Due to the small size of risk weighted assets and total assets (as of December 31, 2009, € 8.7billion and € 19.5 billion, respectively), liquidity risk related to our Banking operations is deemed not to be significant at the Group level.
Property-Casualty and Life/Health segments Our insurance operating entities manage liquidity risk locally, using local asset-liability management systems designed to ensure that assets and liabilities are adequately matched. To the extent available, the approaches used to project the liability cash flows for the Property-Casualty segment are similar to the methods used for setting reserves.
The local investment strategies particularly focus on the quality of investments and ensure a significant portion of liquid assets (e.g., Government bonds or covered bonds) in the portfolios. This helps us to meet high liquidity requirements in unlikely events.
Furthermore, in the case of an extraordinary event, a portion of the applicable payments may usually be made with a certain time lag, which reduces the risk that short-term current payment obligations cannot be met.
Asset Management segment With respect to our Asset Management business, forecasting and managing liquidity is a regular process, designed to meet both regulatory requirements and Allianz Group standards. In 2009, this process was further strengthened by liquidity guidelines for new products, implemented at our Allianz Global Investors entities.
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 among 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. Therefore, reputational risk can both cause and result from losses in all risk categories such as market or credit risks.
More specifically, as equity risk is one of our major risk drivers, we actively adjusted the equity exposure and concentration risk through sales and hedging activities, beginning in 2007 and continuing during 2008 and 2009, in order to limit potential impairments and earnings volatility. Through this process, our equity exposure not only decreased in absolute terms, but also in relative terms compared to the Group’s shareholders’ equity, leading to a reduction in our equity gearing. As a consequence, our conglomerate and economic solvency became more resistant to further drops in equity markets. Consistently with this active portfolio management, we also set a more conservative risk limit by increasing the minimum solvency targets following standard adverse scenarios.
At the same time, we continued with our conservative credit policy, only moderately and selectively increasing the credit exposure to counterbalance the equity reduction and taking advantage of attractive liquidity premia embedded in fixed income returns at the beginning of 2009. In addition, we also focused on preserving liquidity in our Life/Health asset portfolios in case of unexpectedly increased surrenders.
These risks are evaluated and analyzed quarterly in the same way as reputational risk. In addition, strategic decisions are discussed in various committees (e.g., Group Capital Committee, Group Risk Committee, Group Finance Committee). The assessment of the associated risks is a fundamental element of these discussions.
In general, our risk management framework is designed to protect the value of Allianz against unexpected developments. As an example of the successful implementation of this framework in practice, Allianz Group’s risk strategy during 2009 was very much aware of the risks to the insurance industry from market turbulence and focused on three main objectives: • Protect the Allianz Group’s capital and solvency position as well as position our investment portfolio for continued market turbulence
Given the impact on the asset side of the balance sheet, protecting our ability to deliver value through our core Property-Casualty underwriting activities became even more important than before.
However, after the discontinuation of some of our noninsurance operations in 2009, the Management Board of Allianz SE reviewed and redefined the Group’s natural catastrophe limit to reflect the greater contribution to the Group’s results made by the Property-Casualty segment. The new limit is based on annual aggregate losses, taking into account expected losses. Overall, the limit remains rather conservative.
In addition, we put higher emphasis on mitigating earnings volatility through our reinsurance programm by increasing protection against multiple higher frequency, mid-sized losses.
Finally, given the influence of short-term market developments on the value of new and existing long-term life insurance products, we reinforced our disciplined and proactive life product management approaches in order to achieve sustainable profitability over time.
In 2009, we especially focused on life product design and pricing across the Group, giving profitability top priority for the Life/Health segment, and enhanced our Life product approval framework in order to ensure decisions on new and existing products were taken in line with our 3 % average portfolio NBM target. This framework defines profitability standards, also allowing for individual exceptions approved for competitive reasons in the light of local market characteristics. We also strengthened our processes for close monitoring of profitability of new and existing business and for regularly reporting on it to the Board of Management of Allianz SE.
As a further example of our efforts to ensure sustainable profitability and in light of the difficult economic environment, we consciously decided in the first quarter of 2009 to discontinue non-profitable components of our U.S. variable annuity product suite. Subsequently, we significantly redesigned, repriced and relaunched major products offered by our entity Allianz Life Insurance Company of North America during 2009 in order to maintain a balanced and sustainable risk and profitability profile even under difficult market conditions. Finally, in addition to our fair value dynamic hedging program for the U.S. variable and equity indexed annuities, we also implemented a hedging program designed to limit the impact of equity market moves on statutory capital requirements for our U.S. subsidiary through the purchase of an equity collar.
The Group’s management also believes that Allianz is well positioned in case of potential future adverse events, in part due to our internal limit framework which limits the impact on our regulatory solvency to adverse financial market shock scenarios. Similarly, the Group’s net exposure to natural catastrophes is also limited and remains within our risk appetite. The Group’s management is confident that, through this risk appetite, we have achieved an appropriate balance between potential earnings, earnings volatility and solvency considerations.
The risk disclosure requirements of IFRS 7 are reflected in the consolidated financial statements and the preceding risk report in the group management report.
Under this new framework, we will apply a structured Monte-Carlo simulation approach using more advanced replicating portfolio techniques for life businesses. We will also include new risk drivers (e.g., credit spread and implied volatility risk) to ensure comprehensive coverage of financial market risks across the Group. We believe that this platform fulfills the quantitative Solvency II Pillar I requirements for internal model approval by regulators. We have thoroughly tested the new internal model framework, performing several parallel runs and reconciling with our existing model. The Allianz Group-wide internal risk capital after Group diversification is expected to remain close to the capital requirements based on the current framework. Even though the non-diversified internal risk capital will generally increase due to the inclusion of new risk drivers, this increase will be offset by a higher level of realized diversification benefits due to the use of more advanced aggregation techniques.
In parallel, we also have successfully implemented a new web-based Credit Risk Reporting Platform (“CRisP”) for comprehensive and flexible portfolio analysis and reporting as well as for a more powerful counterparty limit management; an important element of this project has been the improvement of data delivery processes and controls. While the reporting capabilities have already been introduced, the new CRisP limit system is being introduced at the beginning of 2010 at which time it will have a positive impact on the management of our credit exposures, whether originating from investment assets, counterparty derivative exposures, reinsurance recoverables and credit insurance.
Minneapolis. Allianz Life is named “Company of the Week”. 150 leading American financial services providers cast their ballot every week: One of the firms is named “Company of the Week” and that firm and its employees place particular emphasis on social projects during that week. Allianz Life has participated even during difficult times and is grateful for the honor. And concerning professional engagement: In 2009 Allianz Life delivered a very good result.
Seoul. Risk management, soaring above the sea. Allianz’s role as a global reinsurer is made particularly clear in Seoul. You can’t rush your journey on the new Incheon bridge: it’s 12 kilometres long. It is considered an architectural wonder and is valued at 1.4 billion U.S. Dollars. It’s also one of the best-planned and safest bridges of its kind. Risk management and reinsurance: Allianz Global Corporate & Specialty.
Supplementary Information to the Consolidated Balance Sheets 266 7 Cash and cash equivalents 266 8 Financial assets carried at fair value through income 270 10 Loans and advances to banks and customers 272 11 Reinsurance assets 273 12 Deferred acquisition costs 274 13 Other assets 276 14 Non-current assets and assets and liabilities of disposal groups classified as held for sale 277 15 Intangible assets 280 16 Financial liabilities carried at fair value through income 280 17 Liabilities to banks and customers 281 18 Unearned premiums 281 19 Reserves for loss and loss adjustment expenses 283 20 Reserves for insurance and investment contracts 287 21 Financial liabilities for unit-linked contracts 287 22 Other liabilities 288 23 Certificated liabilities 289 24 Participation certificates and subordinated liabilities
Loans and advances to banks and customers 10 128,996 116,990 397,677 Financial assets for unit-linked contracts 56,963 50,450 66,060
Non-current assets and assets of disposal groups classified as held for sale 4, 14 — 419,513 3,503
Liabilities of disposal groups classified as held for sale 4, 14 — 411,816 1,293
Ceded premiums written (5,061) (5,474) (5,934) Change in unearned premiums (172) (253) (492)
Net income from continuing operations 4,740 4,186 7,991 Net income (loss) from discontinued operations, net of income taxes 4 (395) (6,373) 723 Net income (loss) 4,345 (2,187) 8,714
Diluted earnings per share 50 9.50 (5.47) 17.71 from continuing operations 10.37 8.59 16.26 from discontinued operations (0.87) (14.06) 1.45
Allianz Group Consolidated Statements of Comprehensive Income € mn € mn € mn
Reclassifications to net income 516 2 — Changes arising during the year (118) (261) (1,926)
Available-for-sale investments Reclassifications to net income (753) 560 (2,577) Changes arising during the year 4,242 (9,116) (1,845)
Cash flow hedges Reclassifications to net income (5) — 1 Changes arising during the year (11) 28 33
Miscellaneous Reclassifications to net income — — — Changes arising during the year (87) 100 933
Summary Net cash flow provided by operating activities 13,551 25,278 11,524 Net cash flow used in investing activities (50,387) (6,236) (2,357) Net cash flow provided by (used in) financing activities 3,708 (11,285) (10,746) Effect of exchange rate changes on cash and cash equivalents 21 102 (115) Change in cash and cash equivalents (33,107) 7,859 (1,694) Cash and cash equivalents at beginning of period of continuing operations 8,958 31,337 33,031 Cash and cash equivalents at beginning of period reclassified to assets of disposal groups held for sale 30,238 — — Cash and cash equivalents at end of period 6,089 39,196 31,337 Cash and cash equivalents reclassified to assets of disposal groups held for sale — 30,238 — Cash and cash equivalents at end of period of continuing operations 6,089 8,958 31,337
Cash flow from operating activities Net income (loss) 4,345 (2,187) 8,714 Adjustments to reconcile net income (loss) to net cash flow provided by operating activities
Share of earnings from investments in associates and joint ventures (80) (12) (521) Impairment loss recognized on remeasurement of assets of disposal group to fair value less costs to sell as of September 30, 2008 — 1,409 — Realized gains/losses (net) and impairments of investments (net) of
Reserves for loss and loss adjustment expenses (117) 527 (389) Reserves for insurance and investment contracts 5,190 390 6,675 Deferred tax assets/liabilities (564) 351 55 Financial assets designated at fair value through income (only banking) — 3,204 (2,286) Financial liabilities designated at fair value through income (only banking) — 2,925 1,104
Cash flow from investing activities Proceeds from the sale, maturity or repayment of
Financial assets designated at fair value through income 4,193 4,105 5,678 Available-for-sale investments 94,459 106,665 130,421 Held-to-maturity investments 419 319 183 Investments in associates and joint ventures 1,957 1,285 1,902 Non-current assets and assets of disposal groups classified as held for sale — 2,199 4 Real estate held for investment 391 491 889 Loans and advances to banks and customers (purchased loans) 11,537 8,735 8,823 Property and equipment 210 431 607
Payments for the purchase or origination of Financial assets designated at fair value through income (2,513) (4,107) (6,393) Available-for-sale investments (112,667) (114,041) (129,060) Held-to-maturity investments (192) (182) (183) Investments in associates and joint ventures (973) (610) (1,509) Non-current assets and assets of disposal groups classified as held for sale (36) (97) (1,073) Real estate held for investment (349) (395) (430) Loans and advances to banks and customers (purchased loans) (20,584) (10,169) (12,404) Property and equipment (1,160) (953) (832)
Net cash flows arising during the fourth quarter 2008 from assets and liabilities of disposal groups classified as held for sale — 9,327 — Change in other loans and advances to banks and customers (originated loans) 1,384 (8,673) 43
Cash flow from financing activities Policyholders’ account deposits 20,162 13,205 12,810 Policyholders’ account withdrawals (12,174) (10,985) (9,365) Net change in liabilities to banks and customers (1,097) (4,920) 9,007 Proceeds from the issuance of certificated liabilities, participation certificates and subordinated liabilities 12,541 40,672 58,087 Repayments of certificated liabilities, participation certificates and subordinated liabilities (14,189) (45,868) (71,627) Cash inflow from capital increases 56 239 115 Transactions between equity holders 276 (666) (7,326) Dividends paid to shareholders (1,701) (2,759) (1,995) Net cash from sale or purchase of treasury shares (135) 40 (34)
Net cash flow provided by (used in) financing activities 3,708 (11,285) (10,746)
Significant non-cash transactions Settlement of exchangeable bonds issued by Allianz Finance II B.V. with shares
Novation of quota share reinsurance agreement Reinsurance assets — (29) (2,469) Deferred acquisition costs — 1 145 Payables from reinsurance contracts — (28) (2,324)
Available-for-sale investments 746 — — Assets of disposal groups held for sale (746) — —
Nature of operations Allianz SE and its subsidiaries (“the Allianz Group”) have global Property-Casualty insurance, Life/Health insurance and Asset Management operations in more than 70 countries, with the largest of its operations in Europe. The Allianz Group’s headquarter is located in Munich, Germany. The parent company of the Allianz Group is Allianz SE, Munich. It is recorded in the Commercial Register of the municipal court Munich under its registered address at Koeniginstraße 28, 80802 Munich.
The consolidated financial statements of the Allianz Group for the year ended December 31, 2009 were authorized for issue by the Board of Management on February 22, 2010.
Basis of presentation The consolidated financial statements of the Allianz Group have been prepared in conformity with International Financial Reporting Standards (“IFRS”), as adopted under European Union (“EU”) regulations in accordance with section 315 a of the German Commercial Code (“HGB”). Within these consolidated financial statements, the Allianz Group has applied all IFRS issued by the IASB and endorsed by the EU, that are compulsory as of December 31, 2009. IFRS comprise International Financial Reporting Standards (“IFRS”), International Accounting Standards (“IAS”), and interpretations developed by the International Financial Reporting Interpretations Committee (“IFRIC”) or the former Standing Interpretations Committee (“SIC”).
The accounting policies adopted are consistent with those of the previous financial year except for recently adopted IFRSs effective January 1, 2009 as described in Note 3.
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. Adjustments are then made for the effects of significant transactions or events that occur between that date and the date of the Allianz Group’s financial statements.
Translation from any foreign currency into functional currency The individual financial statements of each of the Allianz Group’s subsidiaries are prepared in the prevailing currency in the primary economic 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 exchange rate prevailing 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. Non-
Classification, recognition and initial measurement Financial assets within the scope of IAS 39 are either classified as financial assets carried at fair value through income, available-for-sale investments, held-to-maturity investments, loans and advances to banks and customers or as derivative financial instruments used for hedging. Furthermore financial assets comprise funds held by others under reinsurance contracts assumed and financial assets for unit-linked contracts.
