A To Our Investors 5 Letter to the Investors 10 Supervisory Board Report 17 Supervisory Board 18 Board of Management 20 International Executive Committee 21 Allianz Share
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thereof: Attributable to shareholders € Mn 5,996 14.6 % 5,231 2,591 5,053 4,207 (2,363) 7,966 69
Standard & Poor’s rating 11 AA – AA AA AA AA AA AA 106 Total assets under management as of 31 December € Mn 1,769,551 (4.5) % 1,852,332 1,656,993 1,517,538 1,202,122 950,548 1,009,586 82 thereof: Third-party assets under management as of 31 December € Mn 1,360,759 (5.4) % 1,438,425 1,281,256 1,163,982 925,699 703,478 764,621 83 1 Prior year figures have been restated to reflect the retrospective application of the amended standard IAS 19 – Employee Benefits, effective as of 1 January 2013. For further information, please refer to note 4 to the consolidated financial statements. Figures prior to 2011 have not been adjusted retrospectively.
As of 1 January 2013, all restructuring charges are presented within operating profit and all prior year figures have been adjusted to conform to the current accounting presentation. Figures prior to 2011 have not been adjusted retrospectively.
Figures prior to 2008 have not been restated to reflect the change in the Allianz Group’s accounting policy for fixed-indexed annuities, effective 1 July 2010.
2 Total revenues comprise statutory gross premiums written in Property-Casualty and Life/Health, operating revenues in Asset Management and total revenues in Corporate and Other (Banking).
3 The Allianz Group uses operating profit as a key financial indicator to assess the performance of its business segments and the Group as a whole.
4 Following the announcement of the sale on 31 August 2008, Dresdner Bank was classified as held for sale and discontinued operations. Therefore, all revenue and profit figures presented for our continuing business do not include the parts of Dresdner Bank that we sold to Commerzbank on 12 January 2009. The results from these operations are presented in a separate net income line “Net income (loss) from discontinued operations, net of income taxes”.
6 Total dividend based on total amount of shares. Actual dividend payment will be reduced by the dividend amount attributable to treasury shares.
10 Pro-forma after sale of Dresdner Bank completed. 11 For further information about insurer financial strength ratings of Allianz SE, please refer to page 106.
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our approximately 148,000 employees do their utmost every day to make the most of financial opportunities and assess and safeguard against risks both to the benefit of our customers and to protect the company. thanks to our global reach, expertise and financial strength, we are a trusted partner for over 83 million customers insured by Allianz all around the world.
* One prOtectiOn fOr my family, nO matter hOw far away i am.
I am pleased to report very good results once again this year. Allianz posted revenues of more than € 110 BN for the first time ever, while at the same time considerably increasing profitability. At € 10.1 BN, our 2013 operating profit was one of the highest in our history. We increased our net income by 14.1 % to € 6.3 BN. Net income attributable to shareholders amounted to € 6.0 BN. Therefore, we will propose a dividend of € 5.30 per share.
This strong performance in such a challenging business environment is once again the impressive result of the efficiency and skill of our employees around the world – and of our distribution partners. I would like to thank them for their remarkable efforts last year. And I think that I also may offer these words of praise on your behalf, as the owners of Allianz.
– especially in the Middle East. As a result, global economic growth in 2013 was even slightly lower than in the previous year. While central banks have supported growth by making an almost unlimited supply of liquidity available, the impact of persistently low interest rate levels represents a challenge for all savers and, in turn, for us as an insurer. In addition, severe hail, storms and floods in 2013 had an adverse effect on our results, in particular in Germany and Eastern Europe.
Meanwhile, our Life/Health revenues grew by 8.5 %, supported by strong growth in particular in Germany and Italy, despite the general uncertainty among clients caused by the low interest rate environment, while operating profit declined by 8.0 % from the high level in the previous year. In Germany, we launched a new life insurance product in 2013 with separate guarantees in the savings and payout phases, which results in much less stringent capital adequacy requirements. In return, the client can expect higher returns. This innovation met with a good response in the market.
The Asset Management business managed to post a record operating profit in 2013, with growth of 7.0 % despite a challenging environment in the second half. Our asset manager Pimco recorded outflows of funds
We continued to pursue our investments in future growth in a systematic manner. This year, we made an acquisition in Turkey, which makes us the market leader in one of the most attractive growth markets. We bought the company – multi-line insurer Yapı Kredi – in July, at the same time securing a 15-year exclusive distribution agreement with Yapı Kredi Bank. Thanks to the acquisition of Yapı Kredi, our market share in Turkey is now almost comparable with our position in Germany.
Although the economies in Europe and the United States are continuing to stabilize, interest rates in both regions are likely to remain low for the foreseeable future. The Euro has meanwhile staged a strong recovery, despite the European debt crisis being far from over. While this is a welcome development in one sense, it also has an adverse impact on exports and on the foreign revenues of European companies with international operations. However, without further diversifying our investment portfolio we won’t achieve a satisfying investment performance on new investments. In this context, we also have to be attuned to currency fluctuations.
During the 2013 fiscal year, the Supervisory Board fulfilled all its duties and obligations as laid out in the company Statutes and applicable law. It monitored the management of the company and advised the Board of Management regarding the conduct of business.
The Board of Management also informed us in writing of important events that occurred between meetings. The chairmen of the Supervisory and Management Board also had regular discussions about major developments and decisions. Details on each member’s participation at meetings of the Supervisory Board and its committees can be found in the Corporate Governance Report, starting on page 27.
iSSUeS DiSCUSSeD iN THe SUPerviSOrY BOArD PLeNArY SeSSiONS In all of the Supervisory Board’s 2013 meetings, the Board of Management reported on Group revenues and results, developments in individual business segments, and on the capital, financial and risk situation. We were regularly informed by the Board of Management on the impact of natural catastrophes, the status of major legal disputes and other essential developments.
