When we look back on fiscal 2005, it is fascinating to observe the close interaction of light and darkness. Please forgive me if I cannot resist turning first to the brighter side.
There is, however, a side that glows less brightly. While we experienced in relative terms moderate losses from the hurricanes in the U.S., we were in absolute terms still too heavily exposed to this risk. It is also true that the gain you made on your Allianz shares followed the general market trend, meaning that their performance was not really exceptional.
in Germany for the pending changes? As the owners of Allianz, should you be concerned that our brand is not as compelling as it used to be, or that we will not be able to implement the improvements sought with these measures?
We already have all the strengths we need for this. We are now positioning ourselves so that our competitive advantages will be used considerably more effectively than they have been to date and achieve even better results for you, our shareholders. The size, reach and multi-local competence of this company give us an exceptionally effective tool for winning market share profitably and being successful in new markets and generating competitive advantages for us as a financial services group. In the meantime, our sustainability program and, closely related to that, our customer focus project, are gaining momentum. Both initiatives seek to improve our competitiveness and increase the value of the company in a sustainable manner, i. e., the
Group-wide is being acknowledged and received with approval by the market. Since my last letter to you, the value of the Allianz share has risen by 46.2 % to € 135.4 by the end of February 2006, and analysts are forecasting even higher prices. I take this as a sign that our key idea has been understood and that we are considered capable of actually implementing what we say.
Today I am very pleased to report that we have exceeded all of these goals. Operating results rose to a respectable € 7.7 billion, and the combined ratio again improved to 92.3 % in spite of an unprecedented series of natural disasters, including Hurricane Katrina, which resulted in the biggest amount of insured damage to date. Life/health insurance achieved excellent results with earnings of € 1.6 billion, and asset management increased this figure by no less than 32 %.
Under difficult conditions, in a time of fundamental changes, they have worked together to bring back the company to its former position of strength and to broaden its business perspectives. I salute them for what they have done; it makes me proud when I hear the high regard in which our people are held by other market participants. This strengthens my confidence that we will also be able to master the next difficult steps.
Those are very good questions. I asked myself those same questions 17 years ago when I joined
We want to rid ourselves of excessive complexity because it is inimical to growth. With the conversion of Allianz AG into a company under European law and with the purchase of the outstanding shares of the Italian RAS Group, we are the first DAX company to pass this innovation milestone. We are creating the legal and organisational framework for eliminating overlaps, achieving trans-European synergies and growing into a pan-European structure that is marked by efficiency, transparency and growth dynamic. Our principal bodies – the
In Germany we are also working with a complex structure that has become artificial and impractical. The existing structure is: Too difficult for customers to understand; too difficult for our agents to deal with; and too difficult for our managers to steer. In short: too difficult.
Now we are acting before time and market forces prevent us from doing so and because we also want to achieve strong organic growth and gain market share in Germany again. The incorporation of Allianz Deutschland AG is a great opportunity in the medium and long term also for our employees to benefit from our market positioning.
Finally, we have decided to restructure certain aspects of the international commercial and industrial insurance business and within Dresdner Bank: some of these changes are already being implemented. The purpose of this is to make the organization more transparent and leaner, allow for increased effectiveness in the daily business and direct the attention of management more towards opportunities for profitable growth.
for providers like us and that the concept of an integrated financial services provider will take off, even if it takes a while until all aspects of the business and earnings are satisfactory.
The sales success of our agents with bank products in 2005 and the dynamic growth and the solid increases in operating results in life insurance and in asset management provide you with an idea of what sort of growth trend can result from the demographic changes and the integrated business model.
Allianz has fundamentally changed its approach. We have our risks under control. Business is again fundamentally strong. Our management is disciplined in the implementation of our plan for profitable growth. These are all prerequisites for smart investors to put our stock on their buy list. I hope that 2006 and the following years will be profitable for you and that all stakeholders will benefit from the continued success of Allianz. We shall not rest.
During the entire reporting year, the Supervisory Board observed the duties incumbent upon it in accordance with the law and the
Group, including the risk situation, important business transactions and corporate strategy. At the meetings of the Supervisory
An important topic of our advisory and monitoring activities was the intended merger of Italian Allianz subsidiary Riunione Adriatica di Sicurtà S.p.A. (RAS) into Allianz AG, which we discussed and reviewed using detailed verbal reports by the Board of Management and comprehensive written documentation. We passed a resolution approving the merger. The Board of Management reported to us on the planned transaction structure, which called for the issue of an offer to acquire the outstanding RAS shares and the hivedown of nearly all of the RAS business to a wholly owned subsidiary, followed by the cross-border merger of RAS into Allianz AG
Munich. The meetings of RAS ordinary and savings shareholders on February 3, 2006 and the extraordinary General Meeting of
Allianz AG on February 8, 2006 approved the merger plan. The merger will become effective with its entry in the commercial
AG into Allianz Versicherungs-AG. The explanations also covered the creation of a joint distribution company for the German insurance business and its future strategic orientation.
Bank and in addition to regular reporting, we had the Board of
Management make a special report to us on this. We were able to ascertain that it had achieved its objective of earning its capital costs in 2005. The Board of Management explained the introduction of a new, client-oriented business model with two strong divisions: Private & Business Clients and Corporate & Investment
Supervisory Board. The explanations of the Board of Management convinced us that the capital base had been strengthened and that the Group’s high rating had been secured. In August 2005 the rating agency Standard & Poor’s raised its outlook for Allianz
We addressed the effects on the results of the hurricanes and other natural catastrophes in 2005 and discussed the consequences for the insurance business of the Allianz Group.
In the course of reporting on significant legal matters, the Supervisory Board was informed about the fine imposed on Allianz
in the proceedings against a large number of German industry insurers. The company has appealed the decision.
We were unanimous in welcoming the decision by the Board of Management to again offer discounted Allianz share purchases to employees of the Allianz Group in 21 countries.
Governance Code. This is expressed in the Declaration of Compliance, which was passed by the Board of Management and the
Group is contained in the report jointly approved by the Board of Management and the Supervisory Board that can be found on pages 12 to 19 of this Annual Report. More information on this subject is also available at the Allianz website at
Committee, the Personnel Committee and the Mediation Committee as called for by the German Co-Determination Act (Mitbestimmungsgesetz ). The current composition of the committees can be found in the following list.
AG, the reorganization of the German insurance business, Group financing, the employee share purchase program, questions of corporate governance and the changes in the remuneration of the
Supervisory Board that were approved by the General Meeting on May 4, 2005. The Personnel Committee convened four times.
The Audit Committee held five meetings in the course of 2005.
KPMG Deutsche Treuhand-Gesellschaft AG Wirtschaftsprüfungsgesellschaft, Munich, audited the financial statements of
Allianz AG and the Allianz Group as well as the respective management reports and issued their certification without any reservations. The consolidated financial statements were prepared in accordance with the International Financial Reporting Standards
(IFRS). In addition, the consolidated interim financial statements for the first half of 2005 and for the first nine months of 2005 were reviewed by KPMG and the interim balance sheet of Allianz
On the shareholder representative side, the court appointments of Prof. Dennis J. Snower and Igor Landau as members of the
Supervisory Board were confirmed by the General Meeting held on May 4, 2005. Dr. Albrecht Schäfer and Prof. Dr.-Ing. Hermann
Scholl have resigned from the Supervisory Board as shareholder representatives with effect from the end of the General Meeting on May 4, 2005. The General Meeting elected Franz Fehrenbach and Dr. Franz B. Humer as new members of the Supervisory Board in their place.
On the employee representative side, Frank Ley ended his service in the Supervisory Board at the end of the General Meeting on May 4, 2005. His seat on the Supervisory Board was taken by
We thank the departing members of the Supervisory Board for their valuable work in our body.
and the accompanying change of legal form into an SE becomes effective. The six shareholder representatives in the Supervisory
General Meeting on 8 February 2006. The shareholder representatives in the first Supervisory Board of Allianz SE will according to this be Prof. Dr. Renate Köcher, Dr. Wulf H. Bernotat, Dr.
Gerhard Cromme, Dr. Franz B. Humer, Igor Landau and Dr. Henning
Tomaso Cucchiani, Jean-Philippe Thierry and Clement B. Booth to the Board of Management. Mr. Cucchiani, who is also Chairman of the Board of Directors of Italian Allianz subsidiary Lloyd
France, Benelux, the Middle East, South America and Africa, for credit insurance, assistance and travel insurance and for the sustainability program in life insurance. The responsibilities of
Mr. Booth, formerly Chairman and CEO of Aon Re International in London, includes the UK, Ireland and Australia, the reinsurance business and Allianz Global Risks, Allianz Marine & Aviation and
Allianz AG and the Group. The managerial tasks of the Board of
Management are primarily to determine the strategic direction and to manage the Group, and the planning, establishment and monitoring of a risk management system. The Chairman of the
Board. For further information on the composition of the Board of Management, see page 11 of this report.
Allianz AG Board of Management has finalised a Group-internal framework to support the governance and coordination of Group companies in selected divisions.
