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
Banking Our banking activities are primarily executed by Dresdner Bank Group, through which we serve individual, corporate and governmental customers with a broad range of private, commercial and investment banking products.
Despite of the financial markets turbulence, which heavily impacted trading income, we recorded an operating profit of � 773 million. Most product lines were not impacted by the credit crisis and performed in line with expectations.
Statutory premiums were up 4.1 % to � 49.4 billion, with substantial contributions from emerging markets in New Europe and Asia-Pacific. Operating profit grew by 16.8 % to � 3.0 billion benefitting from top-line growth and other profit improvements.
Gross premiums written � mn 44,289 43,674 43,699 Operating profit � mn 6,299 6,269 5,142 Net income � mn 5,174 4,746 3,535 1) After elimination of transactions between Allianz Group companies in different geographic regions and different segments. Gross premiums written from our specialty lines have been allocated to the respective geographic regions.
In 2007, we recorded a solid growth in revenues and operating profit, with our cost-income ratio being at a very competitive level of 58.3 %. Furthermore, we grew our third party asset by 8.1 %.
2007 was a record year for the company. Thanks to the commitment of our 181,207 employees and distributors, we increased revenues to � 102.6 billion and improved operating profit by 5.1 % to � 10,915 million. Net income rose by 13.5 % to � 7,966 million. This almost matches total net income for the years 2003 to 2005 and is the best result in more than a century of the company’s history. Shareholders’ equity decreased by 3.8 % to a year-end value of � 47,753 million. The Economic Value Added (EVA®) after minorities, i.e. the value generated in excess of the cost of capital, went up by 11.3 % to � 3,928 million. These figures demonstrate that we can increase our performance even under difficult circumstances.
What were the biggest challenges in the year under review? Hurricane Kyrill over Europe in January, widespread flooding in the United Kingdom in the summer and a host of other storm disasters and forest fires led to losses of � 774 million, up from � 211 million in claims due to natural disasters in 2006. It is the subprime crisis in particular for which this financial year will be remembered. When the U.S. subprime mortgage markets triggered hefty price fluctuations and turbulence in the stock markets in the second half of the year, confidence in the very much larger field of asset-backed securities plunged. Dresdner Bank had to mark down � 1,275 million, regardless of the actual and future real economic value of its assets. Financial service providers were punished across the board on the equity markets, including Allianz. This despite the fact that only 0.16 % of assets in our long-term portfolio are related to subprime assets. Our assets are largely untouched, our risk management works well, and unlike other institutions we do not have a liquidity problem nor indeed an equity shortfall.
I believe that the good figures for 2007 confirm that the strategy we have been persuing is the right one. These results are in no way due to fortunate circumstances, but the result of our 3+One programme and the accompanying strategic initiatives. Our focus and discipline in implementing this plan has paid off, systematically improving our global competitive position.
The path ahead now is more difficult. We must further boost efficiency while also maintaining high-quality growth. By 2011 we want to expand our customer base to around 100 million. There will be no lack of opportunities for growth. We already have a solid base in Asia-Pacific (including Australia) and are gaining about 400,000 new customers each month. In established markets, where the Property-Casualty segment currently is stagnating, our products must become so appealing that we are substantially more successful in acquiring new business, and customers buy more products from us and recommend us to others. There are enough attractive customer segments with very good prospects for growth within these core markets. Targeting these customer groups is one of our strategic priorities.
Achieving cost reductions and high-quality growth involves product innovation, integrated financial solutions and dedicated sales organizations. Above all we have full confidence in the sustainable success of our customer focus initiative and the new business model that places market management at the center. Collectively they will increase our efficiency significantly. This will enable us to offer consumers exactly what they really want from a financial services provider. Although the worldwide roll-out of the new business model will burden the expense ratio temporarily, it is a giant step forward in transforming the company into a global customer-focused and value-creating organization. As our shareholders, you will see the benefits over the long term.
As this letter is going to press, we are focusing our attention on fulfilling our promises also for the 2008 and 2009 financial years. We had said that we intend to increase operating profits from 2007 to 2009 by an average of 10 % each year. In view of the continuing crisis in the financial markets and the difficulty of assessing its impact on the real economy, this has become much more challenging. As a result I need to place a special caveat on our outlook for the banking sector. In view of the current uncertainties and potential further mark-downs it is not possible to give a reliable forecast of the banking segment’s contributions to the overall results.
– We are pressing ahead with the implementation of our new operating model under the leadership of Mr Oliver Bäte.
– The various sales formats (including direct sales, banking agencies, specialist representatives and brokers) in all major markets will be adopted to new customer requirements as well as competitive patterns and regulatory changes.
– We are increasing the pace of the customer focus initiative and extending its scope. We can consider our mission accomplished only once our customers perceive our service as so excellent that they actually recommend our services to others.
Although I do not believe that 2008 will be a less challenging year than 2007, we have done our best to prepare for the difficult market environment. Allianz is now more focused, more efficient and more manageable. Every day represents an opportunity for our management, our committed employees and our salespeople to further enhance the value of the Allianz brand. Every day is a chance to improve our service and make it more accessible. Every day we can increase customer satisfaction with our reliable and friendly customer service. There are 366 opportunities in this leap year to implement our vision of becoming the financial services provider enjoying the highest level of trust. By doing this, we will increase the value of your investment on a sustainable basis. At the end of the day, this is our job.
During the entire reporting year, the Supervisory Board observed the duties incumbent upon it in accordance with the law and the Statutes. We supervised the management of the company, advised the Board of Management in the running of the business and were directly involved in decisions of fundamental importance.
Within the framework of our monitoring and advisory activities, we were regularly provided by the Board of Management, both verbally and in writing, with timely and comprehensive information on the course of business, the financial and economic development of the Allianz Group and of Allianz SE, including the risk situation and the management of risk, compliance issues as well as the company strategy. In Supervisory Board meetings, on the basis of reporting from the Board of Management, we discussed in detail the development of the business and important decisions and business matters. As far as necessary under the law or the Statutes, the Supervisory Board passed resolutions after detailed examination. In addition we dealt with the Board of Management’s planning for the 2008 financial year and medium-term planning. Any deviation from plans and objectives in the course of the business were presented to us. The Supervisory Board examined the reasons for any deviation on the basis of the explanations provided by the Board of Management and the documents provided.
At the meetings in September and December 2007 and March 2008 we obtained up-to-date details of the disruption to financial markets in relation to the U.S. real estate and mortgage crisis. The Board of Management explained the impact on the Allianz Group and particularly Dresdner Bank. We paid particular attention to the possible effects of
We paid special attention to issues of strategy for the Allianz Group at the September meeting. On the basis of a thorough presentation by Mr Michael Diekmann, the Chairman of the Board of Management, we dealt with the strategic direction of the Allianz Group and the different business segments. We then discussed with the Board of Management the strategic challenges and implications for the Allianz Group as well as possible alternative courses of action. We continued this discussion at the December meeting.
In January and February 2007, in the course of two extraordinary telephone conference calls and one extraordinary meeting of the Standing Committee as well as an extraordinary meeting of the Supervisory Board, we dealt with the tender offer to buy out minority interests in French-based Allianz subsidiary Assurances Générales de France (AGF). At the same time we discussed the decision by Allianz Deutschland AG to make an offer to purchase the free-float shares in Allianz Lebensversicherungs-AG. Both transactions were approvingly noted by the Supervisory Board. The Standing Committee granted consent to the public offer to acquire 100 % of AGF. The Standing Committee also approved the Board of Management’s resolution to use the Authorized Capital 2006/I to offer new Allianz shares as part of the consideration for acquiring AGF shares. Again in March 2007 and on the basis of a presentation by the Board of Management we concerned ourselves in the Supervisory Board plenum with the tender offer to the minority shareholders in AGF and Allianz Lebensversicherungs-AG. In subsequent meetings we were kept up-to-date about the status of each of these offers. While the goal of acquiring the full minority interest in Allianz Lebensversicherungs-AG was not yet achieved in the reporting year 2007, the acquisition of all AGF shares through the offer and the subsequent squeezeout was successfully completed in July 2007.
At the December meeting we reviewed the efficiency of the Supervisory Board’s activities, without the presence of the Board of Management. We worked on the implementation of measures agreed upon in the previous year to improve efficiency and discussed further possibilities to improve the workings of the Supervisory Board, in particular to improve the efficiency of the work done in the committees.
Audit Committee Dr. Gerhard Cromme (Chairman) (until March 18, 2008) Dr. Franz B. Humer (Chairman) (since March 18, 2008) Dr. Wulf H. Bernotat Igor Landau Jean-Jacques Cette Jörg Reinbrecht
Personnel Committee Dr. Henning Schulte-Noelle (Chairman) Dr. Gerhard Cromme Claudia Eggert-Lehmann
Risk Committee Dr. Henning Schulte-Noelle (Chairman) Dr. Wulf H. Bernotat Prof. Dr. Renate Köcher Godfrey Robert Hayward Peter Kossubek
The Audit Committee held five meetings and one telephone conference call in financial year 2007. The meetings were held in February, March, May, August and November, while the telephone conference call took place in June 2007. Together with the auditors the committee discussed the Allianz SE and Allianz Group annual financial statements, the management reports, the auditor’s reports and the U.S. Form 20-F report. In addition the committee checked the semi-annual 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, as well as internal control issues and compliance with the provisions of section 404 of the Sarbanes-Oxley Act. In addition, assignments to the auditors for services not connected to the audit itself were discussed. The committee received reports from the heads of the Group Audit department and Compliance department about audit and compliance issues on an ongoing basis. In February 2007 and February 2008 the committee obtained summary reports on significant audit results for the past financial year from the head of the Group Audit department. In these meetings the Committee also received a report of the General Counsel regarding material legal proceedings. In the meeting in November Group Audit presented the audit plan for the year 2008.
The Risk Committee held two meetings in 2007. In the constitutive meeting in March, it firstly approved rules of procedure and agreed on the content and working method of the committee. On the basis of a presentation by the Board of Management it then obtained details of the structure, organisation and functioning of the risk management system and risk control system at Allianz. The September session dealt with the Allianz risk strategy as well as the risks and effects of the disruption to financial markets triggered by the U.S. real estate and mortgage market crisis, which we examined through detailed written and verbal information from the Board of Management. The Board of Management presented the current risk situation at each meeting of the committee. We reviewed the particular risk-related statements in the annual company and consolidated financial statements as well as in the management reports, and reported to the Audit Committee on the results of this preliminary review.
In compliance with special provisions applying to insurance companies (§ 341 k (2) of the German Commercial Code), the statutory auditor and the auditor for the review of the half year financial report are appointed by the Supervisory Board and not by the General Meeting. The Supervisory Board has appointed KPMG Deutsche Treuhand-Gesellschaft AG Wirtschaftsprüfungsgesellschaft, Munich, as statutory auditor for the annual company and consolidated financial statements as well as for the review of the half year financial report. KPMG audited the financial statements 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 in accordance with international accounting standards, in particular the International Accounting Standards (IAS) and the International Financial Reporting Standards (IFRS). The half year financial report and the other quarterly financial statements were also reviewed by KPMG.
The financial statements and the KPMG auditor’s report for financial year 2007 were made available to all members of the Supervisory Board in a timely manner. The financial statements and the results of the KPMG audit were discussed on a provisional basis by the Audit Committee in their meeting held on February 20, 2008. The final financial statements and KPMG auditor’s reports were examined by the Audit Committee in its meeting on March 17, 2008 and in the Supervisory Board plenary session on March 18, 2008. The auditors took part in these discussions. They gave an account of the main findings of the audit and were available for any questions or further information.
The term of the first Supervisory Board of Allianz SE expired following the ordinary General Meeting on May 2, 2007. The Supervisory Board was therefore re-elected at the General Meeting. The six employee representatives on the Supervisory Board were appointed on the proposal of the employees. In this respect the General Meeting was bound to accept the employees’ proposals, in accordance with the provisions of the Statutes. Ms. Margit Schoffer’s seat on the Supervisory Board expired following the ordinary General Meeting on May 2, 2007. We have thanked Ms. Schoffer for her valuable work on our board. The General Meeting elected Mr. Peter Kossubek as her successor on May 2, 2007. In all other respects the General Meeting confirmed the members of the first Supervisory Board in office. The shareholder representatives on the Allianz SE Supervisory Board are Professor Dr. Renate Köcher, Dr. Wulf H. Bernotat, Dr. Gerhard Cromme, Dr. Franz B. Humer, Mr. Igor Landau and Dr. Henning SchulteNoelle.
The employee representatives consist of Ms. Claudia Eggert-Lehmann, Mr. Jean-Jacques Cette, Mr. Godfrey Robert Hayward, Mr. Peter Kossubek, Mr. Jörg Reinbrecht and Mr. Rolf Zimmermann. In accordance with the allocation of seats under the Agreement concerning the Participation of Employees in Allianz SE of September 20, 2006, four employee representatives from Germany were again elected and one each from France and the UK, namely Mr. Cette and Mr. Hayward respectively. The current term of the Supervisory Board expires following the ordinary General Meeting in 2012.
Good Corporate Governance is essential for long-term business performance. For this reason it is important that the existing Corporate Governance structures are constantly reviewed and developed further, whenever necessary. We successfully completed the actions associated with conversion into a European Company (Societas Europaea – SE) in 2007. Over the past 15 months the Supervisory Board, with a new composition of only 12 members, has been gaining experience under the new conditions. Expectations of improved and more extensive reporting and discussions within the Supervisory Board have been fulfilled. The transformation of Allianz into an SE has been wholeheartedly welcomed by customers, shareholders, employees and the general public.
The Board of Management reports regularly and comprehensively to the Supervisory Board on business development, the financial position and earnings, budgeting and achievement of objectives, compliance issues, and on the strategy and existing risk exposure. Certain important decisions of the Board of Management require approval from the Supervisory Board. Some of these decisions subject to special approval are stipulated by law or are included in decisions of the General Meeting, such as approval for the Board of Management to increase the share capital (Authorised Capital), acquire treasury stock, or issue convertible bonds or bonds with warrants. In addition to these decisions, in accordance with § 9 of the Statutes the Supervisory Board also must approve intercompany agreements and the launch of new business segments or closure of existing ones, insofar as such actions are material to the Group. Approval is also required for acquiring companies and holdings in companies as well as divestments of equity stakes in a Group company, whenever such divestment results in the company leaving the Group. In these instances approval is required if it does not involve a financial equity investment and if in a particular case the market value or, in the absence of the market value, the book value of the acquired or divested investment amounts to at least
Allianz Group Annual Report 2007 Corporate Governance and Remuneration Report 10 % of the equity in the most recent consolidated balance sheet. Pursuant to the Supervisory Board’s rules of procedure, the appointment of the member of the Board of Management responsible for employment and social welfare by the Board of Management also requires the approval of the Supervisory Board. An overview of the Board of Management’s members can be found on page 23 of this report.
The Audit Committee is responsible for an initial review of the Company’s and the Group’s annual financial statements and management reports (including the risk report) and the dividend proposal. In addition, it reviews the quarterly reports and the U.S. annual report on Form 20-F. Finally, the Audit Committee is an important contact for the external auditors, whose independence it also monitors. It also deals with Compliance issues. Allianz follows the suggestion of the German Corporate Governance Code by which former members of the Board of Management should not chair the Audit Committee. In particular the chairman of the Supervisory Board, Dr. Schulte-Noelle, is neither the chairman nor a member of the Audit Committee.
The Risk Committee, established in December 2006, monitors the risk strategy, the appropriateness of the Company’s
In December 2007 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 committee is responsible for drawing up selection criteria for shareholder representatives on the Supervisory Board, seeking suitable potential shareholder representatives for election and proposing them to the Supervisory Board for its election proposals to the General Meeting. This procedure complies with the new recommendation in No. 5.3.3 of the German Corporate Governance Code.
Allianz Group accounts comply with international accouting standards, in particular the International Accounting Standards (IAS) and the International Financial Reporting Standards (IFRS) as published by the IASB. As the Allianz share is quoted on the New York Stock Exchange (NYSE), we are obliged to file an annual report on Form 20-F with the U.S. Securities and Exchange Commission (SEC), in accordance with the U.S. rules applicable to foreign issuers. In November 2007 the SEC issued amendments to the regulations, according to which financial statements of foreign issuers in the United States are recognised without a reconciliation statement for U.S.-GAAP, provided such financial statements are prepared in compliance with IFRS as published by the IASB.
Allianz SE and the consolidated financial statements under German and U.S. law.
The Government Commission on the Corporate Governance Code made several amendments to the Code in June 2007. Essentially these involve a suggestion to limit severance pay for Board of Management members if their employment ends prematurely. The suggestion is to limit compensation to two years’ pay, or three years’ pay if the employment was terminated due to a change in control of the Company. As described above, the Code now recommends the establishment of a Nomination Committee under the Supervisory Board. This committee supports the Supervisory Board in selecting suitable candidates as shareholder representatives for proposal to the General Meeting.
In addition, the planned risk limitation law (Law on Limiting Risks arising from Financial Investments) will involve new aspects to Corporate Governance. The primary objective of the associated changes is to ensure greater transparency in equity holdings. One of the aims is to improve the registration in the share register of shareholders in a company with registered shares, which in practice is inadequate. This would also reduce the current difficulties encountered in sending general meeting and voting documentation to shareholders, particularly abroad. These changes will be beneficial to using the advantages of registered shares.
Further changes are expected on implementation of the EU Directive on Shareholders Rights, which must be introduced into German law by August 2009. This is expected to foster increased participation by foreign shareholders. It is also hoped that this will help to increase shareholder attendance at general meetings in the long-term, in conjunction with other measures.
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 2007 year end, the DAX-30 companies met an average of 97 % of all recommendations whereas in the M-DAX around 92 % and in the S-DAX about 86 % of the recommendations had been followed by the companies.
On December 20, 2007, the Board of Management and the Supervisory Board issued the Declaration of Compliance of Allianz SE on the German Corporate Governance Code in accordance with § 161 of the German Stock Corporation Act as follows: “Declaration by the Board of Management and the Supervisory Board of Allianz SE on the recommendations of the Government Commission on the German Corporate Governance Code in accordance with § 161 of the German Stock Corporation Act (AktG)
1. Allianz SE will comply with all the recommendations made by the Government Commission on the German Corporate Governance Code (Code version dated June 14, 2007).
as suggested by the Code. It is preferable, in our view, for a Supervisory Board taking joint decisions to have a uniform term of office for its members.
Our two listed Group companies Allianz Lebensversicherungs -AG and Oldenburgische Landesbank AG issued their own declarations of compliance in December 2007. Allianz Lebensversicherungs-AG discloses therein a deviation from the recommendation concerning performance-based pay for its Supervisory Board members. Oldenburgische Landesbank AG complies with all recommendations except the recommendation of a deductible on its Directors&Officers insurance.
In previous financial years we made considerable efforts to implement section 404 of the Sarbanes-Oxley Act (SOA) and corrected weaknesses found. We have extensively documented our control system for financial reporting and we test its effectiveness on an ongoing basis. As in the previous year, we will disclose the results of auditing our compliance with section 404 of the Sarbanes-Oxley Act in our U.S. annual report on Form 20-F.