No active markets – valuation techniques If the market for a financial instrument is not active, the fair value is determined by using valuation techniques. The valuation techniques used are based on market observable inputs when available. Such market inputs include references to recently quoted prices for identical instruments from an active market, quoted prices for identical instruments from an inactive market, quoted prices for similar instruments from active markets and quoted prices for similar instruments from inactive markets. Market observable inputs also include interest rate yield curves, option volatilities and foreign currency exchange rates. Where observable market prices are not available, fair value is based on appropriate valuation techniques using non-market observable inputs. Valuation techniques include net present value techniques, the discounted cash flow method, comparison to similar instruments for which observable market prices exist and other valuation models. In the process, appropriate adjustments are made for credit risks.
Amortized cost of financial instruments The amortized cost of a financial instrument is the amount at which the financial instrument is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest rate method of any difference between that initial amount and the maturity amount, and minus any subsequent reduction for impairment or uncollectability.
Recognition of a day one profit or loss If the fair value of a financial instrument differs from its initial transaction price (i.e. by comparing it to other observable current market transactions or by using a technical valuation model incorporating only observable market data), it is required that the recognition of a “day one profit or loss“ is consistent with the subsequent measurement of the financial instrument with all the other requirements regarding the calculation of fair value. A profit or loss should be recognized after initial recognition only to the extent that it arises from a change in a factor that market participants would consider in setting a price.
Financial assets and liabilities are classified as held for trading if they have been principally acquired or incurred for the purpose of generating a profit from short-term fluctuations in price or for the purpose of selling in the near future.
Financial assets and liabilities carried at fair value through income are measured at fair value. Changes in fair value are recognized directly in the consolidated income statement. The recognized net gains and losses include dividends and interest of the underlying financial instruments. A financial instrument may only be designated at inception as held at fair value through income and cannot be subsequently changed.
Available-for-sale investments Available-for-sale investments comprise debt and equity securities that are designated as available-for-sale or are not classified as held-to-maturity, loans and advances to banks and customers, or financial assets carried at fair value through income. Available-for-sale investments 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 other comprehensive income, 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. When an available-for-sale investment is derecognized or determined to be impaired, the cumulative gain or loss previously recorded in shareholders’ equity is transferred and recognized in the consolidated income statement. Realized gains and losses on securities are generally determined by applying the average cost method at the subsidiary level.
Loans and advances to banks and customers Loans and advances to banks and customers are non-derivative financial assets with fixed or determinable payments, that are not quoted in an active market, are not classified as available-for-sale investments or held-to-maturity investments, financial assets held for trading, or financial assets designated at fair value through income. Loans to banks and customers are initially recorded at fair value plus transaction costs, and subsequently recorded at amortized cost using the effective interest rate method. Interest income is accrued on the unpaid principal balance, net of charge-offs. Using the effective interest method, net deferred fees and premiums or discounts are recorded as an adjustment of interest income yield over the lives of the related loans.
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 substantially all of the risks and rewards 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 under loans and advances to banks and customers. Interest income on reverse repo agreements is accrued over the duration of the agreements and is reported in interest and similar income.
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.
Investment contracts with policyholders Fair value for investment and annuity contracts are determined using the cash surrender values of policyholders’ and contract holders’ accounts.
Financial liabilities for unit-linked contracts The fair value of financial liabilities for unit-linked contracts is equal to the fair value of the financial assets for unit-linked contracts.
If a held-to-maturity debt security is impaired based on the Allianz Group’s impairment review process, the related impairment loss is measured as the difference between the security’s carrying amount and the present value of estimated future cash flows, discounted at the security’s original effective interest rate.
Impairment of available-for-sale equity securities 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 % or a prolonged decline to be one in which fair value is below the weighted average cost for greater than nine months. This policy is applied by all subsidiaries at the individual security level.
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. If the amount of the impairment subsequently increases or decreases due to an event occurring after the initial measurement of impairment, a change in the allowance is recognized in earnings by a charge or a credit to the loan loss provisions. The loan loss allowance is reported either as a reduction of the carrying amount (for loans and advances) or as provision (for off-balance sheet positions).
The 2008 amendments to IAS 39 permit an entity to reclassify certain non-derivative financial assets out of the “held for trading” (“at fair value through income”) category and out of the “available-for-sale” category if the following specific conditions are met.
• Debt instruments, classified as “held for trading” (“at fair value through income”) or “available-for-sale” may be reclassified to the “loans and receivable” category, if they meet the definition of loans and receivables at the reclassification date and where the Allianz Group has now the intent and ability to hold the assets for the foreseeable future or until maturity.
• Any other debt instrument and any other equity instrument, classified as “held for trading” (“at fair value through income”) may be reclassified to the “held-to-maturity” category (debt instruments) or to the “available-for-sale” category in rare circumstances (e.g. deterioration of the world’s financial markets in 2008) and where Allianz Group has no longer the intention to sell or trade the assets in the short term.
Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously.
Hedges of a net investment in a foreign entity Hedge accounting may be applied to derivative financial instruments used to hedge the foreign currency risk associated with a net investment in a foreign entity. The proportion of gains or losses arising from valuation of the derivative financial instrument, which is determined to be an effective hedge, is recognized in unrealized gains and losses (net) in other comprehensive income, while any ineffectiveness is recognized directly in net income.
– Investment contracts with policyholders Fair value Financial liabilities for unit-linked contracts Fair value Other liabilities
– Financial liabilities for puttable equity instruments Redemption amount Certificated liabilities (Other liabilities) Amortized cost Participation certificates and subordinated liabilities (Other liabilities) Amortized cost Liabilities held in trust Fair Value
Off-balance sheet Financial guarantees Nominal value Irrevocable loan commitments Nominal value
The risk disclosure requirements of IFRS 7 and the requirements of IAS 1 with regard to capital disclosures are reflected in the consolidated financial statements and the risk report in the group management report.
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 Group 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 the related reinsurance accounting provisions of US GAAP, deposit accounting is applied as required under the related reinsurance accounting provisions of US GAAP or under IAS 39, respectively.
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. The amount of reserves ceded to reinsurers 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.
Deferred acquisition costs Deferred acquisition costs (“DAC”), present value of future profits (“PVFP”) and deferred sales inducements comprise the deferred acquisition costs in the consolidated balance sheets.
For short-duration and traditional long-duration contracts and limited-payment contracts, DAC is amortized in proportion to premium revenue recognized. For universal life-type contracts, participating life insurance contracts and investment contracts with discretionary participation features, DAC is amortized over the contract life of a book of contracts based on estimated gross profits (“EGP”) or estimated gross margins (“EGM”), as appropriate, based on historical and anticipated future experience, which is evaluated regularly.
The value of an insurance business acquired or the value of an insurance portfolio acquired is demonstrated by the PVFP which is the present value of net cash flows anticipated in the future from insurance contracts in force at the date of acquisition. It is amortized over the life of the related contracts. PVFP was determined using discount rates ranging from 8.0 % to 12.0 %. Interest accrues on the PVFP balance based upon the policy liability rate or contract rate. Interest accrues on PVFP at rates between 2.0 % and 6.5 %.
Shadow accounting in a broader sense is also applied to all valuation differences between statutory accounting which is the basis for profit participation of policyholders and IFRS accounting. These valuation differences are accounted for as latent reserve for premium refunds. Further information are included in a succeeding section entitled ‘Reserves for insurance and investment contracts and financial liabilities for unit-linked contracts’.
Amounts charged as consideration for origination of certain long-duration insurance contracts (i.e. initiation or front-end fees) are reported as unearned revenue which are included in unearned premiums. According to the insurance accounting provisions of US GAAP, these fees are recognized using the same methodology as DAC amortization.
Unbundling The deposit component of an insurance contract is unbundled when both of the following conditions are met: 1. the deposit component (including any embedded surrender options) can be measured separately (i.e. without taking into account the insurance component); and 2. the Allianz Group’s accounting policies do not otherwise require the recognition of all obligations and rights arising from the deposit component.
Reserves for loss and loss adjustment expenses Reserves are established for the payment of losses and loss adjustment expenses (“LAE”) on claims which have occurred but are not yet settled. Reserves for loss and loss adjustment expenses fall into two categories: case reserves for reported claims and incurred but not reported reserves (“IBNR”).
IBNR reserves are established to recognize the estimated cost of losses that have occurred but where the Allianz
Group has not yet been notified. IBNR reserves, similar to case reserves for reported claims, are established to recognize the estimated costs, including expenses, necessary to bring claims to final settlement. The Allianz Group relies on its past experience, adjusted for current trends and any other relevant factors to estimate IBNR reserves. IBNR reserves are estimates based on actuarial and statistical projections of the expected cost of the ultimate settlement and administration of claims. The analyses are based on facts and circumstances known at the time, predictions of future events, estimates of future inflation and other societal and economic factors. Trends in claim frequency, severity and time lag in reporting are examples of factors used in projecting the IBNR reserves. IBNR reserves are reviewed and revised periodically as additional information becomes available and actual claims are reported.
There is no adequate statistical data available for some risk exposures in liability insurance, such as environmental and asbestos claims and large-scale individual claims, because some aspects of these types of claims become known very slowly and continue to evolve. Appropriate provisions have been made for such cases based on the Allianz Group’s judgment and analyses of the portfolios in which such risks occur. These provisions represent the Allianz Group’s best estimate. The reserves for loss and loss adjustment expenses for asbestos claims in the United States were reviewed by independent actuaries as of year-end 2005. In addition, operating entities regularly monitor asbestos and environmental claims emergence and trends. Current reserves reflect subsequent loss development and reestimation of initial reserves. An update of the independent asbestos analysis was initiated in 2009 and is expected to be finalized in 2010.
Reserves for insurance and investment contracts and financial liabilities for unit-linked contracts Reserves for insurance and investment contracts include aggregate policy reserves, reserves for premium refunds and other insurance reserves.
The aggregate policy reserves for participating life insurance contracts are computed in accordance with the related insurance accounting provisions under US GAAP using the net level premium method. The method uses assumptions for mortality, morbidity and interest rates that are guaranteed in the contract or used in determining the policyholder dividends (or “premium refunds”). DAC and PVFP for traditional participating insurance products are amortized over the expected life of the contracts in proportion to EGMs based upon historical and anticipated future experience, which is determined on a best estimate basis and evaluated regularly. The present value of EGMs is computed using the expected investment yield. EGMs include premiums, investment income including realized gains and losses, insurance benefits, administration costs, changes in the aggregate reserves and policyholder dividends. The effect of changes in EGMs are recognized in net income in the period revised.
The aggregate policy reserves for universal life-type insurance contracts and unit-linked insurance contracts in accordance with the related insurance accounting provisions under US GAAP 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
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2009 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.
Current and historical client data, as well as industry data, are used to determine the assumptions.
Aggregate policy reserves also consider liabilities for guaranteed minimum death, and similar mortality and morbidity benefits related to non-traditional contracts and annuitization options. These liabilities are calculated based on contractual obligations using actuarial assumptions.
Switzerland Group Life all sources of profit 90 % Individual Life all sources of profit 100 %
Other assets Other assets primarily consist of receivables, prepaid expenses, derivative financial instruments used for hedging that meet the criteria for hedge accounting, and firm commitments, property and equipment and other assets.
Goodwill resulting from business combinations represents the difference between the acquisition cost of the business
Other liabilities Other liabilities include payables, unearned income, provisions, deposits retained for reinsurance ceded, derivative financial instruments for hedge accounting purposes that meet the criteria for hedge accounting and firm commitments, financial liabilities for puttable equity instruments and other liabilities. These liabilities are reported at redemption value.
Separately acquired intangible assets are initially recorded at cost which is usually its purchase price and any directly attributable costs. 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 and its fair value can be measured reliably. Internally generated intangible assets are initially recorded at cost which is the sum of expenditure incurred from the date when the intangible asset first meets the recognition criteria in the development phase.
Similar to goodwill, an intangible asset with an indefinite useful life is subject to an annual impairment test, or more frequently if there is an indication that it is not recoverable. The impairment test includes comparing the recoverable amount to the carrying amount. Where it is not possible to identify separate cash flows for estimating the recoverable amount of an individual asset, the Allianz Group estimates the recoverable amount of the cash generating unit to which
Long-duration contracts are contracts that are non-cancelable and guaranteed renewable and that are expected to remain in force over an extended period of time. Premiums for long-duration contracts are recognized as earned when due. Long-duration contracts can comprise Property-Casualty, Life and Health insurance contracts.
Interest and similar income/expenses Interest income and interest expenses are recognized on an accrual basis. Interest income is recognized using the effective interest method. This line item also includes dividends from available-for-sale equity securities, interest recognized on finance leases and income from investments in associated entities and joint ventures. Dividends are recognized in income when the right to receive the dividend is established. Interest on finance leases is recognized in income over the term of the respective lease so that a constant period yield based on the net investment is attained.
Income from investments in associated entities and joint ventures (net) represents the share of net income from entities accounted for using the equity method.
Income from financial assets and liabilities carried at fair value through income (net) Income from financial assets and liabilities carried at fair value through income includes all investment income, and realized and unrealized gains and losses from financial assets and liabilities carried at fair value through income. In addition, commissions attributable to trading operations and related interest expenses and transaction costs are included in this line item.
Income taxes Income tax expense consists of current taxes on taxable income actually charged to the individual Allianz Group companies and changes in deferred tax assets and liabilities. Expense and income from interest and penalties to or from tax authorities are included in current taxes. The calculation of deferred taxes is based on temporary differences between the Allianz Group’s carrying amounts of assets or liabilities in its consolidated balance sheet and their tax bases, on unused tax credits and on tax loss
Leases Payments made under operating leases to the lessor are charged to administrative expenses using the straight-line method over the period of the lease. When an operating lease is terminated before the lease period has expired, any penalty is recognized in full as an expense at the time when such termination takes place.
For defined benefit plans, the Allianz Group uses the projected unit credit actuarial method to determine the present value of its defined benefit plans and the related service cost and, where applicable, past service cost. The principal assumptions used by the Allianz Group are included in Note 47. The census date for the primary pension plans is October or November, with any significant changes through December 31, taken into account.
Share based compensation plans The share-based compensation plans of the Allianz Group are required to be classified as equity settled or cash settled plans. Equity settled plans are measured at fair value on the grant date and recognized as an expense, with an increase in shareholders’ equity, over the vesting period. Equity settled plans include a best estimate of the number of equity instruments that are expected to vest in determining the amount of expense to be recognized. For cash settled plans, the Allianz Group accrues the fair value of the award as compensation expense over the vesting period. Upon vesting, any change in the fair value of any unexercised awards is recognized as compensation expense. Please see in addition for further details note 3.
