Allianz Group utilizes the capitalized earnings method to derive the value in use for all cash generating units in the Property-Casualty segment and Banking
The business plans applied in the value in use are the results of the structured management dialogues between the Board of Management of the Allianz Group and the companies in connection with a reporting process integrated into these dialogues. Generally, the business plans comprise a planning horizon of three
The terminal values are largely based on the expected profits of the final year of the detailed planning period. Where necessary, the planned profits are adjusted so that long term sustainable earnings are reflected. The financing of the assumed eternal growth in the terminal values is accounted for by appropriate profit retention.
The discount rate is based on the capital asset pricing The discount rates and eternal growth rates for the significant cash generating units used for the allocation of the fair values are as follows:
Sensitivity analysis with regards to discount rates and/or key value drivers of the business plans were performed. Changes of capitalized earnings values of Property-Casualty cash generating units due to changes in applied long term sustainable combined ratios and changes of capitalized earnings values of the Asset Management cash generating units due to changes in assumptions regarding cost income ratios were analyzed. For all cash generating units excluding New Europe, Property-Casualty Asia & Middle East and Banking respective capitalized earnings value sensitivities still exceeded respective carrying values.
For all cash generating units in the Life/Health segment, with the exception of The Market Consistent Embedded Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Due to the unusual economic circumstances at year-end for Taiwan the calculation was based on sensitivities that reflected the average interest level of the last five years. For the U.S. instead of the Market Consistent Embedded Value the Appraisal Value was derived from a traditional Embedded Value Calculation. Taiwan is included in the cash generating unit Asia & Middle East, U.S. is included in the cash generating unit Anglo Broker Market & Global Lines. Sensitivity analysis with regard to considered new business values are performed. For all Life cash generating units excluding Asia & Middle East, respective Appraisal Value sensitivities still exceeded respective carrying values.
The carrying amounts of goodwill and brand names allocated to Allianz Group’s cash generating units as of December 31,
Brand name
The brand name “Dresdner Bank” is reclassified to held-for-sale and is separately tested for impairment according to IFRS 5. 2007 The brand name “Dresdner Bank” has an indefinite life, as there is no foreseeable end to its economic life; therefore, it is not subject to amortization and it is recorded at cost less accumulated impairments. The fair value of this brand name, registered as a trade name, was determined using a royalty savings approach. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Change in fair value of financial liabilities designated at fair value through income attributable to changes in credit risk As of December 31, 2008 all of the financial liabilities designated at fair value through income related to the discontinued operations of Dresdner Bank and thus have been reclassified and presented as “Liabilities of disposal groups classified as held-for-sale” in accordance with IFRS 5. 17 Liabilities to banks and customers
Liabilities to banks and customers by contractual maturity
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Liabilities to banks and customers by type of customer and geographic region
As of December 31,
Changes in the reserves for loss and loss adjustment expenses for the Property-Casualty segment
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Prior of
The following table illustrates the development of the
Discounted loss and loss adjustment expenses
As of December 31, The discount reflected in the reserves is related to annuities for certain long-tailed liabilities, primarily in workers’ compensation, personal accident, general liability, motor liability, individual and group health disability and employers’ liability. All of the reserves that have been discounted have payment amounts that are fixed and timing that is reasonably determinable. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
The following table shows, by
Aggregate policy reserves
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Changes in aggregate policy reserves for
Changes in aggregate policy reserves for universal life-type insurance contracts and
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
As of December 31,
Reserves for premium refunds
Concentration of insurance risk in the Life/Health segment
The Allianz Group’s Life/Health segment provides a wide variety of insurance and investment contracts to individuals and groups in approximately 30 countries around the world. Individual contracts include both traditional contracts and unit-linked contracts. Without consideration of Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
As of December 31,
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
A
Furthermore,
As a result of the
The Allianz Group’s Life/Health segment is exposed to significant investment risk as a result of guaranteed minimum interest rates included in most of its traditional contracts.
In most of these markets, the effective interest rates being earned on the investment portfolio exceed these guaranteed minimum interest rates. In addition, the operations in these markets may also have significant mortality and expense margins. As a result, as of December 31, 21 Financial liabilities for unit-linked contracts
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Changes in financial liabilities for unit-linked insurance contracts and unit-linked investment contracts for the years ended December 31, 2008 and 2007 were as follows:
Liquidity Risk Tabular disclosure of contractual obligations The table sets forth the Allianz Group’s contractual obligations as of December 31, 2008. Contractual obligations do not include contingent liabilities or commitments. Only transactions with parties outside the Allianz Group are considered. With the announcement of the sale of Dresdner Bank from Allianz to Commerzbank as of August 31, 2008, Dresdner Bank was classified as a disposal group held-for-sale and discontinued operations. Following this classification, contractual obligations of Dresdner Bank are presented as part of the disposal group held-for-sale and discontinued operations. The following table includes only continuing operations. The table includes only liabilities that represent fixed and determinable amounts. The table excludes interest on floating rate long-term debt obligations and interest on money market securities, as the contractual interest rate on floating rate interest is not fixed and determinable. The amount and timing of interest on money market securities is not fixed and determinable since these instruments have a daily maturity. For further information, see Notes 23 and 24 to the consolidated financial statements. Furthermore, reserves for insurance and investment contracts presented in the table include contracts where the timing and amount of payments are considered fixed and determinable and contracts which have no specified maturity dates and may result in a payment to the contract holder depending on mortality and morbidity experience and the incidence of surrenders, lapses, or maturities. For contracts which do not have payments that are fixed and determinable, the Allianz Group has made assumptions to estimate the undiscounted cash flows of contractual policy benefits including mortality, morbidity, interest crediting rates, policyholder participation in profits, and future lapse rates. These assumptions represent current best estimates, and may differ from the estimates originally used to establish the reserves for insurance and investment contracts as a result of the lock-in of assumptions on the issue dates of the contracts as required by the Allianz Group’s established accounting policy. For further information, see Note 2 to the consolidated financial statements. Due to the uncertainty of the assumptions used, the amount presented could be materially different from the actual incurred payments in future periods. Furthermore, these amounts do not include premiums and fees expected to be received, investment income earned, expenses incurred to parties other than the policyholders such Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) as agents, or administrative expenses. In addition, these amounts are presented net of reinsurance expected to be received as a result of these cash flows. The amounts presented in this table are undiscounted and therefore exceed the reserves for insurance and investment contracts presented in the consolidated balance sheet. For further information on reserves for insurance and investment contracts, see Note 20 to the consolidated financial statements. As of December 31, 2008, the income tax obligations amounted to €1,446 mn. Thereof €1,106 mn the Allianz Group expects to pay within the twelve months after the balance sheet date. For the remaining amount of €340 mn an estimate of the timing of cash outflows is not reasonably possible. The income tax obligations are not included in the table below.