In accordance with applicable U.S. legislation, our Audit Committee has established procedures for dealing with complaints relating to accounting policies and financial reporting as well as special procedures to ensure the independence of the statutory auditors. The Allianz SE Supervisory Board has determined that Dr. Wulf Bernotat, Dr. Gerhard Cromme, Dr. Franz B. Humer and Mr. Igor Landau fulfil the requirements laid down by U.S. legislation to be an “Audit Committee Financial Expert”. Dr. Cromme resigned from his office as member and chairman of the Audit Committee as of March 18, 2008. As his successor, the Supervisory Board elected Dr. Humer member of the Audit Committee and appointed him chairman of the committee.
In compliance with provisions contained in the SarbanesOxley Act, Allianz SE has drawn up, in addition to the Code of Conduct applying to all employees, a special “Code of Ethics” that applies to the members of the Board of Management and to senior employees in certain divisions, mainly in finance.
In addition, we are subject to the NYSE corporate governance standards. These rules are only partially binding on foreign issuers. Nevertheless, we are obliged to disclose the main differences between our own corporate governance and NYSE standards in short summary form. The main differences arise particularly from our two-tier board system with a Board of Management and a Supervisory Board, employee representation on the Supervisory Board and different legislation and best practice standards in Germany and in the EU. A summary of these differences is available on our website under www.allianz.com/corporate-governance.
Members of the Board of Management and the Supervisory Board are required, pursuant to § 15 a of the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG), to disclose any acquisitions or divestments of Allianz SE securities, if the value of such acquisitions or divestments made by the board member or any person close to him or her amounts to at least � 5,000 in one calendar year. These declarations are published on our website under www.allianz.com/
corporate-governance. On June 5, 2007 Mr. Peter Kossubek, member of the Supervisory Board of Allianz SE, sold 60 shares in Allianz SE at a price of � 171.87. On November 27, 2007 Dr. Wulf H. Bernotat, also a member of the Supervisory Board of Allianz SE, bought 500 shares in Allianz SE at a price of � 133.60.
The total holdings of members of the Management Board and the Supervisory Board in Allianz SE as of December 31, 2007 amounted to less than 1 % of the Company’s issued stock.
The information provided in the remuneration report should be considered part of the Group Management Report.
The remuneration of the Board of Management consists of fixed and variable pay components and it is designed to support sustained value-oriented management performance. To achieve this objective a significant portion of overall remuneration is variable. It is a three tier incentive system which includes short-term and mid-term cash bonus plans and equity related long-term incentives. The overall remuneration of individual Board Members is dependent upon their delegated role and accountability, individual performance, achievement of the financial goals of the Allianz Group and of the respective business unit, as well as the evolution of the Allianz SE share price. The remuneration of the Board of Management is set by the Personnel Committee of the Supervisory Board. The Personnel Committee is committed to a remuneration policy that is aligned to the interests of shareholders taking into consideration the competitive environment and the global market place in which the company operates. The structure of remuneration is regularly reviewed and discussed at the Supervisory Board.
Annual bonus The annual bonus is dependent on the achievement of annual goals. These include financial targets set at Group or business division level as well as personal objectives. Performance against these goals is assessed at the end of the annual performance period with the amount of bonus payable depending on the extent to which the targets and objectives have been met. The Personnel Committee sets the target bonus level for members of the Board of Management. For 2007 the target bonus amounts to 150.0 % of base salary. The maximum achievement is set at 165.0 % of target performance.
Three-year bonus The three-year or mid-term bonus plan was designed to make the continuous increase in value of the company a priority concern of executive management across the Group. Plan participants are the Board of Management and approximately 100 top managers globally. Bonus payouts under the plan depend on the attainment of financial and strategic goals over the defined three-year performance period. The mid-term bonus is granted at the end of the defined three year performance period and the amount is based on the overall achievement for the three years. Certain exceptions apply, for example in the event of retirement.
Equity-related remuneration The Board of Management and approximately 800 top managers and high performing future leaders worldwide participate in the Group Equity Incentives (GEI) program. This consists of virtual stock options, known as Stock Appreciation Rights (SAR) and virtual stock awards, known as Restricted Stock Units (RSU).
The SAR have a vesting period of two years and subject to the performance conditions mentioned below, they may be exercised during the following five years as set out in the rules of the plan. They lapse unconditionally at the end of the seven year term. To align the interests of management with those of shareholders the Personnel Committee has set two performance conditions for the exercise of the SAR. These are directly linked to the performance of Allianz SE stock. The conditions consist of a relative measure linked to the Dow Jones EURO STOXX Price Index (600) and an absolute measure requiring a set increase in the price of Allianz SE stock over the period between grant and exercise. Also, the program has a cap of 150.0 % of the grant price on the potential payout from SAR exercises in recognition of the leverage profile. To encourage long term value creation the RSU have a vesting period of five years, at the end of which they are automatically released as set out in the rules of the plan.
Miscellaneous The members of the Board of Management also receive perquisites. These consist of contributions to accident and liability insurances and the provision of a company car and, where applicable, a travel allowance for non-resident Board Members. Each member of the Board of Management is responsible for income tax on these perquisites. For 2007 the total value of the perquisites amounted to � 0.5 million.
� thou % � thou � thou % � thou % � thou %
1) Broad range reflects travel allowances for non resident Board Members. 2) Actual bonus paid in 2008 for fiscal year 2007.
The following table sets out the details of all awards made under the GEI program of equity–related remuneration in 2007 for each member of the Board of Management.
The following table sets out the current service cost and contributions arising in relation to the current pension plans according to IAS 19, excluding the current service cost for the old pension plan redeemed as of December 31, 2004 for each individual member of the Board of Management of Allianz SE in 2007.
Termination of service The Supervisory Board has decided to amend the service contract for members of the Board of Management for future appointments and prolongations to comply with a new suggestion of the German Corporate Governance Code regarding a severance payment cap. According to this amendment, payments made to members of the Board of Management in case of premature termination of the service contract without serious cause will be limited to a maximum of the value of two years cash compensation including benefits.
Three components make up the Supervisory Board’s remuneration: a fixed sum of � 50,000 and two performancebased components. One of the performance-based components has a short-term focus and depends on the increase of consolidated earnings-per-share in the previous fiscal year; the other is long-term and corresponds to the cumulative increase of this figure over the past three years.
The Chairperson and Deputy Chairpersons of the Supervisory Board as well as the Chairperson and members of its committees receive additional remuneration as follows: The Chairperson of the Supervisory Board receives double, the deputies one-and-a-half times the regular remuneration of a member of the Supervisory Board. Members of the Personnel Committee, Standing Committee and Risk Committee receive an additional 25.0 %, and the Chairpersons of each of these committees 50.0 %. Members of the Audit Committee are entitled to a fixed sum of � 30,000 per year, the Committee Chairperson receives � 45,000. No additional remuneration is granted to the members of the Nomination Committee.
There is a cap on the total remuneration of each member of the Supervisory Board. It is reached when the Chairperson of the Supervisory Board has been awarded triple and the other members of the Supervisory Board double the regular remuneration of a member of the Supervisory Board.
Remuneration for mandates in other Allianz Group subsidiaries As members of the Supervisory Board of Dresdner Bank AG Claudia Eggert-Lehmann received � 45,000 and Margit Schoffer � 45,000. Peter Kossubek received � 40,000 as member of the Supervisory Board of Allianz Versicherungs-AG.
Jean-Jacques Cette Secretary of the Group commission, Assurances Générales de France
Dr. Franz B. Humer President of the Board of Management, F. Hoffmann-La Roche AG, Chief Executive Officer, F. Hoffmann-La Roche AG (until March 4, 2008)
International Executive Commitee In addition to members of the Allianz SE’s Board of Management, the International Executive Committee includes the heads of major subsidiaries. Chaired by Michael Diekmann, this body discusses overall strategic issues at an Allianz Group level.
Gary C. Bhojwani, Allianz Life Insurance, Minneapolis William S. Thompson, PIMCO, Newport Beach Werner Zedelius, Allianz SE, Munich
Clement B. Booth, Allianz SE, Munich Maximilian Zimmerer, Allianz Deutschland AG, Munich Paul Achleitner, Allianz SE, Munich
Markus Rieß, Allianz Deutschland AG, Munich Oliver Bäte, Allianz SE, Munich Ulrich Rumm, Allianz Deutschland AG, Munich Thomas Pleines, Allianz Deutschland AG, Munich
Terry Towell, Allianz Australia, Sydney Axel Theis, Allianz Global Corporate & Specialty, Munich Andrew Torrance, Allianz Cornhill Insurance, London
– We believe we can serve our shareholders best by making our customers the focus of our work.
– We know that our long-term success is based on our good reputation, our image in society and our appeal as a company which employs high-performing people.
– We wish to expand in business segments in which we can earn more than our cost of capital on a sustainable basis, thereby creating value for our shareholders.
– We will only satisfy our customers in the long term by offering them the most convenient ways to invest, long-term financial security, integrity and excellent, trustworthy advice.
– The goal of the Customer Focus initiative is to ensure that customers view all our services as so positive and reliable that we are their first port of call for financial services and that they recommend us to others. We regularly measure the extent to which our customers are willing to recommend us compared to our competitors. In addition, we conduct about 100,000 in-depth interviews with customers each month.
– Our innovation initiative “i2s” (ideas to success) has already produced a wealth of ideas present from our employees.
Strategy Our goal is to be the most trusted financial services company throughout the world. We can come closer to this goal by ensuring that we receive the very highest ratings for our services as an insurer, asset manager, banker and as a provider of integrated products through a wide range of distribution channels.
Relatively well-off families, a growing global trend, are one of these customer groups. In a cross-border scenario integrated solutions are demanded to safeguard growth in asset values, pensions and healthcare costs, and to preserve and increase families’ wealth.
The demographic age-shift, which has a long way to go before reaching its peak, does not by itself increase demand for financial pension services. Over the next few decades the elderly will increasingly want relevant products in almost all categories of financial services. We are already attending to this area of growth and will do so much more intensively in the future. This will be a line of business with high rates of expansion, even in saturated markets. An example of this is that elderly well-off individuals want practical help rather than cash benefits. They like to buy assistance services, as a benefit to be claimed under an insurance arrangement or as a permanent on-call service.
Grasping future business opportunities certainly also means applying our resources regionally and by line of business at locations where economic growth is highest. In this respect our established markets are becoming segmented. We are also engaged in the development of new business in large markets such as Japan, the booming Middle East, in New Europe and Asia, especially in India and China.
Allianz shares declined in value by 4.4 % in the year under review. This result was significantly better than our most important benchmark, the Dow Jones EURO STOXX Insurance (-10.0 %). This index reflects the prices of the largest insurance companies in the Eurozone. Overall market indices, on the other hand, performed noticeably better. The Dow Jones EURO STOXX 50 rose by 6.8 % and the DAX surged 22.3 %. The U.S. mortgage crisis was the principal factor in making investors stay clear of financials. This general attitude also dragged down our share price. After reaching almost � 180 in mid-year, the price of Allianz shares fell appreciably over the second half of the year in the wake of the U.S. credit crunch. Despite this disappointing price performance, most analysts surveyed by Bloomberg continued to be positive about Allianz shares. Around 74 % recommended them as a buy at end of February 2008.
Development of the Allianz share price versus Dow Jones EURO STOXX 50 and Dow Jones EURO STOXX Insurance indexed on the Allianz share price in �
Source: Thomson Financial Datastream Current Information on the development of the Allianz share price is available on the internet at www.allianz.com/share.
In spite of the setback in 2007 the longer-term performance of the share price has been strong. Over the past three years the average annual price gain has been 14.9 %, while in the past five years the value of Allianz shares has risen by 12.9 % each year on average. To calculate the performance of your own investment in Allianz shares, you can use the share performance calculator available online at www.allianz.com/
Allianz Share – Allianz shares too were caught up in the negative atmosphere surrounding financials in 2007, trading at � 147.95 as of December 31, 2007, 4.4 % below the previous year’s figure. However, Allianz shares fell substantially less than our major competitors. We view this as an indication that investors have noticed and to some extent acknowledged the successes achieved in our operations.
The market capitalization of the Allianz Group remained almost constant at � 66.6 billion despite the price drop, given that we issued almost 17 million new Allianz shares when buying out the minority interests in AGF (see page 99 of this annual report for more on this transaction). As a result, Allianz remains one of the most highly valued financial services providers in Europe. Our stock is included in all the major indices. In the year under review it was added to the Dow Jones Global Titans Index, which contains only two other insurance companies.
Our stock also appears in the sustainability indices “FTSE-4Good ”, “Climate Disclosure Leadership” and “Dow Jones Sustainability”. Within the latter index Allianz took the top insurance spot worldwide in terms of sustainability, as in the previous year. The Sustainable Business Institute of the European Business School estimates that the proportion of Allianz shares that are held by investors oriented towards sustainability has almost doubled in the period from 2004 to 2006, from 1.4 % to 3.0 %. Allianz stock is held by 117 European retail funds that focus on sustainability. This makes our stock the most popular German shareholding for European sustainability investments.
Weighting of the Allianz share in major indices as of December 31, 2007
Allianz has 412,000 shareholders and, as such, is one of the biggest publicly held corporations in Europe. The number of private shareholders fell a further 6 % to 405,000 – a trend also apparent with other DAX companies over the last few years. We were therefore pleased to note a break in this trend in the fourth quarter, when more private investors held Allianz shares than in the previous quarter. The breakdown shows that the proportion of shares held by private investors has declined slightly to 10 %, while the remaining 90 % are held by institutional investors. Around 75 % of our shares are held by European investors, and 25 % by nonEuropeans. The proportion of U.S.-American investors was 22 % in the year under review; 4 % higher than in 2006 . All Allianz shares are held in free float. For up-to-date information on our shareholder structure, visit www.allianz.com/
Shareholder structure as of December 31, 2007 in % of subscribed capital
Basic earnings per share � 18.00 17.09 11.24 Price-earnings ratio 8.2 9.1 11.4 Dividend per share � 5.50 3.80 2.00 Dividend yield as of December 31 % 3.7 2.5 1.6
Return on equity after income tax 2) % 16.4 15.9 12.9 1) In comparison with Dow Jones EURO STOXX 50; source: Bloomberg 2) Based on average shareholders‘ equity. Average shareholders‘ equity has been calculated based upon the average of the current and preceding year’s shareholders‘ equity.
Detailed Index 34 Executive Summary and Outlook 35 Allianz Group’s Consolidated Results of Operations 38 Impact of the financial markets turbulence 41 Recently Adopted and Issued Accounting
Pronouncements and Changes in the Presentation of the Consolidated Financial Statements 41 Recommendation for Appropriation of Profit 41 Events After the Balance Sheet Date 42 Outlook 44 Property-Casualty Insurance Operations 44 Earnings Summary 48 Property-Casualty Operations by Geographic Region 50 Life/Health Insurance Operations 50 Earnings Summary 54 Life/Health Operations by Geographic Region 56 Banking Operations 56 Earnings Summary 59 Banking Operations by Division 59 Banking Operations by Geographic Region 60 Asset Management Operations 60 Third-Party Assets Under Management of the Allianz Group 61 Earnings Summary 64 Corporate Activities 64 Earnings Summary 65 Balance Sheet Review 65 Consolidated Balance Sheets 66 Shareholders’ Equity 66 Total Assets and Total Liabilities 69 Off-Balance Sheet Arrangements
German Commercial Code and Explanations 125 Reconciliation of Consolidated Operating Profit and
The statements contained herein may include statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words “may”, “will”, “should”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, or “continue” and similar expressions identify forwardlooking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz Group’s core business and core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv)
mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults, (vii) interest rate levels, (viii) currency exchange rates including the Euro/U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures, and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The matters discussed herein may also be affected by risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statement.
– Strong earnings with an operating profit of � 10.9 billion and net income of � 8.0 billion.
1) The Allianz Group operates and manages its activities primarily through four operating segments: Property-Casualty, Life/Health, Banking and Asset Management. Effective January 1, 2006, in addition to our four operating segments and with retrospective application, we introduced a fifth business segment named Corporate. For detailed information on the Allianz Group, our activities and structures, as well as the environment in which we operate please see “Allianz Group Success Factors” on pages 96 to 106.
Total revenues – Segments in € mn 1) Total revenues comprise Property-Casualty segment’s gross premiums written, Life/Health segment’s statutory premiums Banking segment’s operating revenues and Asset Management segment’s operating revenues.
The considerable growth in statutory premiums fuelled a further extension of our asset base, which increased by � 8.7 billion to � 350.0 billion, despite negative impacts from foreign currency translation, higher interest rates and the weakening stock market towards year-end.
Banking Operating revenues in our Banking segment were down by 19.3 % to � 5.7 billion. Core product lines not impacted by the credit crisis performed in line with expectations. Net interest income grew by 14.1 %, while net fee and commission income increased modestly. The financial markets turbulence resulted in markdowns of � 1.3 billion on asset backed securities relating only to a limited number of business lines in the Investment Bank, driving Dresdner Bank’s net trading income to a negative income of � 0.5 billion. The remaining shortfall in these lines was indirectly related to the credit crisis. This decline outweighed the growth in the other revenue components.
Asset Management In asset management we again outperformed the vast majority of our performance benchmarks. Operating revenues were up 7.1 %, before negative foreign currency translation effects of � 0.2 billion. Internal growth of the asset base amounted to 8.1 %.
At � 765 billion, third-party assets under management recorded net inflows and positive market effects totalling � 62 billion. Offsetting this was � 59 billion of negative foreign currency translation effects.
Property-Casualty At � 6.3 billion, operating profit growth was relatively flat with an increase of 0.5 % compared to the prior year period. Claims from natural catastrophes were � 0.6 billion higher than in 2006, a year that was marked by exceptionally low claims from natural catastrophes. Higher current investment income compensated for the high losses incurred in connection with Kyrill, the floods in the United Kingdom and severe storms in several parts of the world.
Banking Our Banking segment’s operating profit was down 45.6 % to � 0.8 billion due to the major impact of the credit crisis. Although most lines of business in the Investment Bank were not impacted by the financial markets turbulence, a number of business lines experienced a markdown of � 1.3 billion due to the credit crisis. The remaining shortfall in these business lines was also related to the credit crisis. In lines of business which were not impacted by the credit crisis, operating profit increased by � 0.3 billion, or 57.8 %.
Corporate Segment Due to higher investment income and lower expenses the operating loss was significantly reduced to � 0.3 billion.
Net realized gains, were � 144 million lower than last year, albeit still at a high level of � 2,538 million. This was mainly driven by large harvesting transactions in the first quarter of 2007, when we took advantage of market conditions. With write-downs amounting to � 381 million, impairments on investments are at the same level as in 2006.
Interest expense from external debt increased by � 276 million to � 1,051 million, mainly in connection with bridge financing for the acquisition of the outstanding minority interests in AGF.
Net income grew by 13.5 % to almost � 8.0 billion.
