Income before income taxes and minority interests in earnings 714 660 1,275 1,209 1,526 1,455 1) We have enhanced the presentation of revenues and operating profit stemming from trades in shares of Allianz SE and its affiliates. From 2007 onwards, these results are eliminated on Dresdner Bank level, whereas in 2006 they were adjusted on segment level only. At Dresdner Bank this led to reduced operating revenues and reduced operating profit of � 6 mn and � 6 mn, respectively, compared to the figures as stated in 2006. As a result income taxes decreased by � 3 mn. All other changes are related to rounding.
Investors � mn � mn � mn � mn � mn � mn
Net fee and commission income 1) 3,133 3,060 2,924 2,874 2,636 2,597
Administrative expenses, excluding acquisition-related expenses 4) (1,900) (1,857) (1,754) (1,713) (1,590) (1,560)
Income before income taxes and minority interests in earnings 865 829 735 720 425 409 1) Represents fee and commission income less fee and commission expenses.
2) Represents interest and similar income less interest expense and investment expenses. 3) For the Asset Management segment, total revenues are measured based upon operating revenues. 4) The total of these items equals acquisition and administrative expenses (net) in the segment income statement. 5) Consists of retention payments for the management and employees of PIMCO and Nicholas Applegate. 6) Represents operating expenses divided by operating revenues.
Interest and similar income 855 509 416 Income from financial assets and liabilities designated at fair value through income (net) 1) 7 (60) — Operating income from financial assets and liabilities held for trading (net) 1) (33) — — Fee and commission income 198 190 164 Other income 15 28 — Income from fully consolidated private equity investments 2,367 1,392 598
Interest expense, excluding interest expense from external debt 2) (535) (507) (534) Loan loss provisions (10) (5) —
Non-operating income from financial assets and liabilities held for trading (net) 1) 77 (274) (441) Realized gains/losses (net) 980 861 172 Interest expense from external debt 2) (1,051) (775) (787) Impairments of investments (net) (11) 32 (62) Acquisition-related expenses 3) (15) — — Restructuring charges (9) — — Non-operating items (29) (156) (1,118)
The change in fair value of loans to banks and customers attributable to changes in credit risk amounts to a loss of � 23 mn (2006: gain of � 10 mn) for the year ended December 31, 2007 and cumulatively to a loss of � 13 mn (2006: gain of � 10 mn).
Available-for-sale investments 268,001 277,898 Held-to-maturity investments 4,659 4,748 Funds held by others under reinsurance contracts assumed 1,063 1,033 Investments in associates and joint ventures 5,471 4,900 Real estate held for investment 7,758 9,555
Unrealized losses on available-for-sale investments and held-to-maturity investments The following table sets forth gross unrealized losses on available-for-sale investments and held-to-maturity investments and the related fair value, segregated by investment category and length of time such investments have been in a continuous unrealized loss position as of December 31, 2007 and 2006.
As of December 31, � mn � mn � mn � mn � mn � mn
Government and government agency bonds 36,587 (699) 18,522 (797) 55,109 (1,496)
Government and agency mortgage-backed securities (residential and commercial) 2,706 (66) 4,815 (152) 7,521 (218) Corporate mortgage-backed securities (residential and commercial) 1,738 (13) 1,078 (40) 2,816 (53)
Total unrealized losses amounted to � 112 mn as of December 31, 2007. The unrealized loss positions concern mostly issues of United States government agencies, which are primarily held by Allianz Group’s North American entities. These pay-through/pass-through securities are serviced by cash flows from pools of underlying loans to mostly private debtors. The unrealized losses of these mortgage-backed securities were partly caused by interest rate increases between purchase date of the individual securities and the balance sheet date. Also in various instances, price decreases were caused by increased prepayment risk for individual loan pools that were originated in a significantly higher interest rate environment. Because the decline in fair value is attributable to changes in interest rates and, to a lesser extent, instances of insignificant deterioration of credit quality, the Allianz Group does not consider these investments to be impaired at December 31, 2007.
Corporate bonds Total unrealized losses amounted to � 2,359 mn as of December 31, 2007. The Allianz Group holds a large variety of bonds issued by corporations mostly domiciled in OECD countries. For the vast majority of the Allianz Group’s corporate bonds, issuers and/or issues are of “investment grade”. Therefore, the unrealized losses on Allianz Group’s investment in corporate debt securities were primarily caused by interest rate increases between the purchase date of the individual securities and the balance sheet date. As the decline in fair value is primarily attributable to changes in interest rates, the Allianz Group does not consider these investments to be impaired at December 31, 2007.
Equity securities As of December 31, 2007, unrealized losses from equity securities amounted to � 467 mn. These unrealized losses concern equity securities that did not meet the criteria of Allianz Group’s impairment policy for equity securities as described in Note 2. Substantially all of the unrealized losses have been in a continuous loss position for less than 6 months.
Contractual term to maturity The amortized cost and estimated fair value of availablefor -sale debt securities and held-to-maturity debt securities as of December 31, 2007, by contractual term to maturity, are as follows: Amortized Cost
Available-for-sale investments Due in 1 year or less 16,333 16,459 Due after 1 year and in less than 5 years 64,716 64,612 Due after 5 years and in less than 10 years 59,781 59,048 Due after 10 years 66,158 64,821
Held-to-maturity investments Due in 1 year or less 336 340 Due after 1 year and in less than 5 years 1,406 1,422 Due after 5 years and in less than 10 years 1,436 1,437 Due after 10 years 1,481 1,506
Equity investments carried at cost As of December 31, 2007, fair values could not be reliably measured for equity investments with carrying amounts totaling � 1,742 mn (2006: � 1,486 mn). These investments are primarily investments in privately held corporations and partnerships. During the year ended December 31, 2007, such investments with carrying amounts of � 27 mn (2006: � 12 mn) were sold leading to gains of � 42 mn (2006: � 32 mn) and losses of � 6 mn (2006: � 1 mn).
Cost as of January 1, 13,039 13,090 13,655 Accumulated depreciation as of January 1, (3,484) (3,521) (3,027) Carrying amount as of January 1, 9,555 9,569 10,628
As of December 31, 2007, the fair value of real estate held for investment was � 12,031 mn (2006: � 13,494 mn). As of December 31, 2007, real estate held for investment pledged as security, and other restrictions on title, were � 146 mn (2006: � 55 mn).
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007 9 Loans and advances to banks and customers
Short-term investments and certificates of deposit 10,316 — 10,316 6,775 — 6,775
Collateral paid for securities borrowing transactions 16,664 23,714 40,378 15,191 19,121 34,312
Corporate customers 148,848 155,845 Private customers 55,761 59,505 Public authorities 8,647 7,297
As of December 31, 2007, unearned income related to discounts deducted from loan balances was � 58 mn (2006: � 69 mn).
Finance lease receivables Loans and advances to customers include amounts receivable under finance leases at their net investment value of � 1,256 mn (2006: � 2,081 mn).
Unearned finance income Due in one year or less (95) (98) Due after one year and not later than five years (367) (314) Due after five years (297) (251)
During the year ended December 31, 2007, lease payments received were recognized as income in the amount of � 174 mn (2006: � 154 mn; 2005: � 122 mn). As of December 31, 2007 and 2006, an allowance for uncollectible lease payments was not required.
� mn � mn � mn � mn � mn � mn � mn � mn � mn
Changes in the consolidated subsidiaries of the Allianz Group — (1) (3) — — — — (1) (3) Additions charged to the income statement 537 456 659 35 77 115 572 533 774 1) The unwinding-interest income for the year ended December 31, 2006 relates to loans in the non-homogeneous portfolio belonging to the Allianz Group in Germany that have been called in and for which the process of realising the collateral has started. For the year ended December 31, 2007 the unwinding interest income additionally includes loans in the homogeneous portfolio belonging to the Allianz Group in Germany.
Reconciliation of allowances for credit losses by specific and general allowance
2) Includes portfolio allowances. 3) The unwinding-interest income for the year ended December 31, 2006 relates to loans in the non-homogeneous portfolio belonging to the Allianz Group in Germany that have been called in and for which the process of realising the collateral has started. For the year ended December 31, 2007 the unwinding interest income additionally includes loans in the homogeneous portfolio belonging to the Allianz Group in Germany.
The following tables present information relating to the Allianz Group’s impaired and non-accrual loans: As of December 31, 2007 2006 � mn � mn
As of December 31, 2007, the Allianz Group had � 40 mn (2006: � 34 mn) of commitments to lend additional funds to borrowers whose loans are non-performing or whose terms have been previously restructured.
Changes in aggregate policy reserves ceded to reinsurers are as follows: � mn � mn � mn
Carrying amount as of January 1, 8,223 9,772 10,276 Foreign currency translation adjustments (311) (340) 443 Changes recorded in consolidated income statements 108 (7) 135
Carrying amount as of December 31, 5,319 8,223 9,772 1) Primarily relating to novation of quota share reinsurance agreement.