In the meeting of 20 February 2013, the Supervisory Board dealt comprehensively with the provisional financial figures for the 2012 fiscal year and the Board of Management’s recommended dividend. It also discussed the intended closure of Allianz Bank’s business operations and the planned purchase of Turkish insurer Yapı Kredi. The appointed audit firm, KPMG AG Wirtschaftsprüfungsgesellschaft (KPMG), Munich, reported in detail on the provisional results of their audit. The Supervisory Board also reviewed the extent to which individual members of the Board of Management had achieved their targets and set their variable remuneration for the 2012 fiscal year and their 2010 – 2012 mid-term bonus.
In the meeting of 14 March 2013, the Supervisory Board discussed the audited annual Allianz SE and consolidated financial statements as well as the recommendation for the appropriation
of earnings by the Board of Management for the 2012 fiscal year. KPMG confirmed there were no discrepancies to their February report and issued an unqualified auditor’s report for the individual and consolidated financial statements. The Supervisory Board also dealt with the agenda for the 2013 AGM of Allianz SE and approved the Supervisory Board’s proposals for resolution. In addition, we resolved to appoint KPMG as auditor for the individual and consolidated financial statements for the 2013 fiscal year as well as for the auditor’s review of the 2013 half-yearly interim report. By way of a presentation the Supervisory Board was also informed in detail about the performance of global credit insurer Euler Hermes.
On 7 May 2013, just before the AGM, the Board of Management briefed us on the first quarter 2013 performance and on the Group’s current situation, particularly the capital adequacy. We further used this meeting to prepare for the subsequent AGM. The Supervisory Board adopted a resolution regarding the extension of Manual Bauer’s appointment until 31 December 2014, the year in which he will turn 60.
At the 12 December 2013 meeting, the Board of Management informed us of the third-quarter results, further business developments, the situation of the Allianz Group, and several other issues. We then discussed the planning for the 2014 fiscal year and the three-year period 2014 – 2016, as well as the remuneration structures within the Allianz Group and the Declaration of Conformity with the German Corporate Governance Code (Code). On the recommendation of the Personnel Committee, the Supervisory Board adopted a resolution to adjust the remunera-
5 Letter to the Investors 10 Supervisory Board Report 17 Supervisory Board 18 Board of Management 20 International Executive Committee 21 Allianz Share
The Standing Committee held five meetings in 2013. These related primarily to corporate governance issues, the preparation for the AGM, the Employee Stock Purchase Plan, and a review of the Supervisory Board’s efficiency conducted by an external advisor. During the fiscal year the committee passed resolutions requiring approval on the use of Authorized Capital 2010/II for the issue of shares to employees and to approve loans to senior executives.
The Personnel Committee met four times over the fiscal year 2013. The committee dealt with personnel matters for both active and former members of the Board of Management, including succession planning and top management development. It also reviewed the extent to which members of the Board of Management had achieved their annual targets for fiscal year 2012 and the targets for the 2010-2012 mid-term bonus. The committee prepared the review of the Board of Management’s remuneration system, including the setting of targets for variable remuneration in 2014. In addition, the committee dealt with the mandates held by Board of Management members in the interests of the Allianz Group. In relation to this, resolutions were also adopted by written procedure in April and July 2013.
AUDiT OF ANNUAL ACCOUNTS AND CONSOLiDATeD FiNANCiAL STATeMeNTS In compliance with the special legal provisions applying to insurance companies, the statutory auditor and the auditor for the review of the half-yearly financial report are appointed by the Supervisory Board of Allianz SE and not by the AGM. The Supervisory Board has appointed KPMG as statutory auditor for the annual Allianz SE and consolidated financial statements as well as for the review of the half-yearly financial report. KPMG audited the financial statements of Allianz SE and the Allianz Group as well as the respective management reports. They issued an auditor’s report without any reservations. The consolidated financial statements were prepared on the basis of the international financial reporting standards (IFRS), as adopted in the European Union. KPMG performed a review of the half-yearly and quarterly financial reports.
All Supervisory Board members received the documentation relating to the annual financial state ments and the auditor’s reports from KPMG for the 2013 fiscal year on schedule. The provisional financial statements and KPMG’s audit results were discussed in the Audit Committee
On the basis of our own reviews of the annual Allianz SE and consolidated financial statements, the management and group management reports and the recommendation for appropriation of earnings, we raised no objections and agreed with the results of the KPMG audit. We approved the Allianz SE and consolidated financial statements prepared by the Board of Management. The company’s financial statements are therefore adopted. We agree with the Board of Management ’s proposal on the appropriation of earnings.
MeMBerS OF THe SUPerviSOrY BOArD AND BOArD OF MANAGeMeNT Dr. Gerhard Cromme resigned as a member of the Supervisory Board effective 14 August 2012. Christine Bosse was initially appointed to the Supervisory Board by court order as his successor. On 7 May 2013, the AGM elected Ms Bosse to the Supervisory Board. The current term of the Supervisory Board will expire following the 2017 AGM.
iGor lanDau Member of the Board of Directors of Sanofi S.A.
5 Letter to the Investors 10 Supervisory Board Report 17 Supervisory Board 18 Board of Management 20 International Executive Committee 21 Allianz Share oliver Bäte Insurance Western & Southern Europe
Jon Dye Allianz Insurance PLC United Kingdom moHameD el-erian PIMCO USA
roBert franssen Allianz Benelux Belgium rÉmi Grenier Allianz Global Assistance France
Allianz Share − Allianz shares gain 24.4 % as stock markets rally. − Dividend rises to € 5.30.
Following the publication of the 2013 results, 59 % of analysts issued a “buy” recommendation for Allianz shares – with an average price target of € 140. For analysts’ current recommendations and earnings estimates, please refer to www.allianz.com/analystsrecommendations.
Given our positive business development, we will propose to increase the dividend by € 0.80 to € 5.30 to the Annual General Meeting. Based on the year-end share price, this corresponds to a dividend yield of 4.1 %. The payout ratio, based on net income 1 for 2013, is 40 % 2.
Weighting of AlliAnz shAres in mAjor inDices as of 31 December 2013 Weighting in % Ranking Index members msci World Financials 1.2 14 340
1 Based on net income after non-controlling interests. 2 Total dividend based on total amount of shares. Actual dividend payment will be reduced by the dividend amount attributable to treasury shares.