Our effective tax rate of 24.7 % and income tax expense of � 2,854 million were significantly higher than a year ago, where especially the one-off benefit of � 571 million from capitalization of corporate tax credits in Germany significantly reduced the effective tax rate. Furthermore, a higher income before income taxes and minority interests in earnings of � 11,568 million (2006: � 10,323 million) contributed to this development. The positive impact on net income in 2007 resulting from the German tax reform, implemented by the business tax reform act 2008 (“Unternehmensteuerreformgesetz 2008”), amounted to � 152 million.
1) See note 50 to our consolidated financial statements for further details.
The turbulences on the financial markets also impacted our business development. However, the impact varied depending on the different business segments.
Asset Management segment was marginal. In contrast, we had to record a significant impact of this crisis within the Banking segment, with the substantial portion being attributable to some business units of Dresdner Bank’s investment banking activities.
Within our Life/Health asset base, ABS amounted to � 13.8 billion, as of December 31, 2007, less than 4 % of total average Life/Health assets. Of these, � 0.3 billion are CDOs of which none are subprime-related. No unrealized losses on CDOs were recorded in our equity. Realized losses of � 7 million were reflected in the segment’s income.
Asset-backed securities of the trading book The underlying of asset-backed securities is a pool of assets.
As of December 31, 2007, Dresdner Bank carried ABS within trading assets on the balance sheet of � 15.1 billion and was, due to short derivative positions, economically exposed by � 10.5 billion (comprising only drawn liquidity facilities) as of December 31, 2007. The majority of these ABS is of a high quality, as 89 % of them were rated A or better. Only � 1.6 billion of the net exposure is subprime.
After write-downs of � 1.3 billion the net exposure amounts to � 9.2 billion as of December 31, 2007. It contains � 1.5 billion CDOs, � 1.4 billion U.S. RMBS and � 6.3 billion other ABS. Because the financial markets turbulence mainly affected CDOs and U.S. RMBS, these net exposures are classified as “critical ABS”. We took substantial write-downs on CDOs and U.S. RMBS, recognizing the different quality and characteristics of the assets. The following table summarizes the write-downs on CDOs and U.S. RMBS.
Credit enhancements Credit enhancements are one or more initiatives taken by the originator in a securitization structure to enhance the security, credit or the rating of the securitized instrument. In this context, Dresdner Bank offered protection against the risk of sharp and sudden decline of ratings of assets (so called risk gap protection) for conduit asset financing entities (“CAFE”) and second loss protection for credit investment related conduits (“CIRC”). Both structures primarily contain ABS.
Leveraged buy-out A leveraged buy-out is a financing transaction involving a significant amount of debt.
Monoliner Dresdner Bank has entered into business relations with monoliners – companies that guarantee the repayment of a security and the corresponding interest in the event that the issuer defaults – in order to hedge the exposure from credit protection sold for third party ABS.
Dresdner Bank has provided credit protection via Credit Default Swaps (“CDS”) for ABS exposures. According to our risk policies, these CDS positions are re-insured with monoliners: only in case of a default of payment from the underlying assets and a breach of contractual duties of the monoliners an ultimate loss will occur. This loss amounts to the difference between the guaranteed amount from the monoliner and the value of the underlying assets. Dresdner Bank bought credit protection for counterparty risks on monoliners of notional � 0.4 billion, reducing the net counterparty risk to � 0.8 billion as of December 31, 2007. Considering both, the quality of the underlying assets as well as the credit risk of the monoline coverage bought, we believe our monoline-related critical assets amounted to approximately � 1.1 billion.
Due to the worldwide financial market crisis, some markets faced a significant shortage of liquidity, which affected the valuation techniques used by the Allianz Group to measure fair value. For certain financial instruments, the market has been completely illiquid and market prices were no longer available. In addition, the market prices of other ABS-based products declined significantly. Although the steep decline of certain market prices might not always have been rational from an economic perspective (e.g. due to forced sales), the Allianz Group has adhered to strict principles in measuring the affected financial instruments at fair value.
Whenever possible the fair value is determined using the market prices available in active markets. If there is no quoted market price available, valuation techniques are used which are based on market prices of comparable instruments or parameters from comparable active markets (market observable inputs). If no observable market inputs are available valuation models are used (non-market observable inputs).
As a benchmark for the ABS of the trading book, the ABX index was applied. Because the ABX.HE (Home Equity) index represents a standardized basket of Home Equity ABS reference obligations, the Allianz Group believes that it provides an adequate valuation standard. The ABS portfolio was divided into sub-portfolios based on certain criteria, such as the underlying product category, the rating or the vintage. The valuation was based on the respective ABXprices. For a large part of the RMBS portfolio, market quotes were available and used for valuation purposes. For the so-called “prime” assets (only certain RMBS), the Allianz Group has not used the ABX index, because the index only represents the subprime market. In this case, the Allianz Group took the midpoint of prices provided by other market participants for prime assets and used them as a valuation input.
Because there are no generally valid market standards existing in these areas, the valuation methods are naturally limited, so that alternative assumptions and input parameters would generate different results.
See “Outlook” below and Note 52 to the consolidated financial statements.
We are aiming at a combined ratio of less than 94 % on average in our Property-Casualty segment, an average new business margin 1) greater than 3 % in the Life/Health segment and average annual growth of third-party assets under management of 10 %, excluding foreign currency conversion effects for our Asset Management segment.
Asia will again be the most dynamic region with forecast growth of 8 %. China will lead the way with growth of just over 10 % (11.5 %), with a modest slowdown welcome here in order to prevent the economy from overheating. India takes second place with growth of 8 %, approximately half a percentage point below 2007. The other emerging markets in Asia are not expected to grow quite as strongly this year as in 2007. Expansion in Latin America and Eastern Europe in 2008 is expected to be roughly a percentage point below the corresponding figure for 2007.
Not an easy environment for financial services providers The ageing of society is happening regardless of the economic uncertainties. The long-term fundamentals of the Life/ Health segment remain intact. Private pension schemes remain important and are becoming ever more vital for the general public. In contrast to many pension insurance systems, most health insurance schemes are still faced with fundamental reform. Rising healthcare costs, which can scarcely be financed through the common pay-as-you-gobased systems, will increasingly have to be paid privately. This gives rise to challenges and opportunities for private healthcare insurers.
Pensions should be based on more than one pillar, both now and in the future. Many countries are reorganizing their systems accordingly while building up capital for future pensions. This form of private financing is also increasingly being adopted in booming Asia, providing excellent business opportunities for asset managers. In the ageing societies of Europe and the U.S. the prospects for growth in the fund management sector remain intact.
2) Together with our property-casualty assumed reinsurance business, primarily attributable to Allianz SE, the decline within Germany was (6.0) % (2006: (1.9) %).
Increases in gross premiums written were primarily achieved in New Europe and Spain as well as in the global travel and assistance business at Mondial and credit insurance at Euler Hermes. In contrast, as we intentionally forewent premium growth in order to protect our underwriting profitability, revenues were down in the United States and in Italy.
With � 838 million additional premium volume, New Europe contributed the highest portion to revenue growth. The first time consolidation of ROSNO and Progress Garant in Russia and ATF-Polis in Kazakhstan were the main drivers
Allianz Group Annual Report 2007 Group Management Report for this development. Additionally, motor insurance business in Poland and Romania added to the increase in gross premiums.
Increase in gross premiums written in our Travel and Assistance business by � 95 million was driven by growth in most regions coming mainly from e-commerce partnerships in travel insurance.
Premium growth within the credit insurance business was due to higher business volume. Despite the weak U.S. Dollar compared to the Euro and price declines which are due to high competition and very low claims ratios in the market, total revenues were up by � 90 million.
At Allianz Sach within Germany, we closely monitored pricing development in order to maintain profitability. Due to a weak market environment and higher no claims bonuses in motor insurance, revenues declined by � 114 million. Furthermore, internal reinsurance business at Allianz SE, which we also show within Germany, was significantly reduced as we optimized internal reinsurance arrangements in the year under review. Overall premiums in Germany were down by � 681 million.
Due to the unfavourable development of the U.S. Dollar compared to the Euro, we had to record declining revenues of � 206 million at Fireman’s Fund Insurance Company (“Fireman’s Fund”) in the United States. On a U.S. Dollar basis, growth amounted to 3.8 % and we saw a satisfying business performance, coming predominantly from crop insurance business and personal lines.
Our operations in Italy showed a decline in gross premiums written of � 167 million mainly due to stagnation in the motor market and the impact from a new regulation, the so-called Bersani law, which resulted in an overall price reduction.
In the United Kingdom the decrease of � 160 million in revenues was due to the internal transfer of large risk business to Allianz Global Corporate & Specialty (“AGCS”). Otherwise, premium volume increased by � 185 million mainly coming from personal motor and commercial lines.
The accident year loss ratio increased by 2.0 percentage points to 69.6 % . In comparison, the previous year’s loss ratio was on a generally lower level.
In total, non-operating items decreased by 25.5 % to � 962 million mainly coming from lower net realized gains, a negative trading result and higher impairments of investments. These effects could not be balanced by lower restructuring charges.
Non-operating net impairments of investments increased to � 276 million, reflecting impairments of available-for-sale equity securities.
Restructuring charges were down by two thirds to � 122 million as the prior year’s figure reflected the impact from the reorganization of our German insurance operations that was not repeated in 2007.
Property-Casualty insurance segment’s income statement and ratios as of and for the years ended December 31, 2007 2006 2005 � mn � mn � mn
Loan loss provisions (6) (2) (1) Impairments of investments (net), shared with policyholders 4) (67) (25) (18)
Income before income taxes and minority interests in earnings 7,261 7,560 6,166
Group Management Report Allianz Group Annual Report 2007 1) Contains run-off of � 21 mn, � 20 mn and � (4) mn in 2007, 2006 and 2005 respectively from a former operating entity located in Luxembourg. 2) Effective February 21, 2007, Russian People’s Insurance Society “Rosno” was consolidated following the acquisition of approximately 49.2 % of the shares in ROSNO by the Allianz Group, increasing our holding to approximately 97 %. Effective May 21, 2007, we consolidated Progress Garant for the first time.
Australia 1,543 1,452 1,469 1,245 1,195 1,159 296 225 235 Other 349 310 280 170 141 121 16 19 17 Asia-Pacific 1,892 1,762 1,749 1,415 1,336 1,280 312 244 252 South America 918 869 716 692 623 510 55 47 61 Other 95 68 58 50 32 30 9 9 7 Specialty lines
Russia 2) 104.2 88.5 22.9 64.7 34.7 5.8 39.5 53.8 17.1 Hungary 96.7 97.0 101.6 67.1 64.8 70.7 29.6 32.2 30.9 Poland 94.4 92.8 93.3 58.6 57.4 59.7 35.8 35.4 33.6 Romania 101.2 92.0 94.8 79.7 72.4 75.8 21.5 19.6 19.0 Slovakia 66.8 86.4 74.5 38.2 55.4 43.2 28.6 31.0 31.3 Czech Republic 79.5 82.6 85.7 56.7 61.4 63.8 22.8 21.2 21.9 Bulgaria 85.5 80.2 66.6 43.6 41.7 27.0 41.9 38.5 39.6 Croatia 100.1 95.6 97.7 65.1 63.8 63.0 35.0 31.8 34.7 New Europe 3) 94.3 92.0 91.0 60.8 61.1 61.7 33.5 30.9 29.3 Other Europe 94.4 90.5 91.1 64.5 61.5 62.7 29.9 29.0 28.4
Australia 95.7 96.2 95.2 70.8 70.3 69.1 24.9 25.9 26.1 Other 98.6 93.8 94.5 60.2 55.7 57.2 38.4 38.1 37.3 Asia-Pacific 96.0 95.9 95.2 69.5 68.7 68.0 26.5 27.2 27.2 South America 99.0 101.2 100.8 62.9 64.8 64.5 36.1 36.4 36.3 Other — 5) — 5) — 5) — 5) — 5) — 5) — 5) — 5) — 5)
3) Contains income and expense items from a management holding in both 2007 and 2006. 4) Effective Q1 2007, life business in Mexico is shown within the Life/Health segment. 5) Presentation not meaningful. 6) Represents elimination of transactions between Allianz Group companies in different geographic regions.
Life/Health Insurance Operations – Dynamic statutory premium development showing double-digit growth rates in many countries.
Most of our operating entities worldwide, especially our emerging markets 1) but also some of the more mature markets, showed high double-digit growth rates. For the emerging markets growth came to 22.6 %. Asia-Pacific and New Europe contributed � 5,677 million or 11.4 % to total statutory premiums.
1) New Europe, Asia-Pacific, South America, Mexico, Middle East and Northern Africa.
Allianz Group Annual Report 2007 Group Management Report ance channel continued to perform well. Within South Korea, we saw a further strong increase in single premium business, adding to the rise of � 134 million. In China, the revenue increase amounted to � 168 million. Furthermore, we expanded our sales network in China, benefiting from our strategic partnership with Industrial and Commercial Bank of China Limited (“ICBC”). Our joint-venture “Bajaj Allianz Life” in India, which is not consolidated in the Group financial statements, saw another year of strong growth and generated � 1.4 billion in statutory premiums, up 87 %.
Total revenues in France were up 13.1 % or � 758 million mostly driven by group insurance business and increased sales of individual life insurance policies. Unlike in the past, the highest share of new business now comes from proprietary sales channels.
Statutory premium volume in our German life insurance business grew by 3.9 % or � 503 million mainly coming from a significant increase in single premium business. While growth during the first quarters of 2007 was weak due to a difficult market environment, we experienced a very strong fourth quarter growing by more than 20 % through a pick-up in single premium business.
In the United States, statutory premium development still reflected the legal and regulatory environment affecting the sale of indexed annuity products. However, during the last months we made progress in closing pending litigations. Year over year, revenues declined by 20.9 % or � 1,827 million. In addition, business was affected by the weakening of the U.S. Dollar compared to the Euro. On a local currency basis, the decline amounted to 13.2 % or USD 1,445 million
Year over year, operating profit increased by 16.8 % to � 2,995 million benefiting from top-line growth and improvements in all sources of profit. Most of our life insurance companies worldwide contributed to this development.
Furthermore, we benefited from an extraordinary reserve release of � 170 million in South Korea.
Acquisition and administrative expenses increased by 3.4 % or � 151 million and thus slightly less than growth of statutory premiums. Administrative expense included integration costs in Italy and further investments in operations in AsiaPacific (China and Japan). Our statutory expense ratio improved slightly by 0.2 percentage points to 9.4 %.
Net income increased by 21.2 % to � 1,991 million driven by the higher operating profit. Income tax expenses of � 897 million, were up � 256 million year on year. The higher tax expense in 2007 is a result of the higher pre-tax income. Additionally, the benefit from tax-exempt income was lower than in 2006, leading to a higher effective tax rate of 28.9 % (2006: 23.7 %).
Minority interests in earnings were almost halved to � 214 million reflecting the minority buy outs at RAS in Italy and at AGF in France.
Claims and insurance benefits incurred (net) (17,637) (17,625) (17,439) Changes in reserves for insurance and investment contracts (net) (10,268) (10,525) (10,443)
Loan loss provisions 3 (1) — Impairments of investments (net), shared with policyholders 4) (824) (390) (199)
Income before income taxes and minority interests in earnings 3,102 2,700 2,271
1) Statutory premiums are gross premiums written from sales of life insurance policies as well as gross receipts from sales of unit-linked and other investment-oriented products, in accordance with the statutory accounting practices applicable in the insurer’s home jurisdiction.
2) Loss ratios were 71.6 %, 68.4 % and 69.7 % for 2007, 2006 and 2005, respectively. 3) Contains run-off of � (3) mn, � (2) mn and � (11) mn in 2007, 2006 and 2005 respectively, from our former life insurance business in the United Kingdom which we sold in December 2004.
Germany Life 13,512 13,009 12,231 10,381 10,543 10,205 Germany Health 2) 3,123 3,091 3,042 3,123 3,091 3,042 Italy 9,765 8,555 9,313 1,006 1,098 1,104 France 6,550 5,792 5,286 1,760 1,436 1,420 Switzerland 992 1,005 1,058 432 455 470 Spain 738 629 547 399 400 350
Poland 431 367 99 121 96 53 Slovakia 235 183 149 157 135 129 Hungary 141 96 89 80 75 73 Czech Republic 96 76 64 56 54 50 Croatia 58 48 41 40 36 33 Bulgaria 35 25 19 28 23 19 Romania 30 25 18 12 12 7 Russia 13 8 — 12 7 —
4) Effective 2007, life business in Mexico is shown within the Life/Health segment. 5) Contains, among others, the Life/Health business assumed by Allianz SE, which was previously reported under Germany in the Property-Casualty segment. Prior year balances have been adjusted to reflect this reclassification and allow for comparability across periods. 6) Presentation not meaningful. 7) Represents elimination of transactions between Allianz Group companies in different geographic regions.
Dresdner Bank’s operating revenues were down by 20.3 % to � 5,424 million compared to the previous year. This development resulted mainly from the effects of the financial markets turbulence which heavily impacted our net trading income. However, the net interest income grew.
Net fee and comission income improved slightly by 0.9 % to � 2,866 million. This resulted from an increased fee volume in the advisory business of our Investment Bank and higher transaction-driven fees in Corporate Other. Lower income from the securities business in PCC, where we saw less client activity due to the market turbulence, partially offset this development.
The development in our net trading income was significantly impacted by the financial markets turbulence leading to a negative result of � 461 million (2006: income of � 1,242 million). This decline was almost entirely attributable to the markdowns of � 1,275 million in only a limited 1) The results of operations of our Banking segment are almost exclusively represented by Dresdner Bank, accounting for 94.8 % of our total Banking segment ’s operating revenues for the year ended December 31, 2007 (2006: 96.0 %, 2005: 95.6 %). Accordingly, the discussion of our Banking segment’s results of operations relates solely to the operations of Dresdner Bank.
number of business lines of our Investment Bank. The remaining shortfall in these business lines was indirectly related to the credit crisis, resulting from constrained activities in the capital markets. Unaffected business units in aggregate recorded revenue growth of 6.1 %. This growth was largely driven by higher client revenues, particularly in leveraged finance, loans and interest derivatives.
Operating expenses, at � 4,826 million, were down 11.0 %. We saw reductions in all expense categories. Administrative expenses were down by 10.7 % to � 4,809 million. Thereof, personnel expenses declined by 14.9 % to � 2,894 million driven by significantly lower performance-related expenses at the Investment Bank, reflecting the development in operating revenues. Further staff reductions and efficiency gains, achieved under the “New Dresdner Plus” programme, also contributed to this development. Non-personnel expenses also decreased by 3.4 % to � 1,915 million. This decline resulted predominantly from lower office costs and reduced consulting fees, partly offset by additional expenses for focused growth initiatives.
The non-operating result more than halved to a loss of � 70 million in 2007. The main drivers were significantly reduced restructuring charges and lower net impairments on investments.