In 2005, the German Government Commission has amended and changed the German Corporate Governance Code, particularly in regard to the Supervisory Board. In addition, the legislature has introduced further regulations that should strengthen corporate integrity and investor protection. Moreover, for fiscal year 2006 and beyond, disclosure of individual remuneration of
The corporate constitution of Allianz AG, as controlling company of the Allianz Group, is marked by its two-tier management system, which consists of the Board of Management and the Supervisory Board.
The Allianz AG Board of Management currently consists of 11 members, and is multinationally staffed, in keeping with our international orientation. It is responsible for the management of
in the United States. Finally, the Audit Committee is an important contact for the independent auditor, whose independence it also monitors.
Moreover, it is responsible for drawing up the Declaration of Compliance pursuant to clause 161 of the German Stock Corporation
Meeting (“one share, one vote”). To facilitate the exercise of shareholder rights, we offer shareholders the opportunity to follow the General Meeting on the Internet and to vote by proxy.
As a company quoted on the New York Stock Exchange (NYSE), we are also bound to submit to the American supervisory body, the Securities and Exchange Commission (SEC), a filing (“Form 20-F”) complying with the U.S. rules for foreign issuers. This is based on the IFRS consolidated financial statements and contains a further reconciliation statement in accordance with the United
Sicurtà S.p.A. (RAS) into Allianz AG, which was resolved at the
RAS shareholders’ meetings on February 3, 2006, and at the extraordinary General Meeting of Allianz AG on February 8, 2006,
According to the Statutes of the future Allianz SE, which were approved together with the merger plan by the extraordinary General Meeting of Allianz AG on February 8, 2006, Allianz SE will retain its two-tier management system of a Board of Management and a Supervisory Board. Upon effectiveness of the merger, the mandates of the current members of the Board of Management and the Supervisory Board of Allianz AG will expire.
Board are determined in the articles of corporation. In future, the employee representatives on the Supervisory Board will no longer exclusively be representatives of the German employees, but also representatives of the employees of other European coun-
Meeting of Allianz SE. For the period prior to the first election by the General Meeting, the employee representatives will be court appointed.
The German Corporate Governance Code applies in its June 2, 2005 version. In addition to legal regulations, it contains recognized corporate governance standards in the form of recommendations and suggestions. There is no statutory duty to comply with these standards; compliance is a matter of self-regulation by business. However, under clause 161 of the German Stock
and the companies in the S-DAX with around 86 % of the recommendations.
Stock Corporation Act was published on December 15, 2005, and in its English convenience translation reads as follows: 1. Allianz AG will comply with all recommendations made by the Government Commission on the German Corporate Governance Code (Code version as of June 2, 2005).
2. Since the last Declaration of Compliance as of December 15, 2004, which referred to the German Corporate Governance
Board are in principal not elected to staggered terms, as suggested in the Code. It is preferable in our view for a Supervisory Board with employee co-determination to retain a simultaneous term of office.
ports sustainable value-oriented management. In the last several years, it has been enhanced in order to arrive at a balanced structure, whose level is appropriate and competitive, and achieves the intended management purpose.
The remuneration of the Board of Management is determined by the Personnel Committee of the Supervisory Board. The remuneration structure is regularly discussed and examined in the plenary meetings of the Supervisory Board. See Note 45 to our consolidated financial statements for more information.
This consists of stock appreciation rights (SAR) and restricted stock units (RSU). More detailed information on the stock-based remuneration components can be found at Note 43 to our consolidated financial statements or on the Internet at .
Income-equivalent ancillary benefits vary with the function and position of the recipient and are subject to personal income tax.
ceived the following stock-related remuneration: The pension agreements for members of the Board of Management stipulate retirement benefits of a fixed amount that is not linked to the development of the fixed or variable remuneration components. The agreements are examined and revised at irregular intervals. In 2005 we changed to a contribution-oriented system. This involves savings contributions and a fixed interest rate of 2.75 %
per year, which is also the actuarial interest rate for life insurance companies in Germany. In the case of an insured event, the accumulated capital is converted to equal annuity payments that are then paid out for the rest of the member’s life. If the net return on investment exceeds the actuarial interest rate, a corresponding profit share will be credited in the following year.
When a member of the Board of Management retires from the
The Allianz Group paid € 1.4 million (2004: € 1.2 million) to increase pension reserves and reserves for similar benefits for active members of the Board of Management in the past financial year.
On May 4, 2005, they were rearranged by resolution of the Annual General Meeting. The relevant provisions are contained in clause 9 of the Articles of Association.
The relationship between the fixed and variable remuneration components is now more balanced. In addition, merit-based remuneration is no longer determined by the dividend, but by corporate earnings per share.
Three components make up the Supervisory Board’s remuneration: a fixed sum of € 50,000 and two merit-based components.
components is limited to € 24,000. This means that the maximum total compensation for a Supervisory Board member is € 98,000.
Board as well as the chairmen and members of its committees receive additional remuneration as follows: The chairman of the
The additional remuneration of the committee members is capped by an upper limit. This limit takes effect when the remuneration of the chairman of the Supervisory Board has reached triple and that of the other members of the Supervisory Board double the basic remuneration.
Board are obligated under clause 15 a of the German Securities
Mr. Sultan Salam, a member of the Allianz AG Supervisory Board, sold 102 shares of Allianz AG at a price of € 122.77.
Allianz AG amounted to less than 1 % of the company’s issued shares.
Allianz AG is subject to U.S. corporate governance rules inasmuch as these are applicable to foreign issuers.
Securities and Exchange Commission (SEC), foreign issuers must pass an audit and evaluation of their compliance with Section 404
To meet the requirements of the SOA, we had already amended the internal rules of procedure of the Audit Committee of our
Supervisory Board in past years. In particular, procedures for handling complaints relating to accounting or financial reporting have been introduced, as have special procedures for ensuring the independence of the auditors.
Manfred Schneider meets the requirements that U.S. law places upon the Audit Committee Financial Expert. As part of compliance with the rules of the SOA, Allianz AG has also adopted a
“Code of Ethics” for members of the Board of Management and senior employees of certain divisions, mainly in field of finance.
Officer in certifying the financial statements towards the SEC, as required by the SOA.
The NYSE has also further developed its corporate governance standards. For foreign issuers, the greater part of these rules are not mandatory. Nonetheless, there is a duty to disclose the main differences between a company’s own corporate governance and the NYSE standards, in the form of a brief summary. These differences are mainly based on our two-tier management system, the applicable co-determination law as well as differing legal regulations and best practice standards in Germany and the EU.
portunities offered by our home market of Europe in order to drive our profitable growth. This is why we have decided to fully integrate our Italian subsidiary group company RAS into the Group.
We are pressing ahead with our efforts to leverage on the size, international reach and competence of Allianz. To this end, we are combining our resources into a transparent organisation in which everybody learns from each other and whose local businesses are well-tuned to each other. Your Allianz is evolving into a single entity; an entity that, despite continuing to work on a
Allianz with a higher value and growth in every possible environment. Everyone connected with the company will benefit from this: customers, shareholders, employees and society. The program is based on four main initiatives: Protecting and strengthening our capital base
How can we take advantage of and increase the value of the
Under this initiative, our top experts search systematically to seek out outstanding successes in product offerings, processes and service offerings within both property and casualty insurance as well as life insurance. The highest Allianz standard is then made obligatory for all companies.
In banking, in addition to investment- and corporate-banking, we will further expand our wealth management for wealthy retail clients. In Germany, Italy and France, our most important markets, we are improving the conditions for the sale of investment and banking products through our insurance providers, the socalled assurbanking.
We continually analyze the largest trends and their influence on our markets as well as opportunities for continued development of our business models.
The consumption of assets and the transfer of a large volume of inheritances to the next generation provide financial service providers with a broad basis for completely new business opportunities, such as offering new investment classes or providing special services for older customers.
To better position ourselves for current and future demand and to meet our customers’ high expectations of service, we are investing in the expansion and qualification of our sales channels and strengthening our market position in our strategic growth markets.
We consider our employees’ ability to innovate to be an important value driving our profitable growth. Each promising idea for improvement should be given a chance. We promote employee loyalty and intend to strengthen it further, as it is an important driver of new ideas and effective innovations, even during a time of great changes in the company.
The strength of our business model, our operating excellence and the sustainability with which we drive profitable growth are the best premises to offer attractive employment opportunities.
We are confident that all of the initiatives described here will bring us considerably closer to living up to our claim that we are a leading global financial service provider that does not just deliver on its promises, but also exceeds expectations.
The basic idea behind EVA® involves comparing profit with the cost of capital. EVA® – whether positive or negative – is the difference between the two. It tells us whether or not our profits exceed the return expected by our shareholders. Thus, EVA® is the result of the following calculation: The cost of capital represents the return an investor can expect from an alternative investment with comparable risk. An EVA®
AG shares. In this case, his investment has destroyed value instead of increasing it.
In calculating risk capital the amount of capital each individual operational entity requires to cover the financial risks involved in ongoing business activities is first determined. The required capital depends upon the risks that are typical for the products offered by our operating entities, i. e., premium, reserve and credit risks plus risks in connection with capital investment and operational risks. Additionally, the amount of capital needed is also geared to the mandatory level of security that is centrally prescribed for the Allianz Group as a whole. Uniform standards are also applied when determining risk capital; through the use of an internal risk model which allows us to precisely determine company-specific risk factors.
