CONTENT A To our Investors Pages 1 - 12 2 Letter to the Investors 5 Supervisory Board Report 11 Mandates of the Members of the Supervisory Board 12 Mandates of the Members of the Board of Management
B Corporate Governance Pages 13 - 34 14 Corporate Governance Report 19 Statement on Corporate Management pursuant to § 315 (5) and § 289a of the HGB
(part of the Group Management Report) 21 Takeover-related Statements and Explanations (part of the Group Management Report) 24 Remuneration Report (part of the Group Management Report)
C Group Management Report Pages 35 - 76 36 Business Operations 39 Business Environment 41 Executive Summary of 2016 Results 43 Property-Casualty Insurance Operations 45 Life/Health Insurance Operations 48 Asset Management 50 Corporate and Other
D Consolidated Financial Statements Pages 77 - 146 78 Consolidated Balance Sheets 79 Consolidated Income Statements 80 Consolidated Statements of Comprehensive Income 81 Consolidated Statements of Changes in Equity 82 Consolidated Statements of Cash Flows
Disclaimer regarding roundings The consolidated financial statements are presented in millions of Euros (€ MN) unless otherwise stated. Due to rounding, numbers presented may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures.
Further Information Following the change in the E.U. Transparency Directive, Allianz Group adjusted its reporting in 2016, including the discontinuation of the First Quarter and Third Quarter Interim Reports. We have also taken this opportunity to enhance transparency, streamline our disclosures, and remove redundancies wherever possible.
All references to chapters, pages, notes, internet pages, etc. within this report are also linked.
That said, our share price could not repeat the double-digit performance seen the previous year, what with unprecedented negative interest rates, political instability, and a difficult second quarter. But as the figures in our annual financial statements show, we are working hard to sustainably increase your company’s value to key stakeholder groups and to place customers at the center of all our actions.
Our strategy and our Renewal Agenda are taking effect: they strengthen Allianz and enhance your company’s competitiveness.
− We are making good progress in shifting our Life portfolio towards capital-efficient products; our new business margin has increased to 2.7 %. And we continue to address deficits in the existing portfolio just as rigorously, as the successful sale of our South Korean business demonstrates.
− In order to make a comparative assessment of our customer orientation, the measurement of customers’ willingness to recommend Allianz (Net Promoter Score) was harmonized on a group-wide basis. Results for 2016 were quite gratifying: 55 % of our businesses achieved an NPS above the respective market average.
− We also moved up the newly defined Inclusive Meritocracy Index, which measures progress in establishing an inclusive performance culture: it stood at 70 % in 2016, after 68 % in 2015.
− Our commitment to being a sustainable business was rewarded by the Dow Jones Sustainability Index, one of the most prestigious Responsible Business ratings. We achieved a gold rating and were the highest-placed primary insurer. Over the last year, we continued to take industry-leading steps including our divestment from coal-based industries and the growth of our renewable energy portfolio to € 4.6 BN.
We are experiencing an exciting moment in the history of Allianz, with huge and tantalizing challenges ahead. It makes me happy to see how, at the various Allianz entities, young talents work with experienced veterans to take this proud global company further into the digital age. I am very pleased that we have such talented employees, and I extend my warmest thanks to them for their hard work and outstanding dedi cation. Special thanks also go to our sales partners, in particular our capable Allianz representatives worldwide. I am sure I am expressing these thanks on your behalf as well.
Dear investors, we greatly appreciate your ongoing loyalty and support. Please be assured that in 2017, as in the past years, we will not rest on our laurels, and we are making good progress despite all the uncertain ties and challenges we are facing. It is not in our power, obviously, to prevent low interest rates, strong market fluctuations, or natural catastrophes. But we can work hard to achieve our ambitious goals, and to ensure that your Allianz will remain successful as the world goes digital.
P.S.: Our financial reporting goes digital, too, and we are deliberately keeping this Annual Report as brief as possible. For further details on our figures and plans, please refer to our website at www.allianz.com/investor-relations or our Allianz Investor Relations App.
During the fiscal year 2016, the Supervisory Board fulfilled all its duties and obligations as laid out in the company Statutes and applicable law. It monitored the management of the company, devoted particular attention to personnel matters related to the Board of Management, and advised the Board of Management regarding the conduct of business.
OVERVIEW In all of the Supervisory Board’s 2016 meetings, the Board of Management reported on Group revenues and results as well as developments in individual business segments. The Board of Management informed us on the course of business as well as on the development of the Allianz Group and Allianz SE, including deviations in actual business developments from the planning. Within the framework of our activities, the Board of Management reported to us on a regular basis and in a timely and comprehensive manner, both verbally and in writing. Key reporting issues were strategic topics, such as the implementation of the Renewal Agenda and the portfolio strategy, the risk strategy and capital management, the ongoing challenges facing the life insurance business due to the low interest rates, the divestment of the life insurance business in South Korea, as well as the business development in the Asset Management segment. In addition, we were extensively involved in the Board of Management’s planning for both the fiscal year 2017 and the three-year period from 2017 to 2019. We dealt extensively with the implementation of the audit reform legislation, in particular the preparation of the audit firm rotation. Finally, we prepared for the election of the Supervisory Board in spring 2017 and also took a look at the result of the review of the efficiency of the Supervisory Board’s activities carried out with the support of an external advisor.
ISSUES DISCUSSED IN THE SUPERVISORY BOARD PLENARY SESSIONS In the meeting of 18 February 2016, the Supervisory Board dealt comprehensively with the pro- visional financial figures for the fiscal year 2015 and the Board of Management’s recommended dividend. The appointed audit firm, KPMG AG Wirtschaftsprüfungsgesellschaft (KPMG), Munich, reported in detail on the provisional results of their audit. The Chief Compliance Officer then gave his annual report on the compliance organization and key compliance-related matters. During the further course of the meeting, the Supervisory Board also reviewed the extent to
In the meeting of 10 March 2016, the Supervisory Board dealt, firstly with personnel matters and appointed Ms. Jacqueline Hunt to the Board of Management as successor to Mr. Jay Ralph with effect from 1 July 2016, and Dr. Günther Thallinger as successor to Dr. Maximilian Zimmerer with effect from 1 January 2017. The Supervisory Board also discussed the audited annual Allianz SE and consolidated financial statements as well as the recommendation for the appropriation of earnings by the Board of Management for the fiscal year 2015. The auditor confirmed that there were no discrepancies to their February report, and issued an unqualified auditor’s report for the individual and consolidated financial statements. In addition, the Board of Management submitted its report on risk developments in 2015. The Supervisory Board also dealt with the agenda and the proposals for resolution for the 2016 AGM of Allianz SE. It also resolved to appoint KPMG as auditor for the individual and consolidated financial statements for the fiscal year 2016 and for the auditor’s review of the 2016 half-yearly financial report. In addition, the Supervisory Board was also informed about the implementation status of the Renewal Agenda and the consideration of environmental, social, and governance (ESG) aspects in the investment and underwriting process.
DECLARATION OF CONFORMITY WITH THE GERMAN CORPORATE GOVERNANCE CODE On 15 December 2016, the Board of Management and the Supervisory Board issued the Declaration of Conformity in accordance with § 161 of the German Stock Corporation Act (“Aktiengesetz ”). The Declaration was posted on the company website, where it is available to shareholders at all times. Allianz SE fully complies and will continue to fully comply with the recommendations of the German Corporate Governance Code made in the Code’s version of 5 May 2015.
COMMITTEE ACTIVITIES The Supervisory Board has formed various committees in order to perform its duties efficiently. The committees prepare the discussion and adoption of resolutions in the plenary sessions or can adopt resolutions themselves.
The Audit Committee held five regular and two extraordinary meetings, and adopted one resolution by written procedure in 2016. In the presence of the auditors, it discussed the annual financial statements of Allianz SE and the consolidated financial statements of the Allianz Group, the management reports and auditor’s reports as well as the half-yearly financial report. The Audit Committee saw no reason to raise any objections. In addition, the Board of Management submitted its report on the results of the first and third quarter. The committee also dealt with the auditor’s engagement and established priorities for the annual audit for the 2016 financial year. It also discussed assignments to the auditors for non-audit services. In addition, it dealt extensively with the compliance system, the internal audit system as well as the internal financial reporting process and the internal controls over financial reporting. The committee received regular reports on legal and compliance issues and the work of the internal audit function and initiated a review of the group-wide implementation status of the governance requirements according to Solvency II. The preparations for the audit firm rotation from the fiscal year 2018 were one of the main areas of focus of the Audit Committee’s work. A tender procedure in accordance with the new legal requirements was carried out for this purpose and a recommendation finally submitted to the plenary session.
measures to reduce it were also dealt with in detail. Other matters considered were the risk strategy of Allianz SE and of the Allianz Group, the risk categories “operational risk” and “credit risk”, the effects of the prevailing low-interest environment, and the rules for Global Systematically Important Insurers (G-SII).
The Nomination Committee held four meetings, two of which by conference call in 2016, in which it dealt comprehensively with the proposals made by the shareholders for the election of the Supervisory Board by the 2017 AGM.
All Supervisory Board members received the documentation relating to the annual financial statements and the auditor’s reports from KPMG on schedule. The provisional financial statements and KPMG’s audit results were discussed in the Audit Committee on 15 February 2017 and in the plenary session of the Supervisory Board on 16 February 2017. The final financial statements and KPMG’s audit reports were reviewed on 9 March 2017 by the Audit Committee and in the Supervisory Board plenary session. The auditors participated in these discussions and presented the main results from the audit. No material weaknesses in the internal financial 9Annual Report 2016 Allianz Group
reporting control process were discovered. There were no circumstances that might give cause for concern about the auditor’s independence. In addition, the market-value balance sheet as of 31 December 2016 as well as the relevant KPMG report, were addressed by the Audit Committee and Supervisory Board.
MEMBERS OF THE SUPERVISORY BOARD AND BOARD OF MANAGEMENT Ms. Ira Gloe-Semler resigned from her office of employee representative on the Supervisory Board effective 31 March 2016, due to her change of function with the union ver.di. The SE Works Council appointed Ms. Martina Grundler, also a representative of the union ver.di, as her successor. Mr. Peter Denis Sutherland stepped down from the Supervisory Board following the AGM on 4 May 2016, having reached retirement age. Dr. Friedrich Eichiner was elected to the Supervisory Board as his successor by the AGM.
DR. WULF H. BERNOTAT Vice Chairman Member of various Supervisory Boards Membership in other statutory supervisory boards and SE administrative boards in Germany Bertelsmann Management SE Bertelsmann SE & Co. KGaA Deutsche Telekom AG Vonovia SE (Chairman)
ROLF ZIMMERMANN Vice Chairman Chairman of the (European) SE Works Council of Allianz SE
JEAN-JACQUES CETTE Chairman of the Group Works Council of Allianz France S.A. Membership in comparable1 supervisory bodies Membership in Group bodies Allianz France S.A.
DR. FRIEDRICH EICHINER since 4 May 2016 Member of various Supervisory Boards Membership in other statutory supervisory boards and SE administrative boards in Germany Festo AG Membership in comparable1 supervisory bodies Festo Management AG
IRA GLOE-SEMLER until 1 April 2016 Regional Representative Financial Services of ver.di Hamburg
PROF. DR. RENATE KÖCHER Head of “Institut für Demoskopie Allensbach” (Allensbach Institute) Membership in other statutory supervisory boards and SE administrative boards in Germany BMW AG Infineon Technologies AG Nestlé Deutschland AG Robert Bosch GmbH
JÜRGEN LAWRENZ Employee of Allianz Managed Operations & Services SE Membership in other statutory supervisory boards and SE administrative boards in Germany Membership in Group bodies Allianz Managed Operations & Services SE
SERGIO BALBINOT Insurance Western & Southern Europe Insurance Middle East, Africa Asia Pacific since 1 January 2017 Membership in comparable1 supervisory bodies Bajaj Allianz General Insurance Co. Ltd. since 12 January 2016 Bajaj Allianz Life Insurance Co. Ltd. since 12 January 2016 UniCredit S.p.A.
JACQUELINE HUNT since 1 July 2016 Asset Management, US Life Insurance Membership in comparable1 supervisory bodies Membership in Group bodies Allianz Life Insurance Company of North America (Chairwoman) since 22 July 2016
DR. HELGA JUNG Insurance Iberia & Latin America, Legal, Compliance, Mergers & Acquisitions Membership in other statutory supervisory boards and SE administrative boards in Germany Deutsche Telekom AG since 25 May 2016 Membership in Group bodies Allianz Asset Management AG (Chairwoman) Allianz Deutschland AG since 11 March 2016 Allianz Global Corporate & Specialty SE Membership in comparable1 supervisory bodies UniCredit S.p.A.
until 31 May 2016 Membership in Group bodies Allianz Compañía de Seguros y Reaseguros S.A. Companhia de Seguros Allianz Portugal S.A.
DR. CHRISTOF MASCHER Operations, Allianz Worldwide Partners Membership in other statutory supervisory boards and SE administrative boards in Germany Volkswagen Autoversicherung AG Membership in Group bodies Allianz Managed Operations & Services SE (Chairman) Membership in comparable1 supervisory bodies Membership in Group bodies Allianz Worldwide Partners S.A.S.
JAY RALPH until 30 June 2016 Asset Management, US Life Insurance Membership in comparable1 supervisory bodies Membership in Group bodies Allianz Life Insurance Company of North America (Chairman)
DR. AXEL THEIS Global Insurance Lines & Anglo Markets Membership in other statutory supervisory boards and SE administrative boards in Germany ProCurand GmbH & KGaA (Chairman) Membership in Group bodies Allianz Global Corporate & Specialty SE (Chairman) Membership in comparable1 supervisory bodies Membership in Group bodies Allianz Australia Ltd.
DR. DIETER WEMMER Finance, Controlling, Risk Membership in other statutory supervisory boards and SE administrative boards in Germany Membership in Group bodies Allianz Asset Management AG Allianz Investment Management SE Membership in comparable1 supervisory bodies UBS Group AG since 10 May 2016
DR. WERNER ZEDELIUS Insurance German Speaking Countries and Central & Eastern Europe Membership in other statutory supervisory boards and SE administrative boards in Germany FC Bayern München AG Membership in Group bodies Allianz Deutschland AG (Chairman) Allianz Investment Management SE Membership in comparable1 supervisory bodies Membership in Group bodies Allianz Elementar Lebensversicherungs-AG (Chairman) Allianz Elementar Versicherungs-AG (Chairman) Allianz Investmentbank AG Allianz Suisse Lebensversicherungs-Gesellschaft AG Allianz Suisse Versicherungs-Gesellschaft AG Allianz Tiriac Asigurari S.A.
DR. MAXIMILIAN ZIMMERER until 31 December 2016 Investments, Global Life/Health Insurance Asia Pacific Membership in other statutory supervisory boards and SE administrative boards in Germany Membership in Group bodies Allianz Asset Management AG Allianz Investment Management SE (Chairman) Allianz Lebensversicherungs-AG
GrouP CaPITaL CoMMITTEE (dissolved effective as of 1 July 2016) Oliver Bäte (Chairman), Dr. Dieter Wemmer, Dr. Maximilian Zimmerer.
Proposals to the Board of Management concerning risk capital management, including group-wide capital and liquidity planning, as well as investment strategy.
Preparation of the capital and liquidity planning for the Group and Allianz sE, implementing and overseeing the principles of group-wide capital and liquidity planning, as well as invest ment strategy and preparing risk strategy. This includes, in particular, significant individual investments and guidelines for currency management, Group financing and internal Group capital management, as well as establishing and overseeing a group-wide risk management and monitoring system including dynamic stress tests.
Developing, proposing, implementing and monitoring a group-wide IT strategy, approval of relevant IT investments.
Corporate Constitution of the European Company (SE) As a European Company, Allianz SE is subject to special European SE regulations and the German SE Implementation Act (“SE-Ausführungsgesetz ”) in addition to the German stock corporation Act. However, the main features of a German stock corporation – in particular the two-tier board system (Board of Management and Supervisory Board) and the principle of equal employee representation on the Super visory Board – have been maintained by Allianz SE.
Function of the Board of Management The Board of Management of Allianz SE comprises nine members. It is responsible for setting business objectives and the strategic direction, coordinating and supervising the operating entities, as well as implementing and overseeing an efficient risk management system. The Board of Management also prepares the Group’s consolidated financial statements and the annual financial statements of Allianz SE, including the market value balance sheet, as well as interim reports.
GrouP CoMPENsaTIoN CoMMITTEE Board members of Allianz sE and executives below Allianz sE Board level
Designing, monitoring and improving group-wide compensation systems in line with regulatory requirements and sub mitting an annual report on the results of its monitoring, along with proposals for improvement.
Monitoring of the underwriting business, of the related risk management and strategy as well as developing an under- writing policy.
GrouP INvEsTMENT CoMMITTEE Members of the Board of Management and executives below Allianz sE Board level
The Allianz Group runs its operating entities and business segments via an integrated management and control process. The Holding and the operating entities first define the business strategies and goals. On this basis, joint plans are then prepared for the Supervisory Board’s consideration when setting targets for the performancebased remuneration of the members of the Board of Management. For details, see the Remuneration Report starting on page 24.
SUPERVISORY BOARD COMMITTEES Part of the Supervisory Board’s work is carried out by its committees. The Supervisory Board receives regular reports on the activities of its committees. The composition of committees and the tasks assigned to them are regulated by the Supervisory Board’s Rules of Procedure.
supervisory Board Committees suPErvIsory Board CoMMITTEEs rEsPoNsIBILITIEs sTaNdING CoMMITTEE 5 members
− Preparation of the efficiency review of the Supervisory Board audIT CoMMITTEE 5 members
− Chairman: appointed by the Supervisory Board (Dr. Wulf H. Bernotat)
− Initial review of the annual Allianz sE and consoli- dated financial statements, management reports (incl. Risk Report) and the dividend proposal, review of half-yearly reports or, where applicable, quarterly financial reports or statements
− Three shareholder representatives (in addition to Dr. Helmut Perlet: Christine Bosse, Peter Denis Sutherland until 4 May 2016, Dr. Friedrich Eichiner from 4 May 2016)
− Approval of the assumption of other mandates by Board of Management members
− Two further shareholder representatives (Prof. Dr. Renate Köcher, Peter Denis Sutherland until 4 May 2016, Jim Hagemann Snabe from 4 May 2016)
− Setting of concrete objectives for the composition of the Supervisory Board
PLENary sEssIoNs oF THE suPErvIsory Board Dr. Helmut Perlet (Chairman) 6/6 100 Dr. Wulf H. Bernotat (Vice Chairman) 6/6 100 Rolf Zimmermann (Vice Chairman) 6/6 100 Dante Barban 6/6 100 Christine Bosse 4/6 66 Gabriele Burkhardt-Berg 6/6 100 Jean-Jacques Cette 6/6 100 Dr. Friedrich Eichiner 3/3 1 100 Ira Gloe-Semler 2/2 2 100 Martina Grundler 4/4 3 100 Prof. Dr. Renate Köcher 5/6 83 Jürgen Lawrenz 6/6 100 Jim Hagemann Snabe 5/6 83 Peter Denis Sutherland 2/3 4 66 sTaNdING CoMMITTEE Dr. Helmut Perlet (Chairman) 2/2 100 Dr. Wulf H. Bernotat 2/2 100 Gabriele Burkhardt-Berg 2/2 100 Prof. Dr. Renate Köcher 1/2 50 Rolf Zimmermann 2/2 100
“The aim of Allianz sE’s Supervisory Board is to have members who are equipped with the necessary skills and competence to properly supervise and advise Allianz sE’s management. Supervisory Board candidates should possess the professional expertise and experience, integrity, motivation and commitment, independence and personality required to successfully carry out the responsibilities of a Supervisory Board member in a financial-services institution with international operations. To promote additional cooperation among Supervisory Board members, care should be taken in selecting the candidates to ensure that adequate attention is paid to ensuring diversity in occupational backgrounds, professional expertise and experience.
5. Term of membership The continuous period of membership for any member of the Supervisory Board should, as a rule, not exceed 15 years.
2. Independence At least eight members of the Supervisory Board should be independent as defined by No. 5.4.2 of the Corporate Governance Code, i.e. they may not have any business or personal relations with Allianz sE or its Executive Bodies, a controlling shareholder or an enterprise associated with the latter, which may cause a substantial and not merely temporary conflict of interests. In case shareholder representatives and employee representatives are viewed separately, at least four members should be independent within the meaning of No. 5.4.2 of the Corporate Governance Code. Regarding employee representatives, however, the mere fact of employee representation and the existence of a working relationship with the company shall not itself affect independence.