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Reconciliation of future policy benefits The following table presents a reconciliation of future policy benefits to the total balance sheet positions, which include reserves for insurance and investment contracts and financial liabilities for unit-linked contracts, as presented in the consolidated balance sheet:
Reconciling items related to the effect of discounting and differences between locked-in and best estimate assumptions occur because future policy benefits are presented on an undiscounted basis, while reserves for insurance and investment contracts in the consolidated balance sheet reflect the time value of money. Furthermore, future policy benefits are based on current best estimate assumptions such as mortality, morbidity, interest rates, policy-holder participation in profits and future lapse rates. For certain contracts (SFAS 60 and SFAS 97), current best estimate assumptions may differ from the locked-in estimates required to be used to establish the reserves for insurance and investment contracts in the consolidated balance sheet, which also include provisions for adverse deviations as required by the Allianz Group’s established accounting policy. Reconciling items related to expected future premiums and expenses occur because future policy benefits take into account best estimates of future premiums expected to be received and future expenditures expected to be incurred. Future policy benefits implicitly include embedded derivatives or market value liability options (MVLO) of our equity-indexed annuity business that are accounted for as derivatives and are presented within financial liabilities carried at fair value through income in our consolidated balance sheet. Deferred acquisition costs comprise deferred acquisition costs for our Life/Health segment, present value of future profits and deferred sales inducements. See Note 12 to our consolidated financial statements for more information. Ceded reserves to reinsurers are presented within reinsurance assets in our consolidated balance sheet. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Other liabilities due within one year amounted to 24,766 mn (2007: €38,151 mn) and those due after more than one year totaled €8,164 mn (2007: €9,880 mn). Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Issued capital
Issued capital at December 31,
Authorized capital
As of December 31,
As of December 31, authorized in 2006. In February 2008 the remaining 2.2 mn warrants were exercised which the Allianz Group had issued in February 2005 as part of the “All-in-One” transaction. In conjunction with the exercise, 2.2 mn new shares of Allianz SE resulting from conditional capital were issued leading to proceeds from this increased equity of €202 mn. The new shares are entitled to dividend as of the financial year 2008. A capital increase out of unissued conditional
Changes
In November Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) as treasury shares for further subscriptions by employees in the context of the employee share purchase plan in In April 2007 16,974,357 new Allianz SE shares were issued for the execution of the minority buy-out of AGF shares. The increase in share capital due to the minority buyout of AGF amounts to €43 mn; the additional paid-in capital increased by €2,722 mn.
On October 13, 2006, Allianz AG and RAS merged resulting in the issuance of 25,123,259 shares of Allianz SE to the shareholders of RAS. As a result, share capital increased by €64 mn and capital reserve increased by €3,589 mn.
All shares issued during the years ended December 31,
Dividends
For the year ended December 31,
Treasury shares
The Annual General Meeting on May
In order to enable Dresdner Bank Group to trade in shares of Allianz SE, the Annual General Meeting on May Group purchased
the year ended December 31,
Composition of the treasury shares
Minority interests
Capital Requirements
The Allianz Group’s capital requirements are primarily dependent on our growth and the type of
business that it underwrites, as well as the industry and geographic locations in which it operates. In addition, the allocation of the Allianz Group’s investments plays an important role. During the Allianz Group’s annual planning dialogues with its operating entities, capital requirements are determined through business plans regarding the levels and timing of capital expenditures and Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) investments. Regulators impose minimum capital rules on the level of both the Allianz Group’s operating entities and the Allianz Group as a whole.
On January 1, 2005, the Financial Conglomerates Directive, a supplementary European Union
At December 31,
In addition to regulatory capital requirements, Allianz SE also uses an internal risk capital model to determine how much capital is required to absorb any unexpected volatility in results of operations.
Certain of the Allianz Group’s insurance subsidiaries prepare individual financial statements based on local laws and regulations. These laws establish restrictions on the minimum level of capital and surplus an insurance entity must maintain and the amount of dividends that may be paid to shareholders. The minimum capital requirements and dividend restrictions vary by jurisdiction. The minimum capital requirements are based on various criteria including, but not limited to, volume of premiums written or claims paid, amount of insurance reserves, asset risk, mortality risk, credit risk, underwriting risk and off-balance sheet risk.
As of December 31,
Certain insurance subsidiaries are subjected to regulatory restrictions on the amount of dividends which can be remitted to Allianz SE without prior approval by the appropriate regulatory body. Such restrictions provide that a company may only pay dividends up to an amount in excess of certain regulatory capital levels or based on the levels of undistributed earned surplus or current year income or a percentage thereof. By way of example only, the operations of
Dividends paid in excess of these limitations generally require prior approval of the insurance commissioner of the state of domicile. The Allianz Group believes that these restrictions will not affect the ability of Allianz SE to pay dividends to its shareholders in the future. In addition, Allianz SE is not subject to legal restrictions on the amount of dividends it can pay to its shareholders, except the legal reserve in the appropriated retained earnings, which is required according to clause 150 (1) of the
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Supplementary Information to the Consolidated Income Statements
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Income from financial assets and liabilities held for trading (net)
Life/Health Segment
Income from financial assets and liabilities held for trading for the year ended December 31,
Corporate Segment
Income from financial assets and liabilities held for trading for the year ended December 31,
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
32
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
37 Impairments of investments (net)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
40
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
During the year ended December, 31,
Of the deferred tax charge for the year ended December 31,
The recognized income tax
The effective tax rate is determined on the basis of the effective income tax
The effects of German tax law changes stem, in 2007, from decrease in tax rates due to German corporate tax reform and, in 2006, from the capitalization of corporate tax credits due to the German Reorganization Tax Act (“SEStEG”).
During the year ended December 31, Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
The tax rates used in the calculation of the Allianz Group deferred taxes are the applicable national rates, which in
Deferred taxes on losses carried forward are recognized as an asset to the extent sufficient future taxable profits are available for realization.
Deferred tax assets and liabilities
Taxable temporary differences associated with investments in Allianz Group companies, for which no deferred tax liabilities are recognized because Allianz is able to control the timing of their reversal and they will not reverse in the foreseeable future amount to €267 mn (2007: €343 mn). Deductible temporary differences arising from investments in Allianz Group companies, for which no deferred tax assets are recognized because it is not probable that they reverse in the foreseeable future amount to €219 mn (2007: €588 mn).
Tax losses carried forward
Tax losses carried forward at December 31,
Tax losses carried forward are scheduled according to their expiry periods as follows:
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
43 Derivative financial instruments
Derivatives derive their fair values from one or more underlying assets or specified reference values.
Examples of derivatives include contracts for future delivery in the form of futures or forwards, options on shares or indices, interest rate options such as caps and floors, and swaps relating to
Derivatives used by individual subsidiaries in the Allianz Group comply with the relevant supervisory regulations and the Allianz Group’s own internal guidelines. The Allianz Group’s investment and monitoring rules exceed regulations imposed by supervisory authorities. In addition to local management supervision, comprehensive financial and risk management systems are in force across the Allianz Group. Risk management is an integral part of the Allianz Group’s controlling process that includes identifying, measuring, aggregating and managing risks. Risk management objectives are implemented at both the Allianz Group level and by the local operational units. The use of derivatives is one key strategy used by the Allianz Group to manage its market and investment risks.