Changes in the consolidated subsidiaries of the Allianz Group 66 — — Foreign currency translation adjustments (72) (35) 78
Changes in the consolidated subsidiaries of the Allianz Group — — (26) Foreign currency translation adjustments (555) (464) 541
Deferred acquisition costs Property-Casualty 3,675 3,692 Life/Health 14,118 13,619 Asset Management 94 50
Present value of future profits 1,206 1,227 Deferred sales inducements 520 547
Changes in the consolidated subsidiaries of the Allianz Group (159) 819 (2,493)
Cost as of January 1, 3,764 3,472 3,320 Accumulated amortization as of January 1, (2,686) (2,381) (2,348) Carrying amount as of January 1, 1,078 1,091 972
Changes in the consolidated subsidiaries of the Allianz Group (9) 73 (2)
Other assets due within one year amounted to � 33,732 mn (2006: � 29,399 mn), and those due after more than one year totaled � 7,796 mn (2006: � 8,602 mn).
Real estate held for investment and real estate held for own use in Germany 1,950 — Selecta AG 1,543 — Other 10 — Total 3,503 —
Liabilities associated with non-current assets and disposal groups held for sale
During the fourth quarter ended December 31, 2007, the Allianz Group reclassified the assets, including goodwill, and liabilities related to its ownership of Selecta AG in the Corporate segment to disposal groups held for sale as the classification criteria of IFRS 5 were met. The Allianz Group is seeking to dispose of Selecta AG in 2008. No gain or loss was recognised on reclassification as fair value less costs to sell exceded the carrying amount.
Cost as of January 1, 12,368 12,384 12,038 Accumulated impairments as of January 1, (224) (224) (224) Carrying amount as of January 1, 12,144 12,160 11,814
Disposals — — (45) Foreign currency translation adjustments (372) (368) 479 Reclassifications — 37 — Reclassifications into held for sale (472) — (158) Carrying amount as of December 31, 12,453 12,144 12,160 Accumulated impairments as of December 31, 224 224 224 Cost as of December 31, 12,677 12,368 12,384
– increasing the interest in Russian People’s Insurance Society, Moscow, from 47.4 % to 97.2 %,
– the acquisition of a 100.0 % participation in SC Tour Michelet, Paris,
– the acquisition of 100.0 % participation in United Mercantile Agencies, Inc., Kentucky.
2007 The reclassifications affect the goodwill of Selecta AG, Muntelier as this subsidiary was reclassified to disposal groups held for sale.
2006 The reclassification affects intangible assets of Allianz Slovenská poist’ovna a.s., Bratislava as they were reclassified to goodwill due to a change in the accounting treatment.
Amortization expense of definite life intangible assets is estimated to be � 36 mn in 2008, � 36 mn in 2009, � 35 mn in 2010, � 17 mn in 2011 and � 17 mn in 2012.
The cash generating units of the Life/Health segment are: Insurance Germany, Austria & Switzerland; Insurance Germany Health; Europe I, including Italy, Spain, Portugal and Greece; Europe II, including France, Netherlands, Belgium, Luxemburg and Africa; Asia Pacific & Middle East and Insurance Anglo NAFTA Markets & Global Lines, including United Kingdom, Ireland, Australia, United States and Mexico.
The recoverable amounts of all cash generating units excluding Private Equity are determined on the basis of value in use calculations. The recoverable amount of the cash generating unit Private Equity is determined on the basis of the fair values of the Private Equity investments.
The business plans applied in the value in use are the results of the structured management dialogues between the Board of Management of the Allianz Group and the companies in connection with a reporting process integrated into these dialogues. Generally, the business plans comprise a planning horizon of three years and are based on current market environment.
The discount rate is based on the capital asset pricing model and appropriate eternal growth rates. The assumptions, including the risk free interest rate, market risk premium, segment beta and leverage ratio, used to calculate the discount rates are consistent with the parameters used in the Allianz Group’s planning and controlling process, specifically those utilized in the calculation of Economic Value Added.
Europe II 638 — 611 — South America 21 — 21 — Asia Pacific & Middle East 79 — 31 —
Insurance Anglo, NAFTA Markets & Global Lines 410 — 419 — Specialty Lines I 7 — 5 — Specialty Lines II 27 — 19 —
Life/Health Insurance Germany, Austria & Switzerland 554 — 554 — Insurance Germany Health 325 — 325 —
Investment Banking 183 — 183 — Other Banking 52 — 52 —
Brand name The brand name “Dresdner Bank” has an indefinite life, as there is no foreseeable end to its economic life; therefore, it is not subject to amortization and it is recorded at cost less accumulated impairments. The fair value of this brand name, registered as a trade name, was determined using a royalty savings approach.
Sensitivity analysis with regard to considered new business values are performed. For all Life cash generating units, respective Appraisal Value sensitivities still exceeded respective carrying values.
Collateral received from securities lending transactions 16,235 4,729 20,964 17,493 4,405 21,898
As of December 31, 2007 Up to 3 months > 3 months up to 1 year > 1 year up to 3 years > 3 years up to 5 years
As of December 31, 2007, the carrying amount of financial liabilities designated at fair value through income was � 63 mn lower (2006: � 14 mn lower) than the contractually required payment at maturity. The amount of the change in fair value attributable to changes in credit risk for the year ended December 31, 2007 was � 10 mn (2006: � (4) mn) and � 6 mn (2006: � (4) mn) cumulatively.
Prior years’ loss and loss adjustment expenses incurred reflects the changes in estimation charged or credited to the consolidated income statement in each year with respect to the reserves for loss and loss adjustment expenses established as of the beginning of that year. During the year ended December 31, 2007, the Allianz Group recorded additional income of � 1,360 mn (2006: � 969 mn; 2005: � 1,200 mn) with respect of losses occurring in prior years. During the year ended December 31, 2007, these amounts as percentages of the net balance of the beginning of the year were 2.8 % (2006: 2.0 %; 2005: 2.6 %).
Foreign currency trans lation adjustments and other changes1) (2,022) 666 (1,356) (1,491) 497 (994) 2,278 (837) 1,441 Changes in the consolidated subsidiaries of the Allianz Group 125 (23) 102 — — — 1 — 1 1) Includes effects of foreign currency translation adjustments for loss and loss adjustment expenses for prior years claims of gross � (1,690) mn (2006: � (1,141) mn; 2005: � 2,371 mn) and net of � (1,052) mn (2006: � (962) mn; 2005: � 1,348 mn).
Development of the reserves for loss and loss adjustment expenses for the Property-Casualty segment The following table illustrates the development of the reserves for loss and loss adjustment expenses over the past five years. The table presents calendar year data, not accident year data. In addition, the table includes (excludes) subsidiaries from the date acquired (disposed).
Three years later 29,007 26,149 24,812 Four years later 32,839 29,859 Five years later 35,845 Reserves reestimated as of
1) Gross/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 trans lation adjustments of gross � 1,690 mn (2006: � 1,141 mn) and net � 1,052 mn (2006: � 962 mn). This leads to an effective run off result excluding effects of foreign currency translation of gross � 1,708 mn (2006: � 1,186 mn) and net � 1,360 mn (2006: � 969 mn) which can be found in the table for changes in the reserves for loss and loss adjustment expenses within this footnote. Please note that the 2006 numbers refer to the surplus presented in the consolidated financial statements 2006 and not the cumulative surplus of the calendar year 2006 presented in the table above.
Discounted loss and loss adjustment expenses As of December 31, 2007 and 2006, the Allianz Group PropertyCasualty reserves for loss and loss adjustment expenses reflected discounts of � 1,466 mn and � 1,377 mn, respectively. The discount reflected in the reserves is related to annuities for certain long-tailed liabilities, primarily in workers’ compensation, personal accident, general liability, motor liability, individual and group health disability and employers’ liability. All of the reserves that have been discounted have payment amounts that are fixed and timing that is reasonably determinable.
Aggregate policy reserves 264,243 256,333 Reserves for premium refunds 27,225 30,024 Other insurance reserves 776 675
Traditional participating insurance contracts (SFAS 120) 127,502 123,835 Long-duration insurance contracts (SFAS 60) 46,337 45,390 Universal life-type insurance contracts (SFAS 97) 89,840 86,681 Non unit linked investment contracts 564 427
Changes in aggregate policy reserves for traditional participating insurance contracts and long-duration insurance contracts for the years ended December 31, 2007 and 2006 were as follows: Traditional partici pating insurance contracts (SFAS 120)
As of December 31, 2007, participating life business represented approximately 65 % (2006: 62 %) of the Allianz Group’s gross insurance inforce. During the year ended December 31, 2007, participating policies represented approximately 61 % (2006: 66 %) of gross statutory premiums written and 60 % (2006: 63 %) of life premiums earned. As of December 31, 2007, reserves for conventional participating policies were approximately 54 % (2006: 54 %) of the Allianz Group’s consolidated aggregate policy reserves.
