Our Business Our Strategy Allianz Brand Customer Focus Our Employees Sustainable Development please visit www.allianz.com/annualreport
Consolidated Financial Statements 151 Detailed Index 152 Consolidated Financial Statements 159 Notes to the Consolidated Financial Statements 208 Supplementary Information to the
campaign, which focuses on sharing the knowledge and experience of real people in authentic situations. The campaign will be active in more than 20 countries around the world by the end of this year. This report includes a selection of images that have already appeared.
Net income from continuing operations 5 € mn 5,209 12.0 % 4,650 4,268 7,991 7,843 — 71 Net income (loss) from discontinued operations, net of income taxes 5 € mn — n. m. (395) (6,373) 723 467 — —
Share price as of December 31 € 88.93 2.0 % 87.15 75.00 147.95 154.76 127.94 16 Market capitalization as of December 31 € mn 40,419 2.2 % 39,557 33,979 66,600 66,880 51,949 17
Other Data Return on equity after income taxes 1, 7, 8 % 11.9 (0.6) pts 12.5 9.9 15.0 15.0 12.9 17 Total assets under management as of December 31 € mn 1,517,538 26.2 % 1,202,122 950,548 1,009,586 1,011,802 977,957 91 thereof: Third-party assets under management as of December 31 € mn 1,163,982 25.7 % 925,699 703,478 764,621 763,855 742,937 91 1 Figures prior to 2008 have not been restated to reflect the change in the Allianz Group’s accounting policy, effective July 1, 2010. For further information please refer to note 4 of our consolidated financial statements.
2 Total revenues comprise statutory gross premiums written in Property-Casualty and Life/Health, operating revenues in Asset Management and total revenues in Corporate and Other (Banking). 3 Figures do not reflect changes in the presentation implemented in 2009. 4 The Allianz Group uses operating profit as a key financial indicator to assess the performance of its business segments and the Group as a whole. 5 Following the announcement of the sale on August 31, 2008, Dresdner Bank was classified as held for sale and discontinued operations. Therefore, all revenue and profit figures presented for our continuing business do not include the parts of Dresdner Bank that we sold to Commerzbank on January 12, 2009. Starting as of 2006 the results from these operations are presented in a separate net income line "Net income (loss) from discontinued operations, net of income taxes".
Share price as of December 31, 2010 | ▶ page 16
Increase in net income from continuing operations | ▶ page 71
Strong result in a low interest rate environment: – Revenues up 12.5 % to € 57.1 billion. – Operating investment income grew by 14.6 %
Another record year for Asset Management: – Third-party net inflows of € 113 billion. – Outstanding operating profit of € 2.1 billion.
Third-party assets under management by regions/coun- tries as of December 31, 2010 (December 31, 2009) 4 in %
Combined Ratio ▶ pages 75 – 83 1 After elimination of transactions between Allianz Group companies in different geographic regions and different segments. 2 Gross premiums written from our specialty lines have been allocated to the respective geographic regions. 3 Gross premiums written of our specialty line Travel and Assistance (Mondial) are now assigned to France as a result of the relocation of their headquarters from Switzerland to
In last year’s Letter to the Investor, I wrote that your Allianz was well positioned to mitigate risks and exploit opportunities. Today, I can confirm this: with the exception of a few countries, the financial data for the year under review are excellent. Our strategic “3+One” program continues to take effect and will ensure that your company remains at the forefront in the international insurance and asset management industries.
We achieved strong growth in 2010, with total revenues rising by 9.3 % to more than € 106 billion – the highest ever. Following the two crisis years of 2008 and 2009, operating profit has bounced back strongly by 17.0 % to € 8.2 billion. Net income from continuing operations increased by 12.0 % to € 5.2 billion. Overall, this year’s figures are among the best that we have ever presented in Allianz’s more than 120-year history.
– Despite tough market conditions, the Property-Casualty business had a combined ratio of 97.2 % and reported a 3.2 % increase in revenues. As our global portfolio is well diversified and profitable we were able to offset weaknesses in our German, French, Italian and U.S. units. A profit turnaround program has been aggressively implemented at the respective companies and should deliver noticeably better performance in 2011. In Italy, for example, we have been continually outperforming the market since the integration of our local companies.
– Our Asset Management business had another record year: total assets under management exceeded € 1,500 billion, and third-party net inflows reached € 113 billion. In our management of fixed income products, we have already achieved the level of excellence that we aim for in all our business segments.
– With a solvency ratio of 173 %, Allianz is well capitalized and enjoys strong credit ratings.
I hope that you, too, will be encouraged by this overview. These figures demonstrate how resolutely your Allianz is working to achieve a solid and dependable performance for you, our owners – even under adverse conditions. This is also good news for all our other stakeholders: more than 76 million customers, 151,338 employees, several hundred thousand distribution partners and the companies in around 70 countries in which we have operations.
4 Allianz Group Annual Report 2010 To Our Investors are committed to a culture of change whose objective is to confirm and improve the core value of our business as well as enable us to compete at the highest level globally. At the same time, we are using the same proven toolkit that has served us so well for over 120 years to strengthen our business.
– That’s why we have prescribed a fundamental transformation in Allianz’s operating model, although this won’t be easy. But it will ensure that your company does a better job of listening to the customer, that the employees at their desk will be fully aware of the real market outside and that our work is considerably more efficient and customer-oriented.
These and other initiatives will be carried forward. They lend stability to our future and the returns of our customers alike. Indeed, most of them will never cease, because the market never stops changing. These initiatives are having an impact and our business is flourishing, thanks to our marvelous, talented, committed and deeply dedicated employees and distribution partners. They’re smart, they’re motivated, they’re proud of Allianz and they worked hard to ensure that the company enjoyed strong profitability in 2010. I would also like to warmly thank them, on your behalf, for their extraordinary commitment.
What does this mean for Allianz? How will this affect you as an investor? Those are important questions. They matter to us because they matter to you.
Our responsibility at Allianz is to take advantage of these new technologies to create real added value for customers, representatives and brokers as well as to boost our productivity and service quality. I am talking about digitally optimized distribution channels, operating processes, new products and services as well as analysis tools, which provide more insight into customer needs and help us to respond more quickly to new developments.
Dear investors, while we are adjusting to a new global economic reality, our fundamental values remain the same. We are a financial services provider who earns the trust of its customers by guaranteeing security and performance in any situation. Only now that a global economic crisis of historic proportions is starting to fade do clients and the general public recognize the true value of keeping such promises. We continue to have ambitious goals. And we do not rest on laurels based upon what we have achieved up to now. To date, this dual approach – ambitious goals and the will to improve continually month by month, quarter by quarter and year by year – has served us well, allowing us to generate sustainable, stable returns for you, the owners. I hope you will continue to put your trust in us by continuing to invest in Allianz.
The Board of Management’s reports on the business situation and on particular issues were provided on the basis of written presentations and documents that were sent before each meeting to each Super­ visory Board member for preparation. This was also the case with all financial statements and the audi­ tor’s reports. For all management decisions, which required the approval of the Supervisory Board or of
At the extraordinary meeting held on February 24, 2010, the Supervisory Board appointed Mr. Manuel Bauer to the Board of Management as of January 1, 2011, in response to the retirement of Dr. Rupprecht from the Board of Management of Allianz SE (effec­ tive as of December 31, 2010). At the same meeting, we reviewed the extent to which individual members of the Board of Management had achieved their tar­ gets and set their variable remuneration accordingly. Lastly, a discussion on the dividend proposal of the Board of Management was held.
At the meeting held on March 17, 2010, the Supervisory Board adopted a resolution on extending the appoint­ ment of Mr. Booth to the Board of Management until December 31, 2014. The mandates of Mr. Cucchiani and Dr. Faber were extended until December 31, 2011, in view of the fact that both had reached the age of 60. In the rest of the meeting, we dealt primarily with the annual and the consolidated financial state­ ments and the Board of Management’s recommen­ dation for the appropriation of profits from the 2009 fiscal year. KPMG reported on the material findings of the audit. The Supervisory Board gave the necessary approval to the domination and profit transfer agree­ ments of Allianz Common Applications and Services GmbH and AZ Argos 45 Vermögensverwaltungs­ gesellschaft mbH. In addition, it dealt with the agenda for the 2010 General Meeting of Allianz SE and adopted the resolutions proposed by the Supervisory Board regarding the General Meeting. A written and verbal report provided by the Board of Management also gave us a detailed picture of the implementation status of the E.U.’s Solvency II Directive.
In an Executive Session meeting on September 9, 2010, we closely examined the current changes in the German Corporate Governance Code, in particular the issue of diversity at the level of Board of Manage­ ment and the Supervisory Board, and adopted corre­ sponding amendments to the Supervisory Board’s rules of procedure. We discussed possible underlying principles for specifying objectives regarding the Super visory Board’s composition. Subsequently, we dealt with the structure of Supervisory Board remu­ neration. Following a suggestion from the last effi­ ciency review, the Personnel Committee had engaged Kienbaum Management Consultants to prepare a review of current Supervisory Board remuneration. Based on the outcome of this study, we reflected on
On December 15, 2010, the Board of Management and the Supervisory Board issued the Declaration of Compliance in accordance with § 161 of the German Stock Corporation Act (Aktiengesetz). The Declaration was posted on the company website, where it is available to shareholders at all times. Since the last Declaration, Allianz SE has complied with all recom­ mendations made by the Government Commission on the German Corporate Governance Code. It will comply with all the recommendations in the current version of the Code dated May 26, 2010, with the exception of No. 5.4.6 section 2 sentence 1 because the company intends to propose to the General Meeting a transition towards a fixed remuneration system for the Supervisory Board.
Further explanations on Corporate Governance in the Allianz Group are available in the report on Cor­ porate Governance and the Statement on Corporate Management beginning on page 22. The Allianz web­ site www.allianz.com/corporate­governance contains further information on Corporate Governance.
In order to exercise its functions efficiently, the Super­ visory Board has set up an Audit Committee, a Standing Committee, a Personnel Committee, a Risk Committee and a Nomination Committee. The committees prepare the discussion and adoption of resolutions in the plenary session. Furthermore, in appropriate cases, the authority to adopt resolutions has been delegated to the committees themselves. The Conciliation Committee no longer exists because the German Co­Determination Act (Mitbestim­ mungsgesetz), which provides for such a committee, does not apply to Allianz SE. The current members of these committees are set out in the adjacent list.
In the 2010 fiscal year, the Standing Committee held three regular meetings. These related primarily to Corporate Governance issues, preparation for the ordinary General Meeting, the Employee Stock Purchase Plan and review of the Supervisory Board’s efficiency. In an additional meeting during the General Meeting in May 2010, the committee dealt with a shareholder’s motion under the rules of proce­ dure to vote out the person directing the General Meeting. During the fiscal year, the committee passed resolutions requiring approval on the use of Autho­ rized Capital 2010/II for the issue of employee shares and on the granting of loans to managers and Board members.
The Audit Committee held five meetings in the fiscal year 2010, which took place in February, March, May, August and November. Together with the auditors, the committee discussed the Allianz SE and Allianz Group annual financial statements, the management reports and the auditor’s reports. In addition, the committee checked the half year financial report and the other quarterly financial statements and, together with the auditors, went through details of the auditor’s review of these financial statements. After carrying out these checks, the Audit Committee saw no reason to raise objections. The committee also covered the auditor’s engagement and established priorities for the audit. In addition, assignments to the auditors for services not connected to the audit itself were dis­ cussed. The committee also dealt with the risk man­ agement and risk monitoring system, the compliance system and the internal audit system. The committee received reports from the heads of the Group Audit department and Group Compliance department about audit and compliance issues on an ongoing basis. Furthermore, the committee obtained a report on significant audit results for the past fiscal year from the head of the Group Audit department. The Committee regularly received reports from the General Counsel regarding material legal proceedings. In the meeting in November 2010, Group Audit pre­ sented the audit plan for the year 2011.
Chair and Committees of the Supervisory Board As of December 31, 2010 (and subsequent changes)
Standing Committee Dr. Henning SchulteNoelle (Chairman) Dr. Wulf H. Bernotat Dr. Gerhard Cromme Karl Grimm (until December 31, 2010) Peter Kossubek (since January 1, 2011) Rolf Zimmermann www.allianz.com/corporate-governance
The Risk Committee held two meetings in 2010. At both meetings, the Board of Management presented the current risk situation of the Allianz Group which we subsequently discussed with the Board of Man­ agement. The committee’s work also covered the effects of the financial market crisis, the treatment of risks arising from natural catastrophes and inflation risks, and the strategic asset allocation adopted by the Group Capital Committee, which serves as a basis for capital investment decisions. The committee also dealt in detail with the effects of the planned risk­ oriented changes to European solvency regulations (equity finance requirements) for insurance com­ panies (Solvency II). It also reviewed the risk­related statements in the annual accounts, consolidated financial statements and management reports, and reported to the Audit Committee on the results of this preliminary review.
In compliance with special legal provisions applying to insurance companies, the statutory auditor and the auditor for the review of the half year financial report are appointed by the Supervisory Board of Allianz SE and not by the General Meeting. The Supervisory Board has appointed KPMG AG Wirtschaftsprüfungs­ gesellschaft, Munich, as statutory auditor for the an­ nual accounts and the consolidated financial state­ ments as well as for the review of the half year financial report. KPMG audited the financial state­ ments of Allianz SE and Allianz Group as well as the respective management reports and issued an audit certificate thereon without any reservations. The consolidated financial statements were prepared on the basis of the international financial reporting standards, as applied in the European Union. The half year financial report and the other quarterly financial statements were also reviewed by KPMG.
11 2 Letter to the Investor 6 Supervisory Board Report 12 Members of the Board of Management 13 International Executive Committee 15 Members of the Supervisory Board 16 Allianz Share 20 Services for Allianz Investors
Due to his partial retirement effective as of Decem ­ ber 31, 2010, Mr. Grimm resigned from the Super­ visory Board of Allianz SE. The Supervisory Board has expressed its gratitude for, and recognition of, his commitment. By resolution of December 20, 2010, the local court (Amtsgericht) of Munich appointed Mr. Heiß as Mr. Grimm’s successor on the Supervisory Board effective as of January 1, 2011, until the next General Meeting. The current term of the Supervisory Board expires following the ordinary General Meeting in 2012.
Effective as of January 1, 2011, the Supervisory Board has appointed Mr. Bauer to the Board of Management of Allianz SE. Mr. Bauer is the Board member re­ sponsible for Growth Markets assuming Dr. Zedelius’ previous responsibilities. He has worked for the Allianz Group for many years and was most recently responsible for the Allianz region Central and Eastern Europe, Middle East and North Africa.
Dr. Faber will retire at the end of 2011. Mr. Ralph, cur­ rently the Allianz SE Board member responsible for the insurance business in North America and Mexico, will additionally take over Dr. Faber’s board respon­ sibility for global Asset Management effective as of January 1, 2012. Initially he will assume the role of Chief Operating Officer at Allianz Global Investors AG on April 1, 2011.
International Executive Committee The International Executive Committee includes all members of Allianz SE’s Board of Management and heads of major Allianz subsidiaries. Chaired by Michael Diekmann, this body discusses overall strategic issues for the Allianz Group.
15 Maximilian Zimmerer, Allianz Deutschland AG/ Allianz Lebensver sicherungs-AG, Allianz Private Krankenver sicherungs-AG
23 Gerhard Rupprecht, Allianz SE, Munich 24 Terry Towell, Allianz Australia, Sydney 25 Andree Moschner, Allianz Deutschland AG/
26 Gary C. Bhojwani, Allianz Life Insurance Company of North America 27 Werner Zedelius, Allianz SE, Munich 28 Markus Rieß, Allianz Deutschland AG, Munich 29 Jay Ralph, Allianz SE, Munich 30 George Sartorel, Allianz S.p.A., Milan
Dr. Gerhard Cromme Vice Chairman Chairman of the Supervisory Board, ThyssenKrupp AG
Dr. Wulf H. Bernotat Former Chairman of the Board of Management, E.ON AG
After an increase of 16.2 % to € 87.15 in 2009, our share price held firm at year-end despite a difficult trading environment for financial stocks in 2010. Very low interest rates affected our share price negatively, especially over the summer, but Allianz’s share performance gained ground during the final quarter when the interest rates rose again. As in 2009, our shares performed slightly better than the sector average. While Allianz’s annual performance in 2010 was 2.0 % with a closing price of € 88.93, the total return, i.e. performance plus dividend payment, amounted to 7.4 %. The STOXX Europe 600 Insurance performance stood at 1.6 % and its total return at 5.5 %. Thus the Allianz share, as in the previous year, did better than the sectoral average. Upon publication of the results for fiscal year 2010, 63 % of financial analysts recommended buying Allianz shares. The average target price was € 114.83. For up-to-date information on analysts’ recommendations, please visit www.allianz.com/analystsrecommendations.
However, the increase in our share price in 2009 and 2010 has not yet compensated for its loss of value in 2008. As a result, the longer-term performance based on a five- and ten-year comparison is still negative. This is in line with the average performance of the insurance sector. At www.allianz.com/share we offer a share calculator, with which the performance of an investment in Allianz shares can be calculated.
Allianz Share – Allianz’s share price has held up quite well in a tough climate for financial stocks. – We propose to the Annual General Meeting that the dividend per share should be
2 Letter to the Investor 6 Supervisory Board Report 12 Members of the Board of Management 13 International Executive Committee 15 Members of the Supervisory Board 16 Allianz Share 20 Services for Allianz Investors
We want our shareholders to participate in our strong results and for this reason we propose to the Annual General Meeting that the dividend payment per share should be increased from € 4.10 to € 4.50. This equals a dividend yield of 5.1 %. With respect to net income for the year 2010, the payout ratio is 40 %. 3
Dividend yield as of 12/31 % 5.1 4.7 4.7 Payout ratio 3 % 40 40 40 Return on equity after income tax 3, 4 % 11.9 12.5 9.9 1 In comparison with EURO STOXX 50; source: Bloomberg.
Security Codes WKN 840 400 ISIN DE 000 840 400 5
In 2010 around 73 % of total trades in Allianz shares were processed on German stock exchanges (including Xetra). In the meantime, OTC trading platforms are also gaining in importance.
Weighting of the Allianz share in major indices as of December 31, 2010
With around 484,000 shareholders, Allianz is one of the largest publicly owned corporations in Europe. All of our shares continue to be held in free float. At the end of the year, 84 % were held by institutional investors and 16 % by private investors. The breakdown by region shows that 79 % of Allianz shares were held by European investors, while 21 % were held by nonEuropean investors. Year-on-year, the number of shareholders remained stable.
Shareholder structure as of December 31, 2010 (December 31, 2009) in % of subscribed capital
Regional shareholder structure as of December 31, 2010 (December 31, 2009) in % of subscribed capital
Communication with the Capital Markets Communication with investors is very important to us. At numerous roadshows in Europe, the U.S.A., Asia and Canada, members of the Board of Management and our Investor Relations (IR) team presented Allianz’s business development and strategic direction in 2010. Overall, we held 364 meetings with institutional investors and analysts, including the meetings at our headquarters in Munich. Investors and analysts showed a strong interest in our analysts’ conference on the previous year’s results and our telephone conferences on the quarterly figures.
Our Munich Capital Markets Day was also well attended, where top managers presented Allianz’s global lines of business. Management answered questions from institutional investors and analysts at nine other international investor conferences. Dialogue with private shareholders is another key component of our IR work. As in the previous year, we processed around 8,500 of their enquiries in 2010.
The work of our IR team was again recognized by analysts and portfolio managers in 2010.