Insurance subsidiaries in the Allianz Group use derivatives to manage the risk exposures in their investment portfolios based on general thresholds and targets. The most important purpose of these instruments is hedging against adverse market movements for selected securities or for parts of a portfolio. Specifically, the Allianz Group selectively uses derivative financial instruments such as swaps, options and forwards to hedge against changes in prices or interest rates in their investment portfolio.
Within the Allianz Group’s banking business, derivatives are used both for trading purposes and to hedge against movements in interest rates, currency rates and other price risks of the Allianz Group’s investments, loans, deposit liabilities and other interest-sensitive assets and liabilities.
Market and counterparty risks arising from the use of derivative financial instruments are subject to control procedures. Credit risks related to counterparties are assessed by calculating gross replacement values. Market risks are monitored by means of up-to-date value-at-risk calculations and stress tests and limited by specific stop-loss limits.
The counterparty settlement risk is virtually excluded in the case of exchange-traded products, as these are standardized products. By contrast,
over-the-counter Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Property-Casualty, Life/Health and Corporate Segments
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Banking and Asset Management Segments
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Derivative financial instruments used in accounting hedges
The Allianz Group principally uses fair value hedging. Important hedging instruments
Fair value hedges The Additionally the Allianz Group uses fair value due to movements in interest rates or exchange rates. The derivative financial instruments used for For the year ended December 31, 2008, the Allianz Group recognized for fair value hedges a net gain of €2,115 mn (2007: net loss of €462 mn; 2006: net loss of €687 mn) on the hedging instrument and a net loss of €2,027 mn (2007: net gain of €494 mn; 2006: net gain of €698 mn) on the hedged item attributable to the hedged risk. Cash flow hedges
During the year ended December 31, Hedge of
As of December 31,
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
44 Fair value of financial instruments
Fair values and carrying amounts of financial instruments The following table presents a comparison of the carrying amount and the fair value of the Allianz Group’s classes of financial instruments:
The fair value of a financial instrument is defined as the amount for which a financial For the
Financial assets and liabilities designated at fair value through Available-for-sale investments Financial assets and liabilities for unit-linked contracts Derivative financial instruments and firm commitments included in other assets and other liabilities Investment contracts with policyholders Financial liabilities for puttable equity instruments Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Following is an explanation of Cash and Cash and cash equivalents comprises cash and demand deposits with banks together with short-term highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of change in value. They are carried at nominal value, which represents a reasonable estimate of the fair value Held-to-maturity investments
The fair value of Loans and advances to banks and customers For loans and advances to banks and customers quoted market prices are not available as there are no active markets where these instruments are traded. The fair value is determined using generally accepted valuation techniques with actual market parameters. For short-term loans the carrying amount represents a reasonable estimate of the fair value. For long-term loans the fair value is estimated by discounting future contractual cash flows using risk-adjusted discount rates. Additionally, the individually assessed component of the allowance for loan losses and the recoverable amounts of collateral are considered in the fair value determination of loans. Liabilities to banks and customers For short-term liabilities the carrying amount represents a reasonable estimate of the fair value. For long-term instruments the fair value is determined by discounting future cash flows. The fair value determination reflects current market interest rates and the credit rating of the Allianz Group. Certificated liabilities, participation certificates and subordinated liabilities The fair value of certificated liabilities, participation certificates and subordinated liabilities is determined using quoted market prices, if available. If quoted prices are not available, for short-term liabilities the carrying amount represents a reasonable estimate of the fair value. For long-term instruments the fair value is determined by discounting the remaining contractual future cash flows at a discount-rate at which Allianz Group could issue debt with similar remaining maturity. The fair value determination reflects current market interest rates and the credit rating of the Allianz Group. Fair value hierarchy of financial instruments The fair value of a financial instrument is determined using quoted prices for an identical instrument in active markets (Level I). If quoted prices for an identical instrument in active markets are not available, the Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
The following table presents the
For the vast majority of Allianz Group’s financial instruments carried at fair value in the consolidated balance sheet as of December 31, 2008, the fair value is determined using quoted prices in active markets for the identical instrument (Level I). Available-for-sale investments assigned to Level II included corporate bonds of €23 bn and The fair value of market observable input parameters (Level III). Within financial assets designated at fair value through income these instruments comprise investments in private equity of €184 mn. Within available-for-sale investments these instruments relate to investments in private equity of €2.1 bn, investments in corporate bonds of €1.7 bn and corporate asset-backed-securities of €133 mn. Financial liabilities held for trading include €5.2 bn of embedded derivative financial instruments relating to annuity products.
Due to the sale of Dresdner Bank to Commerzbank on January 12, 2009 the table above Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) does not include certain CDOs that Allianz Group has repurchased from Dresdner Bank after the completion of the sale to Commerzbank. The amount of these assets as of December 31, 2008 was €1.1 bn and is presented in non-current assets and assets from disposal groups classified as held-for-sale. Day one profit During the year ended December 31, 2008 the Allianz Group did not recognize day one profits. The day one profits of the previous year all related to Dresdner Bank and were reclassified with the related assets to “Non-current assets and assets of disposal groups classified as held-for-sale”.
Allianz Group companies maintain various types of ordinary course business relations (particularly in the area of insurance, banking and asset management) with related enterprises. In particular, the business relations with associated companies, which are active in the insurance business, take on various forms and may also include special service, computing, reinsurance,
46 Contingent liabilities, commitments, guarantees, and assets pledged and collateral
Contingent liabilities
Litigation
Allianz Group companies are involved in legal, regulatory and arbitration proceedings in Germany and a number of foreign jurisdictions, including the United States, involving claims by and against them, which arise in the ordinary course of their businesses, including in connection with their activities as insurance, banking and asset management companies, employers, investors and taxpayers. It is not feasible to predict or determine the ultimate outcome of the pending or threatened proceedings. Management does not believe that the outcome of these proceedings, including those discussed below, will have a material adverse effect on the financial position or results of operations of Allianz Group, after consideration of any applicable reserves.