Foreign currency translation adjustments (19) (24) (4) Changes due to fluctuations in market value (4,099) (50) 4,094 Changes in the consolidated subsidiaries of the Allianz Group — (491) 6 Changes due to valuation differences charged to income 645 895 1,055
Changes in aggregate policy reserves for universal life-type insurance contracts and non unit linked investment contracts for the years ended December 31, 2007 and 2006 were as follows: Universal life-type insurance contracts
Additions 81 — — — Portfolio acquisitions and disposals (37) — — —
Other Western and Southern Europe 305 2,188 126 — 2,314 3,564 5,878
Furthermore, all of the Allianz Group’s annuity policies issued in the United States meet the criteria for classification as insurance contracts under IFRS 4 on an individual contract basis, because they include options for contract holders to elect a life-contingent annuity. These contracts currently do not expose the Allianz Group to significant insurance risk, nor are they expected to do so in the future, as the projected and observed annuitization rates are very low. Additionally, many of the Allianz Group’s traditional contracts issued in France and Italy do not incorporate significant insurance risk, although they are accounted for as insurance contracts, because of their discretionary participation features. Similarly, a significant portion of the Allianz Group’s unit linked contracts in France and Italy do not incorporate significant insurance risk.
South Korea 5.29 6.06 1) The life operations of the Allianz Group in the United States only grant minimum guaranteed interest rates on approximately 15 % of their existing business, the weighted average minimum interest rate for these contracts as of December 31, 2007 is 2.7 % (2006: 2.7 %).
Other liabilities due within one year amounted to � 39,444 mn (2006: � 40,839 mn) and those due after more than one year totaled � 9,880 mn (2006: � 8,925 mn).
Contractual interest rate 0.75 % — — — — — — — Money market securities
Contractual interest rate 4.50 % — — — — — — —
Contractual interest rate — — — — — 2.11 % — — Money market securities Fixed rate — — — — — — — 599 Contractual interest rate — — — — — — — —
Total all other subsidiaries — — — — — 3 3 603 1) Except for the interest rates. The interest rates represent the weighted-average. 2) Includes senior bonds, exchangeable bonds and money market securities issued by issued by Allianz Finance B.V. and Allianz Finance II B.V. guaranteed by Allianz SE and money market securities issued by Allianz Finance Corporation, a wholly-owned subsidiary of Allianz SE, which are fully and unconditionally guaranteed by Allianz SE.
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007 22 Participation certificates and subordinated liabilities
Contractual interest rate — — — — — 5.94 % — —
Minority interests 3,628 7,180 1) As of December 31, 2007 includes � 175 mn related to cash flow hedges (2006: � 140 mn).
Issued capital Issued capital at December 31, 2007 amounted to � 1,152,384,000 divided into 450,150,000 registered shares. The shares have no par value but a mathematical per share value of � 2.56 each as a proportion of the issued capital.
On October 13, 2006, Allianz AG and RAS merged resulting in the issuance of 25,123,259 shares of Allianz SE to the shareholders of RAS. As a result, share capital increased by � 64 mn and capital reserve increased by � 3,589 mn.
On February 18, 2005, the Allianz Group issued a subordinated bond with 11.2 mn detachable warrants, which allow the holder to purchase a share of Allianz SE. The warrants are exercisable at any time during their three year term and
Treasury shares The Annual General Meeting on May 2, 2007 (2006: May 3), authorized Allianz SE to acquire its own shares for other purposes pursuant to clause 71(1) no. 8 of the German Stock Corporation Law (“Aktiengesetz”). During the year ended December 31, 2007 the authorization was used to acquire 143,663 (2006: 57,232) shares of Allianz SE.
The resulting short position in own shares is hedged by the use of derivatives and is reflected in the revenue reserves. Due to written put options the Allianz Group is obliged to buy own shares amounting to � - mn (2006: � 2mn), in case the put options are exercised.
Capital Requirements The Allianz Group’s capital requirements are primarily dependent on our growth and the type of business that it underwrites, as well as the industry and geographic locations in which it operates. In addition, the allocation of the Allianz Group’s investments plays an important role. During the Allianz Group’s annual planning dialogues with its operating entities, capital requirements are determined through business plans regarding the levels and timing of capital expenditures and investments. Regulators impose minimum capital rules on the level of both the Allianz Group’s operating entities and the Allianz Group as a whole.
On January 1, 2005, the Financial Conglomerates Directive, a supplementary European Union (or “EU”) directive, became effective in Germany. Under this directive, a financial conglomerate is defined as any financial parent holding company that, together with its subsidiaries, has significant crossborder and cross-sector activities. The Allianz Group is a financial conglomerate within the scope of the directive and the related German law. The law requires that the financial conglomerate calculates the capital needed to meet the respective solvency requirements on a consolidated basis.
At December 31, 2007, based on the current status of discussion, our eligible capital for the solvency margin, required for our insurance segments and our banking and asset
Dresdner Bank is subject to the German Banking Act (“Kreditwesengesetz ”) as well as to the new Solvency Regulation (“Solvabilitäts-Verordnung”) and therefore Dresdner Bank calculates and reports under such guidelines to the German Federal Financial Supervisory Authority (the Bundesanstalt für Finanzdienstleistungsaufsicht, or “BaFin”) and the Deutsche Bundesbank, the German central bank. These guidelines are used to evaluate capital adequacy based primarily on the perceived credit risk associated with balance sheet assets, as well as certain off-balance sheet exposures such as unfunded loan commitments, letters of credit, and derivative and foreign exchange contracts. In addition, for Allianz SE to maintain its status as a “financial holding company ” under the U.S. Gramm-Leach-Bliley Financial Modernization Act of 1999, Dresdner Bank must be considered “well capitalized” under guidelines issued by the Board of Governors of the Federal Reserve System. To be considered “well capitalized” for these purposes, Dresdner Bank must have a Tier I Capital Ratio of a least 6 % and a combined Tier I and Tier II Capital Ratio of at least 10 %, and not be subject to a directive, order or written agreement to meet and maintain specific capital levels. As shown in the table below, Dresdner Bank maintained a “well capitalized” position during both 2007 and 2006.
1) Represents the difference between fair value and amortized cost of real estate held for investment and investments in associates and joint ventures, net of deferred taxes, policyholders’ participation and minority interests.
The following table sets forth Dresdner Bank’s BIS capital ratios: As of December 31, 2007 2006 � mn � mn
Tier I capital (core capital) 11,234 12,469 Tier I & Tier II capital 16,964 18,668 Tier III capital (supplementary capital) — — Total capital 16,964 18,668
Risk-weighted assets – banking book 119,477 117,355 Risk-weighted assets – trading book 3,638 2,625 Total risk-weighted assets 123,115 119,980
Certain insurance subsidiaries are subjected to regulatory restrictions on the amount of dividends which can be remitted to Allianz SE without prior approval by the appropriate regulatory body. Such restrictions provide that a company may only pay dividends up to an amount in excess of certain regulatory capital levels or based on the levels of undistributed earned surplus or current year income or a
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007 percentage thereof. By way of example only, the operations of our insurance subsidiaries located in the United States are subject to limitations on the payment of dividends to their parent company under applicable state insurance laws.
Unrealized gains and losses (net) 95 888 Share of earnings 748 1,289 Other equity components 2,785 5,003
The reduction in minority interests includes the impact of the minority buy-out of AGF with an amount of � (3,868) mn.
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007 24 Premiums earned (net) – continued
Dividends from availablefor -sale investments 2,332 2,119 1,469 Interest from availablefor -sale investments 9,709 9,160 8,592 Share of earnings from investments in associates and joint ventures 521 287 253 Rent from real estate held for investment 835 930 993 Interest from loans to banks and customers 12,200 11,058 10,875
Income (expense) from financial assets and liabilities held for trading (51) (1,337) (464) — 44 (35) (1,843) Income from financial assets designated at fair value through income 150 345 67 64 7 (8) 625 Income (expense) from financial liabilities designated at fair value through income 3 11 (34) — — — (20) Income (expense) from financial liabilities for puttable equity instruments (net) (17) 41 — (33) — — (9)
Income (expense) from financial assets and liabilities held for trading 83 (808) 1,282 7 (274) 72 362 Income (expense) from financial assets designated at fair value through income 121 742 95 (105) 5 — 858 Expense from financial liabilities designated at fair value through income (1) (2) (42) — — 1 (44) Income (expense) from financial liabilities for puttable equity instruments (net) (14) (293) — 136 (65) — (236)
Income (expense) from financial assets and liabilities held for trading 32 (324) 1,170 3 (441) (3) 437 Income from financial assets designated at fair value through income 128 780 74 247 — — 1,229 Expense from financial liabilities designated at fair value through income — — (81) — — 3 (78) Income (expense) from financial liabilities for puttable equity instruments (net) 4 (198) — (231) — — (425)
Financial assets and liabilities held for trading (577) 927 12 362 Financial assets designated at fair value through income 316 167 375 858 Financial liabilities designated at fair value through income (89) 45 — (44) Financial liabilities for puttable equity instruments (net) — — (236) (236)
Financial assets and liabilities held for trading 244 567 (374) 437 Financial assets designated at fair value through income 211 117 901 1,229 Financial liabilities designated at fair value through income (73) (5) —- (78) Financial liabilities for puttable equity instruments (net) —- —- (425) (425)
Life/Health Segment Income from financial assets and liabilities held for trading for the year ended December 31, 2007 includes in the Life/ Health segment expenses of � 1,352 mn (2006: � 834 mn; 2005: � 377 mn) from derivative financial instruments. Expenses of � 756 mn (2006: � 513 mn; 2005: � 50 mn) result from the purchase of forward contracts for interest bonds and forward sales of shares. Also included are expenses from derivative financial instruments related to equity indexed annuity contracts and guaranteed benefits under unit- linked contracts of � 622 mn (2006: � 350 mn; 2005: � 199 mn) and income from other derivative financial instruments of � 26 mn (2006: � 29 mn; 2005: � 128 mn).