Net fee and commission income 3) 3,048 2,866 3,008 2,841 2,850 2,693
The following table sets forth our banking operating revenues, operating profit and cost-income ratio by division. Consistent with our general practice, these figures are presented before consolidation adjustments, representing the elimination of transactions between Allianz Group companies in different segments.
3) Presentation not meaningful. 4) Consists of non-Dresdner Bank banking operations within our Banking segment.
The following table sets forth our banking operating revenues and operating profit by geographic region for the years ended December 31, 2007, 2006 and 2005. Consistent with our general practice, these figures are presented before consolidation adjustments, representing the elimination of transactions between Allianz Group companies in different segments.
Third-party assets under management – by geographic region as of December 31, 2007 (2006) 1)
There were no major movements in the geographic origination of third party assets under management in the year. The allocation between retail and institutional clients also remained almost unchanged. Roughly two thirds were made up by institutional clients with a majority thereof coming from the United States. The same applied to retail clients. With regards to investment categories, the proportion between fixed income and equity does not reflect any major movements either. The majority were fixed income investments mainly from the United States. On the equity side the allocation between the United States, Germany and other countries was fairly balanced.
Operating revenues amounted to � 3,178 million, up 6.3 % from a year ago. At constant exchange rates, operating revenue growth would have been 13.5 % ahead of the prior year period.
Net fee and commission income was up � 186 million to � 3,060 million driven by higher management fees resulting from our growing asset base, as well as by increased performance fees. In contrast, loading and exit fees decreased reflecting the development in mutual fund sales.
Operating Profit – Allianz Global Investors in � mn 1) The results of operations of our Asset Management segment are almost exclusively represented by AGI, accounting for 97.5 % of our total Asset Management segment’s operating revenues for the year ended December 31, 2007 (2006: 98.2 %, 2005: 98.3 %). Accordingly, the discussion of our Asset Management segment’s results of operations relates solely to the operations of AGI.
Administrative expenses, excluding acquisition-related expenses were up 8.4 % to � 1,857 million as a result of our business expansion and structured investments to secure future growth. In line with new business generation, compensation -related expenses were also up. At 58.4 % our cost-income ratio remains at a very competitive level.
There was no charge in 2007 for amortization of intangible assets compared to a charge in the prior year of � 23 million that was related to the impairment of a brand name.
Income before income taxes and minority interests increased by � 109 million, giving rise to a higher tax charge. Our effective tax rate increased by 2.4 percentage points to 40.7 %, primarily due to a highter taxable income in the United States.
Net income therefore grew by 19.0 % to � 470 million in 2007.
1) Please see Note 48 to our consolidated financial statements for further information on the Class B Units.
Income statement and cost-income ratios for the Asset Management segment and AGI
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 expense.
4) The total of these items equals acquisition and administration expenses (net) in the segment income statement included in Note 5 to the consolidated financial statements. 5) Consists of retention payments for the management and employees of PIMCO and Nicholas Applegate. 6) Represents operating expenses divided by operating revenues.
Operating profit At � 446 million, the operating loss was nearly halved, a considerable improvement as compared to a year earlier. On the revenue side, in line with a higher asset base and an increase in yields, the main driver was interest and similar income which was up 74.5 %, reaching � 745 million, driven by a high liquidity accumulated to pay back liabilities. Additionally, operating expenses declined by 6.9 %, primarily attributing to lower investment expenses which reflect declined banking and investment transaction costs.
Net income Due to significantly lower tax income, stemming primarily from the German tax reform, our net loss came to � 168 million.
Operating profit At � 121 million, the operating result turned positive after an operating loss of � 7 million a year ago reflecting profit participation of � 65 million.
Non-operating result Non-operating result turned negative and recorded an aggregate loss of � 66 million, following a gain of � 299 million a year ago, as the high level of realized gains from disposals in the prior year period – mainly in connection with the sale of Four Seasons Health Care Limited – was not repeated.
Loans and advances to banks and customers 396,702 423,765 Financial assets for unit linked contracts 66,060 61,864 Reinsurance assets 15,312 19,360 Deferred acquisition costs 19,613 19,135 Deferred tax assets 4,771 4,727 Other assets 41,528 38,001 Intangible assets 13,413 13,072 Total assets 1,061,149 1,110,081
Total liabilities and equity 1,061,149 1,110,081 1) The Allianz Group identified prior period errors through an analysis of various balance sheet accounts (the “Errors”). The Errors resulted primarily from the accounting for the purchase of Dresdner Bank in 2001 and 2002, consolidation of special funds in 2001 and other errors related to minority interest and policyholder participation occurred in combination with mergers. The Errors had the effect of reducing net income by �78 mn in 2006, �42 mn in 2005, and �157 mn for the 4 years from 2001 through 2004. As the majority of the Errors related to the years 2001 through 2004, the Errors from these periods have been accounted for in 2007 by adjusting the opening balance sheet as of January 1, 2005. The Errors for 2005 and 2006 have been corrected through an out-of-period adjustment to net income in 2007. Certain financial instruments that were previously presented on a net presentation are now presented on a gross basis, due to contractual limitations to the right of offset. Partially offsetting these reclassifications from net to gross presentation is a change in the presentation of Collateral paid for securities borrowing transactions and Collateral received for securities lending transactions from gross to net presentation. The net effect is an increase in total assets and total liabilities of �57,610 mn. For further information, see Note 3 to the consolidated financial statements.
Property-Casualty asset base fair values 1) in � bn 1) Loans and advances to banks and customers, held-to-maturity investments, and real estate held for investment are stated at amortized cost. Investments in associates and joint ventures are stated at either amortized cost or equity, depending upon, among other factors, our ownership percentage. For further information see note 2 to the consolidated financial statements.
2) Does not include affiliates of � 10.0 bn and � 9.5 bn as of December 31, 2007 and 2006, respectively.
3) Includes debt securities of � 2.7 bn and � 3.2 bn as of December 31, 2007 and 2006, respectively, equity securities of � 0.4 bn and � 0.4 bn as of December 31, 2007 and 2006, respectively, and derivative financial instruments of � 0.1 bn and � 0.1 bn as of December 31, 2007 and 2006, respectively.
2) Financial assets for unit-linked contracts represent assets owned by, and managed on the behalf of, policyholders of the Allianz Group, with all appreciation and depreciation in these assets accruing to the benefit of policyholders. As a result, the value of financial assets for unitlinked contracts in our balance sheet corresponds with the value of financial liabilities for unitlinked contracts.
3) Does not include affiliates of � 2.7 bn and � 2.8 bn as of December 31, 2007 and 2006, respectively.
Banking loans and advances to banks and customers Loans and advances to banks and customers in our banking segment decreased by 10.2 % to � 295.5 billion as of December 31, 2007. The decrease was particularly driven by a reduced volume in reverse repurchase agreements of Dresdner Bank. This development was a result of the financial market turbulence which led to distortions in the money market business and therefore to reduced business activities between banks.
Banking liabilities to banks and customers Due to the reasons mentioned, liabilities to banks and customers also experienced a decrease of 12.4 % to � 320.4 billion namely in the form of repurchase agreements.
Asset-backed securities transactions 22,643 Various receivables corporate notes, index certificates and derivatives 22,643 —
Derivatives transactions 3,861 Derivatives, equity, leases and cash balances 3,861 —
The following tables set forth the total assets of non-consolidated SPEs in which the Allianz Group has a significant beneficial interest, the Allianz Group’s maximum exposure to loss associated with these SPEs and further information regarding the Allianz Group’s involvement as of December 31, 2007. A significant beneficial interest is considered to be either an investment greater than �100 million in an SPE, or a smaller investment in an SPE that leads to expected losses greater than �5 million. Allianz Group’s maximum exposure to loss comprises the total amount of investment, including
Securitization conduit Commercial paper 8,654 1,658 SIV – K2 Capital notes, liquidity, repo facilities and investment manager
In addition to an equity interest or fund investment interest, the Allianz Group has various other types of interests in certain non-consolidated SPEs. These interests include direct loans, as well as liquidity facilities, which the SPE can draw upon if necessary. For certain mutual funds, primarily those sponsored by Allianz Global Investors in the normal course of business, the Allianz Group has guaranteed a portion of the investors’ principal. Other agreements include securities lending and a foreign currency hedge transaction.
On February 21, 2008 Dresdner Bank decided to offer the Structured Investment Vehicle (“SIV”) K2 a support facility. The offer is intended to ensure the repayment of all senior debt of K2. Dresdner Bank will take over the assets that remain after the restructuring. The impact on the consolidated financial statements will depend on the specific restructuring alternative selected and implemented.1)
The following table summarizes the Allianz Group’s maximum exposures to loss by the type of exposure and by type of SPE: Without any mitigation of risks Equity/Fund Investment
K2 is a SIV incorporated in Grand Cayman on October 17, 1997. K2 has invested in a diversified portfolio of assets. Dresdner Bank acts as the asset manager of K2.
In regard to credit risk, the rating of K2 assets as of December 31, 2007 is presented as follows: Rating Category Moodys % of Portfolio
Liquidity planning is an integral part of the overall financial planning and capital allocation process and is based on strategic decisions which include solvency planning, our dividend target, and expected merger and acquisition activities. The Board of Management of Allianz SE, the holding and ultimate parent company of the Allianz Group, decides, after consultation with local management for the Allianz Group companies, on how to allocate capital among the Group.
Allianz SE coordinates and executes external debt financing for instance through securities issues and other capital raising transactions for the Allianz Group in order to fund any liquidity need. We have access to commercial paper, medium-term notes and other credit facilities as additional sources of liquidity. As of December 31, 2007, we had access to unused, committed and long-term credit lines as a source of further liquidity with different banks.
As of December 31, 2007, the majority of Allianz SE’s external debt financing was made up of bonds and money market securities.
Our use of commercial paper as a short-term financing instrument was increased by � 2.0 billion to � 2.9 billion in 2007 from � 0.9 billion in 2006. Interest expense on commercial paper increased by 85.1 % to � 87.0 million (� 47.0 million) due to increasing interest rates in 2007 and higher average usage.
Additionally, see Note 43 to our consolidated financial statements for information regarding how we use certain derivatives to hedge our exposure to interest rate and foreign currency risk related to certificated and subordinated liabilities.
Liquidity and Capital Resources – Allianz Group and its subsidiaries are well-capitalized. – Ratings upgraded by both Standard & Poor’s and A.M. Best.
On July 10, 2007, the Allianz Group completed the squeezeout procedure for the outstanding AGF shares. In connection with this transaction, we completed a capital increase involving the issuance of 16.97 million new Allianz SE shares. The total cash component of the consideration for the acquisition of the outstanding AGF shares amounted to approximately � 6.0 billion.
On January 14, 2008, the Allianz Group announced its intention to redeem the remaining 35.65 % of the BITES index-linked bond at the final maturity date with Munich Re shares.1)
� mn � mn � mn � mn � mn � mn 1) Bonds and exchangeable bonds issued or guaranteed by Allianz SE in the capital market, presented at nominal and carrying values. Excludes � 85.1 mn of participation certificates at each December 31, 2007 and 2006, with interest expense of � 16.2 mn and � 6.2 mn, respectively.
Certificated liabilities and subordinated bonds 1) by maturity – Overview as of December 31, 2007 in � mn 1) Bonds and exchangeable bonds issued or guaranteed by Allianz SE in the capital market, presented at carrying values. Excludes � 85.1 million of participation certificates.
Interest expense � 61.6 mn Total interest expense for senior bonds � 209.3 mn 2. Subordinated bonds 6.125 % bond issued by Allianz Finance II B. V., Amsterdam Volume � 2 bn Year of issue 2002 Maturity date 5/31/2022
Interest expense � 65.9 mn 7.25 % bond issued by Allianz Finance II B. V., Amsterdam Volume USD 0.5 bn Year of issue 2002 Maturity date Perpetual Bond
Interest expense � 84.0 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 � 62.9 mn 5.375 % bond issued by Allianz Finance II B. V., Amsterdam Volume � 0.8 bn Year of issue 2006 Maturity date Perpetual Bond ISIN DE000A0GNPZ3 Interest expense � 46.0 mn Total interest expense for subordinated bonds � 407.1 mn 3. Exchangeable bonds 0.75 % Basket Index Tracking Equity Linked Securities (BITES) issued by Allianz Finance II B.V., Amsterdam Underlying DAX®
Volume � 0.5 bn Year of issue 2005 Maturity date 2/18/2008
Interest expense � 47.9 mn Total interest expense for matured issues � 84.9 mn Total interest expense � 725.8 mn 1) Bonds and exchangeable bonds issued or guaranteed by Allianz SE in the capital market.
Change in cash and cash equivalents for the years ended December 31, in � mn 1) Includes effect of exchange rate changes on cash and cash equivalents of � (115) mn, � (78) mn and � 72 mn in 2007, 2006 and 2005, respectively.
Net cash outflow provided by financing activities was down by � 25.3 billion to � 9.6 billion in 2007. The main contributing factors were lower net inflows from liabilities to banks and customers, as well as higher net outflows from certificated liabilities, participation certificates and subordinated liabilities. Additionally the cash flow for financing activities was affected by higher outflows from transactions between equityholders (mainly AGF).
Balances with banks payable on demand 23,848 26,915 Balances with central banks 6,301 4,945 Cash on hand 918 919 Treasury bills, discounted treasury notes, similar treasury securities and checks 264 224 Bills of exchange 6 28
– Approves Group Risk Policy – Defines risk strategy of Allianz Group – Defines limit system
– Monitors solvency and risk profile – Defines risk standards and Group and operating entities limits – Recommends/approves actions to mitigate risks
– Enhances risk dialogue between Group and operating entities – Implements internal risk capital model – Reports and communicates Group risks
– Manages risks proactively within Group policies and limits – Reports risk exposures to Group Risk
– Integration of risk considerations and capital needs into management and decision making processes through the attribution of risk and allocation of capital to the various segments.
The Allianz risk governance approach is designed to enable us to manage our local and global risks equally and to reduce the likelihood that our overall risk increases in an undetected manner. The following diagram provides an overview regarding risk-related decision-making responsibility within our risk governance structure.
The Board of Management of Allianz SE formulates business objectives and allocates capital resources across the Allianz Group, balancing return on investment and risk. The Supervisory Board Risk Committee of Allianz SE meets on a regular and ad-hoc basis to monitor the risk profile of the Allianz Group based on risk reports presented by the Chief Financial Officer and Chairman of the Group Risk Committee.
The Group Risk department (“Group Risk”), which reports to the Chief Financial Officer, develops methods and processes for identifying, assessing and monitoring risks across the Allianz Group based on systematic qualitative and quantitative analysis and regularly informs management concerning the Allianz Group’s risk profile. Group Risk develops the Allianz risk framework and oversees the operating entities’ adherence to the framework. The core elements of the risk framework are set forth in the Group Risk Policy, which has been approved by the Board of Management of Allianz SE and which defines the minimum requirements for all operating entities within the Allianz Group. Additional risk standards, such as standards related to specific segments or risk categories, are in place for our operating entities worldwide.
We define internal risk capital as the capital required to protect against unexpected, extreme economic losses. We aggregate internal risk capital consistently across all business segments (Property-Casualty, Life/Health, Banking, Asset Management and Corporate), providing a common standard for measuring and comparing risks across the wide range of different activities that we undertake as an integrated financial service provider.
To calculate internal risk capital using the VaR approach at the Allianz Group level, we assume a confidence level of 99.97 % and a holding period of one year, which is assumed to be equivalent to an “AA” rating of Standard & Poor’s. We apply a holding period of one year because it is generally assumed that it may take up to one year to identify a counterparty to whom to transfer the liabilities in our portfolio. This capital requirement is sufficient to cover a loss in any one year equivalent to a 3-in-10,000 year event. Although our internal risk capital is based on extreme events, it nonetheless provides adequate indications to manage the risks resulting from reasonably possible smaller adverse events that we might identify in the near-term, because the results allow us to analyze separately and in aggregate our exposure to each source of risk.
Our internal risk capital model considers both concentration and correlation when aggregating results on the Allianz Group level, in order to reflect that not all of our potential losses are likely to be realized at the same time. This effect is known as diversification. Managing diversification forms a central element of our risk management framework. The Allianz Group strives to diversify the risks to which it is exposed to limit the impact of any single source of risk and to help ensure that the positive developments of some businesses operate in such a manner to neutralize the possible negative developments of others.
Possible losses caused by the failure of our debtors, bond issuers, reinsurance partners or counter parties to meet payment obligations or by changes in their creditworthiness
Cost risks, as well as operational risks which is the risk of a loss resulting from inadequate or failed internal processes, or from personnel and systems, or from external events
Our internal risk capital model takes into account the following sources of risk, classified as risk categories per segment: management decisions such as investment strategies and policyholder participation rules.
Our internal risk capital model covers: – Substantially all of our major insurance and banking operations.
– Substantially all of our assets (including bonds, mortgages, investment funds, loans, floating rate notes, equities and real estate) and liabilities (including the cash flow profile of all technical reserves as well as deposits and issued securities). For the Life/Health segment, the model reflects the interaction between assets and liabilities and local 1) Foreign currency risks are mainly allocated to the Corporate segment.
We apply customized derivative valuation tools which are suitable to our business to reflect substantially all of our derivatives in internal risk capital. Our integrated internal risk capital model for insurance operations currently only allows for the 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 non-standard instruments is not material on either the local or the Allianz Group level, but a more precise modeling of these instruments might impact the fair value and resulting internal risk capital for these derivatives. However, we believe that any such change would not be material.
In managing our capital position, we also consider additional external requirements of regulators and rating agencies. While meeting rating agencies’ capital requirements forms a strategic business objective of the Allianz Group, capital requirements imposed by regulators constitute a binding constraint. Regulators and rating agencies impose minimum capital rules on the level of both the Allianz Group’s operating entities and on the Allianz Group as a whole.
Allocated internal risk capital by segment (total portfolio before minority interest) in � mn
Best as “A+” (stable outlook), and by Moody’s as “Aa3” (stable outlook). Subsequently to December 31, 2007, Standard & Poor’s changed the outlook on its rating of Dresdner Bank (“A+”) from stable to negative.
In addition to its long-term financial strength rating, Standard & Poor’s has introduced a new rating category for “Enterprise Risk Management” (ERM) which is rated separately. Standard & Poor’s commenced its analysis of the Allianz risk management approach in 2006 and continued the review in 2007. Currently Standard & Poor’s has assigned Allianz a “Strong” rating for the ERM capabilities for our insurance operations. This rating indicates that Standard & Poor’s regards it “unlikely that Allianz SE will experience losses outside its risk tolerance”. Standard & Poor’s stated that the assessment is based on the Allianz Group’s strong risk management culture, strong controls for the majority of key risks and strong strategic risk management.
In addition to our internal risk capital analysis, we perform regular stress tests that act as early-warning indicators in monitoring the Allianz Group’s regulatory solvency capital ratios and its capital position required by rating agencies. We also apply regular stress tests on a local operating entity level in order to monitor capital requirements imposed by local regulators and rating agencies.