For the fourth consecutive time, we ranked top of the European insurance sector in the renowned “Extel Pan European Survey” by Thomson Reuters, which assessed the work of 45 European insurance IR teams.
The finance magazine “Institutional Investor” selected our IR team in 2010 as the number 2 in European insurance.
– Please visit www.allianz.com/investor-relations for up-to-date information on the performance of the Allianz Group and the Allianz share. We broadcast all our analysts’ conferences live and make them available as recordings and podcasts afterwards.
– Important IR information published on allianz.com is now also available for iPhone and iPod touch through our “Investor App”. This service – available in the Apple App Store – provides the Allianz share price, IR announcements, analysts’ presentations, podcasts of analysts’ conferences and the financial calendar. A similar service is also available on m. allianz.com for mobile phone and BlackBerry users.
As we can never rule out changes of dates, we recommend verifying them on the Internet at: www.allianz.com/financialcalendar.
May 4, 2011 Annual General Meeting May 12, 2011 Interim Report 1st quarter 2011 August 5, 2011 Interim Report 2nd quarter 2011 November 11, 2011 Interim Report 3rd quarter 2011 February 23, 2012 Financial press conference for the financial year 2011 February 24, 2012 Analysts’ conference for the financial year 2011 March 23, 2012 Annual Report 2011 May 9, 2012 Annual General Meeting
ur In ve st or s 2 Letter to the Investor 6 Supervisory Board Report 12 Members of the Board of Management 13 International Executive Committee 15 Members of the Supervisory Board 16 Allianz Share 20 Services for Allianz Investors
Good Corporate Governance is essential for sustainable business performance. This is why existing Corporate Governance structures need to be constantly reviewed and, whenever necessary, developed further.
The German Corporate Governance Code now in effect was amended on May 26, 2010. Besides repeating important legal provisions, the Code also contains recommendations and suggestions for proper Corporate Governance. There is no legal obligation to comply with these standards. Under § 161 of the German Stock Corporation Act, listed companies are, however, obliged to make an annual Declaration of Compliance with the terms of the Code’s recommendations on a “comply or explain” basis. The declaration is meant to explain any deviations from the Code’s recommendations. The Declaration of Compliance issued by the Board of Management and Supervisory Board and the company’s position with regard to Code suggestions can be found in the Statement on Corporate Management on pages 28 to 30.
In Germany the Code is taken as the benchmark of good Corporate Governance and control. Surveys show that acceptance of the German Corporate Governance Code remains high. At year-end 2010, the DAX-30 companies met an average of 97 % of all recommendations, while in the M-DAX around 93 % and in the S-DAX about 87 % of the recommendations had been followed by the companies.
The members of the Board of Management have joint responsibility for overall management. Notwithstanding the overall responsibility of all members of the Board of Management, the individual members of the Board head the departments they have been assigned independently and on their own responsibility. In addition to divisional responsibilities for each business segment, there are also functional responsibilities; the latter include the Chairman’s division, the Controlling /Reporting/Risk division, the Finance division and the Chief Operating Officer’s division. The business division responsibilities focus either on geographic
Co rp or at e Go ve rn an ce regions or on operating segments. As of December 31, 2010, these included Insurance Europe, NAFTA markets, Insurance German Speaking Countries, Insurance Growth Markets, Global Insurance Lines & Anglo Markets and Asset Management Worldwide. Rules of procedure specify in more detail the work of the Board of Management. In these rules, the Board has in particular regulated the specific responsibilities of Board members, matters reserved for the whole Board and other ways to pass resolutions.
The Board meets regularly at Board of Management meetings convened by the Chairman of the Board. Each member of the Board may request a meeting while at the same time providing notification of the agenda. Under the Board’s rules of procedure, the entire Board makes decisions on a resolution by a simple majority of the members participating.
– The task of the Group Finance Committee is the preparation and monitoring of the principles of the Groupwide investment policy as well as Group financing and capital management.
– The Group Risk Committee is responsible for establishing and overseeing a Group-wide risk management and risk monitoring system, including dynamic stress tests.
The Board has also set up an International Executive Committee as a permanent Group commission. The Group commission has the task of preparing decisions reserved for the entire Board of Management of Allianz SE, submitting proposals for resolutions and ensuring the exchange of information within the Group. The Group Compensation Committee is comprised of both Board members and executives reporting to the Board of Management of Allianz SE and satisfies the requirements of the Regulation governing Compensation Systems in the Insurance Sector (Versicherungs-Vergütungsverordnung) that took effect in December 2010. It is responsible for designing, monitoring and improving compensation systems.
Every year, it must submit a report on the results of its monitoring, along with proposals for improvements.
Group Finance Committee Dr. Paul Achleitner Oliver Bäte Dr. Joachim Faber Dr. Werner Zedelius
The German Co-Determination Act (Mitbestimmungsgesetz ) no longer applies to Allianz SE because it has the legal form of a European Company (SE). The size and the members of the Supervisory Board are now based on the European general regulations on European Companies. These regulations have been implemented by provisions in the Statutes and by the Agreement Concerning the Participation of Employees in Allianz SE, which was signed on September 20, 2006 with representatives of European Allianz employees. This agreement can be found on our website under www.allianz.com/allianz-se.
The Supervisory Board holds regular meetings in March, in April or May, in September and in December. Additionally, extraordinary meetings may be convened as needed. The committees also hold regular meetings. The Supervisory Board takes all decisions based on a simple majority. The special decision requirements for the appointment of members to the Board of Management contained in the German Co-Determination Act and the requirement for a Conciliation Committee no longer apply to an SE. In the event of a tied vote, the casting vote lies with the Chairman of the Supervisory Board. The Chairman of the Supervisory Board of Allianz SE may only be a shareholder representative. In the event of a tied vote, if the Chairman of the Supervisory Board is not present, the casting vote lies with the deputy chairperson from the shareholder side. A second deputy chairperson is elected on the proposal of the employee representatives, but has no casting vote.
The Supervisory Board regularly reviews the efficiency of its activities. The efficiency review is prepared by the Standing Committee. The plenary Supervisory Board then offers recommendations for improvements and, where appropriate, adopts corresponding measures.
The Standing Committee has five members. Its members include the Chairman of the Supervisory Board as well as two members nominated by the shareholder side and two nominated by the employee side of the Supervisory Board. One of the members nominated by the employee side to the Standing Committee shall be the Supervisory Board deputy chairperson that has been elected upon proposal by the employee side. The Chairman of the Supervisory Board also serves as chairman of this committee. The Standing Committee is responsible for the approval of certain transactions that need to be approved by the Supervisory Board. These include, in particular, certain capital transactions and acquisitions or divestments. Furthermore, it is responsible for preparation of the Declaration of Compliance required by § 161 of the German Stock Corporation Act as well as for the regular review of the Company’s Corporate Governance. It submits proposals for examining the efficiency of the Supervisory Board’s activities to the Supervisory Board plenary session.
In December 2007, in compliance with a recommendation of the German Corporate Governance Code, the Supervisory Board established a Nomination Committee comprising the Chairman of the Supervisory Board and two other shareholder representatives elected by the shareholder side. The Chairman of the Supervisory Board also serves as chairman of this committee. The committee is responsible for drawing up selection criteria for shareholder representatives and identifying suitable candidates for the election proposals of the Supervisory Board to the General Meeting. In addition to the statutory requirements, the committee ensures compliance with the Code’s recommendations on the composition of the Supervisory Board and also monitors the diversity of its members.
Supervisory Board targets regarding its composition At its meeting on December 15, 2010, to implement a new recommendation by the Code, the Super - visory Board specified the following objectives for its composition.
The following requirements and objectives apply to the composition of Allianz SE’s Supervisory Board: I. Requirements relating to the individual members of the Supervisory Board 1. General selection criteria: – Managerial or operational experience – General knowledge of the insurance and financial services business – Willingness and ability to make sufficient commitments on time and substance – Fulfillment of the regulatory requirements: – Reliability – Knowledge of the field of corporate governance and regulation 1
Co rp or at e Go ve rn an ce have any business or personal relations with Allianz SE or its Board of Management, which could cause a conflict of interests. Moreover, one member shall be independent within the meaning of § 100(5) of the German Stock Corporation Act.
On the basis of the SE Agreement concerning the Participation of Employees, two employee representatives from other member states of the E.U. are already members of the Supervisory Board.
Members of the Supervisory Board are appointed at the Annual General Meeting. As regards the election of employee representatives, the Annual General Meeting is bound by the proposals of the employees. The Annual General Meeting also approves the actions taken by the Board of Management and the Supervisory Board. It decides on the use of profits, capital transactions and the approval of intercompany agreements, as well as the remuneration of the Supervisory Board and changes to the Company’s Statutes. Changes to the Statutes require the backing of at least half of the share capital or a two third majority of the votes cast in accordance with European regulations and the Statutes. Each year, an ordinary
The Corporate Governance Statement pursuant to § 289 a of the German Commercial Code (Handelsgesetzbuch - HGB) forms part of the consolidated management report. According to § 317 (2), sentence 3 of the HGB, the information provided pursuant to § 289 a of the HGB does not have to be included within the scope of the audit.
The financial calendar for 2011 and 2012 is also presented herein on page 20.
The total holdings of all of the members of the Board of Management and the Supervisory Board in Allianz SE amounted to less than 1 % of the Company’s issued stock as of December 31, 2010.
The members of the Board of Management and the Supervisory Board or related parties are required by the German Securities Trading Act (Wertpapierhandelsgesetz ) to disclose any acquisition or divestment of shares of Allianz SE worth € 5,000 or more within a calendar year. These notifications are published on our website at www.allianz.com/corporate-governance.
1. Since the last Declaration of Compliance as of December, 17, 2009, which referred to the German Corporate Governance Code in its version as of June, 18, 2009, Allianz SE has complied with all recommendations made by the Government Commission on the German Corporate Governance Code then in force.
The listed Group company Oldenburgische Landesbank AG issued its own declaration of compliance in December 2010, which states that Oldenburgische Landesbank AG complies with all of the recommendations of the German Corporate Governance Code.
In cases of doubt, employees within the compliance department are responsible for providing advice to the business units on regulatory provisions and on the creation, implementation, and monitoring of compliance with internal guidelines and standards. They also give employees regular training on the regulations that apply to them.
Code of Ethics In addition to the Code of Conduct, Allianz SE has adopted a special Code of Ethics, which is directed at the members of the Board of Management and at senior management of certain departments, primarily in the financial area. Its rules govern ethical and proper conduct in both the private and professional spheres, particularly relating to the handling of conflicts of interest and compliance with high standards of corporate disclosure. The Code of Ethics can be found on the Internet at www.allianz.com/corporate-governance.
The standards of conduct established by the Allianz Group’s Code of Conduct for Business Ethics and Compliance serve to implement these guidelines and principles, and are obligatory for all employees worldwide. The Code of Conduct is available on the Internet via the following link: www.allianz.com/corporate-governance.
The Code of Conduct and the internal guidelines derived from it provide all employees with clear guidance on conduct that is in accordance with the values of Allianz. In order to transmit the principles of the Code of Conduct and other compliance guidelines and controls effectively and on a sustained basis, Allianz has developed interactive training programs around the world. These provide practical guidelines which enable employees to come to their own decisions and avoid potential conflicts of interest. The Code of Conduct also forms the basis for guidelines and controls to ensure fair dealings with Allianz customers (sales compliance).
A major component of the compliance program of Allianz is a whistleblower system that allows employees to alert the relevant compliance department confidentially about irregularities. Employees who voice concerns about irregularities in good faith should not fear retribution in any form, even if they turn out later to be unfounded.
Restrictions on voting rights and share transfers; exercise of voting rights in case of employee equity participations
Shares may only be transferred with the consent of the Company. The Company may withhold a duly applied approval only if it deems this to be necessary in the interest of the Company on exceptional grounds. The applicant will be informed of the reasons.
1 The following statements are made pursuant to § 289 (4) of the German Commercial Code.
Direct or indirect interests in the share capital of Allianz SE that exceed 10 % of the voting rights have not been reported to Allianz SE; nor is it otherwise aware of any such interests.
Legal and statutory provisions applicable to the appointment and removal of members of the Board of Management and to amendments of the Statutes
The members of the Board of Management of Allianz SE are appointed by the Supervisory Board for a maximum term of five years (Article 9 (1), Article 39 (2) and Article 46 SE Regulation, §§ 84, 85 German Stock Corporation Act, § 5 (3) of the Statutes). Reappointments, in each case for a maximum of five years, are permitted. A simple majority of the votes cast in the Supervisory Board is required to appoint members of the Board of Management. In the case of a tied vote, the Chairperson of the Supervisory Board, who pursuant to Article 42 sentence 2 SE Regulation must be a shareholder representative, shall have the casting vote (§ 8 (3) of the Statutes). If the Chairperson does not participate in the vote, the Deputy Chairperson shall have the casting vote, provided that the Deputy Chairperson is a shareholder representative. A Deputy Chairperson who is an employee representative has no casting vote (§ 8 (3) of the Statutes). If a required member of the Board of Management is missing, in urgent cases the Courts must appoint such member upon the application of an interested party (§ 85 of the German Stock Corporation Act). Members of the Board of Management may be dismissed by the Supervisory Board if there is an important reason (§ 84 (3) German Stock Corporation Act).
German insurance supervisory law requires that members of the Board of Management have the reliability and professional competence needed to manage an insurance company. A person cannot become a member of the Board of Management if he or she is already a manager of two other insurance undertakings, pension funds, insurance holding companies or insurance special purpose vehicles. However, more than two such mandates can be admitted by the supervisory authority if they are held within the same group (§§ 121 a, 7 a German Insurance Supervision Act (Versicherungsaufsichtsgesetz, VAG)). The intention of appointing a member to the Board of Management must be notified to the Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht ) pursuant to §§ 121 a, 13 d No. 1 German Insurance Supervision Act.
The Board of Management is authorized to issue shares as well as to acquire and use treasury shares as follows: It may increase the Company’s share capital, on or before May, 2015, upon approval of the Supervisory Board, by issuing new registered no-par value shares against contributions in cash and/or in kind, on one or more occasions: – up to a total of € 550,000,000 (Authorized Capital 2010/I). The shareholders’ subscription rights for these shares can be excluded, with the consent of the Supervisory Board, for fractional amounts, for safeguarding the rights pertaining to holders of convertible bonds or bonds with warrants, in the event of a cash capital increase of up to 10 % if the issue price of the new shares is not significantly less than the stock market price, and in the event of a capital increase against contributions in kind; and
The Company’s share capital is conditionally increased by up to € 250,000,000 (Conditional Capital 2010). This conditional capital increase will only be carried out to the extent that conversion or option rights resulting from bonds issued by Allianz SE or its subsidiaries on the basis of the authorization of the General Meeting of May 5, 2010 are exercised, or that conversion obligations tied to such bonds are fulfilled.
Domestic or foreign banks that are majority-owned by Allianz SE, may buy and sell Allianz shares for trading purposes (§ 71 (1) No. 7 and (2) German Stock Corporation Act) under an authorization of the General Meeting valid until May 4, 2015. The total number of shares acquired thereunder, together with treasury shares held by Allianz SE or attributable to it under §§ 71 a et seq. German Stock Corporation Act, shall at no time exceed 10 % of the share capital of Allianz SE.
The following compensation agreements have been entered into by the Company with members of the Board of Management or employees for the event of a takeover bid: A change of control clause in the service contracts of the members of the Allianz SE Board of Management provides that, if within 12 months after the acquisition of more than 50 % of the Company’s share capital by one shareholder or several shareholders acting in concert (change of control), the appointment as a member of the Board of Management is revoked unilaterally by the Supervisory Board, or if the mandate is ended by mutual agreement, or if the Management Board member resigns his or her office because the responsibilities as a Board Member are
Board of Management Remuneration In support of transparency for shareholders, and recognizing the new remuneration arrangements introduced from January 2010, this section describes the: – Governance system – Remuneration principles and market positioning – Remuneration structure – Remuneration components – Target setting and performance assessment for variable remuneration – 2010 remuneration and link to performance – Outlook for 2011
February – Appointment of Manuel Bauer as member of the Board of Management effective January 1, 2011 – Determination of variable remuneration award based on the target performance achievement for the: – Annual bonus 2009 – Three-year bonus 2007 - 2009 – Estimation of equity incentive grant 2010
– Review of the horizontal (external) and vertical (internal) appropriateness of remuneration – Preparation of the review of variable pay for 2010 – Individual determination of the 2011 remuneration at target and performance targets for Board Members – Adjustment of fixed remuneration for selected Board Members – Determination of pensions and risk contributions for 2011
Board of Management remuneration is designed to be competitive given the Group’s scale of business activities, operating environment and performance compared to peers. While structured to attract and retain highly qualified executives, the overall goal is to support and encourage sustained value-oriented management.
The key principles of Board of Management remuneration are as follows: – Support for the Group’s strategy: performance targets reflect the Group’s business strategy. Targets measure quantitative financial operating results. In addition, the achievement of qualitative programs and initiatives which are designed to increase the underlying sustainability of the organization are measured. Role modeling of Allianz Leadership Values and the Code of Conduct are additional qualitative considerations.
– Alignment with shareholder interests: an important component of remuneration is dependent upon share price performance.
Full descriptions of the responsibilities of the Supervisory Board and the Personnel Committee are provided on pages 24 to 25.
– The structure of Allianz total reward is more strongly weighted to variable, longer-term remuneration.
Allianz remuneration and benefits arrangements are periodically compared with best practices in the European financial services sector and at other relevant, large corporations. Pension provisions are reviewed periodically to take market practice and development into account.
The Supervisory Board determines the need for any adjustment by taking into account relevant market information, the competitiveness of the total remuneration offer, the performance of the company, general economic conditions and the evolution of Board of Management remuneration relative to remuneration levels within the Group.
There are four main remuneration components, excluding pensions and perquisites, each with approximately the same weighting within annual target remuneration: Base salary, Annual bonus, Three-year bonus and Equity-related remuneration. The split of fixed to variable remuneration in 2010 at target is 25 % :75 %.
2 All members of the Board of Management except Dr. Paul Achleitner (total target remuneration € thou 3,200) and the Chairman.
salary levels. However, total remuneration will differ based on actual performance delivered.
Variable remuneration Variable awards are made under the plan rules and conditions of the “ Allianz Sustained Performance Plan” (ASPP) which consists of the following equallyweighted components: 1. Annual bonus (short-term): a performance-related cash payment which rewards annual achievement of targets.
3. Equity-related remuneration (long-term): consists of virtual shares, known as Restricted Stock Units (RSU). Annual achievement of targets is the basis for the initial grant value. The longer-term performance of the Group is reflected in the Allianz stock price evolution over the four-year vesting period. Payout occurs after five years.
Purpose Variable remuneration aims for balance between short-term performance, longer-term success and sustained value creation. It is designed to balance risk and opportunity to achieve an appropriate level of remuneration in different performance scenarios and business circumstances. It recognizes different levels of performance, providing enhanced reward at times of top performance and reduced reward at times of lower performance.
Pensions and similar benefits Board Members participate in a contribution-based system covering Board service from January 1, 2005.
Prior to 2005, members of the Board of Management participated in a defined benefit plan that provided fixed benefits not linked to base salary increases. The levels of benefit generated for each year of service under this plan were frozen at the end of 2004.
Additionally, all Board Members participate in the Allianz Versorgungskasse VVaG (AVK), a contributionbased pension plan and the Allianz Pensionsverein e.V. (APV), which provides pension benefits for salaries up to the German social security ceiling.