On November 5, 2001, a lawsuit, Silverstein v. Swiss Re International Business Insurance Company
Ltd., was filed in the United States District Court for the Southern District of New York against certain insurers and reinsurers, including a subsidiary of Allianz SE which is now named Allianz Global Risks
On May 24, 2002, pursuant to a statutory squeeze-out procedure, the general meeting of Dresdner Bank AG resolved to transfer shares from its minority shareholders to Allianz Notes to the Allianz Allianz on the basis of an expert opinion, and its adequacy was confirmed by a court appointed auditor. Some of the former minority shareholders applied for a court review of the appropriate amount of the cash settlement in a mediation procedure
Allianz Global Investors of America L.P. and
as putative class actions and other proceedings related to matters involving market timing Two nearly identical class action civil complaints were filed against Pacific Investment Management Company LLC (PIMCO), a granted the petition of PIMCO and PIMCO Funds for leave to appeal the class certification ruling. That appeal is pending. Management currently believes the complaint is without merit but the outcome
The U.S. Department of Justice has alleged False Claims Act violations related to
Three members of the Fireman’s Fund group of companies in the United States, all subsidiaries of Allianz SE, are
Allianz Life Insurance Company of North America (“Allianz Life”) Notes to the lawsuit
Other contingencies
With the sale of Dresdner Bank becoming effective on
Commitments
Loan commitments
The Allianz Group engages in various lending commitments to meet the financing needs of its customers. The following table represents the amounts at risk should customers draw fully on all facilities and then default, excluding the effect of any collateral. Since the majority of these commitments may expire without being drawn upon, the amounts shown may not be representative of actual liquidity requirements for such commitments.
Leasing commitments
The Allianz Group occupies property in many locations under various long-term operating leases and has entered into various operating leases covering the long-term use of data processing equipment and other office equipment.
As of December 31,
Rental expense net of sublease rental income received of
Purchase obligations
The Allianz Group has commitments for mortgage loans and to buy multi-tranche loans of €5,102 mn (2007: €4,489 mn) as well as to invest in private equity funds totaling Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Other commitments
Other principal commitments of the Allianz Group include the following:
Pursuant to para. 124 ff. of the German Insurance Supervision Act
Guarantees
A summary of guarantees issued by the Allianz Group by maturity and related collateral-held is as follows:
The customers of the letters of credit and of the indemnification contracts have the following external credit ranking:
Letters of credit and other financial guarantees
The majority of the Allianz Group’s letters of credit and other financial guarantees are issued to customers through the normal course of business of the Allianz Group’s Banking segment in return for fee and commission income, which is generally determined based on rates subject to the nominal Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) amount of the guarantees and inherent credit risks. Once a guarantee has been drawn upon, any amount paid by the Allianz Group to third-parties is treated as a loan to the customer, and is, therefore, principally subject to collateral pledged by the customer as specified in the agreement.
Market value guarantees
Market value guarantees represent assurances given to customers of certain mutual funds and fund management agreements, under which initial investment values and/or minimum market performance of such investments are guaranteed at levels as defined under the relevant agreements. The obligation to perform under a market value guarantee is triggered when the market value of such investments does not meet the guaranteed targets at
The Allianz Group’s Asset Management segment, in the ordinary course of business, issues market value guarantees in connection with investment trust accounts and mutual funds it manages. The levels of market value guarantees, as well as the maturity dates, differ based on the separate governing agreements of the respective investment trust accounts and mutual funds. As of December 31,
The Allianz Group’s banking operations in France, in the ordinary course of business, issue market value and performance-at-maturity guarantees in connection with mutual funds offered by the Allianz Group’s asset management operations in France. The levels of market value and performance-at-maturity guarantees, as well as the maturity dates, differ based on the underlying agreements. In most cases, the same mutual fund offers both a market value guarantee and a performance-at-maturity guarantee. Additionally, the performance-at-maturity guarantees are generally linked to the performance of an equity index or group of equity indexes. As of December 31,
Indemnification contracts
Indemnification contracts are executed by the Allianz Group with various counterparties under existing service, lease or acquisition transactions. Such contracts may also be used to indemnify counterparties under various contingencies, such as changes in laws and regulations or litigation claims.
In connection with the sale of various of the Allianz Group’s former private equity investments, subsidiaries of the Allianz Group provided indemnities to the respective buyers in the event that certain contractual warranties arise. The terms of the indemnity contracts cover ordinary contractual warranties, environmental costs and any potential tax liabilities the entity incurred while owned by the Allianz Group.
Credit derivatives
Credit derivatives consist of written credit default swaps, which require payment by the Allianz Group in the event of default of debt obligations, as well as written total return swaps, under which the Allianz Group guarantees the performance of the underlying assets. The notional principal amounts and fair values of the Allianz Group’s credit derivative positions as of December 31, Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Assets pledged and collateral
The carrying amount of the assets pledged as collateral where the secured party does not have the right by contract or custom to sell or repledge the assets are as follows:
As of December 31, As of December 31, 2008 the Allianz Group took possession of collateral it holds as security with a carrying amount of €– mn. These financial assets will be systematically sold in the market.
47 Pensions and similar obligations
Retirement benefits in the Allianz Group are either in the form of defined benefit or defined contribution plans. Employees, including agents in Germany, are granted such retirement benefits by the various legal entities of the Allianz Group. In Germany, these are primarily defined benefit plans in nature.
For defined benefit plans, the participant is granted a defined benefit by the employer or via an external entity. In contrast to defined contribution arrangements, the future cost to the employer of a defined benefit plan is not known with certainty in advance.
Defined benefit plans
Amounts recognized in the Allianz Group’s consolidated balance sheets for defined benefit plans are as follows:
The following table sets forth the changes in the projected benefit obligations, the changes in fair value of plan assets and the net amount recognized for the various Allianz Group defined benefit plans:
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
As of December 31,
The net periodic benefit cost related to defined benefit plans of the Allianz Group consists of the following components:
During the year ended December 31,
The actual return on plan assets amounted to
A summary of amounts related to defined benefit plans is as follows:
Assumptions
The assumptions for the actuarial computation of the projected
The calculations are based on current actuarially calculated mortality estimates. Projected turnover depending on age and length of service have also been used, as well as internal Allianz Group retirement projections.
The
The discount rate assumptions reflect the market yields at the balance sheet date of high-quality
The
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
For the year ended December 31,
The determination of the expected long-term rate of return for the individual asset categories is based on capital market surveys.
Plan assets
The defined benefit plans’
The bulk of the plan assets are held by the Allianz Versorgungskasse VVaG, Munich. This entity insures effectively all employees of the German insurance
Plan assets do not include equity securities issued by the Allianz Group or real estate used by the Allianz Group.
The Allianz Group plans to gradually increase in the long term its actual equity securities allocation for plan assets of defined benefit plans.
Contributions
During the year ending December 31,
Defined contribution plans
Defined contribution plans are funded through independent pension funds or similar organizations. Contributions fixed in advance (e.g.