In measuring our success, we minimize the impact of equity market fluctuations by basing our calculations on “normalized”
Our plan for achieving economic value added does not only benefit our shareholders: our customers, employees and the communities in which we operate benefit as well. After all, sustainable success can only be achieved by offering excellent products at attractive prices that satisfy our customers, generate sales to secure jobs and produce profits that allow us to continue to, and increase our contribution to society.
With a price rise of 31.1 %, markedly better than the Dow Jones
STOXX Insurance (31.7 %). This price trend over 2005 as a whole is even more notable when one considers the disappointing performance of the first half year. Particularly as of July, the price took a steep upswing, showing that our operational improvements and our strategic course were accepted and endorsed.
“Economic Value Added” (EVA®) as the key indicator for controlling our business. This indicator also determines the stock-related compensation of our senior management. For more information on this subject, see pages 15 to 18 or pages 24 to 25 of this
Our fiscal 2004 Annual General Meeting once again attracted lively interest. With approximately 5,300 shareholders, the meeting was well attended. The proportion of subscribed capital represented at the
Annual General Meeting decreased by 2 %-points to 35 %. This was mainly due to the higher proportion of free float. To counter this trend, we are communicating with our large investors and depositary banks of foreign investors even more strongly than before. We have also engaged an external consultant to support our shareholders outside Germany in exercising their voting rights, if required. Meanwhile, the presence of foreign investors has risen by about 3 %-points.
Our Internet service during the Annual General Meeting was also quite popular. As in previous years, shareholders could follow the entire meeting live over the Internet and change their instructions until shortly before voting began. About 40,000 shareholders have meanwhile taken advantage of our offer to send the
Annual General Meeting documents by e-mail. This saves money and protects the environment, and the shareholder receives his or her documents considerably faster. For more details on the Annual
During the reporting year, we further improved our service to private and institutional investors. Our Road Show now visits Tokyo and Sydney to serve better to investors in the Asia-Pacific region.
U.S. life insurance business to approximately 80 participants. The number of discussions we held with analysts and institutional investors during the reporting year grew again by just under 10 %, to about 300.
Annual General Meeting, and publications can be ordered. We have recently begun sending current information directly to the shareholder’s handheld computer or mobile phone, if desired. For telephone queries, our “Allianz Investor Line” is available round the clock, seven days a week. In 2005 our investor relations team fielded approximately 8,000 questions from private investors.
As we cannot rule out changes of dates, we recommend to check them on the Internet at .
The particular distribution channels we use vary based on product and geographic market. Within our primary market of Germany, we rely predominantly on full-time tied agents. Our insurance products are marketed in Germany primarily under the “Allianz”
Allianz AG, the parent company of the Allianz Group, acts as the Allianz Group’s reinsurer for almost all of our insurance operations, other than international industrial risks reinsurance. For the years ended December 31, 2005, 2004 and 2003, Allianz AG
Spain, Switzerland and the United Kingdom comprise our primary insurance markets, with Germany as our most important single market, although we operate in almost every European country.
We also consider the United States as one of our primary markets.
Please see “International Presence” for a breakdown of selected operating entities within our primary markets and others.
offers corporate loans, structured financing, as well as treasury, securities and insurance products, and provides corporate customers with cash management solutions, payment services, global documentary services and advice on occupational pension plans.
offers corporate finance advisory services on mergers and acquisitions, divestitures, restructurings and other strategic matters, and provides securities underwriting and market-making, securitization products and services, securities and derivatives trading, portfolio management, and other capital markets products and services.
September 30, 2005 having successfully completed its mandate to free-up risk capital through the reduction of risk-weighted assets.
contains income and expense items that are not directly assigned to our operating divisions, such as income and expenses from the Dresdner Bank-wide treasury function, as well as provisioning requirements for country and general risks.
In November 2005, we announced that, effective 1Q 2006, we will reorganize our banking business. Our newly-formed Private
& Business Clients division will combine all banking activities formerly provided by the Personal Banking and Private & Business
Corporate & Investment Banking, to further improve the leverage of the market potential in our corporate client and capital markets business. In the future, we expect to increase the part of banking products sold through insurance agents.
We conduct our retail asset management business primarily through our operating companies worldwide under the brand name, Allianz Global Investors (or “AGI”). In our institutional asset management business, we operate under the brand names of our investment management entities; AGI serves as an endorsement brand. Please see “International Presence” for a breakdown of selected operating entities within our primary markets and others.
Competition stems from all major international financial institutions and peer insurance companies, which have large, multi-jurisdictional and multi-product asset management operations and compete for both retail and institutional clients.
by geographic region at December 31, 2005, including our ownership percentage. It does not contain all subsidiaries of the Allianz
Group, nor does it indicate whether an interest is held directly or indirectly by the Allianz AG. Further, the ownership percentage presented in the following table includes equity participations held by dependent enterprises of the Allianz Group in full, even if the Allianz Group’s ownership in the dependent enterprise is below 100 %. Please see pages 201 to 206 of this annual report for a more extensive list of Allianz Group operating subsidiaries, associated enterprises and other selected holdings in listed companies.
Led by our Life/Health and Asset Management operations, our total revenues increased by 4.2 % to € 100.9 billion. Internal growth was 4.3%.
Operating revenues from our banking operations declined by 3.3 % to € 6.2 billion primarily due to the faster than planned close of Dresdner Bank’s IRU and negative accounting impacts from IAS 39. In contrast, operating revenues from Dresdner Bank’s strategic business*), excluding the negative impacts from IAS 39, increased by 4.1 % to € 6.1 billion.
We achieved record net inflows of thirdparty assets of € 64 billion, particularly from our fixed income institutional funds business within the United States and Germany.
Market-related appreciation of third-party assets amounted to € 33 billion. Overall, third-party assets increased by 27.0 % to € 743 billion at December 31, 2005. These positive developments led to significant operating revenue growth of 18.4 % to € 2.7 billion.
We achieved a new low combined ratio of 92.3 %, 2.7 percentage points better than our target. We continued to adhere to our disciplined underwriting and pricing practices worldwide, thereby successfully improving our combined ratio by 60 basis points compared to 2004. These positive developments were achieved despite the negative impacts of various natural catastrophes, including one of the worst hurricane seasons on record. The combined effects of losses from natural catastrophes produced estimated claims of € 1.1 billion, net of reinsurance.
Operating profit strengthened by 13.0 % and reached € 1.6 billion, exceeding our 2005 target by approximately € 100 million. Strong margins on new business and the increased business volume from the strong growth rates in recent years were the most important factors in this development. Our statutory expense ratio1) declined by 1.0 percentage point to 8.1 %, resulting from statutory premium growth, while net acquisition costs and administrative expenses decreased.
In 2005, Dresdner Bank was successful in earning its cost of capital for the first time since it was acquired by the Allianz
Our operating profit of € 7.7 billion drove the with earnings from ordinary activities reaching € 7.9 billion. Non-operating items, in aggregate, amounted to € 137 million, benefiting from the discontinuance of goodwill amortization due to a change in accounting under IFRS
The following table sets forth our basic and diluted earnings per share for the years ended December 31, 2005, 2004 and 2003.
Our shareholders’s equity before minority interests grew by 31.6 % to € 39.5 billion. This increase resulted primarily from our strong net income for 2005, growth in unrealized gains on investments due to favorable equity market conditions and lower interest rates in Europe, as well as reduced negative foreign currency translation effects from the strengthening of the U.S. Dollar against the Euro. Additionally, the reduction in treasury shares (net € 352 million) and the issuance of warrants on Allianz AG shares, of which 9 million were exercised in 3Q 2005 raising capital of € 828 million, increased our shareholders’
“RAS”), our shareholders’ equity before minority interests also increased by € 1.1 billion through the issuance of shares out of authorized capital without pre-emptive rights, offset by € 1.3 billion related to the acquisition cost for additional interest in RAS. See “Allianz-
Increases within our total liabilities, primarily our reserves for insurance and investment contracts, which rose by € 32.8 billion
(10.0 %), were more than offset by the € 39.4 billion (20.6 %)
See “Group Asset Allocation” and “Liquidity and Capital Resources ” for detailed information on our investments and investments in associated enterprises and joint ventures, as well as the development of our cash and cash equivalents, respectively. Decreases in loans and advances to banks and in liabilities to banks primarily reflect reduced volumes of repurchase and reverse repurchase operations at Dresdner Bank. The growth in reserves for insurance and investment contracts was driven predominantly by aggregate policy reserves at € 19.7 billion (8.6 %) and reserves for premium refunds at € 7.3 billion (34.2 %). Our aggregate policy reserves increased primarily due to strong sales of unit- and indexed -linked life insurance contracts (see “Life/Health Insurance
Unrealized gains/losses (net) Revenue reserves (inclusive of foreign currency translation adjustments)
Of the total group’s own investments, the majority are invested in fixed income securities and, to a lesser extent, equities. At December 31, 2005, group’s own investments amounted to € 467.5 billion, an increase of 6.0 % compared to December 31, 2004. This increase was mainly due to higher balances of fixed income and equity available-for-sale securities, resulting predominantly from favorable capital market conditions, lower interest rates in Europe, and strong growth in sales of our life operations. See “Life/Health
2005, Bilfinger Berger AG in 2Q 2005, as well as the sale of 7.35 % of our 28.48 % shareholding in Eurohypo AG to Commerzbank AG in 4Q 2005. During 4Q 2005, Eurohypo AG was reclassified as held-for-sale and presented within “Other assets”.
