strength and value. Our performance in 2006 is a testament to our continued progress towards that goal.
Loans and advances to banks and customers € mn 408,278 21.2 % 336,808 377,223 378,295 329,195 162
Liabilities to banks and customers € mn 361,078 16.4 % 310,316 348,484 332,906 284,598 170 Reserves for loss and loss adjustment expenses € mn 65,464 (2.3)% 67,005 62,331 62,782 65,961 171 Reserves for insurance and investment contracts € mn 287,697 3.4 % 278,312 251,497 233,896 225,049 173
Returns Return on equity after income taxes6) % 15.6 3.0pts 12.6 7.8 11.0 (12.5) Return on equity after income taxes and before
May 8, 2007 Announcement of first quarter results 2007 Interim report first quarter 2007
February 21, 2008 Financial press conference for the 2007 fiscal year
As we cannot rule out changes of dates, we recommend checking them on the internet atwww.allianz.com/ financialcalendar.
Will we be successful? What we can promise is that we will do everything within our power to secure an even better position as one of the best among the world's leading financial services providers. At the same time I have a great deal of confidence in the ability and commitment of everyone at Allianz to adapt to and help implement the necessary changes. A deeply rooted entrepreneurial spirit exists at all levels within the company and a great deal of energy is everywhere. There is a lot going on in the company, and the results of this activity will help us to achieve our goals in the years to come.
It is our intention to win this race, which is why we are ensuring right now that Allianz is viewed by customers, employees and investors as themost attractive choice among international financial services providers. This is not some vague, non-committal vision of what the futuremay hold but a reference to quite specific developments, the results of which have been reflected in our financial figures for some time now. A brief look at what has been achieved over the past three years shows us that from 2004 to 2006 operating profits improved by 48.4%, and in 2006 alone by 29.8% to € 10,386 million. The net income rose by 109.5% and in 2006 alone by 60.3% to € 7,021 million. Shareholders' equity has increased by 68.3% since 2004, and in 2006 alone by 27.8% to € 50.5 billion. Finally a look at Economic Value Added® (EVA®), which is value generated in excess of capital costs. Over the past three years this increased by 92.1%, and in 2006 alone by 37.6% to € 3,528 million. In the year under review all four business segments posted significantly better results than in the previous year. Even when one takes into account the fact that we were sparedmajor natural disasters in 2006 and that the capital markets performed positively, these results indicate how robust our business has now become.
The sustainability initiatives I have reported in previous years are making substantial progress. The results of these initiatives can be seen in improved products, distribution and processes. This demonstrates once again the enormous increase in value that can be achieved by this company if it rolls out its best solution to a particular problem across its global operations. Although "I2s" (Ideas to success), our new innovation initiative, is still in its early stages, its first concrete results have already shown the wealth of ideas present among our employees.
The company has also made a breakthrough in China. Sales of insurance through branches of the Industrial and Commercial Bank of China (ICBC), in which we invested in 2006, have so far surpassed even our expectations. Meanwhile, growth in our insurance companies in India is accelerating almost daily. In fact, we are now number two among foreign providers in the country and are gaining 400,000 new customers eachmonth. Given ourmajority holding in the Russian company Rosno we are now well equipped to repeat the success of our operations in the interestingmarkets of Central and Eastern Europe.
Within the framework of its monitoring and advisory activities, the Supervisory Board was regularly provided by the Management Board, both verbally and in writing, with timely and comprehensive information on the course of business, the financial and economic development of the Allianz Group and of Allianz SE, including the risk situation and themanagement of risk as well as the company strategy. In Supervisory Board meetings, on the basis of reporting from the Management Board, we discussed in detail the development of the business and important decisions and businessmatters. As far as necessary under the law or the Statutes, the Supervisory Board passed resolutions after detailed examination. In addition we took care of the Management Board’s planning for the financial year 2007 andmedium term planning. For the past financial year, explanations of any deviation from plans and objectives in the course of the business were presented to us and examined by us on the basis of the documents provided.
An important area of our advisory and supervisory activity was themerger of the Italian Allianz subsidiary RAS Holding S.p.A. (RAS) into Allianz AG and the necessary preparations for this. We discussed and checked all this in our meetings in March, May and September on the basis of verbal reports from the Management Board and writtenmaterial. In two cases, the Supervisory Board passed written resolutions on this. In addition to its ordinary meetings, the Standing Committee twice took decisions through themedium of telephone conference calls. One of the decisions dealt with the conclusion of a settlement with those shareholders who had started actions in law to contest themerger. In the settlement that was reached the plaintiffs agreed to withdraw their actions in consideration for our assuming their lawyers’ costs, so that these actions nomore stood in the way of the merger and transformation of the company. The Supervisory Board also closely monitored the
negotiations over the future participation of employees in Allianz SE, in conjunction with themerger and transformation of the company. These negotiations ended on September 20, 2006 with the signing of the Agreement concerning the Participation of Employees in Allianz SE. Themerger became effective with registration in the Commercial Register on October 13, 2006. At the same time Allianz took on the form of a European Company (Societas Europaea – SE) and its company name is now Allianz SE.
In addition to regular reports on turnover and results of our banking business segment we were informed in the September and December meetings of developments at Dresdner Bank and its restructuring into the business divisions Private & Corporate Clients and Investment Banking. We were able to satisfy ourselves that Dresdner Bank, after having amortized its equity costs in 2005, was able in 2006 to increase profitability and obtain a post-tax return on equity employed of 10.9 %, excluding restructuring costs. We will continue to follow developments at Dresdner Bank very closely.
In the context of the transformation into an SE the Supervisory Board in its December meeting adopted new rules of procedure. These replaced the temporary procedures that the SE Supervisory Board had adopted at its constitutive meeting in September and which were only designed to remain in force until the employee representatives joined the Supervisory Board. These new rules of procedure were necessary so as to bring the existing Allianz AG Supervisory Board rules of procedure into line with the provisions in the SE Regulation, the German SE Implementation Act (SE-Einführungsgesetz) and the newly enacted Statutes of Allianz SE. In the course of adopting these new procedures we took a look at the split of responsibilities between the Supervisory Board plenary sessions and committees and also set up a new Risk Committee.
Further explanations on corporate governance in the Allianz Group are available in the combined Management and Supervisory Board report on pages 10 to 14 of this annual report. The Allianz website at www.allianz.com/corporate-governance also contains further information on corporate governance.
In order to efficiently exercise its functions, the Supervisory Board has set up an Audit Committee, a Standing Committee and a Personnel Committee and in December 2006 it also set up a Risk Committee. These committees prepare resolutions and the work of Supervisory Board plenary sessions. Also, in adequate cases authority to take decision has been delegated to committees themselves. The Conciliation Committee no longer exists because the German Co-Determination Act (Mitbestimmungsgesetz), which provides for such a committee, does not apply to Allianz SE. The current composition of these committees is set out in the following list.
Risk Committee Dr. Henning Schulte-Noelle (Chairman) Dr. Wulf H. Bernotat Prof. Dr. Renate Köcher Godfrey Robert Hayward Margit Schoffer
Standing Committee Dr. Henning Schulte-Noelle (Chairman) Dr. Gerhard Cromme Dr. Franz B. Humer Claudia Eggert-Lehmann Rolf Zimmermann
During financial year 2006 the Standing Committee held threemeetings (two as part of Allianz AG and one as part of Allianz SE) and two telephone conference calls dealing primarily with implementing themerger of RAS into Allianz AG, the transformation into an SE, the employee share purchase program and questions of corporate governance. The Personnel Committeemet on two occasions. Themeetings dealt with staffingmatters as well as the structure and amount of Management Board remuneration. No occasion arose that necessitated calling ameeting of the former Conciliation Committee.
The newly established Risk Committee held nomeetings in the last financial year. Its future role will be to supervise the establishment andmaintenance of the risk management and risk control system and its organization and development. Furthermore it monitors consistency of the risk strategy with overall business strategy and appraises itself of the general risk situation and any particular risk developments. Within the framework of the audit of the annual accounts and management reports, this committee is responsible for prior verification of any particular risk-related statements and for reporting to the Audit Committee on the results of this preliminary review.
The financial statements and the KPMG auditor’s report for financial year 2006 were made available to all members of the Supervisory Board in a timely manner. The financial statements and the results of the KPMG audit were discussed on a provisional basis by the Audit Committee in their meeting held on February 21, 2007. The final accounts and KPMG auditor’s reports were examined by the Audit Committee in its meeting on March 13, 2007 and in the Supervisory Board plenary session on March 14, 2007. The auditors took part in these discussions. They gave an account of themain findings of the audit and were available for any questions or further information.
On the basis of our own review of the financial statements of Allianz SE and Allianz Group, the management report and the Group Management Report and the recommendation for appropriation of earnings, wemade no objections and agreed with the result of the KPMG audit. We approved the financial statements for Allianz SE and Allianz Group drawn up by the Management Board; the individual accounts are therefore adopted. We concur with the proposal of the Management Board as to the appropriation of earnings.
The authority explained in themanagement report to buy back or make use of treasury shares or issue convertible bonds or bonds with warrants or issue new shares out of authorized capital enables the Management Board to raise capital swiftly and flexibly taking advantage of attractive financing opportunities as and when they arise on themarkets and, for example, offer Allianz stock as consideration whenmaking acquisitions of participations. Furthermore Allianz stock can be offered to employees of the Allianz Group. The authority to deal in own stock for trading purposes is especially useful for Dresdner Bank giving it the possibility to deal in Allianz stock.
The so-called “change of control” clause in Management Boardmembers’ contracts of employment for the eventuality that a member should leave the board following a change in control is explained in the remuneration report on page 18 of this report. The Supervisory Board considers this arrangement to be justified. It is only effective when one shareholder alone or acting with other shareholders, holds more than 50% of voting rights in Allianz SE. Furthermore, it only applies if there is a close link between leaving the board and the change of control, in that the provision requires that within 12months of the change of control the Supervisory Board terminates the appointment of the Management Boardmember concerned or themember leaves on the basis of an agreement or themember relinquishes, on account of materially diminished responsibilities, his or her appointment. The Supervisory Board also considers the amountsmentioned in this arrangement to be justified. Only in the case the remaining un-served period of the service contract is less than three years the compensation is higher than the remuneration for the remaining un-served period of the service contract. In such cases the amount of fixed remuneration and annual bonus claimable is increased corresponding to a period of three years. The same rules apply when a Management Board appointment is not renewed prior to the expiry of two years after the change in control. The change of control arrangement is designed to contribute to the independency of the Management Board’s opinion in the event of a possible change in control.
The Supervisory Board also considers the inclusion of a change of control clause in so-called Group Equity Incentive Plans to be justified; further details can be found on page 112 of this report. In providing for the non application, in the event of a change of control, of any limitation on the period for exercising rights under such plans, account is taken of the fact that the conditions under which the share price moves are very different when there is a change in control.
control and receive a compensation on the basis of the terms and conditions of the participation certificate, are, in our opinion, justified too, and correspond to usual market practice for the defense of the interests of holders of participation certificates.
With the transformation into an SE the appointments of themembers of the previous Allianz AG Supervisory Board came to an end. We have thanked the departing members of the Supervisory Board for their much appreciated work on our board.
As part of this transformation the Supervisory Board has been reduced to twelve members and is now composed of six shareholder representatives and six employee representatives. The six shareholder representatives in the Allianz SE Supervisory Board were appointed through the Statutes that formed part of themerger plan resolved at the Shareholders’ General Meeting of February 8, 2006. The shareholder representatives on the first Allianz SE Supervisory Board are Professor Dr. Renate Köcher, Dr. Wulf H. Bernotat, Dr. Gerhard Cromme, Dr. Franz B. Humer, Mr Igor Landau and Dr. Henning Schulte-Noelle.
The newly constituted Supervisory Board has elected Dr. Henning Schulte-Noelle as chairman. The Supervisory Board elected as deputy chairpersons Dr. Gerhard Cromme upon proposal of the shareholder representatives and Ms Claudia Eggert-Lehmann upon proposal of the employee representatives.
The appointments of Allianz AGManagement Board members also expired on the effective date of the transformation. They were all re-appointed by the Supervisory Board asmembers of the Allianz SE Management Board. The position of labour director within themeaning of section 33 of the German Co-determination Act no longer exists in Allianz SE. In accordance with the Agreement concerning the Participation of Employees in Allianz SE, the Management Board has appointed the former labour director, Dr. Gerhard Rupprecht, as Management Board member responsible for work and social welfare. The Supervisory Board has approved this appointment.
Allianz is now a European Company (SE) and still has a responsibility to achieve excellence in its corporate governance and corporate controls.
Allianz AG has adopted the form of a European Company (Societas Europaea or SE) on October 13, 2006, and is the first DAX and first EURO STOXX 50 company to do so. This step comes along with a couple of important changes in the corporate governance structure. In particular, the reduction of the size of the Supervisory Board to 12 members and the Europeanization of its composition constitute a milestone for themodern and efficient corporate governance of Allianz.
Board of Management The board of management is responsible for managing Allianz SE and the Allianz Group. Corresponding to the international scope of the Allianz Group’s business, the internationally composed board of management currently consists of 11 members. Themanagement board’s main responsibilities are the determination of the business objectives and the strategic directions, the coordination and supervision of the operating entities, as well as the implementation and supervision of an efficient risk control system. The chairman of the management board coordinates the board’s activities. As a consequence of the transformation into Allianz SE, the position of the chairman was strengthened by providing himwith a statutory veto right with respect to the management board’s decisions. If he objects a decision, that decision is deemed to be not taken. On the other hand, he can not bind the board of management to any decision against themajority vote. In cases of equal votes the chairman has the casting vote. This definition of the chairman’s position is essentially in line with the already exercised practice.
The board of management reports regularly and comprehensively to the Supervisory Board on the business developments, the financial and profit situation, the planning and achievement of objectives as well as on the strategy and existing risk exposures. Certain important decisions of themanagement board, for example, major acquisitions or divestments of strategic stakeholdings, the conclusion of significant agreements or the opening or closure of important business segments require approval from the supervisory board.
The size of the supervisory board has been reduced from 20 to 12members. Six of these members are appointed pursuant to a nomination by the employees. For the first time in the history of Allianz there are employee representatives from several European countries on the supervisory board. In accordance with the agreement on employee representation in Allianz SE, the seats for the 6 employee representatives are arranged in proportion to the total number of Allianz employees in the EUmember states. The first supervisory board and the supervisory board that will be elected at the 2007 General Meeting consists of 4 employee representatives from Germany and one each from France and the UK. Given that the duration of nominations to the first Supervisory Board is limited by law to the next Annual General Meeting, the entire Supervisory Board will newly be elected by the Annual General Meeting of Allianz SE on May 2, 2007. As regards the election of employee representatives, the General Meeting is bound to accept the candidates proposed by the company employees.
The supervisory board oversees and advises the board of management onmanaging the business. Furthermore, the supervisory board is responsible for appointing the members of the board ofmanagement and the determination of their remuneration as well as the review of Allianz SE’s and Allianz Group’s annual financial statements. The supervisory board takes all decisions on a simplemajority. The special decision-making provisions for the appointment ofmembers of the board of management contained in the law on co-determination as well as the requirement to establish amediation committee, no longer apply. In cases of tied votes, the casting vote lies with the chairman of the Supervisory Board, or, if he is not present, with the deputy chairman representing shareholder interests. Another deputy chairman is elected on recommendation of the employee representatives, but he has no casting vote.