Recently adopted accounting pronouncements (effective January 1, 2009 and early adoption)
IFRS 7, Financial Instruments: Disclosures – Amendments enhancing disclosures about fair value and liquidity risk In March 2009, the IASB issued amendments to IFRS 7, Financial Instruments: Disclosures. The amendments improve the disclosure requirements about fair value measurements and reinforce existing principles for disclosures about the liquidity risk associated with financial instruments.
The amendments to IFRS 7 introduce a three-level hierarchy for fair value measurement disclosures and require entities to provide additional disclosures about the relative reliability of fair value measurements. These disclosures will help to improve comparability between entities about the effects of fair value measurements. In addition, the amendments clarify and enhance the existing requirements for the disclosure of liquidity risk. This is aimed at ensuring that the information disclosed enables users of an entity’s financial statements to evaluate the nature and extent of liquidity risk arising from financial instruments and how the entity manages that risk.
The amendments to IFRS 7 apply for annual periods beginning on or after January 1, 2009. However, an entity will not be required to provide comparative disclosures in the first year of application. The Allianz Group disclosed voluntarily the amendments regarding the fair value hierarchy in the 2008 consolidated financial statements and adopted the other amendments in 2009 with no material impact on its financial result or financial position. Due to improvements in the Allianz Group’s guidelines and processes for the determination of the different levels of the fair value hierarchy, some of the prior period figures have been adjusted to be in line with the presented figures for 2009.
Previously, under IAS 14, the Allianz Group reported “Property -Casualty”, “Life/Health”, “Banking”, “Asset Management ” and “Corporate” as primary segments that, where appropriate, were subsequently organized by geographical areas. The implementation of IFRS 8 led to a change in the segment report (Note 6) from prior periods. Based on information reported to the Allianz Group’s chief operating decision maker for the purposes of allocating resources and measuring performance, IFRS 8 reportable segments have been selected on the basis of property-casualty insurance and life/health insurance (both organized by geographic regions), as well as asset management and corporate and
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2009 other activities. Corporate and other activities refer to the Allianz Group’s holding function, banking business and alternative investment operations.
Since the Allianz Group uses operating profit as its internal profit or loss measure, operating profit is included in the segment report. For further details on segment reporting, please refer to Note 6.
The amendment is effective for annual periods beginning on or after January 1, 2010, and early application is permitted. The Allianz Group adopted the amendment in the first quarter 2009. The amendment has not yet been endorsed by the EU, but does not have a material impact on the Allianz Group’s consolidated financial statements.
Presentation of Financial Statements – amended • IFRS 2, Share-based Payment – amended • Improvements to IFRSs issued in May 2008 with an effective date as of January 1, 2009 • Amendments to IFRIC 9 and IAS 39
• IFRIC 13, Customer Loyalty Programmes • IFRIC 15, Agreements for the Construction of Real Estate • IFRIC 16, Hedges of a Net Investment in a Foreign Operation
Recently issued accounting pronouncements (effective on or after January 1, 2010 and not early adopted)
• Acquisition-related costs are generally recognized as expenses and are not included in goodwill.
• Contingent consideration must be recognized and measured at fair value at the acquisition date. Subsequent changes in fair value are recognized in accordance with other IFRSs, usually in profit and loss. Goodwill is no longer adjusted for those changes.
• Transactions with non-controlling interests, i.e., changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control, are accounted for as equity transactions.
• Losses are allocated to a non-controlling interest even if they exceed the non-controlling interest’s share of equity in the subsidiary.
• Any retained non-controlling investment at the date control is lost is remeasured to fair value.
The revised standards apply to annual financial statements for annual 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. Both standards have to be applied together. 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 its consolidated financial statements.
IFRS 9 is effective for annual periods beginning on or after January 1, 2013. The Allianz Group is currently evaluating the impact on its consolidated financial statements.
Improvements to IFRSs issued in May 2008 and April 2009 Various IFRIC 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction – Amendments annual periods beginning on or after January 1, 2011
They are expected to have no material impact on the financial position and financial result of Allianz Group. Early adoption is generally allowed but currently not intended by the Allianz Group.
Changes in accounting policies and changes in the presentation of the consolidated financial statements with impact on the consolidated balance sheets
The categorization has been corrected as of September 30, 2009 and prior periods have been adjusted accordingly. There is no impact on the consolidated income statement since the measurement of both categories is the same and interest payments are shown in “Interest and similar income ” for both held-to-maturity investments and loans and receivables. The line items in the consolidated balance sheet have been adjusted leading to a transfer of the corporate loans from “Investments” to “Loans and advances to banks and customers”.
Changes in accounting policies and changes in the presentation of the consolidated financial statements with impact on the consolidated income statements
Reclassification of expenses for GEI plans In prior years, the Allianz Group accrued the fair value of the awards relating to Group Equity Incentive (“GEI”) plans as compensation expenses over the vesting period. The fair value of the recorded liability is driven by two separate effects being (1) the accrual of the plan benefits over the vesting period and (2) changes in the share price of Allianz SE. In prior years, both effects were included in administrative expenses. The second effect is hedged with derivatives with changes in the fair value of the derivatives recognized in the line item “Income from financial assets and liabilities carried at fair value through income (net)”.
With year-end reporting 2009, the Allianz Group now includes all interests in “Net income (loss)”. The allocation attributable to shareholders and attributable to minority interests is disclosed just below “Net income (loss)”.
Net income (loss) as reported in Annual Report 2008 (attributable to shareholders) (2,444) 7,966 Net income (loss) attributable to minority interests 257 1) 748 1)
Net income (loss) as reported in Annual Report 2009 (attributable to shareholders and minority interests) (2,187) 8,714 1) Comprise minority interests in earnings from continuing operations of € 219 mn (2007: € 675 mn), minority interests in earnings from discontinued operations for the nine months period ended September 30, 2008 of € 43 mn and minority interests in earnings from discontinued operations for the period between October 1, 2008 and December 31, 2008 of € (5) mn (2007: € 73 mn for the full year).
Impact of the changes in accounting policies and changes in presentation on the Allianz Group’s consolidated income statements The following tables summarize the impacts on the consolidated income statements for the years ended December 31, 2008 and 2007 relating to the change in accounting policy for GEI plans, the reclassification within Alternative Investment Management and the reclassification of foreign exchange gains and losses: As previously reported
As reported € mn € mn € mn € mn € mn
Claims and insurance benefits incurred (gross) (48,287) — — — (48,287) Claims and insurance benefits incurred (ceded) 2,628 — — — 2,628 Claims and insurance benefits incurred (net) (45,659) — — — (45,659) Change in reserves for insurance and investment contracts (net) (5,140) — — — (5,140) Interest expenses (1,893) — — — (1,893) Loan loss provisions (59) — — — (59) Impairments of investments (net) (9,495) — — — (9,495)
Premiums written 65,788 — — — 65,788 Ceded premiums written (5,934) — — — (5,934) Change in unearned premiums (492) — — — (492) Premiums earned (net) 59,362 — — — 59,362 Interest and similar income 18,624 — — — 18,624 Income from financial assets and liabilities carried at fair value through income (net) (817) 32 — (163) (948) Realized gains/losses (net) 6,008 — — — 6,008 Fee and commission income 6,553 — — — 6,553 Other income 217 — — — 217 Income from fully consolidated private equity investments 2,367 — — — 2,367
Income from continuing operations before income taxes 10,563 — — — 10,563 Income taxes (2,572) — — — (2,572) Net income from continuing operations 7,991 — — — 7,991 Net income from discontinued operations, net of income taxes 723 — — — 723 Net income 8,714 — — — 8,714
The transfer of ownership of Dresdner Bank to Commerzbank was completed on January 12, 2009 as scheduled. Accordingly, assets and liabilities of Dresdner Bank have been deconsolidated in the first quarter 2009. The loss from derecognition of discontinued operations amounts to € 395 mn and represents mainly the reclassification of components of other comprehensive income to net income.
The following tables show the assets and liabilities of disposal groups classified as held for sale: As of December 31, 2008 € mn
Net income (loss) from discontinued operations for the years ended December 31, 2009, 2008 and 2007, respectively, is comprised of: € mn € mn € mn
Result from operating activities of discontinued operations before income taxes — (1,633) 1,005 Income taxes — (398) (282) Result from operating activities of discontinued operations after income taxes — (2,031) 723
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2009 5 Consolidation
Scope of consolidation In addition to Allianz SE, the consolidated financial statements for the period ended December 31, 2009, generally include all German and foreign operating companies in which Allianz SE directly or indirectly holds a majority of voting rights, or whose activities it can in some other way control. The companies are consolidated from the date on which Allianz SE is able to exercise control.
The companies listed in the table below are consolidated in addition to the parent company Allianz SE.
Number of fully consolidated Special Purpose Entities (“SPE”) 4 59 55 Total of fully consolidated entities 949 1,204 1,289 Number of joint ventures valued at equity 14 10 4 Number of associated entities valued at equity 146 167 218 1) Includes 8 (2008: 10; 2007: 8) 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.
Allianz Hayat ve Emeklilik AŞ, Istanbul 89.0 07/21/2008 Life/Health 81 Increase in equity interest
Components of costs The acquisition of cominvest was part of the consideration received from Commerzbank for the sale of Dresdner Bank on January 12, 2009. The fair value of the cominvest entities was determined to be € 700 mn and was recognized as the cost of this acquisition.
At the date of the acquisition, goodwill reflects to a large extent the strengthening and expansion of the market position of the Allianz Group’s asset management operations. Goodwill has been adjusted largely due to the recognition of separately identified intangible assets.
The impact of Ayudhya on the Allianz Group’s net income for the year ended December 31, 2009 was € 3 mn.
The premiums written of the combined entity (Allianz Group including Ayudhya Allianz C.P. Life Public Company Limited) for the year ended December 31, 2009, would have been € 65,237 mn, if the acquisition date had been on January 1, 2009. The net income of the combined entity for the year ended December 31, 2009, would have been € 4,363 mn if the acquisition date had been on January 1, 2009.
Investments (1,708) Deferred acquisiton costs (PVFP) (230) Other assets (93) Unearned premiums 5 Reserves for insurance and investment contracts 1,973 Other liabilities 26 Minority interests 33 Less: previous investments in Ayudhya 71 Acquisition of subsidiary, net of cash acquired 77 2008 Significant acquisitions
The transfer of ownership of Dresdner Bank to Commerzbank was completed on January 12, 2009. According to the agreement Allianz received a total of € 3.215 bn in cash plus cash and cash equivalents of the Asset Manager cominvest of € 48 mn. The impact of the disposal, net of cash disposed, on the consolidated statement of cash flows for the year ended December 31, 2009 was: € mn
Ayudhya Allianz C.P. Life Public Company Limited On June 29, 2009, the Allianz Group obtained control of the Thai life insurance company Ayudhya Allianz C.P. Life Public Company Limited, Bangkok, by appointing the majority of the members of the board of directors.
The cost of the investment in Ayudhya Allianz C.P. Life Public Company Limited amounts to € 71 mn.
At the date of acquisition the goodwill reflects mainly the market position and growth potential of the Turkish insurance market.
The impact of Allianz Sigorta AŞ and Allianz Hayat ve Emeklilik AŞ on the Allianz Group’s net income for the year ended December 31, 2008 was € 8.3 mn.
The premiums written of the combined entity (Allianz Group including Allianz Hayat and Allianz Sigorta) for the year ended December 31, 2008 would have been € 66,417 mn, if the acquisition date had been on January 1, 2008. The net loss of the combined entity for the year ended December 31, 2008 would have been € 2,187 mn if the acquisition date had been on January 1, 2008.
The impact of the acquisition, net of cash acquired, on the consolidated statement of cash flows for the year ended December 31, 2008 was: € mn
Russian People’s Insurance Society “ROSNO”, Moscow In addition to the already owned shares of 47.4 %, the Allianz Group acquired on February 21, 2007 49.8 % of Russian People´s Insurance Society “ROSNO”, Moscow (“ROSNO”) at a purchase price of € 572 mn. In 2008, additional 2.6 % of the shares were acquired (see table: “Acquisitions and disposals of significant minority interests”). ROSNO is the second largest insurance company in Russia which offers products in the business segments Property-Casualty, Life/Health and Asset Management.
At the date of acquisition the goodwill reflects mainly the market position and growth potential of the Russian insurance market.
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.
Cash and cash equivalents 53 53 Other assets 404 360 Intangible assets 683 46 Total assets 1,140 459 Other liabilities 448 230 Total equity 692 229 Total liabilities and equity 1,140 459
DEGI Deutsche Gesellschaft für Immobilienfonds mbH, Frankfurt am Main 94.0 01/01/2008 103 Corporate and Other
— Sale to third party 1) For further details please see Note 4.
Asset Management The reportable segment Asset Management operates as a global provider of institutional and retail asset management products and services to third-party investors and provides investment management services to the Allianz Group’s insurance operations. The products for retail and institutional customers include equity and fixed income funds as well as alternative products. The United States and Germany as well as France, Italy and the Asia-Pacific region represent the primary asset management markets.
The Allianz Group uses operating profit to evaluate the performance of its business segments and the Group as a whole. Operating profit highlights the portion of income before income taxes attributable to the ongoing core operations of the Allianz Group. The Allianz Group considers the presentation of operating profit to be useful and meaningful to investors because it enhances the understanding of the Allianz Group’s underlying operating performance and the comparability of its operating performance over time.
The definitions for non-operating income from financial assets and liabilities held for trading (net), realized gains/ losses (net) and impairments of investments (net) state the general treatment in the segments. However, there are special cases which are different from this general treatment: • Property-Casualty insurance business: the line items are generally booked within the non-operating items; they can be classified as operating items if they are shared with the policyholders, which occurs in the context of an casualty insurance product with premium refunds issued in the German market.
Recent Organizational Changes For the year ended December 31, 2009, the Allianz Group has reorganized the structure of its non-insurance activities. In order to better reflect the nature and effects of the Allianz Group’s business activities, non-insurance activities are organized on the basis of asset management activities and corporate and other activities, with the latter one consisting of three reportable segments: Holding & Treasury, Banking and Alternative Investments. Previously reported information has been restated to reflect this change in the composition of the Allianz Group’s reportable segments.