The sale of the remaining 21.13 % participation in Eurohypo AG
ment risk by establishing high thresholds on the creditworthiness of our debtors and by spreading our risk accordingly. The credit quality of our insurance operations’ fixed income securities portfolio has been, and continues to be, strong. At December 31, 2005, approximately 91 % of the fixed income investments of the insurance companies of the Allianz Group had an investment grade rating. Approximately 87 % were distributed over obligors that had been assigned at least an “A” rating by Standard & Poor’s. Additionally, of the not rated fixed income investments, which amounted to approximately 8 % at
AA+ to AA– AAA A+ to A– Not Rated*) BBB+ to BBB–
associated enterprises and other selected holdings in listed companies, including our ownership percentage, please see pages 205 und 206 of this Annual Report.
In the ordinary course of business, the Allianz Group enters into arrangements that, under IFRS, are not recognized on the consolidated balance sheet and do not affect the consolidated income statement. Such arrangements remain off-balance sheet as long as the Allianz Group does not incur an obligation from them or become entitled to an asset itself. As soon as an obligation is incurred, it is recognized on the Allianz Group’s consolidated balance sheet, with the corresponding loss recorded in the consolidated income statement. However, in such cases, the amount recognized on the consolidated balance sheet may or may not, in many instances, represent the full loss potential inherent in such off-balance sheet arrangements. The importance of such arrangements to the Allianz Group as it concerns liquidity, capital resources or market and credit risk support, is not significant. Additionally, the Allianz Group does not rely on off-balance sheet arrangements as a significant source of revenue. Similarly, the
Allianz Group has not incurred significant expenses from such arrangements and does not reasonably expect to do so in the future.
Distinct areas the Allianz Group is involved in off-balance sheet arrangements as of December 31, 2005, which are all conducted through the normal course of our business, include various irrevocable loan commitments, leasing commitments, purchase obligations and various other commitments. Additionally, we extend market value guarantees to customers, as well as execute indemnification contracts under existing service, lease or acquisition transactions. See Note 42 to our consolidated financial statements for further information.
Tier I capital release, we conducted a synthetic securitization to place credit risk from a designated loan portfolio on the open market. As of December 31, 2005, credit risks in the amount of € 1.0 billion had been transferred to third-parties using a special purpose vehicle, which is not consolidated within our consolidated financial statements.
IFRS at the Allianz Group consolidated level, as well as a description of each 2005 IFRS compared to pre-2005 IFRS, please refer to Note 3 of our consolidated financial statements.
The following table sets forth the impacts of 2005 IFRS on the
The adoption of IAS 1 revised required the inclusion of minority interests in shareholders’ equity. Hence, shareholders’ equity increased, while total liablities decreased by the same amount.
IAS 39 revised required several changes to the Allianz Group’s accounting policies. One of the most significant of these changes relates to the recognition of impairments of available-for-sale equity securities. In particular, the changes in the Allianz Group’s impairment policy led to the following effects on our consolidated financial statements:
Accelerated impairments in 2002, caused by weak equity markets, led to a rise in net realized gains on available-for-sale equity securities in 2003 and 2004, resulting in increased net income in 2003 and 2004, with our Property -Casualty, Life/Health and Banking segments most heavily impacted. The increase in net realized gains in 2003 and 2004 was offset in part by a decrease in reversals of impairments on available-for-sale equity securities, since such reversals are no longer permitted under IAS 39 revised, and an increase in insurance and investment contract benefits due to policyholder participation in the increased net realized gains.
Unrealized gains (net of unrealized losses) were increased in 2003 and 2004, while revenue reserves were reduced by the same amount.
At Allianz Marine & Aviation, the positive development was driven by our marine and aviation business in the United Kingdom, largely as a result of additional business generated from a fairly new branch office, as well as the strengthening of the British
RAS was mainly driven by the develpoment of our non-motor business, and in particular by the significant growth of personal lines and business with small and medium enterprises. Furthermore, motor business at RAS increased marginally, in line with the market growth in Italy, partially compensated by the development of the direct channel, Genialloyd. Within our specialty lines, growth within credit insurance at Euler Hermes of € 71 million (4.4%)
AG and Allianz Lebensversicherungs-AG (or “Allianz Leben”) in 1Q 2005. Furthermore, at Sachgruppe Deutschland (or “SGD”), we remained committed to our policy of focusing on profitability and not volume. Additionally, SGD undertook a range of portfolio measures in our motor business resulting in higher “no claims bonuses”, which reduced gross premiums written on these contracts. As a consequence, gross premiums written at SGD declined
In the United Kingdom at Allianz Cornhill, this decline was primarily related to lower premiums in our motor and household lines, a development that was significantly driven by our cycle management efforts, through which we endeavor to balance volume and margin criteria. Our French subsidiary, AGF IART, as result of a more competitive environment, experienced decreases in gross premiums written especially through its brokerage business with large accounts. The decline in gross premiums written at Allianz Global Risks Re resulted from a more competitive environment in the global property market, leading primarily to a decrease of new business volume.
low of 92.3%, our grew by 4.6% to € 4,162 million, a growth rate stronger than that of our gross premiums written.
In a year that saw a large number of global catastrophes and one of the worst hurricane seasons on record, the insurance and reinsurance markets as a whole incurred multi-billion Euros in damages.
Our operating entities most affected by the natural catastrophes included Allianz Marine & Aviation, Allianz Global Risks Re, Allianz AG,
However, our net loss reserve position remains sound. Moreover, our ratio of loss reserves expressed as a percentage of net premiums earned has increased from 119.2 % to 130.7 % over the prior year. In the United States, the planned external review of the asbestos & environmental (or “A&E”) liability reserves at Fireman’s
Our 3) remained stable at 25.2 % (2004: 25.2 %), although our administrative expenses declined by € 55 million.
remained relatively unchanged decreased significantly to € 488 million due to a reclassification of interest expenses attributable to investments financed by borrowed funds, which is now classified in
DAX companies we own, although the development of these available -for-sale securities is reflected in unrealized gains and losses within shareholders’ equity, and not net income. Additionally, the effects of embedded derivatives from an equity-linked loan, which was issued in connection with the Allianz-RAS merger, contributed € 243 million to the significant decline in our net trading income.
was € 432 million lower than in 2004, due primarily to our French operating entity, AGF
decreased slightly by 3.4 % resulting primarily from the maturation of two bond issues during 1Q and 3Q 2005.
Conversely, of € 67 million were incurred during 2005, of which € 52 million are attributable to the AGF
decreased by 25.9 % to € 1,126 million, leading to an effective tax rate of 19.4 % (2004: 24.3 %), largely driven by the discontinuation of non-tax deductible goodwill amortization.
decreased by 13.4 % to € 997 million, primarily as a result of reduced earnings at our French operating entities.
The following table sets forth our property-casualty gross premiums written, combined ratio, loss ratio, expense ratio, as well as earnings after taxes and before minority interests in earnings, which we refer to herein as “earnings after taxes and before minority interests”, by geographic region. Applicable only for 2004 and 2003, earnings after taxes and before minority interests excludes amortization of goodwill. Consistent with our general practice, gross premiums written, combined ratio, loss ratio, expense ratio as well as earnings after taxes and before minority interests by geographic region are presented before consolidation adjustments representing the elimination of transactions between
SGD is the market leader in Germany based on gross written premiums in 20052), accounting for € 10.0 billion, or 21 %, of our gross premiums written. SGD offers a wide variety of insurance products, of which our main lines of business include motor - liability and own damage - general liability, homeowner and accident. SGD distributes our products mainly through a network of full-time tied agents. However, distribution through Dresdner
Insurance Operations” for a description of initiatives we have undertaken to further strengthen our position in the German market going forward.
IART comprised 11% of our gross premiums written in 2005, with a volume of € 5.1 billion. AGF IART offers a broad range of products for both individuals and corporate customers including property, injury and liability insurance. AGF IART distributes primarily through a network of general agents, brokers and other direct sales channels. AGF IART is ranked third in France, based on gross premiums written in 20043). Operating in a market which has seen only limited growth in recent years, AGF IART has focused intensively on maintaining operating profitability while simultaneously implementing selective growth initiatives.
We operate in the Italian market through our “RAS” and “Lloyd
Adriatico” brands. The Italian non-motor market, which has a lower penetration rate for insurance products in comparison to other European markets, provides us with great growth potential.
Lloyd Adriatico contributed more than 11% to our gross premiums written. RAS operates in most major personal and commercial property and casualty lines in Italy, while Lloyd Adriatico underwrites mainly personal lines. RAS’s most important business line is motor, which contributes heavily to its results of operations.
Italian operating entities have recorded strong operating profits and combined ratios below the average of our property-casualty segment.
Allianz Cornhill has concentrated on active cycle management as a measure to maintain its operating profitability, even if, at times, it requires forgoing business volume. Allianz Cornhill ranks seventh in the United Kingdom based on gross premiums written in 20035).