3. Time of availability Each member of the Supervisory Board must ensure that it has sufficient time to dedicate to the proper fulfilment of the Supervisory Board mandate. It has to be taken into account that – there at least four, but usually six ordinary Supervisory Board meetings per year, each of which requires adequate preparation; – sufficient time has to be dedicated for the audit of the annual and consolidated financial statements; – attendance of the General Meeting is required; II. Requirements relating to the composition of the Board as a whole 1. Specialist knowledge – Make certain that the members in their entirety are familiar with the insurance and financial-services industry as defined under Article 100 (5) of the German Stock Corporation Act (AktG).
– At least one member must have considerable experience in the insurance and financial-services fields
At Allianz sE as a Societas Europaea (European Company), Allianz employees from different Member States of the E.u. are considered in the distribution of Supervisory Board seats for employee representatives, according to the Agreement concerning the Participation of Employees in Allianz sE dated 3 July 2014.
The composition of the Supervisory Board of Allianz SE reflects these objectives. It has an appropriate number of independent members with international backgrounds. With four female Supervisory Board members, the current legislation for equal participation of women and men in leadership positions (statutory gender quota of 30 %) is being met. The current composition of the Supervisory Board and its committees is described on page 9.
Directors’ dealings Members of the Board of Management and the Supervisory Board are obliged by the E.U. Market Abuse Directive to disclose to both Allianz SE and the German Federal Financial Supervisory Authority any transactions involving shares or debt securities of Allianz SE or financial derivatives or other instruments based on them as soon as the value of the securities acquired or divested by the member amounts to five thousand Euros or more within a calendar year. These disclosures are published on our website at www.allianz.com/directorsdealings.
In compliance with special legal provisions that apply to insurance companies, the auditor of the annual financial statements and of the half-yearly financial report is appointed by the Supervisory Board, and not by the AGM. The audit of the financial statements covers the individual financial statements of Allianz SE and also the consolidated financial statements of the Allianz Group.
To ensure maximum transparency, we inform our shareholders, financial analysts, the media and the general public about the company ’s situation on a regular basis and in a timely manner. The annual financial statements of Allianz SE, the Allianz Group’s consolidated financial statements and the respective management reports are published within 90 days of the end of each financial year. Additional information is provided in the Allianz Group’s half-yearly financial reports and quarterly statements. Information is also made available at the AGM, at press and analysts’ conferences, as well as on the Allianz Group’s website. Our website also provides a financial calendar listing the dates of major publications and events, such as annual reports, quarterly statements and half-yearly financial reports, AGMs as well as analyst conference calls and Financial press conferences.
You can find the 2017 financial calendar on our website at www.allianz.com/financialcalendar.
Regulatory requirements The regulatory requirements for corporate governance as set out in Solvency II are additionally important. These requirements, which became effective as of 1 January 2016, include, in particular, the establishment and further design of significant control functions (risk management, actuarial function, compliance and internal audit) as well as general principles for a sound business organization. The regulatory requirements are applicable throughout the Group and have been implemented using written guidelines issued by the Board of Management of Allianz SE. For the financial year 2016 it was required to prepare for the first time a market value balance sheet at the individual and Group level, for this to be audited by the auditor and separately reported on.
The Statement on Corporate Management pursuant to § 315 (5) and § 289a of the German Commercial Code (“Handelsgesetzbuch – HGB”) forms part of the Group Management Report. According to § 317 (2), sentence 4 of the HGB, this Statement does not have to be included within the scope of the audit.
In addition, Allianz SE follows all the suggestions of the Code in its 5 May 2015 version.
The Declaration of Conformity and further information on corporate governance at Allianz can be found on our website at www. allianz.com/corporate-governance.
In addition, the quality of the internal control system is assessed by the Allianz Group’s internal audit staff. Internal Audit conducts independent audit procedures, analyzing the structure and efficacy of the internal control systems as a whole. It also examines the potential for additional value and improvement of our organization’s operations. Fully compliant with all international auditing principles and standards, Internal Audit contributes to the evaluation and improvement of the effectiveness of the risk management, control and governance processes. Therefore, internal audit activities are geared towards helping the company to mitigate risks and further assist in strengthening its governance processes and structures.
COMPLIANCE PROGRAM The sustained success of the Allianz Group is based on the responsible behavior of all Group employees, who embody trust, respect and integrity. By means of the global compliance program coordinated by its central compliance function, Allianz supports and follows internationally and nationally recognized guidelines and standards for rulescompliant and value-based corporate governance. These include the principles of the United Nations (UN Global Compact), the Guidelines of the Organization for Economic Co-operation and Development (OECD guidelines) for Multinational Enterprises, and European and international standards on data and consumer protection, economic and financial sanctions and combating corruption, bribery, money laundering and terrorism financing. Through its support for and acceptance of these standards, Allianz aims to avoid the risks that might arise from non-compliance. The central compliance function is responsible – in close cooperation with local compliance departments – for ensuring the effective implementation and monitoring of the compliance program within the Allianz Group, as well as for investigating potential compliance infringements.
A general description of the functions of the Board of Management, the Supervisory Board and their committees can be found in the Corporate Governance Report starting on page 14, and on our website at www.allianz.com/corporate-governance.
COMPOSITION OF SHARE CAPITAL As of 31 December 2016, the share capital of Allianz SE was € 1,169,920,000. It was divided into 457,000,000 registered and fully paid-up shares with no-par value and a corresponding share capital amount of € 2.56 per share. All shares carry the same rights and obligations. Each no-par value share carries one vote.
LEGAL AND STATUTORY PROVISIONS APPLICABLE TO THE APPOINTMENT AND REMOVAL OF MEMBERS OF THE BOARD OF MANAGEMENT AND TO AMENDMENTS OF THE STATUTES The Supervisory Board appoints the members of Allianz SE’s Board of Management for a maximum term of five years (Articles 9 (1), 39 (2) and 46 of the SE Regulation, §§ 84, 85 AktG and § 5 (3) of the Statutes). Reappointments, for a maximum of five years each, are permitted. A simple majority of the votes cast in the Supervisory Board is required to appoint members of the Board of Management. In the case of a tie vote, the Chairperson of the Supervisory Board, who pursuant to Article 42 of the SE Regulation must be a shareholder representative, shall have the casting vote (§ 8 (3) of the Statutes). If the Chairperson does not participate in the vote the Vice Chairperson shall have the casting vote, provided he or she is a shareholder representative. A Vice Chairperson who is an employee representative has no casting vote (§ 8 (3) of the Statutes). If a required member of the Board of Management is missing, in urgent cases the courts must appoint such member upon the application of an interested party (§ 85 AktG). The Supervisory Board may dismiss members of the Board of Management if there is an important reason (§ 84 (3) AktG).
According to § 5 (1) of the Statutes, the Board of Management shall consist of at least two persons. Apart from that, the Supervisory Board determines the number of members. The Supervisory Board has appointed a Chairman of the Board of Management pursuant to § 84 (2) AktG.
German insurance supervisory law requires that members of the Board of Management have the reliability and professional competence needed to manage an insurance company. A person cannot become a member of the Board of Management if he or she is already a manager of two other insurance undertakings, pension funds, insurance holding companies or insurance special purpose vehicles. However, the supervisory authority may permit more than two such mandates if they are held within the same group (§ 24 (3) of the German Insurance Supervision Act (“Versicherungsaufsichts gesetz – VAG”)). The Federal Financial Services Supervisory Authority (“Bundes anstalt für Finanz dienst leistungsaufsicht – BaFin”) must be notified about the intention of appointing a Board of Management member pursuant to § 47 No. 1 VAG.
Takeover-related Statements and Explanations The following information is given pursuant to § 289 (4) and § 315 (4) of the German Commercial Code (“Handelsgesetzbuch – HGB”) and § 176 (1) of the German Stock Company Act (“Aktiengesetz – AktG”).
AUTHORIZATION OF THE BOARD OF MANAGEMENT TO ISSUE AND REPURCHASE SHARES The Board of Management is authorized to issue shares as well as to acquire and use treasury shares as follows: It may increase the company’s share capital, on or before 6 May 2019, with the 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 € 550,000,000 (Authorized Capital 2014/I). In case of a capital increase against cash contribution, the Board of Management may exclude the shareholders’ subscription rights for these shares with the consent of the Supervisory Board, (i) for fractional amounts, (ii) in order to safeguard the rights pertaining to holders of convertible bonds or bonds with warrants, including mandatory convertible bonds, and (iii) in the event of a capital increase of up to 10 %, if the issue price of the new shares is not significantly below the stock market price. The Board of Management may furthermore exclude the shareholders’ subscription rights with the consent of the Supervisory Board, in the event of a capital increase against contributions in kind.
The company’s share capital is conditionally increased by up to € 250,000,000 (Conditional Capital 2010/2014). This conditional capital increase will only be carried out to the extent that conversion or option rights are exercised (or conversion obligations fulfilled) resulting from bonds that have been issued by Allianz SE or its subsidiaries based on the authorizations granted by the General Meeting on 5 May 2010 and 7 May 2014.
The Board of Management may buy back and use Allianz shares for other purposes until 6 May 2019 on the basis of the authorization of the General Meeting of 7 May 2014 (§ 71 (1) No. 8 AktG). Together with other treasury shares that are held by Allianz SE, or which are attributable to it under §§ 71a et seq. AktG, such shares may not exceed 10 % of the share capital at any time. The shares acquired pursuant to this authorization may be used, under exclusion of the shareholders’ subscription rights, for any legally admissible purposes, and in particular those specified in the authorization. Furthermore, the acqui sition of treasury shares under this authorization may also be carried out using derivatives such as put options, call options, forward purchases or a combination thereof, provided such derivatives do not relate to more than 5 % of the share capital.
Domestic or foreign banks that are majority-owned by Allianz SE may buy and sell Allianz shares for trading purposes (§ 71 (1) No. 7 and (2) AktG) under an authorization of the General Meeting valid until 6 May 2019. The total number of shares acquired thereunder, together with treasury shares held by Allianz SE or attributable to it under §§ 71a et seq. AktG, shall at no time exceed 10 % of the share capital of Allianz SE.
ESSENTIAL AGREEMENTS OF ALLIANZ SE WITH CHANGE OF CONTROL CLAUSES AND COMPENSATION AGREEMENTS PROVIDING FOR TAKEOVER SCENARIOS The following essential agreements of the company are subject to a change of control condition following a takeover bid: − Our reinsurance contracts, in principle, include a clause under which both parties to the contract have an extraordinary termination right if and when the counterparty merges or its ownership or control situation changes materially. Agreements with brokers regarding services connected with the purchase of reinsurance cover also provide for termination rights in case of a change of control. Such clauses are standard market practice.
− Allianz SE is also party to various bancassurance distribution agreements for insurance products in various regions. These distribution agreements normally include a clause under which the parties have an extraordinary termination right in case there is a change of control of the other party’s ultimate holding company.
− Bilateral credit agreements in some cases provide for termination rights if there is a change of control, mostly defined as the acquisition of at least 30 % of the voting rights within the meaning of § 29 (2) of the German Takeover Act (“Wertpapiererwerbs- und Übernahmegesetz – WpÜG”). If such termination rights are exercised, the respective credit lines have to be replaced by new credit lines under conditions then applicable.
The company has entered into the following compensation agreements with members of the Board of Management and certain employees providing for the event of a takeover bid: A change-of-control clause in the service contracts of the members of Allianz SE’s Board of Management provides that, if within twelve months after the acquisition of more than 50 % of the company ’s share capital by one shareholder or several shareholders acting in concert (change of control) the appointment as a member of the Board of Management is revoked unilaterally by the Supervisory Board, or if the mandate is ended by mutual agreement, or if the Management Board member resigns because his or her responsibilities as a Board member are significantly reduced through no fault of the Board member, he or she shall receive his or her contractual 22 Annual Report 2016 Allianz Group
GOVERNANCE SYSTEM The remuneration of the Board of Management is decided upon by the entire Supervisory Board, based on proposals prepared by the Personnel Committee. If required, outside advice is sought from independent external consultants. The Personnel Committee and the Supervisory Board consult with the Chairman of the Board of Management, as appropriate, in assessing the performance and remuneration of members of the Board of Management. The Chairman of the Board of Management is not present when his own remuneration is discussed. Regarding the activities and decisions taken by the Personnel Committee and the Supervisory Board, please refer to the Supervisory Board Report starting on page 5.
− Variable remuneration focused on sustainability and aligned with shareholder interests: Two thirds of the variable remuneration reflect longer-term performance. One third is a deferred payout after three years, based on a sustainability assessment covering the three-year period. The other third rewards the sustained performance of the share price with a deferred payout four years after grant.
REMUNERATION STRUCTURE, COMPONENTS AND TARGET SETTING PROCESS There are four main remuneration components. Each has the same weighting within annual target remuneration: base salary, annual bonus, annualized mid-term bonus (MTB), and equity-related remuneration. The target compensation of each variable component does not exceed the base salary, with the total target variable compensation not exceeding three times the base salary. In addition, Allianz offers pensions and similar benefits and perquisites.
VARIABLE REMUNERATION Variable remuneration is designed to balance short-term performance, longer-term success and sustained value creation. Each year, the Supervisory Board agrees with members of the Board of Management on performance targets for the variable remuneration component.
aspects. The latter is framed in a common standard (“People Letter ”) designed to drive cultural change across the Group, namely: − Customer and Market Excellence, − Collaborative Leadership, − Entrepreneurship, − Trust.
To support the assessment of People Letter behaviors, a so-called “multi-rater” process has been introduced. Each member of the Board of Management collects feedback from the Chairman of the Allianz SE Board of Management, the other Board members and direct reports. The resulting analysis supports the assessment of the behavioral part of performance and additionally provides a sound basis for feedback and personal development discussions. Based on the 2016 target achievement for the Group, the business division/corporate functions, and the qualitative performance, the total annual bonus awards ranged between 100 % and 131 % of the target, with an average bonus award of 123 % of the target.
− Equity-related remuneration (long-term): A virtual share award, known as “Restricted Stock Units” (RSus). The grant value of the RSus allocated equals the annual bonus of the performance year. The number of RSus allocated is derived from dividing the grant value by the fair market value of an RSu at the time of grant.
The fair market value is calculated based on the ten-day average Xetra closing price of the Allianz stock following the financial press conference on the annual results. As RSus are virtual stocks without dividend payments, the average Xetra closing price is reduced1 by the net present value of the expected future 1 The fair market value of the RSUs is further subject to a small reduction of a few Euro cents due to the 200 % cap on the RSU payout. This reduction is calculated based on a standard option pricing formula.
Variable remuneration components may not be paid, or payment may be restricted, in the case of a breach of the Allianz Code of Conduct, risk limits, or compliance requirements. Additionally, a reduction or cancellation of variable remuneration may occur if the supervisory authority (BaFin) requires this in accordance with its statutory powers.
For members of the Allianz SE Board of Management who were born before 1 January 1958, and for the rights accrued before 2015, the guaranteed minimum interest rate remains at 2.75 % and the retirement age is still 60.
From 1 January 2005 until 31 December 2014, most Board of Management members have participated in a contribution-based system which was frozen as of 31 December 2014 and is now only covering disability and death. Before 2005 a defined benefit plan provided fixed benefits which were not linked to base salary increases. Benefits generated under this plan were frozen at the end of 2004. Additionally, most Board members participated in the Allianz Versorgungskasse VVaG, a contribution-based pension plan, and the Allianz Pensionsverein e.V. which were closed for new entries as of 1 January 2015.
2 The relevant share price used to determine the final number of RSUs granted and the 200 % cap is available only after sign-off by the external auditors.
10 Jacqueline Hunt received an off-cycle one time payment of € 120 ThOU to reimburse her for relocation cost.
AEI 2016/RSu4 996 – – – – – – 750 – – – – – – – – – – – – – AEI 2012/RSu4 – – – – – – 1,334 – – – – – – – – – – – – – – AEI 2011/RSu4 – – – – – 1,704 – – – – – – – – – – – – – – – GEI 2010/RSu4 – – – – – 916 – – – – – – – – – – – – – – – GEI 2010/SAR5 – – – – – – – – – – – – – – – – – – – – – GEI 2008/SAR5 – – – – – 263 – – – – – – – – – – – – – – –
8 In addition to the amounts disclosed in the table, Sergio Balbinot received a buyout award of € 6 Mn to compensate for forfeited grants from his previous employer: € 3 Mn in cash and € 3 Mn in RSUs. 50 % of the cash amount was paid in February 2015 and 50 % was paid in 2016 and are subject to clawback.
5 The equity-related remuneration that applied before 2010 consisted of two vehicles, virtual stock awards known as RSUs and virtual stock options known as “Stock Appreciation Rights” (SAR). Only RSUs have been awarded as of 1 January 2010. The remuneration system valid until December 2009 is disclosed in the
IndIvIdual remuneratIon: 2016 and 2015 € Thou (total might not sum up due to rounding)
AEI 2012/RSu4 – – – – – – – – – – – – – – – – – – – – 1,083 AEI 2011/RSu4 – – – – – – – – – – – – – – – – – – – 1,505 – GEI 2010/RSu4 – – – – – – – – – – – – – – – – – – – 1,225 – GEI 2010/SAR5 – – – – – – – – – – – – – – – – – – – 591 – GEI 2008/SAR5 – – – – – – – – – – – – – – – – – – – 328 –
6 Pension Service Cost in accordance with IAS 19: represents the company cost not the actual entitlement nor a payment, however, according to the German Corporate Governance Code the Pension Service Cost is to be included in all columns.
7 Jay Ralph left Allianz on 30 June 2016. He received a pro-rated base salary and an amount of € 1,125 ThOU in lieu of his pro-rated 2016 annual bonus, MTB tranche and equity-related compensation (€ 375 ThOU each) which was paid in August 2016. According to his separation agreement, he received an amount of € 1,000 ThOU in return, specifically, for a non-poaching and non-competition agreement.
5 The equity-related remuneration that applied before 2010 consisted of two vehicles, virtual stock awards known as RSUs and virtual stock options known as “Stock Appreciation Rights” (SAR). Only RSUs have been awarded as of 1 January 2010. The remuneration system valid until December 2009 is disclosed in the Annual Report 2009 (starting on page 17). Whereas the GEI/RSU grants are automatically exercised at the vesting date, the GEI/SAR grants are exercised by the Board member within the exercise period following the vesting date. Hence, the total payout from SARs depends on the individual decision by the Board member. SARs are released to plan participants upon expiry of the vesting period, assuming all other exercise hurdles are met. For SARs granted until and including 2008, the vesting period was two years and the exercise period five years. SARs can be exercised on the condition that the price of the Allianz SE stock is at least 20 % above the strike price at the time of grant. During the term of the plan, at least once on five consecutive trading days the Allianz SE stock must relatively appreciate at least 0.01 percentage points ahead of the appreciation of the Dow Jones EURO STOXX Price Index (600).
7 Dr. Maximilian Zimmerer left the Allianz SE Board of Management upon his retirement effective 31 December 2016. According to his contract, he receives a transition payment of € 937.5 ThOU. The payment is calculated based on the latest base salary, which is paid for a further six months starting 1 July 2017, and a final lump-sum payment of 25 % of the target variable remuneration. The payable pension takes into account the monthly payments over the six-month period. The lump-sum payment will be paid in spring 2018.
GERMAN ACCOUNTING STANDARD 17 DISCLOSURE The total remuneration to be disclosed for 2016 in accordance with German Accounting Standard 17 is defined differently than in the German Corporate Governance Code and is composed of the base salary, perquisites, annual bonus and the fair value of the RSu grant, but excludes the notional annual accruals of the MTB 2016 – 2018. The figures for 2015 (in parentheses) include the payout of the MTB 2013 – 2015. Both figures exclude the pension service cost: Oliver Bäte € 4,103 (7,046) THou, Sergio Balbinot € 2,747 (3,780) THou, Jacqueline Hunt € 1,423 (–) THou, Dr. Helga Jung € 2,542 (4,813) THou, Dr. Christof Mascher € 2,492 (5,356) THou, Jay Ralph € 1,5111 (5,293) THou, Dr. Axel Theis € 2,724 (3,644) THou, Dr. Dieter Wemmer € 2,674 (5,844) THou, Dr. Werner Zedelius € 2,677 (5,753) THou, Dr. Maximilian Zimmerer € 2,731 (5,638) THou.