During the year ended December 31,
48 Share-based compensation plans
Group Equity Incentives Plans
The Group Equity Incentives Plans
Stock appreciation rights
The
the excess of the market price of an Allianz SE share over the reference price on the exercise date for each
during their contractual term, the market price of Allianz SE share has outperformed the Dow Jones Europe STOXX Price Index at least once for a period of five consecutive trading days; and
the Allianz SE market price is in excess of the reference price by at least 20% on the exercise date. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
In addition, upon death of plan participants, a change
Upon the expiration date, any unexercised
The fair value of the
The following table provides the assumptions used in estimating the fair value of the
The
As of December 31,
Restricted stock units
The
In addition, upon death of plan participants, a change The RSUs are notional stocks without dividend payments. The fair value is calculated by subtracting the net present value of expected future dividend payments until maturity of the
The
As of December 31, Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Share-based compensation plans of subsidiaries of the Allianz Group
PIMCO LLC Class B Unit Purchase Plan
When acquiring AGI L.P. during the year ended December 31, 2000, Allianz SE caused Pacific Investment Management Company LLC
The Class B equity units issued under the Class B Plan vest over
The total recognized compensation expense for Class B equity units that are outstanding is recorded as a liability in other liabilities. As of December 31, PIMCO LLC Class M-Unit Allianz Global Investors (AGI) has launched a new management share-based payment incentive plan for certain senior level executives of PIMCO LLC and certain of its affiliates. Participants in the plan are granted options to acquire a new class of equity instruments (M-Units), which vest in one-third increments on approximately the third, fourth and fifth anniversary of the option valuation date. Upon vesting, options will be automatically exercised in a cashless transaction. Participants may elect to defer the receipt of M-Units through the M-Unit Deferral Plan. With the M-Unit Plan, participants can directly participate in PIMCO’s performance. Class M-Units are non-voting common equity with limited information rights. They bear quarterly distributions equal to a pro-rata share of PIMCO’s net distributable income. Deferred M-Units have a right to receive quarterly cash compensation equal to and in lieu of quarterly dividend payments. The maximum of 250,000 M-Units are authorized for issuance under the M-Unit Plan. The fair value of the underlying M-Options was measured using the Black-Scholes option-pricing model. Volatility was derived in part by considering the average historical and implied volatility of a select group of peers. The expected life was calculated based upon treating the three vesting tranches (one third in years 3, 4, and 5) as three separate awards. The following table provides the assumptions used in calculating the fair value of the M-Options at grant date:
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
A summary of the number and
The aggregate intrinsic value of share options outstanding was €(1) mn for the year ended December 31, 2008. The M-Units outstanding as of December 31, 2008 have an exercise price between of €6,190.13 and of €6,230.86 and a weighted average remaining contractual life of 4.46 years.
The shares settled by delivery of During the year ended December 31,
AGF Group share option plan
The AGF Group has awarded share options on AGF shares to eligible AGF Group executives and managers of subsidiaries, as well as to certain employees, whose performance justified grants. The primary objective of the share option plan is to encourage the retention of key personnel of AGF Group and to link their compensation to the performance of AGF Group. During the year ended December 31, 2007, Allianz acquired all of the remaining AGF shares from minority shareholders in the context of the Tender Offer and Squeeze-out. Under the terms of an agreement (the “Liquidity Agreement”) between Allianz SE, AGF and the beneficiaries of the AGF share option plans 2003-2006 (AGF employees), Allianz has the right to purchase all AGF shares issued through the exercise of these AGF share option plans after the put period (where the beneficiaries have the right to sell to Allianz). The price payable by Allianz per AGF share is a cash consideration equal to the Allianz 20-day-average share price prior to the date the right to buy or to sell is exercised, multiplied by a ratio representing the consideration proposed in the Tender Offer for each AGF share (€126.43) divided by the Allianz share price on January 16, 2007 (€155.72). This ratio is subject to adjustments in case of transactions impacting Allianz or AGF share capital or net equity. The cash settlement is based upon the initial offer proposed for each AGF share during the Tender Offer. As of December 31, 2007 all shares issued under these plans were fully vested and exercisable. Due to the change in settlement arising from the Liquidity Agreement, the Allianz Group accounts for the AGF share option plans as cash settled plans, as all AGF employees will receive cash for their AGF shares. Therefore, the Allianz Group recognizes any change in the fair value of the unexercised plans as compensation expense. The effects of these modifications that increased the total fair value of the AGF share option plan to the AGF employees were expensed at the date of modification and amounted to €15 mn in 2007. The modification of the settlement terms from an equity share to cash for vested options was recorded directly in equity, and amounted to €18 mn during 2007. Originally, the AGF share options Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
The fair value of
The following table provides
The following table provides an overview about the underlying assumptions used for the valuation after taking into account the impact of the
During the year ended December 31,
option plan (modified RAS Group share option plan 2005)
The RAS Group awarded eligible members of senior management with share purchase options on RAS ordinary shares. The share options had a vesting period of 18 months to 2 years and a term of 6.5 to 7 years.
The share options allow for exercise at any time after the vesting period and before expiration, provided that:
on the date of exercise, the RAS share price is at least 20% higher than the average share price in January of the grant year (for share options granted during the year ended December 31, 2001, the hurdle is 10%), and
the performance of the RAS share in the year of grant exceeds the Milan Insurance Index in the same year.
The fair value of the options at grant date was measured using a trinomial tree option pricing model.
The following table provides the grant date fair value and the assumptions used in calculating their fair value:
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
A summary of the number and
On the effective date of the merger between Allianz SE and RAS, the RAS share option plan was modified. The outstanding share options, which were granted in 2005, on the date of the merger were replaced with Allianz SE share options on the basis of 1 Allianz SE option for every
During the year ended December 31, 2006, the Allianz Group recorded compensation expense of €1 mn (2005: €1
After modification the valuation model for the RAS Group Allianz SE share option plan
adjusted. The following table provides the grant date fair value and the assumptions used in calculating their fair value:
A summary of the number
The aggregate intrinsic value of share options outstanding was €6 mn for the year ended December 31, 2008 (2007: €11 mn). The options outstanding as of December 31, 2008 have an exercise price of €48.96 and a weighted average remaining contractual life of 3 years. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) The shares settled by delivery of Allianz SE shares are accounted for as equity settled plans by the RAS Group. Therefore, the RAS Group measures the total compensation expense to be recognized for the equity settled shares based upon their fair value as of the grant date. The total compensation expense is recognized over the vesting period.
During the year ended December 31,
The Allianz Group offers Allianz SE shares in 22 countries to qualified employees at favorable conditions. The shares have a minimum holding period of
In addition, during the year ended December 31, 2006, the AGF Group offered AGF shares to qualified employees in France at favorable conditions.
Other share option and shareholding plans
The Allianz Group has other local share-based compensation plans, including share option and employee share purchase plans, none of which, individually or in the aggregate, are material to the
consolidated financial statements. During the year ended December 31,
As of December 31,
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
The development of the restructuring provisions reflects the implementation status of the restructuring initiatives. Based on the specific IFRS guidance, restructuring provisions are recognized a termination arrangement the respective part of the restructuring provision has been transferred to provisions for employee expenses. In addition, provisions for vacant office spaces that result from restructuring initiatives have been transferred to Allianz Deutschland AG´s provisions for restructuring In 2006, Allianz Deutschland AG announced a restructuring plan for the insurance business in Germany, that is expected to be completed in 2008. In the course of the fiscal year 2008 the restructuring plan has been extended for another year up to 2009. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) The objective of the restructuring program is to make the insurance business more customer focused, operate more efficiently and achieve growth. During the year ended December 31, 2008, Allianz Deutschland AG recorded restructuring charges of €(9) mn (2007: €(16) mn). This amount includes additions to existing provisions, release of provisions recognized in previous years, and restructuring charges as reflected in the consolidated income statement. The reduction of staff within this agreed upon before the restructuring provision was recorded and are not part of the restructuring provision.