Our sustainable entrepreneurial approach has long been recognized and resulted in our stock’s listing in major sustainability indices such as the Dow Jones Sustainability Index and the FTSE4Good. This is just one of the reasons why we are considered one of the most sustainable financial services providers worldwide.
For further information on sustainability in the Allianz Group, please refer to the Progress in Sustainable Development chapter starting on page 59 and to www.allianz.com/sustainability.
Total number of issued shares as of 31 December 456,500,000 455,950,000 455,300,000 454,500,000 453,900,000 Weighted average number of shares outstanding 453,297,832 452,666,296 451,764,842 451,280,092 450,845,024 Share price as of 31 December € 130.35 104.80 73.91 88.93 87.15
Dividend yield as of 31 December % 4.13 4.3 6.1 5.1 4.7
Return on equity after income tax 2,5,6 % 11.9 11.1 5.9 11.9 12.5 1 In comparison with EURO STOXX 50, source: Bloomberg. 2 Prior year figures have been restated to reflect the retrospective application of the amended standard
IAS 19 – Employee Benefits, effective as of 1 January 2013. For further information, please refer to note 4 to the consolidated financial statements. Figures prior to 2011 have not been adjusted retrospectively.
5 Based on net income from continuing operations after non-controlling interests. 6 Based on average shareholders‘ equity. Average shareholders‘ equity has been calculated based upon the average of the current and the preceding year’s shareholders’ equity as of 31 December.
Important dates for shareholders and analysts See financial calendar (back cover)
27 Corporate Governance Report 32 Statement on Corporate Manage ment pursuant to § 289a of the HGB (part of the Group Management Report) 34 Takeover-related Statements and Explanations (part of the Group Management Report) 37 Remuneration Report (part of the Group Management Report)
The Board of Management and the Supervisory Board of Allianz SE attach great importance to complying with the recommendations of the German Corporate Governance Code (referred to hereinafter as the “Code”). Allianz SE complies with all but one of the current Code’s recommendations and with all its suggestions. The Declaration of Conformity issued by the Board of Management and Supervisory Board on 12 December 2013 and the company’s position regarding the Code’s suggestions can be found in the Statement on Corporate Management pursuant to § 289a of the HGB starting on page 32.
Corporate constitution of the European Company As a European Company, Allianz SE is subject to special European SE regulations and the German SE Implementation Act (SE-Ausführungsgesetz ) in addition to German stock corporation law. The main features of the German stock corporation – in particular the two-tier board system (Board of Management and Supervisory Board) and the principle of equal employee representation on the Supervisory Board
The Board of Management manages Allianz SE and the Allianz Group. It currently comprises eleven members. Its responsibilities include setting business objectives and the strategic direction, coordinating and supervising the operating entities, as well as implementing and overseeing an efficient risk management system. In this context, the Board of Management is responsible for monitoring adherence to statutory provisions and official regulations. The Board of Management also prepares the quarterly and half-yearly financial reports, as well as the Group’s consolidated financial statements and the annual financial statements of Allianz SE.
Human Resources, Legal and Compliance, and Mergers & Acquisitions. Business division responsibilities focus on geographic regions or operating segments, such as Asset Management. Rules of procedure specify in more detail the work of the Board of Management. Such rules set out for the specific responsibilities of Board members, matters reserved for the whole Board and other procedures necessary to pass resolutions.
Board of ManaGeMent and Group CoMMittees In the financial year 2013, the following Board committees helped to improve the efficiency of the work done by the Board of Management.
Group finanCe CoMMittee Dr. Maximilian Zimmerer (Chairman), Dr. Helga Jung, Jay Ralph, Dr. Dieter Wemmer, Dr. Werner Zedelius
Deciding on material investments, preparing and monitoring the Group’s investment policy, financing and capital management.
Group it CoMMittee Dr. Christof Mascher (Chairman), Jay Ralph, Dr. Dieter Wemmer, Dr. Werner Zedelius
Group risk CoMMittee Dr. Dieter Wemmer (Chairman), Clement Booth, Jay Ralph, Dr. Maximilian Zimmerer
Group CoMpensation CoMMittee Board members and executives reporting to the Allianz se Board of Management
internationaL exeCutive CoMMittee All members of the Board of Management of Allianz se and Managing Directors of the major subsidiaries of Allianz Group
Discussion of overall strategic issues for the Allianz Group (for composition, see page 20).
The responsibilities and composition of the Board of Management and Group committees are set out in the respective Rules of Procedure, which require the approval of the Board of Management. In December 2013, the Board approved certain changes to the responsibilities of the Board and Group committees to harmonize them with the responsibilities of Board members. These changes come into force in financial year 2014.
The Supervisory Board comprises twelve members appointed by the AGM. Six of these twelve members are appointed on the basis of proposals from employees, which the AGM is bound to accept.
The Supervisory Board oversees and advises the Board of Management on managing the business. It is also responsible for appointing the members of the Board of Management, determining their overall remuneration and reviewing Allianz SE’s and the Allianz Group’s annual financial statements. The Supervisory Board’s activities in the 2013 financial year are described in the Supervisory Board Report starting on page 10.
− Preparation of the Declaration of Compliance pursuant to § 161 Aktiengesetz (German Stock Corporation Act) and control of corporate governance
− Initial review of the annual Allianz se and consoli - dated financial statements, management reports (incl. Risk Report) and the dividend proposal, review of half-yearly and quarterly financial reports
− Monitoring of the risk situation and special risk developments in the Allianz Group
oBjeCtives of tHe supervisory Board reGardinG its CoMposition In order to implement a recommendation by the Code, the Supervisory Board specified the following objectives for its composition at its meeting on 12 December 2012: oBjeCtives of tHe supervisory Board reGardinG its CoMposition
Employee representation within Allianz se, as provided for by the se Agreement concerning the Participation of Employees dated 20 September 2006, contributes to diversity of work experience and cultural background. Pursuant to § 6 (2) sentence 2 of the Act on the Participation of Employees in a European Company (seBG), the number of women and men appointed as German employee representatives should be proportional to the number of women and men working in the German companies. However, the Supervisory Board does not have the right to select the employee representatives.