Jay Ralph – 35,681 – – 1,095 Dr. Axel Theis 7,604 24,366 – – 770 Dr. Dieter Wemmer 7,457 37,688 – – 1,318 Dr. Werner Zedelius 7,457 36,582 – – 1,128 Dr. Maximilian Zimmerer 7,677 33,420 – – 1,081 1 The relevant share price used to determine the fair market value, and hence the final number of RSUs granted, is only available after sign-off of the Annual Report by the external auditors, thus numbers are based on a best estimate. As disclosed in the Annual Report 2015, the equity-related grant in 2016 was made to participants as part of their 2015 remuneration. The disclosure in the Annual Report 2015 was based on a best estimate of the RSU grants. The actual grants deviated from the estimated values and have to be disclosed accordingly. The actual RSU grants as of 4 March 2016 under the Allianz Equity Incentive are as follows: Oliver Bäte: 11,733, Sergio Balbinot: 9,300, Dr. Helga Jung: 7,053, Dr. Christof Mascher: 7,999, Jay Ralph: 8,098, Dr. Axel Theis: 8,896, Dr. Dieter Wemmer: 8,948, Dr. Werner Zedelius: 8,926, Dr. Maximilian Zimmerer: 8,746.
PENSIONS Company contributions for the current pension plan are set at 50 % of the base salary reduced by the cover for disability and death. They are invested in a fund and have a guarantee for the contributions paid, but no further interest guarantee (for members of the Board of Management who were born before 1 January 1958, the guaranteed minimum interest rate remains at 2.75 % p.a.). For members with pension rights in the frozen defined benefit plan, the above contribution rates are reduced by 19 % of the expected annual pension from that frozen plan. The Allianz Group paid € 5 MN (2015: € 4 MN) to increase reserves for pensions and similar benefits for active members of the Board of Management. As of 31 December 2016, reserves for pensions and similar benefits for active members of the Board of Management amounted to € 44 MN (2015: € 38 MN).
LOANS TO MEMBERS OF THE BOARD OF MANAGEMENT As of 31 December 2016, there were no outstanding loans granted by Allianz Group companies to members of the Board of Management.
Arrangements for termination of service including retirement are as follows: 1. Board members who were appointed before 1 January 2010 – and who have served a term of at least five years – are eligible for a sixmonth transition payment after leaving the Board of Management.
Annual pension payment4 SC 5 DBo 6 SC 5 DBo 6 SC 5 DBo 6 SC 5 DBo 6 SC 5 DBo 6 SC 5 DBo 6 2015 – – – – – – – – – – – – –
1 The service cost of the frozen contribution-based pension plan reflects the continued death and disability cover.
3 For details on the transition payment, see section “Termination of service”. In any event a death benefit is included.
Severance payment cap Payments to Board members for early termination with a remaining term of contract of more than two years are capped at two years’ compensation.
Whereby the annual compensation: 1. is calculated on the basis of the previous year’s annual base salary plus 50 % of the target variable remuneration (annual bonus, accrued MTB and equity-related remuneration: For a Board member with a fixed base salary of € 750 THou, the annual compensation would amount to € 1,875 THou. Hence, he/she would receive a maximum severance payment of € 3,750 THou) and 2. shall not exceed the latest year’s actual total compensation.
Change of control In case of early termination as a result of a change of control, severance payments made to Board members generally amount to three years’ compensation (annual compensation as defined above) and shall not exceed 150 % of the severance payment cap (a Board member with a base salary of € 750 THou would receive a maximum of € 5,625 THou).
REMUNERATION PRINCIPLES − Set total remuneration at a level aligned with the scale and scope of the Supervisory Board’s duties, and appropriate to the company ’s activities and business and financial situation.
ATTENDANCE FEES AND EXPENSES In addition to the fixed and committee-related remuneration, members of the Supervisory Board receive an attendance fee of € 750 for each Supervisory Board or committee meeting they attend. Should several meetings be held on the same or consecutive days, the attendance fee will be paid only once. Allianz SE reimburses the members of the Supervisory Board for their out-of-pocket expenses and the VAT payable on their Supervisory Board activity. For the performance of 33Annual Report 2016 Allianz Group
REMUNERATION FOR 2016 The total remuneration for all Supervisory Board members, including attendance fees, amounted to € 2,025 THou in 2016 (2015: € 2,021 THou). The following table shows the individual remuneration for 2016 and 2015: LOANS TO MEMBERS OF THE SUPERVISORY BOARD As of 31 December 2016, there was one outstanding loan granted by Allianz Group companies to members of the Supervisory Board of Allianz SE. One member received a mortgage loan of € 80 THou from Allianz Bank in 2010. The loan has a duration of ten years and was granted at a normal market interest rate.
Legend: C = Chairperson of the respective committee, M = Member of the respective committee 1 Abbreviations: A – Audit, N – Nomination, P – Personnel, R – Risk, S – Standing.
Corporate and Other The Corporate and Other business segment’s activities include the management and support of the Allianz Group’s businesses through its central holding functions, as well as Banking and Alternative Investments.
Allianz Group structure Allianz SE and its subsidiaries (the Allianz Group) offer propertycasualty insurance, life/health insurance and asset management products and services in over 70 countries, with the largest of our operations located in Europe. The Allianz Group insures 86.3 million customers. Allianz SE, the parent company of the Allianz Group, has its headquarters in Munich, Germany.
The Allianz Group structure reflects both our business segments and geographical regions. Business activities are organized by product and type of service, based on how these are strategically managed: insurance activities, asset management activities, and corporate and other activities. Due to differences in the nature of products, risks, and capital allocation, insurance activities are further divided into property-casualty and life/health categories. In accordance with the responsibilities of the Board of Management, each of the insurance categories is grouped into regional reportable segments. Corporate and other activities are divided into three different reportable segments in order to differentiate between the respective products, risks, and capital allocation. In 2016, the Allianz Group had 16 reportable segments.
◼ Singapore3 ◼ ◼ Sri Lanka ◼ Taiwan ◼ ◼ Thailand asset ManageMent
Europe ◼ ◼ ◼ Italy ◼ ◼ Greece ◼ ◼ Turkey ◼ ◼ ◼ France ◼ ◼ Belgium ◼ ◼ ◼ The Netherlands ◼ ◼ Luxembourg
◼ Property-Casualty ◼ Life/Health ◼ Banking ◼ Retail Asset Management ◼ Institutional Asset Management 1 This overview is based on our organizational structure in place as of 31 December 2016. 2 Oldenburgische Landesbank AG in Germany is classified as “held for sale”. 3 Property-Casualty business belongs to Allianz Global Corporate & Specialty. 4 Classified as “held for sale”.
Our steering BOARD OF MANAGEMENT AND ORGANIZATIONAL STRUCTURE Allianz SE has a divisional Board structure based on functional and business responsibilities. Business-related divisions reflect our business segments Property-Casualty, Life/Health, Asset Management, and Corporate and Other, and in 2016 were overseen by five Board members. The remaining four divisions (i.e. Chairman of the Board of Management, Finance, Investments, and Operations) focus on Group functions, along with business-related responsibilities.
We continuously monitor our business performance against these targets through monthly reviews – which cover key operational and financial metrics – to ensure we can move quickly and take appropriate measures in the event of negative developments. The Allianz Group uses operating profit and net income as key financial performance indicators across all its business segments. Other indicators include segment-specific figures, such as the combined ratio for Property-Casualty, return on equity1 for Life/Health, and the costincome ratio for Asset Management. To steer and control new business in our business segments Property-Casualty and Life/Health, we use Return on Risk Capital (RoRC). For a comprehensive view of our business segment performance, please refer to the chapters from page 39 onwards. Besides performance steering, we also have a risk steering process in place, which is described in the Risk and Opportunity Report starting on page 62.
1 Excluding unrealized gains/losses on bonds net of shadow accounting. 2 NPS is a measurement of customers’ willingness to recommend Allianz. Top-down NPS is measured regularly according to global cross-industry standards and allows benchmarking against competitors in the respective markets.
Our Corporate Responsibility approach As an international financial services company, we find it vital to ensure that our growth is both sustainable and profitable. We want to create long-term value by strategically embedding sustainability in our core business and by enabling our customers to address tomorrow’s challenges. This requires us to continually adapt our business strategy in response to our stakeholders’ and working partners ’ needs, to the most pressing sustainability issues, and to the activities of national and international sustainability bodies and initiatives, in order to deliver on global commitments such as the United Nations Sustainable Development Goals.
In the emerging markets, growth deceleration finally came to an end in the course of 2016. Commodity-exporting emerging markets benefited from the uptick in commodity prices. Most Eastern European E.U. member states continued to benefit from the ongoing recovery in the Eurozone. Russia saw its economy stabilizing, following a severe recession in 2015. Thanks primarily to fiscal stimulus, China’s growth decelerated only marginally from 6.9 % in 2015 to 6.7 % in 2016. As a whole, the emerging-market group expanded by a rather disappointing 3.6 % – the same rate as in 2015 and well below the long-term average of roughly 5.5 % per year. Overall, the world economy grew by an estimated 2.4 %, somewhat slower than in 2015, when global output rose by 2.7 %. Global merchandise trade registered its lowest growth rate since the Great Recession in 2009: less than 1 %. The pace of globalization in merchandise trade has evidently abated considerably.
In the property-casualty sector, premium growth decelerated slightly in advanced markets, reflecting some weaknesses in Japan and North America. Western Europe, on the other hand, kept more or less pace thanks to the ongoing economic recovery, but overall the market remained rather weak. As in the past, premiums grew much faster in the emerging markets, driven by a robust growth in Asia. The other two major emerging regions fared quite differently: Whereas the slowdown in Latin America continued in 2016, Eastern Europe showed clear signs of a recovery. Pricing continued to be a concern in nearly all markets, particularly in the commercial insurance segment. Premiums, overall and at a global level, rose by an estimated 4 % in 2016 (in nominal terms and adjusted for foreign currency translation effects).
Underwriting profitability suffered from more frequent and more costly natural catastrophes, such as the Kumamoto Earthquake in Japan, severe storms and floods in Germany and France, and Hurricane Matthew in the United States. Insurers’ investment income remained weak as investment returns were challenged by very low interest rates. As a result, overall profitability is likely to have slipped marginally in 2016.
In the life sector, premium growth was very strong in emerging markets or, more precisely, in emerging Asian markets: Life premiums rose by more than 20 percent there, mainly due to the extraordinary growth experienced in the Chinese market. The other two emerging regions show a totally different picture: Premium growth in Latin America flattened, reflecting the economic troubles of its biggest market, Brazil; Eastern Europe remained in the doldrums, not least due to changes in the tax regime for life products in some key markets. For advanced markets, too, 2016 proved to be a rather difficult year. Premium growth slowed – or even turned negative – in many markets as the ongoing low-yield environment continued to pose problems for the savings-type core insurance business. In total, according to our own estimates, global premiums grew by almost 5 % in 2016 (in nominal terms and adjusted for foreign currency translation effects).
Business environment 2016 for the asset management industry This was a disruptive year for the asset management industry. Global equity markets started 2016 with a sharp drop, then made a broad recovery in the following months. Emerging-market and U.S. equities finished the year particularly strong; European indices lagged a bit and exhibited higher volatility, particularly after the Brexit vote, but still finished the year in positive territory.
Continued accommodative monetary policy across major economies led to falling yields and rising bond prices through most of the year. This resulted in very strong returns for bond indices in both Europe and the United States – until the results of the U.S. election sent yields soaring, as prospects of a more supportive fiscal policy and a tightening labor market raised inflation expectations. There was also some spill-over into the Eurozone, causing yields to rise late in the year, albeit to a lesser extent than in the United States. Bond indices in both the United States and Europe still finished the year with positive returns.
The shift in investor preference towards passively managed funds continued throughout 2016 and was especially pronounced in the United States, where active equity mutual funds were particularly hard-hit. Actively managed taxable bond mutual funds in the United States finished the year with positive flows, but were also notably outstripped by their passive counterparts. Investors showed a general preference for bonds over actively managed equities most of the year, though this trend reversed towards year-end as yields rose and U.S. equity markets rallied following the election. European investors directed flows predominately into active fixed income funds and to a lesser extent into passive equity and fixed income products.
Income taxes fell by € 167 mN to € 3,042 mN, mainly driven by higher tax-exempted income. The effective tax rate decreased to 29.6 % (2015: 31.5 %).
The increase in our net income was driven by the higher operating profit and lower effective tax rate.
Our shareholders’ equity rose by € 4.2 BN to € 67.3 BN, compared to 31 December 2015. Over the same period our Solvency II capitalization ratio strengthened from 200 % to 218 %.
9 For further information on the impairment loss on the Oldenburgische Landesbank AG, and the disposal of Allianz Life Insurance Co. Ltd., Seoul, please refer to note 4 to the consolidated financial statements.
Earnings summary1234567 MANAGEMENT’S ASSESSMENT OF 2016 RESULTS Our total revenues decreased by 2.2 % this past business year, a drop of 0.8 % on an internal basis8 compared to 2015. Much of this decrease was attributable to our Life/Health business segment, where we continued our targeted shift towards preferred lines of business. Both lower other net fee and commission income, mainly due to lower third-party assets under management-driven margins, and a decrease in performance fees in our Asset Management business segment further contributed to the decline. Our Property-Casualty business segment enjoyed internal premium growth, mainly arising from Turkey, Germany and Allianz Worldwide Partners.
3 The Allianz Group uses operating profit and net income as key financial indicators to assess the performance of its business segments and of the Group as a whole.
4 Figures as of 31 December. 5 Changed regulatory tax treatment of German life sector reduced our year-end Solvency II capitalization ratio from 200 % to 196 % on 1 January 2016.
8 Internal total revenue growth excludes the effects of foreign currency translation as well as acquisitions and disposals. Please refer to page 60 for a reconciliation of nominal total revenue growth to internal total revenue growth for each of our business segments and the Allianz Group as a whole.
Key figures key figures AlliAnz group1 thereof: attributable to shareholders € MN 6,883 6,616 267 Solvency II capitalization ratio4,5,6 % 218 200 18 %-p
Other information During the year ended 31 December 2016, the Allianz Group disposed of its South Korean Life/Health business (Allianz Life Insurance Co. Ltd., Seoul), a 100 % owned subsidiary of the Allianz Group. The entity had been classified as held for sale since the beginning of the second quarter of 2016. The entity was deconsolidated on 30 December 2016.
For further information please refer to note 4 to the consolidated financial statements.
Other parts of the Group Management Report The following information also forms part of the Group Management Report: − Statement on Corporate Management pursuant to § 315 (5) and § 289a of the HGB starting on page 19,
− Takeover-related Statements and Explanations starting on page 21, and the
The following operations contributed negatively to internal growth: Italy: Gross premiums were at € 4,572 mN, a decline of 3.9 % on an internal basis. Main drivers were negative price and volume effects in our motor insurance business.
United Kingdom: Gross premiums amounted to € 2,623 mN, a decline of 3.6 % on an internal basis. Positive price developments in our retail motor and pet insurance businesses were more than offset by negative volume effects, mostly in our retail motor insurance business.
1 Consists of fee and commission income/expenses, other income/expenses, and restructuring charges.
The decrease in operating profit was mainly driven by the expected decline in investment result due to the current low-yield environment. Furthermore, our 2015 operating profit had included a € 0.1 BN net gain (net of related expenses and restructuring charges) from the sale of the Fireman’s Fund personal insurance business.
Our underwriting result increased thanks to a higher contribution from run-off as well as lower losses from natural catastrophes and weather-related events, compared to 2015, resulting in an improve ment in our combined ratio.
Premiums earned (net) 46,588 46,430 159 Accident year claims (32,661) (32,646) (15) Previous year claims (run-off) 2,084 1,924 160
Our accident year loss ratio stood at 70.1 % – a 0.2 percentage point improvement compared to the previous year. It was driven by a slight decrease in losses from natural catastrophes from € 738 mN to € 689 mN, representing a reduced combined ratio impact from 1.6 percentage points in 2015 to 1.5 percentage points in 2016.
The following operations contributed positively to internal growth: Turkey: Gross premiums reached € 1,695 mN. The internal growth of 43.0 % was driven by positive volume and price contributions in our motor third-party liability insurance business.
Allianz Worldwide Partners: Gross premiums increased to € 4,185 mN. The internal growth of 4.7 % was mainly driven by our U.S. travel business and our assistance business in France.
2 Represents claims and insurance benefits incurred (net), divided by premiums earned (net). 3 Represents acquisition and administrative expenses (net), excluding one-off effects from pension revalua tion divided by premiums earned (net).
6 Based on the average exchange rates in 2016 compared to 2015.
Excluding losses from natural catastrophes, our accident year loss ratio improved to 68.6 %. This was predominantly due to a combination of lower losses from weather-related events and profitability programs we conducted across the Allianz Group.
Spain: 0.1 percentage points. This was driven by portfolio cleaning actions in loss making lines of business and price increases across the portfolio.
1 The operating investment income (net) of our Property-Casualty business segment consists of the operating investment result – as shown in note 5 to the consolidated financial statements – and expenses for premium refunds (net) (policyholder participation).
In 2015 we recorded a € 0.1 BN net gain (net of related expenses and restructuring charges) from the sale of the Fireman’s Fund personal insurance business.
Net income Net income increased, driven by a higher non-operating result, which benefited from the absence of negative effects from pension revaluation and an increase in the non-operating investment result, thus offsetting the decline in operating profit.
Statutory premiums in the German life business amounted to € 18,876 mN, a 6.4 % increase on an internal basis. This resulted mainly from a growth in our business with capital-efficient products. It more than offset the decline in sales of traditional life products, which include long-term interest rate guarantees. Statutory premiums in the German health business increased to € 3,289 mN, representing an internal growth of 1.0 %, driven by the acquisition of new customers in the supplementary health care coverage.
In Italy we recorded statutory premiums of € 9,529 mN. The decrease of 20.2 % on an internal basis was largely attributable to lower unit-linked single premium sales – as a result of higher financial market volatility – and a decrease in traditional life business.
present vAlue of new business premiums (pvnbp) in % by lines of business1 %
Unit-linked without guarantee 20.1 24.9 (4.8) Capital-efficient products 37.0 27.7 9.3 1 Current and prior year figures are presented excluding effects from the South Korean business.
6 PVNBP before non-controlling interests. 7 Prior year figures changed in order to reflect the roll out of profit source reporting to China and the inclusion of the capital-efficient products line of business. 8 Current and prior year figures are presented excluding effects from the South Korean business.
At the beginning of the second quarter of 2016, all requirements were fulfilled to present our South Korean business – until its disposal in the fourth quarter of 2016 – as held for sale. Consequently, the negative result of € 268 mN that the South Korean business generated was considered as non-operating, as the entity is no longer part of our ongoing core operations. In order to better reflect the true underlying drivers of our operating profit, we report it by profit sources and by lines of business for both 2015 and 2016 excluding South Korea, and specify the South Korean operating loss as a separate item.
1 For further information on Allianz Life/Health figures, please refer to note 5 to the consolidated financial statements.
3 From the classification of our South Korean life business as “held for sale” in the second quarter of 2016 until its disposal in the fourth quarter of 2016, the total result of € (268) mN was considered as non-operating.
Loadings and fees 5,609 5,479 130 Investment margin 4,401 4,062 339 Expenses (6,687) (6,390) (297)
Our operating profit went up, mainly driven by a higher investment margin in the United States as well as favorable DAC unlocking effects in France.
Loadings from premiums 3,716 3,584 133 Loadings from reserves 1,143 1,125 18 Unit-linked management fees 750 770 (20)
Loadings from premiums as % of statutory premiums 5.9 5.5 0.4 Loadings from reserves as % of average reserves2,3 0.2 0.2 – Unit-linked management fees as % of average unit-linked reserves3,4 0.6 0.6 (0.1)
1 Current and prior year figures are presented excluding effects from the South Korean business. 2 Aggregate policy reserves and unit-linked reserves. 3 Yields are pro rata. 4 Unit-linked management fees, excluding asset management fees, divided by unit-linked reserves.
1 Prior year figures changed in order to reflect the roll out of profit source reporting to China and the inclusion of the capital-efficient products line of business.
2 The purpose of the Life/Health operating profit sources analysis is to explain movements in IFRS results by analyzing underlying drivers of performance on a Life/Health business segment consolidated basis.