Trading in interest products 1) 411 637 569 Trading in loan products 2) (1,231) 241 146 Trading in equity products 309 304 224 Foreign exchange/ precious metals trading 256 209 112 Other trading activities (209) (109) 119 1) For the year ended December 31, 2007 includes impairments of � (23) mn for asset-backed securities held for trading of Dresdner Bank.
Investments in associates and joint ventures 1) 220 891 1,218 Loans to banks and customers 80 47 116 Real estate held for investment 371 766 373
1) During the year ended December 31, 2007, includes realized gains from the disposal of subsidiaries and businesses of � 185 mn (2006: � 613 mn; 2005: � 394 mn).
Realized gains from disposals of real estate held for own use 210 82 23 Other income from real estate held for own use 2 3 33
Income from non-current assets and disposal groups held for sale 4 1 35 30 Income from fully consolidated private equity investments
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007 32 Change in reserves for insurance and investment contracts (net)
Ceded Aggregate policy reserves 16 92 — 108 Other insurance reserves 2 5 — 7 Expenses for premium refunds 15 18 — 33
Aggregate policy reserves (225) (5,162) — (5,387) Other insurance reserves (11) (12) — (23) Expenses for premium refunds (521) (5,409) (26) (5,956)
Ceded Aggregate policy reserves 17 118 — 135 Other insurance reserves (6) 5 — (1) Expenses for premium refunds 39 17 — 56
Held-to-maturity investments — (8) (2) Investments in associates and joint ventures (10) (12) (50) Real estate held for investment (51) (252) (240)
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007 37 Acquisition and administrative expenses (net)
Commissions and profit received on reinsurance business ceded 691 (2) 689 722 (1) 721 953 (1) 952
Amortization of deferred acquisition costs (4,384) — (4,384) (3,843) — (3,843) (2,686) — (2,686)
Commissions and profit received on reinsurance business ceded 146 — 146 150 — 150 115 — 115
Amortization of deferred acquisition costs (1,643) — (1,643) (1,772) — (1,772) (1,393) — (1,393)
Realized losses from disposals of real estate held for own use (4) (9) (8) Impairments of real estate held for own use (17) (3) (9)
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007 41 Income taxes
The German Reorganization Tax Act (SEStEG) which entered into force in December 2006 stipulates that corporation tax credits accumulated under the pre-2001 corporation tax imputation system will be refunded in the future without regard to dividend distributions. The refunds are spread equally over a ten year period from 2008 to 2017. As a consequence of the tax law change Allianz Group’s total corporate tax credits were capitalized on a discounted basis as of December 31, 2006, and reduced current income tax expense in 2006 by � 571 mn.
Of the deferred tax charge for the year ended December 31, 2007, an expense of � 178 mn (2006: income of � 480 mn; 2005: income of � 468 mn) is attributable to the recognition of deferred taxes on temporary differences and expense of � 57 mn (2006: � 785 mn; 2005: � 492 mn) is attributable to tax losses carried forward. Additionally, changes of applicable tax rates due to changes in tax law produced deferred tax income of � 185 mn (2006 expense of � 18 mn; 2005 income of � 7 mn). In this amount is included a tax income of � 152 mn resulting from the German corporate tax reform. Current and deferred tax benefit included in shareholders’ equity during the year ended December 31, 2007, amounted to � 870 mn (2006: benefit of � 740 mn; 2005: charge of � 101 mn).
The recognized income tax charge for the year ended December 31, 2007, is � 524 mn (2006: � 1,130 mn; 2005: � 278 mn) lower than the expected income tax charge. The following table shows the reconciliation from the expected income tax charge of the Allianz Group to the effectively recognized tax charge. The Allianz Group’s reconciliation is a summary of the individual company-related reconciliations, which are based on the respective country-specific tax rates after taking into consideration consolidation effects with impact on the group result. The expected tax rate for domestic Allianz Group subsidiaries applied in the reconciliation includes corporate tax and the solidarity surcharge and amounts to 26.38 % (2006: 26.38 %; 2005: 26.38 %).
The effective tax rate is determined on the basis of the effective income tax charge on income before income taxes and minority interests in earnings.
Expected income tax rate in % 29.2 30.4 29.9 Expected income tax charge 3,378 3,143 2,340 Municipal trade tax and similar taxes 522 208 280 Net tax exempt income (1,022) (884) (503) Effects of tax losses 226 (50) (73) Effects of German tax law changes (152) (571) —
During the year ended December 31, 2007, a deferred tax charge of � 8 mn (2006: � 35 mn; 2005: � 4 mn) was recognized due to a devaluation of deferred tax assets on tax losses carried forward. Due to the use of tax losses carried forward for which no deferred tax asset was recognized, the current income tax charge diminished by � 52 mn (2006: � 45 mn; 2005: � 64 mn). The recognition of deferred tax assets on losses carried forward from earlier periods, for which no deferred taxes had yet been recognized or which had been devalued resulted in a deferred tax income of � 207 mn (2006: � 54 mn; 2005: � 39 mn). The non-recognition of deferred taxes on tax losses for the current fiscal year increased tax charges by � 477 mn (2006: � 14 mn; 2005: � 26 mn). The above mentioned effects are shown in the reconciliation statement as “effects of tax losses”.
The tax rates used in the calculation of the Allianz Group deferred taxes are the applicable national rates, which in 2007 ranged from 10.0 % to 45.4 %. Changes to tax rates already adopted on December 31, 2007, are taken into account.
Fee and commission income 3,598 (421) 3,177 Fee and commission expense (590) 57 (533) Net fee and commission income 3,008 (364) 2,644
Fee and commission income 3,397 (313) 3,084 Fee and commission expense (547) 24 (523) Net fee and commission income 2,850 (289) 2,561
The net fee and commission income of the Allianz Group’s Banking segment includes the following: � mn � mn � mn
USD GBP Other Total Total � mn � mn � mn � mn � mn
Other banking information As of December 31, 2007, the Allianz Group had deposits that have been reclassified as loan balances of � 8,152 mn (2006: � 6,697 mn) and deposits with related parties of � 302 mn (2006: � 627 mn). The Allianz Group received no deposits on terms other than those available in the normal course of banking operations.
Market and counterparty risks arising from the use of derivative financial instruments are subject to control procedures. Credit risks related to counterparties are assessed by calculating gross replacement values. Market risks are monitored by means of up-to- date value-at-risk calculations and stress tests and limited by specific stop-loss limits.
The Property-Casualty and the Life/Health segments use fair value hedges to hedge forward sales of shares. The financial instruments used in the fair value hedges had a total fair value of � (2,050) mn (2006: � (67) mn) as of December 31, 2007.
Cash flow hedges During the year ended December 31, 2007, cash flow hedges were used to hedge variable cash flows exposed to interest rate fluctuations. As of December 31, 2007, the interest rate swaps utilized had a negative fair value of � 2 mn (2006: � 55 mn); other reserves in shareholders’ equity increased by � 35 mn (2006: � 1 mn). Ineffectiveness of the cash flow hedges led to net realized losses of � 1 mn in 2007 (2006: � 2 mn).
Financial liabilities Financial liabilities held for trading 124,083 124,083 120,885 120,885 Financial liabilities designated at fair value through income 1,970 1,970 937 937 Liabilities to banks and customers 336,494 335,394 376,565 376,765 Investment contracts with policyholders 90,404 90,404 87,108 87,267 Financial liabilities for unit linked contracts 66,060 66,060 61,864 61,864 Derivative financial instruments and firm commitments included in other liabilities 2,210 2,210 907 907 Financial liabilities for puttable equity instruments 4,162 4,162 3,750 3,750 Certificated liabilities, participation certificates and subordinated liabilities 56,894 57,961 71,284 73,212
Financial assets held for trading A financial asset is classified as held for trading if it is acquired principally for the purpose of selling in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative (not in a qualifying hedge relationship). Held for trading financial assets are initially recognized at fair value with transaction costs being recognized in profit or loss. Subsequently they are measured at fair value. Gains and losses on held for trading financial assets are recognized in profit or loss as they arise.
Financial assets designated as at fair value through income Financial assets that the Group designates on initial recognition as being at fair value through income are recognized at fair value, with transaction costs being recognized in income and are subsequently measured at fair value. Gains and losses on financial assets that are designated as at fair value through income are recognized in profit or loss as they arise. Financial assets may be designated as at fair value through income only if such designation (a) eliminates or significantly reduces a measurement or recognition inconsistency; or (b) applies to a group of financial assets, financial liabilities or both that the Group manages and evaluates on a fair value basis; or (c) relates to an instrument that contains an embedded derivative which is not evidently closely related to the host contract. Fair value designation significantly reduces the measurement inconsistency that would arise if these assets were classified as available-for-sale.