2. Independence At least eight members of the Supervisory Board should be independent as defined by No. 5.4.2 of the Corporate Governance Code, i.e. they may not have any business or personal relations with Allianz se or its Board of Management, a controlling shareholder or an enterprise associated with the latter, which may cause a substantial and not merely temporary conflict of interests. In case shareholder representatives and employee representatives are viewed separately, at least four members should be independent within the meaning of No. 5.4.2 of the Corporate Governance Code, respectively. Regarding employee representatives, however, the mere fact of employee representation and the existence of a working relationship with the company shall not itself affect independence.
1. Specialist knowledge – At least one member must have considerable experience in the insurance and financial-services fields – At least one member must have expert knowledge of accounting and auditing as defined by § 100 (5) AktG – Specialist knowledge of, or experience in, other economic sectors.
The composition of the Supervisory Board of Allianz SE reflects these objectives. It has an appropriate number of independent members with international backgrounds. With a current complement of four female members, the goal of ensuring that women are adequately represented on the Supervisory Board is being met. The current composition of the Supervisory Board and its committees is described on page 15.
Shares held by members of the Board of Management and the Supervisory Board The total holdings of members of the Board of Management and the Supervisory Board of Allianz SE amounted to less than 1 % of the company ’s issued shares as of 31 December 2013.
In compliance with special legal provisions that apply to insurance companies, the auditor of the annual financial statements and of the half-yearly financial report is appointed by the Supervisory Board and not by the AGM. The audit of the financial statements covers the individual financial statements of Allianz SE and also the consolidated financial statements of the Allianz Group.
To ensure maximum transparency, we inform our shareholders, financial analysts, the media and the general public of the company’s situation on a regular basis and in a timely fashion. The annual financial statements of Allianz SE, the Allianz Group’s consolidated financial statements and the respective management reports are published within 90 days of the end of each financial year. Additional information is provided in the Allianz Group’s quarterly and halfyearly financial reports, which are reviewed by the auditor. Information is also made available at the AGM, at press conferences and analysts’ meetings, as well as on the Allianz Group’s website. Our website also provides a financial calendar listing the dates of major publications and events, such as annual reports, quarterly and half-yearly financial reports and AGMs.
As it sets about implementing the regulatory requirements of the future Solvency II supervisory regime, the Allianz Group will continue to develop its existing governance system – particularly in the areas of risk management and control systems.
The Statement on Corporate Management pursuant to § 289a of the German Commercial Code (“Handelsgesetzbuch – HGB”) forms part of the Group Management Report. According to § 317 (2), sentence 3 of the HGB, this Statement does not have to be included within the scope of the audit.
Declaration of conformity with the German Corporate Governance Code On 12 December 2013, the Board of Management and the Supervisory Board issued the following Declaration of Compliance of Allianz SE with the German Corporate Governance Code: DECLARATION OF CONFORMITY WITH THE GERMAN CORPORATE GOVERNANCE CODE
In addition, Allianz SE follows all the suggestions of the German Corporate Governance Code Commission in its 13 May 2013 version and also followed all suggestions in the previous version of 15 May 2012.
The quality of the internal control systems is assessed by internal audit staff of the Allianz Group who are independent of the activities which are audited. Internal Audit is an independent, objective assurance and consulting activity designed to add value and improve our organization’s operations. It helps us to accomplish our objectives by introducing a systematic, disciplined approach and thus contributing to the evaluation and improvement of the effectiveness of the risk management, control and governance processes. Therefore, internal audit activities are geared towards helping the company to mitigate risks as well as further assist in strengthening its governance processes and structures.
B Corporate Governance 27 Corporate Governance Report 32 Statement on Corporate Management pursuant to § 289a of the HGB
The standards of conduct established by the Allianz Group’s Code of Conduct for Business Ethics and Compliance are obligatory for all employees worldwide. The Code of Conduct is available on our website at www. AlliAnz.com/corporAte-governAnce.
legal and statutory provisions appliCable to the appointment and removal of members of the board of management and to amendments of the statutes The Supervisory Board appoints the members of Allianz SE’s Board of Management for a maximum term of five years (Article 9 (1), Article 39 (2) and Article 46 of the SE Regulation, §§ 84, 85 of the German Stock Corporation Act and § 5 (3) of the Statutes). Reappointments, in each case for a maximum of five years, are permitted. A simple majority of the votes cast in the Supervisory Board is required to appoint members of the Board of Management. In the case of a tie vote, the Chairperson of the Supervisory Board, who pursuant to Article 42 sentence 2 of the SE Regulation must be a shareholder representative, shall have the casting vote (§ 8 (3) of the Statutes). If the Chairperson does not participate in the vote, the Deputy Chairperson shall have the casting vote, provided he or she is a shareholder representative. A Deputy Chairperson who is an employee representative has no casting vote (§ 8 (3) of the Statutes). If a required member of the Board of Management is missing, in urgent cases the courts must appoint such member upon the application of an interested party (§ 85 of the German Stock Corporation Act). The Supervisory Board may dismiss members of the Board of Management if there is an important reason (§ 84 (3) of the German Stock Corporation Act).
essentiAl AGreeMents of AlliAnz se witH cHAnGe of control clAuses And coMpensAtion AGreeMents providinG for tAkeover scenArios The following essential agreements of the Company are subject to a change of control condition following a takeover bid: − Our reinsurance contracts, in principle, include a provision under which both parties to the contract have an extraordinary termination right in the case where the other party to the contract merges or its ownership or control situation changes materially. Agreements with brokers regarding services connected with the purchase of reinsurance cover also provide for termination rights in case of a change of control. Such clauses are standard market practice.