ASSETS Cash and cash equivalents 2,281 2,669 2,478 4,827 Financial assets carried at fair value through income 2,100 1,998 11,269 11,739 Investments 80,401 74,982 213,036 186,040 Loans and advances to banks and customers 16,325 18,229 100,316 91,373 Financial assets for unit-linked contracts — — 56,963 50,450 Reinsurance assets 8,885 9,442 4,691 5,178 Deferred acquisition costs 3,789 3,723 16,685 18,693 Deferred tax assets 1,329 1,579 316 737 Other assets 19,980 23,876 16,024 18,085 Non-current assets and assets of disposal groups classified as held for sale — — — — Intangible assets 2,361 2,384 2,306 2,300
Business Segment Information – Total revenues and reconciliation of Operating profit (loss) to Net income (loss)
Non-operating income from financial assets and liabilities carried at fair value through income (net) (45) 44 (100) (22) (26) 5 Non-operating realized gains/losses (net) 732 2,349 1,433 63 (39) 137 Income from fully consolidated private equity investments (net) — — — — (2) — Interest expenses from external debt — — — — — — Non-operating impairments of investments (net) (519) (2,012) (276) (76) (414) (3) Acquisition-related expenses — — — — — — Amortization of intangible assets (21) (17) (14) (3) (3) (3) Non-operating restructuring charges (69) (75) (122) (19) (51) (29) Reclassification of tax benefits — — — — — — Non-operating items 78 289 921 (57) (535) 107
Income (loss) from continuing operations before income taxes 4,142 5,936 7,261 2,751 673 3,102 Income taxes (1,363) (1,489) (1,656) (704) (260) (897) Net income (loss) from continuing operations 2,779 4,447 5,605 2,047 413 2,205 Net income (loss) from discontinued operations, net of income taxes — — — — — — Net income (loss) 2,779 4,447 5,605 2,047 413 2,205
German Speaking Countries Europe I incl. South America Europe II incl. Africa 1)
Loss ratio 2) in % 70.8 69.5 67.4 72.9 71.4 70.3 73.6 68.4 64.5 Expense ratio 3) in % 27.0 25.6 25.5 24.7 24.2 24.0 30.2 29.9 29.1 Combined ratio 4) in % 97.8 95.1 92.9 97.6 95.6 94.3 103.8 98.3 93.6 1) Corporate customer business in France transferred to AGCS in 2009. Prior year balances have not been adjusted. 2) Represents claims and insurance benefits incurred (net) divided by premiums earned (net). 3) Represents acquisition and administrative expenses (net) divided by premiums earned (net).
4) Represents the total of acquisition and administrative expenses (net) and claims and insurance benefits incurred (net) divided by premiums earned (net). 5) Presentation not meaningful.
Anglo Broker Markets/ Global Lines 1) Growth Markets Consolidation Property-Casualty € mn € mn € mn € mn € mn € mn € mn € mn € mn € mn € mn € mn
German Speaking Countries Europe I incl. South America Europe II incl. Africa € mn € mn € mn € mn € mn € mn € mn € mn € mn
Statutory premiums 1) 20,036 18,273 18,023 10,015 7,287 10,801 8,711 9,164 7,731 Ceded premiums written (196) (205) (340) (93) (102) (118) (261) (271) (114) Change in unearned premiums (78) (34) (1) 46 85 (19) 14 (69) 82 Statutory premiums (net) 19,762 18,034 17,682 9,968 7,270 10,664 8,464 8,824 7,699 Deposits from insurance and investment contracts (5,576) (3,846) (3,458) (8,536) (5,595) (9,080) (5,054) (5,416) (5,451) Premiums earned (net) 14,186 14,188 14,224 1,432 1,675 1,584 3,410 3,408 2,248 Interest and similar income 7,501 7,628 7,318 1,334 1,344 1,284 2,535 2,476 2,629 Operating income from financial assets and liabilities carried at fair value through income (net) 5 2,018 (899) 1 37 8 359 (997) 105 Operating realized gains/losses (net) 1,104 312 2,416 49 (4) 58 564 573 1,082 Fee and commission income 27 44 38 289 339 363 89 82 55 Other income 12 112 147 — 3 3 3 3 15 Operating revenues 22,835 24,302 23,244 3,105 3,394 3,300 6,960 5,545 6,134
Claims and insurance benefits incurred (net) (13,408) (13,797) (12,839) (1,673) (1,716) (1,633) (2,884) (2,733) (1,893) Changes in reserves for insurance and investment contracts (net) (5,062) (3,697) (6,857) (151) (143) (242) (1,344) 306 (1,927) Interest expenses (126) (162) (252) (12) (15) (16) (39) (157) (143) Loan loss provisions (14) (10) — — (1) — 1 1 — Operating impairments of investments (net) (1,168) (3,863) (662) (87) (318) (6) (340) (1,262) (117) Investment expenses (361) (340) (393) (29) (35) (38) (162) (168) (158) Acquisition and administrative expenses (net) (1,759) (1,572) (1,225) (610) (686) (701) (1,381) (1,312) (1,127) Fee and commission expenses (25) (41) (33) (145) (153) (157) (36) (33) (18) Operating restructuring charges (15) 1 (16) — — — — — — Other expenses — — (1) — — — — — (1)
Operating expenses 1) Statutory premiums are gross premiums written from sales of life and health insurance policies, as well as gross receipts from sales of unit-linked and other investment-oriented products, in accordance with the statutory accounting practices applicable in the insurer’s home jurisdiction.
Reportable segments – Asset Management business € mn € mn € mn
Holding & Treasury Banking € mn € mn € mn € mn € mn € mn
Interest expenses, excluding interest expenses from external debt (445) (648) (542) (395) (677) (559) Loan loss provisions — — — (48) (29) (5) Investment expenses (81) (150) (164) — — — Administrative expenses (net), excluding acquisition-related expenses (574) (531) (615) (634) (554) (589) Fee and commission expenses (195) (9) (3) (200) (193) (233) Other expenses — — — (2) (3) (2) Operating expenses (1,295) (1,338) (1,324) (1,279) (1,456) (1,388)
1) Represents investment expenses, administrative expenses (net), excluding acquisition-related expenses and other expenses divided by interest and similar income, operating income from financial assets and liabilities carried at fair value through income (net), fee and commission income, other income, interest expenses, excluding interest expenses from external debt and fee and commission expenses.
Available-for-sale investments 279,045 242,099 Held-to-maturity investments 3,475 3,599 Funds held by others under reinsurance contracts assumed 1,193 1,039 Investments in associates and joint ventures 3,025 4,524 Real estate held for investment 7,514 7,551
Debt securities Government and agency mortgage-backed securities (residential and commercial) 8,202 209 (53) 8,358 7,814 177 (2) 7,989 Corporate mortgage-backed securities (residential and commercial) 8,116 76 (444) 7,748 8,714 14 (1,417) 7,311
Unrealized losses on available-for-sale investments and held-to-maturity investments The following table sets forth gross unrealized losses on available-for-sale investments and held-to-maturity invest-
As of December 31, € mn € mn € mn € mn € mn € mn
Government and government agency bonds Total unrealized losses amounted to € 671 mn as of December 31, 2009. The Allianz Group holds a large variety of government bonds, mostly of OECD countries (Organization of Economic Cooperation and Development). Given the fact that the issuers of these bonds are backed by the fiscal capacity of the issuers and the issuers typically hold an “investment grade” country- and/or issue-rating, credit risk is not a significant factor. Hence, the unrealized losses on Allianz Group’s investment in government bonds were mainly caused by interest rate increases between the purchase date of the individual securities and the balance sheet date. As the unrealized loss is attributable to changes in interest rates in prior years and, to a lesser extent, to instances of insignificant deterioration of credit quality, the Allianz Group does not consider these investments to be impaired at December 31, 2009.
Equity securities As of December 31, 2009, unrealized losses from equity securities amounted to € 150 mn. These unrealized losses concern equity securities that did not meet the criteria of Allianz Group’s impairment policy for equity securities as described in Note 2. Substantially all of the unrealized losses have been in a continuous loss position for less than 6 months.
Contractual term to maturity The amortized cost and estimated fair value of availablefor -sale debt securities and held-to-maturity debt securities as of December 31, 2009, by contractual term to maturity, are as follows: Amortized Cost
Actual maturities may deviate from the contractually defined maturities, because certain security issuers have the right to call or repay certain obligations ahead of schedule, with or without redemption or early repayment penalties. Investments that are not due at a single maturity date are, in general, not allocated over various maturity buckets, but are shown within their final contractual maturity dates.
Investments in associates and joint ventures As of December 31, 2009, loans to associated enterprises and joint ventures and available-for-sale debt securities issued by associated enterprises and joint ventures held by the Allianz Group amounted to € 114 mn (2008: € 73 mn). As of December 31, 2009, the fair value of investments in associates and joint ventures was € 3,045 mn (2008: € 4,560 mn).
Real estate held for investment € mn € mn € mn
Changes in the consolidated subsidiaries of the Allianz Group — 14 3
Reclassifications out of/(into) non-current assets and assets of disposal groups classified as held for sale — (62) (1,382) Foreign currency translation adjustments 14 93 (92)
Loans and advances to banks 11,190 7,097 10,528 10,392 45,541 84,748 Loans and advances to customers 2,185 2,914 5,300 6,502 27,491 44,392
Loans and advances to customers (prior to loan loss allowances) by economic sector
Additions charged to the consolidated income statements 212 118 537 3 3 35 215 121 572 Unwinding interest income 1) — — (8) — — — — — (8)
Reclassifications to non-current assets and assets of disposal groups classified as held for sale — (721) — — (192) — — (913) —
The following table presents information relating to the Allianz Group’s impaired loans: As of December 31, 2009 2008 € mn € mn
Unearned premiums 1,424 1,294 Reserves for loss and loss adjustment expenses 7,456 8,180 Aggregate policy reserves 4,613 5,018 Other insurance reserves 66 107
The Allianz Group reinsures a portion of the risks it underwrites in an effort to control its exposure to losses and events and protect capital resources. In general international corporate and specialty business is either underwritten directly or assumed by Allianz Global Corporate & Specialty (“AGCS”) from other Allianz Group’s subsidiaries. AGCS buys global reinsurance cover in the external reinsurance market, other parts are reinsured internally by Allianz SE. The Allianz Group maintains a centralized program for natural catastrophe events that pools exposures from a number of subsidiaries by internal reinsurance agreements with Allianz SE. Allianz SE limits exposures in this portfolio through external reinsurance. For other risks, the subsidiaries of the Allianz Group maintain individual reinsurance programs. Allianz SE participates as a reinsurer on an arms’ length basis in these programs.
Deferred acquisition costs Property-Casualty 3,789 3,721 Life/Health 14,748 16,709 Asset Management 149 147
Changes in the consolidated subsidiaries of the Allianz Group — (13) 66 Foreign currency translation adjustments 54 (85) (72)
Changes in the consolidated subsidiaries of the Allianz Group — 18 — Foreign currency translation adjustments (62) 53 (555)
Carrying amount as of December 31, 14,748 16,709 14,118 1) For the year ended December 31, 2009, consists of amortization of € (2,491) mn (2008: € (1,240) mn; 2007: € (1,577) mn) and of changes of shadow accounting of € (1,693) mn (2008: € 1,360 mn; 2007: € (18) mn).
Present value of future profits € mn € mn € mn
As of December 31, 2009, the percentage of PVFP that is expected to be amortized in 2010 is 13.23 % (12.76 % in 2011, 11.87 % in 2012, 10.51 % in 2013 and 9.49 % in 2014).
Carrying amount as of December 31, 725 747 520 1) For the year ended December 31, 2009, consists of amortization of € (117) mn (2008: € 10 mn; 2007: € (52) mn) and of changes of shadow accounting of € (141) mn (2008: € 98 mn; 2007: € (2) mn).
Fixed assets of Alternative Investments 822 419 1) As of December 31, 2009, includes prepaid benefit costs for defined benefit plans of € 276 mn (2008: € 256 mn).
Reclassifications out of/(into) non-current assets and assets of disposal groups classified as held for sale 4 (902) (574) Foreign currency translation adjustments 31 (40) (47)
Reversals of impairments — 11 1 Carrying amount as of December 31, 2,916 3,122 3,708 Accumulated depreciation as of December 31, 1,092 1,014 1,139 Cost as of December 31, 4,008 4,136 4,847
Cost as of January 1, 3,400 3,946 3,764 Accumulated amortization as of January 1, (2,284) (2,781) (2,686) Carrying amount as of January 1, 1,116 1,165 1,078
2) As of December 31, 2009, includes € 812 mn (2008: € 701 mn; 2007: € 746 mn) for software developed inhouse and € 485 mn (2008: € 415 mn; 2007: € 419 mn) for software purchased from third parties.
Changes in the consolidated subsidiaries of the Allianz Group 6 (48) (3)
Carrying amount as of December 31, 803 823 1,313 Accumulated depreciation as of December 31, 2,508 2,279 2,876 Cost as of December 31, 3,311 3,102 4,189 1) Includes in 2008 equipment of Dresdner Bank.
Allianz Group Annual Report 2009 Notes to the Consolidated Financial Statements 14 Non-current assets and assets and liabilities of disposal groups classified as held for sale
Total — 419,513 Liabilities of disposal groups classified as held for sale
Dresdner Bank Group As described in Note 4, the sale of Dresdner Bank was completed on January 12, 2009. Accordingly, assets and liabilities of Dresdner Bank were deconsolidated in the first quarter 2009.
Selecta AG Given the market environment in the first half of 2009 the intended sale of Selecta has been deferred in order to optimise investment proceeds.
As a result, firstly the assets and liabilities of Selecta were re classified from “non-current assets and assets and liabilities of disposal groups classified as held for sale” as of June 30, 2009 based on their original IFRS presentation.
Secondly, the non-current assets of Selecta were remeasured at the date of reclassification to reflect the carrying amounts the assets would have had in the absence of the held for sale classification from the end of the fourth quarter 2007 until the end of the second quarter 2009. This resulted in depreciation and amortization expenses net of deferred income taxes of € 120 mn.
Cost as of January 1, 538 426 231 Accumulated depreciation as of January 1, (119) (73) (13) Carrying amount as of January 1, 419 353 218
Carrying amount as of December 31, 822 419 353 Accumulated depreciation as of December 31, 330 119 73 Cost as of December 31, 1,152 538 426 1) Includes fixed assets of wind parks, manroland and Selecta. 2) Includes fixed assets of Selecta.
2) Includes primarily research and development costs of € 81 mn (2008: € 97 mn) and bancassurance agreements of € 14 mn (2008: € 16 mn).
Amortization expense of intangible assets with finite useful lives is estimated to be € 74 mn in 2010, € 71 mn in 2011, € 63 mn in 2012, € 62 mn in 2013 and € 62 mn in 2014.
Cost as of January 1, 11,445 12,677 12,368 Accumulated impairments as of January 1, (224) (224) (224) Carrying amount as of January 1, 11,221 12,453 12,144
Foreign currency translation adjustments (113) 32 (372) Impairments (53) — — Reclassification out of/(into) non-current assets and assets of disposal groups classified as held for sale 491 (1,511) (472) Carrying amount as of December 31, 12,014 11,221 12,453 Accumulated impairments as of December 31, 277 224 224 Cost as of December 31, 12,291 11,445 12,677
2007 The reclassification affects the goodwill of Selecta AG, Muntelier, as this subsidiary was reclassified to disposal groups held for sale.