3 Loadings and fees include premium and reserve based fees, unit-linked management fees, and policyholder participation in expenses.
3 Investment margin divided by the average of current and previous year-end aggregate policy reserves. 4 Yields are pro rata.
The increase in our investment margin was largely driven by a higher spread margin in our fixed-indexed annuity business and by favorable hedging-related impacts in our traditional variable annuity business in the United States.
4 The investment margin is defined as IFRS investment income net of expenses, less interest credited to IFRS reserves and policyholder participation (including policyholder participation beyond contractual and regulatory requirements mainly for the German life business).
IMPACT OF CHANGE IN DEFERRED ACQUISITION COSTS (DAC)2 impAct of chAnge in dAc1 € MN
The improvement in the impact of change in DAC was largely due to higher capitalization of DAC, resulting mainly from increased sales in fixed-indexed and non-traditional variable annuities in the United States as well as in capital-efficient products in Germany.
The operating profit rise in our guaranteed savings & annuities line of business was mainly due to positive hedging-related impacts in our traditional variable annuity business in the United States as well as favorable DAC unlocking effects in France. Operating profit in the protection & health line of business dropped, largely driven by a lower investment margin in the German health business and one-off effects in the United States. Our operating profit in the unit-linked without guarantee line of business went down, primarily due to a reduction of unit-linked performance fees in Italy. An increase in operating profit in the capital-efficient products line was largely attributable to a higher spread margin in the United States.
1 Technical margin comprises risk result (risk premiums less benefits in excess of reserves less policyholder participation), lapse result (surrender charges and commission clawbacks) and reinsurance result.
3 Prior year figures changed in order to reflect the roll out of profit source reporting to China and the inclusion of the capital-efficient products line of business.
Return on equity As of 2016 onwards, margin on reserves has been replaced by return on equity to better reflect the way we steer our Life/Health insurance operations.
The shares in third-party assets of both mutual funds and separate accounts5 were quite steady compared to the end of 2015, with mutual funds at 57.8 % (31 December 2015: 58.3 %) and separate accounts at 42.2 % (31 December 2015: 41.7 %).
4 Market and Other represents current income earned on, and changes in the fair value of, securities held in client accounts. It also includes dividends from net investment income and from net realized capital gains to investors of open ended mutual funds and of closed end funds.
5 Mutual funds are investment vehicles (in the United States, investment companies subject to the U.S. code; in Germany, vehicles subject to the “Standard-Anlagerichtlinien des Fonds” Investmentgesetz) where the money of several individual investors is pooled into one account to be managed by the asset manager, e.g. open-end funds, closed-end funds. Separate accounts are investment vehicles where the money of a single investor is directly managed by the asset manager in a separate dedicated account (e.g. public or private institutions, high net worth individuals, and corporates).
Assets under management 12 Composition of total assets under management € BN
Net outflows3 of total assets under management (AuM) amounted to € 28 bn in 2016. Thereof, € 20 bn were attributable to third-party AuM net outflows (2015: € 107 bn). A major share of this year’s outflows were PIMCO’s third-party AuM net outflows – mainly in the United States and the United Kingdom –, which could only partly be offset by third-party AuM net inflows that primarily occurred in Japan. PIMCO’s third-party AuM net outflows occurred in the first half of 2016, and turned into net inflows in the second half. AllianzGI recorded minor third-party AuM net outflows, mostly in the United States.
1 For further information about our Asset Management business segment, please refer to note 5 to the consolidated financial statements.
Total assets under manage ment as of 31 December € BN 1,871 1,763 108 thereof: Third-party assets under manage ment as of 31 December € BN 1,361 1,276 85 48 Annual Report 2016 Allianz Group
three-year rolling investment performanCe of pimCo and allianzgi1 as of 31 December in %
The overall three-year rolling investment performance of our Asset Management business improved significantly, with 83 % of thirdparty assets outperforming their respective benchmarks (31 December 2015: 69 %). The increase was driven by PIMCO’s rolling investment performance, which strengthened towards the end of the year.
Operating profit Operating profit declined by 4.4 % on an internal basis1. While operating revenues declined, the corresponding impact on operating profit was mitigated by reduced operating expenses.
Our cost-income ratio declined slightly, as the relative decrease in operating expenses outpaced the relative decrease in operating revenues. The SPA effect contributed 0.7 percentage points to the costincome ratio – net of the impact on variable compensation.
Net income We recorded a 2.7 % decline in net income, reflecting the decrease in operating profit, which was partly compensated by the absence of the negative effect from the adapted cost allocation scheme for the pension provisions.
Our net loss remained at the previous year’s level, as various effects offset one another. We recorded a higher non-operating investment result as well as lower income taxes, offset by the absence of positive effects from an adapted cost allocation scheme for the pension provisions.
In Holding & Treasury, our operating result increased. This was mainly driven by lower administrative expenses, caused by a decline in pension costs. Also, our income from financial assets and liabilities carried at fair value increased due to the valuation of seed money funds.
1 For more detailed information on the previous year’s outlook for 2016, please see the Annual Report 2015 from page 92 onward.
2 The information presented in the sections “Economic outlook”, “Insurance industry outlook”, and “Asset management industry outlook” is based on our own estimates.
upward movement in oil prices and rising inflation will weigh on private consumption, household spending will be supported by rising employment. The group of emerging market economies is set for a moderate acceleration of growth, mainly driven by a gradual stabilization in the group’s heavyweights, Russia and Brazil, and by a recovery in commodity-exporting countries. Overall, global output is likely to expand by about 2.8 % in 2017, compared with 2.4 % in 2016. Industrialized countries are expected to register gross domestic product growth of 1.9 %, while in emerging markets growth could increase to 4.1 % from the 3.6 % seen in 2016.
The uncertain global economic and political environment (e.g. rise of populism, high emerging market indebtedness, risk of E.U. disintegration ) is likely to result in higher financial-market volatility this year. As far as monetary policy is concerned, assuming that the labor market remains tight and inflation rates continue to move up, the Federal Reserve is likely to continue to hike interest rates this year. By contrast, we do not see any major change in the European Central Bank’s expansionary monetary policy stance.
Outlook 2017 Overview: 2016 results versus previous year’s outlook1 2016 results versus previous year outlook for 2016 ouTlook 2016 – as per aNNual reporT 2015 resulTs 2016 alliaNz group Operating profit of € 10.5 BN, plus or minus € 0.5 BN. Operating profit of € 10.8 BN.
Combined ratio was strong at 94.3 % and on track towards our ambition for 2018.
Pressure on operating investment income (net) to continue due to reinvestments in a consistently low interest rate environment.
As expected, operating investment income (net) declined across our subsidiaries due to the low interest rate environment.
life/HealTH Prioritizing profitability over growth and continuing to shift new business mix towards unit-linked, capitalefficient and protection products. Addressing customer needs in the prolonged low yield environment. Revenues are expected to be in the range of € 62.0 BN to € 68.0 BN.
Revenues of € 64.6 BN at the mid-point of outlook. Strong growth from capital-efficient products in Germany and the United States was more than offset by lower unit-linked sales in Italy and Taiwan.
Operating profit between € 3.3 BN and € 3.9 BN. Operating profit of € 4.1 BN above target range, driven by favorable investment margin supported by higher level of net harvesting from further portfolio de-risking actions.
RoE1 between 9.0 % and 11.0 %. RoE1 at 10.3 % above mid-point of target range.
Operating profit in the range of € 1.9 BN to € 2.5 BN. Operating profit amounted to € 2.2 BN and meets the mid-point of the target range.
Cost-income ratio of well below 65 %. With a cost-income ratio of 63.4 % our Asset Management business segment came in well below 65 %.
Insurance industry outlook In 2017, things are likely to start moving in the right direction for the insurance industry: The global economy is set to shift up a gear, inflation will return – which will set the scene for monetary normalization – and last but not least, interest rates are expected to rise. That said, the overall momentum will probably be too weak to finally escape the low-growth, low-yield environment; so, for the time being, we expect premium growth to remain modest and investment income to remain under pressure. Moreover, political risks could easily derail the economy and knock markets from their path to normalization.
Global economic and political divergence creates uncertainty and volatility thus involving risks, but it also provides opportunities. For instance, strong economic trends, such as job and wage growth, as well as a pick-up in inflation should allow the Federal Reserve to continue with gradual rate increases, driving treasury yields higher. Bonds are particularly interesting for the growing number of retirees in developed countries who are looking for a stable stream of income; also, liability-driven investors may look to further de-risk into bonds as yields become more attractive.
Overview: outlook and assumptions 2017 for the Allianz Group ouTlook 2017 alliaNz group Operating profit of € 10.8 BN, plus or minus € 0.5 BN. Protection of shareholders’ investments, while continuing to provide attractive returns and dividends. Selective profitable growth.
life/HealTH Continue with selective focus on profitable growth and further shift new business mix towards capital efficient, unit-linked, and protection products. Considering the disposal of our South Korean business, revenues are expected to be in the range of € 60.0 BN to € 66.0 BN. Operating profit between € 3.7 BN and € 4.3 BN.
asseT maNagemeNT Slight increase in total AuM due to positive market return, supported by moderate net inflows at pimCo and at Allianzgi. Operating profit in the range of € 2.0 BN to € 2.6 BN. Cost-income ratio well below 65 %.
ASSUMPTIONS Our outlook assumes no significant deviations from the following underlying assumptions: − Global economic growth is set to continue. − Modest rise in interest rates expected.
− A 100 basis point increase or decrease in interest rates would, respectively, either raise or lower operating profits by approximately € 0.1 bn in the first year following the rate change.
Our net income attributable to shareholders increased, reaching € 6.9 bn in 2016. Consistent with our disclosure practice in the past and given the susceptibility of our non-operating results to adverse capital market developments, we do not provide a precise outlook for net income. However, since our outlook presumes no major disruptions of capital markets, we anticipate a rather stable net income for 2017.
We believe the overall slow rise in prices we witnessed in a number of markets in 2016 will continue in 2017. However, as in previous years, we will keep our focus on achieving strong underwriting results by adhering to our strict underwriting discipline and will accept a lower top line if target margins cannot be achieved.
LIFE/HEALTH INSURANCE In 2016, our operating profit of € 4.1 bn exceeded our target range. For 2017, we expect operating profit in our Life/Health business segment to be between € 3.7 bn and € 4.3 bn.
As pointed out in 2015, RoE is one of the key performance indicators for the steering of our Life/Health business. In 2017, we expect the RoE of the Life/Health business segment to be between 10.0 % and 12.0 %.
ASSET MANAGEMENT We see a challenging environment for the asset management industry again in 2017. That said, we expect the positive trend in PIMCO’s thirdparty AuM net inflows that we observed over the last two quarters of 2016 to continue into 2017, supported by net inflows from AllianzGI in 2017. Market returns are expected to contribute moderately to a positive development of total AuM. While performance fees are expected to decrease slightly, an increase in management and loading fees should lead to a slight increase in operating revenues, which should more than offset a moderate increase of operating expenses. Therefore, we envisage our operating profit to be in the range of € 2.0 bn and € 2.6 bn in 2017 (2016: € 2.2 bn).
Financing and liquidity development and capitalization The Allianz Group maintains a healthy liquidity position, combined with superior financial strength and capitalization well above what supervisory authorities currently require.
Through capital management, Allianz Group aims for a healthy balance between an attractive yield and investment in profitable growth. We will continue to return 50 % of Allianz Group’s net income (attributable to shareholders) to shareholders in the form of a regular dividend.
1 This represents the management’s current intention and may be revised in the future. Also, the decision regarding dividend payments in any given year is subject to specific dividend proposals by the Management and Supervisory Boards, each of which may elect to deviate if appropriate under the then prevailing circumstances, as well as to the approval of the Annual General Meeting.
2 For further information on subsequent events, please refer to note 44 to the consolidated financial statements.
Allianz also aims to keep the regular dividend per share at least at the level paid in the previous year. However, the Board of Management and the Supervisory Board of Allianz SE have decided to simplify Group capital management to make it more flexible. Going forward, Allianz will return capital to its shareholders on a flexible basis, rather than following a formulaic approach. Return of capital to shareholders will no longer be coupled to the unused budget for external growth and a three-year timeframe.
Management’s overall assessment of the current economic situation of the Allianz Group Overall, at the date of issuance of this Annual Report and given current information regarding natural catastrophes and capital market trends – in particular foreign currency, interest rates, and equities – the Board of Management has no indication that the Allianz Group is facing any major adverse developments.
Cautionary note regarding forward-looking statements The statements contained herein may include prospects, 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. Actual results, performance, or events may differ materially from those expressed or implied in such forwardlooking statements.
Such deviations may arise due to, without limitation, (i) changes of the general economic conditions and competitive situation, particularly in the Allianz Group’s core business and core markets, (ii) performance of financial markets (particularly market volatility, liquidity and credit events), (iii) frequency and severity of insured loss events, including natural catastrophes, and the development of loss expenses, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) particularly in the banking business, the extent of credit defaults, (vii) interest rate levels, (viii) currency exchange rates, including the Euro/U.S. Dollar exchange rate, (ix) changes in laws and regulations, including tax regulations, (x) the impact of acquisitions, including related integration issues and reorganization measures, and (xi) general competitive factors, in each case on a local, regional, national, and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences.
No duty to update The company assumes no obligation to update any information or forward-looking statement contained herein, save for any information required to be disclosed by law.
Foreign currency translation adjustments (754) (926) 172 Unrealized gains and losses (net) 11,830 10,920 910
1 This does not include non-controlling interests of € 3,052 mn and € 2,955 mn as of 31 December 2016 and 31 December 2015, respectively. For further information, please refer to note 20 to the consolidated financial statements.
2 Excluding self-originated German private retail mortgage loans. For 3 %, no ratings were available.
and 0.2 %, with unrealized gains (gross) of € 3,862 mn, € 1,188 mn and € 40 mn. Our covered bonds portfolio contained 41 % (31 December 2015: 42 %) German Pfandbriefe, backed by either public-sector loans or mortgage loans. The portfolio shares of French, Spanish and Italian covered bonds were at 16 %, 9 % and 8 % (31 December 2015: 16 %, 10 % and 8 %).
Our exposure to equities increased due to positive developments on major equity markets. Our equity gearing3 remained almost unchanged at 23 % (31 December 2015: 24 %), as the increase in this exposure was accompanied by increases in shareholders’ equity and hedging of the risen exposure against share price declines.
3 Equity gearing is defined as the ratio of our equity holdings allocated to the shareholder after policyholder participation and hedges to shareholders’ equity plus off-balance sheet reserves less goodwill.
1 For further information about changes in the reserves for loss and loss adjustment expenses for the Property-Casualty business segment, please refer to note 15 to the consolidated fin an cial statements.
The Allianz Group enters into various commitments including loan and leasing commitments, purchase obligations and other commitments. Please refer to note 39 to the consolidated financial statements for more details.
Please refer to the Risk and Opportunity Report from page 62 onwards for a description of the main concentrations of risk and other relevant risk positions.
Liquidity and Funding Resources ASSET MANAGEMENT OPERATIONS Within our Asset Management operations, the most important sour ces of liquidity are fees generated from asset management activities. These are primarily used to cover operating expenses.
Liquidity management and funding of Allianz SE The responsibility for managing the funding needs within the Group, maximizing access to liquidity sources, and minimizing borrowing costs lies with Allianz SE. We therefore comment on the liquidity and funding resources of Allianz SE in the following sections. Restrictions on the transferability of capital within the Group result mainly from the capital maintenance rules under applicable company laws as well as from the regulatory solvency capital requirements for regulated Group companies.
LIQUIDITY RESOURCES AND USES Allianz SE ensures adequate access to liquidity and capital for our operating subsidiaries. The main sources of liquidity available for Allianz SE are dividends received from subsidiaries and funding provided by capital markets. Liquidity resources are defined as readily available assets – specifically cash, money market investments, and highly liquid government bonds. Our funds are primarily used for interest payments on our debt funding, operating costs, internal and external growth investments, and dividends to our shareholders.
FUNDING SOURCES Allianz SE’s access to external funds depends on various factors such as capital market conditions, access to credit facilities, credit ratings, and credit capacity. The financial resources available to Allianz SE in the capital markets for short-, mid- and long-term funding needs are described below. In general, mid- to long-term financing is covered by issuing senior or subordinated bonds or ordinary shares.
Allianz SE has the option to increase its equity capital base according to authorizations provided by our shareholders. The following table outlines Allianz SE’s capital authorizations as of 31 December 2016: capital authorizationS of allianz Se
LONG-TERM DEBT FUNDING As of 31 December 2016, Allianz SE had senior and subordinated bonds with a variety of maturities outstanding, reflecting our focus on long-term financing. As the cost and availability of external funding may be negatively affected by general market conditions or by matters specific to the financial services industry or the Allianz Group, we seek to reduce refinancing risk by actively steering the maturity profile of our funding structure.
Contractual maturity date as of 31 December Up to 1 year > 1 year up to 5 years Over 5 years
Interest expenses on senior bonds decreased, mainly due to the depreciation of the British Pound against the Euro. For subordinated bonds, the increase of interest expenses was primarily driven by higher outstanding volumes on average in 2016.
The table below details the long-term debt issuances and redemptions of Allianz SE during 2016 and 2015: iSSuanceS and redemptionS of allianz Se’S Senior and Subordinated bondS € mn as of 31 December Issuances1 Redemptions1 Issuances net of redemptions
Funding in non-Euro currencies enables us to diversify our investor base or to take advantage of favorable funding costs in those markets. Funds raised in non-Euro currencies are incorporated in our general hedging strategy. As of 31 December 2016, approximately 18.4 % (2015: 12.5 %) of long-term debt was issued or guaranteed by Allianz SE in currencies other than the Euro.
currency allocation of allianz Se’S Senior and Subordinated bondS1 € mn as of 31 December Euro Non-Euro Total
Senior and sub ordinated bonds 16,450 2,347 18,797 1 Based on nominal value.
SHORT-TERM DEBT FUNDING Short-term funding sources available are the Medium-Term Note Program and the Commercial Paper Program. Money market securities decreased in the use of commercial paper compared to the previous year-end. Interest expenses on money market securities increased mainly due to higher funding costs on average in 2016.
Net cash flow provided by operating activities decreased in 2016. This consists of net income plus adjustments for non-cash charges, credits and other items included in net earnings, and cash flows related to the net change in operating assets and liabilities. Net income after adding back non-cash charges and similar items went down by € 1.4 bn to € 9.1 bn in 2016. In addition, operating cash flows from net changes in operating assets and liabilities, including other items, fell by € 0.8 bn to € 12.4 bn. This was driven by net cash outflows (after net cash inflows in 2015) from repurchase agreements and collateral received from securities lending transactions – in particular at Allianz SE. Higher reserves for insurance and investment contracts in our Life/Health business segment, mainly in the United States, Germany and France, partially offset this effect.
For further information on the consolidated statements of cash flows, please refer to page 82.
Reconciliations The previous analysis in our Group Management Report is based on our consolidated financial statements and should be read in conjunction with them. In addition to our figures stated in accordance with the International Financial Reporting Standards (IFRS), the Allianz Group uses operating profit and internal growth to enhance the understanding of our results. These additional measures should be viewed as complementary to, rather than a substitute for, our figures determined according to IFRS.
Asset Management Operating revenues 6,022 6,479 consisting of: Net fee and commission income 6,019 6,488 Net interest income1 (5) (5) Income from financial assets and liabilities carried at fair value through income (net) 6 (8) Other income 3 4
Corporate and Other thereof: Total revenues (Banking) 551 577 consisting of: Interest and similar income 474 546 Income from financial assets and liabilities carried at fair value through income (net)2 14 16 Fee and commission income 540 565 Interest expenses, excluding interest expenses from external debt (172) (212) Fee and commission expenses (308) (340) Consolidation effects within Corporate and Other 2 2
reconciliation of nominal total revenue growth to internal total revenue growth %
Acquisition costs incurred and commissions (5,304) (5,262) Capitalization of DAC2 1,868 1,721 Definition: URR capitalized 509 528 Definition: policyholder participation3 1,022 880
Capitalization of DAC 3,586 3,364 Amortization, unlocking and true-up of DAC2 (1,916) (1,878) Definition: URR amortized 64 (175) Definition: policyholder participation3 (881) (1,006)
Administrative expenses on reinsurance business ceded 4 4 1 Prior year figures changed in order to reflect the roll out of profit source reporting to China. 2 As per Group Management Report. 3 For German Speaking Countries, policyholder participation on revaluation of DAC/URR capitalization/
amortization. 4 As per notes to the consolidated financial statements. 5 Excluding one-off effects from pension revaluation.