A summary of the changes in the provisions for restructuring of the Allianz Deutschland AG during the year ended December 31, 2008 is:
Allianz Deutschland AG recorded releases of provisions via transfers to other provision categories of Assurance Générales de France (AGF Group)’s provisions for restructuring In 2008, the AGF Group announced a restructuring plan, so called “Comprehensive Adaptation Plan” (“Plan Global d’Adaptation”), for the insurance business in France which is expected to continue through 2011. The objectives of the restructuring program are to regain market shares and increase the quality of service, by increasing commercial staff and sales effectiveness, developing employees’ competencies, and implementing a comprehensive plan of competitiveness. The restructuring activities of the AGF Group will result in a reduction of locations within France from 14 to 10 and a relocation of workers and activities with critical team size purpose as well as a strong reduction of non-HR costs (especially IT, purchasing, facilities). Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Through the Comprehensive Adaptation Plan, the AGF Group plans to reduce the number of administrative jobs by 688 and increase the number of commercial employees by 506. The reduction of staff within this program includes measures for voluntary termination under restricted conditions and early retirement for the employees affected by the close-down of locations. During the year ended December 31, 2008, the AGF Group recorded restructuring charges of €81 mn as follows:
A summary of the changes in the provisions for restructuring of the AGF Group during the year ended December 31, 2008 is:
Other restructuring plans For 2008, amongst others the following restructuring plans were reflected: Allianz S.p.A., Italy In 2007, the Boards of RAS, Lloyd Adriatico and AZ Subalpina announced a restructuring program for the integration of these three companies into Allianz S.p.A effective since October 1, 2007. The objective is to reorganize its strategic and commercial direction by aligning the underwriting strategies, refocusing some lines of business in the insurance business, as well as in the asset management segment, unifying all the support functions leveraging on best practices. Further some activities will be relocated within Italian sites whereas other operations will be integrated into one single organization. During the year ended December 31, 2008, Allianz S.p.A. together with its group companies recognized restructuring charges of €2 mn (2007: €73 mn). As of December 31, 2008 Allianz S.p.A. recorded a provision of €36 mn (2007: €52 mn). Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Allianz Shared Infrastructure Service SE (ASIC SE) During 2007, ASIC SE recorded a provision for restructuring. The reason for the restructuring program are outsourcing activities for the divisions Desktop, Network and Telecommunication Services of ASIC SE (former Allianz Shared Infrastructure Service GmbH), Munich. During the year ended December 31, 2008, ASIC SE recognized restructuring charges of €— mn (2007: €79 mn) in total. As of December 31, 2008 ASIC SE recorded a provision for restructuring of €15 mn (2007: €42 mn).
Basic earnings per share Basic earnings per share
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Diluted earnings per share Diluted earnings per share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period, both adjusted for the effects of potential dilutive common shares. Potential dilutive common shares arise from the assumed conversion of participation certificates issued by Allianz SE, warrants issued by Allianz SE and share-based compensation plans into Allianz shares, as well as from the conversion of derivatives on own shares.
During the year ended December 31,
Employee information
The average total number of employees for the year ended December 31,
Personnel expenses
In the table above are included the personnel expenses from the discontinued operations of Dresdner Bank, which amounted to 2,532 mn in 2008. Notes to the Allianz Group’s Consolidated Financial Statements—(Continued) Issuance of the Declaration of Compliance with the German Corporate Governance Code according to clause 161 AktG
On December 18,
The Declaration of Compliance of the
Principal accountant fees and services
For a summary of fees billed by the Allianz Group’s principal auditors, see page
Compensation for the Board of Management
As of December 31,
Total compensation of the Board of Management for the year ended December 31, Compensation to former members of the Board of Management and their beneficiaries totaled Pension obligations to former members of the Board of Management and their beneficiaries are accrued in the amount of €47.0 mn
Total compensation to the Supervisory Board amounts to
Board of Management and Supervisory Board compensation by individual is included in the Corporate Governance section of this Annual Report. The information provided there is considered part of these consolidated financial statements.
On
Net claims from the
Winterstorm “Quinten” in Bushfires in
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
53
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)
Disclosure of equity investments Information according to clause 313 (2) German Commercial Code is published together with the consolidated financial statements in the German Electronic Federal Gazette as well as on the Company’s website.
The accounting terms explained here are intended to help the reader understand this Annual Report. Most of these terms concern the balance sheet or the income statement. Terminology relating to particular segments of the insurance or banking business has not been included.
Acquisition cost
The amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition.
Affiliated enterprises
The parent company of the Group and all consolidated subsidiaries. Subsidiaries are enterprises where the parent company can exercise a dominant influence over their corporate strategy in accordance with the control concept. This is possible, for example, where the parent
Aggregate policy reserves
Policies in
Allowance for loan losses
The overall volume of provisions includes
Identified counterparty risk is covered by specific credit risk allowances. The size of each allowance is determined by the probability of the borrower’s agreed payments regarding interest and installments, with the value of underlying collateral being taken into consideration. General
Country risk allowances are established for transfer risks. Transfer risk is a reflection of the ability of a certain country to serve its external debt. These country risk allowances are based on an internal country rating system which incorporates economic data as well as other facts to categorize countries.
Where it is determined that a loan cannot be repaid, the uncollectable amount is written off against any existing specific loan loss allowance, or directly recognized as expense in the income statement. Recoveries on loans previously written off are recognized in the income statement under net loan loss provisions.
Assets under management
The total of all investments, valued at current market value, which the Group has under management with responsibility for maintaining and improving their performance. In addition to the Group’s own investments, they include investments held under management for third parties.
Associated enterprises
All enterprises, other than affiliated enterprises or joint ventures, in which the Group has an interest of between 20% and 50%, regardless of whether a significant influence is actually exercised or not. At amortized cost
Under this accounting principle the difference between the acquisition cost and redemption value (of an investment) is added to or subtracted from the original cost figure over the period from acquisition to maturity and credited or charged to income over the same period.
Available-for-sale investments
Available-for-sale investments are securities which are neither held to maturity nor have been acquired for sale in the near term; available-for-sale investments are shown at fair value on the balance sheet. Business combination
A business combination is the bringing together of separate entities or businesses into one reporting entity.
Cash flow statement
Statement showing movements of cash and cash equivalents during an accounting period, classified by three types of activity:
investing activities
financing activities
Certificated liabilities
Certificated liabilities comprise debentures and other liabilities for which transferable certificates have been issued.
Combined ratio
Represents the total of acquisition and administrative expenses (net) and claims and insurance benefits incurred (net) divided by premiums earned (net).