In the Swiss market we are represented by Allianz Suisse and
ART. Jointly, these two operating entities generated premiums of € 2.0 billion in 2005. While Allianz Suisse operates in the general property-casualty market, ART offers conventional reinsurance as well as a variety of alternative risk transfer products. The most important line of business for Allianz Suisse is motor, comprising approximately 40 % of its gross premiums written. Allianz Suisse
Suisse has recently been able to increase gross premiums written in motor primarily through a rise in the number of contracts sold and, to a lesser degree, higher pricing.
Central and Eastern Europe, one of the fastest growing insurance markets in the world. Based on gross premiums written in 2004, we are one of the five leading insurers in the following markets: Hungary, Czech Republic, Slovakia, Poland, Bulgaria, Romania and Croatia8). We also market property-casualty insurance in Russia. In the Central and Eastern European region, we recorded premiums of € 1.8 billion, a growth rate of 11.2 % over 2004. Motor business and increasingly other personal lines products continue to be the main drivers for profitable growth.
Our operations in the United States are organized under the umbrella of Allianz of America, Inc. (or “Allianz of America”), which contributed approximately 11 %, or € 5.0 billion, of our gross premiums written. Allianz of America comprises a group of operating entities underwriting a wide, but focused, variety of lines of business. Through Fireman’s Fund, we underwrite personal, commercial and specialty lines. Fireman’s Fund has increasingly implemented a focused business strategy, targeting a segment of the market that addresses the needs of high net worth customers.
Through Allianz Global Risks US Insurance Company, we operate in the international industrial insurance market.
In Asia-Pacific, the large majority of our operations are conducted through Allianz Australia, which contributed € 1.5 billion, or 3 %, of our gross premiums written. Allianz Australia serves the markets of Australia, New Zealand and Papua New Guinea and its insurance operations include a variety of products and services.
trade insurance, marine, aviation and industrial transport insurance, international industrial risks reinsurance, as well as travel insurance and assistance service. In contrast to our other insurance businesses, we offer these services on a worldwide basis. Through
Euler Hermes, the largest credit insurer in the world based upon gross premiums written in 20049), we underwrite credit insurance in major markets around the world. In 2005, Euler Hermes contributed € 1.7 billion to our gross premiums written. Allianz
Asia-Pacific region at 29.7 % (€ 758 million). In Switzerland, statutory premiums remained relatively unchanged at € 1,058 million.
Our Italian operating entities, RAS and Lloyd Adriatico, experienced considerable growth of 6.6 % from the sale of unit-linked and index-linked products through all distribution channels, particularly through representative agencies and financial planners.
In addition, statutory premiums from the RAS’s bancassurance channel grew, reflecting increased sales at CreditRas Vita. Within
Our Asia-Pacific business excelled by 29.7 % to € 3,309 million, mainly in South Korea and Taiwan, thus highlighting the strategic importance of this region. The growth at Allianz Life Insurance
In the United States, at Allianz Life of North America (or
Our increased significantly by 13.0 % to € 1,603 million, surpassing our target of € 1.5 billion for 2005. The strongest improvements occurred at our German and Italian operations, specifically Allianz Leben (€ 75 million), Allianz Private Krankenversicherung (€ 33 million) and RAS (€ 39 million). Improved margins on new business brought about by enhanced risk management providing a better basis for pricing and the increased business volume from the strong growth rates in recent years, were important factors in this development.
developed favorably with an increase of 4.3 % to € 11,826 million, despite lower interest rates in the Euro zone. Main contributors were Allianz Life (€ 334 million ) and Allianz Leben (€ 84 million), driven predominantly by an increased investment base resulting primarily from significant inflows of funds from new business underwritten. Higher dividend yields on equity investments also had a beneficial impact.
decreased by 2.9 % to € 3,921 million, despite a € 95 million increase at Allianz
Life resulting from increased wages and fees. Major drivers of this decline included reduced acquisition costs compared to the 2004 level which was impacted by the German Retirement Revenue
net acquisition costs and administrative expenses, our declined by 1.0 percentage point to 8.1 %.
Driven by strong operating profitability and increased net capital gains grew significantly by 55.6 % to € 1,349 million.
attributable to shareholders increased to € 608 million. This was primarily the result of favorable capital markets conditions, which we sought to leverage to yield increased realizations, with our sale of Gecina
S.A. (France) in 1Q 2005 as the most significant. At the same time, net impairments remained low at € 63 million.
The following table sets forth our Life/Health insurance segment’s income statement and key operating ratio for the years ended
The following table sets forth our life/health statutory premiums, gross premiums written, statutory expense ratio, as well as earnings after taxes and before minority interests in earnings, which we refer to herein as “earnings after taxes and before minority interests”, by geographic region. Applicable only for 2004 and 2003, earnings after taxes and before minority interests excludes amortization of goodwill. Consistent with our general practice, statutory premiums, gross premiums written, statutory expense ratio as well as earnings after taxes and before minority interests by geographic region are presented before consolidation adjustments representing the elimination of transactions between Allianz
Private Health provides a wide range of health insurance products, including full private healthcare coverage for the self-employed, supplementary insurance for individuals insured under statutory health insurance plans, supplementary care insurance as well as foreign travel medical insurance.
In France, we operate through the companies of AGF. AGF is the eighth-largest life insurance provider in France based on statutory premiums in 20043) and experienced significant growth of 12.0 %
Vie in 4Q 2004. AGF contributed € 5.3 billion, or 11 %, to our statutory premiums in 2005. AGF provides a broad line of life insurance and other financial products, including short-term investment and savings products. An important portion of AGF’s life statutory premiums is generated through the sale of unit-linked policies. Life statutory premiums growth was strong in January 2006 and we expect this positive trend to continue in 2006.
Through RAS and Lloyd Adriatico, we maintain a strong position in Italy, where the life market is increasingly focusing on investment-related products. RAS and Lloyd Adriatico contributed 15 % and 4 % of our statutory premiums in 2005, respectively.
Consistent with general trends in the Italian market, our business includes an increasing amount of unit-linked policies, where policyholders participate directly in the performance of policy-related investments. At December 31, 2005, two-thirds of our combined statutory premiums at RAS and Lloyd Adriatico comprise unitlinked products. Jointly, and on the basis of statutory premiums in 2004, RAS and Lloyd Adriatico ranked second in Italy4). A large percentage of our contracts are marketed through our bancassurance channel.
We conduct our life/health operations in Switzerland primarily through the Allianz Suisse Lebensversicherungs-Gesellschaft and
Korean operations market a wide range of life insurance products, including unit-linked products, variable life, individual whole life insurance polices, annuities and endowments. Due to the very low interest rate environment in South Korea since 2000, Allianz
Life Korea has increasingly shifted its focus to variable life products. As a result, we have achieved a strong increase in statutory premiums and, more importantly, new business in 2005 has been more profitable than in recent years. Additionally, due to strict expense management, improved commission schemes and cutbacks in agency costs, Allianz Life Korea posted strong results of operations in 2005.
Insurance, Taipeh (or “Allianz President Life”), which contributed € 1.3 billion, or 3 %, of our statutory premiums in 2005. Allianz
business, with an improvement in our capital markets and mergers & acquisitions business more than offsetting the substantial decrease in net trading income, largely due to the difficult capital market conditions in April and May. In the second half of 2005,
Net fee and commission income grew by 6.1 % to € 2,610 million, principally driven by the securities business in our Personal
In summary, despite the revenue growth experienced by our strategic business, the faster than planned completion of the winddown of our non-strategic IRU, which was closed effective September 30, 2005, as well as the negative impacts from IAS 39 of € 214 million, resulted in a decrease in operating revenues by 4.4 % to € 5,954 million at Dresdner Bank.
Operating revenues improved in our four operating divisions (Personal Banking, Private & Business Banking,
Corporate Banking and DrKW). In aggregate, operating revenues from our strategic business increased by 4.1 % to € 6,098 million, excluding the aggregate negative accounting effects from IAS 39 of € 214 million (2004: income of € 7 million).
Additionally, our Personal Banking division benefited from the improved securities business, specifically from closed-end funds, as did our Private & Business Banking division, which experienced an increase in operating revenues of 3.0 % to € 1,179 million.
While operating revenues in our Corporate Banking division increased slightly by 1.3 % to € 1,027 million, at DrKW, operating revenues rose by 2.8 % to € 2,102 million. The increase at DrKW
to € 775 million. However, given lower operating revenues and an almost unchanged expense base, our 1) increased from 85.2 % to 88.9 %, substantially burdened by the negative impact from the application of the IAS 39 hedge accounting rules on derivative financial instruments.
The increase in operating profit was driven by the positive developments within our , resulting in a net release of € 113 million (2004: net charge of € 337 million). While gross releases and recoveries decreased, the decline in gross new additions was even stronger. Gross releases and recoveries reached € 850 million (2004: € 1,061 million), stemming principally from exits from large debtors, mainly within our IRU. Gross new additions to allowances of € 737 million were significantly lower compared to € 1,398 million in 2004, predominantly due to the reductions in our non-strategic business within our IRU
Our Personal Banking division experienced a strong improvement in 2005. Operating revenues increased by 2.0 % to € 1,883 million and operating profit was more than three times higher compared to 2004, reaching € 210 million. These positive developments reflect primarily strict cost control while loan loss provisions reached normalized levels. Our cost-income ratio strengthened by 5.0 percentage points to 84.2 %.