Under the Allianz Sustained Performance Plan (ASPP), Restricted Stock Units (RSU) – i.e. virtual Allianz shares – are granted as a stockbased remuneration component to senior management of the Allianz Group worldwide. In addition, under the Group Equity Incentive (GEI) scheme, Stock Appreciation Rights (SAR) – i.e. virtual options on Allianz shares – were also granted until 2010. Some of these are still outstanding. The conditions for these RSU and SAR contain change of control clauses which apply if a majority of the voting share capital in Allianz SE is acquired, directly or indirectly, by one or more third parties which do not belong to the Allianz Group and which provide for an exception from the usual exercise periods. The RSU will be exercised, in line with their general conditions, by the Company for the relevant plan participants on the day of the change of control without observing any vesting period that would otherwise apply. The cash amount payable per RSU must be at least the price offered per Allianz share in a preceding tender offer. In case of a change of control as described above, SAR will be exercised, in line with their general conditions, by the Company for the relevant plan participants on the day of the change of control without observing any vesting period. By providing for the non-application of the blocking period in the event of a change of control, the terms take into account the fact that the conditions under which the share price moves are very different when there is a change in control.
The report is prepared in accordance with the requirements of the German Commercial Code (HGB) and the International Financial Reporting Standards (IFRS). It also takes into account § 64b Law on the Supervision of Insurance Undertakings (“Versicherungsaufsichts­ gesetz – VAG”), the requirements of the German Ministry of Finance’s Insurance Remuneration Regulation (“Versicherungs­Vergütungs­ verordnung – VersVergV”), and the recommendations of the German Corporate Governance Code.
− Alignment of pay and performance: A significant performance­ based, variable component.
Variable remuneration Variable remuneration aims to balance short­term performance, longer­term success and sustained value creation.
Variable compensation components: − Annual bonus (short­term): A cash payment which rewards the achievement of quantitative and qualitative targets for the respective financial year and is paid the year following the per­ formance year. Quantitative targets represent 75 % and consist of 50 % Group targets (equally split between annual operating profit and annual net income) and 25 % divisional targets. For the divisional targets a new split was introduced for 2013: 10 % annual operating profit, 10 % annual net income and 5 % dividend. Quantitative targets for board members with a functional focus are determined based on their key responsibilities. Qualitative targets reflect the specific individual priorities for 2013 per member of the Board of Management.
2 Actual accrual for the MTB (mid-term) usually equals the annual bonus payout of the respective financial year. Since the performance assessment and the final payout occur after completion of the performance cycle this value is only a notional indication.
The performance of the Chairman is determined by the average target achievement of the other Board of Management members and can be adjusted by the Supervisory Board based on the Chairman’s personal performance.
Pensions and similar benefits To provide competitive and cost­effective retirement and disability benefits, since 1 January 2005 Board of Management members par­ ticipate in a contribution­based system. Prior to this date, Board members participated in a defined benefit plan that provided fixed benefits not linked to base salary increases. Benefits generated under this plan were frozen at the end of 2004. Additionally, most Board members participate in the Allianz Versorgungskasse VVaG (AVK), a contribution­based pension plan and the Allianz Pensionsverein e.V. (APV), which provide pension benefits for salaries up to the German social security ceiling.
Company contributions to the current pension plan depend on the years of service on the Board of Management. They are invested in a fund with a guaranteed minimum interest rate per year. On retirement, the accumulated capital is converted into a lifetime annuity. Each year the Supervisory Board decides whether, and to what extent, a budget is provided, also considering the targeted pen­ sion level. This budget includes a risk premium paid to cover death and disability. The earliest age a pension can be drawn is 60, except for cases of occupational or general disability for medical reasons. In these cases it may become payable earlier on; an increase by projec­ tion may apply. In the case of death, a pension may be paid to depen­ dents. Surviving dependents normally receive 60 % (surviving partner)
1 The relevant share price used to determine the final number of RSUs granted and the 200 % cap are only available after sign-off by the external auditors.
and 20 % (per child) of the original Board member’s pension, with the aggregate not to exceed 100 %. Should Board membership cease prior to retirement age for other reasons, the accrued pension rights are maintained if vesting requirements are met.
Perquisites Perquisites mainly consist of contributions to accident and liability insurances and the provision of a company car. Where applicable, expenses are paid for the maintenance of two households. Perqui­ sites are not linked to performance. Each member of the Board of Management is responsible for the income tax on these perquisites. The Supervisory Board reviews regularly the level of perquisites.
1 Actual bonus paid in 2014 for fiscal year 2013 and in 2013 for fiscal year 2012. 2 Michael Diekmann received an anniversary payment of € 267 THOU. 3 Gary Bhojwani’s base salary and variable compensation is denominated in USD, the contractually agreed
Below we discuss the 2013 remuneration results and the link to per­ formance against targets for all key remuneration elements and the total remuneration of each member of the Board of Management.
− Base salary: Base salaries for 2013 were maintained at their existing levels.
− MTB 2013 – 15: An accrual mirroring the annual bonus was made.
− Equity-related remuneration: In accordance with the approach described earlier, a number of RSus were granted to each Board member in March 2014 which will vest in 2017 and be distributed/ settled in 2018. At the time of grant, each award had the same value as the award for the 2013 annual bonus.
1 The equity-related remuneration that applied before 2010 consisted of two vehicles, virtual stock awards known as RSUs and virtual stock options known as “Stock Appreciation Rights” (SAR). Only RSUs have been awarded as of 2010. The remuneration system valid until December 2009 is disclosed in the Annual Report 2009 (starting on page 17).
2 The relevant share price used to determine the final number of RSUs granted is only available after sign-off by the external auditors, thus numbers are based on a best estimate as well as the maximum amount distributed after the RSU portion has vested. As disclosed in the Annual Report 2012, the equity-related grant in 2013 was made to participants as part of their 2012 remuneration. The disclosure in the Annual Report 2012 was based on a best estimate of the RSU grants. The actual grants, as of 7 March 2013, deviated from the estimated values and have to be disclosed accordingly. The actual RSU grants as of 7 March 2013 under the Allianz equity program are as follows: Michael Diekmann: 17,415, Oliver Bäte: 10,995, Manuel Bauer: 10,446, Gary Bhojwani: 9,573, Clement Booth: 10,760, Dr. Helga Jung: 9,958, Dr. Christof Mascher: 9,778, Jay Ralph: 10,962, Dr. Dieter Wemmer: 11,135, Dr. Werner Zedelius: 10,419, Dr. Maximilian Zimmerer: 8,302.