Policyholder participation is included within change in reserves for insurance and investment contracts (net) in the group income statement.
Acquisition expenses and commissions2 (4,927) (4,754) Administrative and other expenses2 (1,760) (1,636) Capitalization of DAC2 1,868 1,721 Amortization, unlocking and true-up of DAC2 (1,916) (1,878) Acquisition and administrative expenses (6,735) (6,548)
Risk and Opportunity Report Our risk management system is based on the following four essential elements: Risk underwriting and identification: A sound risk underwriting and identification framework forms the foundation for adequate risktaking and management decisions such as individual transaction approvals, new product approvals, and strategic asset allocations. The framework includes risk assessments, risk standards, valuation methods, and clear minimum standards for underwriting.
Risk strategy and risk appetite: Our risk strategy clearly defines our risk appetite. It ensures that rewards are appropriate considering the risks taken and that the delegated authorities are in line with our overall risk-bearing capacity. The risk-return profile is improved by integrating the risk considerations and capital needs into decisionmaking processes. This also keeps risk strategy and business objectives consistent with each other and allows us to take opportunities within our risk tolerance.
Communication and transparency: Finally, transparent and robust risk disclosure provides the basis for communicating this strategy to our internal and external stakeholders, ensuring a sustainable positive impact on valuation and financing. It also strengthens the risk awareness and risk culture throughout the entire Group.
OUR BUSINESS ASPIRATIONS The Allianz Group seeks to position itself as the world’s most trusted financial institution through a focus on the following: − portfolio strength: establishing a strong and high-quality portfolio in large and attractive markets,
− market leadership: maintaining a commanding position in each market with superior skills and scale,
− customer centricity: practicing relentless execution centered on customers while outperforming competition.
In addition, we take into account the requirements of regulators and rating agencies. While capital requirements imposed by regulators constitute a binding constraint, meeting rating agencies’ capital requirements and maintaining strong credit ratings are strategic business objectives of the Allianz Group.
For this the risk management system described in the following is applied.
This comprehensive framework ensures that risks are identified, analyzed, assessed, and managed consistently across the Group. Our risk appetite is defined by a clear limit structure and a risk strategy consistent with the underlying business strategy of the Group. Close risk monitoring and reporting allows us to detect potential deviations from our risk tolerance at an early stage at both the Group and operating entity levels.
SUPERVISORY BOARD AND BOARD OF MANAGEMENT Within our risk governance system, the Supervisory Board and Board of Management of Allianz SE have both, Allianz SE and group-wide responsibilities and have set up committees to provide them with support. Examples include: Supervisory Board The Risk Committee of the Supervisory Board monitors the effectiveness of the Allianz risk management and monitoring framework. Furthermore, it focuses on risk-related developments as well as general risks and specific risk exposures.
The Group Finance and Risk Committee (GFRC) ensures oversight of the Group’s and Allianz SE’S risk management framework, acting as a primary early-warning function by monitoring the Allianz Group’s and Allianz SE’S risk profiles as well as the availability of capital. The GFRC also ensures that an adequate relationship between return and risk is maintained. Additionally, the GFRC defines risk standards, forms the limit-setting authority within the framework set by the Board of Management and approves major financing and reinsurance transactions. Finally, the GFRC supports the Board of Management with recommendations regarding the capital structure, and the capital allocation and investment strategy, including strategic asset allocation.
Operating entities Operating entities are responsible for their own risk management, including adherence to both external requirements (for example, those imposed by local regulators) and internal group-wide standards. The operating entities’ Boards of Management are responsible for setting and approving a local risk strategy during the annual Strategic and Planning Dialogues with the Group and for ensuring operating entities’ adherence to their risk strategy.
Group Legal and Compliance seeks to mitigate legal risks with support from other departments. The objectives of Group Legal and Compliance are to ensure that laws and regulations are observed, to react appropriately to all impending legislative changes or new court rulings, to attend to legal disputes and litigation, and to provide legally appropriate solutions for transactions and business processes. In addition, Group Legal and Compliance is responsible for integrity management, which aims to protect the Allianz Group, our operating entities and employees from regulatory risks.
Risk based steering and risk management The Allianz Group is exposed to a variety of risks through its core insurance and asset management activities. These include market, credit, underwriting, business, operational, strategic, liquidity, and reputational risks.
With Solvency II being the binding regulatory regime since 1 January 2016 and the approval of our partial internal model1, risk is measured and steered based on the risk profile underlying our regulatory capital requirement. We introduced capitalization limits defining a target capitalization according to Solvency II after applying shock scenarios on both the Group and the operating entity level. By that we allow for a consistent view on risk steering and capitalization under the Solvency II framework. This is supplemented by economic scenarios and sensitivities.
Allianz steers its portfolio using a comprehensive view of risk and return, i.e. results based on the partial internal risk model including scenario-based analysis are actively used for decision-making: On the one hand, economic risk and concentrations are actively restricted by the limits outlined above; on the other hand, there is a comprehensive analysis of the return on risk capital (RoRC). The latter allows us to identify profitable lines of business and products on a sustainable basis, which provide reasonable profits on allocated risk capital over the life time of the products. Therefore, it is a key criterion for capital allocation decisions.
CREDIT RISK The Allianz Group monitors and manages credit risk exposures and concentrations to ensure we are able to meet policyholder obligations when they are due. Credit risks are reflected by the internal credit risk model as well as the obligor group limit management system. Groupwide credit data is collected following a centralized process and using standard obligor and obligor group mappings.
The loss profile of a given portfolio is obtained through a Monte Carlo simulation, taking into account interdependencies and exposure concentrations per obligor segment. To reflect portfolio-specific diversification effects, the loss profiles are calculated at different levels of the Allianz Group structure (pre-diversified). They are then fed into the overall partial internal risk capital model for further aggregation across sources of risk to derive group-diversified internal credit risk.
Our credit insurance portfolio is modeled by Euler Hermes based on a proprietary model component, which is a local adaptation of the central internal credit risk module and is reviewed by Group Risk. Euler Hermes’s loss profile is integrated in the Group’s internal credit risk model to capture the concentration and diversification effects. In our credit insurance business, proactive credit management offers opportunities to keep losses from single credit events below expected levels and therefore strongly supports writing business that contributes to a balanced Group credit portfolio.
To ensure effective credit risk management, credit VaR limits are derived from our internal risk capital framework, as well as from rating bucket benchmarks which define our risk appetite for exposures in the lower investment grade and non-investment grade area.
Our group-wide country and obligor group limit management framework (CRisP1) allows us to manage counterparty concentration risk. It covers credit and equity exposures and is based on data used by the investment and risk experts at the Group and operating entity levels. This limit framework forms the basis for discussions on credit actions and provides notification services with a quick and broad communication of credit-related decisions across the Group. Clearly defined processes ensure that exposure concentrations and limit utilizations are appropriately monitored and managed. The setting of country and obligor exposure limits from the Group’s perspective (i.e. the maximum concentration limit) takes into account the Allianz Group’s portfolio size and structure as well as our overall risk strategy.
Premium risk is subdivided into natural catastrophe risk, terror risk, and non-catastrophe risk. We calculate premium risk based on actuarial models that are used to derive loss distributions. Premium risk is actively managed by the Allianz Group and its local operating entities. The assessment of risks as part of the underwriting process are key elements of our risk management framework. There are clear underwriting limits and restrictions, centrally defined and in place across the Group. In addition to the underwriting limits which are defined centrally, local operating entities have limits in place that take into account their business environments. Excessive risks are mitigated by external reinsurance agreements. All these measures contribute to a limitation on risk accumulation.
In general, our operating entities constantly monitor the development of reserves for insurance claims on a line-of-business level.2 In addition, the operating entities generally conduct annual reserve uncertainty analyses. Allianz SE performs regular independent reviews of these analysis and Allianz SE representatives participate in the local reserve committees’ meetings.
OPERATIONAL RISK Allianz has developed a consistent group-wide operational risk management framework that focuses on the early recognition and proactive management of operational risks in all “first line of defense” functions. Local risk managers as the “second line of defense” ensure this framework is implemented in their respective operating entities.
They identify and evaluate relevant operational risks and control weaknesses via a dialogue between the “first line of defense” and the risk function. Furthermore, operational risk events are collected in a central risk event database. Since 2015, Allianz also delivers anonymized internal loss data to the “Operational Riskdata eXchange Association (ORX)”, a global operational loss data insurance consortium, to improve our internal control system and to validate operational risk parameters.
The risks related to non-compliance or other misconduct are addressed via various dedicated compliance programs. Written policies detail the Allianz Group’s approach towards the management of these areas of risk. The implementation and communication of those compliance programs are monitored by the Group Compliance function at Allianz SE. In close cooperation with the Risk function of the Group, risk-mitigating measures are taken and enforced by a global network of dedicated compliance functions throughout the Allianz Group. With respect to financial statements, our internal control system is designed to mitigate operational risks.3 2 For further information, please refer to note 15 to the consolidated financial statements.
Major failures and disasters at our outsourcing providers which could cause a severe disruption to our working environment may represent significant operational risks for the Allianz Group. Our Business Continuity and Crisis Management framework strives to protect critical business functions from these events and enables them, for example, to carry out their core tasks on time and at the highest standard also in a crisis event.
Allianz works on a Cyber and Information Security program on an ongoing basis, in order to better respond to external developments and to further strengthen the internal control environment for related operational risks.
OTHER RISKS There are certain risks that cannot be fully quantified across the Group using our partial internal risk capital model. For these risks we also pursue a systematic approach with respect to identification, analysis, assessment, monitoring, and steering. In general, the risk assessment is based on qualitative criteria or scenario analyses. The most important of these other risks are strategic, liquidity and reputational risk.
1 The Allianz Environmental, Social, Governance (ESG) Board and ESG office are constituted as advisor to the Board of Management of Allianz SE and will further elevate environmental, social, and governance aspects in corporate governance and decision-making processes at the Allianz Group.
Risk capital is defined as the difference between the current portfolio value and the portfolio value under adverse conditions dependent on the 99.5 % confidence level. Because we consider the impact of a negative or positive event on all sources of risks and covered businesses at the same time, diversification effects across products and regions are taken into account. The results of our Monte Carlo simulation allow us to analyze our exposure to each source of risk, both separately and in aggregate. In addition, in particular for market risks, we analyze several pre-defined stress scenarios, based on either historically observed market movements or hypothetical market movement assumptions. This modeling approach, therefore, also enables us to identify scenarios that may have a positive impact on our solvency situation.
COVERAGE OF THE RISK CAPITAL CALCULATIONS Allianz’s partial internal risk capital model covers all major insurance operations1. This includes the relevant assets (including bonds, loans, mortgages, investment funds, equities, and real estate) and liabilities (including the cash flow run-off profile of all technical reserves as well as deposits, issued debt, and other liabilities). For with-profit products in the Life/Health business segment, options and guarantees embedded in insurance contracts – including policyholder participation rules – are taken into account.2
Smaller entities within the European Economic Area which are not covered by the partial internal model are reflected based on their standard model results. At Group level, the capital requirements for smaller insurance operating entities outside the European Economic Area that have only an immaterial impact on the Group’s risk profile are treated with book value deduction3.
1 As mentioned under Internal risk capital framework, Allianz Life US is based on third country equivalence. 2 For further information about participating life business, please refer to note 16 to the consolidated financial statements.
In addition, we adjust the risk-free yield curves by a volatility adjustment in most markets where a volatility adjustment is defined by EIOPA and approved by the local regulator. This is done to better reflect the underlying economics of our business, as the cash flows of our insurance liabilities are, to a large degree, predictable. The advantage of being a long-term investor, therefore, is the opportunity to invest in bonds yielding spreads over the risk-free return and earning this additional yield component over the duration of the bonds. Being a long-term investor considerably mitigates the risk of forced selling of debt instruments at a loss prior to maturity. Therefore, we reflect this mitigation using a volatility adjustment spread risk offset, and view the more relevant risk to be default risk rather than credit spread risk.
VALUATION ASSUMPTIONS: REPLICATING PORTFOLIOS Since efficient valuation and complex, timely analysis are required within the context of our partial internal model, we replicate the liabilities of our Life/Health insurance business as well as for our internal pension obligations. This technique enables us to represent all product related options and guarantees, both contractual and discretionary, by means of standard financial instruments. In the risk calculation we use the replicating portfolio to determine and revalue these liabilities under all potentially adverse Monte Carlo scenarios.
Where possible, we derive correlation parameters for each pair of market risks through statistical analysis of historical market data, considering quarterly observations over several years. In case historical market data or other portfolio-specific observations are insufficient or not available, correlations are set according to a well-defined group-wide process. Correlations are determined by the Correlation Settings Committee, which combines the expertise of risk and business experts. In general, we set the correlation parameters to represent the joint movement of risks under adverse conditions. Based on these correlations, we use an industry-standard approach, the Gaussian copula approach, to determine the dependency structure of quantifiable sources of risk within the applied Monte Carlo simulation.
RISK PROFILE AND MARKET ENVIRONMENT As mentioned earlier, the Allianz Group is exposed to a variety of risks. The largest risks in terms of their contribution to Allianz’s risk profile are: − Market risk, especially interest rate risk, due to the duration mismatch between assets and liabilities for long-term savings products, equity risk, credit and credit spread risks driven by assets backing long-term liabilities, which we take to benefit from the expected risk premium; − Property-casualty premium and reserve risks resulting from natural and man-made catastrophes as well as from claims uncertainty.
The risk profile and relative contributions have changed in 2016, predominantly due to changes in the market environment and management actions such as the disposal of our South Korean life business.
FINANCIAL MARKETS AND OPERATING ENVIRONMENT Financial markets are characterized by historically low interest rates and risk premiums, prompting investors to look for higher-yielding – and potentially higher-risk – investments. In addition to sustained low interest rates, the challenges of implementing long-term structural reforms in key Eurozone countries and the uncertainty about the future path of monetary policy may lead to continued market volatility. This could be accompanied by a flight to quality, combined with falling equity and bond prices due to rising spread levels, even in the face of potentially lower interest rates. Also, possible asset bubbles (as observed in the Chinese equity market) might spill over to other markets, contributing to increasing volatility. Therefore, we continue to closely monitor the political and financial developments in the Eurozone – such as Brexit in the United Kingdom and the “No” vote to constitutional reforms in Italy – in order to manage our overall risk profile to specific event risks.
ized. Finally, the potential for a multiplicity of different regulatory regimes, capital standards, and reporting requirements will increase operational complexity and costs.
MANAGEMENT ASSESSMENT The Allianz Group’s management feels comfortable with the Group’s overall risk profile and has confidence in the effectiveness of its risk management framework to meet the challenges of a rapidly changing environment as well as day-to-day business needs. This confidence is based on several factors, which are summarized below: − Due to its effective capital management, the Allianz Group is well capitalized and met its internal-, rating agency- and regulatorysolvency targets as of 31 December 2016. Allianz is also confident that it will be able to meet the capital requirements under new regulatory regimes. Allianz remains one of the highest rated insurance groups in the world, as reflected by our external ratings.
− The Group’s management also believes that Allianz is well positioned to deal with potentially adverse future events, in part due to our strong internal limit framework defined by the Group’s risk appetite and risk management practices including our approved partial internal model.
AlliAnz Group: Solvency ii reGulAtory cApitAlizAtion as of 31 December 2016 2015
of our South Korean life business but also to measures taken to reduce our exposure to market risks, including hedging of equity exposure and improving our interest rate risk profile. In addition, changes in the regulatory tax treatment of the German life sector as well as minor model changes also slightly contributed to a decreased capital requirement. This effect, however, was partly offset by market movements as well as higher exposure due to business growth.
The following table presents the sensitivity of our predicted Solvency II capitalization ratio under certain standard financial scenarios.
AlliAnz Group: predicted Solvency ii reGulAtory cApitAlizAtion After StreSS ScenArioS %
Base capitalization ratio 218 200 Interest rates up by 0.5 %1 220 208 Interest rates down by 0.5 %1 207 185 Equity prices up by 30 % 224 208 Equity prices down by 30 % 216 190 Combined scenario: Interest rate down by 0.5 %1 Equity prices down by 30 % 203 176 1 Non-parallel interest rate shifts due to extrapolation of the yield curve beyond the last liquid point in line with Solvency II rules.
Quantifiable risks and opportunities by risk category This Risk and Opportunity Report outlines the Group’s risk figures, reflecting its risk profile based on pre-diversified risk figures and group diversification effects. Pre-diversified risk figures reflect the diversification effect within each modeled risk category (i.e. market, credit, underwriting, business, and operational risk) but does not comprise the diversification effects across risk categories. Groupdiversified risk figures also capture the diversification effect across all risk categories. As of 31 December 2016, the group-diversified risk reflecting our risk profile before non-controlling interests of € 34.6 bN (2015: € 36.4 bN) represented a diversification benefit2 of approximately 25 % (2015: 27 %) across risk categories and business segments.
INTEREST RATE RISK As interest rates may fall below the rates guaranteed to policyholders in some Life/Health markets, and given the long duration of insurance obligations, we are specifically exposed to interest rate risk because we have to reinvest maturing assets prior to the maturity of life contracts. This interaction of our investment strategy and obligations to policyholders forms an integral part of our internal risk capital framework. In addition, our ALM approach is closely linked to the internal risk capital framework and designed to achieve investment returns over the long term in excess of the obligations related to insurance and investment contracts.
Our total pre-diversified market risk showed a decrease of € 3.7 bN mainly driven by interest rate and equity risk in the Life/Health business segment. The decrease in interest rate risk was driven by the disposal of our South Korean life business as well as by management actions to improve our interest rate risk profile by asset/liability management (ALM) measures. Equity risk also decreased due to management actions, in particular derivative hedging programs. For credit spread risk, the decrease was driven by exposure changes, due to ALM measures, and the corresponding effects on the liability side.
We manage interest rate risk from a comprehensive corporate perspective: While the potential payments related to our liabilities in the Property-Casualty business segment are typically shorter in maturity than the financial assets backing them, the opposite usually holds true for our Life/Health business segment, due to the long-term life insurance contracts. In part, this provides us with a natural hedge on an economic basis at the Group level. As of 31 December 2016, our interest-rate-sensitive investments excluding unit-linked business – amounting to a market value of € 428.5 bN1 – would have gained € 31.4 bN or lost € 36.1 bN in value in the event of interest rates changing by (100) and +100 basis points, respectively.
EQUITY RISK Risks from changes in equity prices are normally associated with decreasing share prices and increasing equity price volatilities. As stock-market prices also might increase, opportunities may arise from equity investments. As of 31 December 2016, our investments excluding unit-linked business that are sensitive to changing equity markets – amounting to a market value of € 47.0 bN2 – would have lost € 12.4 bN in value assuming equity markets declined by 30 %.
CURRENCY RISK As our operating entities are typically invested in assets of the same currency as their liabilities, the major part of foreign currency risk results from the economic value of our non-Euro operating entities. If non-Euro foreign exchange rates decline against the Euro from a Group perspective, the Euro-equivalent net asset values also decrease.
2 The stated market value includes all investments whose market value is sensitive to equity movements (excluding unit-linked business) in line with the Solvency II framework, and therefore is not based on classifications given by accounting principles.
However, at the same time the capital requirements in Euro terms from the respective non-Euro entity also decrease, partially mitigating the total impact on our capitalization.
CREDIT RISK Credit risk is measured as the potential economic loss in the value of our portfolio that is due to either changes in the credit quality of our counterparts (“migration risk”) or the inability or unwillingness of the counterparty to fulfill contractual obligations (“default risk”). Credit risk arises from our fixed income investments, cash positions, derivatives, structured transactions, receivables from Allianz agents and other debtors, credit insurance, and reinsurance recoverables. The following table presents our group-wide risk figures related to credit risks.