The Allianz Group has allocated goodwill to nine cash generating units in the Property-Casualty segment, six cash generating units in the Life/Health segment, one cash generating unit in the Asset Management segment and two cash generating units in the Corporate and Other segment.
Cash generating units of the Property-Casualty segment are: • German Speaking Countries, • Europe I & II, including France, Netherlands, Belgium, Luxembourg, Italy, Spain, Portugal, Greece, Turkey and Africa, • South America, • Asia-Pacific & Middle East, • New Europe, including Bulgaria, Croatia, Czech Republic,
• Specialty Lines I, including Allianz Global Corporate & Specialty and Credit Insurance,
Cash generating units of the Corporate and Other segment are: • Banking, • Alternative Investments.
The recoverable amounts of all cash generating units are determined on the basis of value in use calculations. The Allianz Group applies generally acknowledged valuation principles to determine the value in use. In this regard, the Allianz Group utilizes the capitalized earnings method to derive the value in use for all cash generating units in the Property-Casualty segment as well as for the cash generating units Asset Management, Health Germany, Alternative Investments and Banking.
The discount rates and eternal growth rates for the significant cash generating units are as follows: Discount rate
Property-Casualty German Speaking Countries 7.6 1.5 Europe I & II 8.0 1.5 South America 14.3 3.0 Asia-Pacific & Middle East 9.7 3.0 New Europe 11.9 4.0 Global Insurance Lines & Anglo Markets 8.3 1.5 NAFTA Markets 7.8 1.5 Specialty Lines I 7.8 1.0 Specialty Lines II 7.9 2.0
For all cash generating units in the Life/Health segment, with the exception of the U.S., the fair value for the goodwill impairment test is based on an Appraisal Value which is derived from the Market Consistent Embedded Value, and a multiple of the Market Consistent Value of new business.
The Market Consistent Embedded Value is an industry specific valuation method to determine the fair value of the current in-force portfolio and is in compliance with the general principles of the discounted earnings methods. The Market Consistent Embedded Value approach utilized is based on the Allianz Group’s Embedded Value guidelines.
The brand name “Dresdner Bank” was reclassified to held for sale and separately tested for impairment according to IFRS 5.
The carrying amounts of goodwill and brand names allocated to Allianz Group’s cash generating units as of December 31, 2009 and 2008 are as follows: As of December 31, 2009 2008
Cash generating units € mn € mn € mn € mn
The customer relationships of cominvest and Selecta have useful lives of 4 years and 10 years, which were determined by average customer retention period for German mutual funds and by the multi-period excess earnings method. They are amortized on a straight line basis over the remaining useful lives of 3 years and 7.5 years.
Financial liabilities held for trading Derivative financial instruments 6,660 6,242 Other trading liabilities 83 2
Term deposits and certificates of deposit 1,188 2,185 3,373 1,296 3,035 4,331
Collateral received from securities lending transactions 44 — 44 627 — 627
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2009 18 Unearned premiums
Reserves for loss and loss adjustment expenses (net) 45,480 49,655 49,331 48,677 47,796 48,540 Reserves for loss and loss adjustment expenses (ceded) 10,049 10,604 9,333 8,266 7,820 7,175 Reserves for loss and loss adjustment expenses (gross) 55,529 60,259 58,664 56,943 55,616 55,715 Paid (cumulative) as of
Three years later 42,293 43,695 43,375 Four years later 41,315 43,183 Five years later 41,187 Cumulative surplus
Gross surplus after changes in the consolidated subsidiaries of the Allianz Group 2) 5,514 8,316 7,817 4,388 1,355
Net surplus after changes in the consolidated subsidiaries of the Allianz Group 2) 4,293 6,473 5,956 3,006 531 Net surplus as percentage of initial reserves 9.4 % 13.0 % 12.1 % 6.2 % 1.1 %
1) Gross/Net surplus represents the cumulative surplus from re-estimating the reserves for loss and loss adjustment expenses for prior years claims and includes foreign currency translation adjustments of gross € 607 mn (2008: € 313 mn) and net € 536 mn (2008: € 284 mn). This leads to an effective run off result excluding effects of foreign currency translation of gross € 1,962 mn (2008: € 2,241 mn) and net € 1,067 mn (2008: € 1,443 mn) which can be found in the table for changes in the reserves for loss and loss adjustment expenses within this section. Please note that the 2008 numbers refer to the surplus presented in the consolidated financial statements 2008 and not the cumulative surplus of the calendar year 2008 presented in the table above.
2) Three major reclassifications occurred in 2008 in which the accident and health unit of AGF IART and the health unit from AZ Belgium were transferred from the Property-Casualty segment into the Life/Health segment and the AGF Brazil health unit was transferred from the Life/Health segment into the Property-Casualty segment, accounting for the € 1,458 mn gross effect and € 1,371 mn net effect in 2008. The effect on the liability re-estimated consists of effects on paid and unpaid losses for prior years in the year of the transaction, while the effect of (divestitures)/acquisitions presented in the table “Changes in the reserves for loss and loss adjustment expenses” states the total amount of loss reserves being deconsolidated or consolidated for the first time.
Aggregate policy reserves 297,112 278,700 Reserves for premium refunds 24,430 17,195 Other insurance reserves 646 662
Traditional long-duration insurance contracts € mn € mn € mn € mn
Foreign currency translation adjustments 5 262 390 (929) Changes in the consolidated subsidiaries of the Allianz Group — 1,942 — 266 Changes recorded in consolidated income statements 1,933 736 1,187 828 Dividends allocated to policyholders 1,193 311 1,153 244 1) For the year ended December 31, 2009, consists of changes of shadow accounting of € 87 mn (2008: € (135) mn).
Changes in aggregate policy reserves for universal life-type insurance contracts and non-unit-linked investment contracts for the years ended December 31, 2009 and 2008 were as follows: Universal life-type insurance contracts
Non-unit-linked investment contracts € mn € mn € mn € mn
As of December 31, 2009, participating life business represented approximately 62 % (2008: 65 %) of the Allianz Group’s gross insurance in-force. During the year ended December 31, 2009, participating policies represented approximately 64 % (2008: 64 %) of gross statutory premiums written and 63 % (2008: 64 %) of life premiums earned. As of December 31, 2009, reserves for conventional participating policies were approximately 51 % (2008: 54 %) of the Allianz Group’s consolidated aggregate policy reserves.
Concentration of insurance risk in the Life/Health segment The Allianz Group’s Life/Health segment provides a wide variety of insurance and investment contracts to individuals and groups in approximately 30 countries around the world. Individual contracts include both traditional contracts and unit-linked contracts. Without consideration of policyholder participation, traditional contracts generally incorporate significant investment risk for the Allianz Group. Traditional contracts include life, endowment, annuity, and health contracts. Traditional annuity contracts are issued in both deferred and immediate types. In addition, the Allianz Group’s life insurance operations in the United States issue a significant amount of equity indexed deferred annuities. Unit-linked contracts generally result in the contract holder assuming investment risk. In addition, in certain markets, the Allianz Group issues contracts for group life, group health and group pension products.
Other Western and Southern Europe 335 2,228 12 6 2,246 3,964 6,210
A majority of the Allianz Group’s Life/Health segment operations is conducted in Western Europe. Insurance laws and regulations in Western Europe have historically been characterized by legal or contractual minimum participation of contract holders in the profits of the insurance company issuing the contract. In particular, Germany, Switzerland and Austria, which comprise approximately 49 % and 48 %, of the Allianz Group’s reserves for insurance and investment contracts as of December 31, 2009 and 2008, respectively, include a substantial level of policyholder participation in all sources of profit including mortality/morbidity, investment and expense. As a result of this policyholder participation, the Allianz Group’s exposure to insurance, investment and expense risk is mitigated.
Furthermore, all of the Allianz Group’s annuity policies issued in the United States meet the criteria for classification as insurance contracts under IFRS 4, because they include options for contract holders to elect a life-contingent annuity. These contracts currently do not expose the Allianz Group to significant longevity risk, nor are they expected to do so in the future, as the projected and observed annuitization rates are very low. Additionally, many of the Allianz Group’s traditional contracts issued in France and Italy do not incorporate significant insurance risk, although they are accounted for as insurance contracts, because of their discretionary participation features. Similarly, a significant portion of the Allianz Group’s unit-linked contracts in France and Italy do not incorporate significant insurance risk.
Changes in financial liabilities for unit-linked insurance contracts and unit-linked investment contracts for the years ended December 31, 2009 and 2008 were as follows: Unitlinked
Foreign currency translation adjustments (233) 14 697 (15) Changes in the consolidated subsidiaries of the Allianz Group — — — 152
Allianz Group Annual Report 2009 Notes to the Consolidated Financial Statements 23 Certificated liabilities
Contractual interest rate — — — — — 2.11 % — —
Allianz SE, which are fully and unconditionally guaranteed by Allianz SE.
Contractual interest rate — — — — — 7.26 % — —
Contractual interest rate — — — — — 3.64 % — —
2) Includes subordinated bonds issued by Allianz Finance II B.V. and guaranteed by Allianz SE. 3) With effect of December 31, 2009, the profit participation certificates issued by Allianz SE have been called for redemption pursuant to Section 6 para. 4 of the conditions of the profit participation certificates. As of January 4, 2010, holders received a cash compensation of € 103.32 for each profit participation certificate of € 5.12 nominal value. As of December 31, 2009, the balance sheet line item “participation certificates and subordinated liabilities” includes the total cash compensation payable for the 1,175,554 outstanding profit participation certificates.
Minority interests 2,121 3,564 1) As of December 31, 2009, includes € 187 mn (2008: € 203 mn) related to cash flow hedges.
Total number of issued shares 453,900,000 453,050,000 450,150,000 1) Treasury shares held for trading purposes in prior periods by Dresdner Bank are considered outstanding for the year 2009.
In April 2007, 16,974,357 new Allianz SE shares were issued for the execution of the minority buy-out of AGF shares. The increase in share capital due to the minority buyout of AGF amounts to € 43 mn; the additional paid-in capital increased by € 2,722 mn.
Dividends For the year ended December 31, 2009, the Board of Management will propose to shareholders at the Annual General Meeting the distribution of a dividend of € 4.10 per qualifying share. For the years ended December 31, 2008 and 2007, Allianz SE paid a dividend of € 3.50 and € 5.50, respectively, per qualifying share.
Capital requirements The Allianz Group’s capital requirements are primarily dependent on the growth and the type of business that it underwrites, as well as the industry and geographic locations in which it operates. In addition, the allocation of the Allianz Group’s investments plays an important role. During the Allianz Group’s annual planning dialogues with its operating entities, capital requirements are determined through business plans regarding the levels and timing of capital expenditures and investments. Regulators impose minimum capital rules on the level of both the Allianz Group’s operating entities and the Allianz Group as a whole.
3) Available funds and requirement as of December 31, 2008, including discontinued operations, were adjusted to reflect a pro-forma view, assuming the completion of the Dresdner Bank transaction prior to year end of 2008. For example, the Allianz Group removed hybrid capital related to Dresdner Bank from available funds and adjusted the deduction of goodwill and other intangible assets. Furthermore, the Allianz Group deleted the requirement of the discontinued operations.
Allianz Group Annual Report 2009 Notes to the Consolidated Financial Statements 26 Premiums earned (net) – continued
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2009 28 Income from financial assets and liabilities carried at fair value through income (net)
Income (expenses) from financial assets and liabilities held for trading (net) (23) (504) 5 293 4 (225) Income (expenses) from financial assets and liabilities designated at fair value through income (net) 158 1,499 106 19 — 1,782 Income (expenses) from financial liabilities for puttable equity instruments (net) (31) (400) (71) (4) — (506) Foreign currency gains and losses (net) (31) 99 — (165) — (97)
Income (expenses) from financial assets and liabilities held for trading (net) 89 1,098 — (66) (69) 1,052 Income (expenses) from financial assets and liabilities designated at fair value through income (net) (112) (2,108) (236) (24) — (2,480) Income (expenses) from financial liabilities for puttable equity instruments (net) 29 765 166 1 — 961 Foreign currency gains and losses (net) 47 (90) (1) 166 4 126
Life/Health Segment Income from financial assets and liabilities held for trading for the year ended December 31, 2009 includes in the Life/ Health segment expenses of € 536 mn (2008: income of € 1,160 mn; 2007: expenses of € 1,352 mn) from derivative financial instruments. This includes expenses of € 165 mn (2008: income of € 2,257 mn; 2007: expenses of € 764 mn) of German entities from financial derivative positions to protect against equity and foreign exchange rate fluctuations as well as for duration management. Also included are expenses from U.S. entities amongst others from embedded derivatives required to be separated related to equity indexed annuity contracts and guaranteed benefits under unit-linked contracts of € 248 mn (2008: € 1,302 mn; 2007: € 620 mn)
Corporate and Other Segment Income from financial assets and liabilities held for trading for the year ended December 31, 2009, includes in the Corporate and Other segment income of € 317 mn (2008: expenses of € 173 mn; 2007: expenses of € 12 mn) from derivative financial instruments. This includes income of € 84 mn (2008: expenses of € 11 mn; 2007: income of € 63 mn) from financial derivative instruments to protect investments and liabilities against foreign exchange rate fluctuations. Additionally, income from financial derivative instruments embedded in exchangeable bonds of € — mn (2008: € 133 mn; 2007: expenses of € 222 mn) and expenses from derivative financial instruments of € — mn (2008: € 7 mn; 2007: income of € 164 mn) which partially hedge the exchangeable bonds, however which do not qualify for hedge accounting, are included. Financial derivatives in the context of hedging strategies which did not qualify for hedge accounting induced expenses of € 182 mn (2008: income of € 420 mn; 2007: expenses of € 13 mn). The impact of financial derivatives in the context of investment strategies amounted to an income of € 370 mn (2008: expenses of € 118 mn). Additionally, income from financial assets and liabilities held for trading for the year ended December 31, 2009 includes expenses of € 36 mn (2008: income of € 110 mn; 2007: income of € 31 mn) from the hedges of share based compensation plans (restricted stock units).
Allianz Group Annual Report 2009 Notes to the Consolidated Financial Statements 29 Realized gains/losses (net)
Investments in associates and joint ventures 1) 26 158 197 Real estate held for investment 206 268 371 Loans to banks and customers 150 101 52
1) During the year ended December 31, 2009, includes realized gains from the disposal of subsidiaries and businesses of € 14 mn (2008: € 143 mn; 2007: € 164 mn).