The Audit Committee is responsible for the preliminary review of the annual financial statements of the company and the group as well as the respective management reports (including the risk report) and the recommendation on profit distribution. In addition, it reviews the quarterly reports and the US annual report on Form 20-F. Finally, the audit committee is an important contact for the external auditor, whose independence it supervises.
The Standing Committee is responsible for the approval of certain transactions that need to be approved by the supervisory board. These include, in particular, certain capital measures and acquisitions or divestments. Furthermore, the standing committee is responsible for the preparation of the compliance statement pursuant to section 161 of the German Stock Corporation Act (AKtG) as well as for the periodic review of the company’s corporate governance and the efficiency of the Supervisory Board’s activities.
The Personnel Committee is responsible for personnel matters concerningmembers of the board of management. It prepares the nomination of members of the board of management, takes decisions concerning their contracts with the company, including the remuneration of the board of management and is involved in long-term succession planning for the board of management.
The Directive on Shareholders Rights, that is intended to establish a uniformminimum standard in Europe regarding the information and the use of voting rights in general meetings and, in particular, to eliminate obstacles to the use of voting rights across borders, is currently under discussion. This issue is also important given the often insufficient presence at general meetings. In this regard the use of registered shares offers the advantage that documents can be sent directly by letter or e-mail to the shareholders registered in the share register and registration and exercise of voting rights can be done over the internet. A major obstacle in the exercise of voting rights across borders is that currently there is insufficient registration of actual shareholders in the share register or that the documents for the general meetings are not passed on or the use of the right to exercise voting rights by intermediaries. Apart from this directive, there are several discussions under way in Germany aiming to increase the low numbers of people attending general meetings.
Furthermore, the European Commission in the autumn of 2006 commissioned a study on the implementation across Europe of the principle of “One share - one vote”.
The German Corporate Governance Code (the “Code”) applies as amended on June 12, 2006. Besides setting out important legal provisions, the Code also contains recommendations and suggestions for good corporate governance. There is no legal obligation to follow these standards. Under section 161 of the German Stock Corporation Act, listed companies are, however, obliged to make a declaration of compliance following the terms of the Code’s recommendations on the basis “comply or explain”.
2. Since the last Declaration of Compliance as of December 15, 2005, which referred to the German Corporate Governance Code in its June 2, 2005 version, Allianz SE has complied with all recommendationsmade by the Government Commission on the German Corporate Governance Code then in force.”
Furthermore, we comply with the non-binding suggestions of the German Corporate Governance Code with the exception that the shareholder representatives on the Supervisory Board are, in principle, not elected to staggered terms, as suggested by the Code. It is preferable, in our view, for a Supervisory Board with employee co-determination to retain a uniform term of office.
In the previous financial years we had already been working intensely on the implementation of section 404 of the Sarbanes Oxley Act (SOA) and eliminated discovered weak points. We have extensively documented our control system over financial reporting and tested its effectiveness. For the first time this year, we will disclose the results of auditing our compliance with SOA section 404 in our US annual report on Form 20-F.
At management level in Allianz SE and in the larger group companies, we have put in place Disclosure Committees. In the Allianz SE Disclosure Committee first drafts of the financial reports are reviewed and discussed by the heads of the relevant units. In this way the Disclosure Committee assists the board of management and particularly the Chairman of the board of management and the Chief Financial Officer in providing
their certifications of the financial statements to the SEC, as laid down in the SOA.
In addition, we are subject to the NYSE corporate governance standards. These rules are only partially binding on foreign issuers. Nevertheless, we are obliged to disclose themain differences between our own corporate governance and NYSE standards in short summary form. Themain differences arise particularly from our two-tier board system, employee representation on the Supervisory Board and different legislation and best practice standards in Germany and in the EU. A summary of these differences is available on our website under www.allianz.com/corporate governance.
Members of the Board of Management and of the Supervisory Board are required, pursuant to section 15a of the German Securities Trading Act (WpHG), to disclose any acquisitions or divestments of Allianz SE securities, provided the value of such acquisitions or divestments made by the boardmember or any person close to him or her reaches or exceeds 5,000 euros in one calendar year. These declarations are published on our website under www.allianz.com/corporate governance. On September 22, 2006 Ms Claudia Eggert-Lehmann, member of the Supervisory Board, sold 55 shares in (formerly) Allianz AG at a price of € 135.18.
Shares held by members of the Management Board and the Supervisory Board
The total holdings of members of the Management Board and the Supervisory Board in Allianz SE as of December 31, 2006 amounted to less than 1 percent of the company’s issued stock.
The remuneration of the Board of Management consists of different components and is aimed at supporting a sustained value-orientedmanagement. Therefore, a distinction should bemade between fixed salary, performance-based remuneration and equity-based remuneration as a long-term incentive. The amount of total remuneration of individual Board Members is dependent upon the delegated role and accountability, individual performance, achievement of the financial goals of the Allianz Group and of the respective business unit, as well as the evolution of the Allianz SE share price. The remuneration of the Board of Management is set by the Personnel Committee within the Supervisory Board while consideringmarket and competition. Moreover, the structure of remuneration is regularly reviewed and discussed at the Supervisory Board.
In detail, the remuneration of the Board of Management comprises the following components: Fixed salary The fixed amount is paid as amonthly basic salary unrelated to performance. It is reviewed at the latest every three years. The amount is firstly influenced by the delegated role and accountability and, secondly, by external market conditions.
Equity-based remuneration This element consists of virtual options (“Stock Appreciation Rights”, SAR) and virtual stocks (“Restricted Stock Units”, RSU). It is identical to the Allianz Equity Incentive Programwhich around 700 topmanagers and approximately 100 top performing future leaders participate in worldwide. Its value is aligned to the evolution of the Allianz SE share price. More detailed information on equity-based remuneration components can be found under Note 48 of our consolidated financial statements and on the internet at www.allianz.com/ corporate governance.
Performance-based remuneration and equity-based remuneration together form a three-tier incentive system as presented in the following overview: Three-tier incentive system
Miscellaneous Themembers of the Board of Management also receive perquisites. These are essentially contributions to accident and liability insurances as well as the provision of a company car; they are taxed individually as a remuneration component for each individual Board Member. In total, the value of perquisites amounted to
The following table sets forth the total remuneration each individual member of the Board of Management of Allianz SE received in 2006.
SARs can be exercised any time from May 17, 2008 to May 16, 2013 at the latest after the expiration of a blocking period, under the condition that the price of the Allianz SE share is at least € 158.89 and that it at least once during the plan period exceeded the Dow Jones Europe STOXX Price Index (600) during a period of five consecutive trading days. Moreover, the Board of Management has voluntarily committed to hold options in principle until the end of plan as long as the share price has not already reached the defined maximum relevant for the exercise of the specific SARs. For further information on the SARs please refer to Note 48 of the consolidated financial statements.
Remuneration for Allianz Group Mandates and for Mandates from outside the Allianz Group If a member of the Board of Management accepts mandates in other companies and receives compensation for it, the amount is fully transferred to Allianz SE in the case of Allianz owned companies. In case of remuneration received frommandates in companies outside the Allianz Group, 50% of it is normally transferred to Allianz SE. In 2006, the remuneration that themembers of the Board of Management were entitled to keep after payment to Allianz SE amounted to € 397,225. The remuneration frommandates in companies outside the Allianz Group is shown in the Annual Reports of the companies concerned.
For a list of Supervisory Boardmandates in companies outside the Allianz Group see page 240 to 241.
The Allianz Group has paid € 3.6 million (2005: € 2.0 million) to increase pension reserves and reserves for similar benefits for active members of the Board of Management. On December 31, 2006, pension reserves and reserves for similar benefits to members of the Board of Management who were active at that date, amounted to € 23.1 million.
If service is terminated as a result of a so-called “change of control”, the following separate regulation additionally applies: A change of control requires that a stockholder of Allianz SE acting alone or together with other stockholders holds more than 50% of voting rights in Allianz SE. If the appointment of a member of the Board of Management is unilaterally revoked by the Supervisory Board as a result of such a change of control within a period of twelve months after the change of control, membership terminates by resignation jointly or from the side of the concernedmember of the Board of Management, because his or her responsibilities as manager are substantially decreased and, without the concerned Board Member culpably giving cause for termination, he receives the contracted benefits for the rest of the duration of his or her employment contract paid in the form of a lump-sum payment. The amount depends on the following determining factors: the fixed salary at the change of control, the annual and current three-year bonus, in each case discounted according to market conditions at the time of payment. A target achievement of 100% is the basis for the annual or three-year bonus. If the remaining duration of the service contract is not at least three years at the time of the change of control, the lump-sum payment increases in regard to fixed salary and annual bonus to correspond to a term of three years. If the concernedmember of the Board of Management completes his or her 60th year of age before three years have elapsed, the lump-sum payment decreases correspondingly. In view of equity-based remuneration the concernedmember of the Board of Management is treated as a pensioner according to the respective conditions of the pension plan. These regulations are effective correspondingly if the Board of Management mandate is not extended within two years after a change of control.
Benefits to retired Members of the Board of Management In 2006, remuneration and other benefits of € 4.3 million (2005: € 4.3 million) were paid to retiredmembers of the Board of Management and their surviving dependents. Additionally, a reserve for current pensions and accrued pension rights totaled in € 47.0 million
Remuneration system The remuneration of the Supervisory Board is based on the size of the company, the functions and responsibilities of themembers of the Supervisory Board and the financial situation of the company. It is determined by the Annual General Meeting. Remuneration for the Supervisory Board of Allianz AG was regulated in clause 9 of the Articles of Association of Allianz AG. In connection with the conversion of Allianz AG into Allianz SE, effective October 13, 2006, the regulations for remuneration of the Supervisory Board were transferred unchanged into clause 11 of the Articles of Association of Allianz SE.
Three components make up the Supervisory Board’s remuneration: a fixed sum of € 50,000 and two performance-based components. One of the performance-based components has a short-term orientation and depends on the increase of consolidated earnings-per-share in the previous fiscal year; the other is long-term and focuses on the cumulative trend in this indicator over the past three years.
Themaximum sum for each of the two variable remuneration components is limited to € 24,000. This means that with the fixed sum of € 50,000 themaximum total compensation for an ordinary Supervisory Board member amounts to € 98,000. This maximum amount is achieved when the previous year’s earnings-per-share have risen by 16% and when this indicator has further improved by a total of 40% or more over the last three years. If there has been no improvement in corporate earnings-per-share during the relevant period (i.e. the past fiscal year or the past three years), no performancebased remuneration will be awarded.
There is also a cap on the total remuneration of each member of the Supervisory Board. It is reached when the Chairman of the Supervisory Board has been awarded triple and the other members of the Supervisory Board double the remuneration of an ordinary member of the Supervisory Board.
Remuneration of the Supervisory Board of Allianz AG On October 13, 2006, when the conversion of Allianz AG into Allianz SE became effective, themandates of the present Supervisory Boardmembers of Allianz AG were terminated. Therefore, they received a time-apportioned 10/12 of the above-described remuneration for their activity in 2006 according to clause 9 paragraph 4 of the Articles of Association of Allianz AG. The fixed sum for fiscal year 2006 was thus 10/12 of € 50,000, i.e. € 41,667. In 2006, both performance-based remuneration components reached € 24,000 because the consolidated earnings-per-share improved bymore than 16% in 2006 andmore than 40% during the period from 2003 to 2006. Because of the time-apportioned calculation both performance-based remuneration components total for the Chairman and Deputy Chairman of the Supervisory Board as well as the Chairman and the members of committees is determined based on these amounts.
Remuneration of the Supervisory Board of Allianz SE The newly constituted first Supervisory Board of Allianz SE was established with the completion of the conversion of Allianz AG into Allianz SE, effective October 13, 2006. Employee representatives were legally appointed on October 27, 2006. The remuneration for the appointment period of members of the first Supervisory Board until the regular Annual General Meeting on May 2, 2007 can be determined only by the Annual General Meeting according to clause 113 paragraph 2 of the German Stock
Remuneration for Mandates in other Allianz Group subsidiaries In connection with the assumption of Supervisory Board or similar mandates in other companies of the Allianz Group, Dr. Diethart Breipohl received € 57,829, Claudia Eggert-Lehmann € 45,000, Peter Haimerl € 67,500, Igor Landau € 45,000, Sultan Salam € 45,000 and Margit
Loans to Members of the Board of Management and Supervisory Board Loans granted by the Dresdner Bank AG and other Allianz Group companies to members of the Board of Management and Supervisory Board totalled € 61,285 on the date of balance. Loans are provided at standard market conditions or at those conditions also valid for employees. The repaid amounts of these loans amounted to € 12,168 in 2006. Moreover, overdraft facilities were granted to members of the Board of Management and Supervisory Board as part of existing account relationships, likewise corresponding to conditions according to market standard or those valid for employees.
Dr. Henning Schulte-Noelle Chairman Former Chairman of the Board of Management Allianz AG
Dr. Gerhard Cromme Vice Chairman Chairman of the Supervisory Board ThyssenKrupp AG
Godfrey Robert Hayward since October 27, 2006 Employee, Allianz Cornhill Insurance plc, UK
Prof. Dr. Rudolf Hickel until October 13, 2006 Professor of finance, University of Bremen
Jörg Reinbrecht since October 27, 2006 Trade Union Secretary, ver.di Bundesverwaltung
Dr. Manfred Schneider until October 13, 2006 Chairman of the Supervisory Board Bayer AG
Prof. Dr. Dennis J. Snower until October 13, 2006 President Institut für Weltwirtschaft, University of Kiel
Dr. Gerhard Rupprecht Insurance Germany, Director responsible for Work and Social Welfare
In addition to members of the Allianz SE’s Board of Management, the International Executive Committee includes the heads of the major subsidiaries. Chaired by Michael Diekmann, this body discusses overall strategic issues at an Allianz Group level.
We are a leading financial services provider seeking a market capitalization which ranks us among the ten largest international companies in our industry. Our success is based on a consistent long-range strategy aimed at generating returns in excess of the capital cost, regardless of the underlying trend. Although our strategy has global reach, we do not wish to operate everywhere with the same level of commitment. Our core markets are Europe, the USA, and a series of Asian countries whose economies have shown to be highly dynamic over the long term. Through broad implementation of our “3+One” program we have laid the foundation for a significant increase in our market value and are now making a major effort to develop new areas offering high-yield growth.
We have been very successful in implementing our 3+One program. Allianz has recaptured its ability to operate profitably in every conceivable setting. This is demonstrated by our performance, even under difficult conditions, in the financial and insurancemarkets. A strengthened capital base, higher operating profitability and less complexity were the objectives signified by the “3” in our program. Not only were these goals achieved; in some areas they were substantially exceeded. We will nevertheless continue to work on these goals and will continue replacing what is good with what is better. Moving forward, our main focus will now be on sustainably boosting our competitiveness and shareholder value, the “+One” in the Allianz program. This dimension, too, has already seen considerable progress. Our strategic initiatives “Sustainability” and “Customer Focus”, together with the new operating model, will produce top results, and are already improving our performance in some areas. Nonetheless, the progress made is not enough to enhance our position on a truly sustainable basis in a highly competitive environment. In particular, we recognize the need to improve growth andmarket share in our core markets.