Operation Company contributions for the current pension plan depend on the years of service on the Board of Management of Allianz SE and are invested in a fund with a minimum guaranteed interest rate per year. On retirement the accumulated capital is converted to a lifetime annuity. An additional risk premium of 5 % of regular pension contribution is paid to cover death and disability. Pension is payable from age 60 at the earliest.
Detailed information can be found in the section “Target setting and performance assessment” on pages 40 f.
Operation Generally administered centrally to ensure compliance with provisions and applicable regulations.
The chart below shows the potential value of the offer (excluding pension and perquisites) at different performance outcomes (zero, target and maximum). In addition they show the corresponding proportions delivered through fixed and variable remuneration.
Value of annual offer in various performance achievement scenarios (Example: regular member of the Board of Management with € 700 thou fixed and € 2,100 thou target variable remuneration)
Group targets 50 % – Annual operating profit – Annual net income attributable to shareholders
Qualitative targets 25 % 5 categories that are essential to the 2010 - 2012 Group strategy – “Partner of Choice” for stakeholders (customers, employees, investors, general public) – Profitable growth – Strengthening of competitiveness – Development of market management (e. g. sales channel, customer segments and profitable customer base growth) – Protection of shareholders’ equity
Business Division level – 2010 - 2012 average growth – 2012 return on capital
Sustained increase in share price 1 Additional operating profit targets were set for Dr. Christof Mascher for overseeing Mondial Assistance.
The following section provides additional explanation of each variable component: The Annual bonus award depends on the quantitative and qualitative target achievement for the respective financial year set to achieve an appropriate return on capital, as approved by the Supervisory Board.
The Three-year bonus recognizes sustained target achievement over the three-year performance period as well as a sustainability assessment. Quantitative three-year targets focus on portfolio development, as measured by absolute growth and profit which achieve both an appropriate return on capital and relative peer group performance. The Supervisory Board undertakes an initial assessment of achievement versus target based on a portfolio development matrix.
This initial assessment, considering growth and return on capital, ensures that the final award not only depends on a high profit margin but also on profitable growth. Also, to avoid payouts due to general short-term variability not related to sustainable performance, growth is measured over a three-year period.
We discuss below the 2010 remuneration results and the link to performance against targets. The performance results take into account financial considerations as outlined in the discussions of financial performance throughout this Annual Report.
Three-year bonus: Three-year performance achievement for the 2010-2012 plan will be measured and bonus outcomes determined during the first half of 2013. For accrual purposes, the target achievement of the Annual bonus serves as the notional indication.
Equity remuneration: In accordance with the approach described earlier, a number of RSU were granted to each Board Member in March 2011. At the time of grant, each award had the same “fair value” as the award for the 2010 annual bonus and it is this figure which is shown in the Total Remuneration Table.
Pensions: Company contributions for the current plan are 30 % of base salary, increasing to 37.5 % after five years and to 45 % after ten years service on the Board of Management of Allianz SE. These are invested in a fund and have a minimum guaranteed interest rate of 2.75 % in each year. If the net annual return of the AVK exceeds 2.75 %, the full increase in value is credited in the same year.
For members with pension rights in the frozen plan, the above contribution rates are reduced by an amount equivalent to 19 % of the annual pension from that plan.
A pension can be received at the earliest from age 60, except for cases of occupational or general disability for medical reasons, when it may become payable earlier-on, or in the case of death, when a pension may be paid to dependents. Surviving dependents normally receive 60 % (widow/er) and 20 % (per child) of the original pension to the employee, with the aggregate not to exceed 100 %. In the AVK a benefit appreciation will occur in cases of death or disability. Should board membership cease prior to retirement age for other reasons, the accrued pension right is maintained if vesting requirements are met.
The following table sets out the 2010 service cost and contributions for each member of the Board of Management of Allianz SE.
Total Pensions Total incl. Pensions € thou € thou € thou € thou € thou € thou € thou € thou € thou 2009 — — — — — — — — —
To provide disclosure comparable to prior years, the remuneration table includes the notional annual accrual of the Three-year bonus for 2010 to 2012. However, as in the 2009 report, we also disclose below the actual total remuneration per member of the Board of Management for each respective year. For this purpose, the “Total” for 2010 excludes the notional annual value of the Three-year bonus 2010 to 2012 and the “Total” for 2009 1 (in parenthesis) includes the full payout of the Three-year bonus 2007 to 2009: Michael Diekmann € 4,312 (5,560) thousand Dr. Paul Achleitner € 3,011 (3,720) thousand Oliver Bäte € 2,643 (3,093) thousand Clement B. Booth € 2,809 (3,664) thousand Enrico Cucchiani € 2,596 (3,400) thousand Dr. Joachim Faber € 2,778 (3,718) thousand Dr. Christof Mascher € 2,484 (983) thousand Jay Ralph € 2,471 (—) thousand Dr. Gerhard Rupprecht € 2,421 (3,317) thousand Dr Werner Zedelius € 2,390 (3,967) thousand
The total remuneration of the Board of Management of Allianz SE for 2010, excluding the notional annual accrual of the Three-year bonus, amounts to € 28 million (2009: € 36 million including the payout of the Three-year bonus for the period 2007-2009).
The sum of total remuneration of the Board of Management of Allianz SE and the pension service costs for 2010 (excluding the notional annual Midterm Bonus accrual) amounts to € 32 million (2009: € 40 million including the payout of the Three-year bonus for the period 2007-2009).
Grants and outstanding holdings in equity incentives: The equity-related remuneration which applied before 2010 consisted of two vehicles, virtual stock options, known as Stock Appreciation Rights (SAR) and virtual stock awards, known as Restricted Stock Units (RSU). The new arrangements continue to award RSU. The table below shows the number of SAR and RSU held as of December 31, 2010 and the approximate number of RSU granted in March 2011 for performance in 2010.
1 The values for total remuneration for 2009 now include the actual fair values of equity grants and therefore differ from the estimated figures shown in last years’ report. 2 As disclosed in the Annual Report 2009 the equity related grant 2010 is deemed to have been granted to participants as part of their 2009 remuneration. The disclosure in the Annual Report 2009 was based on a best estimate of the Stock Appreciation Rights (SAR) and Restricted Stock Units (RSU) grants. The actual grants, as of March 11, 2010, deviate from the estimated values and have to be disclosed accordingly. The actual grants as of March 11, 2010 under the Group Equity Program in form of SAR and RSU are as follows: Michael Diekmann: SAR 20,884 , RSU 10,367, Dr. Paul Achleitner: SAR 13,923, RSU 6,911, Oliver Bäte: SAR 12,183, RSU 6,048, Clement B. Booth: SAR 15,572, RSU 7,730, Enrico Cucchiani: SAR 9,757, RSU 4,843, Dr. Joachim Faber: SAR 15,764, RSU 7,825, Dr. Christof Mascher: SAR 7,892, RSU 3,918, Dr. Gerhard Rupprecht: SAR 10,093, RSU 5,010, Dr. Werner Zedelius: SAR 16,296, RSU 8,089. The remuneration system valid until December 2009 is disclosed in the Annual Report 2009 (pages 17ff.).
The Allianz Equity Incentive is accounted for as a cash-settled plan. Any changes in fair value of the grants are accrued as compensation expense over the relevant vesting period. Upon vesting, any changes in the fair value of the unexercised SAR are recognized as compensation expense. The Equity Incentive compensation expense in 2010 amounted to € 5,246 thousand, for Mr. Diekmann € 697 thousand, for Dr. Achleitner € 434 thousand, for Mr. Bäte € 407 thousand, for Mr. Booth € 639 thousand, for Mr. Cucchiani € 474 thousand, for Dr. Faber € 509 thousand, for Dr. Mascher € 412 thousand, for Mr. Ralph € 443 thousand, for Dr. Rupprecht € 492 thousand and for Dr. Zedelius € 739 thousand.
SAR are released to plan participants upon expiry of the vesting period, assuming all other exercise hurdles are met. For SAR granted until and including 2008, the vesting period was two years. For SAR granted from 2009, the vesting period is four years. SAR can be exercised on the condition that the price of the Allianz SE stock is at least 20 % above their strike price at time of grant. Additionally, the price of the Allianz SE stock must have exceeded the Dow Jones EURO STOXX Price Index (600) over a period of five consecutive trading days at least once during the plan period. RSU are released to plan participants on the first trading day after the end of the vesting period.
Termination of service Board of Management contracts are normally initially set for a three-year period, renewable at the end of the term. If renewed, a maximum period of five years applies for the further term(s), or shorter if age 60 is reached before then. Arrangements for termination of service (including retirement) are as follows: Board Members who were appointed before January 1, 2010 and who have served a term of at least five years are eligible for a six-month transition payment when leaving the Allianz SE Board. Board Members receiving a transition payment are subject to a six months non-compete clause. The payment is calculated based on last base salary and a proportion of the annual target bonus. An Allianz pension, where immediately payable, is taken into account in adjusting transition payment amounts. Current Board Members are eligible to use the company car for a period of 12 months after their retirement.
Special terms apply if service is terminated as a result of a “change of control”. A change of control requires that a shareholder of Allianz SE, acting alone or together with other shareholders, holds more than 50 % of voting rights in Allianz SE. Termination as a result of change of control occurs where within twelve months of the change of control (i) the Management Board appointment is unilaterally revoked by the Supervisory Board or (ii) the Board Member terminates service
by resignation due to a substantial decrease in managerial responsibilities and without giving cause for termination, or (iii) a Management Board appointment is terminated by mutual agreement or where it is not extended within two years of the change of control.
Internal and external Board Appointments Where a member of the Board of Management holds an appointment in another company within the Allianz Group, the full remuneration amount is transferred to Allianz SE. In recognition of the benefits to the organization, Board of Management members are supported if they accept a limited number of nonexecutive supervisory roles in appropriate external organizations. In these cases, 50 % of the remuneration received is paid to Allianz SE. A Board Member retains the full remuneration only where the Supervisory Board qualifies the appointment as a personal one. Remuneration paid by external organizations is shown in the annual reports of the companies concerned. The remuneration relating to the external appointment is set by the governing body of the relevant organization.
– A key focus for 2011 will be the continuing review of compliance with the emerging national and international regulations applying to our sector.
– Contributions as a percentage of base salary currently paid by the company for the contributionbased pension plan will decrease from 2011 onwards to achieve target provision level using new actuarial and increasing tenure assumptions: Allianz SE Board Service
For a list of current external appointments, please refer to page 302.
Executive remuneration below the Board of Management In support of greater transparency for shareholders and to align with regulatory requirements this section on executive remuneration below the Board of Management describes the: – Governance system – Framework and minimum standards – Remuneration principles – Remuneration components – 2010 Remuneration – Outlook for 2011
For the purpose of this report, senior executives are defined as Allianz employees who may either have material impact on the company’s financial or risk positions, or lead critical operations of the Group (approximately 160 individuals). In general, the same principles and governance standards described for the Board of Management apply to the remuneration of senior executives. However, executives below the Board of Management are more directly responsible for specific lines of business or product groups. Likewise, their remuneration is more closely aligned with their specific business, country and/or regional operating environments. Consequently there is a higher degree of variation in remuneration practices and levels.
The general objective for all Allianz remuneration structures is to offer competitive reward in terms of components, structure and level which allows Allianz to attract, motivate and retain high performing employees without encouraging excessive risk-taking.
Remuneration governance across Allianz is based on five key principles: – Effective committees – Written guidelines and policies – Appropriate accountabilities – Supervision and monitoring – Effective information flow
– The roles and responsibilities of its members – Operating procedures – Principles and boundaries of remuneration
The members of the GCC in 2010 were the following members of the Allianz SE Board of Management: Michael Diekmann (Chairman), Oliver Bäte (Controlling, Reporting and Risk), Clement Booth (Global Insurance Lines/Anglo Markets), Dr. Joachim Faber (Asset Management Worldwide) and Dr. Gerhard Rupprecht (Insurance German Speaking Countries) with additional HR representation (including remuneration experts) at every meeting and specific further topical experts vetting materials or attending as guests as appropriate.
Beyond local Compensation Committee oversight, the GCC must be informed quarterly of payments or individual agreements exceeding certain materiality thresholds.
In 2010, Allianz conducted a comprehensive remuneration risk assessment for senior executives in companies classified as significant according to VersVergV to confirm that the remuneration structures for senior executives are appropriate to their role, transparent and aligned to the sustainable development of Allianz. The objectives of this review were to develop any recommendations for improving risk mitigation and aligning pay for performance and, ultimately, to confirm compliance with the relevant insurance regulation on remuneration.
– A further review of the existing minimum standards for performance management and the implications for the annual target setting process.
– An effectiveness review of the governance and oversight process, which included operating entity self-assessments against the revised Compensation Committee framework.
In 2010, a number of adjustments were made to executive remuneration programs. A comprehensive review of governance processes also provided support for initial program changes and informed the continuous improvement objectives going forward. However, the overall key principles of executive remuneration strategy are enduring. These are to: – Provide a transparent, fair and integrated offer to attract, motivate and retain highly qualified executives.
Remuneration structures have been designed in general to mitigate inappropriate risk-taking as follows: – Caps are in place on all incentives to ensure that extreme performance outcomes which might encourage risk-taking are not rewarded.
– Risk is considered at all levels where individuals can affect it.
Performance link Annual adjustments also take account of sustained performance in the role, the performance of the company, general economic conditions and the level of increases awarded elsewhere in the Group.
Variable remuneration Purpose In general, variable remuneration is designed to encourage and reward achievement of both annual performance goals and the sustainable success of the Group and local companies.
Performance link Variable remuneration is structured to align with risk positioning strategy and to reward the personal contribution of the individual.
Operation Annual and where applicable, multi-year targets are set, communicated and documented in advance of the performance period and generally conform with SMART (specific, measurable, attainable, relevant and time-bound) principles. In the case of breaches of the Code of Conduct, compliance or other relevant criteria, payout can be reduced partially or in full.
For operations that have either asset management or alternative investment business for Allianz or thirdparty assets, incentive programs and remuneration structures are consistent with the risk positions and competitive markets in which they operate. These may deviate from the general Allianz variable remuneration program descriptions and may include profit sharing, co-investment and other cash-based incentive plans. These businesses use appropriate risk control measures. Oversight is performed through their respective Compensation Committees whose members have the requisite competence and industry expertise to govern and endorse these reward structures.
In its meeting on January 13, 2011, the Allianz SE Board of Management decided that Dr. Christian Finckh (Chief Human Resources Officer, Allianz SE), Thomas Münkel (Chief Governance Officer, Allianz SE), Dr. Thomas Naumann (Head of Group Planning and Controlling, Allianz SE) and Dr. Werner Zedelius (Member of the Allianz SE Board of Management) will become additional members of the Group Compensation Committee with immediate effect. Dr. Werner Zedelius takes over the chair of the Group Compensation Committee from Michael Diekmann who will remain on the Committee as a regular member. Dr. Gerhard Rupprecht leaves the Committee upon his retirement effective December 31, 2010. These changes are made both to provide additional expertise and capacity on the Committee and to comply with German Insurance Remuneration Regulation. 3
As a result of the review of key executive remuneration contained in the 2010 Compensation Report to the Board of Management and the Supervisory Board, there will also be changes to the remuneration structures covering certain senior executives.
3 In accordance with the German Insurance Remuneration Regulation, Compensation Committee membership in Allianz generally will not solely consist of Board Members/Managing Directors and will also include representatives of the business as well as representatives of HR and control functions. In order to avoid potential conflicts of interest, attention is paid to ensuring that each Compensation Committee comprises members whose own remuneration is not covered by its remit.
The structure of the remuneration of the Supervisory Board complies with the German Corporate Governance Code and is regularly reviewed with respect to additional German, European and international recommendations and regulations.
The remuneration of the Supervisory Board is designed primarily to support alignment with stakeholder interests, while also establishing sufficient separation from Board of Management incentives to allow for proper oversight of business and executive remuneration decisions.
– The remuneration takes into account the individual functions and responsibilities of Supervisory Board Members, such as chair, or vice-chair or committee mandates.
Basic remuneration Three components make up the basic remuneration 1 of a member of the Supervisory Board of Allianz SE.
– Long-term variable remuneration: focuses on three-year performance. Performance is measured by the growth of consolidated earnings-per-share (EPS) compared to the level achieved three years earlier. 3 Zero payout occurs if no growth (0 %) is achieved, and a maximum payout occurs if 40 % EPS growth is achieved.
For both variable remuneration components, payouts only occur if EPS is above an initial hurdle of € 5 earnings -per-share.
3 € 60 for each tenth percentage point by which the Group’s earnings-per-share increased over the past three years.
Attendance fees In addition, members of the Supervisory Board receive a € 500 attendance fee for each Supervisory Board or committee meeting that they attend in person. This sum remains unchanged if several meetings occur on one day or when various meetings are held on consecutive days.
The table below provides an overview of the basic remuneration for different Supervisory Board positions in 2010. The detailed individual result for each member is in the table which follows.
€ thou € thou € thou € thou € thou € thou 2009 — — — — — —
Legend: C = Chairperson of the respective committee, M = Member of the respective committee. 1 Audit Committee.
Loans to members of the Supervisory Board On December 31, 2010, there were no outstanding loans granted by Allianz Group companies to members of the Supervisory Board of Allianz SE.
A regular Supervisory Board Member shall receive a fixed remuneration of € 100 thousand per year, a deputy Chairperson shall receive € 150 thousand and the Chairperson € 200 thousand. The additional committee related remuneration is listed below.
Chairpersons of the Personnel Committee, Standing Committee and Risk Committee € thou 40 Members of the Personnel Committee, Standing Committee and Risk Committee € thou 20 Chairperson of the Audit Committee € thou 80 Members of the Audit Committee € thou 40 Members of the Nomination Committee € thou 0
The new remuneration structure – subject to approval by the Annual General Meeting and its registration with the commercial register – shall come into effect for the business year 2011. As the current German Corporate Governance Code recommends a variable remuneration component for the Supervisory Board, the company is planning to deviate from this recommendation in the future. The reason for such deviation is the belief that a fair, fixed remuneration is more suitable to the control function of the Supervisory Board. The Supervisory Board discussed the changes to the remuneration structure in its September 2010 and December 2010 meetings based on a proposal from the Personnel Committee and following a review of, and advice on, remuneration levels and practices by Kienbaum Management Consultants.