Foreign currency gains and losses (net) Foreign currency gains and losses are reported within income from financial assets and liabilities carried at fair value through income (net). These foreign currency gains and losses arise subsequent to initial recognition on all assets and liabilities denominated in a foreign currency, excluding exchange differences arising on financial assets and liabilities measured at fair value through profit or loss, which do not have to be disclosed separately. The Allianz Group is substantially hedged against foreign currency fluctuations with freestanding derivatives resulting in an offsetting effect of € 89 mn in 2009.
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2009 30 Fee and commission income
Property-Casualty Fees from credit and assistance business 663 — 663 769 (2) 767 703 (2) 701
Investment advisory — — — 8 — 8 — — —
Allianz Group Annual Report 2009 Notes to the Consolidated Financial Statements 31 Other income € mn € mn € mn
Income from non-current assets and disposal groups held for sale — — 4 32 Income and expenses from fully consolidated private equity investments € mn € mn € mn
General and administrative expenses (704) (481) (324) Other operating expenses (159) (96) —
Net Claims and insurance benefits paid (24,885) (17,547) — (42,432) Change in loss and loss adjustment expenses (600) (90) — (690)
Commissions and profit received on reinsurance business ceded 79 (1) 78 83 — 83 146 — 146
Property-Casualty Fees from credit and assistance business (594) — (594) (606) — (606) (615) 1 (614)
Realized losses from disposals of real estate held for own use — (1) (4) Impairments of real estate held for own use — (9) (10)
Allianz Group Annual Report 2009 Notes to the Consolidated Financial Statements 42 Income taxes € mn € mn € mn
For the years ended December, 31, 2009, 2008 and 2007, the income taxes relating to components of the other comprehensive income consist of the following: € mn € mn € mn
During the year ended December, 31, 2009, current income tax expense included an income of € 320 mn (2007: an expense of € 6 mn; 2007: an income of € 20 mn) related to prior years.
In 2009, decisions of the European Court of Justice (Steko case) and the German Federal Tax Court (BFH) effected that impairments recognized in 2001 on certain investments are considered tax deductible. These court decisions lead to an income for the Group of € 283 mn and for the policyholders of € 730 mn. The tax benefit from these court decisions consists of current and deferred taxes in respect of current and previous years.
Expected income tax expense 1,595 1,599 3,129 Trade tax and similar taxes 150 166 405 Net tax exempt income (599) (469) (592) Effects of tax losses (59) 28 (17) Effects of German tax law changes — — (291)
In the tax reconciliation for 2009, the other effects of € (499) mn include € (505) mn current and deferred taxes for prior years, a major part resulting from the court decisions (Steko/BFH) mentioned above. The effects of German tax law changes stem in 2007 from a decrease in tax rates due to German corporate tax reform.
The tax rates used in the calculation of the Allianz Group deferred taxes are the applicable national rates, which in 2009 ranged from 10.00 % to 42.05 %. Changes to tax rates already adopted on December 31, 2009, are taken into account.
Deferred acquisition costs 3,922 4,531 Other assets 573 680 Intangible assets 346 115 Insurance reserves 2,552 2,465 Pensions and similar obligations 203 226 Other liabilities 728 1,044 Total deferred tax liabilities 12,026 12,201 Effect of netting (8,121) (8,368) Net deferred tax liabilities 3,905 3,833 Net deferred tax assets/(liabilities) (1,186) 163
Taxable temporary differences associated with investments in Allianz Group companies, for which no deferred tax liabilities are recognized because the Allianz Group is able to control the timing of their reversal and they will not reverse in the foreseeable future, amount to € 418 mn (2008: € 267 mn). Deductible temporary differences arising from investments in Allianz Group companies, for which no deferred tax assets are recognized because it is not probable that they reverse in the foreseeable future amount to € 253 mn (2008: € 219 mn).
Insurance subsidiaries in the Allianz Group use derivatives to manage the risk exposures in their investment portfolios based on general thresholds and targets. The most important purpose of these instruments is hedging against adverse market movements for selected securities or for parts of a portfolio. Specifically, the Allianz Group selectively uses derivative financial instruments such as swaps, options and forwards to hedge against changes in prices or interest rates in their investment portfolio.
Exchange traded Swaps — — 35 35 15 — — — —
Cash flow hedges During the year ended December 31, 2009, cash flow hedges were used to hedge variable cash flows exposed to interest rate and exchange rate fluctuations. As of December 31, 2009, the derivative instruments utilized had a positive fair value of € 43 mn (2008: € 31 mn). Unrealized gains and losses (net) in shareholders’ equity decreased by € 16 mn (2008: increased by € 28 mn).
The fair value of a financial instrument is defined as the amount for which a financial asset could be exchanged, or a financial liability settled, between knowledgeable, willing parties in an arm’s length transaction.
Determination of fair value for financial instruments not carried at fair value In the following the determination of the fair value for financial instruments, that are not carried at fair value in the consolidated balance sheet, but for which a fair value has to be disclosed under IFRS 7, is described:
Held-to-maturity investments The fair value of held-tomaturity investments is determined using the quoted market price as of the balance sheet date.
Liabilities to banks and customers For short-term liabilities the carrying amount represents a reasonable estimate of the fair value. For long-term ins truments the fair value is determined by discounting future cash flows. The fair value determination reflects current market interest rates and the credit rating of the Allianz Group.
• Derivative financial instruments and firm commitments included in other assets and other liabilities
Fair value hierarchy of financial instruments IFRS 7 requires that financial instruments carried at fair value in the consolidated balance sheets are classified into a three-level hierarchy (“the fair value hierarchy”) depending on the valuation techniques used and whether the inputs to those valuation techniques are observable in the market.
The following tables present the fair value hierarchy for financial instruments carried at fair value in the consolidated balance sheets as of December 31, 2009 and 2008.
2) For the purpose of this disclosure to match the disclosures made in Note 9 the Allianz Group‘s unlisted equity securities and investments in limited partnerships of € 375 mn, which are measured at cost less impairment charges because the fair value cannot be reliably measured, are included.
Financial assets Debt securities designated at fair value through income 298 Corporate bonds 578 Financial assets for unit-linked contracts 1,685 Total financial assets at fair value 2,561
Financial liabilities Financial liabilities for unit-linked contracts 1,685 Financial liabilities for puttable equity instruments 127 Total financial liabilities at fair value 1,812
The fair value of € 1.1 bn of certain corporate bonds within available-for-sale investments is determined using broker quotes or matrix pricing, which are based on unobservable inputs. These fair values are compared with additional broker quotes obtained from other sources and a range of fair values is determined, of which the maximum fair value would be € 0.3 mn higher and the minimum fair value would be € 1 mn lower.
The remaining corporate bonds classified as Level 3 consist of various porfolios for which different valuation techniques with non-observable inputs including broker quotes and pricing services are used. While in total the effect of changing the valuation assumptions to reasonable possible alternative values might have a significant impact on the fair values, when considered individually for each portfolio, the impact would not be significant.
Financial liabilities held for trading include € 5.6 bn of embedded derivative financial instruments relating to annuity products. Internal discounted cash flow models are used to determine the present value of the underlying insurance benefits and expenses. Sensitivities of the fair value to reasonable possible alternative assumptions are calculated by varying the annuitizations and surrenders by 10 %. A 10 % increase in annuitizations and a 10 % decrease in surrenders would increase the fair value by € 181 mn, whereas a 10 % decrease in annuitizations and a 10 % increase in surrenders would decrease the fair value by € 192 mn.
Financial assets held for trading Debt securities 45 6 — (6) Derivative financial instruments 16 31 — (15) Subtotal 61 37 — (21)
Financial assets designated at fair value through income Debt securities 10 14 (2) (55) Equity securities 178 83 — (70) Subtotal 188 97 (2) (125)
Reclassification of financial assets In January 2009, certain U.S. Dollar denominated CDOs with a fair value of € 1.1 bn (notional amount of € 2.2 bn) were retained from Dresdner Bank. On January 31, 2009, subsequent to the derecognition of Dresdner Bank, these CDOs were reclassified from financial assets held for trading to loans and advances to banks and customers in accordance with IAS 39, as the Allianz Group has the intention to hold the CDOs until maturity. The fair value of € 1.1 bn became the new carrying amount of the CDOs at the reclassification date. The expected recoverable cash flows as of the date of reclassification was € 1.8 bn, leading to an effective interest rate of approximately 7 %.
Tabular disclosure of contractual obligations The table sets forth the Allianz Group’s contractual obligations as of December 31, 2009. Contractual obligations do not include contingent liabilities or commitments. Only transactions with parties outside the Allianz Group are considered.
As of December 31, 2009, the income tax obligations amounted to € 1,890 mn. Thereof € 1,238 mn the Allianz Group expects to pay within the twelve months after the balance sheet date. For the remaining amount of € 652 mn an estimate of the timing of cash outflows is not reasonably possible. The income tax obligations are not included in the table below.
Financial liabilities Financial liabilities carried at fair value through income please refer to note 43 Liabilities to banks and customers 1) 14,478 3,866 2,904 21,248 Derivative financial instruments and firm commitments included in other liabilites please refer to note 43 Financial liabilities for puttable equity instruments 3,451 — — 3,451 Certified liabilities, participation certificates and subordinated liabilities 1) 1,785 2,626 12,898 17,309 Insurance liabilities
Future policy benefits of € 974,063 mn Reserves for insurance and investment contracts presented in the table include contracts where the timing and amount of payments are considered fixed and determinable and contracts which have no specified maturity dates and may result in a payment to the contract holder depending on mortality and morbidity experience and the incidence of surrenders, lapses or maturities. Furthermore, the amounts presented in the table above are undiscounted and therefore exceed the reserves for insurance and investment contracts presented in the consolidated balance sheet that reflect the time value of the money.
Business relations with associates are set on an arm’s length basis and are additionaly of subordinate importance as a whole.
Litigation Allianz Group companies are involved in legal, regulatory and arbitration proceedings in Germany and a number of foreign jurisdictions, including the United States, which arise in the ordinary course of their businesses, including in connection with their activities as insurance, banking and asset management companies, employers, investors and taxpayers. It is not feasible to predict or determine the ultimate outcome of the pending or threatened proceedings. Management does not believe that the outcome of these proceedings, including those discussed below, will have a material adverse effect on the financial position and the results of operations of Allianz Group, after consideration of any applicable reserves.
Three members of the Fireman’s Fund group of companies in the United States, all subsidiaries of Allianz SE, are among the roughly 135 defendants named in a class action filed on August 1, 2005 in the United States District Court of New Jersey in connection with allegations relating to contingent commissions in the insurance industry. No class has been certified for this class action. The court dismissed with prejudice the federal court causes of action and dismissed without prejudice the state law causes of action. The plaintiffs have appealed the ruling. Unless the Court of Appeal reverses the lower court’s decision, the case will remain dismissed. It is not possible to predict potential outcomes or assess any eventual exposure at this time.
Allianz and HT1 Funding GmbH have signed a Contingent Indemnity Agreement in July 2006, pursuant to which Allianz may, in certain circumstances, be obliged to make payments to HT1 Funding GmbH. HT 1 Funding GmbH issued nominal € 1,000 mn Tier 1 Capital Securities with an annual coupon of 6.352 % (as of June, 30 2017, the coupon will be 12-months EURIBOR plus a margin of 2.0 % p.a.). The securities have no scheduled maturity and the securityholders have no right to call for their redemption. The securities may be redeemed at the option of the issuer on 30 June 2017 and thereafter. It is not possible for Allianz to predict potential payment obligations for 2010 and future periods at this time, but management currently does not expect any material negative financial impact for Allianz Group.
Rental expense net of sublease rental income received of € 14 mn, for the year ending December 31, 2009, was € 271 mn (2008: € 253 mn; 2007: € 429 mn).
In December 2002, Protektor Lebensversicherungs-Aktiengesellschaft (“Protektor”), a life insurance company whose role is to protect policyholders of all German life insurers, was founded. Allianz Lebensversicherungs-Aktiengesellschaft and some of its subsidiaries are obligated to provide additional funds either to the mandatory insurance guarantee scheme or to Protektor, in the event that the funds provided to the mandatory insurance guarantee scheme are not sufficient to handle an insolvency case. Such obligation amounts to a maximum of 1 % of the sum of the net underwriting reserve with deduction of payments already provided to the insurance guarantee scheme. As of December 31, 2009, and under inclusion of the contributions to the mandatory insurance scheme mentioned above, the aggregate outstanding commitment of Allianz Lebensversicherungs -Aktiengesellschaft and its subsidiaries to the insurance guarantee scheme and to Protektor was € 879 mn (2008: € 877 mn).
Guarantees A summary of guarantees issued by the Allianz Group by maturity and related collateral-held is as follows: Letters of credit and other financial guarantees
The customers of the letters of credit and of the indemnification contracts have the following external credit ranking: € mn
AAA — AA 4 A 4 BBB 13 BB — B and lower — without rating 565 Total 586
Letters of credit and other financial guarantees The majority of the Allianz Group’s letters of credit and other financial guarantees are issued to customers through the normal course of business of the Allianz Group’s reportable segment Banking in return for fee and commission income, which is generally determined based on rates subject to the nominal amount of the guarantees and inherent credit risks. Once a guarantee has been drawn upon, any amount paid by the Allianz Group to third-parties is treated as a loan to the customer, and is, therefore, principally subject to collateral pledged by the customer as specified in the agreement.
The Allianz Group’s banking operations in France, in the ordinary course of business, issue market value and performance -at-maturity guarantees in connection with mutual funds offered by the Allianz Group’s asset management operations in France. The levels of market value and performance -at-maturity guarantees, as well as the maturity dates, differ based on the underlying agreements. In most cases, the same mutual fund offers both a market value guarantee and a performance-at-maturity guarantee. Additionally, the performance-at-maturity guarantees are generally linked to the performance of an equity index or group of equity indexes. As of December 31, 2009, the maximum potential amount of future payments of the market value and performance-atmaturity guarantees was € 1,518 mn (2008: € 1,356 mn), which represents the total value guaranteed under the respective agreements. The fair value of the mutual funds related to the market guarantees as of December 31, 2009, was approximately € 1,425 mn (2008: € 1,260 mn). Such funds generally have a duration of five to eight years.
Credit derivatives Credit derivatives consist of written credit default swaps, which require payment by the Allianz Group in the event of default of debt obligations, as well as written total return swaps, under which the Allianz Group guarantees the performance of the underlying assets. The notional principal amounts and fair values of the Allianz Group’s credit derivative positions as of December 31, 2009 are provided in Note 43.
Assets pledged and collateral The carrying amount of the assets pledged as collateral where the secured party does not have the right by contract or custom to sell or repledge the assets are as follows: As of December 31, 2009 2008 € mn € mn
As of December 31, 2009, the Allianz Group has received collateral, consisting of fixed income and equity securities, with a fair value of € 660 mn (2008: € 1,672 mn), which the Allianz Group has the right to sell or repledge. As of December 31, 2009 and 2008 respectively, no previously received collateral was sold or repledged by the Allianz Group.