Conversely, DrKW’s cost-income ratio rose to a disappointing 91.7 % from 89.4 %, primarily reflecting decreased net trading income and increased expenses. Accordingly, operating profit declined by 6.4 % to € 204 million.
Bank’s 7.3 % shareholding in Munich Re to Allianz AG in 1Q 2005 as part of the Allianz Group’s “All-in-One” capital market transactions. In addition to the positive operating profit development, the growth in net income was attributable to our improved nonoperating results.
Bank rose by € 547 million. This increase resulted principally from the aforementioned Munich Re transfer, the complete sale of our shareholding in Bilfinger Berger in 2Q 2005, as well as the sale of 7.35 % of our 28.48 % shareholding in Eurohypo AG to
Germany. Of the total increase in our third-party assets, market-related appreciation amounted to € 33 billion, primarily attributable to favorable equity capital markets and, to a lesser extent, bond capital markets. These achievements continue to strengthen our position as one of the world’s largest asset managers, based on total assets under management. A major success factor has been our competitive performance, as the overwhelming majority of the third-party assets we manage outperformed their respective benchmarks in 2005. Further, positive effects of € 66 billion from exchange rate movements were incurred, resulting primarily from the strengthening of the U.S. dollar compared to the Euro.
Allianz Global Distributors continued to remain in the top 5 market positions in the U.S. retail market based on net inflows.
AGI ranked first and fourth among German asset management companies based on net inflows for 2005 and assets under management at December 31, 2005, respectively1).
Net inflows from mutual funds through both third-party distributors, as well as the Allianz Group’s tied agents network and
The dit-Euro Bond Total Return Funds were once again Germany’s best selling fixed income funds, based on net inflows of more than € 4.3 billion.
Our Asset Management segment’s results of operations are almost exclusively represented by AGI, which accounted for 98.7 % and 98.3 % of our total Asset Management segment’s operating revenues and net income, respectively, for the year ended December 31, 2005.
declined by 5.1 % to € 713 million. Thereof, € 676 million was due to the deferred purchases of interests in PIMCO related to the Class B Plan, which increased by 34.9 %. The rise was commensurate with the strong profit development at PIMCO in 2005 and the increased number of vested units according to the vesting schedule of the purchase plan. The Class B Plan was agreed upon at the time this company was acquired. Of the total acquisitionrelated expenses, a further € 12 million was incurred due to retention payments for the management and employees of PIMCO and
amounted to € 130 million, resulting in an effective tax rate of 31.2 %, compared to a tax credit of € 53 million in 2004. Taxes increased due predominantly to improved operating profitability, inclusive of higher taxable income in the United States, partially offset by a one-off deferred tax credit of € 37 million related to tax deductible goodwill amortization.
equity units from former and current members of the management of PIMCO under the Class B Plan. The total amount paid related to the call of the Class B equity units was € 71 million. Under the plan, participants acquired Class B equity units annually through 2004 for a total of 150,000 units. Please see Note 43 to our consolidated financial statements for further information.
The following table sets forth the income statements and key operating ratio for both our Asset Management segment as a whole and AGI
On December 15 and 16, 2005, the Board of Management of
Allianz AG and the Board of Directors of RAS accomplished the merger plan for the merger of RAS with and into Allianz AG. This merger plan was notarially certified on December 16, 2005. On
We are confident that we will achieve the entry of the merger in the course of such release ruling. As a further prerequisite for the effectiveness of the merger and the accompanying conversion of
Allianz AG into an SE, a procedure for the employee involvement in decisions of the Allianz SE must be conducted. We expect the merger to become effective in September 2006 at the earliest.
To implement the merger, the remaining RAS shares will be exchanged for Allianz AG shares through an increase of Allianz AG’s issued capital by up to € 64.3 million, which was approved by the extraordinary shareholders’ meeting on February 8, 2006.
The capital increase will be accomplished by the issuance of up to 25,123,259 new registered no-par value Allianz AG shares.
Allianz AG expects the cost of the entire transaction, including the voluntary tender offer, to be approximately € 5.9 billion. However, this amount may vary, depending upon the market price of
On September 11, 2005, Allianz AG announced its intention to merge Riunione Adriatica di Sicurtà S.p.A. (or “RAS”, and taken together with its subsidiaries, the “RAS Group”) with and into
Company (Societas Europaea or “SE”) and subsequently adopt the corporate name Allianz SE1). As a preparatory step, Allianz
AG placed a voluntary tender offer to purchase all RAS ordinary shares and RAS savings shares it did not already own. The offer period began on October 20 and the acceptance period closed on
By fully integrating RAS, Allianz AG expects to increase profitability and customer service and to take a significant step forward in reducing complexity of the entire Allianz Group. In 2005, the
Following completion of the tender offer and further purchases of RAS shares outside the tender offer, the Allianz Group increased its ownership to 76.3 % of the total ordinary and savings shares of
RAS at December 31, 2005 from 55.4 % at December 31, 2004.
The total cost to the Allianz Group of the tender offer and the additional purchases of RAS shares outside the tender offer, including transaction-related costs, amounted to approximately € 2.7 billion.
Effective January 1, 2006, the previous regional structure of the property-casualty operations in Germany as well as of the branch offices of Allianz Lebensversicherungs-AG and Allianz
Private Krankenversicherungs-AG has been replaced by the establishment of four sales and service regions, which include the “northwest ” (Schleswig-Holstein, Hamburg, Bremen, Lower Saxony,
Allianz Private Krankenversicherungs-AG (health insurance) are subsidiaries of Allianz Deutschland AG since November 2005. In connection with this reorganization, on January 30, 2006, and effective October 1, 2005, two property-casualty subsidiaries,
In addition, the sales activities of the said German property-casualty and life/health insurance companies are to be consolidated into a separate sales company as the fourth subsidiary of Allianz
lines, in particular with respect to natural disasters, market and credit risks. This structure ensures that we control our local and global risks equally and are not exposed to the danger of overall risk increasing unnoticed.
These regional Finance Committees compile local investment guidelines for their particular locations. Operational responsibility for investment portfolios lies within the local units.
Insurance, banking and asset management are all heavily influenced by legal factors; legislative changes in particular have a primary influence on our activities. Legal risks also include major litigation and disputes, regulatory proceedings, and contractual clauses that are unclear or construed differently by the courts.
Limitation of such legal risks is a major task of our Legal Department, carried out with support from other departments. The objective is to ensure laws are observed, to react appropriately to all
The Group Risk Committee monitors the capitalization and risk profile of the Allianz Group to ensure a reasonable ratio between these two criteria. Its role is to ensure comprehensive risk awareness within the Allianz Group and to further improve risk control.
Risk Committee to support the Group Risk Committee in matters concerning property-casualty insurance. This committee is responsible for updating our underwriting guidelines and monitoring the development of our property-casualty insurance portfolio.
Group Risk Control, which reports to the Chief Financial Officer, develops methods and processes for risk assessment and control on an Allianz Group-wide basis. An important instrument to assess the Allianz Group’s risk profile is our internal risk capital model. In 2005, we also introduced a system for systematic qualitative risk evaluation. On this basis, it forms an overview of local and global risks, derives the risk situation of the Allianz Group, and regularly informs management about the current situation.
impending legislative changes or new court rulings, attend to legal disputes and litigation, and provide legally appropriate solutions for transactions and business processes.
The principle of independent risk oversight is well-established within the Allianz Group. There is a clear distinction between risk assumption (i.e. the responsibility for the business including associated risk management) and independent risk monitoring.
The latter also analyzes alternative courses of action and proposes recommendations to the Risk Committee and the Board of
Our internal risk capital model evaluates quantifiable risks within a set timeframe and calculates a potential loss. This model allows us to systematically evaluate internal data using methods based on the theory of probability. This process takes into account the special characteristics of our operating entities as well as the specific nature of their risks. The model is based on the value-atrisk approach. Value-at-risk estimates the maximum loss which cannot be exceeded with a certain probability at a specified confidence level within a set holding period. The capital we allocate to our operating entities in accordance with our internal risk capital model meets the requirements for the one-year target shortfall of an “A” rating from Standard & Poor’s. Diversification effects from balancing portfolio risks result in a capitalization of the Allianz
Cost and lapse risks, as well as operational risks, i.e. risks associated with external events or arising from insufficient or failing internal processes, procedures and systems.
The risk profile of the Allianz Group is managed actively. Under the “3+One program”, we reduced risk capital from € 43.5 billion at December 31, 2002 to € 37.5 billion at December 31, 2005, thereby significantly strengthening the Allianz Group’s capitalization.
There are certain risks that cannot be quantified in our risk capital model. For these risks, we pursue a systematic approach with regard to identification, analysis, assessment and monitoring. The assessment is based on qualitative criteria or using scenario analyses. For example, these risks include: These are risks that the business is unable to meet its current or future payment obligations in full or on a timely basis. These risks also include risks that, in the event of a liquidity crisis, refinancing funds could only be obtained at higher market rates (refinancing risk) or assets could only be sold at lower market prices (market liquidity risk).