Group Management Report 58 Your Allianz 65 Management Discussion and Analysis 118 Risk Report and Financial Control
In support of recent international debate to move increasingly more Annual Report content online, we have changed our publication strategy and thus the structure of our Group Management Report. We thus now provide the following additional unaudited information, which is not legally required but is nonetheless useful for our readers, for download at www.allianz.com/annualreport: – Our Business – Our Strategy – Allianz Brand – Customer Focus – Our Employees – Sustainable Development
Management Discussion and Analysis 65 Business Environment 65 Economic Environment 2010 66 Business Environment 2010 68 Executive Summary of 2010 Results 69 Total Revenues 69 Operating Profit 70 Non-operating Result 70 Income Taxes 71 Net Income 71 Shareholders’ Equity 73 Recommendation for Appropriation of Profit 73 Events After the Balance Sheet Date 74 Changes in Segment Structure, Presentation and Accounting Policies 74 Other Parts of the Group Management Report 75 Property-Casualty Insurance Operations 76 Gross Premiums Written 78 Operating Profit 82 Property-Casualty Operations by Business Divisions 84 Life/Health Insurance Operations 85 Statutory Premiums 86 Operating Profit 88 Life/Health Operations by Business Division 90 Asset Management 91 Assets under Management 92 Operating Revenues 93 Operating Profit 94 Corporate and Other 95 Earnings Summary Holding & Treasury 95 Earnings Summary Banking 95 Earnings Summary Alternative Investments 96 Overview: 2010 Actual versus Prior Year Outlook 97 Economic Outlook 97 Industry Outlook 98 Outlook for the Allianz Group 99 Overview: Outlook 2011 99 Management’s Assessment of Expected Earnings and
Risk Report and Financial Control 118 Risk Report 118 Overall Risk Profile 118 Market and Business Context 119 Capital Management Framework 122 Risk Management Framework 123 Risk Governance Structure 125 Internal Risk Capital Framework 131 Concentration of Risks 132 Market Risk 136 Credit Risk 139 Underwriting Risk 143 Business Risk 144 Other Risks 147 Disclosures Relating to Financial Instruments 147 Risk Management Priorities for 2011 148 Controls and Procedures 148 Internal Controls over Financial Reporting 149 Risk Capital Controls
Via Mondial Assistance Group, we are the worldwide leader of travel insurance and assistance services, based on revenue .1 Mondial Assistance is one of our fast growing entities, entering new markets and successfully developing highly sophisticated new products. Some services provided by Mondial are sold with our insurance products, thus enriching our global portfolio.
Our Business Allianz is present in about 70 countries and offers a comprehensive range of insurance and asset management products and services to more than 76 million customers.
Insurance Operations We are the leading property-casualty insurer globally and among the top 5 in the life/health business. Most of our insurance markets are served by local Allianz companies, while selected business lines (Global Corporate Customers, Credit insurance, Assistance services, Reinsurance, Worldwide Care) are run globally.
Corporate and Other Activities in this segment include the management and support of the Allianz Group’s businesses through its centralized functions as well as Banking and Alternative Investments. Our banking operations support our insurance business and complement our product offerings in Germany, Italy, France and Central and Eastern Europe.
For further information on board member responsibilities and steering please refer to pages 12 and 35, respectively.
Our Strategy 2010 was a challenging year, but our strong results demonstrate our leading positions in our markets and the consistency with which we have executed our plan. With our proven strategy, resilient business model and strong brand, we are well on our way to building the world’s most trusted financial community.
2. Well-balanced and synergetic business portfolio Our segments and operating entities complement and enrich each other, primarily by serving the diverse needs of our customers. We exploit the group-wide synergies that stem from our strong brand, our capital allocation, functional and industry best practices, as well as from shared operations and joint investments in technology.
For further information on our strategy please refer to www.allianz. com/annualreport www.allianz.com/annualreport
61 58 Your Allianz 65 Management Discussion and Analysis 118 Risk Report and Financial Control
Allianz Brand A brand provides identification and trust for our many customers and stakeholders. Allianz builds on the heritage of a strong brand that is based on two pillars: out­ standing delivery in products, services and sales to clients, and branding that is insightful, consistent and within a global perspective. Our brand conveys a sense of security and trust that helps guide people’s buying decisions.
Some Key Facts about the Allianz Brand – The Allianz Group is active in about 70 countries, with currently 79 % of revenues branded as Allianz. With the planned rebranding in 2011/2012 of Mondial, branded revenues will increase to approximately 80 % of revenues.
– Our one­brand vision, however, leaves room for renowned specialty brands such as PIMCO, the largest fixed income asset manager in the U.S.A., as well as Euler Hermes, the world’s number one credit insurance provider.
– Our Allianz trademark is registered and protected worldwide, as are our web domains. – Based on the Interbrand ranking, the value of the Allianz Brand increased from approximately
Customer Focus We aim to further drive profitable growth and long lasting customer relationships. To these ends, we continue to empower the Market Management function in all our countries to support our businesses’ efforts to strengthen their focus on customers and markets.
Market Management Building on market and customer insights our Market Management function enables us to: – create a holistic view across all relevant customer interactions
– identify strategic customer segments – develop product, service and channel propo sitions – build customer loyalty – align Brand Management with business objectives.
For further information on customer focus at Allianz please refer to www.allianz.com/ annualreport
63 58 Your Allianz 65 Management Discussion and Analysis 118 Risk Report and Financial Control
Talent Management The Allianz Group invested € 130 million (2009: € 147 million) in training and continuing­education measures in 2010 or on average € 980 (2009: € 1,100) per employee worldwide.
For further information on board member remuneration please refer to pages 35 to 46.
For further information on our employees please refer to www.allianz. com/annualreport 2010 Selected Awards
– Our internet portal allianz.com/careers was named “Best Corporate Career Website 2010” by the corporate consultancy firm Potentialpark. – Allianz Germany won the “InnoWard” from the German Insurance Industry’s Professional Training Institute. – Mondial Assistance was recognized as one of the best companies to work for in several regions. – Our company ROSNO was identified as one of “the most attractive employers” by the Russian career platform Superjob and as one of the
Asia-Pacific & Africa: 11.2 1 Including women in positions at the board level as well as three levels below the board level (division, department and team managers).
Sustainable Development Allianz has laid solid foundations over the last 120 years, which have enabled us to navigate a changing environment and evolving markets. As the pace of change accelerates, we continue to integrate sustainability into our business to ensure our continued success.
1. Safeguarding natural resources in our internal operations We monitor and control our impact on the environment, with a special emphasis on the reduction of carbon emissions by Allianz Group companies, through a Group-wide Environmental Management System under the leadership of a Group Environmental Officer.
3. Strengthening long-term and mutually beneficial partnerships with our stakeholders In 2010, Allianz teamed up with partners to launch an initiative that promotes financial literacy and independence in schools. “My Finance Coach” is only one example of how Allianz supports and encourages volunteering among our employees, as well as the use of our corporate expertise and competencies for the community’s benefit.
For further information about sustainable development please refer to www.allianz.com/ annualreport
CO2 Emissions of the Allianz Group in kilograms per employeeKey Figures
Number of green solutions (rounded) 70 50 Assets under management in SRI funds € bn 3.1 4.8 Microinsurance customers (rounded) mn 4.0 3.8
Allianz Group Sustainable Development Report will be available online at www.allianz.com/ responsibility from May 2011.
– Dow Jones Sustainability Index: Included since 2000, Allianz was rated the best primary insurer in 2010 for the fifth year running. – Carbon Disclosure Project: Allianz is a founding member and part of the Carbon Disclosure Leadership Index Germany 2010. – FTSE4Good: Included since 2001, Allianz is one of the longest-standing FTSE4Good companies. – Goldman Sachs GS Sustain: Allianz is recognized as one of three sustainability leaders within the insurance industry. The rating is unique as it combines financial and non-financial assessments.
Business Environment – Positive stock market development in the second half of 2010. Long-term interest rates remained low. – Our operating environment still affected by significant economic uncertainties.
The global economy bounced back strongly in the year under review. At the end of 2010, global industrial production was already back above the level it was at before the economic crisis struck in 2008, and global trade had also almost reached its pre-crisis level. The emerging markets, where overall output in 2010 had already comfortably surpassed the 2008 level, continued to perform substantially better than the mature economies.
The U.S. economy was not particularly dynamic in 2010, with the labor market stabilizing only gradually. Economic performance in the E.U. was a mixed bag. While the Greek economy contracted by around 4 %, Sweden achieved growth of close to 5 %. On the back of a strong recovery in exports and a robust labor market, Germany was an important economic engine in Europe with growth of 3.6 %, whereas the economic recovery in France (1.6 %) and Italy (1.1 %) proved to be comparatively modest to date.
80 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Spain 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
The strong global recovery has created economic tailwinds for the insurance industry. After two difficult years caused by the extreme turbulence of the financial crisis, the industry returned to growth in 2010. The industry is back on track and capital positions have been restored. However, despite the favorable economic conditions, 2010 was by no means plain sailing for the insurance industry. To start with, 2010 was the year with the second highest number of natural catastrophes since 1980; in particular, major earthquakes in Haiti, Chile, China and New Zealand caused huge losses. Moreover, extremely low interest rates remain a key challenge; the recent rise from record lows offers no real respite; yields on German bonds, for example, are still miles away from their 20-year average of 5.5 %. The situation is further complicated by falling credit ratings for some government bonds in the wake of Europe’s sovereign debt crisis; government bonds of OECD countries were supposed to be sound investments but are now in the same class as junk bonds. Last but not least, uncertainties related to Solvency II capital requirements weighed on the sector during the course of the year. Despite the fact that the insurance industry came through the financial crisis largely unscathed, regulators seem to be overly cautious, making the implementation of the new regulatory framework much too burdensome.
In the life sector, the strong global recovery led to robust premium growth, especially in emerging markets where premium income was up by more than 10 %. New business recovered across the board – with the glaring exception of the U.S. market which saw a third consecutive year of declining sales as annuity sales were still subdued. In other major markets, new business benefited not only from high demand for risk products (e. g. term assurance or disability) but also from the revived demand for savings products, reflecting the ever increasing need to save for retirement. High growth in emerging markets reflects mainly robust economic fundamentals: rising household income and wealth drive demand for savings products. As demographic change will not spare these markets, longevity products such as annuities are growing particularly strongly. Investment returns recovered slightly but remained weak given the low yield environment. All in all, we expect assets under management, based on preliminary figures, to have grown by around 10 %. However, the relatively strong rebound in premium growth is not an unfettered blessing. Customers in general remained risk averse, with a preference for guaranteed return products over those where they bore the investment risk, such as unit-linked products. However, such long-term guarantees can carry significant market risks and ultra-low interest rates and pending regulatory changes are driving capital requirements higher. Moreover, in some markets premium growth was driven to some degree by deposit-type business as customers were reluctant to enter long-term savings contracts. Risk appetite did at least appear to increase towards the end of the year, concurrent with the uptick in equities markets. This was especially pronounced in emerging markets where demand for investment-linked insurance products swiftly rebounded.
Profitability stabilized in 2010 as companies showed a willingness to sacrifice volume for better margins and control costs more tightly.
Like the insurance business, the asset management industry benefited from the strong global recovery. In 2010, as in the previous year, we recorded strong net cash inflows, also in comparison to our competitors, which enabled us to further increase our share in our target markets. As of December 31, 2010, total assets under management amounted to € 1,518 billion, an increase of 26.2 % over the previous year, of which third-party assets amounted to € 1,164 billion. While fixed income markets were facing more headwinds arising from higher volatility, changing investment patterns, rising concerns over sovereign debt and increased government oversight, bond flows remained very strong in the first three quarters of 2010, driven by sustained investor demand for both safety and income. In the fourth quarter of 2010 however, the market’s concerns over sovereign debt came to the forefront, pushing interest rates somewhat higher (though interest rates are staying on subdued levels in historic comparison) and reducing the investment returns of bondholders. In contrast, investors only cautiously returned to equity funds despite a very robust development of economic indicators and stock prices being fueled by strong growth in corporate sales and profits. In total, fixed income globally remained the dominant asset class throughout 2010, collecting about 60 % of total net flows into mutual funds, with Emerging Market debt being the most popular investment category.
Executive Summary of 2010 Results – Revenues grew by 9.3 % to € 106.5 billion. – Operating profit increased by 17.0 % to € 8.2 billion. – Net income of € 5.2 billion. – Solvency ratio of 173 %. 1
– The Group’s results are reported by product and type of service: Property-Casualty insurance, Life/Health insurance, Asset Management and Corporate and Other activities.
– Although the majority of profits are still derived from our insurance operations, our Asset Management contributions have grown steadily over recent years.
Management’s assessment of 2010 results Allianz delivered strong results in 2010: revenues grew by 9.3 % (6.2 % on an internal basis 3) and our operating profit increased by 17.0 % to € 8,243 million, reaching its highest level since 2007. All segments contributed positively to the increase, in particular Asset Management.
Property-Casualty gross premiums written were flat on an internal basis. Positive pricing effects of 0.9 % were predominantly driven by our Italian, Australian, British and credit insurance operations. These were offset by a 0.9 % decline in volumes.
Life/Health, with internal growth of 9.6 %, delivered the majority of total revenue growth, driven by strong demand for investment-oriented products as well as higher traditional life business revenues.
Our Asset Management operations recorded very strong internal revenue growth of 29.7 %. Total assets under management increased by € 316 billion, to € 1,518 billion compared to December 31, 2009.
Total revenues from our Banking operations (reported in our Corporate and Other segment), increased by 13.8 % on an internal basis. Following the launch of operations in June 2009, Allianz Bank Germany contributed a full twelve months of operating revenues for the first time.
2 Total revenues include € (115) mn, € (117) mn and € 117 mn from consolidation for 2010, 2009 and 2008 respectively.
Life/Health operating profit increased by 7.4 % to € 2,868 million. The operating investment result grew by € 2,038 million to € 15,988 million as growth in the underlying asset base more than compensated for lower yields. Lower impairments and higher interest and similar income more than offset the decline in fair value income while in 2009 we recorded gains from credit spreads and equity market movements.
Asset Management recorded an outstanding operating profit of € 2,060 million, an increase of € 659 million compared to 2009, due to strong growth in assets 3 Figures prior to 2010 have been restated to reflect a change in the Allianz Group’s accounting policy. For further information please refer to note 4 of our consolidated financial statements.
4 Includes € (47) mn, € (63) mn and € (129) mn from consolidation in 2010, 2009 and 2008 respectively.
Please refer to page 117 for the composition of total revenues.
The Corporate and Other operating loss amounted to € 942 million (2009: € 1,028 million). The difference is mainly due to the Allianz Bank in Germany. The previous year was burdened by non-recurring set-up costs of € 134 million.
Our non-operating loss amounted to € 1,070 million compared to € 1,854 million in 2009.
The non-operating investment result increased by € 251 million to € 1,022 million.
Non-operating income from financial assets and liabilities carried at fair value through income decreased by € 205 million to € (57) million, largely due to a € 160 million lower cumulative change in the fair value of The Hartford warrants.
Realized gains amounted to € 1,539 million, down slightly, by 4.8 %, compared to 2009. Total gains include € 864 million from the sale of shares in the Industrial and Commercial Bank of China (ICBC) (2009: € 666 million). As of December 31, 2010, gross ICBC unrealized gains amounted to € 364 million. Total unrealized gains in shareholders’ equity amounted to € 5,057 million.
The outstanding business performance by our Asset Management segment led to a € 34 million increase in acquisition-related expenses, to € 440 million. The improvement in underlying business performance and the effect from the call repurchasing of 25,680 B-units in the first and third quarter of 2010 (no calls in 2009) compensated for the effect of a 46 % decrease to 30,129 (December 31, 2010) in the number of B-units outstanding. We have now acquired 79.9 % of all outstanding B-units1.
The income tax expense increased by € 1,424 million to € 1,964 million mainly due to higher pre-tax income. In addition, 2009 included € 505 million income from prior year taxes, which was mainly as a result of the aforementioned court ruling. The effective tax rate amounted to 27.4 % (2009: 10.4 %).
Net income from continuing operations increased by € 559 million to € 5,209 million.
4 This does not include non-controlling interests. 5 Solvency according to the E.U. Financial Conglomerates Directive. 6 Off-balance sheet reserves are accepted by the authorities as eligible capital only upon request; Allianz SE has not submitted an application so far. The solvency ratio excluding off-balance sheet reserves would be 164 % (2009: 155) %.
Total revenues and reconciliation of operating profit to net income (loss) 1 € mn € mn € mn
Net income (loss) attributable to: Non-controlling interests 156 48 257 1 Figures prior to 2010 have been restated to reflect a change in the Allianz Group’s accounting policy. For further information please refer to note 4 of our consolidated financial statements.
2 Total revenues comprise statutory gross premiums written in Property-Casualty and in Life/Health, operating revenues in Asset Management and total revenues in Corporate and Other (Banking).
Events After the Balance Sheet Date Increase in ownership in China Pacific Insurance On January 8, 2011 the Allianz Group increased its investment in China Pacific Insurance (Group) Co., Ltd. H shares by USD 855 million.
With the exception of a change in accounting policy for fixed-indexed annuities, there have been no material changes in our presentation and accounting policies in 2010. For further details please refer to note 4 of our consolidated financial statements.
Other Parts of the Group Management Report The following information also forms part of the Group Management Report: – Corporate Governance Statement pursuant to § 289 a of the German Commercial Code (HGB) on pages 28 to 30.
Property-Casualty Insurance Operations – Gross premiums written up by 3.2 % to € 43.9 billion. – Operating profit increased by 5.9 % to € 4.3 billion. – Combined ratio of 97.2 %.
– Our Property-Casualty business offers a broad range of products and services for both private and corporate clients.
– Our product and service offering covers many insurance classes such as accident/disability, property, general liability, and motor.
Overall, gross premiums written increased by 3.2 % or € 1,372 million to € 43,895 million, including positive foreign currency translation effects of € 1,356 million. On an internal basis, revenues remained almost unchanged.
Operating profit increased by € 240 million or 5.9 % and amounted to € 4,304 million. Both our underwriting result (up by € 133 million) and operating net investment income (up by € 101 million) contributed to this improvement. The underwriting result improved in spite of losses from natural catastrophes being € 817 million higher than in 2009.
On a nominal basis gross premiums written increased by 3.2 % or € 1,372 million to € 43,895 million. Of this increase, € 1,356 million related to foreign currency translation effects, primarily from the appreciation of the Australian Dollar, the U.S. Dollar and the Brazilian Real against the Euro.
On an internal basis gross premiums written remained almost unchanged, driven by a positive price effect of 0.9 % and a negative volume effect of 0.9 %. We continued to execute on our differentiated portfolio strategy, namely disciplined underwriting, selective growth and good diversification. This led to some volume decline in segments where rates were still not adequate to ensure profitability. The positive effect of accelerating price increases was mainly reflected in Italy, Australia, the United Kingdom and the Credit Insurance business.
Based on overall growth in gross premiums, the main positive drivers were Australia, South America and Travel and Assistance business, partially offset by Germany, the United States and Italy.
1 We comment on the development of our gross premiums written on an internal basis; meaning adjusted for foreign currency translation and (de-)consolidation effects in order to provide more comparable information.
2 After elimination of transactions between Allianz Group companies in different geographic regions and different segments. Gross premiums written from our specialty lines have been allocated to the respective geographic regions.
3 Gross premiums written of our specialty line Travel and Assistance (Mondial) are now assigned to France as a result of the relocation of their headquarters from Switzerland to France in 2010. Mondial’s share of gross premiums written accounted for 3.5 % in 2010 (2009: 3.2 %). 2009 figures have been retrospectively adjusted.
In analyzing internal premium growth in terms of “price” and “volume” effects, we use four clusters based on the internal growth 2010 over 2009: Growth Cluster 1: Overall positive growth; both price and volume effects are positive. Growth Cluster 2: Overall positive growth; either price or volume effects are positive. Growth Cluster 3: Overall negative growth; either price or volume effects are positive. Growth Cluster 4: Overall negative growth; both price and volume effects are negative.
77 58 Your Allianz 65 Management Discussion and Analysis 118 Risk Report and Financial Control
In Australia gross premiums amounted to € 2,161 million, including a favorable foreign currency translation effect of € 398 million. Internal growth of 8.6 % was largely driven by our retail business following price increases that were applied across most business lines already in 2009. Our motor business saw double-digit growth driven by increased penetration and higher sales of third-party liability for motor fleets. The non-motor business was driven by growth in Household. We estimate the positive price effect to be 5.1 %.
In the Credit Insurance business gross premiums increased by 5.7 % to € 1,767 million. Our re-pricing campaign stimulated the gross premium development despite higher rebates due to a lower claims level. The positive price effect was around 3.0 %.