Available-for-sale investments Available-for-sale investments are financial assets that are designated as available-for-sale on initial recognition or are not classified as held-to-maturity, held for trading, designated as at fair value through income, or loans and receivables. Available-for-sale financial assets are initially recognized at fair value plus directly related transaction costs. They are subsequently measured at fair value. Unquoted equity investments whose fair value cannot be measured reliably are carried at cost and classified as available-for-sale financial assets. Impairment losses and exchange differences resulting from retranslating the amortized cost of currency monetary available-for-sale financial assets are recognized in profit or loss together with interest calculated using the effective interest method. Other changes in the fair value of availablefor -sale financial assets are reported in a separate component of shareholders’ equity until disposal, when the cumulative gain or loss is recognized in profit or loss.
Held-to-maturity investments A financial asset is classified as a held-to-maturity investment only if it has fixed or determinable payments, a fixed maturity and the Group has the positive intention and ability to hold to maturity. Held-to-maturity investments are initially recognized at fair value plus directly related transaction costs. They are subsequently measured at amortized cost using the effective interest method, less any impairment losses.
Loans and advances to banks and customers Non-derivative financial assets with fixed or determinable repayments that are not quoted in an active market are classified as loans, except for those that are classified as available-for-sale or as held for trading, or are designated as at fair value through income. Loans are initially recognized at fair value plus directly related transaction costs. They are subsequently measured at amortized cost using the effective interest method less any impairment losses.
Financial assets for unit linked contracts The fair values of financial assets for unit linked contracts were determined using the market value of the underlying investment.
The fair value of a derivative financial instrument is derived from the value of the underlying assets and other market parameters. Exchange-traded derivative financial instruments are valued using the fair-value method, and the fair value is based on publicly quoted market prices. Valuation models established in financial markets (such as present value models or option pricing models) are used to value OTC-traded derivatives. In addition to interest rate curves and volatilities, these models also take into account market and counterparty risks. Fair value represents the capital required to settle in full all the future rights and obligations arising from the financial contract.
Investment contracts with policyholders Fair values for investment and annuity contracts are determined using the cash surrender values of policyholders’ and contract holders’ accounts.
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007 45 Related party transactions
Schering Disposal In June 2006, the Allianz Group sold its 10.6 % shareholding in Schering AG for approximately � 1.8 bn to Dritte BV GmbH, a 100 % subsidiary of Bayer AG. Following this sale, Bayer AG acquired control of Schering AG. One member of the Board of Management of Allianz SE is a member of the Supervisory Board of Bayer AG, but this individual did not participate in the meeting of the Supervisory Board of Bayer AG that approved the acquisition of Schering AG. In addition, at the time of the transaction, the Chairman of the Supervisory Board of Bayer AG was also a member of Allianz’s Supervisory Board but was not involved in Allianz SE’s decision to sell its interest in Schering AG to Bayer AG, which occurred at the level of the Board of Management.
Financial liabilities for unit linked contracts Fair values of financial liabilities for unit linked contracts are equal to the fair value of the financial assets for unit linked contracts.
Day one profit During the year ended December 31, 2007 the Allianz Group entered into transactions, where the fair value of financial instruments is determined using valuation techniques for which not all inputs are market observable rates or prices. The difference between transaction price and the model fair value is called day one profit.
On May 24, 2002, pursuant to a statutory squeeze-out procedure, the general meeting of Dresdner Bank AG resolved to transfer shares from its minority shareholders to Allianz as principal shareholder in return for payment of a cash settlement amounting to � 51.50 per share. The amount of the cash settlement was established by Allianz on the basis of an expert opinion, and its adequacy was confirmed by a court appointed auditor. Some of the former minority shareholders applied for a court review of the appropriate amount of the cash settlement in a mediation procedure (“Spruchverfahren”), which is pending with the district court (“Landgericht”) of Frankfurt. We believe that a claim to increase the cash settlement does not exist. In the event that the court were to determine a higher amount as an appropriate cash settlement, this would affect all of the approximately 16 mn shares that were transferred to Allianz.
Allianz Global Investors of America L.P. and certain of its subsidiaries have been named as defendants in multiple civil US lawsuits commenced as putative class actions and other proceedings related to matters involving market timing and revenue sharing in the mutual fund industry. The consolidated lawsuits concerning revenue sharing allegations were dismissed by the court on September 18, 2007. The plaintiffs have not appealed this decision, which is final now. The lawsuits relating to market timing have been consolidated into and transferred to a multi-district litigation proceeding in the US District Court for the District of Maryland. The potential outcomes cannot be predicted at this time, but management currently does not expect any material negative financial outcome from these matters for the Allianz Group.
Other contingencies Liquiditäts-Konsortialbank GmbH (“LIKO”) is a bank founded in 1974 in order to provide funding for German banks which experience liquidity problems. 30 % of LIKO shares are held by Deutsche Bundesbank, while the remaining shares are being held by other German banks and banking associations. The shareholders have provided capital of � 200 mn to fund LIKO; Dresdner Bank AG’s participation is � 12.1 mn (6.07 %). Dresdner Bank AG is contingently liable to pay future assessments to LIKO up to � 60.7 mn (6.07 %). In addition, under clause 5(4) of the Articles of Association of LIKO, Dresdner Bank AG is committed to a secondary liability, which arises if other shareholders do not fulfill their commitments to pay their respective future assessments. In all cases of secondary liability, the financial status of the other shareholders involved is sound.
Stand-by facilities 1,635 8,930 Guarantee credits 1,604 1,765 Discount credits 64 64 Mortgage loans/public-sector loans 527 662
Moreover the Allianz Group has extended a loan commitment of � 245 mn to the purchaser of a real estate portfolio (“Charlotte”). Title transfer of the real estate as well as disbursement of the loan occurred on March 1, 2008.
Purchase obligations The Allianz Group has commitments for mortgage loans and to buy multi-tranche loans of � 4,489 mn (2006: � 4,337 mn)
Letters of credit and other financial guarantees The majority of the Allianz Group’s letters of credit and other financial guarantees are issued to customers through the normal course of business of the Allianz Group’s Banking segment in return for fee and commission income, which is generally determined based on rates subject to the nominal amount of the guarantees and inherent credit risks. Once a guarantee has been drawn upon, any amount paid by the Allianz Group to third-parties is treated as a loan to the customer, and is, therefore, principally subject to collateral pledged by the customer as specified in the agreement.
The Allianz Group’s Asset Management segment, in the ordinary course of business, issues market value guarantees in connection with investment trust accounts and mutual funds it manages. The levels of market value guarantees, as well as the maturity dates, differ based on the separate governing agreements of the respective investment trust accounts and mutual funds. As of December 31, 2007, the maximum potential amount of future payments of the market value guarantees was � 1,956 mn (2006: � 1,874 mn), which represents the total value guaranteed under the respective agreements including the obligation that would have been due had the investments matured on that date. The fair value of the investment trust accounts and mutual funds related to these guarantees as of Decem-
Assets pledged and collateral The carrying amount of the assets pledged as collateral where the secured party does not have the right by contract or custom to sell or repledge the assets are as follows: As of December 31, 2007 2006 � mn � mn
As of December 31, 2007 the Allianz Group took possession of collateral it holds as security with a carrying amount of � 174 mn. These financial assets will be systematically sold in the market.
Change in projected benefit obligations Projected benefit obligations as of January 1, 17,280 17,159 Service cost 437 472 Interest cost 785 725 Plan participants’ contributions 67 61
Actuarial (gains)/losses (1,316) (689) Foreign currency translation adjustments (266) (43) Benefits paid (685) (678) Changes in the consolidated subsidiaries of the Allianz Group (137) 321 Projected benefit obligations as of December 31, 1) 16,142 17,280 Change in fair value of plan assets Fair value of plan assets as of January 1, 10,888 8,287 Expected return on plan assets 577 557 Actuarial gains/(losses) (331) (90)
2) During January 2006, the Dresdner Bank AG contributed � 1,876 mn to a contractual trust arrangement for the defined benefit plans of the Dresdner Bank Group.
Expected return on plan assets (577) (557) (411) Amortization of prior service cost (25) (33) (45) Amortization of net actuarial loss 101 126 57 (Income)/expenses of plan curtailments or settlements (65) (36) (6) Net periodic benefit cost 656 697 641
During the year ended December 31, 2007, net periodic benefit cost includes net periodic benefit cost related to post-retirement health benefits of � 4 mn (2006: � 9 mn; 2005: � 8 mn).
The weighted-average value of the assumptions used to determine net periodic benefit cost: Expected long-term return on plan assets 5.3 5.3 5.8 Rate of compensation in-
For the year ended December 31, 2007, the weighted expected long-term return on plan assets was derived from the following target allocation and expected long-term rate of return for each asset category: Target allocation
Plan assets The defined benefit plans’ weighted-average asset allocations by asset category are as follows: As of December 31, 2007 2006
Contributions During the year ending December 31, 2008, the Allianz Group expects to contribute � 303 mn to its defined benefit plans and pay � 382 mn directly to plan participants of its defined benefit plans.