We are continuously monitoring trends and analyzing how they impact our markets and business opportunities. In doing so our focus is not solely on our traditional segments; we also seek additional business options that have not been in the focus of large international financial service providers, for example assistance services.
The interconnectedness of the global economy is altering patterns of mobility andmigration; newmiddle classes are emerging, and in general there is rapid growth in the significance of previously economically peripheral regions. Customer requirements in highly developed countries are also changing in the wake of globalization. Our growth strategy targets these trends. For example, we are developing new areas of business in the USA, Middle East, India and Japan, enabling us to tap into additional potential for growth in thesemarkets.
In 2006 the Allianz share continued its strong performance of the previous year. The share price rose by 21%, finishing the year at € 154.76 per share. On the one hand this increase is an endorsement by the market of our operational performance, which has improved yet again, and on the other hand it highlights that our strategic initiatives have been convincing, and that you, our shareholders, have confidence in Allianz’s ability to sustain its profitable growth also in the future.
Source: Thomson Financial Datastream Current information on the development of the Allianz share price is available on the internet at www.allianz.com/stock.
The 2006 price trend was a factor in our stock also producing an attractive return of 15.6% per year, viewed over three years. To calculate the performance of your own investment in Allianz shares, you can use the share performance calculator available online at www.allianz.com/stock.
Shareholder structure as of December 31, 2006 in % of subscribed capital
Basic earnings per share € 17.09 11.24 6.19 Price-earnings ratio 9.1 11.4 15.8
Communication with our investors is important to us. In 2006 we visited a total of 387 investors in 19 cities worldwide and dedicated 41 days to discussing the current course of business and answering any questions. Once a year we organize an analysts’ conference and, for some time now, also a “Capital Markets Day”. This has already become a subject of high interest and is now firmly established in the calendar of events. In the year under review it dealt intensively with our customer focus initiative, with the reorganization of our German insurance business and with our investment banking. More than 50 analysts participated. Overall in 2006 we held 348 meetings with analysts and institutional investors, which was 16%more than in the previous year. The Investor Relations team replied to about 8,800 queries from private investors.
Our Investor Relations again received several awards in 2006. Across a range of industries, “Investor Relations Magazine” placed Allianz among the best five companies in continental Europe in the category “Best Investor Relations”.
• The Allianz Newsletter informs you promptly by e-mail about news and events of the Allianz Group. You can register atwww.allianz.com/newsletter-e.
Contents 34 Executive Summary and Outlook 35 Allianz Group’s Consolidated Results of Operations 39 Recently Adopted and Issued Accounting
Paragraph 4 of the German Commercial Code and Explanations 113 Reconciliation of Consolidated Operating Profit and Total Revenue Growth
The statements contained hereinmay include statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words “may”, “will”, “should”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, or “continue” and similar expressions identify forward-looking statements.
2) Compound annual growth rate (or “CAGR”) is the year-over-year growth rate over a multiple-year period. 3) Does not include minority interests.
Property-Casualty Gross premiums written were flat at € 43.7 billion reflecting average constant prices and a 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.
slightly increased sales volume. On an internal growth basis, premium volume was upmarginally by 0.3%.2) We continued to manage local market cycles and to write profitable 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.
Life/Health Most of our operationsworldwide continued to record statutory premiumgrowth, such as inGermany, France, Asia-Pacific, New Europe and Spain. In 2006, our growthmarkets of Asia-Pacific andNew Europe, in aggregate, contributed 9.6% of our total Life/Health statutory premiumvolume. However, due to considerable decreases in theUnited States and Italy, total Life/Health statutory premiumswere down slightly by 1.8% to € 47.4 billion.We believewewill regain growthmomentum in thesemarkets. Based on internal growth, statutory premiums decreased by 1.6%.2)
At € 10.4 billion in 2006, up 29.8% over the prior year, we continued to significantly grow our consolidated operating profit. All operating business segments exhibited strong double-digit increases.
Property-Casualty Operating profit increased to € 6.3 billion, reflecting our strong underwriting profitability. Our combined ratio improved again from an already very competitive level to 92.9% in 2006, 1.4 percentage points better than a year ago. Both lower severity and frequency of claims contributed to this development. In particular, the exceptionally heavy damages in 2005 frommajor natural catastrophes in the United States, Central Europe and Asia were not repeated in 2006. In addition, our Sustainability Program2) has helped us improve the effectiveness and efficiency of workstreams.
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 of a cost-income ratio of below 80%.
Asset Management We continued to deliver doubledigit operating profit growth and improved our costincome ratio to 57.6% from an already competitive level in 2005. While at the same timemaking 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.
Non-operating items amounted to an overall expense of € 63 million, down € 111million from 2005. In particular, increased restructuring charges were offset by higher realized gains.
Restructuring charges amounted to € 824 million, € 724 millionmore than last year. This increase primarily reflects the reorganization of our German insurance operations and the “Neue Dresdner Plus” reorganization program.3)
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,
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 amore 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. 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 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.
To the extent the Company holds treasury shares on the day of the Annual General Meeting, which are not entitled to dividends pursuant to clause 71 b of the German Stock Corporation Act (Aktiengesetz), the amount attributable to such shares shall be carried forward to new account.
In the following section, we present the expected developments of certain key financial indicators. Among other factors, our expectations are based on the economic and industry outlook described below.
In the years 2007 to 2009, we expect average annual consolidated operating profit growth of 10% from the 2006 level, partly adjusted for the particularly favorable natural catastrophe trend.
factors stated on page 33 in our cautionary note regarding forward-looking statements, may severely impact our results of operations.
Allianz filed the draft tender offer to acquire all outstanding AGF shares on February 22, 2007 with the Autorité des Marchés Financiers (AMF). The acceptance period is being expected to start on March 23, 2007 after the draft tender offer has been approved by the AMF. The consideration for one AGF share provided in the offer is 0.25 of an Allianz SE share to be issued in the exchange for one AGF share, and € 87.50 in cash subject to the following adjustments: • Increased by an amount equal to the dividend per Allianz SE share for 2006multiplied by 0.25 as Allianz SE shares issued due to the tender offer will not carry the rights to dividends for 2006; and
• reduced by the amount of any dividend per AGF share paid after February 22, 2007 but not received by Allianz SE.
Once again, Asia is themost powerful growth driver in the global economy; we expect growth of over 7% here, as compared to 8% in 2006. The highest growth rates are once more expected to be achieved by China (9.5 %; 2006: 10.5%) and India (8%; 2006: 9%). Most other economies in Asia are expected to continue their growth trend of last year, with the exception of Singapore, where the 7.5% rate in 2006 could fall to 5% in 2007. For Japan, we expect economic growth to remain unchanged at 2% (2006: 2.1%).
We believe that the US economic situation in the United States will slow down to 2.5%, compared to 3.4% in 2006, due to the interest rate rises and the downturn in the real estate market last year. Growth in the European Union (EU) should also flatten to a similar level (2006: 2.8%). Among the larger EU states, France will match last year’s growth. The dynamism of the German economy will fall, and we forecast growth of 1.75% (2006: 2.7%). The dent in growth at the start of the year, linked to increased value added tax (VAT) rates, is expected to recede as the year progresses. Private consumption should suffer most due to the higher tax. However, the German economic situation is bolstered by the good position of German export firms, which are benefiting from continuing dynamic global trade.
Interest rate movements will be limited in 2007, as inflationary pressure is declining and the economy is slowing down. This means that the prerequisites are met for central banks to increase interest rates slightly at most, in the United States even an interest rate reduction seems possible. The U.S. Dollar will be quoted at rather a weak rate compared to the Euro. As earning prospects for companies are not quite as good as in 2006 and last year saw sharp price rises in stock markets, we are no longer as positive about equity markets as we were then.
Industry outlook – Good framework conditions overall for financial service providers
An ageing society with a simultaneous reduction in the level of health care support by state pension systems will continue to be an important demand driver for private and corporate life and health insurance in the short term. As state pension systems inmany countries have not been adapted to the demographic reality yet or only inadequately so, the future prospects for life and pension insurance remain highly positive. Health systems also have to be adapted to cater for ageing; in view of the high costs for the old, higher own contributions by patients are unavoidable. This irreversible trend opens up new, additional business opportunities for private health insurers.
Property-Casualty insurance is characterized by highly intensive competition. This has led to a situation where the battle for market share is being waged at the expense of margins in some countries or business sectors. The bullish economic trend, in particular in Asia with its growth dynamics, offer asset insurers interesting new business opportunities.
• Further operating profit growth of 22% to € 6.3 billion after an already strong year in 2005.
• We sustained our successful strategy of selective use of market opportunities.
United Kingdom Asia-Pacific and Rest of World 1) After elimination of transactions between Allianz Group companies in different geographic regions and different segments. Gross premiums written from our specialty lines have been allocated to the respective geographic regions.
South America 1) Before elimination of transactions between Allianz Group companies in different geographic regions and different segments.
We continued to benefit from our global diversification and themeasures implemented as part of our Sustainability Programwhich allow us to take selective advantage of market opportunities and to perform local market cycle management.
Our significantly improved underwriting profitability was themain 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 than 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. The exceptionally high losses from natural catastrophes in the prior year were not repeated. In addition, our motor business experienced severity increases which were clearly lower than inflation. Accordingly, our accident year loss ratio improved by 2.8 percentage points to 67.6%.
Acquisition and administrative expenses (net), at € 10,590 million in 2006, were € 374 million higher than last year. This drove our expense ratio up by 80 basis points to 27.9%.
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 whichmany employees at Allianz Sach took advantage.
Restructuring charges were up € 294 million to € 362 million, stemming primarily from the reorganization of our German insurance operations.1)
Net income increased 34.3% to € 4,746 million, driven both by our significantly improved operating profitability and the higher gain from non-operating items.
1) Please see “Allianz Group Success Factors – Important Group Organizational Changes – Reorganization of German Insurance Operations” and Note 49 to our consolidated financial statements for further information.
Minority interests in earnings decreased by 10.6% to € 739 million primarily as a result of theminority buyout at RAS in Italy.
1) For the Property-Casualty segment, total revenues are measured based upon gross premiums written. 2) 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 5 to the consolidated financial statements.
The following tables set forth our property-casualty gross premiums written, premiums earned (net), combined ratio, loss ratio, 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.
2) The decline since 2004 is due to the merger of International Reinsurance Company S.A. into Allianz SE. The remaining operating profit amounts reflect run-off. 3) In December 2004, we sold our Property-Casualty insurance business, other than our industrial insurance risks business, in Canada. 4) Represents elimination of transactions between Allianz Group companies in different geographic regions. 5) Presentation not meaningful.
Within New Europe – our growthmarkets 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 sixmarkets. 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’s1)
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 the bancassurance channel. In addition, at RAS Group, our share in the total life production of our joint venture partner UniCredit Group decreased.2)
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 improvedmargins both from our new and in-force business, as well as efficiency gains inmany 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 participation amount to our policyholders.
1) The National Association of Securities Dealers (or “NASD”) is a private-sector provider of financial regulatory services in the United States.
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).
Non-operating items, in aggregate, resulted in a gain of € 135 million after a gain of € 177 million a year ago. This development largely mirrors higher non-operating restructuring charges, at € 34 million in 2006, mainly in connection with the reorganization of our German insurance operations.1)
With income tax expenses of € 641 million in 2006, up € 153 million from a year ago, our effective tax rate increased to 23.7% (2005: 21.5%). Both in 2006 and 2005, our 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 yearswere the capitalization of corporate tax credits inGermany in 2006 and a beneficial tax settlement in theUnited States in 2005.
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.
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 policyholders2) 3,087 2,523 1,990 Fee and commission income 630 507 224
Income before income taxes and minority interests in earnings 2,700 2,271 1,613
Statutory expense ratio4) in % 9.6 8.4 8.5 1) 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.
United Kingdom4) — — 198 — — 79 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 investmentoriented products, in accordance with the statutory accounting practices applicable in the insurer’s home jurisdiction.
2) Loss ratios were 68.4%, 69.7% and 68.9% for the years ended December 31, 2006, 2005 and 2004, respectively. 3) On December 31, 2004, AVIP and Martin Maurel Vie were consolidated within the Life/Health insurance operations in France. 4) In December 2004, we sold our life insurance business in the United Kingdom in order to concentrate on our Property-Casualty insurance business in that region. The remaining operating profit amounts reflect run-off.
5) Contains, among others, the Life/Health business assumed by Allianz SE, which was previously reported under Germany in the Property-Casualty segment. Prior year balances have been adjusted to reflect this reclassification and allow for comparability across periods. 6) Represents elimination of transactions between Allianz Group companies in different geographic regions. 7) Presentation not meaningful.
• Strong growth of operating revenues and operating profit, outperforming our expectations.
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.
Dresdner Bank’s operating revenues strongly increased to € 6,811 million, up 12.8% from a year ago. All income categories contributed to this development, with doubledigit growth rates in net interest income and net trading income. Both operating divisions, Private & Business Clients (or “PBC”) and Corporate & Investment Banking (or “CIB”) 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.
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 increasedmerger 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 € 1,248million 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 incomewas 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 € 113million in 2006, after a positive effect of € 132million in 2005.
Wemore 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
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
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.
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 charges increased by € 410 million to € 422 million, reflecting the “Neue Dresdner Plus” reorganization programwhich was finally agreed between the Board of Management and the works council of Dresdner Bank AG in late December 2006.2)
With income tax expenses down 35.9%, our effective tax rate decreased from 25.6% to 19.7%. This development wasmainly attributable to higher tax exempt income and the capitalization of corporate tax credits in Germany, while income before income taxes was lower in 2006.
The following table sets forth the income statements and cost-income ratios for both our Banking segment as a whole and Dresdner Bank for the years ended December 31, 2006, 2005 and 2004.
2) Represents interest and similar income less interest expense. 3) Represents fee and commission income less fee and commission expense.
4) 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 5 to the consolidated financial statements.
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.
Corporate & Investment 1) Our reporting by division reflects the organizational changes within Dresdner Bank in 2006, resulting in two operating divisions. Private & Business Clients combines all banking activities for private and corporate customers formerly provided by the Personal Banking and Private & Business Banking divisions. Furthermore, Corporate & Investment Banking combines the former Corporate Banking and Dresdner Kleinwort Wasserstein divisions. Prior year balances have been adjusted accordingly to reflect these reorganization measures and allow for comparability across periods. After a final agreement between the Board of Management and the works council of Dresdner Bank AG in late December 2006 and effective starting with the first quarter of 2007, the future business model of Dresdner Bank will consist of two new operating divisions Private & Corporate Clients and Investment Banking. According to this future business model, we will integrate our business activities with medium-sized corporate clients into that with private and business clients. In the table above, our medium-sized business clients remain in Corporate & Investment Banking. The future business model with the two new business divisions Private & Corporate Clients and Investment Banking is not reflected in the table above.
In 2006, we faced a volatile and challenging capital market environment. Whereas in the first, third and fourth quarter, equity capital markets developed favorably worldwide, the second quarter showed substantial declines inmarket values. In the fixed income capital markets, substantial decreases in fixed income indices occurred throughout the first half of the year, following the increases inmarket interest rates, and values only recovered slowly during the second half of the year.