5 Gary Bhojwani’s RSU grant will be based on his annual bonus amount of € 942 THOU. The number of RSUs will be calculated in line with the process for other USD participants by application of the 2013 fourth quarter USD/€ exchange rate of 1.36138.
Annual pension payment4 SC5 DBO6 SC5 DBO6 SC5 DBO6 SC5 DBO6 SC5 DBO6 1 For Gary Bhojwani the frozen Allianz Retirement Plan (ARP) and the frozen Supplemental Retirement Plan (SRP).
3 For details on the transition payment see section termination of service. In any event a death benefit is included.
7 Gary Bhojwani only holds pension plans subject to his Allianz of America employment agreement, denominated in USD. All amounts in the table are € amounts derived by applying the contractually agreed USD/€ exchange rate of 1.347910. The Allianz Retirement Plan (ARP) and the Supplemental Retirement Plan (SRP) are two completely frozen DB-plans, i.e. there are no future accruals in these plans. Current pension plans for Gary Bhojwani include the Deferred Compensation Plan (DCP) and the 401(k) plan. Both current plans are Defined Contribution plans. Their contributions are included in the table.
9 The DBO for the ARP is USD 54 THOU (2012: USD 58 THOU) and for the SRP USD 93 THOU (2012: USD 115 THOU). 10 The contribution to the DCP is USD 246 THOU (2012: USD 266 THOU) and to the 401(k) plan USD 18 THOU
In 2013, remuneration and other benefits totaling € 9 Mn (2012: € 7 Mn) were paid to retired members of the Board of Management and dependents. Reserves for current pension obligations and accrued pension rights totaled € 100 Mn (2012: € 105 Mn).
− Perquisites: For 2013, the total value of the perquisites amounted to € 0.8 Mn (2012: € 0.6 Mn).
LOANS TO MEMBERS Of THE BOARD Of MANAGEMENT As of 31 December 2013, there were no outstanding loans granted by Allianz Group companies to members of the Board of Management.
Arrangements for termination of service including retirement are as follows: 1. Board members who were appointed before 1 January 2010 – and who have served a term of at least five years – are eligible for a six­ month transition payment after leaving the Board of Management.
3. Special terms, also compliant with the German Corporate Gover­ nance Code, apply if service is terminated as a result of a “change of control”. This requires that a shareholder of Allianz SE, acting alone or together with other shareholders, holds more than 50 % of voting rights in Allianz SE. Termination as a result of a change of control occurs if within twelve months after a change of control a. the Management Board appointment is unilaterally revoked by the Supervisory Board, or b. the Board member resigned due to a substantial decrease in managerial responsibilities and without giving cause for termi­ nation, or c. a Management Board appointment is terminated by mutual agreement or if the mandate expires and is not renewed within two years of the change of control.
Transition payment (appointment before 1 January 2010) Board members receiving a transition payment are subject to a six months non­compete clause.
An Allianz pension, where immediately payable, is taken into account in adjusting transition payment amounts.
Severance payment cap Payments to Board members for early termination with a remaining term of contract of more than two years are capped at two years’ com­ pensation: Whereby the annual compensation 1. is calculated on the basis of the previous year’s annual base salary plus 50 % of the target variable remuneration (for a Board member with a fixed base salary of € 700 THou the annual com­ pensation would amount to € 1,750 THou; hence he/she would receive a maximum severance payment of € 3,500 THou); and 2. shall not exceed the latest year’s actual total compensation.
Change of Control In case of early termination as a result of a change of control, sever­ ance payments made to Board members generally amount to a three years’ compensation (annual compensation as defined above) and shall not exceed 150 % of the severance payment cap (a Board member with a base salary of € 700 THou would receive a maximum of € 5,250 THou). Consequently, the payout is less than two years’ total remuneration at target (which would be € 5,600 THou).
Internal and external Board appointments When a member of the Board of Management holds an appointment in another company within the Allianz Group, the full remuneration amount is transferred to Allianz SE. In recognition of the benefits to the organization, Board of Management members are supported if
OUTLOOK fOR 2014 The Supervisory Board approved the following changes to the remu­ neration of the Board of Management in December 2013: − The base salary of all regular members of the Board of Manage­ ment has been harmonized for 2014. Those base salaries at € 700 THou for 2013 will be adjusted to € 750 THou.
− The overall cap on the total variable compensation has been low­ ered from 165 % to 150 %, the cap for the single targets (quantitative Group targets, quantitative divisional targets, and qualitative targets) remained unchanged at 165 %.
Overall, for a Board member with a current base salary of € 700 THou, the three measures lead to a reduction of € 40 THou at cap: the maxi­ mum direct compensation decreased from currently € 4,165 THou to € 4,125 THou. For the Chief Executive Officer this reduction equals € 81 THou at cap (from € 7,121 THou down to € 7,040 THou).
The remuneration of the Supervisory Board is governed by the Stat­ utes of Allianz SE and the German Stock Corporation Act. The structure of the Supervisory Board’s remuneration is regularly reviewed with respect to German, European and international corporate gover­ nance recommendations and regulations.
Legend: C = Chairperson of the respective committee, M = Member of the respective committee.
Remuneration for mandates in other Allianz companies and for other functions Mrs. Gabriele Burkhardt­Berg was a member of the Supervisory Board of Allianz Deutschland AG until 10 April 2013 and received a pro rata remuneration of € 20 THou for this membership. All current employee representatives of the Supervisory Board except for Mrs. Ira Gloe­ Semler are employed by Allianz Group companies and receive a mar­ ket aligned remuneration for their services.
The expertise of our employees and partners who support us all around the world is a key factor in our success which we can rely on at all times. Our commitment to help people whenever and wherever they need us ensures optimum results for our customers.