As of 31 December 2016, the credit risk arising from our investment portfolio accounted for 86.4 % (2015: 88.2 %) of our total Group pre-diversified internal credit risk. Credit Risk in the Life/Health business segment is primarily driven by long-term assets covering longterm liabilities. Typical investments are government bonds, senior corporate bonds, covered bonds, self-originated mortgages and loans, as well as a modest amount of derivatives. Due to the nature of the business, the fixed income securities in the Property-Casualty business segment tend to be short- to mid-term, which explains the lower Credit Risk consumption in this segment.1 1 Additionally, 5.7 % (2015: 4.8 %) of our total Group pre-diversified internal credit risk is allocated to receivables, potential future exposure for derivatives and reinsurance, and other off-balance sheet exposures.
reinSurAnce recoverAbleS by rAtinG clASS1 € Bn as of 31 December 2016 2015
Government & agency Covered bond Corporate Banks ABS / MBS Short-term loan Other Total 1 In accordance with the Group Management Report, figures stated include investments of Banking and Asset Management. Table excludes private loans. Stated market values include investments not in scope of the Solvency II framework. Predominantly based on external ratings. For some cases where no external rating is available internal ratings are applied.
We focus on companies with strong credit profiles. We may also require letters of credit, cash deposits, or other financial measures to further mitigate our exposure to credit risk. As of 31 December 2016, 84.0 % (2015: 86.0 %) of the Allianz Group’s reinsurance recoverables were distributed among reinsurers that had been assigned at least an “A-” rating by Standard & Poor’s or A.M. Best. As of 31 December 2016, reinsurance recoverables not rated represented 15.1 % (2015: 13.3 %).
As of 31 December 2016, 7.4 % (2015: 6.5 %) of our total Group prediversified internal credit risk was allocated to Euler Hermes credit insurance exposures, for which the relative increase is primarily driven by the lower credit risk of the investment portfolio.
UNDERWRITING RISK Underwriting risk consists of premium and reserve risks in the Property - Casualty business segment as well as biometric risks in the Life/Health business segment. For the Asset Management business segment and our banking operations, underwriting risks are not relevant.
AlliAnz Group: riSk profile – AllocAted underwritinG riSk by buSineSS SeGMent And Source of riSk (totAl portfolio before non-controllinG intereStS)1 pre-diversified, € mn
Share of total Group pre-diversified risk 22.6 % 21.1 % 1 As risks are measured in an integrated approach and on an economic basis, internal risk profile takes reinsurance effects into account.
Property-Casualty risk changes are mainly driven by exposure and model updates as well discounting effects. For biometric risk there was a slight reduction, mainly driven by a minor model change and the sale of our South Korean life business.
LIFE/HEALTH Life/Health underwriting risk arises from profitability being lower than expected due to changes in actuarial parameters. As profitability calculations are based on several parameters – such as historical loss information, assumptions on inflation or on mortality, and morbidity – the realized parameters may differ from the ones used for calculation. For example, inflation which is higher than what we incorporated in the calculations may lead to a loss. However, deviations can also be beneficial and lead to additional profit. For example, a lower morbidity rate than expected will most likely result in lower claims.
There was a minor movement in business risk for our Life/Health business segment, driven by the sale of our South Korean life business.
The decrease shown in the operational risk is driven by the regular update of local parameters. Foreign currency translation effects (mainly Euro/U.S. Dollar) play a secondary role. There were no central operational risk model changes in 2016.
LIQUIDITY RISK Liquidity risk is defined as the risk that requirements from current or future payment obligations cannot be met or can only be met on the basis of adversely altered conditions. Liquidity risk can arise primarily if there are mismatches in the timing of cash flows on the asset and liability side. Detailed information regarding the Allianz Group’s liquidity risk exposure, liquidity, and funding – including changes in cash and cash equivalents – is provided in Liquidity and Funding Resources from page 57 onwards and in notes 13, 19 and 35 to the consolidated financial statements.
Controls over Financial Reporting − Then, our local entities identify risks that could lead to material financial misstatements including all relevant root causes (i.e. human processing errors, fraud, system shortcomings, external factors, etc.). After identifying and analyzing the risks, their potential impacts and probabilities of occurrence are evaluated.
− Preventive and detective key controls over the financial reporting process have been put in place to reduce the likelihood and impact of financial misstatements. If a potential risk materializes, actions are taken to reduce the impact of the financial misstatement. Given the strong dependence of financial reporting processes on information technology systems, we also implement IT controls.
− Finally, we focus on ensuring that controls are appropriately designed and effectively executed to mitigate risk. We have set consistent documentation requirements across the Allianz Group for elements such as processes, related key controls, and execution. We conduct an annual assessment of our control system to maintain and continuously enhance its effectiveness. Group Audit and local internal audit functions ensure that the overall quality of our control system is subjected to regular control-testing, to assure reasonable design and operating effectiveness. Internal Audit does so through a comprehensive risk-based approach, which holistically assesses the key controls of the company ’s internal procedures and processes, including local and group-internal controls over financial reporting.
The Group Disclosure Committee ensures that these board members are made aware of all material information that could affect our disclosures, and assesses the completeness and accuracy of the information provided in the quarterly statements, half-year, and annual financial reports. In 2016, the Group Disclosure Committee met on a quarterly basis before the quarterly statements and financial reports were issued.
The following information is given pursuant to § 289 (5) and § 315 (2) no. 5 of the German Commercial Code (“Handelsgesetzbuch – HGb”).
ACCOUNTING AND CONSOLIDATION PROCESSES The accounting and consolidation processes we use to produce consolidated financial statements are based on a central consolidation and reporting IT solution and local general ledger solutions. The latter are largely harmonized throughout the Group, using standardized processes, master data, posting logics, and interfaces for data delivery to the Holding. Access rights to accounting systems are managed according to strict authorization procedures.
Consolidated balanCe sheets consolidated balance sheets € mn as of 31 December note 2016 2015
ASSETS Cash and cash equivalents 14,463 14,842 Financial assets carried at fair value through income 6 8,333 7,268
Loans and advances to banks and customers 8 105,369 117,630 Financial assets for unit-linked contracts 111,325 105,873
Deferred acquisition costs 10 24,887 25,234 Deferred tax assets 34 1,003 1,394
Non-current assets and assets of disposal groups classified as held for sale 4 14,196 109
LIABILITIES AnD EQUITY Financial liabilities carried at fair value through income1 10,737 9,207 Liabilities to banks and customers 13 13,038 25,531
Income from fully consolidated private equity investments – 732 Total income 110,500 110,836
Loan loss provisions (46) (60) Impairments of investments (net) 30 (1,940) (1,526)
Foreign currency translation adjustments Reclassifications to net income 13 85 Changes arising during the year 143 993
Share of other comprehensive income of associates and joint ventures Reclassifications to net income 13 1 Changes arising during the year (4) 79
Miscellaneous Reclassifications to net income – – Changes arising during the year (127) 23
Consolidated statements of Changes in equity consolidated statements of changes in equity € mn
Consolidated statements of Cash flows consolidated statements of cash flows € mn
SUmmArY Net cash flow provided by operating activities 21,461 23,663 Net cash flow used in investing activities (19,765) (20,394) Net cash flow used in financing activities (1,732) (2,837) Effect of exchange rate changes on cash and cash equivalents 52 548 Change in cash and cash equivalents 16 979 Cash and cash equivalents at beginning of period 14,842 13,863 Cash and cash equivalents reclassified to assets of disposal groups held for sale (395) – Cash and cash equivalents at end of period 14,463 14,842
Share of earnings from investments in associates and joint ventures (288) (290) 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 and advances to banks and customers, non-current assets and disposal groups classified as held for sale (6,540) (6,407) Other investments, mainly financial assets held for trading and designated at fair value through income 2,710 3,460
Depreciation and amortization 1,345 1,359 Loan loss provisions 46 60 Interest credited to policyholder accounts 4,535 5,319 Net change in: Financial assets and liabilities held for trading (2,877) (3,250) Reverse repurchase agreements and collateral paid for securities borrowing transactions (696) (61) Repurchase agreements and collateral received from securities lending transactions (1,278) 2,365 Reinsurance assets (587) (806) Deferred acquisition costs (588) 202 Unearned premiums 909 775 Reserves for loss and loss adjustment expenses 622 2,040 Reserves for insurance and investment contracts 16,569 14,031 Deferred tax assets/liabilities 361 262
Business combinations (note 4): Proceeds from sale of subsidiaries, net of cash disposed (8) 19 Acquisitions of subsidiaries, net of cash acquired – –
Change in other loans and advances to banks and customers (originated loans) (4,848) (4,142) Other (net) 38 (708) Net cash flow used in investing activities (19,765) (20,394)
SUppLEmEnTArY InformATIon on ThE ConSoLIDATED STATEmEnTS of CASh fLowS Income taxes paid (2,933) (2,609) Dividends received 1,809 1,878 Interest received 19,263 19,412 Interest paid (1,185) (1,265)
Investments in associates and joint ventures 815 – Loans and advances to banks and customers (815) –
Balances with banks payable on demand 6,855 7,764 Balances with central banks 1,273 388 Cash on hand 94 225 Treasury bills, discounted treasury notes, similar treasury securities, bills of exchange and checks 6,241 6,465 83Annual Report 2016 Allianz Group
Joint arrangements are structures over which the Allianz Group and one or more other parties contractually agreed to share control, which exists only when decisions over the relevant activities require the unanimous consent of the parties sharing control. Joint arrangements whereby the Allianz Group has rights to the net assets of the arrangement (joint ventures) are generally accounted for using the equity method.
Offsetting Financial assets and liabilities are offset and the net amount is presented in the balance sheet only when there is a legally enforceable right to offset the recognized amounts and there is an intention to either settle on a net basis, or to realize the asset and settle the liability simultaneously.
Hedge accounting For derivative financial instruments used in hedge transactions that meet the criteria for hedge accounting, the Allianz Group designates the derivative as a hedging instrument in a fair value hedge, cash flow hedge, or hedge of a net investment in a foreign operation. The Allianz Group documents the hedge relationship, as well as its risk management objective and strategy for entering into the hedge transaction. The Allianz Group assesses, both at the hedge’s inception and on an ongoing basis, whether the hedging instruments used are expected to be highly effective in offsetting changes in fair values or cash flows of the hedged items.
Derivative financial instruments designated in hedge accounting relationships are included in the line items Other assets and Other liabilities. Freestanding derivatives are included in the line item financial assets or liabilities held for trading. For further information on derivatives, please refer to note 35 Derivative financial instruments.
FINANCIAL ASSETS AND LIABILITIES CARRIED AT FAIR VALUE THROUGH INCOME Financial assets and liabilities carried at fair value through income include financial assets and liabilities held for trading as well as financial assets and liabilities designated at fair value through income. While the former category includes trading instruments and 85Annual Report 2016 Allianz Group
Held-to-maturity investments Held-to-maturity investments are debt securities with fixed or determinable payments and fixed maturities, for which the Allianz Group has the positive intent and ability to hold to maturity. These assets are initially measured at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortized cost using the effective interest rate method.
Funds held by others under reinsurance contracts assumed Funds held by others under reinsurance contracts assumed relate to cash deposits to which the Allianz Group is entitled, but which the ceding insurer retains as collateral for future obligations of the Allianz Group. The cash deposits are recorded at face value, less any impairment for balances that are deemed not to be recoverable.
Investments in associates and joint ventures For details on the accounting for investments in associates and joint ventures please see the section principles of consolidation.
Real estate held for investment Real estate held for investment is carried at cost less accumulated depreciation and impairments. Real estate held for investment is depreciated on a straight-line basis over its useful life, with a maximum of 50 years and regularly tested for impairment.
Fixed assets of renewable energy investments These assets are accounted for as property, plant and equipment in line with IAS 16. Hence, they are carried at cost less accumulated depreciation and impairments.
Deferred acquisition costs (DAC) Costs that vary with and are directly related to the acquisition and renewal of insurance contracts and investment contracts with discretionary participation features are deferred by recognizing a DAC asset. At inception, DAC is tested to ensure that it is recoverable over the life of the contracts. Subsequently, loss recognition tests at the end of each reporting period ensure that the DAC is covered by future profits.
For short-duration, traditional long-duration, and limited-payment insurance contracts, DAC is amortized in proportion to premium revenue recognized. For universal life-type and participating life insurance contracts as well as investment contracts with discretionary participation features, DAC is generally amortized over the life of a book of contracts based on estimated gross profits (EGP) or estimated gross margins (EGM), respectively.
Deferred sales inducements Sales inducements on non-traditional insurance contracts are deferred and amortized using the same methodology and assumptions as for deferred acquisition costs.
Shadow accounting For insurance contracts and investment contracts with discretionary participation features, shadow accounting is applied to DAC, PVFP and deferred sales inducements in order to include the effect of unrealized gains or losses in the measurement of these assets in the same way as it is done for realized gains or losses. When the gains or losses are realized they are recognized in the income statement through recycling and prior adjustments due to shadow accounting are reversed.
Goodwill is recognized for business combinations in the amount of the consideration transferred in excess of the fair values assigned to the identifiable assets acquired and liabilities assumed. Goodwill is accounted for at the acquiree in the acquiree’s functional currency. There is an at least annual evaluation whether it is deemed recoverable.
For long-duration contracts a premium deficiency is recognized, if actual experience regarding investment yields, mortality, morbidity, terminations or expense indicates 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 DAC.
IBNR reserves are established to recognize the estimated cost of losses that have occurred but where the Allianz Group has not yet been notified. IBNR reserves, similar to case reserves for reported claims, are established to recognize the estimated costs, including expenses, necessary to bring claims to final settlement. The Allianz Group relies on its past experience, adjusted for current trends and any other relevant factors to estimate IBNR reserves.
Reserves for loss and loss adjustment expenses are not discounted, except when payment amounts are fixed and timing is reasonably determinable.
The aggregate policy reserves for universal life-type insurance contracts 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. The aggregate policy reserve also includes reserves for investment contracts with discretionary participation features and liabilities for guaranteed minimum mortality and morbidity benefits related to non-traditional contracts with annuitization options and unit-linked insurance contracts.
Insurance contract features which are not closely related to the underlying insurance contracts are bifurcated from the insurance contracts and accounted for as derivatives in line with IFRS 4 and IAS 39.
The assumptions used for aggregate policy reserves are determined using current and historical client data, industry data, and in the case of assumptions for interest reflect expected earnings on assets, which back the future policyholder benefits. The information used by the Allianz Group’s actuaries in setting such assumptions includes, but is not limited to, pricing assumptions, available experience studies, and profitability analyses.
Non-unit-linked investment contracts without discretionary participating features are accounted for under IAS 39. The aggregate policy reserves for those contracts are initially recognized at fair value, or the amount of the deposit by the contract holder, net of the transaction costs that are directly attributable to the issuance of the contract. Subsequently, those contracts are measured at amortized cost using the effective interest rate method.
Share-based compensation plans The share-based compensation plans of the Allianz Group are classified as either equity-settled or cash-settled plans. Equity-settled plans are measured at fair value on the grant date (grant-date fair value) and the grant-date fair value is recognized as an expense over the vesting period. Where equity-settled plans involve equity instruments of Allianz SE, a corresponding increase in shareholders’ equity is recognized. Where equity-settled plans involve equity instruments of subsidiaries of the Allianz Group, the corresponding increase is recognized in non-controlling interests. 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 a compensation expense over the vesting period. Upon vesting, any change in the fair value of any unexercised awards is also recognized as a compensation expense. Where expected tax deductions differ in amount and timing from the cumulative share-based payment expense recognized in profit or loss, deferred taxes are recognized on temporary differences.
Financial liabilities for puttable equity instruments The Allianz Group records financial liabilities where non-controlling investors have the right to put their equity instruments back to the Allianz Group which primarily is the case for mutual funds controlled but not wholly owned by the Allianz Group. These liabilities are generally required to be recorded at the redemption amount with changes recognized in equity for put options over non-controlling interests and in the income statement for redeemable fund units.
CERTIFICATED LIABILITIES AND SUBORDINATED LIABILITIES Certificated liabilities and subordinated liabilities are subsequently measured at amortized cost, using the effective interest method to amortize the premium or discount to the redemption value over the life of the liability.
Please refer to the above section explaining foreign currency changes that are recognized in equity. The effective portion of gains and losses of hedging instruments designated as hedges of a net investment in a foreign operation is recognized in foreign currency translation adjustments.
Non-controlling interests represent equity in subsidiaries, not attributable directly or indirectly, to Allianz SE as parent.
INCOME FROM FINANCIAL ASSETS AND LIABILITIES CARRIED AT FAIR VALUE THROUGH INCOME (NET) Income from financial assets and liabilities carried at fair value through income (net) includes all investment income as well as realized and unrealized gains and losses from financial assets and liabilities carried at fair value through income. In addition, commissions attributable to trading operations and related interest expenses as well as refinancing and transaction costs are included in this line item. Foreign currency gains and losses on monetary items are also reported within income from financial assets and liabilities carried at fair value through income (net).
Deferred tax assets or liabilities are calculated for temporary differences between the tax bases and the financial statement carrying amounts, including differences from consolidation, unused tax loss carry-forwards, and unused tax credits. Measurement is based on enacted or substantively enacted tax rates and tax rules. The Allianz Group recognizes a valuation allowance for deferred tax assets when it is unlikely that a corresponding amount of future taxable profit will be available against which the deductible temporary differences, tax loss carry forwards and tax credits can be utilized.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS The following amendments and revisions to existing standards became effective for the Allianz Group’s consolidated financial statements as of 1 January 2016: − IAS 1, Disclosure initiative, − IAS 16 & IAS 38, Clarification of Acceptable Methods of Depreciation and Amortisation, − IAS 19, Defined Benefit Plans: Employee Contributions, − IFRS 11, Accounting for Acquisitions of Interests in Joint
No material impact arose on the financial results or the financial position of the Allianz Group.
In 2016, the IASB issued an amendment to IFRS 4 which permits insurers to apply IAS 39 rather than IFRS 9, for annual periods beginning before 1 January 2021, provided certain preconditions are met. These preconditions, relating to insurance being the dominant activity of a reporting entity, are fulfilled by the Allianz Group and it is planned to carry out this option. It can be assumed that the main impact from IFRS 9 will arise from the new classification rules leading to more financial instruments being measured at fair value through profit and loss as well as from the new impairment model. In this context, interdependencies with the not-yet-issued IFRS 17 have to be considered to come to a final conclusion on the combined impact of both standards.
iFrs 15, Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers. IFRS 15 supersedes IAS 18, IAS 11, and a number of revenue -related interpretations. With the introduction of IFRS 15, the IASB pursued the objective of developing a single revenue standard containing comprehensive principles for recognizing revenue. The effective date is 1 January 2018.
The Allianz Group has started an initial assessment of the potential impact on its consolidated financial statements. So far, the most significant impact identified is that the Allianz Group will recognize new assets and liabilities for its operating leases of occupied property. In addition, IFRS 16 replaces the straight-line operating lease expenses with a depreciation charge for right-of-use assets and interest expenses on lease liabilities. The Group has not yet decided whether it will use the optional exemptions. No significant impact is expected for the Group’s finance leases.
IAS 7, Disclosure Initiative Annual periods beginning on or after 1 January 2017
3 – Use of estimates and assumptions The following sections describe complex accounting areas that are especially sensitive to the use of estimates and assumptions.
INSURANCE CONTRACTS For Life/Health and Property-Casualty, the central oversight process around reserve estimates includes the setting of group-wide standards and guidelines, regular site visits, as well as regular quantitative and qualitative reserve monitoring.
Stage two: The Allianz Group Actuarial Department forms an opinion on the adequacy of the reserves proposed by the local entities. The Allianz Group Actuarial Department challenges the operating entities’ selection through their continuous interaction with local teams and quarterly attendance in the local reserve committees. The ability to form a view on reserve adequacy is further enabled by regular reviews of the local reserving practices. Such reviews consist of an evaluation of the reserving process as well as of the appropriateness and consistency of assumptions, and an analysis of movement of reserves. Significant findings from such reviews are communicated in the Allianz Group Reserve Committee to initiate actions where necessary.
The level 1 inputs of financial instruments that are traded in active markets are based on unadjusted quoted market prices or dealer price quotations for identical assets or liabilities on the last exchange trading day prior to or at the reporting date, if the latter is a trading day.
Estimates and assumptions of fair values and hierarchies are particularly significant when determining the fair value of financial instruments for which at least one significant input is not based on observable market data (classified within level 3 of the fair value hierarchy ). The availability of market information is determined by the relative trading levels of identical or similar instruments in the market, with emphasis placed on information that represents actual market activity or binding quotations from brokers or dealers.
The Allianz Group also considers other factors which could provide objective evidence of a loss event, including the probability of bankruptcy and the lack of an active market due to financial difficulty. The presence of either a decline in fair value below amortized cost or the downgrade of an issuer’s credit rating does not by itself represent objective evidence of a loss event, but may represent objective evidence of a loss event when considered with other available information.