During the year ended December 31, 2007, the Allianz Group recognized expense for defined contribution plans of � 282 mn (2006: � 223 mn; 2005: � 192 mn). Additionally, the Allianz Group paid contributions for state pension schemes of � 398 mn (2006: � 381 mn; 2005: � 362 mn).
Group Equity Incentives Plans The Group Equity Incentives Plans (“GEI”) of the Allianz Group support the orientation of senior management, in particular the Board of Management, toward the long-term increase of the value of the Allianz Group. The GEI include grants of stock appreciation rights and restricted stock units.
In addition, upon death of plan participants, a change of control of the Allianz Group or notice for operational reason the stock appreciation rights vest immediately and will be exercised by the company provided the above market conditions have been attained.
The fair value of the stock appreciation rights at grant date is measured using a Cox-Rubinstein binomial tree option pricing model. Volatility was derived from observed historical market prices. In the absence of historical information regarding employee stock appreciation exercise patterns (all plans issued between 1999 and 2002 are significantly “out of the money”), the expected life has been estimated to equal the term to maturity of the stock appreciation rights.
The stock appreciation rights are accounted for as cash settled plans by the Allianz Group. Therefore, the Allianz Group accrues the fair value of the stock appreciation rights as compensation expense over the vesting period. Upon vesting, any changes in the fair value of the unexercised stock appreciation rights are recognized as compensation expense. During the year ended December 31, 2007, the Allianz Group recognized compensation expense related to the unexercised stock appreciation rights of � 18 mn (2006: � 116 mn; 2005: � 99 mn).
As of December 31, 2007, the Allianz Group recorded a liability, in other liabilities, for the unexercised stock appreciation rights of � 182 mn (2006: � 276 mn).
In addition, upon death of plan participants, a change of control of the Allianz Group or notice for operational reason the restricted stock units vest immediately and will be exercised by the company.
As of December 31, 2007, the Allianz Group recorded a liability, in other liabilities, of � 209 mn (2006: � 157 mn) for the nonvested restricted stock units.
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007 compensation expense. During the year ended December 31, 2007, the Allianz Group recognized compensation expense related to the nonvested shares of � 103 mn (2006: � 135 mn). Thereof � 95 mn (2006: � 125 mn) were recognized for equity settled share options.
AGF Group share option plan The AGF Group has awarded share options on AGF shares to eligible AGF Group executives and managers of subsidiaries, as well as to certain employees, whose performance justified grants. The primary objective of the share option plan is to encourage the retention of key personnel of AGF Group and to link their compensation to the performance of AGF Group.
In 2007 Dresdner Kleinwort granted 1,164,377 (2006: 1,405,646) nonvested share units in total. The weighted average fair value at grant date was � 162.78 (2006: � 135.40). Thereof 1,068,189 (2006: 1,303,856) nonvested share units are equity settled and 96,188 (2006: 101,791) share units are cash settled.
The share options allow for exercise at any time after the vesting period and before expiration, provided that: – on the date of exercise, the RAS share price is at least 20 % higher than the average share price in January of the grant year (for share options granted during the year ended December 31, 2001, the hurdle is 10 %), and
terms from an equity share to cash for vested options was recorded directly in equity, and amounted to � 18 mn during 2007.
The following table provides an overview about the underlying assumptions used for the valuation after taking into account the impact of the Liquidity Agreement: Fair value � 48.38 � 64.73 Assumptions: Share price at modification date � 172.95 � 172.95 Expected life (years) 6 5 Risk free interest rate 4.5 % 4.5 %
On the effective date of the merger between Allianz SE and RAS, the RAS share option plan was modified. The outstanding share options, which were granted in 2005, on the date of the merger were replaced with Allianz SE share options on the basis of 1 Allianz SE option for every 5.501 RAS share options outstanding. The outstanding RAS Group options of 953,000 were replaced by 173,241 Allianz SE options. The Allianz SE share options have the same service period of 2 years; however, the market conditions noted above were replaced with a performance condition, which was already achieved on the date of the modification.
After modification the valuation model for the RAS Group Allianz SE share option plan remain unchanged. Nevertheless the underlying assumptions had to be adjusted. The following table provides the grant date fair value and the assumptions used in calculating their fair value: Fair value � 66.35 Assumptions: Share price on modification date � 145.41 Expected life (years) 5 Risk free interest rate 3.9 % Expected volatility 30.5 % Dividend yield 1.5 %
The aggregate intrinsic value of share options outstanding was � 11 mn for the year ended December 31, 2007 (2006: � 11 mn).
The options outstanding as of December 31, 2007 have an exercise price of � 80.74 and a weighted average remaining contractual life of 4 years.
In addition, during the year ended December 31, 2006, the AGF Group offered AGF shares to qualified employees in France at favorable conditions. During the year ended December 31, 2006 the number of shares sold to employees under this plan was 651,012. During the year ended December 31, 2006 the compensation expense recorded was � 12 mn. Due to the Tender Offer all AGF shares were purchased by Allianz SE.
Other share option and shareholding plans The Allianz Group has other local share-based compensation plans, including share option and employee share purchase plans, none of which, individually or in the aggregate, are material to the consolidated financial statements. During the year ended December 31, 2007, the total expense, in the aggregate, recorded for these plans was � 4 mn (2006: � 3 mn; 2005: � 4 mn).
Additions to existing provisions — 9 1 10 Release of provisions recognized in previous years — (15) (5) (20) Release of provisions via payments (2) (13) (83) (98) Release of provisions via transfers (69) (20) — (89) Changes in the consolidated subsidiaries of the Allianz Group — — 4 4 Foreign currency translation adjustments — — (1) (1)
Additions to existing provisions 22 19 4 45 Release of provisions recognized in previous years (65) (29) (1) (95) Release of provisions via payments (27) (65) (52) (144) Release of provisions via transfers (159) (140) — (299) Foreign currency translation adjustments — (6) — (6)
The development of the restructuring provisions reflects the implementation status of the restructuring initiatives. Based on the specific IFRS guidance, restructuring provisions are recognized prior to when they qualify to be recognized under the guidance for other types of provisions. In order to reflect the timely implementation of the various restructuring initiatives, restructuring provisions, as far as they are already “locked in”, have been transferred to the provision type, which would have been used not having a restructuring initiative in place. This applies for each single contract. For personnel costs, at the time an employee has contractually agreed to leave Allianz Group by signing either an early retirement, a partial retirement (Altersteilzeit, which is a specific type of an early retirement program in Germany), or a termination arrangement the respective part of the restructuring provision has been transferred to provisions for employee expenses. In addition, provisions for vacant office spaces that result from restructuring initiatives have been transferred to “other” provisions after the offices have been completely vacated.
Allianz Deutschland AG´s provisions for restructuring In 2006, Allianz Deutschland AG announced a restructuring plan for the insurance business in Germany, which is expected to continue through 2008. The objective of the restructuring program is to make the insurance business more customer focused, operate more efficiently and achieve growth.
Approximately 3,176 full time equivalent positions have already been terminated, a part of which are related to natural employee turnover and early retirement agreements (Altersteilzeit) that were agreed upon before the restructuring provision was recorded and are not part of the restructuring provision.
New provisions — Additions to existing provisions 22 Release of provisions recognized in previous years (65) Restructuring charges directly reflected in the consolidated income statement 27 Total restructuring charges during the year ended December 31, 2007 (16) Total restructuring charges incurred to date 510
A summary of the changes in the provisions for restructuring of the Allianz Deutschland AG during the year ended December 31, 2007 is: Provisions as of
Credit Business. This decision lead to the exit of specific market segments and to the alignment of the product range to the current market environment within the respective Credit Business. Hereby were impacted the areas Credit Flow Trading, Exotic Credit Derivatives, and Debt Capital Markets as well as the respective support areas within the front-office.
New Dresdner Plus and Former Programs During the year ended December 31, 2007, Dresdner Bank Group recorded combined restructuring charges of � 3 mn for the announced restructuring initiative “New Dresdner Plus” and the “Former Programs”, which are in addition to and separately from the “Programs 2007”.
Through the “Former Programs”, Dresdner Bank Group plans to eliminate approximately 17,020 positions. Approximately 16,800 employees had been terminated and approximately 150 additional employees had contractually agreed to leave Dresdner Bank Group pursuant to the “Former Programs” as of December 31, 2007.
A summary of the existing provisions for restructuring related to the Dresdner Bank Group is as follows: Programs 2007 During the year ended December 31, 2007, Dresdner Bank Group recorded restructuring charges of � 48 mn for the announced restructuring initiative “Programs 2007”, which is in addition to and separately from the initiative “New Dresdner Plus” and the “Former Programs”.
Dresdner Bank Group recorded releases of provisions via transfers to other provision categories of � 140 mn as of December 31, 2007.
Other restructuring plans For 2007, amongst others the following restructuring plans were announced: Allianz S.p.A., Italy In 2007, the Boards of RAS, Lloyd Adriatico and AZ Subalpina announced a restructuring program for the integration of these three companies into Allianz S.p.A effective since October 1, 2007.