Consolidated interest (%)
The consolidated interest is the total of all interests held by affiliated enterprises and joint ventures in affiliated enterprises, joint ventures, and associated enterprises.
Contingent liabilities
Financial obligations not shown as liabilities on the balance sheet because the probability of a liability actually being incurred is low. Example: guarantee obligations.
Corridor approach
With defined benefit plans, differences come about between the actuarial gains and losses which, when the corridor approach is applied, are not immediately recognized as income or expenses as they occur. Only when the cumulative actuarial Cost-income ratio
Represents operating expenses divided by operating revenues.
Coverage ratio
Represents ratio of total loan loss provisions to total risk elements according to SEC guide 3 (non-performing loans and potential problem loans).
Credit risk
The risk that one party to a contract will fail to discharge its obligations and thereby cause the other party to incur financial loss.
Current employer service cost
Net expense incurred in connection with a
Deferred acquisition costs
Expenses of an insurance company which are incurred in connection with the acquisition of new insurance policies or the renewal of existing policies. They include commissions paid and the costs of processing proposals.
Deferred tax assets/liabilities
The calculation of deferred tax is based on temporary differences between the carrying amounts of assets or liabilities in the published balance sheet and their tax base, and on differences arising from applying uniform valuation policies for consolidation purposes. The tax rates used for the calculation are the local rates applicable in the countries of the enterprises included in the consolidation; changes to tax rates already adopted on the balance sheet date are taken into account. Defined benefit plans
Defined contribution plans
Derivative financial instruments (derivatives)
Financial contracts, the values of which move in relationship to the price of an underlying Important examples of derivative financial instruments are options, futures, forwards and swaps. Earnings per share (basic/diluted)
Ratio calculated by dividing the consolidated profit or loss for the year by the average number of shares issued. For calculating diluted earnings per share the number of shares and the profit or loss for the year are adjusted by the dilutive effects of any rights to subscribe for shares which have been or can still be exercised. Subscription rights arise in connection with issues of convertible bonds or share options.
Equity consolidation
The relevant proportion of cost for the investment in a subsidiary is set off against the relevant proportion of the shareholders’ equity of the subsidiary.
Equity method
Investments in joint ventures and associated companies are accounted for by this method. They are valued at the Group’s proportionate share of the net assets of the companies concerned. In the case of investments in companies which prepare consolidated financial statements of their own, the valuation is based on the sub-group’s consolidated net assets. The valuation is subsequently adjusted to reflect the proportionate share of changes in the company’s net assets, a proportionate share of the company’s net earnings for the year being added to the Group’s consolidated income.
Expense ratio
Represents acquisition and administrative expenses (net) divided by premiums earned (net).
Fair value
The amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.
FAS
US Financial Accounting Standards on which the details of US GAAP (Generally Accepted Accounting Principles) are based.
Financial assets carried at fair value through income
Financial assets carried at fair value through income include debt and equity securities as well as other financial instruments (essentially derivatives, loans and precious metal holdings) which have been acquired solely for sale in the near term. They are shown in the balance sheet at fair value.
Financial liabilities carried at fair value through income
Financial liabilities carried at fair value through income include primarily negative market values from derivatives and short selling of securities. Short sales are made to generate income from short-term price changes. Shorts sales of securities are recorded at market value on the balance sheet date. Derivatives shown as financial liabilities carried at fair value through income are valued the same way as financial assets carried at fair value through income.
Forwards
The parties to this type of transaction agree to buy or sell at a specified future date. The price of the underlying assets is fixed when the deal is struck. Functional currency
The functional currency is the currency of the primary economic environment in which the entity operates i.e. the one in which the entity primarily generates and expends cash.
Funds held by/for others under reinsurance contracts
Funds held by others are funds to which the reinsurer is entitled but which the ceding insurer retains as collateral for future obligations of the reinsurer. The ceding insurer shows these amounts as “funds held under reinsurance business ceded.”
Futures
Standardized contracts for delivery on a future date, traded on an exchange. Normally, rather than actually delivering the underlying asset on that date, the difference between closing market value and the exercise price is paid.
Goodwill
Difference between the purchase price of a subsidiary and the relevant proportion of its net assets valued at the current value of all assets and liabilities at the time of acquisition.
Gross/Net
In insurance terminology the terms gross and net mean before and after deduction of reinsurance, respectively. In the investment terminology the term “net” is used where the relevant expenses (e.g. depreciations and losses on the disposal of assets) have already been deducted.
Hedging
The use of special financial contracts, especially derivative financial instruments, to reduce losses which may arise as a result of unfavorable movements in rates or prices.
Held for sale
A non-current asset is classified as held for sale if its carrying amount will be recovered principally through sale rather than though continuing use. On the date a non-current asset meets the criteria as held for sale, it is measured at the lower of its carrying amount and fair value less costs to sell.
Held-to-maturity investments
Held-to-maturity investments comprise debt securities held with the intent and ability that they will be held-to-maturity. They are valued at amortized cost.
IAS
International Accounting Standards.
IFRS
International Financial Reporting Standards. Since 2002, the designation IFRS applies to the overall framework of all standards approved by the International Accounting Standards Board. Already approved standards will continue to be cited as International Accounting Standards (IAS). IFRS Framework
The framework for International Financial Reporting Standards (IFRS) which sets out the concepts that underlie the preparation and presentation of financial statements for external users.
Income from financial assets and liabilities carried at fair value through income (net)
Income from financial assets and liabilities carried at fair value through income (net) includes all realized and unrealized profits and losses from financial assets carried at fair value through income and financial liabilities carried at fair value through income. In addition, it includes commissions as well as any interest or dividend income from trading activities as well as refinancing costs.
Issued capital and capital reserve
This heading comprises the capital stock, the premium received on the issue of shares, and amounts allocated when option rights are exercised.
Joint venture
An enterprise which is managed jointly by an enterprise in the Group and one or more enterprises not included in the consolidation. The extent of joint management control is more than the significant influence exercised over associated enterprises and less than the control exercised over affiliated enterprises.
Loss frequency
Number of losses in relation to the number of insured risks.
Loss ratio
Represents claims and insurance benefits incurred (net) divided by premiums earned (net).
Market value
The amount obtainable from the sale of an investment in an active market.
Minority interests in earnings
That part of net earnings for the year which is not attributable to the Group but to others outside the Group who hold shares in affiliated enterprises.
Minority interests
Those parts of the equity of affiliated enterprises which are not owned by companies in the Group.
New cost basis
Historical cost adjusted by depreciation to reflect permanent diminution in value.
Options
Derivative financial instruments where the holder is OTC derivatives
Derivative financial instruments which are not standardized and not traded on an exchange but are traded directly between two counterparties via over-the-counter (OTC) transactions.
Participating certificates
Amount payable on redemption of participating certificates issued. The participating certificates of Allianz SE carry distribution rights based on the dividends paid, and subscription rights when the capital stock is increased; but they carry no voting rights, no rights to participate in any proceeds of liquidation, and no rights to be converted into shares.