In Asia-Pacific, gross premiums amounted to € 486 million. Internal growth was 7.3 %, excluding the transfer of Allianz Fire and Marine Insurance Japan to AGCS and the transfer of Sri Lanka from Middle East to Asia-Pacific as well as a positive foreign currency translation effect of € 58 million. Strong double-digit growth in our Malaysian motor business supported the overall volume-driven increase in gross premiums. The price effect was slightly negative, at approxi-
In the United Kingdom, gross premiums stood at € 1,939 million. Excluding a favorable foreign currency translation effect of € 71 million, internal growth was 4.8 %. This positive development was mainly driven by our motor and household retail business, animal health, commercial liability as well as by our business with corporate partners. Our motor business, in particular, contributed to the strong positive price effect of approximately 5.4 %.
In Spain, despite the economic crisis, gross premiums written increased by 2.1 %, adjusted for the portfolio transfer from Spain to AGCS . Overall, gross premiums amounted to € 2,011 million. Our excellent business model, good cycle management and a reduction of discounts led to volume increases in particular in the retail motor business. The positive volume effect was also stimulated by a recovery of private car sales due to the introduction of car scrapping incentives in the fourth quarter of 2009. We estimate the negative price effect at 1.7 %.
The underwriting result improved by € 133 million to € 999 million, benefiting from positive price momentum and strong recovery of our credit insurance business as well as a more favorable run-off result. In contrast, we recorded significantly higher losses from natural catastrophes up € 817 million to € 1,264 million.
The operating net investment income increased by € 101 million to € 3,218 million. Higher income from our equity investments combined with lower impairments more than compensated for a decline in the operating income from financial assets and liabilities carried at fair value through income (net).
79 58 Your Allianz 65 Management Discussion and Analysis 118 Risk Report and Financial Control
an ag em en t R ep or t lower level of large claims and a decline in claims frequency in our credit insurance business following ongoing risk and commercial actions.
The following operations contributed positively to our accident year loss ratio: – Credit insurance business with (0.6) percentage points due to a sharp decline in claims frequency and severity following the drastic risk and commercial measures that have been taken since the end of 2007.
– France with (0.2) percentage points thanks to our active portfolio management including cleaning actions and tariff increases. This improvement more than compensated a higher level of natural catastrophes, such as windstorm Xynthia, recorded in the first half of the year.
– Central and Eastern Europe with 0.3 percentage points mainly due to higher losses from natural catastrophes and a lower average premium as a result of the ongoing economic recession in the region.
Operating net investment income 1 € mn € mn € mn
Interest and similar income (net of interest expenses) 3,588 3,508 4,182 Operating income from financial assets and liabilities carried at fair value through income (net) 18 118 9 Operating realized gains/losses (net) 42 57 37 Operating impairments of investments (net) (9) (75) (437)
Changes in reserves for insurance and investment contracts (premium refunds) (181) (253) 158 Operating net investment income 3,218 3,117 3,695 1 ‘ Operating net investment income’, as defined above, includes the investment-related part (premium refunds) of ‘Change in reserves for insurance and investment contracts (net)’ and therefore differs from the ‘Operating investment result’ as shown in note 6 of our consolidated financial statements.
Operating net investment income improved by € 101 million to € 3,218 million mainly driven by higher interest and similar income and lower impairments on equity securities.
Interest and similar income increased by € 80 million to € 3,588 million net of interest expenses. Equity investments accounted for most of the growth with € 98 million. Fixed income securities contributed a further € 7 million: the positive volume effect from a higher share of debt securities in our portfolio was almost completely offset by the negative impact of lower yields. The total average asset base increased from € 88.6 billion as of December 31, 2009 to € 92.9 billion.
A € 100 million decline in operating income from financial assets and liabilities carried at fair value through income (net) to € 18 million partially offset the overall positive net investment income development.
Loan loss provisions — (18) (17) Operating impairments of investments (net) (9) (75) (437)
Acquisition and administrative expenses (net) (11,044) (10,540) (10,478) Fee and commission expenses (1,024) (995) (1,141) Other expenses (10) — (2)
1 For the Property-Casualty segment, total revenues are measured based upon gross premiums written. 2 Represents claims and insurance benefits incurred (net) divided by premiums earned (net). 3 Represents acquisition and administrative expenses (net) divided by premiums earned (net). 4 Represents the total of acquisition and administrative expenses (net) and claims and insurance benefits incurred (net) divided by premiums earned (net).
Global Insurance Lines & Anglo Markets 15,102 13,666 12,563 14,575 13,854 11,513 10,226 9,700 1,844 1,453 1,760
Middle East and North Africa 76 69 54 73 61 44 35 25 2 1 3 1 Reflect gross premiums written on an internal basis (adjusted for foreign currency translation and (de-)consolidation effects). 2 Net change of reserves related to savings component of UBR-business included in claims since 2009: claims reduction of € 14 mn for 2010 and € 49 mn for 2009. Prior periods have not been retrospectively adjusted.
3 Corporate customer business in France transferred to AGCS in 2009. 4 Corporate customer business in Spain transferred to AGCS in 2010.
5 From July 21, 2008, Koç Allianz Sigorta AS was consolidated following the acquisition of approximately 47.1 % of the shares in Koç Allianz Sigorta AS by the Allianz Group, increasing our holding to approximately 84.2 %.
7 In the beginning of 2009 the marine business of the United States was transferred to Allianz Global Corporate & Specialty. 8 From 1Q 2010 onwards, Allianz Fire and Marine Insurance Japan Ltd. is shown within AGCS. Prior year figures have not been adjusted. 9 Contains income and expense items from a management holding. 10 Represents elimination of transactions between Allianz Group companies in different geographic regions.
Life/Health Insurance Operations – Revenue grew by 12.5 % to € 57.1 billion. – Operating profit of € 2.9 billion. – Solid investment result from asset base growth and lower impairments.
– Allianz offers a broad range of life, savings and investment-oriented products including individual and group life insurance contracts.
– As one of the worldwide market leaders in life business we serve clients in more than 45 countries.
The increase in our statutory premiums by 12.5 % on a nominal basis and 9.6 % on an internal basis was primarily driven by positive developments in some of our major markets, such as Germany, France, Belgium, Asia-Pacific and the United States.
Statutory premiums by regions/countries as of December 31, 2010 (December 31, 2009) 2 in %
Our premiums in France grew by 9.8 % to € 8,014 million, driven by demand for single premium pure unit-linked as well as traditional products. In addition, there was an increase in sales of investment-oriented products through our partnerships distribution channel, following a sales campaign in the first quarter 2010.
Premiums in Central and Eastern Europe decreased by 1.6 % on an internal basis. Total premiums amounted to € 1,057 million. In Poland, the decrease in our premiums was mainly driven by lower sales of life deposit products and lower sales of payment protection insurance contracts. This negative development was partially offset by higher premiums from unit-linked products and traditional group contracts. In Hungary, total premiums grew due to an increase in sales of our unit-linked business following a successful campaign in the second quarter 2010. A positive premiums development in the Czech Republic was driven by high demand for our single premium products.
Net gains from financial assets and liabilities carried at fair value through income decreased from € 636 million to € 19 million. Compared to the exceptional result in 2009, fair value option income was much lower, mainly from France, due to comparatively better French equity index development in 2009, and from the United States, where we had larger gains from favorable credit spreads movements in 2009.
Improved capital market conditions contributed to the increase in net realized gains from € 1,755 million to € 2,125 million.
Net impairments of investments decreased from € 1,663 million to € 434 million due to significantly lower equity impairments compared to last year as capital markets stabilized in 2010.
1 Figures prior to 2010 have been restated to reflect a change in the Allianz Group’s accounting policy. For further information please refer to note 4 of our consolidated financial statements.
Changes in reserves for insurance and investment contracts (net) amounted to € 13,329 million. The increase of € 4,830 million was mainly due to higher aggregate policy reserves following higher sales of traditional business in Germany, France and AsiaPacific.
Acquisition and administrative expenses (net) decreased from € 5,591 million to € 5,175 million. Administration expenses showed a slight decrease of 0.7 % while acquisition expenses decreased by 10.0 %. This was mainly driven by a change in our presentation of deferred sales inducements (DSI) in the United States from net to gross, and comparatively lower deferred acquisition costs (DAC) amortization resulting from the annual assumption review process in Germany, France and the United States.
Claims and insurance benefits incurred (net) (18,955) (19,326) (19,673) Changes in reserves for insurance and investment contracts (net) (13,329) (8,499) (5,360)
Loan loss provisions 6 (75) (13) Operating impairments of investments (net) (434) (1,663) (5,747)
Operating profit (loss) 2,868 2,670 1,334 1 Figures prior to 2010 have been restated to reflect a change in the Allianz Group’s accounting policy. For further information please refer to note 4 of our consolidated financial statements.
2 For the Life/Health segment, total revenues are based upon statutory premiums. Statutory premiums are gross premiums written from sales of life and health insurance policies, as well as gross receipts from sales of unit-linked and other investment-oriented products, in accordance with the statutory accounting practices applicable in the insurer’s home jurisdiction.
internal 3 € mn € mn € mn € mn € mn € mn € mn € mn
Central and Eastern Europe 1,057 1,032 1,141 1,016 1,032 517 581 608 Middle East and North Africa 137 101 88 120 101 126 95 82 Global Life 270 182 — 270 182 8 4 — Growth Markets 7,951 5,512 4,694 6,977 5,513 2,388 1,973 1,867 1 Figures prior to 2010 have been restated to reflect a change in the Allianz Group’s accounting policy. For further information please refer to note 4 of our consolidated financial statements.
Asset Management – Total assets under management exceeded € 1,500 billion. – Third-party net inflows at a record high of € 113 billion. – Outstanding operating profit of € 2.1 billion.
– Allianz offers asset management products and services for third-party investors and the Allianz Group’s insurance operations.
– We serve a comprehensive range of retail and institutional clients worldwide.
Operating revenues increased by € 1,297 million to € 4,986 million. Internal growth amounted to 29.7 %.
Overall, operating profit went up by 47.0 % to € 2,060 million due to significant growth in assets under management and exceptionally high performance fees. Net inflows reached € 121 billion; of this, third-party net inflows accounted for a record € 113 billion.
At 58.7 % our cost-income ratio was 3.3 percentage points lower than in the previous year.
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The United States accounted for the majority of thirdparty assets under management (62.1 %), supported by strong fixed income net inflows. On an absolute basis, third-party assets under management, grew in all major regions.
The split between fixed income and equity third-party assets remained largely unchanged: fixed income assets grew to 86 % (December 31, 2009: 85 %) while equity assets decreased to 14 % (December 31, 2009: 15 %).
(approximately € 19 bn as of December 31, 2010 and € 24 bn as of December 31, 2009, respectively).
Income from financial assets and liabilities carried at fair value through income (net) amounted to € 19 million, a decline of € 21 million compared to the previous year, resulting largely from lower seed money valuation gains.
93 58 Your Allianz 65 Management Discussion and Analysis 118 Risk Report and Financial Control
We recorded operating profit of € 2,060 million due to exceptional growth in assets under management and strong performance fees. Overall growth on an internal basis was 41.4 %, taking into account € 94 million from positive foreign currency translation effects.
The growth in operating revenues, supported by strong performance fees, exceeded the growth in operating expenses, which is reflected in an excellent cost-income ratio of 58.7 % (2009: 62.0 %).
Income from financial assets and liabilities carried at fair value through income (net) 19 40 (71)
Corporate and Other – Operating loss down € 86 million to € 942 million. – Improvement driven by Banking business; operating loss of Holding & Treasury and
– Holding & Treasury includes the management and support of the Allianz Group’s businesses through its strategy, risk, corporate finance, treasury, financial control, communication, legal, human resources and technology functions.
– Our banking products offering in Germany, Italy, France and Central and Eastern Europe complements our insurance product portfolio.
While low interest rates still limited interest income, the operating loss fell by € 86 million to € 942 million.
Our net interest and fee and commission result aggregated € 585 million in 2010, an increase of € 83 million compared to last year. These positive developments were mostly related to Allianz Bank in Germany. Following the launch of operations in June 2009, Allianz Bank in Germany contributed a full twelve months of operations for the first time.
Overall, the operating loss of our Banking business fell by € 101 million to € 64 million. Our Banking business in Central and Eastern Europe, which continued to suffer from a difficult economic environment, contributed to this operating loss.
Return on equity after income taxes of 11.9 % (2009: 12.5 %) and proposed dividend of € 4.50 (2009: € 4.10) per share.
Operating profit growth of 17.0 % exceeded total revenue growth of 9.3 %.
Property-Casualty Gross premiums written to increase only slightly, due to the continuation of the soft cycle and our strict underwriting discipline.
Gross premiums written increased by 3.2 % on a nominal basis and were flat on an internal basis.
Operating profit in the range of € 4.0 billion to € 5.0 billion. Operating profit of € 4.3 billion, at the lower end of our target range, partly due to higher than expected claims from natural catastrophes.
Combined ratio decreased by 0.2 percentage points to 97.2 %, benefiting from the strong recovery of our credit insurance business, and despite higher than expected claims from natural catastrophes.
Improved underwriting result and investment result reflected in higher operating profit.
We expect operating profit in our Life/Health business to be within the range € 2.2 billion to € 2.8 billion. It must be noted that market volatility and the level of net harvesting can significantly impact the Life/Health segment results.
€ 1.7 billion gross realized gains net of impairments (operating) driven by significant lower impairments.
Asset Management Further strong inflows, especially into fixed income products. Third-party net inflows of € 113 billion, compared to € 84 billion in 2009.
The global economic upswing looks set to continue in 2011 and 2012, although at a more moderate pace of between 3 and 3.5 % in both years (2010: + 4.0 %). The need for consolidation in many government coffers, coupled with moves to cut both private household and corporate debt, will put a damper on global economic momentum. Monetary policy, however, is still very accommodative in the U.S.A., Japan and Europe and favorable financing conditions are providing plenty of economic impetus for private households and the corporate sector alike. Even a slight tightening of the monetary reins – on the cards in the second half of 2011 and still more likely in 2012 – will not fundamentally change this. Furthermore, the growth potential inherent in the emerging markets has not yet been fully exhausted and their demand will continue to reinforce the global economic recovery. We expect the emerging markets to grow by around 6 % in 2011 and 2012. Another factor at play is the investment cycle, which, with capacity utilization levels only recently returning to normal, is just getting under way. This will be of particular benefit to countries with a competitive capital goods industry.
It is important, however, not to underestimate the risks lurking in the shadows for both the economy and the financial markets in 2011 and 2012. As things stand, the greatest risks lie in a surge in commodity prices, an escalation of the sovereign debt crisis, sharp exchange rate swings, especially a steep slide in the U.S. Dollar, and a renewed flare-up of the banking crisis.
During 2011 and 2012, the industry is heading for higher growth, but expectations should not be set too high. The growth in industrialized markets will probably remain on the modest side compared to that of the emerging markets where the underlying economic fundamentals and developing maturity characteristics are more favorable. Solvency II will probably continue to be the dominant industry issue through this period, however we are optimistic that the current uncertainty over its final shape will lift as we draw closer to its planned 2013 implementation. Although fixed income yields will probably improve further over these years, they are still likely to remain below pre-financial crisis levels on a rolling average basis. While we expect non-life prices to improve gently, price adequacy overall will remain a persistent concern for the industry. On balance, we forecast that the operating environment will be more favorable for life than non-life margins and returns.
In the non-life sector, we would expect premium income growth momentum to be more favorable in 2011 and 2012 on the back of improving economic conditions. While emerging markets can be expected to maintain a stronger growth trend than industrialized markets, we are encouraged by the growth prospects for our major European markets too. Our outlook for the pricing environment in 2011 and 2012 remains mixed however. In those markets where prices increased in 2010, importantly for us including
Western Europe, we would anticipate further positive momentum and a broadening to other lines. Though elsewhere, for example U.S. commercial lines, there is a limited visibility on the positive catalysts that could effect a significant improvement, including a better balance of supply and demand and an exhaustion of releases from prior year claims reserves that are fuelling lower prices. We remain steadfast in our belief that prices need to be significantly higher across the board, also to compensate for claims inflation, lower investment yields and long-term catastrophe loss trends.
1 These financial statements were prepared and audited before the severe earthquake in Japan on March 11, 2011 and the resulting severe damage to various Japanese nuclear power plants; a reliable estimation of the financial impacts is not yet available at this point in time.
Allianz Group Operating profit of € 8.0 billion, plus or minus € 0.5 billion.
Property-Casualty Gross premiums written are expected to grow slightly in 2011 after two years without positive growth effects (based on internal growth).
We expect operating profit to be in the range of € 4.2 billion to € 4.8 billion.
We remain committed to our combined ratio target of 96 %.
Asset Management We expect inflows to continue, especially into fixed income products, but at an overall lower level than in 2010.
We expect operating profit to be in the range of € 1.8 billion to € 2.2 billion.
We expect to maintain a cost-income ratio well below 65 %.
In 2010 we exceeded our upper operating profit target of € 7.7 billion by € 0.5 billion and reached € 8.2 billion. The result benefited from favorable foreign exchange rate movements and the change in accounting policy at Allianz Life U.S.
Against this background, we expect for 2011 an operating profit of € 8.0 billion plus or minus € 0.5 billion, assuming no significant deviations from the assumptions stated here and the segment-specific sensitivities mentioned below. This range is driven by operating profit sensitivities to changes in interest rates and foreign exchange rates: – a 100 bps increase (decrease) of interest rates would boost (reduce) operating profit by approximately € 0.2 billion. This does not include fair value changes in interest rate sensitive positions that are reported in our income statement.
– a 10 % weakening (strengthening) of the U.S. Dollar versus our planned rate of 1.40 to the Euro would have a negative (positive) impact of approximately € 0 3 billion.
Property-Casualty operating profit amounted to € 4.3 billion in 2010, with a combined ratio of 97.2 %. The result benefited from the strong recovery of our credit insurance business which will not have such a significant impact in 2011. In contrast, losses from natural catastrophes of € 1.3 billion were almost three times the 2009 level. We anticipate such claims to decrease to long-term average levels.
We remain committed to our combined ratio target of 96 %. With our expectation that the aggregate effect of improvements in pricing, claims management and productivity gains will more than compensate for underlying claims inflation, we expect that in 2011 we will make progress towards this target. A 1.0 percentage point change in the combined ratio would have an operating profit impact of around € 0.4 billion.
It is important to recognize that investment income will remain under pressure due to the short duration of investments in the Property-Casualty segment and the low interest rate environment. Nevertheless we continuously strive to adapt our investment strategy to the current market conditions.
The success story of our Asset Management business continued in 2010. Exceptionally high net inflows and a strong market return carried our third-party assets under management to even higher levels. Operating profit increased by 47.0 % to € 2.1 billion, mostly driven by higher net fee and commission income (up 37.2 %). In 2011 we expect inflows to continue, but at a lower level, especially into fixed income products. However, net fee and commission income, including performance fees, is highly dependent on market values, investment performance and business mix. Although we do not expect the exceptionally strong development experienced in 2010 to continue, we expect operating profit in 2011 to remain at this high level and to be in the range of € 1.8 billion to € 2.2 billion, subject to inflows, markets, U.S. Dollar development, investment performance and investor sentiment. We expect to maintain a cost-income ratio well below 65 %.
Our Corporate and Other segment recorded an operating loss of € 0.9 billion in 2010. Due to the current low interest rate environment, volatility in the fair value of financial assets and liabilities and the increasing pension expenses, we expect for Corporate and Other (including consolidation) an operating loss in the range of € 0.9 billion to € 1.1 billion for 2011, comprised mainly of expenses in the Holding & Treasury function.