This capital market environment led to mixed developments in the asset management industry. For example, net flows in the fixed incomemutual fund market in the United States turned negative during the second quarter of 2006. In Germany, the equity and fixed incomemutual fundmarkets recorded net outflows in 2006, whereas balanced andmoneymarket 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 one of the largest asset managers worldwide, based on total assets under management.1)
The followinggraphspresent the third-party assetsmanaged by theAllianzGroupby geographic region, investment category and investor class as ofDecember 31, 2006 and 2005.
Third-party assets under management – Fair values by investor class in € bn
• Particularly strongnet inflowsof approximately € 7billion at our equity fundmanagerNFJ InvestmentGroup.
• PIMCO CommodityRealReturn Funds began trading on June 29, 2006 and already successfully raised USD 773million in assets to December 31, 2006.
Ourmajor achievements in 2006 included: • Allianz Global Investors Germany ismarket leader in the innovative segment of certificate funds.1)
• Deutscher Investment-Trust Gesellschaft für WertpapieranlagenmbH (or “dit”) ranked first in the “Most Improved Group” of Standard & Poor’s German Fund Awards 2006.
• dit was awarded five stars by the German financial magazine “Capital”, the highest possible score.
Accordingly, the discussion of our Asset Management segment’s results of operations relates solely to the operations of AGI.
Administrative expenses, excluding acquisition-related expenses, at € 1,713 million in 2006, were up 9.8%, representing a considerably less than proportionate increase compared 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.
In aggregate, the net loss from non-operating items decreased significantly from € 708million to € 556 million. Thereof, at € 532 million, acquisition related expenses declined 22.6%. This decrease wasmainly driven by a lower number of outstanding PIMCO LLC Class B Units (or “Class B Units”) in 2006 as compared to 2005. As of December 31, 2006, the Allianz Group had acquired 21,762 of the 150,000 Class B Units originally outstanding. Going forward, we expect acquisitionrelated expenses to bemainly 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 for further information on the Class B Units. Amortization of intangible assets of € 23 million in 2006 was related to themerger of dit and dbi to Allianz Global Investors Kapitalanlagegesellschaft mbH, previously mentioned. Thereby, our dit brand was fully written off in 2006.
The following table sets forth the income statements and cost-income ratios for both our Asset Management segment as a whole and AGI for the years ended December 31, 2006, 2005 and 2004.
Deferred purchases of interests in PIMCO (523) (523) (677) (677) (501) (501)
Income (loss) before income taxes and minority 1) Represents fee and commission income less fee and commission expense.
2) Represents interest and similar income less interest expense and investment expenses. 3) For the Asset Management segment, total revenues are measured based upon operating revenues. 4) The total of these items equals acquisition and administration expenses (net) in the segment income statement in Note 5 to the consolidated financial statements.
5) Consists of retention payments for the management and employees of PIMCO and Nicholas Applegate. These retention payments largely expired in 2005. 6) Includes primarily the impairment of the dit brand name in 2006 and amortization charges related to capitalized bonuses for PIMCO management. These amortization charges expired in 2005. Until December 31, 2005, these amortization charges were classified as acquisition-related expenses. Prior year balances have been reclassified to allow for comparability across periods.
See Note 5 to the consolidated financial statements for our Corporate segment’s income statement for the years
Non-operating items Net expenses from non-operating items decreased by € 654 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 contributedmost. In addition, non-operating items benefited from a lower net loss from financial assets and liabilities held for trading in comparison to 2005 when the effects of derivatives from an equity-linked loan issued in connection with financing the cash tender offer for the outstanding RAS sharesmade a significant negative impact. Interest expense from external debt, at € 775 million in 2006, remained relatively constant.
The following table sets forth the Allianz Group’s consolidated balance sheets as of December 31, 2006 and 2005.
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
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 andminority 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.
Financial assets and liabilities carried at fair value through income Financial assets for unit linked contractsInvestments
2) 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 with the value of financial liabilities for unit-linked contracts.
3) Does not include affiliates at € 2.8 bn and € 3.1 bn as of December 31, 2006 and 2005, respectively.
4) Includes debt securities at € 7.3 bn and € 7.5 bn as of December 31, 2006 and 2005, respectively, equity securities at € 2.9 bn and € 2.3 bn as of December 31, 2006 and 2005, respectively, and derivative financial instruments at € (4.4) bn and € (2.8) bn as of December 31, 2006 and 2005, respectively.
The following graph sets forth the development of our Property-Casualty asset base.
Financial assets and liabilities carried at fair value through income Investments
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 repurchasemarket. 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.
Banking loans and advances to banks and customers in € bn
The developments within our collateralized refinancing activities at Dresdner Bank, previously described, also led to an increase in our liabilities to banks and customers, namely in the form of repurchase agreements and collateral received from securities lending transactions.
Our liquidity resources result from the operating activities of our Property-Casualty, Life/Health, Banking and Asset Management segments, as well as from capital raising activities. In the context of a financial services company, where our working capital is largely representative of our liquidity, we believe our working capital is sufficient for our present requirements. For information on themanagement of our liquidity risk please see our Risk Report on page 86.
Allianz SE coordinates and executes external debt financing, securities issues and other capital raising transactions for 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.
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) established a Medium Term Note (or “MTN”) programwhich is used from time to time for the 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, 2006 and 2005 was € 2.3 billion and € 2.7 billion, respectively. As of December 31, 2006, Allianz SE hadmoneymarket securities outstanding with a carrying value of € 870 million.
In March 2006, Allianz Finance II B.V. issued € 800million of subordinated perpetual bonds, guaranteed by Allianz SE, with a coupon rate of 5.375%. Allianz Finance II B.V. has the right to call the bonds after five years.
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.
Interest expense in 2006 1. Senior bonds 5.75% bond issued by Allianz Finance B.V., Amsterdam Volume € 1.1 bn Year of issue 1997/2000 Maturity date 7/30/2007
Interest expense € 84.8 mn 4.625% bond issued by Allianz Finance II B.V., Amsterdam Volume € 1.1 bn Year of issue 2002 Maturity date 11/29/2007
Interest expense € 6.6 mn Total interest expense for senior bonds € 258.9 mn 2. Subordinated bonds 6.125% bond issued by Allianz Finance II B. V., Amsterdam Volume € 2 bn Year of issue 2002 Maturity date 5/31/2022
Interest expense € 123.5 mn 7.25% bond issued by Allianz Finance II B. V., Amsterdam Volume USD 0.5 bn Year of issue 2002 Maturity date Perpetual Bond
Interest expense € 30.3 mn 6.5% bond issued by Allianz Finance II B. V., Amsterdam Volume € 1 bn Year of issue 2002 Maturity date 1/13/2025
Total interest expense for subordinated bonds € 404.6 mn 3. Exchangeable bonds 0.75% Basket Index Tracking Equity Linked Securities (BITES) issued by Allianz Finance II B.V., Amsterdam Underlying DAX®
Certificated liabilities and subordinated bonds1) by maturity – Overview as of December 31, 2006 in € bn
Perpetual 1) Bonds and exchangeable bonds issued or guaranteed by Allianz SE in the capital market, presented at carrying values. Excludes € 85.1 mn of participation certificates.
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.
Outlook Stable Stable Commercial paper (short term) A-1+ P-1 Not rated
Outlook Stable 1) Includes ratings for securities issued by Allianz Finance B.V., Allianz Finance II B.V. and Allianz Finance Corporation.
2) Outlook revised from “Stable” to “Positive” on April 20, 2006. 3) Issuer credit rating. 4) Ratings vary on the basis of maturity period and terms.
Net cash flow provided by operating activities was € 20.3 billion 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 increased by € 1.4 billion in 2006 to € 33.0 billion as of December 31, 2006.
Risk management is targeted at protecting our capital base and supporting our value-based management.
• We identify, measure, aggregate and manage risks. The result of this process determines, among other things, how much capital is attributed and allocated to the Allianz Group’s various segments.
The Board of Management of Allianz SE formulates the business objectives and allocates the capital resources of the Allianz Group balancing return on investment and risk criteria.
The Group Risk Committeemonitors the Allianz Group’s availability of capital and risk profile to ensure a reasonable relationship between these two criteria. Its role is to provide for comprehensive risk awareness within the Allianz Group and to further improve risk control.
Group Risk, which reports to the Chief Financial Officer, develops methods and processes for identifying, assessing andmonitoring risks on an Allianz Group-wide basis. An important instrument to assess the Allianz Group’s risk profile is our internal risk capital model, which is themethodology we use to assess quantitative risk. This model is described inmore detail in the section below entitled “Internal Risk Capital”. This structure is designed to enable us to manage our local and global risks equally and to reduce the likelihood of our overall risk increasing unnoticed.
The Trend Assessment Committee is responsible for early recognition of new risks and opportunities.
In 2005, we established the Allianz Climate Core Group. This panel of experts consists of representatives from our Property-Casualty, Life/Health, Banking and Asset Management segments and was established to examine the possible effects of climate change on our business. Its task is to develop riskmanagement strategies and to identify potential opportunities resulting from climate change.
Our internal risk capital model is based on the value-at-risk approach. This model, consistent with value-at-risk determinations, calculates a maximum loss in the value of our portfolio of assets and liabilities within a given timeframe and with a certain specified probability, or frequency, in the event of adverse market movements. More specifically, for each risk category, we calculate the net fair value of our assets and liabilities in terms of (i) a best estimate under current market conditions and (ii) an adverse value under adverse market conditions over a certain holding period. The required internal risk capital per risk category is then defined as the difference between the best estimate and adverse value of the portfolio. In order to calculate both of these values, we revalue options and guarantees under
On the Allianz Group level, our objective is to maintain capital according to a confidence level or solvency probability of 99.97% over a holding period of one year, which is equivalent to an “AA” rating of Standard & Poor’s. The time horizon over which the change in value is measured on the Allianz Group level is set at one year, as it is generally assumed that it may take a year to find a counterparty to whom to transfer the liabilities in our portfolio. In support of the Allianz Group’s objective to ensure a solvency probability of 99.97% over a holding period of one year at the Group level, we require our local operating units to hold risk capital allowing them to remain solvent with a certainty of 99.93% over a holding period of one year and take into account the diversification effects resulting from balancing our portfolio risks.
The Allianz Group’s policy is that all loans and deposits in foreign currencies should generally be funded and reinvested in investments in the same currency with matchingmaturities. Therefore, our residual foreign currency risk results primarily from the net fair value base of financial instruments denominated in foreign currency and the net asset value of our local non-Euro operating units. This currencymarket risk is generally managed centrally at the Allianz Group level and is, therefore, allocated to the Corporate segment.
• Business risks Cost and lapse risks, as well as operational risks including risks associated with external events or arising from insufficient or failing internal processes, procedures and systems.
As of December 31, 2006 € mn € mn € mn € mn 1) After Group diversification 2) 2005 figures adjusted as coverage of internal risk capital model has been extended.
Property-Casualty segment The Allianz Group’s Property-Casualty segment provides both personal and commercial insurance coverage. Our business activities are focused inWestern Europe (in terms of IFRS reserves 61% as of December 31, 2006), with further significant activities in North America (in terms of IFRS reserves 11% as of December 31, 2006). The worldwide corporate business is centrally managed by Allianz Global Corporate & Specialty, which was formed in 2006 by the integration of Allianz Global Risks Re and significant elements of Allianz Marine & Aviation. Please see “Allianz Group Success Factors – Important Group Organizational Changes – Merger of Industrial Insurance Business within Allianz Global Corporate & Specialty” for further information.
Potential risk concentrations (e.g. natural catastrophes) are closely monitored on a regular basis. In addition, underwriting guidelines definemaximum limits to the segment’s risk exposure. Reinsurance coverage is obtained to mitigate the peak risks resulting from natural catastrophes and to limit the impact of adverse conditions on profit and loss and shareholders’ equity. We analyze the reinsurance program in an effort to further optimize the Allianz Group’s use of reinsurance arrangements.
Life/Health segment The Allianz Group’s Life/Health segment provides both traditional contracts and unit-linked contracts. Traditional contracts include life, endowment, annuity, and supplemental health contracts. We issue both deferred and immediate traditional annuity contracts. In addition, the Allianz Group’s life operations in the United States issues a significant amount of equity indexed deferred annuities.
A significant part of the Allianz Group’s Life/Health segment operations is conducted inWestern Europe. Insurance laws and regulations inWestern Europe have historically been characterized by the legal or contractual participation of contract holders in the profits of the insurance company issuing the contract subject to aminimum guaranteed crediting rate. In particular, our Life/Health contracts in Germany, Switzerland and Austria, which comprise approximately 42% of the Allianz Group’s IFRS reserves for insurance and investment contracts as of December 31, 2006, include a significant level of policyholder participation in all sources of risk includingmarket, actuarial and expense risks.
Due to the offsetting effects of mortality risk and longevity risk inherent in its combined portfolio 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 actuarial risk.
Due to policyholder participation, our internal risk capital model for the Life/Health segment has a specific focus on the interaction between investments and insurance liabilities. We are continuously developing the integrated asset-liability managementmodeling to enable us to quantify the risk-mitigating effects resulting from policyholder participation inmarket, actuarial and expense risks.
In the following we present our Group-wide internal risk capital related to market risks, as calculated pursuant to our internal risk capital model. The figures presented take into account diversification effects, but do not includeminority interests.
Allocated internal risk capital by business segment and source of risk1)
Real estate 55 33 1) Internal risk capital is calculated as value-at-risk with a one-year holding period and a confidence level of 99.97%.
2) According to the Allianz Group’s policy, foreign currency risks are generally managed centrally at the Allianz Group level and are, therefore, allocated to the Corporate segment. As commodity risk is not significant on Group level, it is covered in our internal risk capital model within currency risk.
3) For our Banking segment, internal risk capital for real estate risk was introduced in 2006.
Banking segment The Banking segment’s interest rate risk arises from its non-trading portfolio of loans and deposits, issued securities, interest rate-related investment securities, as well as corresponding hedges of Dresdner Bank and the other banks forming part of the Allianz Group. The market risk in the non-trading portfolio is also primarily interest rate risk that results from long-term fixed rate loans funded in part by short-term deposits. As is the case for Dresdner Bank’s trading portfolio, Dresdner Bank manages this risk by setting value-at-risk limits. As of December 31, 2006, the value-at-risk, with a 99% confidence level and 10-day holding period, for interest rate risks at Dresdner Bank amounted to € 15.5 million, compared to € 14.0 million as of December 31, 2005.1) The value-at-risk in Dresdner Bank’s non trading book increased due to increases inmarket volatility and lower diversification effects between asset classes.
Dresdner Bank limits currency risks by applying the Allianz Group-wide policy that all loans and deposits in foreign currencies are refinanced or reinvested in the same currency withmatchingmaturities.
1) Last year’s disclosure value has been restated for reasons of comparability with current value-at-risk figure, which according to new methodology includes for the first time equity positions (without participation intention).
Asset Management segment The internal risk capital calculation for the Asset Management segment at Group level is based on a standardmodel of Standard & Poor’s. This approach does not provide separate risk capital figures for market risk. Approximately 99% of the investments held by the Asset Management segment’s units are held for the benefit of third parties and, therefore, do not result in significant market risk for Allianz. As a result, the risk capital calculated for the Asset Management segment is allocated to business risk in its entirety.