For example, stress test results on a Group level indicated that a 10 % price decline in our available-for-sale equity securities as of December 31, 2007 would have resulted in a � 2.7 billion decline in shareholders’ equity before minority interests. If the interest rate had increased by 100 basis points, shareholders’ equity before minority interests would have decreased by � 3.6 billion, if available-for-sale fixed income securities are taken into account as of December 31, 2007.
3) The internal risk capital requirements for the Asset Management segment only reflect business risk (please see “Internal Risk Capital Framework – Scope” for further information).
The decrease in market risk mainly results from the sale of a significant portion of our strategic equity participations, in particular on the Corporate level and in the Property-Casualty segment. Furthermore, an increase in interest rates in Europe reduced our exposure to risk in connection with the minimum guaranteed crediting rate that we must provide to policyholders for certain of our Life/Health products.
As of December 31, 2007, most of the Allianz Group’s insurance -related equity investments are intended to be held long-term. 63 % of the non-diversified internal risk capital allocated to the Property-Casualty and Life/Health segments for equity risk is assigned to our operating entities in Germany, Italy, France and the U.S.
Trading portfolio The Banking segment is active in trading equities, interest rate instruments, foreign exchange, commodities and derivatives. The Banking segment uses derivatives in its trading portfolios primarily to meet customer demands as well as to hedge market and credit risks. Derivatives are also used to take advantage of market opportunities. Dresdner Bank has expanded its use of credit and foreign exchange derivatives in order to meet client demands in this product field.
Although our internal risk capital model generally uses a one-year holding period and a confidence level of 99.93 % for local operating entities, Dresdner Bank calculates market VaR figures based on different confidence level and holding period assumptions for its regulatory reporting as well as for the purposes of internal limit setting and risk management. These assumptions take into account that Dresdner Bank’s trading portfolio can be transferred significantly faster than insurance liabilities.
These market risks are integrated into the Allianz Groupwide internal risk capital model. To this end, Dresdner Bank converts its VaR calculated using a 99 % confidence interval and 10-day holding period to match Allianz’s Group-wide internal risk capital standards for time horizon (one year) and confidence level (99.93 %). The conversion is based on model has been approved by the German regulator, BaFin. For the purpose of risk management and internal limit setting, Dresdner Bank calculates its VaR with a confidence level of 95 % and a one-day holding period. Unlike the VaR calculation required by the BaFin, this model assigns greater weight to the most recent market fluctuations. In doing so, Dresdner Bank endeavors to reflect current market trends on a timely basis.
VaR is only one of the instruments used to characterize and control the market risk profile of Dresdner Bank. In addition, Dresdner Bank uses operational risk indicators and limits that are specifically adapted to the risk situation of the trading units. Current limit utilization is determined and monitored on a daily basis. Limit breaches, if any, are immediately communicated to management so that corrective action can be taken.
the methodology used by industry regulators to convert VaR into regulatory capital requirements. Through this conversion, we achieve the comparability and integration of Dresdner Bank results into the Group-wide analysis.
As of December 31, Over daily results Over daily results Average High Low Average High Low
Non-trading portfolio The market risk in the non-trading portfolio of the Banking segment comprises interest rate risk and equity risk. The interest rate risk in the non-trading portfolio arises from loans and deposits, issued securities, interest rate related investment securities as well as corresponding hedges and also from long-term fixed rate loans funded in part by shortterm deposits. The equity risk arises from available-for-sale securities with equity characteristics. Dresdner Bank manages this risk by setting VaR limits. At December 31, 2007, the Dresdner Bank diversified VaR, with a 99 % confidence level and 10-day holding period, for market risks in the nontrading portfolio amounted to � 15.8 million, compared to � 15.5 million at December 31, 2006.
Group perspective, the Euro equivalent net asset values also decline. Our primary exposures to foreign currency risk are related to the U.S. Dollar, Swiss Franc and South Korean Won.
Credit risk arises from claims against various obligors such as borrowers, counterparties, issuers, guarantors and insurers. Losses may result from the following events: – Changes in creditworthiness of an obligor, including ultimately its failure to meet payment obligations (default and migration risk); – Default on local government debt or temporary suspension of payment obligations (“moratorium”), deterioration of economic or political conditions, expropriation of assets, inability to transfer assets abroad due to sovereign intervention, etc. (country risk including transfer risk); and
1) The internal risk capital requirements for the Asset Management segment only reflect business risk (please see “Internal Risk Capital Framework – Scope” for further information).
In the Property-Casualty and Life/Health segments, credit risks arising from reinsurance counterparties are considered separately from issuer and counterparty risks arising from our investment activities, though the same methodology is applied. For the Corporate segment, our internal risk capital model covers only investment credit risk, as reinsurance activities are generally allocated to the Property-Casualty segment.
Reinsurance credit risk Reinsurance credit risk also covers the premium risk which our credit insurance entity Euler Hermes is exposed to due to its business model, as this type of risk is a special form of credit risk. As of December 31, 2007, it represented 61 % of our total Group non-diversified internal risk capital allocated to credit reinsurance risk.
As of December 31, 2007, 13 % of our total Group non-diversified internal risk capital allocated to credit reinsurance risk was assigned to our operating entities in the U.S.
Reinsurance recoverables by rating class 1) as of December 31, 2007 in � bn 1) Represents gross exposure broken down by reinsurer.
In addition to these fixed income investments, Allianz Group has also non-tradable mortgage loan portfolios in Germany and the U.S. At December 31, 2007, 98 % of the German mortgage portfolio obligors were assigned a Standard & Poor’s equivalent investment grade rating of at least “A” based on an internal scoring. The U.S. commercial mortgage loan investments are subject to thorough credit assessment and conservative underwriting by the responsible credit managers. There have been no delinquent or foreclosed non-tradeable commercial mortgage loans since 1994, and we thus regard the portfolio as investment grade. The North American Allianz insurance companies have a residential mortgage portfolio exposure of less than $2,000,000.
As of December 31, 2007, approximately half (51 %) of total Group non-diversified internal credit risk capital was represented by Dresdner Bank. In the Banking segment, credit risks include default and migration risks arising from the lending and securities business and our derivatives trading activities; for the latter, settlement risk is additionally taken into account. Furthermore, credit risks include country (and transfer) risk.
We use our customers’ credit ratings as the central element for our approval, monitoring and control process. In this process, the creditworthiness of our customers is represented in the form of rating classes with each class representing a different average probability of default. We use a system with 16 distinct rating classes: The first six classes correspond to “investment grade”, classes VII to XIV signify “non-investment grade”. Rating classes XV and XVI are default classes according to the Basel II definition. We assess and improve our rating procedures on an ongoing basis.
The total credit risk exposure of Dresdner Bank of � 299 billion includes loan limits from lending business and market values of trading positions, which for derivatives is the positive replacement value plus risk-based add-ons to reflect possible future changes in market prices. At December 31, 2007, approximately 74.6 % of total credit risk exposure of Dresdner Bank was included in the rating classes I to VI, compared to 77.1 % at December 31, 2006.
Credit profile of Dresdner Bank’s rated portfolio as of December 31, 2007 in %
Despite the difficult market conditions in certain business segments – especially in the second half of the year – loan volumes and quality remained stable. The implementation of a value-oriented growth strategy as well as further enhancements in loan processes contributed to this stable development. At December 31, 2007, approximately 68 % (2006: 68 %) of Dresdner Bank’s loans (measured by limits) were with investment grade obligors.
As part of the investment management process, the Asset Management segment’s entities assess credit risk affecting their customers’ portfolios. Though our asset management companies do not engage in any lending transactions, counterparty risks can arise in certain circumstances, such as with broker-related over-the-counter transactions. Our asset management companies analyze the creditworthiness of their counterparties and set limits per counterparty based on objective criteria.
Internal reserve risk capital increased, as we changed the reinsurance structure and further improved our internal risk capital model. The rise of the internal premium catastrophe risk capital was mainly due to an enhancement of the respective simulation models and their coverage.
Natural disasters such as earthquakes, storms and floods represent a special challenge for risk management due to their accumulation potential and occurrence volatility. In order to measure such risks and better estimate the potential effects of natural disasters, we use special modeling techniques in which we combine data about our portfolio (such as the geographic distribution and characteristics of insured objects and their values), with simulated natural disaster scenarios to estimate the magnitude and frequency of potential losses. Where such models do not exist (for example, hail risk in Germany), we use a scenario-based methodology.
Nearly a third (31 % as of December 31, 2007) of the nondiversified internal premium risk capital allocated to natural catastrophe risk was borne by our operating entities in Germany and the U.S. Our exposure to losses from European windstorm is our largest exposure to natural catastrophe, followed by U.S. hurricane and California earthquake. Our
Reserve risk Reserve risk represents the risk of losses emerging on claims provisions over a one-year time horizon. We measure and manage reserve risks by constantly monitoring the development of the provisions for insurance claims and change the provision for reserves in line with actuarial standards if necessary. We use approaches that are similar to the methods used for setting the reserves.
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. To the extent available, we use assumptions approved by supervisory authorities and actuarial associations to enhance our models.
Business risks consist of operational risks and cost risks. Operational risks represent the loss resulting from inadequate or failed internal processes, or from personnel and systems, external events (such as interruption of business operations due to a break-down of electricity or a flood), damage caused by employee fraud or the losses caused by court cases. Operational risks do not include strategic risk and reputational risks, which are excluded in accordance with the requirements of Solvency II and Basel II. Cost risks consist of unanticipated fluctuations in earnings arising from a decline in income without a corresponding decrease in expenses and include the risk of budget deficits resulting from lower revenues or higher costs than budgeted.
Percentage of total 1) The internal risk capital requirements for the Asset Management segment only reflect business risk (please see “Internal Risk Capital Framework – Scope” for further information).
The increase of internal business risk capital for the Life/ Health segment is mainly due to expanding the scope of our internal risk capital model by systematically taking into account the unit-linked business in our operating entities. In addition, the regular update of assumptions (e.g., lapse and mortality rates) at the beginning of the year contributed to the overall increase, as we take into account the experience of the previous year when determining the adverse scenarios.
Internal business risk capital for the Asset Management segment remained to be the highest Group-diversified figure compared with other segments. This is due to the high volume of third party assets under management coupled with the inherent conservative risk factor incorporated within the aforementioned approach similar to Standard & Poor’s standard model. As discussed, because substantially all of the investments managed by the Asset Management segment are held for the benefit of either third parties or Allianz insurance entities, we are not exposed to significant market and credit risk in the Asset Management segment. As a result, the internal risk capital requirements for the Asset Management segment only reflect business risk.
Allianz has developed a Group-wide operational risk framework that focuses on early recognition and pro-active management of operational risks. The framework defines roles and responsibilities, risk processes and methods and has been implemented at the major Allianz Group companies. Local risk managers ensure this framework is implemented in the respective operating entities.
Liquidity risk is the risk that short-term current or future payment obligations cannot be met or can only be met on the basis of altered conditions, along with the risk that in the event of a company liquidity crisis, refinancing is only possible at higher interest rates or that assets may have to be liquidated at a discount. This risk can arise primarily if there are mismatches in the timing of cash payments and funding obligations. Liquidity risk does not include the risk of a change in market prices due to a worsening of the market liquidity of assets, as this is a component of market risk analyzed through our internal risk capital model (e.g., the assumed volatility of real estate investments takes into account historical observations). Funding risk, a particular form of liquidity risk, arises when the necessary liquidity to fund illiquid asset positions cannot be obtained at the expected terms and when required.
Asset Management segment We limit liquidity risk by continually reconciling the cash flows from our operating business with our commitments to pay liabilities. Forecasting and managing liquidity is a regular process, designed to meet both regulatory requirements and Allianz Group standards.
Reputational risk is the risk of direct loss or loss in future business caused by a decline in the reputation of the Allianz Group or one or more of its specific operating entities from the perspective of its stakeholders – shareholders, customers, staff, business partners or the general public. First, every action, existing or new transaction or product can lead to losses in the value of our reputation, either directly or indirectly, and can also result in losses in other risk categories. Second, every loss in other risk categories, irrespective of its size, can pose reputational risk to the Allianz Group. There-
Consistent Embedded Value (“MCEV”), which, on an economic basis, is considered the shareholders’ future profit embedded in the issued Life/Health business. This model change, applied per January 1, 2008, is expected to result in an increase of Group diversified internal risk capital for the Life/Health segment by approximately � 2.2 billion.
Solvency II is a major European project and is expected to lead to significant changes to the European insurance solvency requirements in the coming years; therefore, the Allianz Group is actively participating in the process. We are continuously providing feedback on the proposals and analyses of the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) and the EU Commission. Furthermore, we participate in the Quantitative Impact Studies and give technical advice, for instance, through the Chief Risk Officer Forum, which is comprised of the Chief Risk Officers of the major European insurance companies and financial conglomerates. It is our aim to have our internal risk capital model, as well as our risk management practices, comply with the forthcoming internal and supervisory requirements at an early stage, and accordingly, we are constantly reviewing them on the basis of the evolving standards.
Strategic risk is the risk of an unexpected negative change in the company value, arising from the adverse effect of management decisions on both business strategies and their implementation. This risk is a function of the compatibility between strategic goals, the business strategies developed to achieve those goals and the resources deployed to achieve those goals. Strategic risk also includes the ability of management to effectively analyze and react to external factors, which could impact the future direction of the relevant operating entity.
As an integrated and globally operating financial services provider we seek to offer our clients considerable value by providing a wide range of insurance and financial products as well as an extensive advisory capacity through our subsidiaries under strong and well-known brands. We operate and manage our activities primarily through four operating segments: Property-Casualty, Life/Health, Banking and Asset Management. We consider ourselves well-positioned to anticipate and successfully respond to competitive forces affecting our various operations.
1) Source: As published by Gesamtverband der deutschen Versicherungswirtschaft e.V. (or “GDV“) in 2007. The GDV is a private association representing the German insurance industry.
We conduct business in almost every European country, with Germany, Italy and France being our most important markets. We also run operations in the United States and in Central and Eastern Europe as well as in Asia-Pacific.2)
We distribute our insurance products via a broad network of self-employed agents, brokers, banks and other channels. Increasingly, we distribute our insurance products in cooperation with car manufacturers and dealers in Europe and Asia-Pacific and also have direct distribution operations in Central Europe, India and Australia. The particular distribution channels vary by product and geographic market.
Our more mature insurance markets (e.g. Germany, France, Italy and the United States) are highly competitive. In recent years, we have also experienced increasing competition in emerging markets, as large insurance companies and other financial service providers from more developed countries have entered these markets to participate in their high growth potential. In addition, local institutions have become more experienced and have established strategic relationships, alliances or mergers with our competitors.
The investments of most Allianz insurance companies’ are managed internally trough specialists within the Allianz Group (Allianz Investment Management).
Allianz SE, the Allianz Group’s parent company, acts on an arm’s length basis as reinsurer for most of our insurance operations and assumed 26.9 %, 33.3 % and 35.6 % of all reinsurance ceded by Allianz Group companies for the years ended December 31, 2007, 2006 and 2005, respectively. Allianz SE also assumes a relatively small amount of reinsurance from external cedents and cedes risk to third-party reinsurers.The Allianz Group has established a pooling arrangement that offers reinsurance coverage to the Group’s subsidiaries against natural catastrophes, which provides the benefit of internal Group diversification.
Dresdner Bank’s focus is on serving the financial needs of private and corporate, as well as multinational and institutional clients according to the following business model.
The Private & Corporate Clients division offers integrated financial solutions for private and corporate clients. These solutions are provided by dedicated sales and product units.
Our retail asset management business is primarily conducted under the brand name Allianz Global Investors (“AGI”) through our operating companies worldwide. In our institutional asset management business, we operate under the brand names of our investment management entities, with AGI serving as an endorsement brand. With � 725 billion of third-party assets as of December 31, 2007, AGI managed 94.8 % (2006: 94.6 %) of our total third-party assets on a worldwide basis, which includes fixed income, equity, money market and sector products, as well as alternative invest1 ) Based on total assets under management as of December 31, 2007.
Our distribution channels vary by product and geographic market. In Europe and in the United States, AGI markets and services its institutional products through specialized operations and personnel. Retail products in Europe are mostly distributed through proprietary Allianz Group channels. In the United States, AGI’s local asset management operating entities also offer a wide range of retail products. In addition we have committed substantial resources to the expansion of the third-party asset management business in the AsiaPacific region.
Our Corporate segment’s activities include the management and support of Allianz Group’s businesses through its strategy, risk, corporate finance, treasury, financial control, communication, legal, human resources and technology functions. The Corporate segment also includes the Group’s alternative investments coordinated by Allianz Alternative Assets Holding GmbH.
The other divisions reflect business responsibilities, which are either regionally- or operation-oriented: Insurance Germany, Europe I, Europe II, NAFTA Markets, Growth Markets, Asset Management, Banking, and Anglo Broker Markets/ Global Lines.
Since January 1, 2008, the Board of Management includes a new Chief Operating Officer’s division. As of the same date,
The Customer Focus initiative is a global change program designed to help Allianz Group companies create superior customer focus. We also run an internal innovation campaning which focuses on Idea Generation and Management from a bottom-up perspective, by mobilizing Allianz employees worldwide and thus lifting even more intensively our internal intellectual capacity and capability.
In our distribution program, we analyze the development of different sales channels for financial services products, for example tied agents, bank branches, brokers and direct sales operations, to leverage the strenghts of our various distribution channels worldwide in close alignment with changing customer needs and preferences.
As of December 31, 2006 Allianz SE owned 57.5 % of the share capital and 60.2 % of the voting rights of its French-based subsidiary, Assurances Générales de France S.A. (“AGF”). In order to achieve full ownership of AGF, Allianz announced a tender offer for the outstanding AGF shares on January 18, 2007.
The acceptance period for the tender offer started on March 23, 2007 and ended on April 20, 2007. The consideration for one AGF share provided in the offer was 0.25 of an Allianz SE share and � 87.50 in cash, which was increased to � 88.45 to reflect the dividend per Allianz SE share for 2006 multiplied by 0.25, as Allianz SE shares issued due to the tender offer did not carry the rights to dividends for 2006.
On April 27, 2007 the French stock market authority, the Autorité des Marchés Financiers (“AMF”) announced, that following the closing of the tender offer for the outstanding shares of AGF, Allianz SE (directly and indirectly through its subsidiary Allianz Holding France SAS) held 178,030,698 AGF shares representing 92.18 % of AGF’s share capital and voting rights. Taking into account the 6,199,392 treasury shares held by AGF representing 3.21 % of the share capital, minority shareholders held 8,895,695 shares representing 4.61 % of AGF, less than 5 %, the threshold for a subsequent squeeze-out procedure of the AGF share capital and voting rights.
In order to achieve 100 % ownership of AGF, Allianz SE and its subsidiary Allianz Holding France SAS subsequently launched a mandatory squeeze-out procedure of the AGF shares still held by minority shareholders. In accordance with the General Regulations of the AMF, and subject to review and prior authorization by the AMF, the squeeze-out was implemented on the basis of a price of � 125.00 in cash per AGF share. Additionally, AGF’s minority shareholders also received the 2006 AGF dividend of � 4.25 per share.