We monitor and manage credit risks with a limit system that is applicable for the entire Allianz Group. The limit system aggregates major risks of Allianz Group-wide significance from credit insurance, lending and our capital investments and serves as the basis for controlling the risk on an Allianz Groupwide basis in detecting credit risks at an early stage. In 2005, this system assisted in identifying critical developments at an early stage and making adjustments accordingly. The number of counterparties monitored by the limit system was significantly increased in 2005, and we also reinforced the automation of our internal reporting on credit risk and improved our procedures (for example, in relation to reducing risks in a crisis situation).
In addition to risk capital analyses, we also carry out stress tests, which act as early-warning indicators to secure external capital requirements. This affects capital requirements from the viewpoint of our supervisory authorities and rating agencies.
A 10 % price decline in our available-for-sale equity securities at
December 31, 2005 would have resulted in a € 2.4 billion decline in shareholders’ equity. If the interest rate had increased by 100 basis points, shareholders’ equity would have decreased by € 3.6 billion, if we consider the available-for-sale fixed income securities at December 31, 2005. A 10 % devaluation of the U.S. dollar against the Euro at December 31, 2005 would have decreased shareholders’ equity by € 1.1 billion. These model calculations do not take into account derivatives.
We limit liquidity risk by continually reconciling the cash flow from our investment portfolio with our commitment to pay liabilities. We employ actuarial methods for estimating our liabilities arising from insurance contracts. The quality of our investments also guarantees that we can also meet high liquidity requirements, for example, in the event of a natural disaster.
December 31, 2005, approximately 78 % of the Allianz Group’s reinsurance recoverables are distributed over reinsurers with an investment grade rating. Additionally, more than 77 % were distributed over reinsurers who have been assigned at least an “A”
rating by Standard & Poor’s. We may also require letters of credit, deposits, or other financial measures to further minimize our exposure to credit risk. See Note 12 to our consolidated financial statements for further information.
We limit our fixed income investment credit risk by setting high requirements on the creditworthiness of our debtors and by spreading the risk. Through our central credit risk management, we consolidate our exposure according to debtors and across all investment categories and business segments, and monitor the exposure of the Allianz Group on a monthly basis. At December 31, 2005, approximately 91 % of the fixed income investments of the insurance companies of the Allianz Group had an investment grade rating. More than 87 % were distributed over obligors that had been assigned at least an “A” rating by Standard & Poor’s.
In 2005, for the first time, we aggregated risk peaks from natural disasters in our portfolio and reinsured such risks. By doing so, we implemented the conclusions suggested by our internal risk capital model. We also continued to develop a limit system arising from natural disaster and terrorism risks, which we plan to further improve in 2006.
We control reserve risks by constantly monitoring the development of the provisions for insurance claims that have been submitted but not yet settled in all companies, and amend the provisions as necessary. For calculating insurance provisions in life insurance, the biometric assumptions, such as life expectancy, disability and illness, play a major role. If available, we use assumptions approved by supervisory authorities and actuarial associations.
“BaFin”) approved Dresdner Bank’s value-at-risk model for purposes of reporting in accordance with Principle I of the German Banking Act. The BaFin also approved the improvements made to this model in 2001, 2002 and 2004. This value-at-risk model, which is used to evaluate capital adequacy for regulatory purposes, must take into account market fluctuations which can occur at a confidence level of 99 % and a 10-day holding period. The value-at-risk model is supplemented by stress tests which estimate the potential loss under extreme market conditions.
These risks mainly comprise the risk of interest changes and is analyzed on the basis of sensitivity and value-at-risk indicators. As in the case for Dresdner Bank’s trading portfolio, Dresdner Bank manages this risk by setting value-at-risk limits. At December 31, 2005, the value-at-risk, with a 99 % confidence level and 10-day holding period, for interest rate risks at Dresdner Bank amounted to € 10.0 million, compared to € 8.6 million at December 31, 2004.
& Business Banking division, 35 % by the Corporate Banking division, and 19 % by the Dresdner Kleinwort Wasserstein division.
In 2005, credit risk management worked towards systematically reducing our non-strategic loan portfolio, lowering concentration risks and focusing the loan portfolio on certain regions and industries. At December 31, 2005, approximately 64 % of the loan portfolio of Dresdner Bank were included in ratings classes
The country risk management at the Dresdner Bank is intended to limit transfer and local risks on the basis of a comprehensive country limit system.
Counterparty risks from the derivative trading business arise mainly from over-the-counter (or “OTC”) transactions. The resulting risk exposure cannot be directly traced to the nominal values of the transactions. In assessing current counterparty risk, positive replacement values from Dresdner Bank’s position is the determining factor. These correspond to the additional expense or lower yield that would result from restoring an equivalent position in the event of a trading partner defaulting. The banking sector, other financial services provider sectors, insurance companies and governments accounted for a large proportion (96.7 %) of the positive replacement values at December 31, 2005.
In order to reduce the counterparty risk from trading activities, we entered into inter-product framework netting agreements with our business partners. Netting makes it possible to balance all outstanding receivables and payables with a counterparty if the counterparty defaults. In addition to these framework agreements, exposure from counterparty risk (positive replacement values after netting) is secured using so-called collateral management.
Dresdner Bank has a process for the systematic identification, measuring and controlling of . The essential risk factors are evaluated in the framework of a structured self-assessment. A loss database is employed to record and analyze losses that actually occur. An internal risk model was developed for calculating the risk capital requirement using the criteria of the
At December 31, 2005, the risk capital of Dresdner Bank before
In addition, we will continue to make progress in our project to evaluate derivatives on the basis of an Allianz Group-wide uniform
IT system. We will also strengthen and clarify our guidelines for handling derivatives.
In order for the risk management at Dresdner Bank to continue to meet the highest standards, we are continually refining and optimizing our internal bank risk assessment procedures, including data entry and associated processes (Basle II). Dresdner Bank is implementing, on schedule, the supervisory requirements of the Capital Accord of Basle II and the related German implementing regulation, the Solvency Regulation (Solvency Order/SolvV).
for operational risks. Dresdner Bank already uses a comparable process for its internal risk management.
As such, Allianz AG not only has to cover the funding needs of its own reinsurance operations but also acts as the central coordinating function for the liquidity and capital allocation of Allianz
In order to finance capital provisioning to our operating entities, Allianz AG uses the intra-Allianz Group dividend funding it receives from operating entities. Furthermore, Allianz AG will also from time to time raise funds on the capital markets through the issue of debt or other financial instruments in order to finance any capital or liquidity requirement in excess of the Allianz Groupinternal financing capacity.
Liquidity planning is an important process at both the operating entity and Allianz AG levels, and is integrated into the financial planning process of the Allianz Group. The financial planning process is based on strategic decisions and includes, for example, solvency planning, dividend targets and merger & acquisition expenditures. Liquidity risks can result from operational risks, planning risks, system risks, adverse developments in solvency levels of operating entities, contingent liabilities as well as requirements caused by natural catastrophes, financial markets, political crises or any other significant adverse developments. Strategic liquidity risks and resources are monitored on a regular basis. Liquidity risks are managed continuously through a variety of instruments to ensure short- and long-term financial flexibility for the Allianz
Group. In the context of a financial services company, where our
German central bank. These guidelines are used to evaluate capital adequacy based primarily on the perceived credit risk associated with balance sheet assets, as well as certain off-balance sheet exposures such as unfunded loan commitments, letters of credit, and derivative and foreign exchange contracts. In addition, for
under the U.S. Gramm-Leach-Bliley Financial Modernization Act of 1999, Dresdner Bank must be considered “well capitalized”
under guidelines issued by the Board of Governors of the Federal
December 31, 2005, we had the following ratings with the major rating agencies: Our liquidity results from the operating activities generated by our property-casualty, life/health, banking and asset management operations, as well as the financing activities from Allianz AG, the holding company for the Allianz Group.
benefits, paying surrenders and cancellations, as well as other operating costs.
We generate substantial cash flow from our insurance operations as a result of most premiums being received in advance of the time when claim payments or policy benefits are required, thereby allowing us to invest these funds in the interim to generate future investment income and realized gains. However, the liquidity of our insurance operations is impacted by, among other factors, the duration of our investments, development of equity markets, the interest rate environment and our ability to realize the carrying value of our investment portfolio to meet insurance claims and policyholder benefits as they become due.
Additionally, the liquidity of our property-casualty insurance operations is affected by the frequency and severity of losses under its policies, as well as by the persistency of its products. Future catastrophic events, the timing and effect of which are inherently unpredictable, may also create increased liquidity requirements for our property-casualty operations. The liquidity needs of our life operations are generally affected by trends in actual mortality experience relative to the assumptions with respect thereto included in the pricing of our life insurance policies, by the extent to which minimum returns or crediting rates are provided in connection with our life insurance products, as well as by the level of surrenders and withdrawals.
Allianz AG coordinates and executes external debt financing, securities issues and other capital raising transactions for the
Additionally, see Note 39 to our consolidated financial statements for information regarding how we use certain derivatives to hedge our exposure to interest rate and foreign currency risk related to certificated and subordinated liabilities.