The trading portfolios of the Allianz Group contain all assets and liabilities classified as “held for trading” positions. In terms of activity and absolute volumes they relate primarily to the Banking segment. While our Banking segment business is separated into a designated trading portfolio and a non-trading portfolio, trading activities in the Property-Casualty, Life/Health and Corporate segments relate mainly to the hedging of insurance liabilities not internally classified as trading. Trading activities in the Asset Management segment are immaterial. In our worldwide trading activities, the Allianz Group uses financial derivatives both as non-standardized financial instruments for the individual management of market risks and as a component of structured financial transactions. The Allianz Group’s derivative trading activities focus on interest-bearing financial instruments, predominately interest rate swaps. The Allianz Group also uses currency, credit and equity/index derivatives.
Banking segment The Banking segment is active in trading equities, interest rate instruments, foreign exchange and commodities. The Banking segment uses derivatives in its trading portfolios primarily to meet customer demands as well as to hedgemarket and credit risk. Derivatives are also used to take advantage of market
opportunities. Dresdner Bank has expanded its use of credit derivatives in line withmarket growth in order to meet client demands in this product field. In terms of volume, the primary derivative products held by the Allianz Group are interest rate swaps, futures and options as well as foreign exchange forwards and equityrelated options. The primary exposures in foreign currencies are U.S. Dollars and British Pounds.
Market risks within Dresdner Bank’s trading portfolio had a value-at-risk, with a 99% confidence level and a 10-day holding period, of € 57 million as of December 31, 2006, compared to € 66million as of December 31, 2005. Market risk from trading activities declined in comparison to last year mainly due to the lower interest rate risk.
Credit risk arises from claims against obligors like borrowers, counterparties, issuers, guarantors or insurers. Losses may result in the following events: • Failure tomeet payment obligations (default risk). • In a given country, default on government debt, temporary suspension of payment obligations (“moratorium”), deterioration of economic or political conditions, expropriation of assets, inability to transfer assets abroad due to sovereign intervention, etc. (country risk including transfer risk).
We assume probability distributions and estimate their parameters for random variables such as the portion of a counterparty’s exposure that would be lost in event of default, of country or industry market-wide events or of counterparty-specific changes on the creditworthiness.
Wemonitor andmanage credit risks pursuant to a limit system applicable to the entire Allianz Group. The limit system aggregates major risks having Group-wide significance such as credit insurance, lending and our capital investments and serves as the basis for controlling the risk on an Allianz Group-wide basis by detecting credit risks at an early stage.
Investment credit risk We limit our fixed income investment credit risk by setting high requirements on the creditworthiness of our debtors and by diversifying our investments. Through our central credit riskmanagement, we consolidate our exposure according to debtors and across all investment categories and business segments, andmonitor the exposure of the Allianz Group on amonthly basis. As of December 31, 2006, approximately 91% of the fixed income investments of the insurance companies of the Allianz Group had an investment grade rating. More than 86% were distributed among obligors that had been assigned at least an “A” rating by Standard & Poor’s.
In the Banking Segment, credit risks include credit and counterparty risks in the lending business, issuer risks from our securities business, counterparty risks from trading activities and country risks.
The total credit risk exposure of Dresdner Bank of € 341 billion includes loans from lending business andmarket values of trading positions, in the case of derivatives it contains the positive replacement values plus risk-based add-ons. As of December 31, 2006, approximately 82% of overall counterparty limits in the trading and non-trading portfolios of Dresdner Bank were included in the rating classes I to VI, compared to 81% as of December 31, 2005. Approximately 18% of limits are included in the rating classes VII to XVI (2005: 19%). Furthermore, 97% (2005: 96%) of the counterparty limits in the trading portfolio are classified with a rating of I to VI.
Increasing loan volumes have been accompanied by a reduction of important risk parameters such as average probability of default, expected loss and internal risk capital. Dresdner Bank hasmade an effort to improve its loan quality, supported by state-of-the-art loan processes, the implementation of a value-oriented growth strategy as well as better economic environment. As of December 31, 2006, approximately 68% (2005: 64%) of Dresdner Bank’s loans were with investment grade counterparties.
In line with the observed portfolio quality, our total volume of problem loans and potential problem loans (measured by usage), which are two additional indicators for the quality of the loan portfolio, decreased from approximately € 3.0 billion as of December 31, 2005 to € 2.0 billion as of December 31, 2006.
As part of the investmentmanagement process the Asset Management segment’s units assess credit risk affecting their customers’ portfolios. Though our asset management companies do not engage in any lending transactions, counterparty risks can arise in certain circumstances, such as with broker-related over-the-counter transactions. Our asset management companies analyze the creditworthiness of their counterparties and set limits per counterparty based on objective criteria.
Actuarial risks consist of premium and reserve risks in the Property-Casualty segment as well as mortality risks in our Life/Health segment. In the Banking, Asset Management and Corporate segments actuarial risks are immaterial.
estimate the potential effects of natural disasters, we use special modeling techniques in which we combine data about our portfolio (such as the geographic distribution of insurance amounts), with simulated natural disaster scenarios to estimate themagnitude of potential damage. Where suchmodels do not exist (for example, hail risk in Germany), we use a scenario-based methodology.
These are the risks of losses resulting from inadequate or failed internal processes, people and systems or from external events. The definition includes legal risk, whereas strategic risk and reputational risk are excluded in accordance with Basel II.
These risks consist of unanticipated fluctuations in earnings arising from a decline in income without a corresponding decrease in expenses and include the risk of budget deficits resulting from lower revenues or higher costs than budgeted. Within our Life/Health segment we also evaluate lapse risks.
Allianz has developed an operational risk framework for the Allianz Group that focuses on early recognition and pro-active management of operational risks. The framework defines roles and responsibilities, risk processes andmethods and has been implemented at the major Allianz Group companies. Local risk managers implement this framework within the respective operating units. The operating units identify and evaluate relevant operational risks and control weaknesses through a bottom-up approach via self-assessment.
There are certain risks that cannot be quantified using our internal risk capital model. For these risks, we pursue a systematic approach with respect to identification, analysis, assessment andmonitoring. The assessment is based on qualitative criteria or using scenario analyses. For example, these risks include: Liquidity risk
Reputational risk is the risk of loss caused by a decline in the reputation of the Allianz Group unit or one or more of its specific operating units from the perspective of its stakeholders, shareholders, customers, staff, business partners or the general public. First, each action, existing or new transaction or product that poses reputational risk to the Allianz Group could lead to losses in the value of our reputation, either directly or indirectly, and could also result in losses in other risk categories. Second, every loss in other risk categories, irrespective of its size, can pose reputational risk to the Allianz Group if and when it is made public. Therefore, reputational risk can both cause and result from losses in all risk categories such as market or credit risks.
Furthermore in 2007, we expect to introduce a revised internal risk capital model for life insurance business. The newmodel is part of an integrated framework addressing the Market Consistent Embedded Value (MCEV) calculation, the assessment of risk capital and the estimation of sensitivity analyses for our life portfolios. When fully introduced, this model is expected to provide significant support to the riskmanagement of our life insurance business.
We also plan to continue our project to evaluate derivatives on the basis of an Allianz Group-wide uniform IT system. In addition, we will further strengthen and clarify our guidelines for handling derivatives.
Founded in 1890 and with 116 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. Beyond the quality of our financial performance a number of other activities and factors are important for the sustainable growth of our competitive strength and company value. These include, but are not limited to, the conversion of our holding company into a European Company, our global diversification, the reduction of complexity, our valuebased management approach, and our crucially important employees.
As an integrated and globally operating financial services provider we are able to offer our clients considerable value by providing a wide range of insurance and finance products as well as extensive advisory capacity through our subsidiaries under strong and well-known brands. We operate andmanage our activities primarily through four operating segments: Property-Casualty, Life/Health, Banking and Asset Management. We are well-positioned to anticipate and successfully respond to competitive forces within our various operations.
We are also among the largest insurance companies in a number of the other countries in which we operate.
1) Source: Gesamtverband der deutschen Versicherungswirtschaft e.V. (or “GDV“). The GDV is a private association representing the German insurance industry.
Through our specialty lines of business, we offer credit insurance, marine, aviation and industrial transport insurance, international industrial risks reinsurance, as well as travel insurance and assistance services, which wemanage on a world-wide basis.
Within our homemarket of Europe, Germany, France, Italy, the United Kingdom, Switzerland and Spain comprise our primary insurancemarkets, 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 one of our primarymarkets. Ourmoremature insurancemarkets (e.g. Germany, France, Italy, United States) are highly competitive. In recent years, we have also experienced increased competition in emergingmarkets as large insurance companies and other financial services providers frommore developed countries have entered thesemarkets 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 in 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 inmarkets 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.
Allianz SE also provides advice to subsidiaries on structuring their own reinsurance programs and establishing lists of permitted reinsurers. In addition the Allianz Group has a pooling concept via Allianz SE in place offering reinsurance cover to the Allianz Group’s subsidiaries against natural catastrophes, which provides Group internal diversification benefits.
customers with a broad range of private, commercial and investment banking products. Dresdner Bank has a strong and well-known brand and is one of the largest banks in Germany.2)
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” reorganization program in 2006 to further integrate our banking businessmodel and to thereby enable us to increase efficiency and reduce complexity.3)
The United States and Germany as well as France, Italy and the Asia-Pacific region are our primary asset managementmarkets.
In the asset management business, we experience competition from all major international financial institutions and peer insurance companies that also offer asset management products and services and compete for retail and institutional clients.
On September 11, 2005, Allianz AG (now Allianz SE) and Riunione Adriatica di Sicurtà S.p.A. (or “RAS”, 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 themerger 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. 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.
Themerger with RAS and the conversion of Allianz AG to Allianz SE was designed to simplify the Allianz Group’s 1) The SE is a legal form based on European Community law and was introduced into the EU by the Council Regulation (EC) No. 2157/2001 of October 8, 2001 on the Statute for a European Company (the “SE Regulation”). Since Allianz SE keeps its registered office in Germany, it is governed by the SE Regulation, the applicable German law supplementing the SE Regulation and relevant German law applicable to German stock corporations, in particular the German Stock Corporation Act.
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 are expected to be achieved more consistently andmore efficiently with the implementation of themerger. Furthermore, themerger 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 insurancemarket.
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.
February 3, 2006 RAS S.p.A. shareholders approve the merger plan at the extraordinary shareholders’ meetings.
July 19, 2006 Contestation suits against formation of Allianz SE withdrawn.
The Allianz-RASmerger 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.
The proposed acquisition of theminority interests in AGF and Allianz Leben, which were announced on January 18, 2007, are also designed to further streamline our Group structure across regions and business units.2)
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 reorganization 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 insurancemarket.
• Allianz Deutschland AG and itsmain subsidiaries committed not tomake any compulsory redundancies until the end of 2009.
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.3)
Merger of industrial insurance business within Allianz global corporate & Specialty
In 2006, Dresdner Bank launched the “Neue Dresdner Plus” reorganization program, by integrating its former four operating divisions into two operating divisions. After an agreement between the Board of Management and the works council of Dresdner Bank AG in late December 2006 and effective starting with the first quarter of 2007, it was determined that the final new businessmodel of Dresdner Bank will require approximately 2,500 fewer employees, and consist of the following two new operating divisions: • Private & Corporate Clients combines all banking activities formerly provided by the Personal Banking and Private & Business Banking (including Private Wealth Management) divisions as well as our activities withmedium-sized business clients from our former Corporate Banking division.
1) For further information see Note 49 to our consolidated financial statements.
In addition, the Corporate Other division contains income and expense items that are not assigned to Dresdner Bank’s operating divisions.
means that an added value has been achieved and a negative EVA® indicates that a shareholder would have received a greater return from another risk adequate investment than from Allianz SE shares.
An important component in the calculation of EVA® is the determination of the capital required to cover the financial risks involved in our business activities.2)
the sustainable creation of value and achieve a leadingmarket position; • maintain an orientation and competency that fit within the long-term strategy of the Allianz Group; and
• are able to generate distributable earnings in an amount that is at least equal to their cost of capital.
Our objective to accomplish a positive EVA® not only benefits our shareholders; our customers, employees and the communities in which we operate benefit as well. We can only succeed by offering high quality products at attractive prices that satisfy our customers, generate sales to secure jobs and produce profits that allow us to further increase our contribution to society.
We consider the work done by Human Resources to be a key factor in successful implementation of our strategy, and the investment wemake in our employees reflects this. Our talent management, performancemanagement and individual agreements on targets as well as variable salary components are all geared towards promoting a culture of leadership and performance in the Allianz Group, and are closely linked to our strategic requirements.
To support our management in implementing our leadership values we have drawn upmandatory communication guidelines intended to give momentum to this process of transformation. These underline the high degree of importance accorded to communication in change-related projects and set out the role played by themanagement in applying them. The guidelines also state that in changemanagement, all significant interest groups (“stakeholders”) and risk aspects must be taken into account.
In order to establish whether our employees receive adequate support from the organization when implementing strategic initiatives, we regularly conduct employee surveys in the subsidiaries. The responses indicate to what extent our workforce is motivated when putting our strategy into action and what the general mood is; they also provide management with indicators of what areas have deficiencies that still need to be addressed in order to improve the way this strategy is implemented.
The success of our strategy and successful change management depend crucially on the actual, verifiable satisfaction of our customers. The standard by which we
Total paymentsmade by the Group to its employees worldwide amounted to € 10.2 billion (2005: 9.6 billion) in 2006. Of this amount, € 3.0 billion alone or 29% was performance- related. Social security contributions, pensions and other additional employee benefits amounted to € 2.7 billion (2005: 2.5 billion).
We have been an SE (see page 91) since 13 October 2006. At the same time the companies involved, RAS and Allianz AG, reached an agreement with employees on how they will participate under the new circumstances. This agreement basically regulates corporate codetermination in the Supervisory Board of Allianz SE as well as the composition and area of responsibility of the future European Staff Council. The Supervisory Board of Allianz SE consists of 12 members, giving equal representation to the shareholders and to employees. For the first time the employee representatives come from different European countries: four from Germany and one each from France and the UK. In the first pan-European SE Staff Council, 37 members from 24 countries represent the interests of employees.
As insurers we are also trustees. This gives rise to a particular duty we have to comply with sustainability criteria. We are true to our word in respect of our customers and shareholders, our employees, and society as a whole. Inmeeting this responsibility we are guided by the ten principles of the UN’s Global Compact (for more information about this, visit www.unglobalcompact.org). These relate to environmental protection, human rights and transparency of corporate management.
2. We are working on tapping into new business opportunities resulting from climate change (for example, investment in renewable energy or in trading emissions rights).
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.
� � � � Bulgaria � � � Slovakia � � � Croatia � � � Czech Republic � � � � Hungary � � � Poland � � Romania � � � � Russia 2006 in review:3)
‰ January 1: Allianz Deutschland AG and a new independent sales company in Germany are launched and, at the same time, regional structures are simplified.
‰ June 22: Restructuring details at Allianz Deutschland AG and Dresdner Bank AG announced.
‰ October 17: Allianz Hungária is the first insurer and asset manager in Hungary to found a retail bank. With this move, Allianz in Hungary becomes an integrated financial services provider.
‰ December 27: Allianz Direct New Europe commences operations as the first panEuropean regional direct platform offering property-casualty insurance products for customers in Poland and the Czech Republic.
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.
� � Argentina � � � Brazil � Colombia � Mexico � � � � United States � � Venezuela
� � Australia � � South Korea � � � � China � � � Malaysia � � Indonesia � � � Singapore � � India � � Taiwan � � � Japan � � Egypt � Laos 2006 in review:3)
‰ 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.