A summary of the changes in the provisions for restructuring of the Dresdner Bank Group during the year ended December 31, 2007 is: Provisions as of
During the year ended December 31, 2007, Allianz Group recorded restructuring charges of � 79 mn in total.
Allianz Group Annual Report 2007 Notes to the Consolidated Financial Statements 50 Earnings per share
Furthermore 3,265,298 (2006: 4,868,560) common shares from trading in derivatives on own shares have been included in the calculation of diluted earnings per share for the year ended December 31, 2007.
Numerator for basic earnings per share (net income) 7,966 7,021 4,380 Effect of dilutive securities (4) (3) — Numerator for diluted earnings per share (net income after assumed conversion) 7,962 7,018 4,380 Denominator for basic earnings per share (weighted-average shares) 442,544,977 410,871,602 389,756,350 Dilutive securities: Share-based compensation plans 1,321,100 335,346 493,229 Derivatives on own shares 3,265,298 4,868,560 807,859
Denominator for diluted earnings per share (weighted-average shares after assumed conversion) 449,563,365 418,282,798 393,270,060 Basic earnings per share � 18.00 � 17.09 � 11.24 Diluted earnings per share � 17.71 � 16.78 � 11.14
During the year ended December 31, 2007, the weighted average number of shares does not include 1,130,838 (2006: 730,391; 2005: 2,389,193) treasury shares held by the Allianz Group.
The average total number of employees for the year ended December 31, 2007 was 176,257 people.
Issuance of the Declaration of Compliance with the German Corporate Governance Code according to clause 161 AktG On December 20, 2007, the Board of Management and the Supervisory Board of Allianz SE issued the Declaration of Compliance according to clause 161 AktG and made it available on a permanent basis to the shareholders on the company ’s website.
Principal accountant fees and services For a summary of fees billed by the Allianz Group’s principal auditors, see page 120. The information provided there is considered part of these consolidated financial statements.
Compensation for the Board of Management As of December 31, 2007, the Board of Management had 11 (2006: 11) members.
Disposal of tranche of properties to IVG Group In August 2007, the Allianz Group sold five held for use properties for � 876 mn to IVG Group. The sale will be finalized in the first half of 2008. After the sale, the properties will be leased back and will continue to be used by the Allianz Group.
Disposal of property portfolio to Whitehall Funds In December 2007 the Allianz Group closed a contract with Whitehall Funds to sell a property portfolio for � 1.7 bn. The sale was finalized on March 1, 2008. No immediate gain was recognized on the sale due to the seller financing that the Allianz Group extended to the buyer.
Board of Management and Supervisory Board compensation by individual is included in the Corporate Governance section of this Annual Report. The information provided there is considered part of these consolidated financial statements.
Allianz Deutschland AG announces squeeze-out on Allianz Lebensversicherungs-Aktiengesellschaft, Stuttgart (“Allianz Leben“) On January 18, 2008 the Allianz Group´s subsidiary Allianz Deutschland AG announced that it has signed contracts via an investment management company regarding the acquisition of further shares in Allianz Leben. Following this transaction, Allianz Deutschland AG’s equity stake in Allianz Leben will increase to more than 95 %. Allianz Leben intends to present a resolution regarding the squeeze-out procedure at its next Annual General Meeting
The mezzanine credit facility provides K2 with immediate additional liquidity, allowing K2 to draw-down funds for terms up to the maturity date of its longest dated senior debt obligations. Under the terms of the backstop facility, Dresdner Bank has undertaken to provide to K2 firm prices at which it will purchase assets from K2 in the event that K2 is unable to obtain better prices for such assets on the open market. The aggregate of such prices provided by Dresdner Bank will at all times equate to an amount that ensures K2 has sufficient funds to repay its senior debt in full.
Financial market turbulences The Allianz Group expects to experience further markdowns in the first quarter of 2008 due to further deterioration of observable market prices and credit indexes.
Italy ◽ ◽ ◽ ◽ ALLIANZ SUBALPINA S.p.A. SOCIETÀ DI ASSICURAZIONI E RIASSICURAZIONI, Turin 246 98.0 ◽ Allianz Global Investors Italia S.p.A, Milan 48 100.0 ◽ ◽ ◽ ◽ Allianz S.p.A., Trieste 3,016 100.0 ◽ GENIALLOYD S.p.A., Milan 72 100.0 ◽ INVESTITORI SGR S.p.A., Milan 17 87.7 ◽ ◽ ◽ ◽ Lloyd Adriatico S.p.A., Trieste 989 99.9 ◽ RAS Tutela Giudiziaria S.p.A., Milan 9 100.0 ◽ RB Vita S.p.A., Milan 209 100.0 Japan ◽ Allianz Global Investors Japan Co. Ltd. , Tokyo 0.6 100.0 Laos ◽ ◽ Assurances Générales du Laos Ltd., Laos 3 51.0 Luxembourg ◽ Allianz Global Investors Luxembourg S.A., Luxembourg 69 100.0 ◽ Dresdner Bank Luxembourg S.A., Luxembourg 530 100.0 Malaysia ◽ Allianz General Insurance Malaysia Berhad p.l.c., Kuala Lumpur 30 100.0 ◽ Allianz Life Insurance Malaysia Berhad p.l.c., Kuala Lumpur 44 100.0 Mexico ◽ ◽ Allianz México S.A. Compañia de Seguros, Mexico 93 100.0 Netherlands ◽ Allianz Europe Ltd., Amsterdam 28,961 100.0 ◽ Allianz Nederland Asset Management B.V., Amsterdam 33 100.0 ◽ Allianz Nederland Levensverzekering N.V., Utrecht 263 100.0 ◽ Allianz Nederland Schadeverzekering N.V., Rotterdam 346 100.0 ◽ Dresdner VPV N.V., Gouda 48 100.0 Poland ◽ TU Allianz Polska S.A., Warsaw 100 100.0 ◽ TU Allianz Zycie Polska S.A., Warsaw 31 100.0 Portugal ◽ ◽ Companhia de Seguros Allianz Portugal S.A., Lisbon 199 64.8 Republic of Korea ◽ Allianz Global Investors Korea Limited, Seoul 19 100.0 ◽ Allianz Life Insurance Co. Ltd., Seoul 513 100.0 Romania ◽ ◽ Allianz Tiriac Asigurari SA, Bukarest 126 52.1 Russia ◽ Dresdner Bank ZAO, St. Petersburg 75 100.0 ◽ Insurance Company “Progress Garant”, Moscow 35 100.0 ◽ Insurance Joint Stock Company „Allianz”, Moscow 11 100.0 ◽ Russian People’s Insurance Society “ROSNO”, Moscow 152 97.5 Singapore ◽ Allianz Global Investors Singapore Ltd., Singapore 1 100.0 Slovakia ◽ ◽ Allianz-Slovenská poist’ovna a.s., Bratislava 417 84.6 Spain ◽ ◽ Allianz Compañia de Seguros y Reaseguros S.A., Madrid 502 99.9 ◽ Euler Hermes Crédito Compañia de Seguros y Reaseguros, S.A., Madrid 7 100.0 ◽ Eurovida, S.A. Compañia de Seguros y Reaseguros, Madrid 59 51.0
◽ Dresdner Kleinwort Group Ltd., London 45 100.0 ◽ Dresdner Kleinwort Limited, London 344 100.0 ◽ Kleinwort Benson Channel Islands Holdings Ltd., St. Peter Port/Guernsey 280 100.0 ◽ Kleinwort Benson Private Bank Ltd., London 73 100.0 ◽ RCM (UK) Ltd., London 14 100.0 United States ◽ Allianz Global Investors of America L.P., Dover/Delaware 1,436 97.5 ◽ ◽ Allianz Global Investors U.S. Retail LLC, Dover/Delaware 37 100.0 ◽ ◽ Allianz Global Risks US Insurance Company, Burbank/California 2,910 100.0 ◽ ◽ Allianz Life Insurance Company of North America, Minneapolis/Minnesota 2,636 100.0 ◽ Allianz of America Inc., Wilmington/Delaware 9,868 100.0 ◽ Allianz Underwriters Insurance Company, Burbank/California 41 100.0 ◽ Dresdner Kleinwort Securities Llc, Wilmington/Delaware 182 100.0 ◽ ◽ Fireman’s Fund Insurance Company, Novato/California 2,427 100.0 ◽ ◽ NFJ Investment Group LP, Dover/Delaware 4 100.0 ◽ ◽ Nicholas Applegate Capital Management LLC, Dover/Delaware 12 100.0 ◽ ◽ Pacific Investment Management Company LLC, Wilmington/Delaware 246 85.0 ◽ RCM Capital Management LLC, Wilmington/Delaware 15 100.0 ◽ Wm. H McGee & Co. Inc., New York/New York 2 100.0 1) Percentage includes equity participations held by dependent enterprises in full, even if the Allianz Group’s share in the dependent enterprise is under 100.0 %. 2) Classified as “held for sale” 3) 99.99 % of the voting share capital
2) Including shares held by dependent subsidiaries. 3) Significant influence due to Allianz’s role in the funds’ management and its ownership share
GEA Group AG, Bochum 458 10.4 1,261 (288) 12/31/2006 Heidelberger Druckmaschinen AG, Heidelberg 243 13.4 1,202 263 03/31/2007 Industrial & Commercial Bank of China Limited, Beijing 3,138 1.9 44,378 4,642 12/31/2006
Rhön Klinikum AG, Bad Neustadt/Saale 142 6.4 729 105 12/31/2006 Royal Dutch Shell plc, London 533 0.3 79,892 17,683 12/31/2006 1) Market value greater than or equal to � 100 mn and percentage of shares owned greater than or equal to 5.0 %, or market value greater than or equal to � 500 mn, excluding trading portfolio of banking business.