ASSESSMENT OF THE INCLUSION METHOD Determining the appropriate inclusion method of some entities involves management judgment.
For certain investment funds managed by third parties where the Allianz Group holds a majority stake, management has assessed that the Allianz Group does not control these investment funds because it has neither a majority representation in the governing bodies of these investment funds nor any substantial removal rights to replace the asset manager.
The analysis and forecasting required in this process, and as a result the determination of the deferred tax assets, is performed for individual jurisdictions by qualified local tax and financial professionals. Given the potential significance surrounding the underlying estimates and assumptions, group-wide policies and procedures have been designed to ensure consistency and reliability around the recoverability assessment process. Forecast operating results are based upon approved business plans, which are themselves subject to a well-defined process of control. As a matter of policy, especially strong evidence supporting the recognition of deferred tax assets is required if an entity has suffered a loss in either the current or preceding period.
PENSION LIABILITIES AND SIMILAR OBLIGATIONS Liabilities for pension and similar obligations and related net pension expenses are determined in accordance with actuarial valuation models. These valuations rely on extensive assumptions. Key assumptions including discount rates, inflation rates, compensation increases, pension increases and rates of medical cost trends are defined centrally at the Allianz Group level, considering the circumstances in the particular countries. In order to ensure their thorough and consistent determination, all input parameters are discussed and defined taking into consideration economic developments, peer reviews, and currently available market and industry data.
Real estate held for investment 160 – Real estate held for own use 79 63
Cash and cash equivalents 395 Financial assets carried at fair value through income 13 Investments 2,631 Loans and advances to banks and customers 10,703 Deferred tax assets 74 Other assets 98 Total assets 13,915 Financial liabilities carried at fair value through income 11 Liabilities to banks and customers 12,365 Other liabilities 442 Certificated liabilities 215 Subordinated liabilities 250 Total liabilities 13,282 93Annual Report 2016 Allianz Group
5 – Segment reporting IDENTIFICATION OF REPORTABLE SEGMENTS The business activities of the Allianz Group are first organized by product and type of service: insurance activities, asset management activities and corporate and other activ ities. Due to differences in the nature of products, risks and capital allocation, insurance activities are further divided into the business segments Property-Casualty and Life/Health. In accordance with the responsibilities of the Board of Management, each of the insurance business segments is grouped into the following reportable segments: − German Speaking Countries and Central & Eastern Europe, − Western & Southern Europe, Middle East, Africa, India, − Iberia & Latin America, − USA (Life/Health only), − Global Insurance Lines & Anglo Markets, − Asia Pacific, − Allianz Worldwide Partners (Property-Casualty only).
PROPERTY-CASUALTY In the business segment Property-Casualty, reportable segments offer a wide variety of insurance products to both private and corporate customers, including motor liability and own damage, accident, general liability, fire and property, legal expense, credit and travel insurance.
ASSET MANAGEMENT The reportable segment Asset Management operates as a global provider of institutional and retail asset manage ment products and services to third-party investors and provides investment management services to the Allianz Group’s insurance operations. The products for retail and institutional customers include equity and fixedincome funds as well as alternative products. The United States and Germany as well as France, Italy and the Asia-Pacific region represent the primary asset management markets.
CORPORATE AND OTHER The reportable segment Holding & Treasury includes the management and support of the Allianz Group’s businesses through its strategy, risk, corporate finance, treasury, financial reporting, controlling, communication, legal, human resources, technology and other functions. The reportable segment Banking consists of the banking activities in Germany, France, Italy, the Netherlands and Bulgaria. The banks offer a wide range of products for corporate and retail clients, with a primary focus on the latter. The reportable segment Alternative Investments provides global alternative investment management services in the private equity, real estate, renewable energy and infrastructure sectors, mainly on behalf of the Allianz Group’s insurance operations.
REPORTABLE SEGMENTS MEASURE OF PROFIT OR LOSS The Allianz Group uses operating profit to evaluate the performance of its reportable segments as well as of the Allianz Group as a whole. Operating profit highlights the portion of income before income taxes that is attributable to the ongoing core operations of the Allianz Group. The Allianz Group considers the presentation of operating profit to be useful and meaningful to investors because it enhances the understanding of the Allianz Group’s underlying operating performance and the comparability of its operating performance over time.
To better understand the ongoing operations of the business, the Allianz Group generally excludes the following non-operating effects: − income from financial assets and liabilities carried at fair value through income (net),
− realized gains/losses (net) and impairments of investments (net), − income from fully consolidated private equity investments (net), − interest expenses from external debt, − acquisition-related expenses (from business combinations), − one-off effects from pension revaluation, − amortization of intangible assets and − profit (loss) of substantial subsidiaries classified as held for sale.
RECENT ORGANIZATIONAL CHANGES Some minor reallocations between the reportable segments have been made.
Total equity 70,392 66,099 Total liabilities and equity 883,809 848,942 96 Annual Report 2016 Allianz Group
Non-current assets and assets of disposal groups classified as held for sale 97 37 146 72 29 – 13,925 – (2) – 14,196 109
Reserves for loss and loss adjustment expenses 61,617 61,169 10,790 10,857 – – – – (34) (23) 72,373 72,003 Reserves for insurance and investment contracts 14,837 14,407 490,876 472,010 – – (57) – (196) (195) 505,460 486,222 Financial liabilities for unit-linked contracts – – 111,325 105,873 – – – – – – 111,325 105,873
Total equity 70,392 66,099 Total liabilities and equity 883,809 848,942 97Annual Report 2016 Allianz Group
Operating income from financial assets and liabilities carried at fair value through income (net) (23) (25) (1,012) (2,050) 6 (8) 18 (15) 1 9 (1,010) (2,089) Operating realized gains/losses (net) 285 252 6,612 6,459 – – – – 3 15 6,900 6,726 Interest expenses, excluding interest expenses from external debt (85) (72) (108) (108) (11) (12) (379) (454) 235 270 (349) (375) Operating impairments of investments (net) (51) (59) (1,208) (1,199) – – – – – – (1,259) (1,258)
Non-operating investment result Non-operating income from financial assets and liabilities carried at fair value through income (net) (53) (99) 26 (51) – – 40 (58) (1) (10) 11 (219) Non-operating realized gains/losses (net) 814 746 81 298 – – 500 337 108 (170) 1,503 1,211 Non-operating impairments of investments (net) (236) (223) (227) (18) – – (217) (27) – – (681) (268)
Income from fully consolidated private equity investments (net) – – – – – – – (52) – (8) – (60) Interest expenses from external debt – – – – – – (858) (849) – – (858) (849)
German Speaking Countries and Central & Eastern Europe 14,465 14,061 12,111 11,741 1,573 1,683 1,394 1,147 Western & Southern Europe, Middle East, Africa, India 12,170 11,855 11,031 10,915 1,642 1,798 1,105 1,283
German Speaking Countries and Central & Eastern Europe 24,922 24,058 14,593 15,115 1,660 1,707 1,134 1,133 Western & Southern Europe, Middle East, Africa, India 20,808 23,591 4,713 4,587 1,145 1,062 869 935
7 – Investments Investments € mn as of 31 December 2016 2015
2 As of 31 December 2016, fair value and amortized cost of debt securities with a contractual maturity of less than 12 months amount to € 30,420 mN (2015: € 28,952 mN) and € 29,807 mN (2015: € 28,361 mN), respectively.
In general, the credit risk of government bonds is rather moderate since they are backed by fiscal capacity of the issuers who typically hold an investment-grade country- and/or issue-rating. During 2016, interest rates of most government bonds decreased. The development has been very volatile, however, leading to a slight increase in unrealized losses on government bonds of € 198 mn.
For the vast majority of corporate bonds, the issuer/the issues have an investment grade. The decrease in unrealized losses of € 2,577 mn compared to 31 December 2015 is due to decreasing interest rates.
The main impact from unrealized losses on corporate bonds comes from the financial and energy sector.
Based on a detailed analysis of the underlying securities, the Allianz Group did not consider these investments to be impaired as of 31 December 2016.
EQUITY SECURITIES As of 31 December 2016, unrealized losses amounted to € 192 mn which is a decrease of € 209 mn compared to 31 December 2015. They concern equity securities that did not meet the criteria of the Allianz Group’s impairment policy for equity instruments as described in note 2 Accounting policies and new accounting pronouncements. The major part of these unrealized losses has been in a continuous loss position of less than 6 months.
Cost as of 1 January 15,113 14,403 Accumulated depreciation as of 1 January (3,136) (3,054) Carrying amount as of 1 January 11,977 11,349
As of 31 December 2016, real estate held for investment pledged as security and other restrictions on title were € 36 mn (2015: € 36 mn).
Carrying amount as of 31 December 2,397 1,763 Accumulated depreciation as of 31 December 472 387 Cost as of 31 December 2,868 2,151 1 Include fixed assets of wind parks and solar parks.
1 Includes loans and advances to banks and customers due within one year of € 11,677 mN (2015: € 11,216 mN).
As of 31 December 2016, impaired loans amounted to € 160 mn (2015: € 515 mn). The interest income recognized on these impaired loans amounted to € 0.4 mn (2015: € 1 mn).
9 – Reinsurance assets reInsurance assets € mn as of 31 December 2016 2015
The Allianz Group reinsures a portion of the risks it underwrites in an effort to control its exposure to losses and events and to protect its capital resources. For natural catastrophe events, the Allianz Group maintains a centralized program that pools exposures from its subsidiaries by internal reinsurance agreements. Allianz SE limits exposures in this portfolio through external reinsurance. For other 10 – Deferred acquisition costs deFerred acquIsItIon costs € mn as of 31 December 2016 2015
Present value of future profits 544 613 Deferred sales inducements 781 1,033 changes In deFerred acquIsItIon costs € mn
Changes in the consolidated subsidiaries of the Allianz Group 31 – Foreign currency translation adjustments 257 908 Changes in shadow accounting (754) 2,279
Reclassifications – (151) Carrying amount as of 31 December 24,887 25,234 risks, the subsidiaries of the Allianz Group have individual reinsurance programs in place. Allianz SE participates with up to 100 % on an arm’s length basis in these cessions, in line with local requirements. The risk coming from these cessions is also limited by external retrocessions.
11 – Other assets other assets € mn as of 31 December 2016 2015
Accrued dividends, interest and rent 7,257 7,887 Prepaid expenses 390 328 Derivative financial instruments used for hedging that meet the criteria for hedge accounting and firm commitments 677 565 Property and equipment
2 As of 31 December 2016, includes € 1,708 mN (2015: € 1,534 mN) for self-developed software and € 932 mN (2015: € 827 mN) for software purchased from third parties.
Distribution agreements1 951 899 Acquired business portfolios2 172 186 Customer relationships 122 116 1 Primarily includes the long-term distribution agreements with Commerzbank aG of € 261 mN (2015: € 298 mN), Banco Popular s.a. of € 371 mN (2015: € 389 mN), Yapı ve Kredi Bankası a.s. of € 96 mN (2015: € 122 mN), Philippine National Bank of € 83 mN (2015: € – mN) and hsbc Asia, hsbc Turkey, btPN Indonesia and Maybank Indonesia of € 133 mN (2015: € 79 mN).
Disposals – (316) Foreign currency translation adjustments 58 352 Impairments – (171) Carrying amount as of 31 December 12,372 12,101 Accumulated impairments as of 31 December 440 976 Cost as of 31 December 12,812 13,077
As a result of the impairment test, all of the goodwill of € 171 mn allocated to the CGU Asia Pacific in the business segment Life/Health was completely impaired.
− Insurance Iberia & Latin America, including Mexico, Portugal, South America and Spain,
CGUs in the Life/Health business segment are: − Insurance German Speaking Countries, − Health Germany, − Insurance Western & Southern Europe, Middle East and Africa, including Belgium, France, Greece, Italy, Luxembourg, the Netherlands, Turkey, Middle East and Africa,
The business segment Asset Management is represented by the CGU Asset Management, including mainly Allianz Global Investors and PImCO.
For all CGUs in the Life/Health business segment the value in use is based on an Appraisal Value method which is derived from the Embedded Value and new business value calculation. As a starting point for the impairment test for the CGUs in the Life/Health business segment, the Market Consistent Embedded Value (mCEV) and a multiple of the Market Consistent Value of New Business is used. mCEV is an industry-specific valuation method to assess the current value of the in-force portfolio. The Allianz Group uses an economic balance sheet approach to derive the mCEV, which is directly taken out of the market value balance sheet (mVBS) as determined using Solvency II guidance. In case where no adequate valuation reflecting a long-term view in line with management judgment and market experience could be derived from market consistent methodology, the Appraisal Value can be derived from a Traditional Embedded Value (TEV) which was the case for the United States.
The discount rate is based on the capital asset pricing model (CAPm) and appropriate eternal growth rates. The assumptions, including the risk-free interest rate, market risk premium, segment beta and leverage ratio used to calculate the discount rates, are in general consistent with the parameters used in the Allianz Group’s planning and controlling process. The discount rates and eternal growth rates for the CGUs in the Property-Casualty business segment are as follows: dIscount rates and eternal growth rates For the cgus In the property-casualty busIness segment1 %
Insurance German Speaking Countries 7.7 1.0 Insurance Western & Southern Europe, Middle East and Africa 9.5 2.5 Insurance Iberia & Latin America 12.2 3.4 Insurance Asia Pacific 11.5 3.5 Insurance Central and Eastern Europe 9.2 1.5 Global Insurance Lines & Anglo Markets 8.5 1.0 Specialty Lines I 7.9 1.0 Specialty Lines II 8.0 1.0 1 The table provides an overview of weighted key parameters on cGU level of the country-specific discount rates and eternal growth rates used.
Valuation techniques The recoverable amounts for all CGUs are determined on the basis of value in use calculations. The Allianz Group applies generally acknowledged valuation principles to determine the value in use.
For entities included in the CGUs of the business segment Life/Health, the mCEV is the excess of assets over liabilities of the mVBS according to the Solvency II requirements. Assets and liabilities included in the mVBS are measured at their market value as of the reporting date. Technical provisions are an essential part of the liabilities included in the mVBS and generally consist of the best estimate plus a risk margin. The best estimate corresponds to the probability-weighted average of future cash flows considering the time value of money, using the relevant risk-free interest rate term structure. The calculation of the best estimate is based on assumptions made for demographic factors (e.g. mortality, morbidity, lapse/surrender rates), expense allowances, taxation, assumptions on market conditions for market consistent projections (e.g. reference rates, volatilities) as well as investment strategy and asset allocation of the entity. The risk margin ensures that the value of the technical provisions is equivalent to the amount that the entity would be expected to require in order to take on and meet the insurance and reinsurance obligations.
The following table provides an overview of the reference rates for the CGUs in the Life/Health business segment: reFerence rates For the cgus In the lIFe/health busIness segment
For those entities reporting in Euro: Euro swap curve minus 10 bps credit risk adjustment plus 13 bps volatility adjustment For other entities: Local swap curve minus 10 bps credit risk adjustment plus volatility adjustment for the following currencies only (HrK: 9 bps, CZK: 1 bps, Pln: 18 bps)
For entities included in the CGU of the Asset Management business segment, key assumptions include assets under management growth, cost-income ratio and risk capital. The key assumptions are based on the current market environment. The discount rate for the CGU Asset Management is 9.7 % and the eternal growth rate is 1.0 %.
In the business segment Life/Health sensitivity analyses were performed based on mCEV sensitivity testing on the reference rate. The analyses have shown that in case of a decrease in reference rates by 50 basis points the appraisal value of each CGU still exceeds its carrying amount.
13 – Liabilities to banks and customers LiabiLities tO baNKs aND CUstOMeRs € mn as of 31 December 2016 2015
Payable on demand and other deposits 897 5,405 Repurchase agreements and collateral received from securities lending transactions and derivatives 4,040 6,495 1 Consists of liabilities to banks and customers due within one year of € 10,193 MN (2015: € 19,968 MN), 1 – 5 years of € 2,256 MN (2015: € 3,404 MN) and over 5 years of € 590 MN (2015: € 2,159 MN).
14 – Unearned premiums UNeaRNeD pReMiUMs € mn as of 31 December 2016 2015
Prior years’ net loss and loss adjustment expenses incurred reflect the changes in estimation charged or credited to the consolidated income statement in each year with respect to the reserves for loss and loss adjustment expenses established as of the beginning of that year. During the year ended 31 December 2016, the Allianz Group recorded additional income of € 2,084 mn (2015: € 1,924 mn) net in respect of losses occurring in prior years. During the year ended 31 December 2016, this amount, expressed as a percentage of the net balance of the beginning of the year, was 3.6 % (2015: 3.5 %).
LOss payMeNts fOR the iNDiviDUaL aCCiDeNt yeaRs (peR CaLeNDaR yeaR, Net) € mn
ReseRves fOR LOss aND LOss aDjUstMeNt expeNses fOR the iNDiviDUaL aCCiDeNt yeaRs at the RespeCtive RepORtiNg Date (Net) € mn
Accident year as of 31 December 109Annual Report 2016 Allianz Group
ULtiMate LOss fOR the iNDiviDUaL aCCiDeNt yeaRs at the RespeCtive RepORtiNg Date (Net) € mn
CaLeNDaR yeaR pReMiUMs eaRNeD aND ULtiMate LOss RatiO fOR the iNDiviDUaL aCCiDeNt yeaRs at the RespeCtive RepORtiNg Date (Net)
CONTRACTUAL CASH FLOWS As of 31 December 2016, reserves for loss and loss adjustment expenses, which are expected to be due in 2017 amounted to € 16,849 mn, while those expected to be due between 2018 and 2021 amounted to € 13,779 mn and those expected to be due after 2021 amounted to € 26,626 mn.
ReseRves fOR iNsURaNCe aND iNvestMeNt CONtRaCts € mn as of 31 December 2016 2015
Aggregate policy reserves 433,748 425,312 Reserves for premium refunds 70,664 59,732 Other insurance reserves 1,048 1,178
Ending balance of discounted loss reserves 4,055 3,882 As of 31 December 433,748 425,312 1 Mainly relate to insurance contracts when policyholders change their contract from a unit-linked to a universal life-type contract.
As of 31 December 16,101 15,400 Latent reserves for premium refunds As of 1 January 44,332 48,006 Foreign currency translation adjustments 41 211 Changes in the consolidated subsidiaries of the Allianz Group (10) – Changes due to fluctuations in market value 4,980 (8,629) Changes due to valuation differences charged to income 5,220 4,743 As of 31 December 54,563 44,332
As of 31 December 2016 and 2015, the Allianz Group’s reserves for insurance and investment contracts for the business segment Life/ Health are summarized per reportable segment as follows: CONCeNtRatiON Of iNsURaNCe RisK iN the Life/heaLth bUsiNess segMeNt peR RepORtabLe segMeNt € mn as of 31 December 2016 2015
German Speaking Countries and Central & Eastern Europe 272,181 9,526 281,708 254,552 9,025 263,577 Western & Southern Europe, Middle East, Africa, India 112,109 64,702 176,811 110,407 59,826 170,233
Global Insurance Lines & Anglo Markets 1,038 – 1,038 1,947 – 1,947 111Annual Report 2016 Allianz Group
The Allianz Group’s Life/Health business segment is exposed to significant investment risk as a result of guaranteed minimum interest rates being included in most of its non-unit-linked contracts. The weighted average guaranteed minimum interest rates of the Allianz Group’s largest operating entities in the business segment Life/Health, comprising 86 % (2015: 84 %) of the aggregate policy reserves in this business segment in 2016, can be summarized by country as follows: weighteD aveRage gUaRaNteeD MiNiMUM iNteRest Rates Of Life iNsURaNCe eNtities as of 31 December 2016 2015
As of 1 January 105,873 94,564 Foreign currency translation adjustments 620 3,215 Changes in the consolidated subsidiaries of the Allianz Group (1,079) 1 Premiums collected 16,189 20,948 Interest credited 3,994 1,182 Releases upon death, surrender and withdrawal (10,547) (10,653) Policyholder charges (1,857) (1,934) Portfolio acquisitions and disposals (25) (46)
As of 31 December2 111,325 105,873 1 These reclassifications mainly relate to insurance contracts when policyholders change their contract from a unit-linked to a universal life-type contract.