‰ April 1: Following the shareholder change in 2005, the former AlIianz Dazhong was renamed into AlIianz China Life.
Products and Distribution We offer a wide variety of insurance products, of which ourmain lines of business includemotor liability and own damage, general liability, homeowner and accident. Allianz Sach distributes its products mainly through a network of full-time tied agents. However, distribution through Dresdner Bank branches and the internet is increasing in relative importance.
Outlook Operating in amarket that has seen limited growth in recent years, we seek to focus onmaintaining 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.
Italy Operations We operate in the Italianmarket 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.
5) Please see “Executive Summary and Outlook – Outlook – Significant Expected Investments” for further information.
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.
Outlook Operating in a highly competitive market, Allianz Cornhill has concentrated on active cycle management as ameasure to support its operating profitability.
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 alternative risk transfer products. Themost important line of business for Allianz Suisse is motor, comprising approximately 42% of its gross premiums written in 2006.
Operations We serve the Spanishmarket through our operating entities Allianz Compañía de Seguros y Reaseguros S.A. and Fénix Directo S.A. We currently rank third in the Spanishmarket, based on gross premiums written in 2006.3)
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 customers in Ireland, and distributes predominantly through brokers and banks as well as telephone- and internet-based direct sales channels.
Outlook The Dutch insurancemarket is characterized by intense competition, with expected price decreases in themotor business. In Ireland, we expect themarket will becomemore favorable in 2007, both in commercial and in personal lines.
1) Source: Financial Services Authority, FSA. 2) Source: Statistics of the Swiss Federal Bureau of Private Insurers.
3) Source: Research and Statistics Bureau of Spanish Insurers and Pension Funds, ICEA.
Outlook 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.
Outlook 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 crossselling through strengthened distributionmanagement.
Asia-Pacific Operations In Asia-Pacific, the large majority of our business is generated by Allianz Australia, which serves themarkets 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 compensationmarket, as well as in rehabilitation and occupational health, safety and environment services. We also operate in certain nichemarkets, including premium financing and pleasure craft insurance. Allianz Australia markets our products through brokers and non-tied agents as well as directly to customers.
Outlook We expect growth to continue, primarily in Brazil and Argentina, mainly driven by themotor market.
Specialty Lines Operations Through our subsidiary Euler Hermes, the largest credit insurer in the world, based on gross premiums written in 20051), we underwrite credit insurance inmajor markets around the world.
Through Mondial Assistance Group, we are among the world’s largest providers of travel insurance and assistance services based on gross premiums written in
Outlook Through the recent combination of our international corporate business within Allianz Global Corporate & Specialty, whichmanages a diversified portfolio of riskmanagement solutions and services, we expect to realize synergies and increase efficiency.
Germany Life Operations In our most important market, Allianz Lebensversicherungs-Aktiengesellschaft (or “Allianz
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 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 schemes and defined contribution plans. Allianz Leben distributes its products mainly through a network of full-time tied agents, while distribution through Dresdner Bank branches and brokers is increasing.
Outlook We are currently reorganizing our major German operating entities. The new structure is designed to further develop our leading position in the German insurancemarket 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.5) The proposed acquisition of theminority interest in Allianz Leben is part of our strategy to establish our German insurance business under one entity, Allianz Deutschland AG.6) This strategy is also designed to simplify our corporate governance structure.
4) Source: German Insurance Association, GDV. 5) Please see “Important Group Organizational Changes – Reorganization of
German Insurance Operations” for further information. 6) Please see “Executive Summary and Outlook – Outlook – Significant
Kranken distributes its products mainly through a network of full-time tied agents.
Outlook The ongoing discussions about reforming the German statutory health insurance system causes uncertainty among customers. The demographic change combined withmedical 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.1)
Outlook Life insurance is one of the fastest growing businesses of the AGF Group and we expect this strong growth to continue.
Italy Operations Wemaintain a strong position in the Italian life insurancemarket 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, but also 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.
Products and Distribution Wemarket a wide range of individual and group life insurance products, including retirement, death and disability products.
Outlook Given the relatively higher market share we hold in our property-casualty business in Switzerland, we believe there is potential for growth in our Life/health business through cross-selling between our segments.
Outlook 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 1) Please see “Important Group Organizational Ghanges – Reorganization of German Insurance Operations” for further information.
2) Source: French Insurers Association, FFSA. 3) Please see “Executive Summary and Outlook – Outlook – Significant
Expected Investments” for further information. 4) Source: Italian Insurers Association, ANIA. 5) Source: Statistics of the Swiss Federal Bureau of Private Insurers.
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.
Outlook The larger life insurancemarkets forming our Western and Southern European region are mature and provide limited growth opportunities.
Outlook Central and Eastern Europe represents one of the fastest growing life insurancemarkets of the world, as current penetration levels are low. In anticipation of the expected growth, we continuously strengthen our sales capacity and product range.
Products and Distribution Allianz Life United States is themarket leader in fixed-indexed annuities, with approximately one-third of themarket share based on statutory premiums in 2006.2) On the same basis, Allianz Life United States holds a 10% share of the overall fixed annuity market and also has a 2% share of the large variable annuity market.2) Its smaller but growing product lines include individual life and long-term care insurance.
Additionally, Bajaj Allianz Life Insurance Company Ltd. (or “Allianz Life India”), in which we held an interest of 26.0% at December 31, 2006, has demonstrated strong growth in the last several years, becoming a leading private insurer in India, which we expect to continue.
The table set forth below contains the aggregate fees billed for each of the last two fiscal years by KPMG DTG or KPMG DTG and the worldwide member firms of KPMG International (or “KPMG”) in each of 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 that 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).
All other fees 7.0 12.1 1) Includes € 1.7 mn, thereof € 1.1 mn attributable to KPMG DTG, additional audit service for Dresdner Bank Group relating to fiscal year 2005 which have been billed in 2006.
KPMG billed the Allianz Group an aggregate of € 57.8 million in 2006 and € 60.1 million in 2005 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 consistedmainly of periodic review engagements and the annual audit.
KPMG billed the Allianz Group an aggregate of € 8.1 million in 2006 and € 11.0 million in 2005 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.
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. All internal control-related services are specifically pre-approved by
Statements in Accordance with Section 315 Paragraph 4 of the German Commercial Code and Explanations
Shares may only be transferred with the consent of the Company. Pursuant to Article 2 Paragraph 2 of the Statutes, the Company will withhold a duly applied approval only, if it deems this to be necessary in the interest of the Company on exceptional grounds. The applicant will be informed about the reasons.
Shares acquired by employees of the Allianz Group as part of the employee share purchase program are in principle subject to a one-year lock-up period; outside Germany, the lock-up periodmay in some cases be up to five years for tax reasons. In some countries the employee shares are held throughout the lock-up period by a bank or other natural person or legal entity as trustee, in order to ensure that the lock-up period is observed. Nevertheless, employees may instruct the trustee on exercising voting rights, or have power-ofattorney granted to them to exercise such voting rights. Providing lock-up periods contributes to the employee share purchase programs’ purpose to commit employees to the company and let them participate in the performance of the stock price.
Themembers of the Board of Management of Allianz SE are appointed by the Supervisory Board for a maximum term of five years (Article 9 Paragraph 1, Article 39 Paragraph 2 and Article 46 SE Regulation, Sections 84, 85 AktG, Section 5 Paragraph 3 of the Statutes). Reappointments, in each case for a maximum of five years, are permitted. Themembers of the Board of Management may be dismissed by the Supervisory Board if there is an important reason (Section 84 AktG). If a required member of the Board of Management is absent, in urgent cases the court must appoint themember upon the application of an involved party, by virtue of Section 85 AktG. With respect to the appointment, it is essential to ensure in particular that themembers of the Board of Management are suited to managing an insurance company in terms of reliability and professional competence (Sections 121a, 7a German Insurance Supervision Act (Versicherungsaufsichtsgesetz, VAG)). The intention of appointing amember to the Board of Management must be notified to the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) (Sections 121a, 13 d No. 1 VAG).
Regulation). Any Member State may stipulate, however, that a simplemajority of votes is sufficient, provided at least half of the share capital is represented (Article 59 Paragraph 2 SE Regulation). German legislation has made use of this in Section 51 Sentence 1 SE Implementation Act (SE-Ausführungsgesetz), pursuant to which the Statutes may stipulate that, a simplemajority of votes is sufficient for the resolution of the General Meeting amending the Statutes, provided at least half of the share capital is represented. This does not apply to a change in the corporate object, relocation of the registered office to another Member State and to cases in which a highermajority is mandatory by law (Section 51 Sentence 2 SE Implementation Act). Accordingly, Article 13 Paragraph 4 Sentence 2 of the Statutes of Allianz SE stipulates that, unless this conflicts withmandatory legal provision, changes of the Statutes require a majority of two thirds of the votes cast, or, as the case may be, if at least half of the share capital is represented, a simple majority of the votes cast. The Supervisory Boardmay alter the wording of the Statutes (Section 179 Paragraph 1 Sentence 2 AktG and Article 10 of the Statutes).
The Board of Management has the following authority to issue shares: ‰ It is authorized to increase the Company’s share capital on or before February 7, 2011, upon approval of the Supervisory Board, by issuing new registered no-par value shares against contributions in cash and/or in kind, on one or more occasions, up to a total of € 450,000,000 (Authorized Capital 2006/I). Shareholders’ subscription rightsmay be excluded for fractional amounts, for safeguarding the rights pertaining to holders of convertible bonds or bonds with warrants, and in the event of a cash capital increase by up to 10%, if the issue price of the new shares is not significantly less than the stock market price. Subscription rightsmay furthermore be excluded in the event of a capital increase against contributions in kind (Article 2 Paragraph 3 of the Statutes).
The authority explained in themanagement report to buy back or make use of treasury shares or issue convertible bonds or bonds with warrants or issue new shares out of authorized capital enables the Management Board to raise capital swiftly and flexibly taking advantage of attractive financing opportunities as and when they arise on themarkets and, for example, offer Allianz stock as consideration whenmaking acquisitions of participations. Furthermore Allianz stock can be offered to employees of the Allianz Group. The authority to deal in own stock for trading purposes is
The reinsurance agreement with Münchener Rückversicherungsgesellschaft AG provides for an extraordinary termination right if the ownership structure or control of Allianz SE should change substantially. The provision accounts for the fact that in case of a change in control the conditions on which the contractual relation is based canmaterially change.
The Group Equity Incentive (GEI) scheme also contains provisions in respect of a change of control. Under this scheme, Stock Appreciation Rights (SAR) and Restricted Stock Units (RSU) are granted as a stock-based remuneration component worldwide to senior management of the Allianz Group (see also Note 48 to our consolidated financial statements). SARs are virtual options on Allianz shares; they obligate the Allianz Group to pay in cash the excess of themarket price of the Allianz share over the reference price on the exercise date. They vest after two years. If a majority of the voting share capital in Allianz SE is acquired, directly or indirectly, by one or more third parties who do not belong to the Allianz Group, in derogation of the above, however, the SARs shall be exercised, pursuant to the general conditions for the SAR, by the Company for the relevant plan participants without observing any vesting period.
The previous analysis is based on our consolidated financial statements and should be read in conjunction with those statements. The Allianz Group uses operating profit to evaluate the performance of its business segments and the Group as a whole. The Allianz Group considers the presentation of operating profit to be useful andmeaningful to investors because it enhances the understanding of the Allianz Group’s underlying operating performance and the comparability of its operating performance over time. Operating profit highlights the portion of income before income taxes andminority interests in earnings attributable to the ongoing core operations of the Allianz Group. To better understand the on-going operations of the business, we exclude the effects of acquisition-related expenses and the amortization of intangible assets, as these relate to business combinations; and we exclude interest expense from external debt and income from financial assets and liabilities held for trading (relating to exchangeables on external debt) as these relate to our capital structure.
The following table reconciles operating profit on a consolidated basis to the Allianz Group’s income before income taxes andminority interests in earnings.
Realized gains/losses and impairments of investments (net) 2,682 1,853 1,346 Income from financial assets and liabilities held for trading (net) (134) (403) (142) Interest expense from external debt (775) (787) (831)
thereof: Dresdner thereof: Allianz thereof: Dresdner thereof: Allianz 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. Segment growth rates are presented before the elimination of transactions between Allianz Group companies in different segments.
Notes to the Consolidated Financial Statements 121 1 Nature of operations and basis of presentation 121 2 Summary of significant accounting policies 134 3 Recently adopted and issued accounting pronouncements and changes in the presentation of the consolidated financial statements 142 5 Segment reporting
Supplementary Information to the Consolidated Balance Sheets 158 6 Cash and cash equivalents 158 7 Financial assets carried at fair value through income 162 9 Loans and advances to banks and customers 164 10 Reinsurance assets 165 11 Deferred acquisition costs 166 12 Other assets 167 13 Intangible assets 170 14 Financial liabilities carried at fair value through income 170 15 Liabilities to banks and customers 170 16 Unearned premiums 171 17 Reserves for loss and loss adjustment expenses 173 18 Reserves for insurance and investment contracts 177 19 Financial liabilities for unit linked contracts 177 20 Other liabilities 178 21 Certificated liabilities 179 22 Participation certificates and subordinated liabilities
Loans and advances to banks and customers 9 408,278 336,808 Financial assets for unit linked contracts 61,864 54,661
Deferred acquisition costs 11 19,135 18,141 Deferred tax assets 41 4,727 5,299
Reserves for loss and loss adjustment expenses 17 65,464 67,005 Reserves for insurance and investment contracts 18 287,697 278,312 Financial liabilities for unit linked contracts 19 61,864 54,661 Deferred tax liabilities 41 4,618 5,324
Income from fully consolidated private equity investments 30 1,392 598 175
Acquisition and administrative expenses (net) 37 (23,486) (22,559) (21,969) Fee and commission expenses 38 (2,351) (2,312) (1,804) Amortization of intangible assets (51) (50) (1,362)
Expenses from fully consolidated private equity investments 40 (1,381) (572) (175)
Transferred to net income on disposal2) — — — (1,405) (1,405) (166) (1,571)
Transferred to net income on disposal2) — — — (1,114) (1,114) (133) (1,247)
Transferred to net income on disposal2) — — — (1,744) (1,744) (146) (1,890)
Allianz Group Consolidated Statements of Cash Flows € mn € mn € mn
Cash flow from operating activities: Adjustments to reconcile net income to net cash flow provided by (used in) operating activities: Minority interests in earnings 1,289 1,386 1,168 Share of earnings from investments in associates and joint ventures (287) (253) (253) Realized gains/losses (net) and impairments of investments (net) of: Available-for-sale and held-to-maturity investments, investments in associates and joint ventures, real estate held for investment, loans to banks and customers (5,376) (4,438) (3,093) Other investments, mainly financial assets held for trading and designated at fair value
Depreciation and amortization 916 723 1,236 Amortization of goodwill — — 1,164 Loan loss provision 36 (109) 354 Interest credited to policyholder accounts 3,126 2,748 2,523 Net change in: Financial assets and liabilities held for trading 19,265 10,371 (30,174) Reverse repurchase agreements and collateral paid for securities borrowing transactions (50,096) 43,508 (19,368) Repurchase agreements and collateral received from securities lending transactions 36,990 (18,692) 33,488
Reserves for losses and loss adjustment expenses (188) 2,621 1,274 Reserves for insurance and investment contracts 7,025 7,634 7,049 Deferred tax assets/liabilities 292 (39) 470
Net cash flow provided by (used in) operating activities 20,265 47,311 1,293
Allianz Group Consolidated Statements of Cash Flows — continued € mn € mn € mn
Payments for the purchase or origination of: Financial assets designated at fair value through income (9,680) (11,278) (2,297) Available-for-sale investments (130,949) (161,583) (135,005) Held-to-maturity investments (280) (255) (1,071) Investments in associates and joint ventures (491) (934) (526) Assets held for sale — (178) — Real estate held for investment (860) (1,064) (1,752) Loans and advances to banks and customers (purchased loans) (10,598) (5,493) (6,172) Property and equipment (1,588) (1,126) (2,345)
Business combinations (Note 4): Proceeds from sale, net of cash disposed — 2,029 (886) Acquisition, net of cash acquired (344) — (416)
Change in other loans and advances to banks and customers (originated loans) (19,224) (1,877) 10,287
Net cash flow provided by (used in) investing activities (34,450) (22,922) (9,155)
Supplementary information on the consolidated statement of cash flows: Income taxes paid (2,241) (1,644) (1,691)
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. On October 13, 2006 Allianz AG changed its legal form to that of a European Company or Societas Europaea (“SE”) incorporated in Germany. It is recorded in the Commercial Register of themunicipal court Munich under its registered address at Königinstraße 28, 80802 Munich.