Having reached the required threshold of 95 % ownership, we announced, on January 18, 2008 the start of a squeezeout procedure to acquire the remaining shares in Allianz Lebensversicherungs-AG.
1) Please see Note 4 to our consolidated financial statements for information on changes in the scope of consolidation in the years ended December 31, 2007, 2006 and 2005.
The German insurance operations are now organized according to the following business structure.
We are continuing this reorganization program and expect the reduced complexity to allow us to reduce costs in the long-term.
On October 1, 2007 the integration of Riunione Adriatica di Sicurtà (“RAS”), Lloyd Adriatico and Allianz Subalpina, which are – as a group – the second largest composite insurer in Italy, was completed successfully. The newly formed Allianz S.p.A. is now able to realize to exploit new opportunities for growth. To support this, the brands of the sales networks were reinforced with the Allianz brand, so e.g. the former RAS brand is now called “Allianz RAS”.
To create value, the capital used by a company must yield a higher return than a comparable alternative investment. In order to accomplish this objective and to measure our success, we apply the EVA® 1) (Economic Value Added) concept, adapted to our specific needs, across the Allianz Group. EVA® involves profit compared to cost of capital, representing the return an investor can expect from an alternative investment with comparable risk. EVA® – whether positive or negative – is the difference between profit and the cost of capital. A positive EVA® means that an added value has been achieved and a negative EVA® indicates that a shareholder would have received a greater return from another risk adequate investment than from Allianz SE shares.
1) EVA® is a registered trademark of Stern Stewart & Co.
For generating the capital charges an important component is the determination of the capital required to cover the financial risks involved in our business activities.1)
The second component of creating capital charges is the cost of capital, which in our Group is based on the return from a risk-free alternative investment plus a market risk premium and taking into account the specific risk of Allianz Group in relation to the overall market.
destroyed along the complete value chain. If value diminishes, countermeasures must be implemented immediately.
Due to our strong net income our EVA®, after minority interests, reached � 3,928 million in 2007 and the return on risk adjusted capital 2) was 21.4 %.
Because EVA® is an important factor in managing our business, senior management compensation is based on this measurement to a significant extent.3) Our incentive-based management compensation system helps to make the continuous increase in the value of the Allianz Group a priority across our entire organization.
Our objective to accomplish a positive EVA® not only benefits our shareholders but our customers, employees and the communities in which we operate benefit as well. We can only succeed by offering high quality products at attractive prices that satisfy our customers, generate sales to secure jobs and produce profits that allow us to further increase our contribution to society.
For that reason we now have unified global talent management. It defines joint standards and delivers a framework in which individuals can better take advantage of career opportunities and the company can apply talent to the best possible effect. The system is highly transparent. On that basis, management can develop talented individuals more effectively across the Group. For our future leaders and experts this means
– The AMI Group promotes an international outlook and performance culture. These are promoted not least by the engagement of top-class business schools, which are involved in designing our talent programs or conduct their own programs in-house. They provide first-rate training for top management and managers worldwide.
High-performing employees also want to be well paid. This desire is met by our pay structure, representing an attractive mix of basic pay, performance-related pay and additional benefits. We have steadily increased performance-related pay. We firmly believe that this pay structure offers the right incentives to take the entrepreneurial initiative as indicated in our strategy. Since refining our objectives and evaluation procedures, we can assess much more clearly how an individual or team has performed, and reward them accordingly.
Holding shares in the company is another established method of giving the workforce a financial interest in the company‘s success. For this reason we have once again set up an employee stock purchase offer in 2007. This gave 122,000 employees in 24 countries the opportunity to acquire Allianz SE shares on preferential terms. 33,331 (33,314) employees accepted the offer. The average investment volume per participating employee rose by 19 % (11 %) to � 3,628 (� 3,053).
The “Agreement Concerning the Participation of Employees in Allianz SE“ of September 20, 2006 regulates the members and responsibilities of the SE works council. This works council represents employee interests of Allianz SE and its subsidiaries with registered offices in EU member states, the European Economic Area and Switzerland, in cross-border matters. In 2007, two regular sessions of the SE works council were held. The items discussed included the business situation and the future outlook for the Allianz Group; the works council was consulted in this respect. The Management Committee was also consulted several times on an ad hoc basis.
We live up to our corporate responsibility, become actively involved in social issues and apply sustainability criteria to our business and risk management.
org). These relate to environmental protection, human rights and transparency of corporate management. On the other hand we work on issues and trends that are important for sustainable business development and have particular relevance to our line of business. This dual approach has been recognised in the form of various awards. One in three European sustainability funds has a holding in our shares. For the second year in succession we took the top spot in the insurance sector in the Dow Jones Sustainability Index.
Allianz has funded studies on climate change and works with the WWF in carrying out research into climate change. Studies so far indicate that the financial services sector’s analysis into its climate risks is still in its infancy. Guidelines have been adopted for our own company specifying how each unit must deal with climate risks. We are certain that transparency about climate risks benefits our customers. Allianz has been subscribing to the Carbon Disclosure Project (www.cdproject.net) each year since 2002. We are involved in international climate initiatives, including the financial initiative of the UN‘s environmental programme.
Our studies on demographic trends assess the relevant risks and opportunities arising for our customers and Allianz. One of the consequences of this trend will be a lack of qualified workers in Europe in the future. Another consequence will be a significantly greater demand for products combining the assistance services and financial services needed by elderly people. We are responding to this challenge in personnel management and in product development, and are advising our customers comprehensively.
As an integrated financial services provider we offer insurance, banking and asset management products and services to more than 80 million customers in over 70 countries. We are one of the leading global services providers of insurance, banking and asset management. Based on our market capitalization 2), we are the largest financial institution in Germany.
Through Allianz Private Kranken, we are the third-largest private health insurer in Germany based on statutory premiums in 2007.4)
1) Please see page 244 for a breakdown of selected operating entities. 2) As of March 1, 2008. Source: Deutsche Börse Group. 3) Please see “Allianz Group Success Factors - Important Group Organizational
For health insurance, we provide a wide range of products, including full private health care coverage for salaried employees and the self-employed, supplementary insurance for individuals insured under statutory health insurance plans, supplementary care insurance and foreign travel medical insurance.
In order to strengthen our market position, we will further develop our customer-focused organization and aim to provide our clients with more integrated products for every stage of their lives.
Our health insurance business with its two basic products – full health care coverage and supplementary insurance – will be impacted by the German health care reform for the upcoming years. We expect full health care coverage to grow only slightly. On the other side, we believe that supplementary insurance will further increase, despite competition arising from statutory health insurers which have been allowed to offer special supplementary insurance (so called “Wahltarif”) from 2007 onwards.
Group Management Report Allianz Group Annual Report 2007 2007 in review 1): – April 30: Allianz Cornhill Insurance plc in the UK was renamed Allianz Insurance plc
– July 10: AGF minorities buy-out procedure completed – October 1: Integration of all Allianz operations in Italy into
Europe is our home region. We consider property-casualty insurance in this region to be rather saturated. In life/health insurance, we view aging societies and their rising need for private retirement products and additional health insurance coverage as a growth opportunity.
The broad range of AGF-branded products for both individuals and corporate customers, including property, injury and liability insurance as well as short-term investment and savings products, are distributed primarily through a network of tied agents, brokers and partnership channels.
In the life/health business, we offer individual life policies, primarily in the form of endowment policies. Additionally, we see annuity products and an increasing number of unit/index-linked policies, in which policyholders participate directly in the performance of policy-related investments. In 2007, these products contributed three-fourths of our combined statutory premiums in Italy. A large percentage of our contracts are marketed through our bancassurance channel.
Operating in a property-casualty market that has seen limited growth in recent years, we seek to focus on maintaining operating profitability while simultaneously implementing selective initiatives aimed at generating growth. For example, we introduced a new motor tariff at the end of 2006 together with special marketing operations in 2007.
We conduct our life/health operations in Spain through Allianz Compañía de Seguros y Reaseguros S.A. and through Eurovida, our joint venture with Banco Popular.
We also provide life/health insurance in most of the other Western and Southern European countries, of which, based on statutory premiums 2007, the largest are in Belgium and the Netherlands.
Allianz Risk Transfer AG offers conventional reinsurance and a variety of alternative risk transfer products. In the general property-casualty market in Switzerland served through Allianz Suisse, the most important line of business for Allianz Suisse is motor, contributing nearly 40 % of its gross premiums written in 2007.
In the life/health market, we provide a wide range of individual and group life insurance products, including retirement, death and disability products.
In Spain, we offer a wide variety of personal and commercial property-casualty insurance products, with an emphasis on motor business, comprising approximately two-thirds of our gross premiums written in Spain in 2007.
Additionally, we provide a broad life/health insurance product portfolio, consisting primarily of traditional life insurance, annuities, pension and unit-linked products, which are mainly distributed by agents and through our bank channel.
In Austria, we offer a broad range of property-casualty products to individual and group customers primarily through salaried sales forces, tied agents and brokers.
In Belgium, we market a wide range of life insurance products, which won awards several times, mainly through brokers. In the Netherlands, we also offer a broad range of life insurance products and have a strong position in the unit-linked market.
We believe there is potential for growth in our life/health business through enhancement of agent and broker networks and, given our relatively high market share in property-casualty, through cross-selling between our segments.
The Dutch insurance market is characterized by intense competition. Here we expect further price decreases in the motor business, whereas in Ireland, we expect the market to become more favorable in 2008, both in commercial and in personal lines.
The larger life insurance markets in our Western and Southern European region are mature and provide only limited growth opportunities.
We offer a broad range of property-casualty products, including a number of specialty products, which we sell through our retail and commercial lines and through a range of distribution channels, including affinity groups.
Group Management Report Allianz Group Annual Report 2007 2007 in review 1): – February 21: Allianz acquires 49.2 % of the shares of the ROSNO Group
– May 21: Allianz acquires Russian insurer Progress-Garant – September 20: Market entry in Kazakhstan through the acquisition of 100 % of the shares of ATF-Polis from ATF Bank
In the life/health segment, we are present in all key markets in this region and are one of the top four life insurance providers, based on statutory premiums in 2006.2)
Operations 1) Further information is available at www.allianz.com 2) Source: Own estimate based on published statistics from regulatory bodies and insurance associations.
The primary property-casualty products sold in these countries are mandatory motor third-party liability and motor own damage coverage as well as industrial, commercial and private property lines. In 2007, we continued to expand our life/health product range and sales capacity throughout New Europe by following a multi-channel distribution approach, and sell both unit-linked and traditional life insurance products. Following the 2006 launch of a limited-edition index-linked life insurance product, we have continued expanding offerings of investment-oriented products. Our Hungarian insurer, Allianz Hungária Biztositó Rt., is transforming into an integrated financial services provider operating under an “assurbanking” model.
Asia-Pacific In the Asia-Pacific region we maintain property-casualty operations in Malaysia (recently expanded through the acquisition of Commerce Assurance Berhad), Indonesia and other Asia-Pacific countries, including China, Thailand, Japan, Hong Kong, Singapore, Laos and India.
We consider Asia Pacific to be one of our major growth regions. Allianz has been present in the region since 1917, when we began providing fire and marine insurance in the coastal cities of China.
Today, Allianz is active in all key markets of the region, offering its core businesses of property and casualty insurance, life and health insurance, asset management and banking. With more than 13,000 staff, Allianz serves over 18.5 million customers in the region.
To elevate our presence in the Middle East region to a new level and to set the course for further internal and external growth, we established the Middle East as our third major growth region from October 1 onwards. The regional unit assembles Allianz’s entities in Bahrain, Egypt, India, Jordan, Lebanon, Pakistan, Saudi Arabia and Sri Lanka and is directed from a central office in Bahrain.
2007 in review 1): – January 15: Acquisition of Commerce Assurance Berhad in Malaysia
– January 18: Majority take over in Taiwan at Allianz President Life and re-branding in Allianz Taiwan Life on July 7
– March 12: New joint venture “Bajaj Allianz Financial Distributors Ltd.” for distribution of financial products, such as mutual funds, credit cards and loans, throughout India
– November 20: Licence to enter Beijing life markets to Allianz China Life
The large majority of our property-casualty business in AsiaPacific is generated by Allianz Australia, which serves the Australian and New Zealand markets.
We are seeking to expand in all of our selected markets in the region through internal growth and selected acquisitions.
In China, our partnership with Industrial and Commercial Bank of China Ltd. emphasizes our long-term commitment to the market and also offers a platform for our strategic expansion.
We are also targeting additional growth in India through our joint venture with Bajaj Allianz Financial Distributors Ltd.
Our Australian insurance operations include a variety of products and services, with strong positions in the workers’ compensation market, as well as in rehabilitation and occupational health, safety and environment services. We also operate in certain niche markets, including premium financing and pleasure craft insurance. Allianz Australia markets products through brokers and non-tied agents, as well as directly to customers.
In Australia, we expect to continue to employ market segmentation techniques, which include diversifying the portfolio outside of the traditionally cyclical areas.
Group Management Report Allianz Group Annual Report 2007 2007 in review 1): – July 2: Sale of our business in Venezuela – September 17: AGF Allianz Argentina renamed Allianz
We reorganized our business lines in the United States by organizing our operating entities under the umbrella of Allianz of America Inc. This reorganization is designed to allow our U.S. companies to leverage all of their available resources and assets and to enable them more effectively anticiapte and deliver on customer needs.
Allianz first established its presence in the Americas in 1974 when an office was opened in Brazil. In 1976, we commenced our property-casualty insurance business in the US. Today, we are active in North and South America, with companies based in the US, Canada, Mexico, Argentina, Brazil and Colombia.
Worldwide Speciality Lines Through our subsidiary Euler Hermes, the global leader in credit insurance, we underwrite credit insurance in major markets around the world.3)
Allianz Global Corporate & Specialty primarily serves as the Allianz Group’s international corporate insurance business.
Through Mondial Assistance Group, we are among the world’s largest providers of travel insurance and assistance services based on gross premiums written in 2006.4)
In contrast to our other geographically-focused insurance businesses, we manage and offer these services on a worldwide basis.
Through Fireman’s Fund we underwrite personal, commercial and specialty lines, selling these products primarily through independent agents. Our commercial business unit offers specialized property and casualty coverage for businesses, while our Personal business unit focuses on high net worth individuals and the Specialty business unit provides marine and casualty products as well as multiperil crop/hail insurance.
Our life and annuity business primarily underwrites fixed, fixed-indexed and variable annuities, which are sold through independent distribution channels.
Through Allianz Global Corporate & Specialty, we offer a variety of other specialty lines of business, namely marine, aviation and industrial transport insurance and international industrial risks reinsurance.
Through the combination of our international corporate business within Allianz Global Corporate & Specialty, managing a diversified portfolio of risk management solutions and services, we expect to realize synergies and increase efficiency.
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (or “KPMG DTG) serves as the external auditing firm for the Allianz Group.
Audit fees 49.0 57.8 Audit-related fees 9.8 8.1 Tax fees 4.2 6.0 All other fees 4.1 7.0 1) Fees attributable to KPMG DTG and affiliated entities for audit fees were � 24.3 mn (2006: � 24.7), audit-related fees � 7.9 mn (2006: � 3.6 mn), tax fees � 2.7 mn (2006: � 2.7 mn) and all other fees � 2.5 mn (2006: � 3.6 mn) for the year ended December 31, 2007. Effective October 1, 2007, KPMG operations in Germany and the United Kingdom became affiliated entities. Fee amounts pertaining to the year 2007 therefore include both entities.
KPMG billed the Allianz Group an aggregate of � 49.0 million in 2007 and � 57.8 million in 2006 in connection with professional services rendered for the audit of our annual consolidated financial statements and services normally provided by KPMG in connection with statutory and regulatory filings or engagements. These services consisted mainly of periodic review engagements and the annual audit.
KPMG billed the Allianz Group an aggregate of � 4.1 million in 2007 and � 7.0 million in 2006 for other services, which consisted primarily of general consulting services and other services under the guidance of Allianz Group management.
All services provided by KPMG to Allianz Group companies must be approved by the Audit Committee of the Allianz SE Supervisory Board. Services other than audit services must be pre-approved by the Audit Committee. The Audit Committee pre-approval process is based on the use of a “Positive List” of activities decided by the Audit Committee and, in addition, a “Guiding Principles and User Test” is applied. All internal control-related services are specifically preapproved by the Audit Committee. Group Compliance and KPMG report to the Audit Committee periodically with respect to services performed.
The restriction on share transferability goes right back to the creation of Allianz in 1890. This practice is widespread in the insurance industry in Germany. In accordance with the Statutes, the Company will only withhold the approval necessary for transfer of shares when this is for extraordinary reasons and is considered to be in the interest of the Company. For several decades no such case has occurred. With the standardization of share transfer processes, the restriction on share transferability does not cause any delay in the registration in the share register and does not impede in any way the quotation of the shares on stock exchanges.
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.
According to § 5 (1) of the Statutes the Board of Management shall consist of at least two persons. Otherwise, the number of the members of the Board of Management is determined by the Supervisory Board. The Supervisory Board has appointed a Chairman of the Board of Management pursuant to § 84 (2) of the German Stock Corporation Act.
The 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). If a required member of the Board of Management is absent, in urgent cases the court must appoint the member upon the application of an involved party, by virtue of § 85 of the German Stock Corporation Act. With respect to the appointment, it is essential to ensure in particular that the members of the Board of Management are suited to managing an insurance company in terms of reliability and professional competence (§§ 121a, 7a 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) (§§ 121a, 13d No. 1 German Insurance Supervision Act).
Amendments to the Statutes must be resolved upon by the General Meeting. In the case of an SE, the resolution amending the Statutes must be passed with a majority of at least two thirds of the votes cast, unless the laws and regulations in the SE’s country of domicile provide for or permit a greater majority (Article 59 (1) SE Regulation). Any Member State may stipulate, however, that a simple majority of votes is sufficient, provided at least half of the share capital is represented (Article 59 (2) SE Regulation). German legislation has made use of this in § 51 sentence 1 SE Implementation Act (SE-Ausführungsgesetz). This does not apply to a change in the corporate object, relocation of the registered office to another Member State and to cases in which a higher majority is mandatory by law (§ 51 sentence 2 SE Implementation Act). Accordingly, § 13 (4) sentence 2 of the Statutes of Allianz SE stipulates that, unless this conflicts with mandatory legal provision, changes of the Statutes require a majority of two thirds of the votes cast, or, as the case may be, if at least half of the share capital is represented, a simple majority of the votes cast. The Supervisory Board may alter the wording of the Statutes (§ 179 (1) sentence 2 German Stock Corporation Act and § 10 of the Statutes).