18 – Other liabilities OtheR LiabiLities € mn as of 31 December 2016 2015
Deposits retained for reinsurance ceded 2,254 1,636 Derivative financial instruments used for hedging that meet the criteria for hedge accounting and firm commitments 159 472 Financial liabilities for puttable equity instruments 2,894 2,585 Other liabilities 6,922 7,159 1 Includes other liabilities due within one year of € 26,981 MN (2015: € 25,568 MN).
FUTURE POLICY BENEFITS As of 31 December 2016, benefits for insurance and investment contracts which are expected to be due in 2017 amounted to € 58 bn, while those expected to be due between 2018 and 2021 amounted to € 219 bn and those expected to be due after 2021 amounted to € 1,009 bn.
The resulting total benefits for insurance and investment contracts in the amount of € 1,286 bn include contracts where the timing and amount of payments are considered fixed and determinable, and contracts which have no specified maturity dates and may result in a payment to the contract beneficiary, depending on mortality and morbidity experience and the incidence of surrenders, lapses or maturities. Furthermore, the amounts are undiscounted and do not include any expected future premiums; therefore they exceed the reserves for insurance and investment contracts presented in the consolidated balance sheet.
19 – Certificated and subordinated liabilities CeRtifiCateD aND sUbORDiNateD LiabiLities € mn1
1 Except for interest rates. Interest rates represent the weighted average. 2 Includes € 122 MN certificated liabilities issued by banking subsidiaries. 3 Relates to certificated liabilities issued by banking subsidiaries. 4 Change due to the issuance of a € 1.4 bN subordinated bond in the third quarter of 2016.
5 Includes € 251 MN subordinated bonds issued by banking subsidiaries. 6 On 3 January 2017, Allianz Finance II b.V. called for redemption the € 1.4 bN 4.375 % subordinated bond effective 17 February 2017. 7 Relates to hybrid equity issued by subsidiaries.
Subordinated liabilities Allianz SE, Munich DE000A1RE1Q3 2012 EUR 1,500 5.625 17 October 2042
Allianz Finance II b.V., Amsterdam DE000A1GNAH1 2011 EUR 2,000 5.750 8 July 2041 XS0211637839 2005 EUR 1,400 4.375 Perpetual
In addition, Allianz SE has authorized capital (Authorized Capital 2014/II) for the issuance of shares against cash until 6 May 2019. The shareholders’ subscription rights can be excluded in order to issue new shares to employees of Allianz SE and its Group companies. As of 31 December 2016, the Authorized Capital 2014/II amounted to € 14 mn (5,359,375 shares).
CONDITIONAL CAPITAL As of 31 December 2016, Allianz SE had conditional capital totaling € 250 mn (97,656,250 shares) (Conditional Capital 2010/2014). This conditional capital increase will only be carried out if conversion or option rights attached to bonds which Allianz SE or its Group companies have issued against cash payments according to the resolutions of the AGm on 5 May 2010 or 7 May 2014, are exercised or the conversion obligations under such bonds are fulfilled, and only to the extent that the conversion or option rights or conversion obligations are not serviced through treasury shares or through shares from authorized capital.
Number of issued shares outstanding as of 1 January 454,823,638 454,248,039 Changes in number of treasury shares 244,099 575,599 Number of issued shares outstanding as of 31 December 455,067,737 454,823,638 Treasury shares1 1,932,263 2,176,362 Total number of issued shares 457,000,000 457,000,000 1 Thereof 1,931,677 (2015: 2,175,776) own shares held by Allianz sE.
PROPOSAL FOR APPROPRIATION OF NET EARNINGS The Board of Management and the Supervisory Board propose that the net earnings (“Bilanzgewinn”) of Allianz SE of € 3,855,866,165.01 for the 2016 fiscal year shall be appropriated as follows: − Distribution of a dividend of € 7.60 per no-par share entitled to a dividend: € 3,458,515,257.20
CAPITAL REQUIREMENTS The Allianz Group’s capital requirements primarily depend on the type of business that it underwrites, the industry and geographic locations in which it operates and the allocation of the Allianz Group’s investments. During the Allianz Group’s annual planning dialogues with its operating entities, internal capital requirements are determined through business plans regarding the levels and timing of capital expenditures and investments. These plans also form the basis for the Allianz Group’s capital management. Internal capital requirements are determined by explicitly taking stress resilience into account. Regulators impose minimum capital requirements at the level of the Allianz Group’s operating entities and the Allianz Group as a whole. For further details on how Allianz Group manages its capital, please refer to the the section “Target and strategy of risk management” of the Risk and Opportunity Report.
With Solvency II being the binding regulatory regime since 1 January 2016 and the approval of the partial internal model1, risk is measured and steered based on the risk profile underlying the regulatory capital requirement which is based on the internal model. The Allianz Group’s own funds as well as capital requirements are based on the market value balance sheet approach as the major economic principle of Solvency II rules2. In order to determine the eligible own funds, the mVbS excess of assets over liabilities as the basis for the own funds compilation is derived mainly by deducting goodwill and intangible assets and adding valuation adjustments to the IFRS equity. To arrive at the eligible own funds, mainly subordinated liabilities are added to and foreseeable dividends and transferability deductions are subtracted from the mVbS excess of assets over liabilities. Compared to year-end 2015, the Solvency II capitalization of the Allianz Group increased by 18 percentage points to 218 %. This was driven by an increase in own funds mainly due to strong Solvency II earnings and the sale of the South Korean life business. This was partially offset by market movements mainly due to decreased interest rates as well as dividend accrual and changes in transferable amount of own funds resulting from changed risk capital requirements. For further information on the Solvency II capitalization, please refer to the section “Solvency II regulatory capitalization” of the Risk and Opportunity Report.
1 From a formalistic perspective, the German Supervisory Authority deems the model to be “partial” because it does not cover all of the operations: some of the smaller operations report under the standard model and others under the deduction and aggregation approach.
Notes to the CoNsolidated iNCome statemeNts 21 – Premiums earned (net) Premiums earned (net) € mn
Change in unearned premiums (net) (234) (309) – (543) Premiums earned (net) 46,430 24,215 – 70,645 22 – Interest and similar income interest and similar income € mn
Income from real estate held for own use 100 36 1 Includes a net gain of € 0.2 bN on the sale of the personal insurance business of Fireman’s Fund Insurance Company to aCe Limited. The sale was an integral part of the reorganization of Allianz Group’s PropertyCasualty insurance business in the United States.
change in reserves for insurance and investment contracts (net) € mn
Liabilities to banks and customers (170) (207) Deposits retained for reinsurance ceded (45) (47) Certificated liabilities (286) (294) Subordinated liabilities (595) (580)
PRoPeRty-Casualty Fees from credit and assistance business 1,051 995 Service agreements 476 478 life/HealtH Service agreements 120 93 Investment advisory 1,226 1,237 asset management Management and advisory fees 6,403 6,795 Loading and exit fees 485 575 Performance fees 474 607
PRoPeRty-Casualty Fees from credit and assistance business (1,043) (999) Service agreements (364) (367)
During the year ended 31 December 2016, current income taxes included expenses of € 178 mn (2015: income of € 73 mn) related to prior years.
30 – Impairments of investments (net) imPairments of investments (net) € mn
Investment management expenses (735) (676) Expenses from real estate held for investment (418) (418) Expenses from fixed assets of renewable energy investments (153) (121)
Foreign currency translation adjustments (28) 119 Available-for-sale investments (807) 1,775 Cash flow hedges (33) 34 Share of other comprehensive income of associates and joint ventures 10 (1)
Deferred acquisition costs 1,204 967 Other assets 1,566 1,435 Intangible assets 254 170 Tax losses carried forward 2,252 2,373 Insurance reserves 5,258 4,888 Pensions and similar obligations 4,551 4,455 Other liabilities 1,133 1,214 Total deferred tax assets 20,855 20,633 Non-recognition or valuation allowance for deferred tax assets on tax losses carried forward (807) (759) Effect of netting (19,045) (18,480) Net deferred tax assets 1,003 1,394 defeRRed tax liabilities Financial assets carried at fair value through income 187 235
Deferred acquisition costs 4,991 4,958 Other assets 1,388 1,267 Intangible assets 804 661 Insurance reserves 3,084 2,808 Pensions and similar obligations 2,635 2,674 Other liabilities 597 524 Total deferred tax liabilities 23,867 22,483 Effect of netting (19,045) (18,480) Net deferred tax liabilities 4,822 4,003 Net deferred tax assets (liabilities) (3,819) (2,609)
TAX LOSSES CARRIED FORWARD Tax losses carried forward at 31 December 2016 of € 9,697 mn (2015: € 10,395 mn) resulted in the recognition of deferred tax assets to the extent that there is sufficient certainty that the unused tax losses will be utilized. At the reporting date, this prerequisite was not fulfilled for a partial amount of € 3,010 mn (2015: € 2,835 mn). According to tax legislation as of 31 December 2016, an amount of € 2,801 mn (2015: € 2,487 mn) of these tax losses may be carried forward indefinitely and in unlimited amounts whereas an amount of € 209 mn (2015: € 348 mn) of these tax losses carried forward will expire over the next 20 years if not utilized.
The table shows the fair value and notional amounts of all freestanding derivatives as well as derivatives for which hedge accounting is applied by the Allianz Group as of 31 December 2016 and 2015, respectively. The notional principal amounts indicated in the table are cumulative, as they include the absolute value of the notional principal amounts of derivatives with positive and negative fair values. Although these notional principal amounts reflect the degree of the Allianz Group’s involvement in derivative transactions, they do not represent amounts exposed to risk. Further information on the use of derivatives to hedge risk can be found in the sections on market and credit risk of the Risk and Opportunity Report, which forms part of the Group Management Report.
FREESTANDING DERIVATIVE FINANCIAL INSTRUMENTS As of 31 December 2016, freestanding derivatives, included in the line item financial assets and liabilities held for trading, had a notional principal amount of € 426.1 bn (2015: € 292.1 bn) as well as a positive fair value of € 2.4 bn (2015: € 1.6 bn) and a negative fair value of € 10.7 bn (2015: € 9.2 bn). Out of the total allocated to the freestanding derivatives, € 265.9 bn (2015: € 202.9 bn) of the notional principal relate to annuity products or derivatives to hedge the annuity products. Annuity products are equity-indexed or contain certain embedded options or guarantees which are considered embedded derivatives under IAS 39. For these embedded derivatives, the notional principal amounts included in the table refer to the account value of the related insurance contracts. The total negative fair value of these embedded derivatives amounts to € 9.4 bn (2015: € 7.8 bn). Further information on the fair value measurement of these derivatives can be found in note 36 Fair values and carrying amounts of financial instruments.
DERIVATIVE FINANCIAL INSTRUMENTS USED IN ACCOUNTING HEDGES As of 31 December 2016, derivatives which form part of hedge accounting relationships, which are included in the line items other assets and other liabilities, had a notional amount of € 17.3 bn (2015: € 19.8 bn) as well as a positive fair value of € 677 mn (2015: € 565 mn) and a negative fair value of € 159 mn (2015: € 472 mn). These hedging instruments mainly include interest rate forwards with a total positive fair value of € 422 mn (2015: € 76 mn).
FAIR VALUE HEDGES The Allianz Group uses fair value hedges to hedge the exposure to changes in the fair value of financial assets due to movements in interest or exchange rates. As of 31 December 2016, the derivative financial instruments used for the related fair value hedges of the Allianz Group had a total negative fair value of € 39 mn (2015: € 177 mn). Within the Allianz Group’s banking business, derivatives to hedge against interest rate changes are implemented for individual transactions (micro hedges) or for a portfolio of similar assets or liabilities (macro hedges).
HEDGE OF NET INVESTMENT IN FOREIGN OPERATIONS As of 31 December 2016, the Allianz Group hedges part of its U.S. Dollar, British Pound, Australian Dollar, Czech Koruna, and Swiss Franc net investments through the issuance of British Pound and Swiss Franc denominated liabilities with a nominal amount of GbP 0.8 bn and CHF 0.5 bn, as well as the use of forward sales of U.S. Dollar, British Pound, Australian Dollar, Czech Koruna and Swiss Franc with a notional of USD 0.5 bn, GbP 0.4 bn, AUD 0.4 bn, CZK 1.4 bn and CHF 0.2 bn. The total positive fair value in 2016 was € 6 mn (2015: € 9 mn).
FAIR VALUES AND CARRYING AMOUNTS The following table compares the carrying amount and fair value of the Allianz Group’s financial assets and financial liabilities: OFFSETTING The Allianz Group mainly enters into enforceable master netting arrangements and similar arrangements for derivatives transactions. None of these enforceable master netting arrangements or similar arrangements meet the requirements for offsetting in line with IAS 32.
Credit risk associated with netting arrangements is further mitigated by collateral. For further information on collateral, please refer to note 36 Fair values and carrying amounts of financial instruments.
FinanCial asseTs Cash and cash equivalents 14,463 14,463 14,842 14,842 Financial assets held for trading 2,907 2,907 2,258 2,258 Financial assets designated at fair value through income 5,426 5,426 5,010 5,010 Available-for-sale investments 512,268 512,268 488,365 488,365 Held-to-maturity investments 2,399 2,805 2,745 3,165 Investments in associates and joint ventures 7,161 9,031 5,056 6,207 Real estate held for investment 11,732 18,380 11,977 17,810 Loans and advances to banks and customers 105,369 124,422 117,630 136,397 Financial assets for unit-linked contracts 111,325 111,325 105,873 105,873 Derivative financial instruments and firm commitments included in other assets 677 677 565 565
FinanCial liabiliTies Financial liabilities held for trading 10,737 10,737 9,207 9,207 Liabilities to banks and customers 13,038 13,062 25,531 25,563 Financial liabilities for unit-linked contracts 111,325 111,325 105,873 105,873 Derivative financial instruments and firm commitments included in other liabilities 159 159 472 472 Financial liabilities for puttable equity instruments 2,894 2,894 2,585 2,585
As of 31 December 2016, fair values could not be reliably measured for equity investments with carrying amounts totaling € 100 mn (31 De- cem ber 2015: € 216 mn). These investments are primarily investments in privately held corporations and partnerships. During the year ended 31 December 2016, such investments with carrying amounts of € 58 mn (2015: € 62 mn) were sold. The gains and losses from these disposals were immaterial.
FAIR VALUE MEASUREMENT ON A RECURRING BASIS The following financial assets and liabilities are carried at fair value on a recurring basis: − Financial assets and liabilities held for trading, − Financial assets and liabilities designated at fair value through income, − Available-for-sale investments, − Financial assets and liabilities for unit-linked contracts, − Derivative financial instruments and firm commitments included in other assets and other liabilities, and − Financial liabilities for puttable equity instruments.
Government and government agency bonds 33,476 165,099 339 198,914 41,977 159,999 47 202,023
FinanCial liabiliTies Financial liabilities held for trading 36 1,538 9,163 10,737 28 1,046 8,134 9,207 Financial liabilities for unit-linked contracts 91,071 19,877 377 111,325 102,954 2,755 164 105,873 Derivative financial instruments and firm commitments included in other liabilities 3 156 – 159 – 472 – 472 Financial liabilities for puttable equity instruments 2,657 92 145 2,894 2,496 71 19 2,585 1 Quoted prices in active markets 2 Market observable inputs 3 Non-market observable inputs
FINANCIAL ASSETS FOR UNIT-LINKED CONTRACTS For level 2, the fair value is determined using the market or the income approach. Valuation techniques applied for the income approach mainly include discounted cash flow models as well as the BlackScholes -Merton model.
DERIVATIVE FINANCIAL INSTRUMENTS AND FIRM COMMITMENTS INCLUDED IN OTHER ASSETS The fair value of the derivatives is mainly determined based on the income approach using present value techniques. Primary inputs include yield curves observable at commonly quoted intervals. The derivatives are mainly used for hedging purposes. Certain derivatives are priced by Bloomberg functions, such as Black-Scholes Option Pricing or the swap manager tool.
FINANCIAL LIABILITIES HELD FOR TRADING – OTHER TRADING LIABILITIES The fair value is mainly determined based on the income approach using present value techniques. Primary inputs comprise swap curves, share prices, and dividend estimates.
FINANCIAL LIABILITIES FOR PUTTABLE EQUITY INSTRUMENTS Financial liabilities for puttable equity instruments are generally required to be recorded at the redemption amount with changes recognized in income. For level 2 and level 3, the fair value is mainly determined using present value techniques.
Financial liabilities held for trading Financial liabilities held for trading mainly include embedded de rivative financial instruments relating to annuity products that are priced internally, using discounted cash flow models (€ 8.9 bn). A significant decrease (increase) in surrender rates, in mortality rates, or in the utilization of annuitization benefits could result in a higher (lower) fair value. For products with a high death benefit, surrender rates may show an opposite effect. However, a 10 % stress of the main non-market observable inputs has only immaterial impact on fair value.
Description Fair value as of 31 December 2016 Valuation technique(s) Non-market observable input(s) Range
Available-for-sale investments Equity securities 6,205 Net asset value n/a n/a Corporate bonds 7,283 Discounted cash flow method Option-adjusted spread n/m 1
Mortality n/a 2 1 Presentation not meaningful. 2 Presentation not meaningful. Mortality assumptions are mainly derived from the Annuity 2000 Mortality Table.
Reconciliation of level 3 financial instruments The following tables show reconciliations of the financial instruments carried at fair value and classified as level 3: reconciliation of level 3 financial assets € mn
Carrying value (fair value) as of 1 January 2016 184 11,881 6,915 164 19,145 Additions through purchases and issues 19 5,621 2,079 103 7,821 Net transfers into (out of) level 3 (30) 47 38 (6) 50 Disposals through sales and settlements (43) (1,189) (1,026) (4) (2,261) Net gains (losses) recognized in consolidated income statement 21 (38) 84 2 68 Net gains (losses) recognized in other comprehensive income – 593 159 – 752
Foreign currency translation adjustments 2 314 32 – 348 Changes in the consolidated subsidiaries of the Allianz Group 34 322 (239) 118 235 Carrying value (fair value) as of 31 December 2016 187 17,513 7,829 377 25,906 Net gains (losses) in profit or loss attributable to a change in unrealized gains or losses for financial assets held at the reporting date 6 (15) – 2 (6)
Carrying value (fair value) as of 1 January 2016 8,134 164 19 8,317 Additions through purchases and issues 1,857 103 144 2,104 Net transfers into (out of) level 3 (26) (6) – (32) Disposals through sales and settlements (2,016) (4) (18) (2,038) Net gains (losses) recognized in consolidated income statement 872 2 – 874 Net gains (losses) recognized in other comprehensive income – – – – Impairments – – – – Foreign currency translation adjustments 346 – – 346 Changes in the consolidated subsidiaries of the Allianz Group (3) 118 – 115 Carrying value (fair value) as of 31 December 2016 9,163 377 145 9,686 Net gains (losses) in profit or loss attributable to a change in unrealized gains or losses for financial liabilities held at the reporting date 1,391 2 – 1,394
fair value hierarchy (items not carrieD at fair value) € mn as of 31 December 2016 2015
FinanCial liabiliTies Liabilities to banks and customers 7,113 4,053 1,896 13,062 8,574 3,938 13,051 25,563 1 Quoted prices in active markets 2 Market observable inputs 3 Non-market observable inputs
REAL ESTATE Fair values are mainly determined using the market or the income approach. The valuation techniques applied for the market approach include market prices of identical or comparable assets in markets that are not active.The fair values are either calculated internally and validated by external experts, or derived from expert appraisals with internal controls in place to monitor these valuations.
TRANSFERS OF FINANCIAL ASSETS As of 31 December 2016, the Allianz Group substantially retained all the risks and rewards out of the ownership of transferred assets. There have not been any transfers of financial assets that were derecognized in full or partly, in which Allianz continues to control the transferred assets. Transfers of financial assets mainly relate to securities lending and repurchase agreement transactions. Transferred financial assets in repurchase agreement and securities lending transactions are mainly available-for-sale debt and equity securities for which substantially all of the risks and rewards are retained. As of 31 December 2016, the carrying amount of the assets transferred for securities lending trans actions amounted to € 6,526 mn (2015: € 5,294 mn). For repurchase agreements, the carrying amount of the assets transferred amounted to € – mn (2015: € 1,394 mn) and the carrying amount of the associated liabilities amounted to € – mn (2015: € 1,410 mn) due to the reclassification of the Oldenburgische Landesbank AG as disposal group classified as held for sale.
Collaterals without right to resell or repledge Financial assets carried at fair value through income 9 7