A business combination occurs when the Allianz Group obtains control over a business. Business combinations are accounted for by applying the purchasemethod. The purchasemethod requires that the Allianz Group allocate the cost of a business combination on the date of acquisition by recognizing the acquiree’s identifiable assets, liabilities and certain contingent liabilities at their fair values. The cost of a business combination represents the fair value of the consideration given and any costs directly attributable to the business combination. If the acquisition cost of the business combination exceeds the Allianz Group’s proportionate share of the fair value of the net assets of the acquiree, the difference is recorded as goodwill. Anyminority interest is recorded at theminority’s proportion of the fair value of the net assets of the acquiree.
The AllianzGroup transfers financial assets to certain SPEs in revolving securitizations of commercialmortgage or other loan portfolios. The AllianzGroup consolidates these SPEs as the AllianzGroup continues to control the financial assets transferred and retains the servicing of such loans.
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 amaximum term of threemonths from the date of acquisition.
Financial assets carried at fair value through income Financial assets carried at fair value through income include financial assets held for trading and financial assets designated at fair value through income.
Financial assets designated at fair value through income are recorded at fair value with changes in fair value recorded in net income for the period. A financial instrumentmay only be designated at inception as held at fair value through income and cannot subsequently be changed.
Investments Investments include available-for-sale investments, held-to-maturity investments, funds held by others
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 quotedmarket 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 assumption that the limited partner has no control over the limited partnership.
Held-to-maturity investments are debt securities 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.
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 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% and a prolonged decline to be one in which fair value is below the weighted-average cost for greater than ninemonths. This policy is applied by all subsidiaries at the individual security level.
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 notmore than 50% of the voting rights. Joint ventures are entities over which the Allianz Group and one ormore other parties have joint control.
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 threemonths. Income from investments in associated enterprises and joint ventures is included in interest and similar income.
Real estate held for investment (i.e., real property and equivalent rights and buildings, including buildings on leased land) is carried at cost less accumulated depreciation and impairments. Real estate held for investment is depreciated on a straight-line basis over its estimated life, with amaximum of 50 years. When testing for impairment, the fair value of real estate held for investment is determined by the discounted cash flow method. Improvement costs are capitalized if they extend the useful life or increase the value of the asset; otherwise they are recognized as an expense as incurred.
Loans and advances to banks and customers Loans and advances to banks and customers are financial assets with fixed and determinable payments, not quoted in an active market, that are not classified as available-for-sale 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 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 theminimum 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.
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.
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 currencydenominated 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.
Reinsurance 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 amanner consistent with the claim liability associated with the reinsured risks. Accordingly, revenues and expenses related to reinsurance agreements are recognized in a manner consistent with the underlying risk of the business reinsured.
Present value of future profits (“PVFP”) is the present value of net cash flows anticipated in the future from insurance contracts in force at the date of acquisition and is amortized over the life of the related contracts. PVFP was determined using discount rates ranging from 12% to 15%. Interest accrues on the PVFP balance based upon the policy liability rate or contract rate. Interest accrues on PVFP at rates between 3.5% and 8.5%.
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, assets held for sale and other assets.
Intangible assets Intangible assets include goodwill, brand names and other intangible assets.
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.
Liabilities to banks and customers Liabilities to banks and customers include repurchase (“repo”) agreements and securities lending transactions. Repo transactions involve the sale of securities by the Allianz Group to a counter-party, 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.
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 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.
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.
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 under the provisions of US GAAP, including SFAS 60, SFAS 97 and SFAS 120.
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 premiummethod, 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. Themethod 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 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 estimated gross profits (“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 includemargins frommortality, 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.
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 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 themost significant countries for latent reserves: Country Base Percentage
Germany Life all sources of Profit 90% Health all sources of Profit 80% France Life investments 80% Italy Life investments 85% Switzerland Group Life all sources of Profit 90% Individual Life all sources of Profit 100%
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, andmaintenance 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.
Equity Issued capital represents themathematical per share value received from the issuance of shares.
Any translation differences, including those arising in the application of the equity method of accounting, are recorded as foreign currency translation adjustments directly in shareholders’ equity without affecting earnings.
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.
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. Unearned premiums are calculated separately for each individual policy to cover the unexpired portion of written premiums. Benefits are recognized when incurred.
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.
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.
Leases Payments made under operating leases to the lessor are charged to administrative expenses using the straightlinemethod 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.
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.
Share-based compensation plans The share-based compensation plans of the Allianz Group are required to be classified as equity settled or cash settled plans. Equity settled plans aremeasured 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 the restructuring and has started to implement the plan or has communicated its main features. The detailed formal plan includes the business concerned, approximate number of employees who will be compensated for terminating their services, the expenses to be incurred and the time period over which the plan will be implemented. The detailed planmust be communicated such that those affected have an expectation that the plan will be implemented.
3 Recently adopted and issued accounting pronouncements and changes in the presentation of the consolidated financial statements
In August 2005, the IASB issued amendments to IAS 39 and IFRS 4, Insurance Contracts, relating to the recognition andmeasurement of financial guarantee contracts. The amendments require that financial guarantee contracts be initially measured at fair value. After initial recognition, the financial guarantee contracts are measured at the higher of the amount determined in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and the amount initially recognized less cumulative amortization recognized in accordance with IAS 18, Revenue. The amendment is effective January 1, 2006; however, the Allianz Group will be required to retrospectively apply the provisions of the amendments to reporting periods prior to January 1, 2006. As the Allianz Group previously applied US GAAP to its credit insurance contracts, the amendments will not impact the insurance segments. The Allianz Group adopted these amendments as of January 1, 2006 with nomaterial effect on its financial results or financial position.
Recently issued accounting pronouncements (effective on or after January 1, 2007) In August 2005, the IASB issued an amendment to IAS 1, Presentation of Financial Statements. The amendment requires additional disclosures relating to the Allianz Group’s capital. In addition, in August 2005, the IASB issued IFRS 7, Financial Instruments: Disclosures. This standard requires additional disclosures relating to the Allianz Group’s financial instruments and insurance contracts. The amendment to IAS 1 and IFRS 7 are effective for the year ended December 31, 2007. The adoptions are not expected to have an impact on the Allianz Group’s financial results or financial position.
In July 2006, the IFRIC issued IFRIC 10, Interim Financial Reporting and Impairment. IFRIC 10 address the potential conflict between requirements of IAS 34 and the requirements for recording impairment losses on goodwill in IAS 36 and certain financial assets in IAS 39. The interpretation prohibits the reversal of an impairment loss recognized in a previous interim period with respect to goodwill or an investment in either an equity instrument or a financial asset carried at cost. IFRIC 10 is effective for annual periods beginning on or after November 1, 2006. As the interpretation is consistent with the Allianz Group’s existing policy, there is no expected impact on the Allianz Group’s financial results or financial position.
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 decisionmaker in order to allocate resources to the segment and assess its performance (i.e., the
Reclassifications A significant portion of these revisions to financial reporting resulted from the implementation of changes to the presentation of certain financial information of the Allianz Group’s consolidated balance sheets and consolidated income statements. These revisions were implemented to improve transparency and result in the following: • The line items in the consolidated income statements include aggregations of items which are similarly aggregated as the line items utilized for determining operating profit.
• The line items in the consolidated income statements include aggregations of items which are basedmore on the nature rather than the function.
• Investments in associates and joint ventures have been reclassified to investments.
• Unearned premiums and reserves for loss and loss adjustment expenses are presented as separate line items.
• Realized gains and realized losses are presented net as a separate line item. Realized gains/losses (net) include realized gains and losses from disposals of associates and subsidiaries and loans and advances to banks and customers.
• Impairments and reversals of impairments are presented net as a separate line item. Impairments of investments (net) include impairments and reversals of impairments of investments in associates and joint ventures.
• Changes in reserves for insurance and investment contracts (net) are presented as a separate line item.
• Foreign currency gains and losses and depreciation of real estate held for investment are included in investment expenses.
4) Includes liabilities to banks and liabilities to customers previously reported as two separate balance sheet line items. 5) Includes other accrued liabilities, other liabilities and deferred income previously reported as three separate balance sheet line items.
Summary of the impact of the reclassifications on the consolidated income statements for the years ended December 31, 2005 and 2004: Year ended December 31, 2005, as previously reported € mn
Income from investments in associated enterprises and joint ventures (net) 1,257 (1,257) — 777 (777) — Income from financial assets and liabilities carried at fair
Claims and insurance benefits incurred (net)3) (53,797) 11,027 (42,770) (52,255) 9,449 (42,806) Change in reserves for insurance and
Segment Reporting Effective January 1, 2006, the Allianz Group introduced a Corporate segment. The Corporate segment includes all group activities which are not allocated to a specific business segment. Further, the Corporate segment includes group funding and riskmanagement activities, such as the senior bonds, subordinated bonds and moneymarket securities issued or guaranteed by Allianz SE and the related derivative financial instruments held by Allianz SE or one of its subsidiaries. The activities included in the Corporate segment were previously reported in the Property-Casualty segment.
Finally, the Allianz Group revised the presentation of elimination for intra- Allianz Group dividends. IntraAllianz Group dividends are now eliminated by the subsidiary receiving the dividend. Intra-Allianz Group dividends were previously eliminated within the segment if the dividend-involved subsidiaries were within the same segment or eliminated in the consolidation adjustments if the dividend-involved subsidiaries were in different segments.
The effects of all of these changes to segment reporting were implemented retrospectively; therefore, all previously reported segment balance sheets and segment income statements were reclassified to ensure consistency and comparability with the presentation as implemented on January 1, 2006.
Operating Profit Methodology As a result of the reclassifications and changes in segment reporting, as well as improving the consistency of external financial reporting with internal financial reporting, themethodology for defining operating profit was changed effective January 1, 2006. A summary of the key changes is as follows: • Amortization of intangible assets and restructuring charges, except for the operating restructuring charges for the Life/Health segment, are non operating items for all segments.
• Realized gains/losses (net) from investments, shared with policyholders and impairments of investments (net), shared with policyholders are included in operating profit for the Property-Casualty and Life/ Health segment.
Summary of the impact of the changes to operating profit by segment for the years ended December 31, 2005 and 2004: Operating profit, as previously reported € mn
Cash Flow Statements As a result of the reclassifications to the consolidated balance sheets and consolidated income statements discussed above, the Allianz Groupmade corresponding reclassifications to the consolidated statements of cash flows. In addition, the Allianz Group reclassified the following line items from operating activities to investing or financing activities in order to consistently present changes in interest-bearing assets and liabilities: • Loans and advances to banks and customers are reclassified as investing activities.
As of December 31, 2006, of the entities that have been consolidated, 9 (2005: 9; 2004: 9) subsidiaries have been consolidated where the Allianz Group owns less than majority of the voting power of the subsidiary, including CreditRas Vita S.p.A. (“CreditRas”) and Antoniana Veneta Popolare Vita S.p.A. (“Antoniana”). The Allianz Group controls these entities on the basis of shareholder agreements between the Allianz Group subsidiary owning 50% of each such entity and the other shareholders. Pursuant to these shareholder agreements, the Allianz Group has the power to govern the financial and operating policies of these subsidiaries and the right to appoint the general manager, in the case of CreditRas, and the CEO, in the case of Antoniana, who have been given unilateral authority over all aspects of the financial and operating policies of these entities, including the hiring and termination of staff and the purchase and sale of assets. Furthermore, all management functions of these subsidiaries are performed by the employees of the Allianz Group and all operations are undertaken in Allianz Group’s facilities. The Allianz Group also develops all insurance products written through these subsidiaries. Although the Allianz Group and the other shareholders each have the right to appoint half of the directors of each subsidiary, the rights of the other shareholders are limited to matters specifically reserved to the board of directors and shareholders under Italian law, such as decisions concerning capital increases, amendments to articles and similar matters. In addition, in the case of Antoniana, the Allianz Group has the right to appoint the Chairman, who has double board voting rights, thereby giving the Allianz Group amajority of board votes. The shareholder agreements for CreditRas and Antoniana are subject to automatic renewal and are not terminable prior to their stated terms.
As of December 31, 2006, there were 9 (2005: 10; 2004: 11) joint ventures that were accounted for using the equity method; each of these entities is jointly managed by the Allianz Group together with a third party not consolidated in the Allianz Group’s consolidated financial statements. As of December 31, 2006, there were 177 (2005: 150; 2004: 181) associated entities accounted for using the equity method.
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 (“HGB”) as they are included in the consolidated financial statements of the Allianz Group. Selected subsidiaries and associated entities are listed in the selected subsidiaries and other holdings section.
Home & Legacy Limited, London 6/15/2006 — 1 68 MAN Roland Druckmaschinen AG, Offenbach 7/18/2006 1,044 3 144 Premier Line Direct Limited, Lancaster 10/1/2006 7 1 36
Intangible assets 268 Loans and advances to banks and customers 386 Other assets 931 Liabilities to banks and customers (491) Other liabilities (625) Deferred tax liabilities (125) Acquisition of subsidiary, net of cash acquired 344 2004 Acquisitions
Four Seasons Health Care Ltd., Wilmslow On August 18, 2004, the Allianz Group acquired 100.0% of Four Seasons Health Care Ltd., Wilmslow at a purchase price of € 347 mn. Four Seasons Health Care Ltd., Wilmslow operates care homes and specialist centres in England, Scotland and Northern Ireland.
Effects on the Consolidated Financial Statements in the Year of Disposal1)
Four Seasons Health Care Ltd., Wilmslow On August 31, 2006, the Allianz Group sold its shares in Four Seasons Health Care Ltd., Wilmslow. The proceeds from sale of these shares amounted to € 863 mn.