As we continuously strive to protect our investors’ capital and provide attractive returns and dividends, we strike a balance between payout and solvency when determining our dividend proposal. Our dividend policy is earnings-based in principle. Since 2008 our dividend payout ratio has been 40 % of net income attributable to shareholders from continued operations. This ratio allows us to retain the capital which is needed to support our growth and will form the basis for our future dividend proposals to the Supervisory Board and Annual General Meeting.
To allow our shareholders to participate in our positive results, we will propose at the Annual General Meeting to increase the dividend payment from € 4.10 in 2009 to € 4.50 per share in 2010. This reflects a payout ratio of 40 %.
Management’s Views on Future Challenges and Opportunities It is essential that we maintain and strengthen the trust we have with our customers, employees, investors and the public. By consistently following our Group strategy, we are confident that the Allianz Group is in a privileged position to build on this trust and to deal with all aspects of the challenges and opportunities ahead.
While many of those challenges and opportunities are specific to our segments, business lines or markets, there are many issues that are global and crossbusiness in nature, such as: Stability of financial markets: With the global financial crisis still fresh in memory, uncertainty and volatility will remain for some time. Insurance plays an important role in society: it safeguards business activities, provides protection for individuals and families and contributes to stability in capital markets by pursuing long-term investment strategies and stringently managing risks. Moreover, we also engage in educational initiatives to improve financial understanding in society and support the development of financially independent individuals.
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Complexity reduction: We continue to reduce the complexity of our business, supported by our Target Operating Model and Operational Transformation Programs that aim to standardize business processes and organization structures in our insurance segments. In parallel, we fight entropy with a Group-sponsored initiative to reduce the number of legal entities, especially insurance carriers, in Western Europe.
Market Management, for example, is responsible for developing and constantly evolving the local market strategy linking clear objectives with customer, sales channel, product, service and brand strategies.
The strategy development process comprises three steps: 1. Analysis of markets and customers to gain insights e. g. on trends, customer needs and behavior.
3. Translation of these findings into necessary adjustments to the market strategy.
The implementation of the strategy is as important as its development in terms of driving and coordinating concrete initiatives and projects. Both aspects are the responsibility of the local Boards of Management. But they are also standing agenda items in the management dialogues between the operating entities and the Holding. This demonstrates the attention given by top management to identifying and exploiting opportunities globally and locally.
As a global company with operating entities in about 70 countries, Allianz has a huge base of local expertise and examples of good practice. One key task of the Holding functions is to make use of this valuable knowledge by sharing it across the Group and supporting its transfer to other Group companies. This also contributes to constantly identifying and exploiting opportunities.
To exploit the opportunities of an increasingly digital environment and to meet changing customer expectations and behavior, Allianz will invest in the development of superior customer interfaces. These will give customers easy-to-use digital access to information and services while also meeting the high standards of security and confidentiality required of a global insurance company. This comprises for example customer, agent and employee portals and mobile applications that can be accessed through multiple devices.
A major strategic issue is the further development and implementation of globally usable core insurance platforms. Building on flexible, reusable and adaptable components these platforms allow multiple local deployments, leveraging economies of scale and skill for the entire Group and accelerating time-to-market.
Expanding the collaboration and communication infrastructure is another major area of activity. The implementation of an upgraded Wide Area Network over the coming years will realize monetary benefits while at the same time enable extended services, such as internet telephony (Voice over IP) or videoconferencing. It will also be the basis for a Global Identity and Access Management allowing for global accessibility in a solidly secure manner.
Further development of the International Client (Workstation Operating System and Standard Software ) will be key to exploiting disruptive virtualization technologies to establish a global solid security foundation and to increase usability while at the same time lowering cost.
Furthermore, the Allianz Group will continue to invest significant amounts in initiatives for implementing the Group’s strategy. In order to build the world’s strongest financial community, major Group initiatives are in place for insurance segments as well as for distribution to capitalize on the Group’s strength, to capture opportunities and to actively address challenges ahead.
In addition, significant efforts are dedicated to prepare Allianz for the challenges posed to the insurance industry by the implementation of Solvency II.
Management’s Overall Assessment of the Current Economic Situation of the Allianz Group Overall at the date of issuance of this Annual Report given current information regarding natural catastrophe and capital market development, in particular foreign currency, interest rates and equities, the Board of Management does not have any indication that the Allianz Group is facing any major adverse developments.1 1 These financial statements were prepared and audited before the severe earthquake in Japan on March 11, 2011 and the resulting severe damage to various Japanese nuclear power plants; a reliable estimation of the financial impacts is not yet available at this point in time.
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1 Off-balance sheet reserves are accepted by the authorities as eligible capital only upon request; Allianz SE has not submitted an application so far. The solvency excluding off-balance sheet reserves would be 164 % (2009: 155 %).
2 This does not include non-controlling interests of € 2,071 mn and € 2,121 mn as of December 31, 2010 and December 31, 2009, respectively. For further information please refer to note 25 to the consolidated financial statements.
The Allianz Group is a financial conglomerate within the scope of the Financial Conglomerates Directive and the related German law in force since January 1, 2005. The law requires that a financial conglomerate calculate the capital needed to meet obligatory solvency requirements on a consolidated basis.
Balance Sheet Review – Shareholders’ equity increased by 10.9 % to € 44.5 billion. – Strong solvency ratio up 9 percentage points to 173 %. 1
In the following sections, we show the asset allocation for our insurance portfolio and analyze important developments within the balance sheets of our Property -Casualty, Life/Health, Asset Management and Corporate and Other segments.
As of December 31, 2010, total assets amounted to € 624.9 billion and total liabilities amounted to € 578.4 billion. Compared to year-end 2009 total assets and total liabilities increased by € 41.2 billion and € 36.9 billion respectively.
Allianz Group’s asset portfolio is mainly derived from our core business of insurance. The following asset allocation covers the insurance segments together with the Corporate and Other segment.
In 2010, our gross exposure to equities increased from € 30.6 billion to € 33.0 billion driven by positive market developments, although partially offset by divestments. Our equity gearing after policyholder participation and hedges, i. e. a ratio of our equity holdings allocated to shareholder’s equity plus offbalance sheet reserves less goodwill, remained unchanged at 0.4.
Our exposure in subordinated securities in banks amounted to € 10.6 billion. Our tier 1 share remains low at 0.5 % of our total exposure to debt instruments.
As of December 31, 2010 2009 Delta € mn € mn € mn
Interest and similar income (net) 1 18,906 17,654 1,252 Inc. fr. fin. assets and liab. carried at fair value through income (net) (38) 874 (912) Realized gains/losses (net) 3,708 3,416 292 Impairments of investments (net) (844) (2,732) 1,888
Income from financial assets and liabilities carried at fair value through income (net) decreased by € 912 million to negative € 38 million. In 2009 we observed positive effects from reduced credit spreads in our Life/Health operations in the U.S.A. as well as from positive equity markets in our operations in France.
Realized gains and losses (net) amounted to € 3,708 million, up by € 292 million. Realized gains on debt investments contributed € 277 million to this development benefiting from still low interest rate levels. Realized gains and losses on equity and real estate investments remained at previous year levels. One of our major transactions was the sale of another tranche of ICBC shares. In 2010 we realized € 1.0 billion from the sale of ICBC shares, compared to € 0.7 billion in 2009.
Property-Casualty liabilities Development of reserves for loss and loss adjustment expenses 5 in € bn
As of December 31, 2010, the segment’s gross reserves for loss and loss adjustment expenses increased by 3.2 % to € 57.5 billion. On a net basis, reserves were up 4.7 % to € 50.8 billion. Foreign currency translation effects and other changes accounted for € 1.6 billion of the increase.
Financial assets for unit-linked contracts grew by € 7.8 billion to € 64.8 billion. Unit-linked insurance contracts increased by € 5.7 billion due to good fund performance and premium inflows exceeding outflows by € 5.2 billion. The most significant contributions came from our operations in the U.S.A. (€ 2.5 billion) and Japan (€ 1.1 billion). Unit-linked investment contracts increased by € 0.2 billion, mainly driven by Allianz Taiwan.
The majority of currency effects resulted from the stronger U.S. Dollar and Asian currencies.
Loans and advances to banks and customers 97.4 100.3 Financial assets for unit-linked contracts 5 64.8 57.0 Life/Health asset base 417.6 381.2 1 2009 figures have been restated to reflect a change in Allianz Group’s accounting policy. For further information please refer to note 4 of our consolidated financial statements.
Significant currency effects stemmed predominantly from the exchange rate developments of the U.S. Dollar, Asian currencies and the Swiss Franc.
Asset Management assets Our Asset Management segment’s results of operations stem primarily from the management of thirdparty assets.2 In this section we refer only to the segment ’s own assets.
Asset Management liabilities Liabilities in our Asset Management segment amounted to € 4.3 billion up by 2.2 %, mainly due to higher liabilities to banks and customers.
2 For further information on the development of these third-party assets, please refer to page 91.
Loans and advances to banks and customers 16.4 20.7 Corporate and Other asset base 39.1 40.4
ABS in our Corporate and Other asset base, amounted to € 0.7 billion as of December 31, 2010, which is around 1.9 % of our Corporate and Other asset base.
Corporate and Other liabilities Our liabilities to banks and customers amounted to € 20.5 billion as of December 31, 2010 versus € 21.2 billion at year-end 2009. This development was driven by a decrease in payables on demand and repurchase agreements with our Banking entities.
2 These do not include affiliates of € 69.2 bn and € 67.5 bn as of December 31, 2010 and December 31, 2009, respectively.
3 Including cash and cash equivalents as stated in our segment balance sheet of € 1.1 bn and € 1.1 bn and receivables from cash pooling amounting to € 0.5 bn and € 0.2 bn net of liabilities from securities lending and derivatives of € 0 bn and € 0 bn as of December 31, 2010 and December 31, 2009, respectively.
4 For further information on Allianz SE debt as of December 31, 2010, please refer to note 23 and 24 of our financial statements.
The Allianz Group enters into various commitments including loan commitments, leasing commitments, purchase obligations and other commitments. Please refer to note 47 of our consolidated financial statements for more details.
The Allianz Group also has investments in four special purpose vehicles. Please refer to note 5 of our consolidated financial statements for more details on such investments and to note 45 for more details on our collaterized debt obligations.
The liquidity management of the Allianz Group is based on policies and guidelines approved by the Board of Management of Allianz SE. The primary responsibility of Allianz SE and each of its major operating subsidiaries is to manage their respective cash flows resulting from their individual business models. In addition, Allianz SE steers the liquidity planning and capital allocation process for the Group as well as the central pooling of liquidity. This process enables the efficient employment of liquidity and capital resources and allows Allianz SE to maintain the desired liquidity and capitalization levels of the Group and its operating entities.
Our insurance operations also carry a high proportion of liquid investments which – under normal market conditions – can easily be turned into cash to pay for claims.
The overall liquidity of our insurance operations depends on the development of equity capital markets, the interest rate environment and our ability to realize the carrying value of our investment portfolio in order to meet insurance claims and policyholder benefits as they become due. Additional factors affecting the liquidity of our Property-Casualty insurance operations include the timing, frequency and severity of losses underlying our policies as well as policy renewal rates. In our Life operations, the liquidity needs are generally affected by trends in actual mortality rates compared to the related assumptions in the pricing of our life insurance policies. Also relevant is the extent to which minimum returns or crediting rates affect our life insurance products and the level of surrenders and withdrawals.
113 58 Your Allianz 65 Management Discussion and Analysis 118 Risk Report and Financial Control
Liquidity Management of Allianz SE The responsibility of Allianz SE is to identify the Allianz Group’s liquidity requirements and to maximize the access to funding sources while minimizing borrowing costs.
The sources of funding available to Allianz SE for both short- and long-term funding needs are listed below. In general, mid- to long-term financing is covered by issuing senior or subordinated bonds, or by issuing ordinary shares.
Allianz SE also has the option to increase its equity capital base according to authorizations provided by our shareholders. The following table outlines Allianz SE’s capital authorizations as of December 31, 2010: Capital authorization Nominal Amount Expiry date of the authorization
Authorization to issue bonds carrying conversion and/or option rights € 10,000,000,000 (nominal bond value)
Conditional Capital 2010 € 250,000,000 (97,656,250 shares) No such conversion or option rights were outstanding as of 12/31/2010.
Long-term debt funding As of December 31, 2010, Allianz SE had senior and subordinated bonds in a variety of maturities outstanding, reflecting our focus on long-term financing. While the cost and availability of external funding may be negatively affected by general market conditions or by matters specific to the financial services industry or the Allianz Group, we seek to mitigate refinancing risk by actively steering our funding structure.
Average interest rate 1 € mn € mn € mn % € mn € mn € mn %
As of December 31, 2010, Allianz SE had money market securities outstanding with a carrying value of € 1,791 million: a € 287 million increase in the use of commercial paper compared to the previous year. Interest expenses on money market securities decreased to € 13.9 million (2009: € 31.3 million) due to lower short-term interest rates than 2009.
Interest expense € 50.9 mn 5.0 % bond issued by Allianz Finance II B.V., Amsterdam Volume € 1.5 bn Year of issue 2008 Maturity date 3/6/2013 ISIN DE 000 A0T R7K 7 Interest expense € 76.7 mn 4.0 % bond issued by Allianz Finance II B.V., Amsterdam Volume € 1.5 bn Year of issue 2006 Maturity date 11/23/2016
Interest expense € 61.8 mn 4.75 % bond issued by Allianz Finance II B.V., Amsterdam Volume € 1.5 bn Year of issue 2009 Maturity date 7/22/2019 ISIN DE 000 A1A KHB 8 Interest expense € 72.8 mn Total interest expense for senior bonds € 262.2 mn 2. Subordinated bonds 3 6.125 % bond issued by Allianz Finance II B. V., Amsterdam Volume € 2.0 bn Year of issue 2002 Maturity date 5/31/2022
Interest expense in 5.5 % bond issued by Allianz SE Volume € 1.5 bn Year of issue 2004 Maturity date Perpetual Bond
Interest expense € 84.5 mn 4.375 % bond issued by Allianz Finance II B. V., Amsterdam Volume € 1.4 bn Year of issue 2005 Maturity date Perpetual Bond
Interest expense € 0.0 mn Total interest expense € 806.0 mn 1 For further information on Allianz SE debt (issued or guaranteed) as of December 31, 2010, please refer to note 23 and 24 to our consolidated financial statements.
3 The terms of the subordinated bonds (except for the two subordinated bonds mentioned in footnote 2 above) do not explicitly provide for early termination rights in favor of the bond holder. Interest payments are subject to certain conditions which are linked, inter alia, to our net income, and may have to be deferred. Nevertheless, the terms of the relevant bonds provide for alternative settlement mechanisms which allow us to avoid an interest deferral using cash raised from the issuance of specific newly issued instruments.
4 On October 23, 2009 the 8.375 % subordinated bond was traded on the New York Stock Exchange for the last time. The bond is now traded in the U.S. OTC market and information on traded prices can be obtained from the website of FINRA (U.S. Financial Industry Regulatory Authority, Inc.).
5 With effect of December 31, 2009 the profit participation certificates issued by Allianz SE have been called for redemption pursuant to Section 6 § 4 of the conditions of the profit participation certificates. As of January 4, 2010 holders received a cash compensation of € 103.32 for each profit participation certificate of € 5.12 nominal value. As of December 31, 2009 the total cash compensation payable for the 1,175,554 outstanding profit participation certificates is shown as a separate line item on the balance sheet.
Allianz Group Consolidated Cash Flows Change in cash and cash equivalents for the years ended December 31, 1 in € mn
Net cash outflow used in investing activities decreased by € 30.9 billion to € 19.5 billion in 2010 which is, to a large extent, attributable to the Dresdner Bank disposal in 2009. The disposal of Dresdner Bank to Commerzbank resulted in a net cash outflow of € 27.0 billion in 2009 as Dresdner Bank’s cash balance of € 30.2 billion left the Allianz Group.
These effects were partially offset by higher net cash outflows for available-for-sale securities, mainly due to growth in the Life/Health segment.
Cash and cash equivalents increased by € 0.6 billion. Including the reclassification of short-term investments at our U.S. operations, cash and cash equivalents increased by € 2.6 billion to € 8.7 billion as of December 31, 2010.
4 Includes reclassificiation of € 2,050 mn from loans and advances to banks and customers at our U.S. subsidiaries.
Asset Management consisting of: Net fee and commission income 4,927 3,590 2,874 Net interest income 21 30 63 Income from financial assets and liabilities carried at fair value through income (net) 19 40 (71)
Corporate and Other consisting of: Interest and similar income 683 708 989 Income from financial assets and liabilities carried at fair value through income (net) 1 17 6 Fee and commission income 445 389 430
Fee and commission expenses (210) (200) (193) Consolidation effects (Banking within Corporate and Other) 1 (2) —
Risk Report – The Allianz risk management approach is designed to add value by focusing on both risk and return. – The Allianz Group is well capitalized and its solvency ratio is resilient.
The Group’s management also believes that Allianz is well positioned to deal with potential future adverse events, in part due to our internal limit framework which limits the impact on our regulatory and economic solvency ratios of adverse shocks. Similarly, the Group’s net exposure to natural catastrophes is also limited and remains within our risk appetite. The Group’s management is confident that, through this risk appetite, we have achieved an appropriate balance between potential earnings, earnings volatility and solvency considerations.
Depending on the individual investment strategy, a continuation of the low interest rate environment may create challenges for some life insurance companies, especially in delivering sufficient investment income to meet policyholders’ future expectations and the long-term guarantees embedded in individual life insurance products. The low interest rate environment also raises demand for certain types of assets. At the same time, the industry may have to deal with expectations of higher interest rates due to the potential for inflation, resulting in a precarious interest rate balancing act.
The Allianz internal risk capital model plays a significant role in the management and allocation of internal capital. We also consider external requirements of regulators and rating agencies. While capital requirements imposed by regulators constitute a binding constraint, meeting rating agencies’ capital requirements and maintaining strong credit ratings are strategic business objectives of the Allianz Group. Regulators and rating agencies impose minimum capital rules at the level of both the Allianz Group’s operating entities and the Group as a whole.
We closely monitor the capital positions on Group and operating entity level and apply regular stress tests based on standard adverse scenarios. This allows us proactively to take appropriate measures to ensure the continued strength of capital and solvency positions. These measures may be related to assets or liabilities, such as a recalibration of our investment policy (e.g. reduction in equity exposure and risk concentration through sales and hedging activities) or reinsurance of certain liabilities. For example, a decrease in equity exposure in relative terms compared to the Group shareholders’ equity would make the Group’s conglomerate and economic solvency more resistant to further drops in equity markets.
As a consequence of our effective capital management, the Allianz Group is well capitalized and meeting its internal and regulatory solvency targets as of December 31, 2010.
The Allianz Group’s available capital is based on the Group shareholders’ equity as adjusted to reflect the full economic capital base available to absorb any unexpected volatility in results of operations. For example, hybrid capital and the present value of future profits in the Life/Health segment are added to shareholders ’ equity, whereas goodwill and other intangible assets are subtracted.
2 For detailed information regarding the internal risk capital framework, please refer to “Internal Risk Capital Framework”.