Authorizations of the Board of Management to issue and repurchase shares
The Board of Management has the following authority to issue shares: – The Board of Management is authorized to increase the Company’s share capital on or before February 7, 2011, upon approval of the Supervisory Board, by issuing new registered no-par value shares against contributions in cash and/or in kind, on one or more occasions, up to a total of � 406,545,646.08 (Authorized Capital 2006/I). The Board of Management is authorized to exclude shareholders ’ subscription rights with the consent of the Supervisory Board for fractional amounts, for safeguarding the rights pertaining to holders of convertible bonds or bonds with warrants, and in the event of a cash capital increase by up to 10 %, if the issue price of the new shares is not significantly less than the stock market price. The Board of Management is furthermore authorized to exclude shareholders‘ subscription rights with the consent of the Supervisory Board in the event of a capital increase against contributions in kind (§ 2 (3) of the Statutes).
The authority explained to issue convertible bonds or bonds with warrants or issue new shares out of authorized capital enables the Management Board to raise capital swiftly and flexibly taking advantage of attractive financing opportunities as and when they arise on the markets and, for example, offer Allianz stock as consideration when making acquisitions of participations. Furthermore Allianz stock can be offered to employees of the Allianz Group. The authority to deal in own stock for trading purposes is especially useful for Dresdner Bank giving it the possibility to deal in Allianz stock.
Our reinsurance contracts in principle include a provision under which both parties to the contract have an extraordinary termination right in case that the other party to the contract merges or its ownership or control situation materially changes. Such clauses are market standard.
The service contracts of the members of the Allianz SE Board of Management contain a change-of-control clause. If, within 12 months after acquisition of more than 50 % of the 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, the mandate is ended by mutual agreement, or the mandate is ended by the Management Board member through resigning his or her office
The Group Equity Incentive (GEI) scheme also contains provisions in respect of a change of control. Under this scheme, Stock Appreciation Rights (SAR) and Restricted Stock Units (RSU) are granted as a stock-based remuneration component worldwide to senior management of the Allianz Group. SARs are virtual options on Allianz shares; they obligate the Allianz Group to pay in cash the excess of the market price of the Allianz share over the reference price on the exercise date. They vest after two years. If a majority of the voting share capital in Allianz SE is acquired, directly or indirectly, by one or more third parties who do not belong to the Allianz Group, in derogation of the above, however, the SARs shall be exercised, pursuant to the general conditions for the SAR, by the Company for the relevant plan participants without observing any vesting period.
RSUs are virtual Allianz shares which obligate the Allianz Group to pay in cash an amount corresponding to the average market price for Allianz shares in the ten trading days preceding the vesting date, or to issue one Allianz share, or other equivalent equity instrument, for each RSU granted. RSUs vest after five years and are exercised by the Allianz Group on the first trading day after their vesting date. If a majority of the voting capital in Allianz SE is acquired, directly or indirectly, by one or more third parties who do not belong to the Allianz Group, the RSUs shall be exercised, pursuant to the general conditions for the RSUs, by the Company for the relevant plan participants without observing any vesting period. In providing for the non application, in the event of a change of control, of any limitation on the period for exercising rights under such plans, account is taken of the fact that the conditions under which the share price moves are very different when there is a change in control.
We believe that trends in the underlying profitability of our business can be more clearly identified without the fluctuating effects of the realized capital gains and losses or impairments of investment securities, as these are largely dependent on market cycles or issuer-specific events over which we have little or no control, and can and do vary, sometimes materially, across periods. Further, the timing of sales that would result in such gains or losses is largely at our discretion. Similarly, we exclude restructuring charges because the timing of the restructuring charges are largely within our control, and accordingly their exclusion provides additional insight into the operating trends of the underlying business.
The following table reconciles operating profit on a consolidated basis to the Allianz Group’s income before income taxes and minority interests in earnings.
We further believe that an understanding of our total revenue performance is enhanced when the effects of foreign currency translation as well as acquisitions and disposals (or “changes in scope of consolidation”) are excluded. Accordingly, in addition to presenting “nominal growth”, we also present “internal growth”, which excludes the effects of foreign currency translation and changes in scope of consolidation. The following table sets forth the reconciliation of nominal total revenue growth to internal total revenue growth for each of our segments and the Allianz Group as a whole for the years ended December 31, 2007 and 2006.
Fi na nc ia l S ta te m en ts a nd
Supplementary Information to the Consolidated Balance Sheets 176 6 Cash and cash equivalents 176 7 Financial assets carried at fair value through income 180 9 Loans and advances to banks and customers 183 10 Reinsurance assets 184 11 Deferred acquisition costs 185 12 Other assets 186 13 Intangible assets 189 14 Financial liabilities carried at fair value through income 189 15 Liabilities to banks and customers 190 16 Unearned premiums 190 17 Reserves for loss and loss adjustment expenses 192 18 Reserves for insurance and investment contracts 196 19 Financial liabilities for unit linked contracts 196 20 Other liabilities 197 21 Certificated liabilities 198 22 Participation certificates and subordinated liabilities
Segment 218 43 Derivative financial instruments 222 44 Fair value of financial instruments 224 45 Related party transactions 225 46 Contingent liabilities, commitments, guarantees, and assets pledged and collateral 230 47 Pensions and similar obligations 232 48 Share-based compensation plans 237 49 Restructuring plans 241 50 Earnings per share 242 51 Other information 242 52 Subsequent events 244 Selected subsidiaries and other holdings 250 Responsibility statement 251 Auditors’ report 258 Glossary 263 Index
Deferred acquisition costs 11 19,613 19,135 Deferred tax assets 41 4,771 4,727
LIABILITIES AND EQUITY Financial liabilities carried at fair value through income 14 126,053 121,822 Liabilities to banks and customers 15 336,494 376,565
Interest and similar income 25 26,047 23,956 22,644 Income from financial assets and liabilities carried at fair value through income (net) 26 (1,247) 940 1,163 Realized gains/losses (net) 27 6,548 6,151 4,978 Fee and commission income 28 9,440 8,856 8,162
Income from fully consolidated private equity investments 30 2,367 1,392 598
Acquisition and administrative expenses (net) 37 (23,218) (23,486) (22,559) Fee and commission expenses 38 (2,673) (2,351) (2,312) Amortization of intangible assets (17) (51) (50)
Income before income taxes and minority interests in earnings 11,568 10,323 7,829
Unrealized gains and losses (net) arising during the year 1) — — — 3,805 3,805 549 4,354 Transferred to net income on disposal 2) — — — (1,114) (1,114) (133) (1,247)
Unrealized gains and losses (net) arising during the year 1) — — — 4,731 4,731 20 4,751 Transferred to net income on disposal 2) — — — (1,744) (1,744) (146) (1,890)
Total income and expense recognized directly in shareholders’ equity — 246 (1,175) 2,984 2,055 (291) 1,764
2) During the year ended December 31, 2007, realized gains/losses (net) transferred to net income on disposal are net of income tax charge of � 206 mn (2006: � 308 mn; 2005: � 303 mn).
Summary: Net cash flow provided by operating activities 12,706 20,681 47,200 Net cash flow provided by (used in) investing activities (4,643) (34,866) (22,811) Net cash flow provided by (used in) financing activities (9,642) 15,647 (8,442) Effect of exchange rate changes on cash and cash equivalents (115) (78) 72 Change in cash and cash equivalents (1,694) 1,384 16,019 Cash and cash equivalents at beginning of period 33,031 31,647 15,628 Cash and cash equivalents at end of period 31,337 33,031 31,647
Cash flow from operating activities: Adjustments to reconcile net income to net cash flow provided by operating activities
Minority interests in earnings 748 1,289 1,386 Share of earnings from investments in associates and joint ventures (521) (287) (253) Realized gains/losses (net) and impairments of investments (net) of: Available-for-sale and held-to-maturity investments, investments in associates and joint ventures, real estate held for investment, loans to banks and customers (5,276) (5,376) (4,438) Other investments, mainly financial assets held for trading and designated at fair value through in-
Depreciation and amortization 891 983 787 Loan loss provision (113) 36 (109) Interest credited to policyholder accounts 3,225 3,126 2,748 Net change in: —
Financial assets and liabilities held for trading 18,948 19,265 10,371 Reverse repurchase agreements and collateral paid for securities borrowing transactions 30,215 (27,294) 72,504 Repurchase agreements and collateral received from securities lending transactions (48,143) 14,188 (47,688)
Reserves for losses and loss adjustment expenses (389) (188) 2,621 Reserves for insurance and investment contracts 6,675 7,025 7,634 Deferred tax assets/liabilities 55 292 (39)
Business combinations (Note 4): Proceeds from sale, net of cash disposed 372 — 2,029 Acquisition, net of cash acquired (670) (344) —
Supplementary information on the consolidated statement of cash flows: Income taxes paid (2,856) (2,241) (1,644)
Effects from buy-out of AGF minorities (Note 4): Revenue reserves (1,843) — — Unrealized gains and losses (net) 146 — — Minority interests (1,068) — — Paid-in capital 2,765 — —
Allianz Group Notes to the Consolidated Financial Statements 1 Nature of operations and basis of presentation
Principles of consolidation The consolidated financial statements of the Allianz Group include those of Allianz SE, its subsidiaries and certain investment funds and special purpose entities (“SPEs”). Subsidiaries, investment funds and SPEs, hereafter “subsidiaries ”, which are directly or indirectly controlled by the Allianz Group, are consolidated. Control exists when the Allianz Group has the power to govern the financial and operating policies of the subsidiary. Subsidiaries are consolidated from the date control is obtained by the Allianz Group. Subsidiaries are consolidated until the date that the Allianz Group no longer maintains control. The Allianz Group has used interim financial statements for certain subsidiaries whose fiscal year is other than December 31, but not exceeding a lag of three months. The effects of intraAllianz Group transactions have been eliminated.
The Allianz Group transfers financial assets to certain SPEs in revolving securitizations of commercial mortgage or other loan portfolios. The Allianz Group consolidates these SPEs as the Allianz Group continues to control the financial assets transferred and retains the servicing of such loans.
Associated enterprises and joint ventures Associated enterprises are entities over which the Allianz Group can exercise significant influence and which are not joint ventures. Significant influence is the power to participate in, but not to control, the financial and operating policies within an enterprise. Significant influence is presumed to exist where the Allianz Group has at least 20 % but not more than 50 % of the voting rights. Joint ventures are entities over which the Allianz Group and one or more other parties have joint control.
Foreign currency translation The individual financial statements of each of the Allianz Group’s subsidiaries are prepared in the prevailing currency in the environment where the subsidiary conducts its ordinary activities (its functional currency). Transactions recorded in currencies other than the functional currency (foreign currencies) are recorded at the rate of exchange on the date of the transaction. At the balance sheet date, monetary assets and liabilities recorded in foreign currencies are translated into the functional currency using the closing exchange rate and non-monetary assets and liabilities are translated at historical rates.
Use of estimates and assumptions The preparation of consolidated financial statements requires the Allianz Group to make estimates and assumptions that affect items reported in the consolidated balance sheets and consolidated income statements, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The most significant accounting estimates are associated with the reserves for loss and loss adjustment expenses, reserves for insurance and investment contracts, loan loss allowance, fair value and impairments of financial instruments, goodwill, deferred acquisition costs, deferred taxes and reserves for pensions and similar obligations.
Recognition and classification Financial assets and liabilities are generally recognized on trade date, when the Allianz Group has entered into contractual arrangements with counterparties to purchase securities or incur a liability.
Financial assets and liabilities carried at fair value through income Financial assets carried at fair value through income include financial assets and liabilities held for trading and financial assets and liabilities designated at fair value through income.
Financial assets and liabilities designated at fair value through income are recorded at fair value with changes in fair value recorded in net income for the period. A financial instrument may only be designated at inception as held at fair value through income and cannot subsequently be changed.
Available-for-sale investments Available-for-sale investments are securities that are designated as available-for-sale or are not classified as held-tomaturity, loans and advances to banks and customers, or financial assets carried at fair value through income. Available -for-sale securities are recorded at fair value. Unrealized gains and losses, which are the difference between fair value and cost or amortized cost, are included as a separate component of shareholders’ equity, net of deferred taxes and the latent reserve for premium refunds to the extent that policyholders will participate in such gains and losses on the basis of statutory or contractual regulations when they are realized. Realized gains and losses on securities are generally determined by applying the average cost method at the subsidiary level.
If there is objective evidence that the cost may not be recovered, an available-for-sale equity security is considered to be impaired. Objective evidence that the cost may not be recovered, in addition to qualitative impairment criteria, includes a significant or prolonged decline in the fair value below cost. The Allianz Group’s policy considers a significant decline to be one in which the fair value is below the weighted-average cost by more than 20 % and a prolonged decline to be one in which fair value is below the weightedaverage cost for greater than nine months. This policy is applied by all subsidiaries at the individual security level.
If an available-for-sale equity security is impaired based upon the Allianz Group’s qualitative or quantitative impairment criteria, any further declines in the fair value at subsequent reporting dates are recognized as impairments. Therefore, at each reporting period, for an equity security that is determined to be impaired based upon the Allianz Group’s impairment criteria, an impairment is recognized for the difference between the fair value and the original cost basis, less any previously recognized impairments.
Loans are placed on non-accrual status when the payment of principal or interest is doubtful based on the credit assessment of the borrower. Non-accrual loans consist of loans on which interest income is no longer recognized on an accrued basis, and loans for which a specific provision is recorded for the entire amount of accrued interest receivable. When a loan is placed on non-accrual status, any accrued interest receivable is reversed against interest and similar income. Loans can only be restored to accrual status when interest and principal payments are made current (in accordance with the contractual terms), and future payments in accordance with those terms are reasonably assured.
When there is a doubt regarding the ultimate collectibility of the principal of a loan placed in non-accrual status, all cash receipts are applied as reductions of principal. Once the recorded principal amount of the loan is reduced to zero, future cash receipts are recognized as interest income.
Loans and advances to banks and customers include reverse repurchase (“reverse repo”) agreements and collateral paid for securities borrowing transactions. Reverse repo transactions involve the purchase of securities by the Allianz Group from a counterparty, subject to a simultaneous obligation to sell these securities at a certain later date, at an agreed upon price. If control of the securities remains with the counterparty over the entire lifetime of the agreement of the transaction, the securities concerned are not recognized as assets. The amounts of cash disbursed are recorded
Loans and advances to customers include the Allianz Group’s gross investment in leases, less unearned finance income, related to lease financing transactions for which the Allianz Group is the lessor. The gross investment in leases is the aggregate of the minimum lease payments and any unguaranteed residual value accruing to the Allianz Group. Lease financing transactions include direct financing leases and leveraged leases. The unearned finance income is amortized over the period of the lease in order to produce a constant periodic rate of return on the net investment outstanding with respect to finance leases.
Impairment of loans Loan loss allowance is recognized for loans for which there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the loan, and that loss event has an impact on the estimated future cash flows of the loan that can be reasonably estimated. If there is objective evidence that a loan is impaired, a loan loss allowance is recognized as the difference between the loan’s carrying amount and the present value of future cash flows, which includes all contractual interest and principal payments, discounted at the loan’s original effective interest rate. The loan loss allowance is reported as a reduction of loans and advances to banks and customers. Provisions for contingent liabilities, such as guarantees, loan commitments and other obligations are reported as other liabilities.
Loans with an outstanding balance greater than � 1 mn are considered to be individually significant, and they are assessed individually to determine whether an impairment exists. Individually significant loans that are not impaired, as well as loans that are not individually significant, are grouped with loans evidencing similar credit characteristics and are collectively assessed for impairment. Loans impaired individually or collectively are eliminated from further testing to ensure that there is no duplication of impairment. The following allowances comprise the total loan loss allowance.
Financial assets for unit linked contracts Financial assets for unit linked contracts are recorded at fair value with changes in fair value recorded in net income together with the offsetting changes in fair value of the corresponding financial liabilities for unit linked contracts.
Funds held by others under reinsurance contracts Funds held by others under reinsurance contracts assumed relate to cash deposits to which the Allianz Group is entitled, but which the ceding insurer retains as collateral for future obligations of the Allianz Group. The cash deposits are recorded at face value, less any impairments for balances that are deemed to be not recoverable.
Insurance and investment contracts Contracts issued by insurance subsidiaries of the Allianz Group are classified according to IFRS 4 as insurance or investment contracts. Contracts under which the Allianz Group accepts significant insurance risk from a policyholder are classified as insurance contracts. Contracts under which the Allianz Group does not accept significant insurance risk are classified as investment contracts. Certain insurance and investment contracts include discretionary participation features. All insurance contracts and investment contracts with discretionary participating features are accounted for under the provisions of US GAAP, including SFAS 60, SFAS 97 and SFAS 120. Investment contracts without discretionary participation features are accounted for as financial instruments in accordance with IAS 39.
Reinsurance contracts The Allianz Group’s consolidated financial statements reflect the effects of ceded and assumed reinsurance contracts. Assumed reinsurance refers to the acceptance of certain insurance risks by Allianz that other companies have underwritten.
Ceded reinsurance refers to the transfer of insurance risk, along with the respective premiums, to one or more reinsurers who will share in the risks. When the reinsurance contracts do not transfer significant insurance risk according to SFAS 113, deposit accounting is applied as required under SOP 98-7.
Premiums ceded for reinsurance and reinsurance recoveries on benefits and claims incurred are deducted from premiums earned and insurance and investment contract benefits.
Assets and liabilities related to reinsurance are reported on a gross basis. Amounts ceded to reinsurers from reserves for insurance and investment contracts are estimated in a manner consistent with the claim liability associated with the reinsured risks. Revenues and expenses related to reinsurance agreements are recognized in a manner consistent with the underlying risk of the business reinsured.
For short and long duration traditional products (SFAS 60) and limited payment products (SFAS 97), DAC is amortized in proportion to premium revenue recognized. For universal life, participating life, and investment-type products (SFAS
PVFP is the present value of net cash flows anticipated in the future from insurance contracts in force at the date of acquisition and is amortized over the life of the related contracts. PVFP was determined using discount rates ranging from 12 % to 15 %. Interest accrues on the PVFP balance based upon the policy liability rate or contract rate. Interest accrues on PVFP at rates between 2.4 % and 9.8 %.
Deferred sales inducements on insurance contracts that meet the following criteria are deferred and amortized using the same methodology and assumptions used to amortized deferred acquisition costs: – recognized as part of reserves for insurance and investment contracts,
– explicitly identified in the contract at inception, – incremental to amounts the Allianz Group credits on similar contracts without sales inducements, and – higher than the contract’s expected ongoing crediting rates for periods after the inducement.
Unearned premiums For short-duration insurance contracts, such as propertycasualty contracts, in accordance with SFAS 60, premiums written to be earned in future years are recorded as unearned premiums. These premiums are earned in subsequent years in relation to the insurance coverage provided.
The method uses best estimate assumptions adjusted for a provision for adverse deviation for mortality, morbidity, expected investment yields, surrenders and expenses at the policy inception date, which remain locked in thereafter unless a premium deficiency occurs. DAC and PVFP for traditional life and health products are amortized over the premium paying period of the related policies in proportion to the earned premium using assumptions consistent with those used in computing the aggregate policy reserves.