Responsibility statement To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the group, and the group management report includes a fair review of the development and performance of the business and the position of the group, together with a description of the principal opportunities and risks associated with the expected development of the group.
We conducted our audit of the consolidated financial statements in accordance with § 317 HGB (Handelsgesetzbuch, “German Commercial Code”) and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftspüfer (IDW, Institute of Public Auditors in Germany), and in supplementary compliance with the Standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework and in the group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and the group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in the consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and the group management report. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRS as adopted by the EU, the additional requirements of German commercial law pursuant to § 315 a Abs. 1 HGB and supplementary provisions of the articles of incorporation and full IFRS and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and risks of future development.
Dr.-Ing. Dieter Hundt, Honorary Senator Managing Partner, Allgaier Werke GmbH (until December 31, 2007), Chairman of the Supervisory Board, Allgaier Werke GmbH (since January 1, 2008)
Peter Löscher since January 2008 Chairman of the Board of Management, Siemens AG
Harry Roels Chairman of the Board of Management, RWE AG (until September 30, 2007)
Dr. h. c. Heinrich Weiss Chairman of the Board of Management, SMS GmbH
Dr. Henning Schulte-Noelle Membership in other statutory supervisory boards and SE administrative councils in Germany E.ON AG, Siemens AG (until January 24, 2008), ThyssenKrupp AG
Dr. Wulf H. Bernotat Membership in other statutory supervisory boards and SE administrative councils in Germany Bertelsmann AG, METRO AG
Membership in comparable 1) supervisory bodies Membership in group bodies E.ON Nordic AB (Chairman), E.ON Sverige AB (Chairman), E.ON UK plc (Chairman), E.ON U.S. Investments Corp. (Chairman)
Dr. Gerhard Cromme Membership in other statutory supervisory boards and SE administrative councils in Germany Axel Springer AG, Siemens AG (Chairman), ThyssenKrupp AG (Chairman)
As of December 31, 2007 or (with members who resigned) day of resignation. 1) We regard memberships in other supervisory bodies as “comparable” if the company is listed on a stock exchange or has more than 500 employees.
Claudia Eggert-Lehmann Membership in other statutory supervisory boards and SE administrative councils in Germany Dresdner Bank AG
Membership in group bodies F. Hoffmann-La Roche AG (Chairman), Roche Deutschland Holding GmbH (Chairman), Roche Diagnostics GmbH (Chairman)
Membership in group bodies Chugai Pharmaceutical Co. Ltd., Roche Holding AG (Chairman)
Michael Diekmann Membership in other statutory supervisory boards and SE administrative councils in Germany BASF SE, Deutsche Lufthansa AG, Linde AG (Deputy Chairman), Siemens AG (since January 24, 2008)
Membership in Group bodies Allianz Deutschland AG (Chairman), Allianz Global Investors AG (Chairman), Dresdner Bank AG (Chairman)
Membership in comparable 1) supervisory bodies Membership in Group bodies Allianz S.p.A. (Vice President), Assurances Générales de France (Vice President)
Membership in Group bodies Allianz Deutschland AG, Allianz Global Investors AG, Allianz Investment Management SE (Chairman), Allianz Lebensversicherungs-AG
Clement B. Booth Membership in other statutory supervisory boards and SE administrative councils in Germany
Enrico Cucchiani Membership in comparable 1) supervisory bodies Pirelli & Co. S.p.A., Unicredit S.p.A.
Membership in Group bodies Allianz Compañía de Seguros S.A. Barcelona (Vice Chairman), Allianz Elementar Lebensversicherungs -AG (Deputy Chairman) (until February 7, 2008), Allianz Elementar Versicherungs-AG (Deputy Chairman ) (until February 7, 2008), Allianz Investmentbank AG (until February 7, 2008), Allianz S.p.A. (CEO), Companhia de Seguros Allianz Portugal S.A. (Vice Chairman), Koç Allianz Hayat ve Emeklilik A.S., Koç Allianz Sigorta A. S.
Membership in Group bodies Allianz Beratungs- und Vertriebs-AG (Vice Chairman), Allianz Global Investors Deutschland GmbH (Chairman), Allianz Global Investors Kapitalanlagegesellschaft mbH (Chairman)
Membership in comparable 1) supervisory bodies Membership in Group bodies Allianz Global Investors Italia SGR S.p.A. (Chairman), Allianz S.p.A., Assurances Générales de France
Membership in Group bodies Allianz Deutschland AG (Vice Chairman), Allianz Global Corporate & Specialty AG (Vice Chairman), Allianz Global Investors AG, Allianz Investment Management SE (Deputy Chairman), Dresdner Bank AG
Membership in Group bodies Allianz Beratungs- und Ver- triebs-AG (Chairman), Allianz Lebensversicherungs-AG (Chairman), Allianz Private Krankenversicherungs-AG (Chairman), Allianz Versicherungs-AG (Chairman)
Membership in Group bodies AGF Holding (Chairman), AGF IART (Chairman), AGF International, AGF VIE (Chairman), Euler Hermes S.A. (Chairman), Mondial Assistance AG (Chairman)
Dr. Herbert Walter Membership in other statutory supervisory boards and SE administrative councils in Germany Deutsche Börse AG, E.ON Ruhrgas AG
Affiliated enterprises The parent company of the Group and all consolidated subsidiaries. Subsidiaries are enterprises where the parent company can exercise a dominant influence over their corporate strategy in accordance with the control concept. This is possible, for example, where the parent company holds, directly or indirectly, a majority of the voting rights, has the power to appoint or remove a majority of the members of the Board of Management or equivalent governing body, or where there are contractual rights of control.
Identified counterparty risk is covered by specific credit risk allowances. The size of each allowance is determined by the probability of the borrower’s agreed payments regarding interest and installments, with the value of underlying collateral being taken into consideration. General allowances for loan losses have been established on the basis of historical loss data.
Country risk allowances are established for transfer risks. Transfer risk is a reflection of the ability of a certain country to serve its external debt. These country risk allowances are based on an internal country rating system which incorporates economic data as well as other facts to categorize countries.
Business combination A business combination is the bringing together of separate entities or businesses into one reporting entity.
Cash flow statement Statement showing movements of cash and cash equivalents during an accounting period, classified by three types of activity: – operating activities – investing activities – financing activities
Financial liabilities carried at fair value through income Financial liabilities carried at fair value through income include primarily negative market values from derivatives and short selling of securities. Short sales are made to generate income from short-term price changes. Shorts sales of securities are recorded at market value on the balance sheet date. Derivatives shown as financial liabilities carried at fair value through income are valued the same way as financial assets carried at fair value through income.
Issued capital and capital reserve This heading comprises the capital stock, the premium received on the issue of shares, and amounts allocated when option rights are exercised.
Premiums written/earned Premiums written represent all premium revenues in the year under review. Premiums earned represent that part of the premiums written used to provide insurance coverage in that year. In the case of life insurance products where the policyholder carries the investment risk (e.g. variable annuities ), only that part of the premiums used to cover the risk insured and costs involved is treated as premium income.
B Banking 56-59 Basic earnings per share 31 Brazil 118-119 Business model 96-99
C Central and Eastern Europe 2, 96, 100 China 116-117 Claims from natural catastrophes 36
Industrial and Commercial Bank of China 51, 117 Investor Relations 31
Remuneration of the Board of Management 15-19 Risk capital 77-95 Risk Report 77-95
S Sarbanes-Oxley Act 7, 14 Schering AG 46, 52 Share 28-32 Share price 28 Shareholder hotline 32 Shareholder structure 30 Shareholders’ equity 1, 66 Slovakia 114-115 Societas Europaea 10, 105
As we can never rule out changes of dates, we recommend checking them on the internet at www.allianz.com/financialcalendar.
Annual Report 2007 I N S U R A N C E | A S S E T M A N A G E M E N T | B A N K I N G
Operations 50 Life/Health Insurance Operations 56 Banking Operations 60 Asset Management Operations 64 Corporate Activities 65 Balance Sheet Review 73 Liquidity and Capital Resources 77 Risk Report 96 Allianz Group Success Factors 96 The Allianz Group’s Business Model 99 Legal Structure 100 Important Group Organizational Changes 101 Value-Based Management 103 Our Employees 106 Corporate Responsibility and
1 Letter to the Shareholder 4 Supervisory Board Report 10 Corporate Governance and Remuneration Report 22 Supervisory Board and Board of Management 24 International Executive Committee 26 Strategy 28 Allianz Share