As of December 31, 2010, the Group diversified internal risk capital before non-controlling interests of € 31.4 billion reflects a benefit of approximately 30 % 2 due to the diversification effect across risk categories and regions. Pre-diversified and Group diversified internal risk capital are broken down as follows: Allocated internal risk capital by risk category (total portfolio before non-controlling interests) as of December 31, 2010 (December 31, 2009 3) Pre-diversified before tax, in € mn
Underwriting risks: Credit risks: Group diversified, in € mn 12/31/2009 12/31/2010
Underwriting risks 2 Based on the new internal risk capital framework, this diversification benefit was approximately 33 % as of December 31, 2009.
Capital ratio: The increase in available capital was mainly driven by an increase in the Group shareholders’ equity, partly compensated by a reduction in the present value of future profits in the Life/Health segment. However, due to higher internal risk capital requirements, the capital ratio dropped.
While internal risk capital as an economic solvency measure focuses on extreme events according to a confidence level of 99.97 % over a holding period of one year, we also monitor risk indicators representing reasonably possible economic value impacts that would be more “tangible” or likely, i. e. maximum economic losses over the same time horizon with a significantly lower confidence level of 90 % (€ 13.0 billion as of December 31, 2010).
The Allianz Group is a financial conglomerate within the scope of the E.U. Financial Conglomerates Directive and related German law. The law requires that a financial conglomerate calculate the capital needed to meet its solvency requirements on a consolidated basis, which we refer to as “eligible capital”. Starting in 2013, these requirements are expected to reflect the Solvency II rules.
Eligible capital increased in line with the Group shareholders ’ equity. Due to business growth primarily related to the Life/Health segment, our solvency requirement is higher as well. As the solvency requirement increased less than eligible capital, the solvency ratio improved.
As of December 31, 2010, Allianz SE had one of the best Standard & Poor’s ratings among the internationally active primary insurance groups in Europe.
– Consistent application of an integrated risk capital framework across the Group to protect our capital base and to support effective capital management.
2 Issuer credit rating. 3 Final ratings vary on the basis of the terms.
The Board of Management of Allianz SE formulates business objectives as well as the risk strategy. It allocates capital resources and limits across the Allianz Group, with the objective of balancing return and risk, for example by redefining the Group’s natural catastrophe limits in 2010. While the Board of Management of Allianz SE is responsible overall for risk management, it has delegated some authorities to various committees. Three Board of Management level committees focus on the Group’s risk exposure: – the Group Capital Committee – the Group Risk Committee – the Group Finance Committee
For the benefit of shareholders and policyholders alike, the Allianz risk management framework adds value to Allianz SE and its operating entities through the following four primary components in a layered structure as outlined in the diagram to the right.
Within our decentralized organization, each of our local operating entities needs individually to adhere to external requirements (e.g. requirements imposed by local regulators) as well as internal Group-wide standards (e.g. Group-wide underwriting standards). In particular, local operating entities assume responsibility for their own risk management, with risk functions and committees that are consistent with the Group structure. Independent risk oversight is a fundamental principle of our risk governance structure, with a clear separation between business functions that actively take decisions and assume risk responsibility, and independent risk oversight functions. If a full alignment of an operating entity’s organizational structure with this separation principle unreasonably decreased efficiency of operations, adequate mitigating measures would be taken. Risk oversight consists of independent risk identification, assessment, reporting and monitoring and also includes analyzing alternatives and proposing recommendations to the Risk Committees and local management or to the Board of Management of Allianz SE. The local risk departments performing the oversight role in our major operating entities are reporting into a local Chief Risk Officer. Group Risk is represented in the local Risk Committees to enhance the risk dialogue between the Group and the operating entities.
The risk governance structure is further complemented by Group Compliance and Group Legal Services. Group Compliance is responsible for integrity management which aims to protect the Allianz Group, its operating entities and employees from regulatory risks. Group Legal Services seek to mitigate legal risks
The Supervisory Board Risk and Audit Committees of Allianz SE meet on a regular and ad hoc basis to monitor the risk strategy and profile of the Allianz Group based on risk reports presented by the Chief Financial Officer, who chairs the Group Risk Committee. While the Audit Committee of the Supervisory Board of Allianz SE supervises the effectiveness of the Allianz risk management and monitoring framework, the Supervisory Board Risk Committee focuses on the overall risk profile of the Allianz Group and monitors risk-related developments as well as general risks and specific risk exposures. The Risk Committee regularly reports to the Audit Committee, in particular on enhancements to the risk management framework required by regulatory changes as well as changes in the market and business environment.
an ag em en t R ep or t with support from other departments. Legal risks include legislative changes, major litigation and disputes, regulatory proceedings and contractual clauses that are unclear or construed differently by the courts. The objective of Group Legal Services is to ensure that developments in laws and regulations are observed, to react appropriately to all impending legislative changes or new court rulings, to attend to legal disputes and litigation, and to provide legally appropriate solutions for transactions and business processes.
The implementation of the new internal risk capital framework incorporates our internal approach of managing risks while reflecting our current interpretation of the evolving Solvency II standards. The framework will be assessed by European regulators in the course of the next years and will be adjusted in accordance with the final regulatory Solvency II rules.
A more detailed description of the new approach is provided in the section “Value-at-Risk approach”.
Comparison To compare the results of the new internal risk capital framework with the former framework, we provide recalculated internal risk capital as of December 31, 2009. The presentation of results has been adjusted to allow a direct comparison of internal risk capital results consistent with our internal reporting under the new framework.
Group diversified allocated internal risk capital by risk category and business segment (total portfolio before non-controlling interests)
By risk category Market risks 15,582 14,284 Credit risks 5,771 3,872 Underwriting risks 8,157 7,933 Business risks 5,785 6,765 Tax impact (5,791) (2,463) Total Group 29,502 30,391 By business segment Property-Casualty 15,431 15,639 Life/Health 13,545 11,179 Asset Management 1,949 1,948 Corporate and Other 4,367 4,088 Tax impact (5,791) (2,463) Total Group 29,502 30,391
Overall changes Our new internal risk capital framework is based on a Monte Carlo simulation approach, which is designed to determine the value for any confidence level of individual and aggregated portfolios over the holding period. As a result, we are able to better analyze specific portfolio related risks by considering a wide variety of adverse scenarios. In addition, the new framework also allows us to integrate all business segments into one technical platform, resulting in a harmonization of market parameters (e.g. volatilities) and model assumptions.
We use an internal risk capital model based on a Value -at-Risk (VaR) approach. Following this approach, we determine the maximum loss in the portfolio value of our businesses in the scope of the model (“covered businesses”) within a specified timeframe (“holding period”) and probability of occurrence (“confidence level”). More specifically, we consider adverse market, credit, insurance and other business events (“sources of risk”) and calculate the portfolio value of the covered businesses as the net fair value of assets and liabilities based on values under current best estimate conditions and under a large number of potential adverse conditions. These adverse conditions are described by a combination of simulated scenarios, which are linked to underlying probabilities of occurrence. Widely known as Monte Carlo simulation, the approach is designed to determine the portfolio value over the holding period for any confidence level. Based on 30,000 scenarios, the required internal risk capital is defined as the difference between the portfolio value under best estimate conditions and the portfolio value under the adverse conditions associated with the desired confidence level.
Because we consider the impact of adverse market, credit, insurance and other business events on all covered businesses at the same time, diversification effects across sources of risk and regions are taken into account.
Where possible, we develop correlation parameters for each pair of market risks through statistical analysis of historical market data, considering weekly observations over several years. If sufficient historical market data or other portfolio specific observations are not available, we use professional judgment, governed by a conservative approach and taking into account standard settings as currently proposed by EIOPA. We also rule out negative correlations. In general, we set the correlation parameters to represent the level of interdependency of risks under adverse conditions. Based on these correlations, we use an industry standard approach, the Gaussian Copula approach, to determine the dependency structure of all sources of risk. With respect to market risks, our approach is similar to the one applied by banks under the Basel II standards.
– Substantially all of our derivatives (options, swaps and futures), in particular if they form part of the operating entity’s regular business model (e.g. at Allianz Life Insurance Company of North America) or if they have a significant impact on the resulting internal risk capital (e.g. hedges of Allianz SE or in the Life/Health segment, if material obligations to policyholders are hedged through financial derivatives ). In general, embedded derivatives contained in a host contract are also included.3
For smaller insurance operating entities that have an immaterial impact on the Group’s risk profile, and for the Asset Management segment, we assign internal risk capital requirements based on an approach which takes local regulatory rules and results from a risk
Possible losses in the market value of the portfolio due to deterioration in the credit quality of counterparties including their failure to meet payment obligations or due to non-performance of instruments (i. e., payment overdue).
Market risk – interest rate including volatility – credit spread – equity including volatility – real estate including volatility – currency
Underwriting risk – premium catastrophe – premium non-catastrophe – reserve – biometric
Our internal risk capital model covers: – Substantially all of our major insurance operations.
factor based model into account. This approach uses the same risk categories as our internal risk capital model, thereby allowing us to consistently aggregate internal risk capital for all segments at the Group level. Regarding our Asset Management segment, approximately 99 % of the investments managed by the Asset Management operating entities are held for the benefit of third parties or Allianz Group insurance entities and, therefore, do not result in significant market and credit risk for the segment. As a result, the internal risk capital requirements for the Asset Management segment only reflect business risk. However, the assessment of market risk and credit risk on the account of third parties is an integral part of the risk management process of our local operating entities.
Internal risk capital related to our banking operations in Germany, Italy, France as well as Central and Eastern Europe is allocated to the Corporate and Other segment, based on the approach as applied by banks under the Basel II standards. It represents an insignificant amount of approximately 1.6 % of total pre-diversified internal risk capital. Therefore, risk management with respect to banking operations is not discussed in detail below.
As described above, the insurance liabilities are replicated by portfolios of standard financial market instruments in order to allow for effective risk management.
an ag em en t R ep or t modeling of common derivatives such as equity calls, puts, forwards and interest rate swaps. For internal risk capital calculations, non-standardized instruments, such as derivatives embedded in structured financial products, are represented by the most comparable standard derivative types. The volume of nonstandard instruments is not material on either the local or the Group level, but a more precise modeling of these instruments might affect the fair value and resulting internal risk capital for these derivatives. However, we believe that any such change would not be material.
With respect to investments, top-down indicators such as strategic asset allocation benchmarks are defined and closely monitored to ensure balanced investment portfolios. Financial VaR limits are in place separately for the Life/Health and the Property-Casualty segment at Group level based on the internal risk capital model, in order to protect the economic capital position and manage peak risks. In addition, adherence to the Group’s strategic asset allocation benchmarks is monitored by leeway limits for each of these segments.
Disproportionately large risks that might accumulate and have the potential to produce substantial losses (e.g. natural catastrophes or credit events) are closely monitored on a standalone basis (i. e. before the diversification effect) and are subject to a global limit framework.
For example, the Management Board of Allianz SE has implemented a framework of natural catastrophe limits at both the operating entity and Group levels in an effort to reduce potential earnings volatility and restrict potential losses from single events as well as on an annual aggregate basis. The exposure is limited for losses having an occurrence probability of once in 250 years. These limits are subject to an annual review. Traditional reinsurance coverage and dedicated financial transactions on Group level are examples of two instruments to mitigate the peak risks and to limit the impact of adverse conditions on our financial results and shareholders’ equity (e.g. severe natural catastrophe losses). In 2010, for example, we renewed the swaps to exchange European windstorm, U.S. hurricane and U.S. earthquake risks, which belong to our largest natural catastrophe exposures, for Japanese typhoon and earthquake risks, as our Property-Casualty operations are small in this region. In addition, we issued a new Catastrophe Bond (“Blue Fin 3”), protecting us against U.S. hurricane and earthquake risks.
At the beginning of 2010, we implemented a new Group-wide country and obligor group limit management framework (CRisP) for credit risk, which is based on consistent data used by the investment and risk functions on Group level as well as on the operating entity level. It forms the basis for discussions regarding appropriate credit actions and provides notification services for a quick and broad communication of credit related decisions across the Group.
In general, obligor limits are calculated by the CRisP system based on predefined rules and key indicators (e.g. the obligor’s rating, balance sheet size, business segment and country of operations). The CRisP system allocates Group obligor limits to the operating entity level, following a factor based approach and taking into account various key indicators such as the operating entity’s balance sheet size and area of domicile as well as the obligor’s business segment and country of operations.
The Allianz Group holds and uses many different financial instruments in managing its businesses. As part of our insurance operations, we collect premiums from our customers and invest them in a wide variety of assets. These investment portfolios ultimately cover the future claims to our customers. We also need to invest shareholders’ capital, which is required to support the risks underwritten.
Grouped according to our internal risk capital model categories, the following are the most significant market risks in terms of market values: interest rate risk (arising from bonds, loans and other debt instruments ) and equity price risk (including risks arising from common shares and preferred shares).
Because of our diversified real estate portfolio, real estate risk is currently of less relevance for the Allianz Group. About 5.6 % of the total pre-diversified internal risk capital is related to real estate exposures.
Movements in financial markets also have an impact on the value of our insurance liabilities. Therefore, our exposure to market risks is ultimately determined by the net positions between assets and liabilities. These interdependencies are described in more detail under “Property-Casualty and Life/Health segments” below.
In the following table, we present our Group-wide internal risk capital related to market risks: Allocated internal market risk capital by business segment and source of risk (total portfolio before tax and noncontrolling interests)
Interest rate Credit spread Equity Real estate Currency Total € mn € mn € mn € mn € mn € mn € mn € mn € mn € mn € mn € mn
Asset Management — — — — — — — — — — — —
On aggregate, Group diversified internal market risk capital remained at almost the same level compared to the previous year, because there have not been any structural changes in our business mix nor any significant market developments. The decrease in internal currency risk capital is mainly derived from enhanced measurement based on a more granular representation of liabilities per currency by our globally operating insurance entity Allianz Global Corporate and Specialty.
Impact of standard financial scenarios on economic available capital represented in terms of internal solvency ratios (total portfolio before non-controlling interests and after tax and Group diversification) in %
for active monitoring and management of our assets and liabilities. Strategic asset allocation benchmarks including leeway limits as well as other portfolio limits (e.g. equity sensitivities, asset durations) are defined at the Group level separately for the Life/ Health and the Property-Casualty segment. They are designed to ensure that assets adequately back policyholder liabilities and that they are held to provide investment income in line with policyholders’ expectations.
The maturity of assets and liabilities is reflected by the concept of effective duration, more specifically, how the value of a certain asset or liability portfolio moves with changes in interest rates. Accordingly, if liabilities have a longer duration than the assets backing them (e.g., because of long-term life insurance products), the liabilities will gain more in value than the assets due to a down shift in interest rates, resulting in an overall loss of the net position. This effect is reflected in the internal risk capital results and managed by duration mismatch limits, which are defined at the Group level separately for the Life/Health and the Property-Casualty segment based on our internal risk capital model.
We have allocated a significant part of the Life/Health segment’s pre-diversified internal risk capital for interest rate risk to Western Europe (84 % as of December 31, 2010), mainly to cover traditional life insurance products. Within certain ranges, traditional products sold in Western Europe generally feature policyholder participation in the profits (or losses) of the insurance company issuing the contract, subject to management discretion and typically floored at a minimum guaranteed crediting rate. The majority of our Life/Health contracts in Western Europe comprise
In accordance with related guarantees, we must still credit minimum rates for individual contracts (e.g. in Germany, France, Italy, the U.S.A. and South Korea).2 However, in most of these markets, the effective interest rates being earned on the investment portfolio exceed these guaranteed minimum interest rates. As interest rates may fall below the guaranteed crediting rates in those markets, we are exposed to interest rate risk. The valuation of these guarantees, which takes into account the interaction of investment strategy and obligations to policyholders, forms an integral part of our internal risk capital model. The associated risks are therefore managed by the financial VaR and duration mismatch limits, based on the internal risk capital model. In addition, our asset liability management approach is closely linked to the internal risk capital framework and designed to achieve long-term investment returns in excess of the obligations related to insurance and investment contracts. Regional diversification also helps mitigate interest rate risks across individual market places.3
The Allianz Group’s insurance operating entities hold equity investments usually to diversify their portfolios and take advantage of attractive long-term returns. Strategic asset allocation benchmarks and leeway limits are used to manage and monitor these exposures. In addition, they come within the scope of the Group-wide country and obligor group limit management framework (CRisP) to avoid disproportionately large concentration risk. 81 % of the pre-diversified internal risk capital allocated to the Property-Casualty and Life/Health segments for equity risk is assigned to our entities operating locally in Germany, Italy, France and the U.S.A.
1 Please see note 20 to our consolidated financial statements for additional information regarding participating life business.
As described above, our residual foreign currency risk results primarily from the fair net asset value of our non-Euro operating entities. In addition, certain exposures to non-Euro denominated assets and liabilities are held at the level of the Corporate and Other segment. Based on a foreign exchange management limit framework, currency risk is monitored and managed through the Group Finance Committee process with the support of Group Treasury & Corporate Finance at the Group level.
Counterparty risk arises from our fixed income investments, cash positions, derivatives, structured transactions, receivables from Allianz agents and other debtors as well as reinsurance recoverables. Our credit insurance activities also expose us to counterparty risk. If a counterparty’s credit quality deteriorates (“migration risk”), the instrument’s fair value will decline, resulting in a loss in portfolio value. Migration risk also includes overdue payments and the inability or unwillingness of the counterparty to fulfill contractual obligations (“default risk”).
Country risk is specifically related to counterparties with cross-border payment obligations. For example, capital transfers may be prohibited or restricted by sovereign acts, currency moratoria, freezing of money or repatriation of capital (“transfer risk”) or currency conversion is prohibited or restricted (“convertibility risk”).
The Allianz Group monitors and manages credit risk exposures and concentrations with the objective to ensure that it is able to meet policyholder obligations when they are due, and to maintain adequate capital and solvency positions for the operating entities and the Group as a whole. This objective is supported by the Group-wide country and obligor group limit management framework (CRisP) as described under “Concentration of Risks”. In addition, standard credit portfolio analysis reports are available for the investment and risk functions on the Group and operating entity levels. They allow us to closely monitor the credit risk profile of the different portfolios.
The internal credit risk capital model is based on obligor ratings and estimates of exposure at default, loss given default and default correlations. Default correlations capture dependencies between single obligors within the portfolio in terms of their default. These parameters are estimated using statistical analysis and professional judgment. Our aggregation methodology is comparable to approaches widely used in the industry and known as “structural model”. In a structural model, a company is deemed to have defaulted when the value of its total assets is lower than its total liabilities. Since changes in the asset value of a company determine whether it defaults, the correlation between different firms’ asset values determines the correlation between the firms’ defaults. Credit risk is aggregated across individual obligors using Monte Carlo simulations to obtain the loss profile of a given portfolio, i. e. its loss probability distribution. The portfolio loss profiles are calculated at different levels of our portfolio hierarchy (e.g. at local operating entity or segment level). They are fed into the overall internal risk capital model for further aggregation across sources of risk to derive Group diversified internal credit risk capital.
Total Group internal credit risk capital: 6,871 (6,152) Share of total Group internal risk capital: 15 % (14 %)
Average, high and low allocated internal risk capital (total portfolio before non-controlling interests and after Group diversification)
The difference between 2009 and 2010 figures in the table shown above is explained by the change in the internal risk capital model. Please see “Introduction of new internal risk capital framework” for further information.
As of December 31, 2010, 6 % of our total Group pre-diversified internal credit risk capital is allocated to reinsurance exposures, 58 % of which is related to reinsurance counterparties in the U.S.A. and Germany.
3 Numbers after tax as disclosed under old internal credit risk model. Please see “Introduction of new internal risk capital framework” for explanations regarding the model change.