Net amount recognized as of January 1, 3,611 3,782 Changes in the consolidated subsidiaries of the Allianz Group 5 (38) Foreign currency translation adjustments (2) 17
Change in defined benefit obligation Defined benefit obligation as of January 1, 12,247 16,142 Service cost 288 321 Interest cost 695 672 Plan participants’ contributions 68 65
2) As of December 31, 2009, includes direct commitments of the consolidated subsidiaries of the Allianz Group of € 4,707 mn (2008: € 4,429 mn) and commitments through plan assets of € 9,020 mn (2008: € 7,818 mn).
As of December 31, 2009, post-retirement health benefits included in the defined benefit obligation and in the net amount recognized amounted to € 6 mn (2008: € 60 mn) and € 7 mn (2008: € 92 mn), respectively.
Expected return on plan assets (440) (448) (432) Amortization of past service cost (8) 38 — Amortization of net actuarial (gain)/loss (55) 6 62 Effect of asset ceiling 99 — — (Income)/expenses of plan curtailments or settlements (8) — (51) Expense recognized in profit or loss 1) 571 589 578 1) 2007 adjusted due to the reclassification of expense recognized in profit or loss of Dresdner Bank Group to net income (loss) from discontinued operations.
During the year ended December 31, 2009, the expense recognized in profit or loss includes expense recognized in profit or loss related to post-retirement health benefits of € (46) mn (2008: € (7) mn; 2007: € — mn).
A summary of amounts related to defined benefit plans is as follows: € mn € mn € mn € mn
The weighted average value of the assumptions for the Allianz Group’s defined benefit plans used to determine defined benefit obligation and the expense recognized in profit or loss are as follows: Expected long-term return on plan assets 5.4 5.5 5.3 Rate of compensation increase 2.4 2.5 2.6 Rate of pension increase 1.6 1.9 1.8 Rate of medical cost trend 5.4 7.5 7.7
The discount rate assumptions reflect the market yields at the balance sheet date of high-quality fixed income investments corresponding to the currency and duration of the liabilities.
Especially the discount rate assumption gives rise to uncertainty resulting in having a significant risk. A change in the discount rate by 0.25 percentage point would lead to an effect of € 452 mn on the defined benefit obligation.
A change in the medical cost trend rate by one percentage point (increase or decrease) would have an effect of € 1 mn and € 1 mn, respectively, on the defined benefit obligation.
On the expense recognized in profit or loss a change in the medical cost trend rate by one percentage point (increase or decrease) would have an effect of € — mn and € — mn, respectively.
Equity securities 26.1 7.7 Debt securities 66.2 4.6 Real estate 5.8 4.9
Equity securities 14.1 16.2 Debt securities 78.3 78.4 Real estate 4.5 3.6
Contributions During the year ending December 31, 2010, the Allianz Group expects to contribute € 237 mn to its defined benefit plans and pay € 256 mn directly to plan participants of its defined benefit plans.
Group Equity Incentives Plans The Group Equity Incentives Plans (“GEI”) of the Allianz Group support the orientation of senior management, in particular the Board of Management, toward the long-term increase of the value of the Allianz Group. The GEI include grants of stock appreciation rights (“SAR”) and restricted stock units (“RSU”).
During the year ended December 31, 2009, the Allianz Group recognized expense for defined contribution plans of € 149 mn (2008: € 212 mn; 2007: € 192 mn). Additionally, the Allianz Group paid contributions for state pension schemes of € 373 mn (2008: € 317 mn; 2007: € 294 mn).
The fair value of the SARs at grant date is measured using a Cox-Rubinstein binomial tree option pricing model. Volatility was derived from observed historical market prices. In the absence of historical information regarding employee stock appreciation exercise patterns (all plans issued between 2004 and 2008 are significantly “out of the money”), the expected life has been estimated to equal the term to maturity of the SARs.
The following table provides the assumptions used in estimating the fair value of the SARs at grant date: 1) The SARs 2010 are deemed to have been granted to participants as part of their 2009 remuneration. Consequently, the assumptions for SAR grants delivered in March 2010 are based on best estimation.
The SARs are accounted for as cash settled plans by the Allianz Group. Therefore, the Allianz Group accrues the fair value of the SARs as compensation expense over the vesting period. Upon vesting, any changes in the fair value of the unexercised SARs are recognized as compensation expense. During the year ended December 31, 2009, the Allianz Group recognized compensation expense related to the unexercised SARs of € 12 mn (2008: € (116) mn; 2007: € 14 mn).
As of December 31, 2009, the Allianz Group recorded a liability, in other liabilities, for the unexercised SARs of € 50 mn (2008: € 37 mn).
The RSUs are notional stocks without dividend payments. The fair value is calculated by substracting the net present value of expected future dividend payments until maturity of the RSUs from the prevailing share price as of the valuation date.
The following table provides the assumptions used in calculating the fair value of the RSUs at grant date: 1) The RSUs 2010 are deemed to have been granted to participants as part of their 2009 remuneration. Consequently, the assumptions for RSU grants delivered in March 2010 are based on best estimation.
The RSUs are accounted for as cash settled plans as the Allianz Group intends to settle in cash. Therefore, the Allianz Group accrues the fair value of the RSUs as compensation expense over the vesting period. During the year ended December 31, 2009, the Allianz Group recognized compensation expense related to the non-vested RSUs of € 72 mn (2008: € (19) mn; 2007: € 41 mn).
As of December 31, 2009, the Allianz Group recorded a liability, in other liabilities, of € 123 mn (2008: € 87 mn) for the non-vested RSUs.
The Class B equity units issued under the Class B Plan vest over 3 to 5 years and are subject to repurchase by AGI L.P. upon death, disability or termination of the participant prior to vesting. As of January 1, 2005, AGI L.P. has the right to repurchase, and the participants have the right to cause AGI L.P. to repurchase, a portion of the vested Class B equity units each year. The call or put right is exercisable for the first time 6 months after the initial vesting of each grant. On the repurchase date, the repurchase price will be based upon the determined value of the Class B equity units being repurchased. As the Class B equity units are puttable by the plan participants, the Class B Plan is accounted for as a cash settled plan.
Therefore, the Allianz Group accrues the fair value of the Class B equity units as compensation expense over the vesting period. Upon vesting, any changes in the fair value of the Class B equity units are recognized as compensation expense. During the year ended December 31, 2009, the Allianz Group recognized compensation expense related to the Class B equity units of € 311 mn (2008: € 185 mn; 2007: € 362 mn). In addition, the Allianz Group recognized expense related to the priority claim on the adjusted operating profits of PIMCO LLC of € 92 mn (2008: € 93 mn; 2007: € 126 mn). During the year ended December 31, 2009, the plan participants put 22,253 Class B equity units. The total amount paid related to the put of the Class B equity units was € 350 mn.
The total recognized compensation expense for Class B equity units that are outstanding is recorded as a liability in other liabilities. As of December 31, 2009, the Allianz Group recorded a liability for the Class B equity units of € 1,118 mn (2008: € 1,151 mn).
PIMCO LLC Class M-Unit Plan In 2008 Allianz Global Investors (AGI) has launched a new management share-based payment incentive plan for certain senior level executives of PIMCO LLC and certain of its affiliates. Participants in the plan are granted options to acquire a new class of equity instruments (M-Units), which vest in one-third increments on approximately the third, fourth and fifth anniversary of the option valuation date. Upon vesting, options will be automatically exercised in a cashless transaction. Participants may elect to defer the receipt of M-Units through the M-Unit Deferral Plan. With the M-Unit Plan, participants can directly participate in PIMCO’s performance. Class M-Units are non-voting common equity with limited information rights. They bear quarterly distributions equal to a pro-rata share of PIMCO’s net distributable income. Deferred M-Units have a right to receive quarterly cash compensation equal to and in lieu of quarterly dividend payments.
The maximum of 250,000 M-Units are authorized for issuance under the M-Unit Plan.
The following table provides the assumptions used in calculating the fair value of the M-Options at grant date: Weighted average fair value of options granted € 1,207.91 € 577.44 Assumptions: Expected term (years) 3.85 3.85
During the year ended December 31, 2007, Allianz acquired all of the remaining AGF shares from minority shareholders in the context of the Tender Offer and Squeeze-out. Under the terms of an agreement (the ”Liquidity Agreement”) between Allianz SE, AGF and the beneficiaries of the AGF share option plans 2003-2006 (AGF employees), Allianz has the right to purchase all AGF shares issued through the exercise of these AGF share option plans after the put period (where the beneficiaries have the right to sell to Allianz). The price payable by Allianz per AGF share is a cash consideration equal to the Allianz 20-day-average share price prior to the date the right to buy or to sell is exercised, multiplied by a ratio representing the consideration proposed in the Tender Offer for each AGF share (€ 126.43) divided by the Allianz share price on January 16, 2007 (€ 155.72). This ratio is subject to adjustments in case of transactions impacting Allianz or AGF share capital or net equity. The cash settlement is based upon the initial offer proposed for each AGF share during the Tender Offer. As of December 31, 2007 all shares issued under these plans were fully vested and exercisable.
The effects of these modifications that increased the total fair value of the AGF share option plan to the AGF employees were expensed at the date of modification and amounted to € 15 mn in 2007. The modification of the settlement terms from an equity share to cash for vested options was recorded directly in equity, and amounted to € 18 mn during 2007.
The following table provides an overview about the underlying assumptions used for the valuation after taking into account the impact of the Liquidity Agreement: Assumptions: Share price at modification date € 172.95 € 172.95 Expected life (years) 6 5 Risk free interest rate 4.5 % 4.5 %
During the year ended December 31, 2009, the Allianz Group recognized total compensation expenses related to the modified share option plans of € 3 mn (2008: € (33) mn; 2007: € 15 mn). As of December 31, 2009, the Allianz Group recorded a liability for these plans of € 14 mn (2008: € 11 mn).
The share options allow for exercise at any time after the vesting period and before expiration, provided that: • on the date of exercise, the RAS share price is at least 20 % higher than the average share price in January of the grant year (for share options granted during the year ended December 31, 2001, the hurdle is 10 %), and
During the year ended December 31, 2006, the Allianz Group recorded compensation expense of € 1 mn (2005: € 1 mn) related to these share options.
The shares settled by delivery of Allianz SE shares are accounted for as equity settled plans by Allianz S.p.A. and ACIF. Therefore, these entities measure the total compensation expense to be recognized for the equity settled shares based upon their fair value as of the grant date. The total compensation expense is recognized over the vesting period.
Employee Stock purchase plans The Allianz Group offers Allianz SE shares in 19 countries to qualified employees at favorable conditions. The shares have a minimum holding period of 1 to 5 years. During the year ended December 31, 2009, the number of shares sold to employees under these plans was 721,740 (2008: 721,830; 2007: 939,303). During the year ended December 31, 2009, the Allianz Group recognized compensation expense, the difference between the market price (lowest quoted price of the Allianz SE stock at the official market in Germany on September 7, 2009) and the discounted price of the shares purchased by employees, of € 11 mn (2008: € 10 mn; 2007: € 30 mn).
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2009 49 Restructuring plans
As of December 31, 2009, the Allianz Group has provisions for restructuring resulting from a number of restructuring programs in various segments. These provisions for restruc-
The development of the restructuring provisions reflects the implementation status of the restructuring initiatives. Based on the specific IFRS guidance, restructuring provisions are recognized prior to when they qualify to be recognized under the guidance for other types of provisions. In order to reflect the timely implementation of the various restructuring initiatives, restructuring provisions, as far as they are already “locked in”, have been transferred to the provision type, which would have been used not having a restructuring initiative in place. This applies for each single contract.
turing primarily include personnel costs, which result from severance payments for employee terminations, and contract termination costs, including those relating to the termination of lease contracts that will arise in connection with the implementation of the respective initiatives.
Additions to existing provisions 22 19 — — — 4 45 Release of provisions recognized in previous years (65) (29) — — — (1) (95) Utilization of provisions via payments (27) (65) — — — (52) (144) Utilization of provisions via transfers (159) (140) — — — — (299) Foreign currency translation adjustments — (6) — — — — (6)
Additions to existing provisions 3 — — — — 24 27 Release of provisions recognized in previous years (53) — — — — (16) (69) Utilization of provisions via payments (16) — (40) (28) — (81) (165) Utilization of provisions via transfers (27) — — (2) — (57) (86) Foreign currency translation adjustments — — — — — 1 1 1) Provision was already created before 2008. There is no connection with the restructuring activities in 2009.
Allianz Deutschland AG´s provisions for restructuring In 2006, Allianz Deutschland AG announced a restructuring plan for the insurance business in Germany. The objective of the restructuring program was to make the insurance business more customer focused, operate more efficiently and achieve growth. With the exception of two insurance centres the restructuring program ended on December 31, 2009. The remaining two insurance centres will finalize their restructuring program December 31, 2012.
The restructuring plan includes an overall reduction of approximately 5,345 positions. Approximately 5,023 full time equivalent positions have already been terminated, a part of which are related to natural employee turnover and early retirement agreements (Altersteilzeit) that were agreed upon before the restructuring provision was recorded and are not part of the restructuring provision.
Allianz France Group’s provisions for restructuring In 2008, the Allianz France Group announced a restructuring plan, so called “Comprehensive Adaptation Plan” (“Plan Global d’Adaptation”), for the insurance business in France which is expected to continue through 2011. The objectives of the restructuring program are to regain market shares and increase the quality of service, by increasing commercial staff and sales effectiveness, developing employees’ competencies, and implementing a comprehensive plan of competitiveness.
The restructuring activities of the Allianz France Group will result in a reduction of locations within France from 14 to 10 and a relocation of workers and activities with critical team size purpose as well as a strong reduction of non-HR costs (especially IT, purchasing, facilities).
Through the Comprehensive Adaptation Plan, Allianz France Group has committed itself to reduce the number of administrative jobs by 688, thereof approximately 600 positions have already been reached. The reduction of staff within this program includes measures for voluntary termination under restricted conditions and early retirement for the employees affected by the close-down of locations”
The restructuring program affects all lines of business and several locations. A staff reduction of approximately 22 % is envisaged. The program is planned to be finalized in 2012. These measurements will positively affect the cost basis and ensure the competitiveness of the company.
During the year ended December 31, 2009, the ABV AG recorded restructuring provision of € 37 mn. The reduction of staff within this program shall mainly occur in consent with the employees. The restructuring plans include a reduction of approximately 225 positions.
During the year ended December 31, 2009 the ABV AG recorded restructuring charges of € 37 mn.