49 Allianz Group structure 49 Insurance operations 50 Asset Management 50 Corporate and Other 51 Worldwide presence and business segments 52 Our markets
66 Earnings summary 67 Total revenues 68 Operating profit 68 Non-operating result 68 Income taxes 69 Net income 69 Proposal for appropriation of net earnings 70 Events after the balance sheet date 70 Changes in segment structure, presentation and accounting policies 70 Other parts of the Group Management Report
87 Overview: 2013 results versus previous year outlook 88 Economic outlook 88 Insurance industry outlook 89 Asset management industry outlook 89 Outlook for the Allianz Group 89 Overview: outlook and assumptions 2014 90 Management’s assessment of expected revenues and earnings for 2014 91 Financing and liquidity development and capitalization 91 Expected dividend development 91 Management’s overall assessment of the current economic situation of the Allianz Group
92 Shareholders’ equity 92 Regulatory capital adequacy 93 Total assets and total liabilities 98 Off-balance sheet arrangements
We offer a wide range of property-casualty and life/health insurance products to both private and corporate customers. We are the leading property-casualty insurer globally and rank among the top five in the life/health insurance business. Our key markets based on premiums are Germany, France, Italy and the United States.
Most of our insurance markets are served by local Allianz companies. However, some business lines – such as Allianz Global Corporate & Specialty (AGCS), Allianz Worldwide Partners (AWP) and Credit Insurance – are run globally. Based on premiums, the split between private and corporate clients is approximately 50 % / 50 % for our Property -Casualty business segment, and about 80 % / 20 % for Life/Health.
– German Speaking Countries – Western & Southern Europe – Iberia & Latin America – USA – Global Insurance Lines & Anglo Markets – Growth Markets – Allianz Worldwide Partners
– Group life products – Group health and disability products – Pension products for employees
The Allianz Group structure reflects both business segments and geographical regions. Our business activities are first organized by product and type of service based on how these are strategically managed: insurance activities, asset management activities and corporate and other activities. Due to differences in the nature of products, risks and capital allocation, insurance activities are further divided into Property-Casualty and Life/Health categories. In accordance with the responsibilities of the Board of Management, each of the insurance categories is grouped into regional reportable segments. Corporate and other activities are divided into three different reportable segments in order to differentiate between the respective products, risks and capital allocation. In total, the Allianz Group has 17 reportable segments.
Our two major investment management businesses, PIMCO and AllianzGI, operate under Allianz Asset Management (AAM). With € 1,770 bn assets under management (including those of the Allianz Group), we are one of the largest asset managers in the world handling third-party assets with active investment strategies. 63 % of thirdparty assets are from institutional investors, while 37 % are from retail clients. Our core markets are the United States, Germany, France, Italy, the United Kingdom and the Asia-Pacific region.
AlternAtiVe inVestments operAtions Alternative Investments provides global alternative investment management services in the private equity, real estate, renewable energy and infrastructure sectors, mainly on behalf of our insurance operations. The Alternative Investments reportable segment also includes a fully consolidated private equity investment.
◼ Property-Casualty ◼ Life/Health ◼ Banking ◼ Retail Asset Management ◼ Institutional Asset Management Insurance market position by gross premiums written: 4 I. Position 1 II. Position 2 to 5 III. Position 6 to 10 IV. Not in the top 10 1 Reflecting our acquisition in 2013, Turkey Property-Casualty and Life/Health ranked in category I. and II., respectively.
3 Based on total market ranking (including domestic competitors), China Property-Casualty ranked in category IV. and India Property-Casualty in category III., respectively.
to premium growth and improved profitability. Furthermore, we will continue to extend our cooperation with the automobile industry and increase our position in the direct market under the brand of AllSecur.
In total, we increased our market share in terms of revenues in 2013 by 1.4 %. After the single premium business reached a new record level in 2013, we expect, however, that the exceptional growth will not recur in 2014.
Through Allianz Private Kranken, we provide a wide range of health insurance products, including full private health care coverage, supplementary health and long-term care insurance as well as foreign travel medical insurance. After a reluctant demand in 2013, we still expect growing demand for both full private health care coverage and supplementary insurance in the future. This should be supported by the very good external ratings we received recently for our full private health care coverage and by our well-positioned long-term care insurance offerings.
Italy Our Italian insurance entity Allianz S.p.A. is strongly dedicated to the agent channel. We also offer our products through Genialloyd (one of the leading companies in direct business), the broker channel, Allianz Bank Financial Advisors S.p.A. and via bancassurance, with UniCredit as our main distribution partner.
The following sections provide an overview of our business operations in certain insurance markets by business division and of our Asset Management business. We focus on our operations in insurance core markets and comment on material developments in selected insurance markets as well as on our asset management market, since these account for the major developments in our operating results.
France II. III. 12,685 822 4.9 Italy II. II. 12,462 1,342 6.0 United States IV. III. 9,375 641 1.2
As the market leader in the German property-casualty market, we offer a wide variety of insurance products for private and commercial customers. Germany is a rather mature market for propertycasualty business, with intensive competition. 2013 showed premium growth mostly in motor business and commercial non-motor business.
Your Allianz 49 Business Operations and Markets 56 Strategy and Steering 59 Progress in Sustainable Development technical capabilities achieved through continuous investment and innovation.
This achievement was strongly supported by the performance of our agent network, which was merged in 2013 after operating as three separate entities in the past. This marks a milestone in the history of Allianz Italy and was accompanied by the introduction of the common digital platform Digital Agency. This new platform supports simple, mobile and paperless processes, allowing for significant increases in service quality, agent efficiency and customer satisfaction. Another driver of innovation has been the introduction of Modular Offer, which provides family coverage against the most serious risks. It is a single contract with protection modules from all insurance lines and affordable pricing on a monthly subscription basis. The success of our initiatives is reflected in a net promoter score for our agents of + 21 %, which stands out against a market average of (11) %.