The aggregate policy reserves for universal lifetype insurance contracts and unit linked insurance contracts in accordance with SFAS 97 are equal to the account balance, which represents premiums received and investment return credited to the policy less deductions for mortality costs and expense charges. DAC and PVFP for universal life-type and investment contracts are amortized over the expected life of the contracts in proportion to EGPs based upon historical and anticipated future experience, which is determined on a best estimate basis and evaluated regularly. The present value of EGPs is computed using the interest rate that accrues to the policyholders, or the credited rate. EGPs include margins from mortality, administration, investment income including realized gains and losses and surrender charges. The effect of changes in EGPs are recognized in net income in the period revised.
Aggregate policy reserves also include liabilities for guaranteed minimum death, and similar mortality and morbidity benefits related to non-traditional contracts, annuitization options, and sales inducements. These liabilities are calculated based on contractual obligations using actuarial assumptions.
Property and equipment includes real estate held for own use, equipment and software.
Costs for repairs and maintenance are expensed as incurred, while improvements, if they extend the useful life of the asset or provide additional functionality, are capitalized.
Goodwill resulting from business combinations represents the difference between the acquisition cost of the business combination and the Allianz Group’s proportionate share of the net fair value of identifiable assets, liabilities and certain contingent liabilities. Goodwill resulting from business combinations is not subject to amortization. It is initially recorded at cost and subsequently measured at cost less accumulated impairments.
Intangible assets acquired in business combinations are initially recorded at fair value on the acquisition date if the intangible asset is separable or arises from contractual or other legal rights. Intangible assets with an indefinite useful life are not subject to amortization and are subsequently recorded at cost less accumulated impairments. Intangible assets with a definite useful life are amortized over their useful lives and are subsequently recorded at cost less accumulated amortization and impairments.
Certificated liabilities, participation certificates and subordinated liabilities Certificated liabilities, participation certificates and subordinated liabilities are initially recorded at cost, which is the fair value of the consideration received, net of transaction costs incurred. Subsequent measurement is at amortized cost, using the effective interest method to amortize the premium or discount to the redemption value over the life of the liability.
Equity Issued capital represents the mathematical per share value received from the issuance of shares.
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007 relation to private placements, syndicated loans and financial advisory services. Other fees reflect fees from underwriting business (new issues), commissions received for trust and custody services, for the brokerage of insurance policies, and fees related to credit cards, home loans, savings contracts and real estate. Fee and commission income is recognized in Allianz Group’s Banking segment when the corresponding service is provided.
Income and expenses from fully consolidated private equity investments All of the income from fully consolidated private equity investments and all of the expenses from fully consolidated private equity investments are presented in separate income and expense line items. Revenue from fully consolidated private equity investments is recognized upon customer acceptance of goods delivered and when services have been rendered.
Restructuring plans Provisions for restructuring are recognized when the Allianz Group has a detailed formal plan for the restructuring and has started to implement the plan or has communicated its main features. The detailed formal plan includes the business concerned, approximate number of employees who will be compensated for terminating their services, the expenses to be incurred and the time period over which the plan will be implemented. The detailed plan must be communicated such that those affected have an expectation that the plan will be implemented. The income statement line item, restructuring charges, includes additional restructuring related expenditures that are necessarily entailed by the restructuring and not associated with the ongoing activities of the entity but which are not included in the restructuring provisions.
(b) qualitative and quantitative information about exposure to risks arising from financial instruments.
The following table summarizes the relations between balance sheet positions, classes according to IFRS 7 and categories according to IAS 39: Balance sheet line item and IFRS 7 classes of financial assets Measurement basis IAS 39 category
Financial assets Cash and cash equivalents Nominal value — Financial assets carried at fair value through income
Financial assets held for trading Fair value Held for trading Financial assets designated at fair value through income Fair value Designated at fair value through income
Investments Available-for-sale investments Fair value Available-for-sale investments Held-to-maturity investments Amortized cost Held-to-maturity investments
Balance sheet line item and IFRS 7 classes of financial liabilities Measurement basis IAS 39 category
Off-balance sheet Financial guarantees Nominal value — Irrevocable loan committments Nominal value —
Fi na nc ia l S ta te m en ts
Allianz Group Annual Report 2007 Notes to the Consolidated Financial Statements
– Credit risk as well as collaterals and other credit enhancements
The requirements of IAS 1 with regard to capital disclosures are also incorporated in the risk report in the group management report.
Recently issued accounting pronouncements (effective on or after January 1, 2008) In November 2006, the IASB issued IFRS 8, Operating Segments.
In January 2008, the IASB issued a revised version of IFRS 3, Business Combinations, and an amended version of IAS 27, Consolidated and Separate Financial Statements. The revised version of IFRS 3 and the amended version of IAS 27 include the following changes: – The scope of IFRS 3 has been extended and applies now also to combinations of mutual entities and to combinations achieved by contract alone.
The revised standards apply to annual financial statements for periods beginning on or after July 1, 2009. The carrying amounts of any assets and liabilities that arose under business combinations prior to the application of the revised IFRS 3 are not adjusted. The amendments to IAS 27 need to be applied retrospectively with certain exceptions. Earlier application is permitted under certain conditions. The Allianz Group is currently evaluating the potential impact that the adoption of the standards will have on the Group’s financial statements.
In January 2008, the IASB issued an amendment to IFRS 2, Share-based Payment. The amendment clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. It also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The amendment applies to annual financial statements for periods beginning on or after January 1, 2009. Earlier application is permitted. The Allianz Group is currently evaluating the potential impact, if any, that the adoption of the amendment of IFRS 2 will have on the Group’s financial statements.
The amendments apply to annual financial statements for periods beginning on or after January 1, 2009. Earlier application is permitted. The Allianz Group is currently evaluating the potential impact, if any, that the adoption of the amendments of IAS 32 and IAS 1 will have on the Group’s financial statements.
The following table summarizes the Errors by issue and by their effect on the consolidated opening balance sheet and the consolidated statement of changes in equity as of January 1, 2005 as well as on the subsequent consolidated balance sheets and consolidated statements of changes in equity as of December 31, 2006 and 2007.
Dresdner Bank Special Funds Other Total � mn � mn � mn � mn
Total shareholders equity 56,890 (60) 56,830 Total liabilities and equity 1,053,226 (755) 1,052,471 1) Excludes the change in presentation due to the reclassification of certain financial instruments
Property Casualty Other assets 17,737 — 17,737 Intangible assets (Goodwill) 1,653 — 1,653 Total assets 150,740 — 150,740 Reserves for insurance and investment contracts (Reserves for premium refunds) 8,956 (2) 8,954 Deferred tax liabilities 3,902 (8) 3,894
Life/Health Other assets 12,891 — 12,891 Intangible assets (Goodwill) 2,399 (169) 2,230
Change in the presentation of financial instruments In accordance with the Allianz Group policy, certain financial instruments are presented on a net basis when there is a legally enforceable right to offset with the same counterparty, and the Allianz Group intends to settle on a net basis. At our Dresdner Bank subsidiary, certain master netting agreements give Dresdner Bank the legal right of offset, but only under certain conditions. The financial instruments related to these agreements, consisting of derivatives, repurchase agreements and reverse repurchase agreements, have previously been reported on a net basis. These agreements have been evaluated and it has been determined that due to the limits to the right of offset, the relevant financial assets and liabilities should be reported on a gross basis.
Partially offsetting these reclassifications from net to gross presentation is a change in the presentation of Collateral paid for securities borrowing transactions and Collateral received for securities lending transactions from gross to net presentation. In this case, the logic in the relevant system did not distinguish between open trades and offsetting borrowing/lending activities with the same counterparty.
Number of fully consolidated Special Purpose Entities (“SPE”) 55 46 35 Total of fully consolidated entities 1,289 1,085 1,137 Number of joint ventures valued at equity 4 9 10 Number of associated entities valued at equity 218 177 150 1) Includes 8 (2006: 9; 2005: 9) subsidiaries where the Allianz Group owns less than majority of the voting power of the subsidiary, including CreditRas Vita S.p.A. (“CreditRas”) and Antoniana Veneta Popolare Vita S.p.A. (“Antoniana”). The Allianz Group controls these entities on the basis of shareholder agreements between the Allianz Group subsidiary owning 50 % of each such entity and the other shareholders. Pursuant to these shareholder agreements, the Allianz Group has the power to govern the financial and operating policies of these subsidiaries and the right to appoint the general manager, in the case of CreditRas, and the CEO, in the case of Antoniana, who have been given unilateral authority over all aspects of the financial and operating policies of these entities, including the hiring and termination of staff and the purchase and sale of assets. Furthermore, all management functions of these subsidiaries are performed by the employees of the Allianz Group and all operations are undertaken in Allianz Group’s facilities. The Allianz Group also develops all insurance products written through these subsidiaries. Although the Allianz Group and the other shareholders each have the right to appoint half of the directors of each subsidiary, the rights of the other shareholders are limited to matters specifically reserved to the board of directors and shareholders under Italian law, such as decisions concerning capital increases, amendments to articles and similar matters. In addition, in the case of Antoniana, the Allianz Group has the right to appoint the Chairman, who has double board voting rights, thereby giving the Allianz Group a majority of board votes. The shareholder agreements for CreditRas and Antoniana are subject to automatic renewal and are not terminable prior to their stated terms.
All subsidiaries, joint ventures and associated enterprises are individually listed in the disclosure of equity investments that will be published together with the consolidated financial statements in the German Electronic Federal Gazette as well as on the Company’s Website. The disclosure of equity investments includes individually listed commercial partnerships which are exempt from preparing single financial statements in accordance with section 264b of the German Commercial Code (“HGB”) as they are included in the consolidated financial statements of the Allianz Group. Selected subsidiaries and associated entities are listed in the selected subsidiaries and other holdings section.
Selecta AG, Muntelier 1) 100.0 07/03/2007 Corporate 472 Purchase Insurance Company “Progress Garant”, Moscow 100.0 05/31/2007 Property-
Russian People’s Insurance Society, Moscow On February 21, 2007, the Allianz Group acquired additional 49.8 % of Russian People´s Insurance Society, Moscow at a purchase price of � 572 mn. Russian People´s Insurance Society, Moscow is the second largest insurance company in Russia which offers products in the business segments PropertyCasualty, Life/Health and Asset Management.
The impact of the acquisition of Russian People´s Insurance Society, Moscow, net of cash acquired, on the consolidated statement of cash flows for the year ended December 31, 2007 was: � mn
The impact on the Group’s net income as of December 31, 2007 was � (11) mn.
Selecta AG, Muntelier On July 3, 2007, the Allianz Group acquired 100.0 % of Selecta AG, Muntelier at a purchase price of � 1,126 mn. Selecta AG, Muntelier is the leading vending operator in Europe.
Purchase price (100.0 % interest) 1,126 Transaction costs — Total purchase price 1,126
2006 Significant acquisitions MAN Roland Druckmaschinen AG, Offenbach On July 18, 2006, the Allianz Group acquired 100.0 % of MAN Roland Druckmaschinen AG, Offenbach, at a purchase price of � 554 mn. MAN Roland is the world’s second largest manufacturer of printing systems.
Purchase price (100.0 % interest) 553 Transaction costs 1 Total purchase price 554
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007 5 Segment reporting
As a result of the Allianz Group’s worldwide organization, the business activities of the Allianz Group are first segregated by product and type of service: insurance activities, banking activities, asset management activities and corporate activities. Due to differences in the nature of products, risks and capital allocation, insurance activities are further divided between property-casualty and life/health categories. Thus, the Allianz Group’s segments are structured as Property-Casualty, Life/Health, Banking, Asset Management and Corporate. Based on various legal, regulatory and other operational issues associated with operating entities in jurisdictions worldwide, the segments of the Allianz Group are also further analyzed by geographical areas or regions in matrixes that comprise a number of profit and servicecenter segments. This geographic analysis is performed to provide further understanding of trends and results underlying the segment data.
Property-Casualty The Allianz Group is the largest German property-casualty insurance company based on gross premiums written during the year ended December 31, 2007. Principal product lines offered primarily within Germany include automobile liability and other automobile insurance, fire and property insurance, personal accident insurance, liability insurance and legal expense insurance. The Allianz Group is also among the largest property-casualty insurance companies in other countries, including France, Italy, the United Kingdom, Switzerland and Spain. The Allianz Group conducts its property-casualty insurance operations in these countries through five main groups of operating entities: in France, primarily offering automobile, property, injury and liability insurance for both individual and corporate customers; Italy, operating in all personal and commercial propertycasualty lines in particular personal automobile insurance; the United Kingdom, offering products generally similar to those offered by the Allianz Group’s German property-casualty operations as well as a number of specialty products, including extended warranty and pet insurance; Switzerland, offering property-casualty insurance, travel and assistance insurance, conventional reinsurance as well as a variety of alternative risk transfer products for corporate customers worldwide; and Spain, offering a wide variety of traditional personal and commercial property-casualty insurance products, with an emphasis on automobile insurance.
Life/Health The Allianz Group is the largest provider of life insurance and the third largest provider of health insurance in Germany based on gross statutory premiums written during the year ended December 31, 2007. Germany is the Allianz Group’s most important market for life/health insurance business. The Allianz Group’s German life insurance companies offer a comprehensive and unified range of life insurance and life insurance-related products on both an individual and group basis. The main classes of coverage offered include endowment life insurance, annuity policies, term life insurance, unit linked annuities, and other life insurance-related forms of cover, which are provided as riders to other policies and on a stand-alone basis. The Allianz Group’s German health insurance companies provide a wide range of health insurance products, including full private healthcare coverage for the self-employed, salaried employees and civil servants, supplementary insurance for people insured under statutory health insurance plans, daily sickness allowance for the self-employed and salaried employees, hospital daily allowance, supplementary care insurance and foreign travel medical expenses insurance. The Allianz Group also maintains significant life/health operations in the United States, offering a wide variety of life insurance, fixed and variable annuity contracts, including equity-indexed annuities to individuals, and long-term care insurance to individual and corporate customers. Italy and France are also markets the Allianz Group maintains a significant presence offering products such as unit linked and investment-oriented products, health insurance and individual and group life insurance.
Banking The Allianz Group’s banking operations primarily comprise the operations of the Dresdner Bank AG and subsidiaries, hereafter “Dresdner Bank Group”, whose principal banking products and services include traditional commercial banking activities such as deposit taking, lending (including residential mortgage lending) and cash management, as well as corporate finance advisory services, mergers and acquisitions advisory services, capital and money market services, securities underwriting and securities trading and derivatives business on its own account and for its customers. The Allianz Group operates through the domestic and international branch network of the Dresdner Bank Group and through various subsidiaries both in Germany and abroad, some of which also have branch networks.
Corporate The Corporate segment includes all group activities which are not allocated to a specific business segment. Further, the Corporate segment includes group funding and risk management activities, such as the senior bonds, subordinated bonds and money market securities issued or guaranteed by Allianz SE and the related derivative financial instruments held by Allianz SE or one of its subsidiaries.
Loans and advances to banks and customers 20,712 16,825 91,188 85,769 295,506 329,196 Financial assets for unit linked contracts — — 66,060 61,864 — —
Income from fully consolidated private equity investments — — — — — — — — —
Claims and insurance benefits incurred (gross) (28,131) (27,028) (28,478) (18,292) (18,520) (18,332) — — — Claims and insurance benefits incurred (ceded) 2,646 2,356 3,147 655 895 893 — — — Claims and insurance benefits incurred (net) (25,485) (24,672) (25,331) (17,637) (17,625) (17,439) — — — Change in reserves for insurance and investment contracts (net) (339) (425) (707) (10,268) (10,525) (10,443) — — —
Expenses from fully consolidated private equity investments — — — — — — — — —
Specialty Lines Allianz Global Corporate and Specialty 1,800 1,545 1,633 67.9 62.5 91.1
Travel Insurance and Assistance Services 1,093 1,008 934 58.1 58.7 60.3
LIFE/HEALTH Europe 1) Represents claims and insurance benefits incurred (net) divided by premiums earned (net). 2) Presentation not meaningful. 3) Represents elimination of intercompany transactions between Allianz Group subsidiaries in different geographic regions. 4) Statutory premiums are gross premiums written from sales of life insurance policies, as well as gross receipts from sales of unit linked and other investment-oriented products, in accordance with the statutory accounting practices applicable in the insurer’s home jurisdiction. 5) Represents acquisition and administrative expenses (net) divided by statutory premiums (net).
% % % � mn � mn � mn � mn � mn
� mn � mn � mn � mn � mn 6) Represents acquisition and administrative expenses (net) divided by premiums earned (net).
While these excluded items are significant components in understanding and assessing the Allianz Group’s consolidated financial performance, the Allianz Group believes that the presentation of operating results enhances the understanding and comparability of the performance of its operating segments by highlighting net income attributable to ongoing segment operations and the underlying profitability of its businesses. For example, the Allianz Group believes that trends in the underlying profitability of its segments can be more clearly identified without the fluctuating effects of the realized capital gains and losses or impairments on investment securities, as these are largely dependent on market cycles or issuer-specific events over which the Allianz Group has little or no control, and can and do vary, sometimes materially, across periods. Further, the timing of sales that would result in such gains or losses is largely at the Allianz Group’s discretion. Operating profit is not a substitute for earnings from ordinary activities before taxes or net income as determined in accordance with IFRS. The Allianz Group’s definition of operating profit may differ from similar measures used by other companies, and may change over time.
The following table summarizes total revenues, operating profit and net income for each of the segments and the Allianz Group for the years ended December 31, 2007, 2006 and 2005.
Income from financial assets and liabilities held for trading (net), not shared with policyholders 2) (59) 83 32 Realized gains/losses (net) from investments, not shared with policyholders 3) 1,433 1,746 1,148 Impairments of investments (net), not shared with policyholders 4) (276) (175) (77) Amortization of intangible assets (14) (1) (11)
Ceded premiums written (644) (840) (942) Change in unearned premiums (61) (221) (168) Statutory premiums (net) 48,662 46,360 47,162 Deposits from SFAS 97 insurance and investment contracts (27,853) (25,786) (27,165) Premiums earned (net) 20,809 20,574 19,997 Interest and similar income 13,417 12,972 12,057 Income (loss) from financial assets and liabilities carried at fair value through income (net), shared with policyholders 2) (945) (361) 258 Realized gains/losses (net) from investments, shared with policyholders 3) 3,579 3,087 2,523 Fee and commission income 701 630 507
Acquisition and administrative expenses (net) (4,588) (4,437) (3,973) Fee and commission expenses (209) (223) (219) Operating restructuring charges 5) (16) (140) —
Income from financial assets and liabilities carried at fair value through income (net), not shared with policyholders 2) 5 — — Realized gains/losses (net) from investments, not shared with policyholders 3) 137 195 208 Impairments of investments (net), not shared with policyholders 4) (3) — — Amortization of intangible assets (3) (26) (13) Non-operating restructuring charges 5) (29) (34) (18) Non-operating items 107 135 177
1) For the Life/Health segment, total revenues are measured based upon statutory premiums. Statutory premiums are gross premiums written from sales of life insurance policies, as well as gross receipts from sales of unit linked and other investment-oriented products, in accordance with the statutory accounting practices applicable in the insurer’s home jurisdiction.