During the year ended December 31, 2009, Allianz S.p.A. together with its group companies recognized restructuring charges of € (6) mn (2008: € 2 mn; 2007: € 73 mn). As of December 31, 2009 Allianz S.p.A. recorded a provision of € 17 mn (2008: € 36 mn).
During the year ended December 31, 2009 Allianz Belgium recognized restructuring charges of € 14 mn. As of December 31, 2009 Allianz Belgium recorded a provision for restructuring of € 17 mn.
Companhia de Seguros Allianz Portugal S.A. (Allianz Portugal) In 2009, Allianz Portugal announced a restructuring program for the integration of IT platforms between Portugal and Spain.
The objective is to establish a common and shared IT infrastructure by IT transformation and process redesign as well as to enlarge the scope of the shared service of Allianz Iberica Services Center. The program intends to integrate support services and to harmonize procedures. The product offer diversity shall be enlarged and the complexity is supposed to be reduced. In addition, the scope of agents sales support tool is going to be enlarged. Moreover, Allianz Portugal plans to leverage internal redundant resources to eliminate external ones and to benefit from lower costs.
Cominvest Group The Allianz Global Investors Deutschland Group (AGI) took over the cominvest entities from Allianz Group with effect from January 12, 2009. Based on management decision of AGI and cominvest, those entities are integrated since takeover.
During the integration, locations and functions will be restructured and merged by end of 2010 and the number of employees will be reduced as far as necessary. The merging of the two organizations rounds off AGI‘s product portfolio while strengthening and differentiating competencies in portfolio management. Thanks to the leveraging of synergistic effects across the entire value-added chain, strength and competencies should be combined.
Basic earnings per share (in €) 9.53 (5.43) 18.00 from continuing operations 10.41 8.81 16.53 from discontinued operations (0.88) (14.24) 1.47
Diluted earnings per share Diluted earnings per share are calculated by dividing net income (loss) attributable to shareholders by the weighted average number of common shares outstanding for the period, both adjusted for the effects of potentially dilutive € mn € mn € mn
Net income (loss) attributable to shareholders 4,297 (2,444) 7,966 Effect of potentially dilutive common shares — (49) (4) Net income (loss) used to calculate diluted earnings per share 4,297 (2,493) 7,962 from continuing operations 4,692 3,918 7,312 from discontinued operations (395) (6,411) 650
Weighted average number of common shares outstanding 450,845,024 450,161,145 442,544,977 Potentially dilutive common shares resulting from assumed conversion of: Share-based compensation plans 814,046 3,226,670 1,321,100 Derivatives on own shares — 1,139,945 3,265,298
Diluted earnings per share (in €) 9.50 (5.47) 17.71 from continuing operations 10.37 8.59 16.26 from discontinued operations (0.87) (14.06) 1.45
Allianz Group Annual Report 2009 Notes to the Consolidated Financial Statements 51 Other Information
Other countries 104,152 111,598 1) Includes as of December 31, 2008, 27,597 employees of Dresdner Bank Group.
Salaries and wages 7,707 9,153 9,741 Social security contributions and employee assistance 1,051 1,298 1,666 Expenses for pensions and other post-retirement benefits 1,123 1,223 1,028 1) Includes in 2008 personnel expenses of € 2,532 mn (2007: € 2,727 mn) of Dresdner Bank Group.
Principal accountant fees and services For a summary of fees billed by the Allianz Group’s principal auditors, see page 93. The information provided there is considered part of these consolidated financial statements.
Board of Management and Supervisory Board compensation by individual is included in the Remuneration Report, which is part of the Corporate Governance section of this Annual Report. The information provided there is considered part of these consolidated financial statements.
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2009 52 Subsequent events
Storm „Xynthia“ in Western Europe On February 28, 2010 the storm “Xynthia” has caused great damage in parts of western Europe, mainly France, Spain and Germany. The Allianz Group with its Property and Casualty subsidiaries is engaged in those countries. Currently a reliable forecast of net claims arising from this storm is not possible1).
Property-Casualty Life/Health Asset Management Corporate and Other Operating entity contributes a substantial portion of the total revenues within the Allianz Group‘s primary geographic markets. Total revenues comprise statutory gross premiums written in Property-Casualty and Life/Health, operating revenues in Asset Management and total revenues in Corporate and Other (Banking).
Operating Subsidiaries – Other countries Equity € mn % owned 1)
Allianz Euro Liquidity 1,263 43.7 Chicago Parking Meters, LLC, City of Wilmington 824 49.9 ODDO TRESORERIE REGULIERE 610 22.5 Natinium 2007-1, Plc, Dublin 519 48.4 CYRIL CONVERTIBLE TAUX, Paris 482 25.4 ODDO ET CIE, SCA, Paris Cedex 09 289 20.0 Cofitem Cofimur, Paris 253 22.1 Allianz Euro High Yield, Paris 246 21.9 Citylife Srl., Milan 239 26.7 KGH FD Licorne Red Eur CL 212 41.9 Oddo Generation C, Paris 198 33.0 PHRV (Paris Hotels Roissy Vaugirard), Paris 181 30.6 PIMCO GL INV.-EURIBORPLUS FUND 151 38.3 Henderson UK Outlet Mall Partnership LP., Edinburgh 150 19.5 3)
2) Including shares held by dependent enterprises in full, even if the Allianz Group’s share in the dependent enterprise is under 100.0 %. 3) Significant influence due to Allianz’s role in the (funds’) management and its ownership share.
2) Including shares held by dependent enterprises in full, even if the Allianz Group’s share in the dependent enterprise is under 100.0 % (incl. consolidated investment funds).
In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRSs, as adopted by the EU, the additional requirements of German commercial law pursuant to § 315a Abs. 1 HGB and supplementary provisions of the articles of incorporation and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and risks of future development.
Dr. Frank Ellenbürger Johannes Pastor Wirtschaftsprüfer Wirtschaftsprüfer (Independent Auditor) (Independent Auditor)
Franz Fehrenbach Chairman of the Board of Management, Robert Bosch GmbH
Dr. Jürgen Heraeus Chairman of the Supervisory Board, Heraeus Holding GmbH
Dr.-Ing. Norbert Reithofer Chairman of the Board of Management, BMW Group
Professor Dr. Dennis J. Snower President, Institut für Weltwirtschaft, University of Kiel
Donald R. Argus AO until December 31, 2009 Chairman, BHP Billiton Group
Dr. Marco Tronchetti Provera Chairman and CEO, Pirelli & Co. S.p.A.
Dr. Henning Schulte-Noelle Membership in other statutory supervisory boards and SE administrative boards in Germany E.ON AG, ThyssenKrupp AG
Membership in comparable 1) supervisory bodies Membership in group bodies E.ON Nordic AB (Chairman) (until January 4, 2010), E.ON Sverige AB (Chairman)
Jean-Jacques Cette Membership in comparable 1) supervisory bodies Membership in group bodies Allianz France S. A.
Membership in comparable 1) supervisory bodies Compagnie de Saint-Gobain S. A.
As of December 31, 2009 or (with members who resigned) day of resignation 1) We regard memberships in other supervisory bodies as “comparable” if the company is listed on a stock exchange or has more than 500 employees.
Membership in Group bodies Allianz Deutschland AG (Chairman), Allianz Global Investors AG (Chairman)
Membership in comparable 1) supervisory bodies Membership in Group bodies Allianz France S. A. (Vice President), Allianz S. p. A.
Dr. Paul Achleitner Membership in other statutory supervisory boards and SE administrative boards in Germany Bayer AG, RWE AG
Oliver Bäte Membership in other statutory supervisory boards and SE administrative boards in Germany Membership in Group bodies Allianz Global Corporate & Specialty AG (Vice Chairman), Allianz Global Investors AG, Allianz Investment Management SE (Vice Chairman)
Clement B. Booth Membership in other statutory supervisory boards and SE administrative boards in Germany Membership in Group bodies Allianz Global Corporate & Specialty AG (Chairman)
Enrico Cucchiani Membership in comparable 1) supervisory bodies Pirelli & C. S. p. A., Unicredit S. p. A.
Membership in Group bodies Allianz Global Investors Deutschland GmbH (Chairman), Allianz Global Investors Kapitalanlagegesellschaft mbH (Chairman)
Membership in comparable 1) supervisory bodies Membership in Group bodies Allianz France S. A., Allianz Global Investors Italia SGR S. p. A. (Chairman), Allianz S. p. A.
Membership in Group bodies Allianz Deutschland AG, Allianz Global Corporate & Specialty AG (Vice Chairman) (until August 31, 2009), Allianz Global Investors AG (until September 15, 2009), Allianz Investment Management SE (Vice Chairman) (until September 9, 2009)
Dr. Christof Mascher since September 10, 2009 Membership in other statutory supervisory boards and SE administrative boards in Germany Membership in Group bodies Allianz Shared Infrastructure Services SE (Chairman)
Jay Ralph since January 1, 2010 Membership in other statutory supervisory boards and SE administrative boards in Germany Membership in Group bodies Allianz Global Corporate & Specialty AG
Membership in comparable 1) supervisory bodies Membership in Group bodies Allianz Life Insurance Company of North America (Chairman), Fireman’s Fund Insurance Company (Chairman)
Dr. Gerhard Rupprecht Membership in other statutory supervisory boards and SE administrative boards in Germany Fresenius SE, Heidelberger Druckmaschinen AG
Jean-Philippe Thierry until December 31, 2009 Membership in comparable 1) supervisory bodies Atos Origin (Chairman), Baron Philippe de Rothschild, Eurazeo, Paris Orléans, Pinault Printemps Redoute, Société Financière et Foncière de participation
Dr. Herbert Walter until January 12, 2009 Membership in other statutory supervisory boards and SE administrative boards in Germany Deutsche Lufthansa AG, Deutsche Börse AG, E.ON Ruhrgas AG
Dr. Werner Zedelius Membership in other statutory supervisory boards and SE administrative boards in Germany Membership in Group bodies Allianz Private Krankenversicherungs-AG (Vice Chairman)
Membership in Group bodies Allianz Hungária Biztositó Rt. (Chairman), Allianz pojistovna a. s. (Chairman), Allianz-Slovenska poistovna a. s. (Chairman), ROSNO (Chairman), T. U. Allianz Polska S. A. (Chairman), T. U. Allianz Życie Polska S. A. (Chairman)
Available-for-sale investments Available-for-sale investments are securities which are neither held to maturity nor have been acquired for sale in the near term; available-for-sale investments are carried at fair value in the balance sheet.
Cash flow statement Statement showing movements of cash and cash equivalents during an accounting period, classified by three types of activity: • operating activities • investing activities • financing activities
Consolidated interest (%) The consolidated interest is the total of all interests held by affiliated enterprises and joint ventures in affiliated enterprises, joint ventures, and associated enterprises.
Credit risk The risk that one party to a contract will fail to discharge its obligations and thereby cause the other party to incur financial loss.
Deferred tax assets/liabilities The calculation of deferred tax is based on tax loss carryforwards, tax credit carryforwards and temporary differences between the carrying amounts of assets or liabilities in the published balance sheet and their tax base, and on differences arising from applying uniform valuation policies for consolidation purposes. The tax rates used for the calculation are the local rates applicable in the countries of the enterprises included in the consolidation; changes to tax rates already adopted on the balance sheet date are taken into account.
Derivative financial instruments Financial contracts, the values of which move in relationship to the price of an underlying asset. Derivative financial instruments can be classified in relation to their underlying assets (e.g. interest rates, share prices, foreing currency exchange rates or prices of goods). Important examples of derivative financial instruments are options, futures, forwards and swaps.
Equity method Investments in joint ventures and associated companies are accounted for by this method. They are valued at the Group’s proportionate share of the net assets of the companies concerned. In the case of investments in companies which prepare consolidated financial statements of their own, the valuation is based on the sub-group’s consolidated net assets. The valuation is subsequently adjusted to reflect the proportionate share of changes in the company’s net assets, a proportionate share of the company’s net earnings for the year being added to the Group’s consolidated income.
Hedging The use of special financial contracts, especially derivative financial instruments, to reduce losses which may arise as a result of unfavorable movements in rates or prices.
Issued capital and capital reserves This heading comprises the capital stock, the premium received on the issue of shares, and amounts allocated when option rights are exercised.
Joint venture An enterprise which is managed jointly by an enterprise in the Group and one or more enterprises not included in the consolidation. The extent of joint management control is more than the significant influence exercised over associated enterprises and less than the control exercised over affiliated enterprises.
Net income attributable to minority interests That part of net income for the year which is not attributable to the shareholders of the Allianz Group but to others third parties who hold shares in affiliated enterprises.
Segment reporting Financial information based on the consolidated financial statements, reported by business segments (Property-Casualty, Life/Health, Asset Management and Corporate and Other ) as well as by reportable segments.
Swaps Agreements between two counterparties to exchange payment streams over a specified period of time. Important examples include currency swaps (in which payment streams and capital in different currencies are exchanged) and interest rate swaps (in which the parties agree to exchange normally fixed interest payments for variable interest payments in the same currency).
Index A Africa 75 AGCS 122 Allianz Deutschland AG 71 Allianz Elementar Versicherungs-AG 72 Allianz Global Corporate & Specialty 78 Allianz Suisse Versicherungs-Gesellschaft 72 Allianz Worldwide Care 78 Alternative Investments 139 Anglo Markets 68 Annual General Meeting 37
B Balance Sheet 149 Banking 139 Basic earnings per share 35 Belgium 75 Board of Management 10 Board of Management Remuneration – 2009 20 Board of Management Remuneration – new system
C Climate change 55 Combined ratio 122 Community engagement 56 Conglomerate solvency 149 Corporate and Other 138 Corporate Governance 10 Corporate Governance Report 10 Corporate Social Responsibility 55 Cost-income ratio 130
D Declaration of Compliance 15 Delisting 16 Directors’ Dealings 17 Diversity 53 Dividend 35
R Remuneration of the Supervisory Board – 2009 28 Remuneration of the Supervisory Board – Principles 27 Remuneration of the Supervisory Board – Structure 27 Remuneration Report 17 Reserves 159 Reward Management 52 Risk Committee 8
S Segment and divisional structure 60 Share 34 Shareholders’ Equity 149 Shareholder Structure 36 Share price 34 South America 75
T Talent Management 52 Third-party assets under management 134 Total assets under management 134 Travel Insurance 70 Turkey 75
As we can never rule out changes of dates, we recommend checking them on the internet at : www.allianz.com/financialcalendar
View our 2009 Annual Report on the Internet at www.allianz.com/annualreport. Make the most of the Internet’s advantages: • select individual data and compare key ratios over a number of years,
• download single chapters and tables (in pdf and excel formats), • access selected data in the report by means of the search function and links.