Allianz AG owns several finance companies. Among those, primarily Allianz Finance B. V. and Allianz Finance II B. V., both incorporated in The Netherlands, are used from time to time for external debt financing and other corporate financing purposes. In addition,
(or “MTN”) program which is used from time to time for purposes of external and internal debt issuance. The volume of debt issued by Allianz Finance B. V. and Allianz Finance II B. V. for the years ended December 31, 2005 and 2004 was € 2.7 billion and zero, respectively. At December 31, 2005, Allianz AG had money market securities outstanding with a carrying value of € 1,131 million.
capital market transactions. The All-in-One capital market transactions (1) reduced the Allianz Group’s equity gearing, (2) included the issuance of a subordinated bond, and (3) helped Dresdner
Dresdner Bank accomplished a further step in its strategy of reducing its nonstrategic equity holdings. Dresdner Bank sold 17,155,008 Allianz
This structure enabled the Allianz Group to benefit from a portion of Allianz AG’s future share price appreciation.
In connection with financing the merger of RAS with and into
On March 23, 2005, we repaid the Siemens exchangeable bond issued in 2000. The issue amount of the exchangeable bond of € 1.7 billion was repaid in cash as the share price of Siemens
Net cash flow provided by operating activities increased by € 28,975 million to € 32,171 million (2004: € 3,196 million) in 2005. Of which, the decrease in financial assets and liabilities held for trading contributed € 11,885 million (2004: reduction of € 30,209 million), mainly resulting from a decline in the trading business and the reduction in trading liabilities. In addition, assets from reverse repurchase agreements and collateral paid for securities borrowing transactions contributed € 43,656 million
At December 31, 2005, we had 177,625 employees in more than 70 countries; that is 1,124 more than in the previous year.
Annual Report). Tying the “3+One” initiatives into our personnel development models forms as much a part of this as consistently integrating the program’s goals and issues into our management seminars. Beyond that, we also implement the basic “3+One”
We promote a corporate culture that is directed towards our internationality as well as our performance and customer-orientation.
This includes identifying young staff with potential for management and specialist responsibilities within the Group and systematically developing them. This way we are an attractive employer to talents both inside and outside Allianz.
Those involved in management broadly support and began implementing the “3+One” initiatives in 2005.
Our senior management participates in the Group Equity Incentive Plan, which is made up of restricted stock units (or “RSUs”)
and stock appreciation rights (or “SARs”). The potential return of those plans depends on the performance of the Allianz AG
Value Added (or “EVA®”) of the Allianz Group and the EVA® of the respective Group company, as well as fulfilment of objectives related to the risk capital employed. The Group Equity Incentive
AMI Group programs regularly link management development to the advancement of the Allianz Group. The “Allianz Excellence
When a project is completed, it is discussed in the Board of Management and introduced into the Allianz Group’s operations.
We desire promote cooperation between employees from diverse cultural backgrounds, as well as those of different ages, levels of experience and ability. We are convinced that diversity is well suited to finding outstanding solutions for heterogeneous and constantly changing markets. Our Diversity Policy lays down a framework for this cooperation. The newly formulated Code of
Conduct describes the general rules, and prohibits any kind of discrimination.
Our technical platform on the Internet “Allianz Global Job Markets ” for finding and attracting new talent and to fill positions, is now in its third year of operation. It has significantly reduced our recruitment costs and contributed substantially to our positive image as an employer in Europe and the United States. The site allows anyone interested from inside or outside the company to obtain information on and apply for open positions anywhere in the world. It is also possible to register interest in positions that are not yet open. The development of a corresponding platform for Asia starts in 2006.
On the financial markets, we expect higher interest rates on short maturities as a result of a restrictive monetary policy by the various central banks across the globe. There is great uncertainty as to the strength of the U.S. dollar, as well as, among others, the effects of the substantial trade deficit of the U.S. economy, which may also slow growth. Initial signs seem to indicate that the profitability of U.S. companies will weaken in the second half of 2006, which would negatively affect the performance of the
These macroeconomic conditions improve the business outlook for financial service providers.
Following a year plagued with a large number of natural catastrophes, including one of the worst hurricane seasons on record, we expect the sector to experience an improved year in 2006, further major natural catastrophes notwithstanding. However, as competition for market share is everincreasing, there exists an inherent risk that insurance companies will adopt a less than disciplined approach in underwriting new business in order to gain market share. The rapid growth in the economy, income levels and the value of property in Asia make the market in this region increasingly interesting for the propertycasualty insurance business.
We expect the business to continue to benefit from the continued necessity of individuals and companies making provisions for retirement. This need will be predominantly covered by life insurance and related retirement products. Demand for products of this type should continue to rise, as in many countries reforms of state retirement systems have not yet been completed, consequently additional cuts in anticipated retirement income promised by these government-sponsored plans are expected. Equally significant are the effects of the aging society on the state healthcare systems, but there appears to be little sign of political will for effective reforms in this area. With this in mind, it appears evident that sooner or later it will be unavoidable that
While economic growth in the United States is predicted to slow to 3.2 % (2005: 3.7 %), primarily as a result of the restrictive interest rate policy of the Federal Reserve Bank, it should increase slightly in Europe. We believe that most of the EU countries will slightly exceed the growth of the previous year, except in Spain, where we expect the pace of growth to slow. We expect the German economy to perform positively in 2006. We expect increased investment and increases in consumer spending as a response to the changes in tax policy by the German federal government, largely as a result of the increase in value added tax in 2007. We estimate economic growth in Germany will reach approximately 2 %, doubling that of the previous year. With minor deviations,
, even in Germany, should present encouraging figures because of the solid growth outlook, as this is a more cyclical industry than, for example, insurance. We expect that a higher corporate propensity to invest will noticeably increase demand for credit.
In 2007, we expect to continue to drive forward our initiatives of sustainable competitiveness and value for our shareholders and policyholders by capitalizing on, among others, the advancement of our Sustainability and Customer Focus programs in order to benefit the performance of all segments.
Through the implementation of the following reporting changes effective January 1, 2006, and applied retrospectively, we will further improve transparency.
We will fully align operating profit methodology across all segments, with the exception of the consolidation of intra-Allianz Group dividends. Life/Health segment’s operating profit will be different from our other operations ’ operating profit with respect to the consolidation of intra-Allianz Group dividends. Intra-Allianz Group dividends received by our Life/Health segment will be further consolidated on the segment level, due to policyholder participation in these dividends. By refining our operating profit methodology, we will further improve its reflection of our business mechanics.
Other income and other expenses will be minimized as they will be, to a significant extent, reflected within our re-defined combined ratio. Accordingly, our Property-Casualty segment’s re-defined combined ratio for 2005 will be approximately two percentage points higher compared to that calculated based on the methodology used herein.
The Board of Management and the Supervisory Board propose that the unappropriated earnings of Allianz AG for fiscal 2005 in the amount of € 820,000,000 be appropriated as follows: Distribution of a dividend of € 2.00 per eligible share: Allocation of € 8,768,070 to other appropriated retained earnings.
“intends”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, or “continue” and similar expressions identify forward-looking statements.
Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz Group’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults (vii) interest rate levels, (viii) currency exchange rates including the Euro-U.S. dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures and (xiv) 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. The company assumes no obligation to update any forward-looking information contained herein.
In brief, our progress in 2005 was as follows: In June 2005, we issued a new Code for Business Ethics and
guidelines for multinational companies. This code of conduct assists us in achieving our objective of considering our business, sustainability and social responsibility as a whole, and of orienting our activities accordingly. These standards provide our employees around the world with ethical guidelines. They demand honest and fair behaviour and prohibit corruption, insider trading and discrimination. Rules are also established with respect to behaviour towards clients, business partners and journalists, as well as to sponsorships, donations and environmental protection.
We offer four investment funds that are managed in accordance with ethically and environmentally sound principles. A total of € 200 million is invested in these funds. Including the sustainability funds we manage for institutional investors and other sustainable capital investments, our total investment for third parties in this growth market is € 3.8 billion. 67 % of the Group’s own capital investments are invested in companies classified as “sustainable ”.
Shares in Allianz AG or their Group companies are included in the Indexes Dow Jones Sustainability World and Dow Jones Sustainability STOXX (where shares of Allianz AG, RAS and AGF are represented). Only 10 % of the companies with the best sustainability ranking in an industry are included in these indices. Our shares are also in the Financial Times Sustainability Indexes FTSE4 -Good Global and FTSE-4-Good Europe. One in three European sustainability funds holds Allianz shares.
KPMG billed the Allianz Group an aggregate of € 12.1 million in 2005 and € 12.1 million in 2004 for other services, which consisted primarily of general consulting services and other services such as assistance in documenting internal control policies and procedures under the guidance of Allianz
Committee of the Allianz AG Supervisory Board. The Audit Committee pre-approval process is based on the use of a “Positive List”
of activities decided by the Audit Committee and, in addition, a “Guiding Principles and User Test” is applied. All internal control -related services are specifically pre-approved by the Audit
in each of the following categories: (i) Audit Fees, which comprise fees billed for services rendered for the audit of the Allianz