DresdnerGrund-Fonds, Frankfurt am Main On December 22, 2005, the Allianz Group sold its shares in DresdnerGrund-Fonds, Frankfurt amMain. The proceeds from sale of these shares amounted to
Riunione Adriatica di Sicurtà S.p.A., Milan (“RAS”) On October 13, 2006, the Allianz Group increased its interest in RAS by 23.7% to 100.0% followed by themerger of RAS with and into Allianz AG. The acquisition cost for the additional interest was € 3,653 mn. This transaction was accounted for as a transaction between equity holders; therefore, the Allianz Group recorded a decrease in shareholders’ equity of € 1,994 mn and a decrease of minority interests of € 1,659 mn.
Allianz Global Investors of America L.P., Delaware During the year ended December 31, 2006, the Allianz Group increased its interest in Allianz Global Investors of America L.P., Delaware, by 0.3% to 97.3%. The acquisition cost for the additional interest was € 70mn. This transaction was accounted for as a transaction between equity holders; therefore, the Allianz Group recorded a decrease in shareholders’ equity of € 70 mn.
Assurances Générales de France, Paris During the year ended December 31, 2005, Assurances Générales de France, Paris issued shares to plan participants as a result of exercises of share options. These issuances resulted in a decrease in the Allianz Group’s ownership interest in Assurances Générales de France, Paris from 62% at December 31, 2004 to 61% at December 31, 2005. These transactions were accounted for as transactions between equity holders; therefore, the Allianz Group recorded an increase in shareholders’ equity of € 19 mn and an increase inminority interests of
As a result of the Allianz Group’s worldwide organization, the business activities of the Allianz Group are first segregated by product and type of service: insurance activities, banking activities, asset management activities and corporate activities. Due to differences in the nature of products, risks and capital allocation, insurance activities are further divided between property-casualty and life/health categories. Thus, the Allianz Group’s segments are structured as PropertyCasualty, Life/Health, Banking, Asset Management and Corporate. Based on various legal, regulatory and other operational issues associated with operating entities in jurisdictions worldwide, the segments of the Allianz Group are also further analyzed by geographical areas or regions inmatrixes that comprise a number of profit and service-center segments (see following pages). This geographic analysis is performed to provide further understanding of trends and results underlying the segment data.
Life/Health The Allianz Group is the largest provider of life insurance and the third largest provider of health insurance in Germany asmeasured by gross premiums written during the year ended December 31, 2006. Germany is the Allianz Group’s most important market for life/health insurance. The Allianz Group’s German life insurance companies offer a comprehensive and unified range of life insurance and life insurance-related products on both an individual and group basis. Themain classes of coverage offered include endowment life insurance, annuity policies, term life insurance, unit linked annuities, and other life insurance-related forms of cover, which are provided as riders to other policies and on a stand-alone basis. The Allianz Group’s German health insurance companies provide a wide range of health insurance products, including full private healthcare coverage for the self-employed, salaried employees and civil servants, supplementary insurance for people insured under statutory health insurance plans, daily sickness allowance for the self-employed and salaried employees, hospital daily allowance, supplementary care insurance and foreign travel medical expenses insurance. The Allianz Group also maintains significant life/health operations in the United States, offering a wide variety of life insurance, fixed and variable annuity contracts, including equity-indexed annuities to individuals, and long-term care insurance to individual and corporate customers. Italy and France are also markets where the Allianz Groupmaintains a significant presence offering products such as unit linked and investment-oriented products, health insurance and individual and group life insurance.
Liabilities to banks and customers 4,473 4,383 7,446 5,479 350,148 301,586
Income from financial assets and liabilities carried at fair value through
Allianz Global Corporate and Specialty2) 1,545 1,633 1,779 62.5 91.1 70.5 Travel Insurance and Assistance Services 1,008 934 863 58.7 60.3 59.7
LIFE/HEALTH Europe 1) Represents claims and insurance benefits incurred (net) divided by premiums earned (net). 2) With effect from the first quarter of 2006, we have combined the activities of the former Allianz Global Risks Re and Allianz Marine & Aviation, as well as the corporate customer business of Allianz Sach, which was formerly included within property-casualty Germany. Additionally, with effect from the second quarter of 2006, we have included Allianz Global Risks US, which was formerly presented within NAFTA, within the newly combined entity Allianz Global Corporate & Specialty. Prior year balances have been adjusted to reflect this reclassification and allow for comparability across periods.
3) Represents elimination of intercompany transactions between Allianz Group subsidiaries in different geographic regions. 4) Statutory premiums are gross premiums written from sales of life insurance policies, as well as gross receipts from sales of unit-linked and other investmentoriented products, in accordance with the statutory accounting practices applicable in the insurer’s home jurisdiction.
5) Represents acquisition and administrative expenses (net) divided by statutory premiums (net). 6) Contains, among others, the life/health business assumed by Allianz SE, which was previously reported under property-casualty Germany in the Property-
Casualty segment. Prior year balances have been adjusted to reflect this reclassification and allow for comparability across periods.
Operating revenues Operating profit (loss) Cost-income ratio € mn € mn € mn € mn € mn € mn
Corporate & Investment 1) Our reporting by divisions reflects the organizational changes within Dresdner Bank in 2006, resulting in two operating divisions. Private & Business Clients combines all banking activities for private and corporate customers formerly provided by the Personal Banking and Private & Business Banking divisions. Furthermore, Corporate & Investment Banking combines the former Corporate Banking and Dresdner Kleinwort divisions. Prior year balances have been adjusted accordingly to reflect these reorganization measures and allow for comparability across periods. After a final agreement between the Board of Management and the works council of Dresdner Bank AG in late December 2006 and effective starting with the first quarter of 2007, the future business model of Dresdner Bank will consist of two new operating divisions Private & Corporate Clients and Investment Banking. According to this future business model, we will integrate our business activities with medium-sized corporate clients into that with private and business clients. In the table above, our medium-sized business clients remain part of Corporate & Investment Banking. The future business model with the two new business divisions Private & Corporate Clients and Investment Banking is not reflected in the table above.
2) The Corporate Other division contains income and expense items that are not assigned to Dresdner Bank’s operating divisions. These items include impacts from the accounting treatment for derivative financial instruments used as a hedge which do not qualify for hedge accounting as well as provisioning requirements for country and general risks. For the years ended December 31, 2006, 2005 and 2004 the impact from the accounting treatment for derivative financial instruments used as a hedge which do not qualify for hedge accounting on Corporate Other’s operating revenues amounted to € (47) mn, € (214) mn and € 7 mn, respectively. With effect from the first quarter of 2006, the majority of expenses for support functions and central projects previously included within Corporate Other have been allocated to the operating divisions. Additionally, the non-strategic Institutional Restructuring Unit was closed down effective September 30, 2005, having successfully completed its mandate to free-up risk capital through the reduction of non-strategic risk-weighted assets. Furthermore, effective in the first quarter of 2006, and as a result of Dresdner Bank restructuring its divisions, the Institutional Restructuring Unit’s 2005 and 2004 results of operations were reclassified into Corporate Other. Prior year balances have been adjusted accordingly to reflect these reclassifications and allow for comparability across periods.
3) Presentation not meaningful. 4) Consists of non-Dresdner Bank banking operations within our Banking segment, as well as the elimination of trading income (net) of € 6 mn at Dresdner Bank resulting from Dresdner Bank’s trading activities in Allianz SE shares during the year ended December 31, 2006.
The Allianz Group evaluates the results of its PropertyCasualty, Life/Health, Banking, Asset Management and Corporate segments using a financial performance measure referred to herein as “operating profit”. The Allianz Group defines segment operating profit as earnings from ordinary activities before taxes, excluding, as applicable for each respective segment, all or some of the following items: net capital gains and impairments on investments, net trading income, intra-Allianz Group dividends and profit transfer, interest expense on external debt, restructuring charges, other non-operating income/expenses, acquisition-related expenses and amortization of goodwill.
Income (loss) before income taxes and minority interests in earnings 5,300 1,613 (92) (275) (1,042) (460) 5,044 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.
Claims and insurance benefits incurred (net) (24,672) (25,331) (25,271) Changes in reserves for insurance and investment contracts (net) (425) (707) (611)
Acquisition and administrative expenses (net) (10,590) (10,216) (10,192) Fee and commission expenses (721) (775) (530)
Loan loss provisions (1) — (3) Impairments of investments (net), shared with policyholders (390) (199) (281)
2) The total of these items equals realized gains/losses (net) in the segment income statement. 3) The total of these items equals restructuring charges in the segment income statement. 4) Represents acquisition and administrative expenses (net) divided by statutory premiums (net).
Net fee and commission income3) 3,008 2,841 2,850 2,693 2,707 2,574
Income from financial assets and liabilities designated at fair value through income (net)4) 53 53 (7) (6) (9) (9)
Income (loss) before income taxes and minority 1) Consists of Dresdner Bank and non-Dresdner Bank banking operations within our Banking segment, as well as the elimination of trading income (net) of € 6 mn at Dresdner Bank resulting from Dresdner Bank’s trading activities in Allianz SE shares during the year ended December 31, 2006.
Impairments of investments (net) (2) (2) — — — — Acquisition-related expenses, thereof:4)
Interest and similar income 509 416 395 Income from financial assets and liabilities designated at fair value through income (net)1) (60) — — Fee and commission income 190 164 137 Other income 28 — — Income from fully consolidated private equity investments 1,392 598 175
Acquisition and administrative expenses (net) (655) (516) (540) Fee and commission expenses (127) (92) (84) Expenses from fully consolidated private equity investments (1,381) (572) (175)
Loss before income taxes and minority interests in earnings (987) (1,999) (1,042)
Balances with central banks 4,945 3,807 Cash on hand 919 1,045 Treasury bills, discounted treasury notes, similar treasury securities and
As of December 31, 2006, compulsory deposits on accounts with national central banks under restrictions due to required reserves from the European Central Bank 7 Financial assets carried at fair value through income
Financial assets held for trading Debt securities 81,881 109,384 Equity securities 31,266 30,788 Derivative financial instruments 24,835 26,012
Available-for-sale investments 277,898 266,953 Held-to-maturity investments 4,748 4,826 Funds held by others under reinsurance contracts assumed 1,033 1,572 Investments in associates and joint
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, 2006 and 2005.
Government and agency mortgage-backed securities (residential and commercial) Total unrealized losses amounted to € 218 mn at December 31, 2006. The unrealized loss positions concernmostly issues of United States government agencies, which are primarily held by Allianz Group’s North American entities. These pay-through/passthrough securities are serviced by cash flows from pools of underlying loans to mostly private debtors. The unrealized losses of these mortgage-backed securities were partly caused by interest rate increases between purchase date of the individual securities and the balance sheet date. Also in various instances, price decreases were caused by increased prepayment risk for individual loan pools that were originated in a significantly higher interest rate environment. Because the decline in fair value is attributable to changes in interest rates and, to a lesser extent, instances of insignificant deterioration of credit quality, the Allianz Group does not consider these investments to be impaired at December 31, 2006.
Government and government agency bonds Total unrealized losses amounted to € 858 mn at December 31, 2006. The Allianz Group holds a large variety of government bonds, mostly of OECD countries (Organization of Economic Cooperation 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” countryand /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. Because the decline in fair value is attributable to changes in interest rates and, to a lesser extent, to instances of insignificant deterioration of credit quality, the Allianz Group does not consider these investments to be impaired at December 31, 2006.
Equity securities As of December 31, 2006, unrealized losses from equity securities amounted to € 159 mn. These unrealized losses concern equity securities that did not meet the criteria of Allianz Group’s impairment policy for equity securities as described in Note 2. Substantially all of the unrealized losses have been in a continuous loss position for less than 6months. In addition, only 2 securities have an aggregated unrealized loss greater than € 10mn.
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, 2006, by contractual term tomaturity, are as follows: As of December 31, 2006 Amortized Cost € mn Fair Value € mn
Equity investments carried at cost As of December 31, 2006, fair values could not be reliably measured for equity investments with carrying amounts totaling € 1,486 mn (2005: € 935 mn). These investments are primarily investments in privately held corporations and partnerships. During the year ended December 31, 2006, such investments with carrying amounts of € 12 mn (2005: € 10 mn) were sold leading to gains of € 32 mn (2005: € 28 mn) and losses of € 1 mn (2005: € – mn).
As of December 31, 2006, the fair value of real estate used by third parties was € 13,494 mn (2005: € 12,901 mn). As of December 31, 2006, real estate used by third parties pledged as security, and other restrictions on title, were
Wholesale and retail trade 4,306 5,023 Financial institutions (excluding banks) and insurance companies 7,740 5,988 Service providers 10,091 10,425
Industry, wholesale and retail trade and service providers 13,474 10,732 Financial institutions (excluding banks) and insurance companies 93,155 75,957
Finance lease receivables Loans and advances to customers include amounts receivable under finance leases at their net investment value of € 2,081 mn (2005: € 1,500 mn).
Net investment in the lease 1) As of December 31, 2006 and 2005, the residual values of the entire leasing portfolio were fully guaranteed.
Loan loss allowance As of December 31, 2006, the overall volume of risk provisions includes loan loss allowances deducted from loans and advances to banks and customers in the amount of € 1,054 mn (2005: € 1,647 mn; 2004: € 4,135 mn) and provisions for contingent liabilities, such as guarantees, loan commitments and other obligations included in other liabilities in the amount of € 261 mn (2005: € 117 mn; 2004: € 371 mn).
Specific allowances Country risk allowances General allowances1) Total € mn € mn € mn € mn € mn € mn € mn € mn € mn € mn € mn € mn
Changes in aggregate policy reserves ceded to reinsurers are as follows: € mn € mn
Carrying amount as of January 1, 9,772 10,276 Foreign currency translation
Change recorded in insurance and investment contract benefits (net) (7) 135 Other changes1) (1,202) (1,082) Carrying amount as of December 31, 8,223 9,772 1) Primarily relates to novation of quota share reinsurance agreement.
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. For international corporate risks exposures exceeding the relevant retention levels of the Allianz Group’s subsidiaries are reinsured internally by Allianz Global Corporate & Specialty AG (“AGCS”) where the portfolio is pooled and with risks exceeding retention limits ceded by external reinsurance. The Allianz Groupmaintains a centralized program for natural catastrophe events which pools exposures from a number of subsidiaries by internal reinsurance agreements with Allianz SE. Allianz SE limits exposures in this portfolio through external reinsurance. For other risks, the subsidiaries of the Allianz Groupmaintain individual reinsurance programs. Allianz SE participates as a reinsurer on an arms’ length basis in these programs.
Deferred acquisition costs Property-Casualty 3,692 3,550 Life/Health 13,619 12,712 Asset Management 50 28
Changes in the consolidated subsidiaries of the Allianz Group — — (60) Foreign currency
Cost as of December 31, 2,359 2,374 2,361 1) During the year ended December 31, 2006, includes interest accrued on unamortized PVFP € 62 mn (2005: € 74 mn; 2004: € 94 mn).
As of December 31, 2006, the percentage of PVFP that is expected to be amortized in 2007 is 13.79% (13.66% in
Non-current assets and disposal groups held for sale — 3,292 Other assets1) 3,028 4,130 1) As of December 31, 2006, includes prepaid benefit costs for defined benefit plans of € 265 mn.
Other assets due within one year amounted to € 30,255 mn (2005: € 34,196 mn), and those due after more than one year totaled € 8,638 mn (2005: € 8,097 mn).
Changes in the consolidated subsidiaries of the Allianz Group 819 (2,493) 691