However, for certain life insurance products, we are able to share losses due to credit events with the policyholder, as described in the context of market risks.
As of December 31, 2010, 80 % of our total Group pre-diversified internal credit risk capital is allocated to investment exposures of the Property-Casualty, Life/Health as well as Corporate and Other segments, 64 % of which is related to issuers and counterparties in the U.S.A. and Germany.
We limit the credit risk of our fixed income investments by setting high requirements on the creditworthiness of our issuers, by diversifying our investments and by setting obligor concentration limits. As of December 31, 2010, approximately 94 % (2009: 95 %) of the fixed income investments of the insurance companies of the Allianz Group had an investment grade rating and approximately 85 % (2009: 87 %) of the fixed income investments were distributed among obligors that had been assigned at least an “A” rating by Standard & Poor’s.
Credit risk – credit insurance The premium risk to which our credit insurance entity Euler Hermes is exposed is a special form of credit risk derived from the Euler Hermes business model. As part of a credit insurance agreement, the policyholder protects a short-term trade credit advanced to a buyer against credit losses by transferring a part of the risk to Euler Hermes. If the creditworthiness of a buyer deteriorates (including its default), it will be unable to meet its payment obligations and Euler Hermes will indemnify the claim to the policyholder. Credit risk arises from potential claim payments due to limits granted by Euler Hermes to its policyholders.
The parameters used to model credit insurance portfolios are estimated by Euler Hermes based on proprietary models and provided as input to the Group’s internal credit risk capital model. In particular, since credit exposures are actively managed by Euler Hermes, a proprietary rating system is applied as opposed to the long-term public ratings primarily used for investment portfolios. Euler Hermes ratings evaluate the short-term creditworthiness of a company taking into account various key risk indicators available on the market and from policyholders.
Underwriting risks consist of premium and reserve risks in the Property-Casualty segment as well as biometric risks in our Life/Health segment. For the Asset Management segment and our Banking operations, underwriting risks are not relevant. Although the Corporate and Other segment provides some guarantees that transfer small parts of the underwriting risk away from local entities, such risk is primarily transferred by internal reinsurance and allocated to the PropertyCasualty segment.
Allocated internal underwriting risk capital by source of risk 1 (total portfolio before tax and non-controlling interests) as of December 31, 2010 (December 31, 2009 2) Pre-diversified, in € mn
Total Group internal underwriting risk capital: 12,028 (10,944) Share of total Group internal risk capital: 27 % (25 %)
Over quarterly results 3 Numbers before tax based on new internal risk capital framework and consistent with presentation of internal underwriting risk capital in this section.
4 Numbers after tax as disclosed under the old internal risk capital model. Please see “Introduction of new internal risk capital framework” for explanations regarding the model change.
1 As risks are measured by an integrated approach on an economic basis, internal risk capital takes reinsurance effects into account. Allowing for a defined deductible, there are contingent liabilities of up to USD 465 mn in connection with certain insurance reserves of Fireman’s Fund Insurance Co., Novato, allocated to the Corporate and Other segment.
Allocated internal underwriting risk capital by business segment 1 (total portfolio before tax and non-controlling interests) as of December 31, 2010 (December 31, 2009 2) Pre-diversified, in € mn
Our Property-Casualty insurance businesses are exposed to premium and reserve risks, both of which are related to the business in force as well as the current year’s new and renewed business. A substantial portion of the Property-Casualty segment’s pre-diversified internal underwriting risk capital is assigned to our entities operating locally in Germany, Italy, France and the U.S.A. (47 % as of December 31, 2010).
Premium risk is actively managed by the Allianz Group and the local operating entities. Assessing the risks as part of the underwriting process is a key element of the Allianz risk management framework. There are clear underwriting limits and restrictions 1 Please also refer to the section “Property-Casualty Insurance Operations – Property-Casualty Operations by Business Division” for a regional breakdown of loss ratios over the past three years.
centrally defined and in place across the Group. Specialty lines risk carriers such as Allianz Global Corporate and Specialty pool specific risks which require expert knowledge. In addition to the centrally defined underwriting limits, the local operating entities have local limits in place that take their individual business environment into account. At the local operating entity and Group level, premium risk relative to the underlying exposures is positively affected by the diversification effect between different lines of business at the local level or different markets at the Group level. In addition, risks are mitigated by external reinsurance agreements.
The Group’s net exposure to natural catastrophes remained within our risk appetite in 2010. In order to further reduce some potential earnings volatility, we purchased slightly more reinsurance capacity for scenarios in some of our smaller business regions, taking advantage of lower prices. We also continued to put emphasis on mitigating earnings volatility through our reinsurance program by enhanced protection against multiple higher frequency and midsized losses.
of these analyses and Group representatives participate in the local reserve committee meetings. Similar to premium risk, reserve risk is positively affected by the diversification effect between different lines of business at the local level and different markets at the Group level.
Biometric risk We consider mortality and longevity risks which can cause variability in policyholder benefits resulting from the unpredictability of the (non-)incidence of death and the timing of its occurrence. For modeling these risks within our internal risk capital model, we distinguish level, trend and calamity risk. Biometric assumptions, such as life expectancy, play a significant role.4 4 For further information regarding biometric assumptions, please refer to “Internal Risk Capital Framework – Non-market assumptions”.
The five largest global accumulation scenarios: Loss potential net of reinsurance for individual events, measured at a probability level of one loss in 250 years (i. e. 0.4 %)
2 Net surplus represents the cumulative surplus from re-estimating the reserves for loss and loss adjustment expenses for prior years’ claims and includes foreign currency translation adjustments. For further information, please see note 19 to our consolidated financial statements.
3 For further information, please see note 19 to our consolidated financial statements.
Due to the offsetting effects of mortality risk and longevity risk inherent in the combined portfolios of life insurance and annuity products, as well as due to a geographically diverse portfolio, our Life/Health segment does not have significant concentrations of biometric risk as of December 31, 2010.1
Total Group internal business risk capital: 7,254 (6,993) Share of total Group internal risk capital: 16 % (16 %)
3 Internal risk capital for guarantees in our Asset Management segment is not significant.
Dedicated minimum security standards are in place for the IT systems across the Allianz Group to ensure the proper use and protection of the Group’s information assets. With respect to financial statements, our system of internal control is designed to mitigate operational risks.1 In general, we aim to reduce process failures by clearly documenting relevant methods, procedures, structures and processes across the Group. Comprehensive and timely documentation is required across the Group as one of the fundamental principles of the Allianz Group Risk Policy.
1 For additional information regarding our internal control over financial reporting, please refer to the section “Controls and Procedures – Internal Controls over Financial Reporting”.
As described under “Risk Governance Structure”, the department Group Legal Services seeks to diminish legal risks with support from other departments.
Detailed information regarding the Allianz Group’s liquidity risk exposure, liquidity and funding including the change in cash and cash equivalents is provided, for instance, in the chapter “Liquidity and Funding Resources” and the notes 17, 23, 24 and 44 to our consolidated financial statements.
The main objective of planning and managing the liquidity position of Allianz SE is to ensure that Allianz SE is always able to meet all current and future payment obligations. To comply with this objective, the liquidity position of Allianz SE is monitored and forecasted on a daily basis. Strategic liquidity planning over a time horizon of 12 months and 3 years is reported to the Board of Management regularly. The main tools to meet unforeseen liquidity requirements are committed credit lines from banks, commercial paper facilities, medium-term debt issuance programs, a centrally managed, highly liquid bond portfolio with direct access to the market of sale and repurchase agreements (the so-called “Repo market”), as well as internal resources in the form of intraGroup loans and an international cash pooling infrastructure.
The accumulated short-term liquidity forecast is updated daily and subject to an absolute minimum strategic cushion amount and an absolute minimum target liquidity. Both are defined for the Allianz SE cash pool in order to be protected against short-term liquidity crises. As part of the strategic planning, contingent liquidity requirements and sources of liquidity are taken into account to ensure that Allianz SE is able to meet any future payment obligations even under adverse developments. Major contingent liquidity requirements include non-availability of external capital markets, combined market and catastrophe risk scenarios for subsidiaries as well as lower than expected profits and dividends from subsidiaries.
Because of the small size of risk-weighted assets and total assets (as of December 31, 2010, € 9.2 billion and € 19.2 billion, respectively), liquidity risk relating to our Banking operations is deemed not to be significant at the Group level.
Property-Casualty and Life/Health segments Our insurance operating entities manage liquidity risk locally, using local asset-liability management systems designed to ensure that assets and liabilities are adequately matched. To the extent available, the approaches used to project the liability cash flows for the Property-Casualty segment are similar to the methods used for setting reserves. For the Life/Health segment, our asset liability management approach is closely linked to the internal risk capital framework and designed to achieve long-term investment returns in excess of the obligations related to insurance and investment contracts. This decentralized approach secures a sufficient flexibility in providing liquidity.
Liquidity risk in our insurance segments is a secondary risk following external events, such as natural disasters, that are generally reflected in our internal risk capital model. Therefore, limiting and monitoring the associated primary risks (such as through the use of reinsurance) also helps limit our liquidity risk related to such events. Extreme adverse changes in business assumptions such as lapse or renewal rates or costs may cause liquidity risk as well. However, these effects are also covered by our internal risk capital model.
The local investment strategies particularly focus on the quality of investments and ensure a significant portion of liquid assets (e.g. Government bonds or covered bonds) in the portfolios. This helps us to meet high liquidity requirements in unlikely events.
formed on the operating entity level and aggregated at the Group level. Excess liquidity is centrally pooled at the Group level and can be transferred to single operating entities if necessary.
Our operating entities identify, assess and manage reputational risks predominately within their business processes (e.g. as part of the underwriting or product development processes). Management of reputational risks exclusively relevant at the level of a single operating entity is based on the local risk governance framework. Planned activities which might endanger the reputation of the Allianz Group as a whole have to be reported to Allianz SE for pre-approval. In addition, Group Risk and the local risk functions identify and assess reputational risks qualitatively as part of a quarterly evaluation (“Top Risk Assessment”). On the basis of this evaluation, an overview of local and global risks is created, which also includes reputational risks. Group Risk analyses the risk profile of the Allianz Group and regularly informs management about the current situation.
Strategic goals are translated into a three-year business plan, which is approved by the Supervisory Board of Allianz SE. To ensure proper implementation of these goals, strategic controls are carried out through monitoring of respective business targets. We also constantly monitor market and competitive conditions, capital market requirements, regulatory conditions etc. with respect to changes which may require strategic adjustments. In addition, strategic decisions are discussed in various Board of Management level committees (e.g. Group Capital Committee, Group Risk Committee, Group Finance Committee ). The assessment of the associated risks is a fundamental element of these discussions. For example, large mergers and acquisitions transactions are subject to review by the Group Finance Committee, if the volume exceeds clearly defined thresholds set for the type of transaction.
Risk Management Priorities for 2011 Our general objectives for 2011 include three priorities for risk management. First and foremost, to be as successful as we were in 2010 in meeting the risk management and reporting challenges. Second, to continue developing and strengthening our risk management framework and network globally. Our third priority is to do what is necessary to meet Solvency II internal model requirements starting in 2013, which is one of the Group’s top priorities set by the Board of Management of Allianz SE.
Solvency II is a major European initiative that is expected to lead to significant changes in European insurance solvency requirements in the coming years. The Allianz Group is actively participating in the process and is continuously providing feedback regarding the proposals and analysis of the European Insurance and Occupational Pensions Authority (EIOPA) and the E.U. Commission. Furthermore, we participate in the Quantitative Impact Studies and give technical advice, for instance, through the Chief Risk Officer Forum and the Chief Financial Officer Forum. We also participate actively in the voluntary pre-approval process for Solvency II with the relevant European supervisors. Given the remaining uncertainty surrounding the final implementation measures and their interpretation, we are constantly reviewing our internal risk capital framework and risk processes and enhance them as necessary to comply with the evolving Solvency II standards.
As part of these efforts, the Group Risk Committee decided in 2010 to introduce the dedicated PropertyCasualty Insurance Risk Model (PRISM) for risk capital calculations and reporting purposes in 2011. This stochastic model framework aligns multiple aspects of actuarial portfolio assessment and provides high flexibility regarding scenario impact analysis for nonlife insurance risks. It is also part of the voluntary preapproval process for Solvency II with the relevant European supervisors.
Moreover, we are planning to further strengthen our risk governance framework by implementing additional Solvency II relevant components including an enhanced model management framework and improved controls related to risk reporting processes. We have also started to prepare for the new reporting and disclosure requirements of Solvency II. All those initiatives are complemented by the development of adequate documentation and, where relevant, are subject to formal internal sign-off processes before final adoption.
Financial reporting processes are also heavily dependent upon IT systems. Consequently, “IT controls” are a vital part of our efforts to establish a strong control system.
It is crucial that controls are appropriately designed to mitigate risk, as well as effectively executed as designed.
Group Audit and local internal audit functions ensure that the overall quality of our internal control system is kept under continuous scrutiny.
identify and mitigate the risk of material errors appearing in our consolidated financial statements. The framework developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) serves as the basis upon which our control system is designed.
A top-down, risk-based approach is used to establish the scope of our internal control system. On an annual basis we conduct a combined qualitative and quantitative analysis of our consolidated financial statements and disclosures to identify those accounts and operating entities to be covered by internal control systems.
The internal risk capital calculation and aggregation draw on models and other techniques which use a significant number of estimates and assumptions.
We have a robust and comprehensive risk governance structure. This structure is supported by audit, compliance and independent review functions similar to our financial reporting governance. However, since our risk capital determination incorporates economic factors not fully reflected in accounting results, we have also implemented additional controls within our management reporting processes to ensure that these additional estimates, including techniques used and relevant assumptions made, are adequately controlled.
The roll-out of an enhanced internal control environment for the computation of our internal Risk Capital under the future Solvency II regime is planned for 2011.
Overall, just as with estimates and assumptions involving financial reporting, management reporting processes that underpin our risk capital framework are well controlled, consistently applied and prudent.
Consolidated Financial Statements 152 Consolidated Financial Statements 159 Notes to the Consolidated Financial Statements 208 Supplementary Information to the Consolidated
Supplementary Information to the Consolidated Income Statements 242 26 Premiums earned (net) 243 27 Interest and similar income 244 28 Income from financial assets and liabilities carried at fair value through income (net) 245 29 Realized gains/losses (net) 246 30 Fee and commission income 247 31 Other income 247 32 Income and expenses from fully consolidated private equity investments 248 33 Claims and insurance benefits incurred (net) 249 34 Change in reserves for insurance and investment contracts (net) 250 35 Interest expenses 250 36 Loan loss provisions 250 37 Impairments of investments (net) 250 38 Investment expenses 251 39 Acquisition and administrative expenses (net) 252 40 Fee and commission expenses 252 41 Other expenses 252 42 Net income (loss) from discontinued operations, net of income taxes 253 43 Income taxes
Other Information 257 44 Derivative financial instruments 259 45 Financial instruments 268 46 Related party transactions 268 47 Contingent liabilities, commitments, guarantees, and assets pledged and collateral 273 48 Pensions and similar obligations 275 49 Share-based compensation plans 281 50 Restructuring plans 286 51 Earnings per share 287 52 Other information 288 53 Subsequent events 290 List of participations of the Allianz Group as of December 31, 2010 according to § 313 (2) HGB
Detailed Index 152 Consolidated Balance Sheets 153 Consolidated Income Statements 154 Consolidated Statements of Comprehensive Income 155 Consolidated Statements of Changes in Equity 156 Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements 159 1 Nature of operations and basis of presentation 159 2 Summary of significant accounting policies 178 3 Use of estimates and assumptions 183 4 Recently adopted and issued accounting pronouncements, changes in accounting policies and changes in the presentation of the consolidated financial statements 193 6 Segment reporting
LIABILITIES AND EQUITY Financial liabilities carried at fair value through income 16 5,013 4,891 4,131 Liabilities to banks and customers 17 21,155 21,248 18,451
Total liabilities and equity 624,945 583,717 954,999 1 As of December 31, 2010, € 613 mn (2009: € 887 mn) are pledged to creditors and can be sold or repledged. 2 As of December 31, 2010, € 90 mn (2009: € 123 mn) are pledged to creditors and can be sold or repledged.
Interest and similar income 27 19,428 18,233 19,072 Income from financial assets and liabilities carried at fair value through income (net) 28 (38) 874 373 Realized gains/losses (net) 29 3,708 3,416 3,603 Fee and commission income 30 7,920 6,239 6,032
Claims and insurance benefits incurred (gross) (48,038) (47,879) (48,287) Claims and insurance benefits incurred (ceded) 1,942 2,233 2,628 Claims and insurance benefits incurred (net) 33 (46,096) (45,646) (45,659) Change in reserves for insurance and investment contracts (net) 34 (13,871) (9,760) (5,378)
Acquisition and administrative expenses (net) 39 (20,883) (20,118) (18,599) Fee and commission expenses 40 (2,561) (2,212) (2,344) Amortization of intangible assets 15 (327) (125) (23)
Expenses from fully consolidated private equity investments 32 (1,803) (2,142) (2,470)
Net income from continuing operations 5,209 4,650 4,268 Net income (loss) from discontinued operations, net of income taxes 42 — (395) (6,373) Net income (loss) 5,209 4,255 (2,105)
Basic earnings per share 51 11.20 9.33 (5.25) from continuing operations 11.20 10.21 8.99 from discontinued operations — (0.88) (14.24)
Reclassifications to net income (9) 516 2 Changes arising during the year 1,347 (122) (268)
Cash flow hedges Reclassifications to net income (2) (5) — Changes arising during the year 11 (11) 28
Miscellaneous Reclassifications to net income (1) — — Changes arising during the year 194 (87) 100
Total equity € mn € mn € mn € mn € mn € mn € mn
Balance as of January 1, 2008, as reported 28,321 12,579 (3,656) 10,470 47,714 3,628 51,342
Summary Net cash flow provided by operating activities 15,414 13,610 25,313 Net cash flow used in investing activities (19,536) (50,387) (6,236) Net cash flow provided by (used in) financing activities 4,465 3,649 (11,320) Effect of exchange rate changes on cash and cash equivalents 265 21 102 Change in cash and cash equivalents 608 (33,107) 7,859 Cash and cash equivalents at beginning of period of continuing operations 6,089 8,958 31,337 Cash and cash equivalents at beginning of period reclassified to assets of disposal groups classified as held for sale — 30,238 —
Cash flow from operating activities Net income (loss) 5,209 4,255 (2,105) Adjustments to reconcile net income (loss) to net cash flow provided by operating activities
Available-for-sale and held-to-maturity investments, investments in associates and joint ventures, real estate held for investment, loans and advances to banks and customers (2,864) (684) 5,710 Other investments, mainly financial assets held for trading and designated at fair value through income 444 (1,008) 2,633
Result of transaction of Dresdner Bank between September 30 and December 31, 2008 — — 2,933 Depreciation and amortization 1,098 902 640 Loan loss provisions 50 141 385 Interest credited to policyholder accounts 4,747 4,166 4,145 Net change in
Financial assets and liabilities held for trading (1,525) 100 6,779 Reverse repurchase agreements and collateral paid for securities borrowing transactions (189) 751 32,463 Repurchase agreements and collateral received from securities lending transactions 346 47 (30,763)
Reserves for loss and loss adjustment expenses 74 (117) 527 Reserves for insurance and investment contracts 8,138 5,190 390 Deferred tax assets/liabilities 159 (612) 395 Financial assets designated at fair value through income (only banking) — — 3,204 Financial liabilities designated at fair value through income (only banking) — — 2,925