Pension and similar obligations
Reserves for current and future post-employment benefits formed for the defined benefit plans of active and former employees. These also include reserves for health care benefits and processing payments.
Premiums written/earned
Premiums written represent all premium revenues in the year under review. Premiums earned represent that part of the premiums written used to provide insurance coverage in that year. In the case of life insurance products where the policyholder carries the investment risk (e.g. variable annuities), only that part of the premiums used to cover the risk insured and costs involved is treated as premium income.
Reinsurance
Where an insurer transfers part of the risk which he has assumed to another insurer. Repurchase and reverse repurchase agreements
A repurchase (“repo”) transaction involves the sale of securities by the Group to a counterparty, subject to the simultaneous agreement to repurchase these securities at a certain later date, at an agreed price. The securities concerned are retained in the Group’s balance sheet for the entire lifetime of the transaction, and are valued in accordance with the accounting principles for financial assets carried at fair value through income or investment securities, respectively. The proceeds of the sale are reported in liabilities to banks or to customers, as appropriate. A reverse repo transaction involves the purchase of securities with the simultaneous obligation to sell these securities at a future date, at an agreed price. Such transactions are reported in loans and advances to banks, or loans and advances to customers, respectively. Interest income from reverse repos and interest expenses from repos are accrued evenly over the lifetime of the transactions and reported under interest and similar income or interest expenses.
Reserves for the cost of insurance claims incurred by the end of the year under review but not yet settled.
Reserve for premium refunds
That part of the operating surplus which will be distributed to policyholders in the future. This refund of premiums is made on the basis of statutory, contractual, or company by-law obligations, or voluntary undertaking. Revenue reserves
In addition to the reserve required by law in the financial statements of the Group parent company, this item consists mainly of the undistributed profits of Group enterprises and amounts transferred from consolidated net income.
Segment reporting
Financial information based on the consolidated financial statements, reported by business segments (Property-Casualty, Life/Health, Banking, Asset Management and Corporate) and by regions.
Subordinated liabilities
Liabilities which, in the event of liquidation or bankruptcy, are not settled until after all other liabilities.
Swaps
Agreements between two counterparties to exchange payment streams over a specified period of time. Important examples include currency swaps (in which payment streams and capital in different currencies are exchanged) and interest rate swaps (in which the parties agree to exchange normally fixed interest payments for variable interest payments in the same currency).
Unearned premiums
Premiums written attributable to income of future years. The amount is calculated separately for each policy and for every day that the premium still has to cover.
Unrecognized gains/losses
Amount of actuarial gains or losses, in connection with defined benefit pension plans, which are not yet recognized as income or expenses (see also “corridor approach”).
Unrecognized past service cost
Present value of increases in pension benefits relating to previous years’ service, not yet recognized in the pension reserve.
US GAAP
Generally Accepted Accounting Principles in the United States of America.
Variable annuities
The benefits payable under this type of life insurance depend primarily on the performance of the investments in a mutual fund. The policyholder shares equally in the profits or losses of the underlying investments.
As of December 31,
SCHEDULE II
ALLIANZ
PARENT ONLY CONDENSED FINANCIAL STATEMENTS BALANCE
SCHEDULE II
ALLIANZ
PARENT ONLY CONDENSED FINANCIAL STATEMENTS STATEMENTS OF INCOME
SCHEDULE II
ALLIANZ
PARENT ONLY CONDENSED FINANCIAL STATEMENTS STATEMENT OF CASH FLOWS
Note to Parent Only Condensed Financial Statements
Contingent liabilities and other financial commitments
The guarantees as described below are provided by Allianz SE to secure liabilities of
Bonds
Letters of
Allianz SE is committed to making future capital payments in favor of our North American holding company, Allianz of America, Inc., Wilmington. This will place Allianz of America Inc., Wilmington, in a position to provide sufficient capital to Allianz SE provides a guarantee to Allianz Argos 14 GmbH to secure the payment obligations under the derivative contract entered into with Blue Fin Ltd. in the context of the issuance of a catastrophe bond. Allianz SE provides a maximum €1.0 bn guarantee for the obligations of AGF Vie, Paris, under a unit linked pension insurance contract. As of December 31, 2008 the guaranteed obligations amounted €537 mn.
With respect to Fireman’s Fund Insurance Co., Novato, there is a conditional commitment to make capital payments which must, in particular, be made in case of future negative developments of the reserves for the year 2003 and before.
Guarantee declarations in a total of €1.4 bn have also been given for deferred annuity agreements signed by Allianz-RAS Seguros y Reaseguros S.A., Madrid.
There is an agreement between Allianz Risk Transfer AG, Zurich, and Allianz SE regarding a target minimum capitalization in the form of a Net Worth Maintenance Agreement.
There
There are also value asset liabilities of
In connection with the sale of holdings in individual cases, guarantees were given covering the various bases used to determine purchase prices. These can for example relate to tax risks. In Allianz Bank Zrt., Hungary, received a guarantee from Allianz SE in the Commitments of Allianz Nederland Schadeverzekering N.V. arising from an insurance contract are guaranteed by Allianz SE with a maximum exposure of
Allianz SE has also provided several subsidiaries and associates with either a standard indemnity guarantee or such guarantee as Guarantees to third parties (Dresdner Bank AG as of January 12, 2009) A guarantee was given to Dresdner Bank AG, Frankfurt, amounting to €50 mn, for the acquisition of receivables from payments for the rights to use a name in connection with Allianz Arena. In the context of a Securities Lending Agreement, Allianz SE gave a payment guarantee with respect to the obligations of Dresdner Bank AG, Frankfurt. A contingent indemnity agreement was entered with respect to securities issued by HT1 Funding GmbH in case HT1 Funding GmbH cannot serve the agreed coupon of the bond partly or in total. As of December 31, 2008 Allianz SE had contingent liabilities under guarantees amounting to €9 mn. Legal obligations
Legal obligations to assume any losses arise on account of management control agreements and/
ACM-Compagnie Mercur AG
Allianz Alternative Assets Holding GmbH Allianz Argos 14 GmbH
Allianz Autowelt GmbH
Allianz Deutschland AG
Allianz Finanzbeteiligungs GmbH
Allianz Global Corporate & Specialty AG
Allianz
AZ-Arges Vermögensverwaltungsgesellschaft mbH
AZ-Argos 3 Vermögensverwaltungsgesellschaft mbH (merged as of December 11, 2008)
AZ-Argos 10 Vermögensverwaltungsgesellschaft mbH (merged as of December 31, 2007/January 1, 2008)
IDS GmbH-Analysis and Reporting Services
META Finanz-Informationssysteme GmbH
Any other control and transfer-of-profit agreements were not concluded by Allianz
Financial liabilities of
Potential liabilities amounting to
Security deposits for leasing contracts amount to €0.3 mn financial commitments. SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE IV
SUPPLEMENTARY REINSURANCE INFORMATION
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
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