In our life business, we increased our premium volume by 33 %, raising our overall life market share by approximately one percentage point. This growth was particularly supported by our bancassurance cooperation with UniCredit and our proprietary financial advisors network. Our unit-linked product market share increased significantly to 20 % 1, leading to an improved new business mix. Sales of unit-linked products accounted for over 70 % of new business, compared to a market average of approximately 34 %. Progetto Reddito, our innovative decumulation product, has generated € 1.3 bn of new business since its launch at the beginning of 2013.
The French property-casualty market has seen limited growth in recent years and remains highly competitive. Competition is likely to remain tough, with expected higher customer churn due to local 1 Based on the first nine months of 2013.
regulatory changes regarding cancellation rules. In this business environment, we continue to concentrate on increasing the efficiency of our company structures, simplifying our product range and processes and rebuilding our IT platform, with a view to delivering stateof -the-art digital solutions and high-quality claims services. This constant focus allows us to grow our customer base, for example in motor insurance. Thanks to the full integration of Gan Eurocourtage in 2013, which specializes in distributing its products via brokers, we are now one of the leaders in the midcorp market.
Our retail insurance activities are complemented by Allianz Banque, which allows us to offer one-stop solutions, in particular for our life customers.
allow us to better position ourselves in this competitive market over time.
Our life and annuity business primarily underwrites fixed index and variable annuities, and fixed index universal life insurance products – all of which are sold through independent distribution channels, as well as large financial institutions such as banks and wire houses. In 2013, we expanded our product portfolio by introducing a hybrid product offering both variable investment allocation options and index-linked investment allocation options. In 2013, competitiveness increased in the fixed index annuity space due to aggressive products offered by competitors that started to enter the industry two years ago. Despite a more competitive market environment we continue to be the market leader in the fixed index annuity market. In the wake of better market conditions and product changes in 2012, product profitability of new business significantly improved in 2013. As a result, our life and annuity insurance business performed well overall. We anticipate continued economic uncertainty, equity market volatility and a low interest rate environment in the long term. On the upside, we continue to believe that U.S. demographic trends present us with an excellent opportunity in the retirement market. In order to reap these benefits, we will continuously strengthen our distribution network and value proposition to our customers through product innovation and high-quality services.
Turkey We serve the Turkish market mainly through our subsidiaries Allianz Sigorta S.A., Allianz Hayat ve Emeklilik S.A. as well as the recently acquired Yapı Kredi Sigorta S.A. and Yapı Kredi Emeklilik S.A., which was rebranded to Allianz Yasam ve Emeklilik.
Through our subsidiary Allianz Sigorta, we continued to accelerate our business in Turkey, with organic premium growth of 34 % compared to a market average of 22 % in property-casualty in 2013. While this growth was mainly driven by motor business, we are also a leading provider of health insurance in Turkey.
In addition to organic growth, the acquisition of Yapı Kredi Sigorta and its life and pension insurance subsidiary Yapı Kredi Emeklilik, rebranded as Allianz Yasam ve Emeklilik, fueled our expansion in Turkey. Through this transaction, which closed on 12 July 2013, Allianz became the market leader in the property-casualty segment and a top-3 player in life and pension solutions. This acquisition allows us to accelerate our growth through strong strategic relationships in an insurance market with significant long-term potential.
An important part of the agreement between Allianz and Yapı Kredi is a 15-year bancassurance agreement which will provide Allianz with exclusive access to the fifth-largest banking network in Turkey, comprising more than 900 branches and 6.5 million customers. A further part of our profitable growth story is the successful launch of a 10-year exclusive distribution agreement with HSbC on 23 August 2013 for the sale of Allianz life and pension products through HSbC’s widely spread branch network in Turkey. Both partnerships will strengthen our presence in the Turkish market for life and long-term provisions, which is currently dominated by bank distribution.
Based on the still very low levels of insurance penetration and the young demographic profile, our outlook for insurance in Turkey remains very optimistic. While we expect competitive pressure to further increase, Allianz in Turkey benefits from its strong and diversified market position to generate further profitable growth.
Based on the combined strengths of these businesses, AWP can provide a comprehensive product and service range.
Allianz’s Asset Management operations recorded strong inflows in areas such as non-traditional fixed income and multi-asset. The overall flow development, however, was impacted by the general market trend of outflows in the traditional bond space.
Strategy and Steering Our longer-term strategic ambition is to be the world’s strongest financial community: the leading property-casualty insurer in terms of revenue and profitability, one of the three most profitable life and health insurers among our global peer group and the number one active wealth manager by assets and operating margin. In 2013, we stayed on target to meet this goal, achieving one of the best operating results in our history. We remain the global number one in property-casualty insurance, are among the top five global life and health insurers and defended our position as the world’s most profitable and second largest active asset manager.
In an uncertain and volatile business environment, we will protect the pillars of our business strategy – our integrity, financial strength, operational excellence and talent base – and leverage our size to offer outstanding products and services to our customers and business partners.
− In November 2013, the European Union agreed on the timeline for the implementation of Solvency II, which will come into effect from 2016 onwards. Allianz has supported Solvency II from the beginning, convinced it will provide the Union with one of the most advanced regulatory regimes in the world, for the benefit of insurers and their stakeholders.
Natural catastrophes were again a major feature of the year, with Europe witnessing the highest ever losses due to flooding and hail. Our diversification and size helped us to absorb those risks but we will continue to monitor closely our overall exposures and to stay at the forefront of developments in the securitization of risks for the capital markets. Economic growth continues to differ markedly between our European core markets and the emerging economies. At the same time the Euro’s appreciation against most relevant currencies impacts our financial results. Consumer behavior is creating new channels and markets, challenging an industry still working largely on paper and face-to-face. Public scrutiny of the financial services industry is at an all-time high, with record fines being passed to banks and ongoing discussions in the public and within our industry on how to best ensure good advice, particularly for life and pension insurance.
Our fOcus gOing fOrward In this environment we will continue to protect the pillars of our business strategy – our integrity, financial strength, operational excellence and talent base. Together with other leading financial institutions we are investing time and talent to define sustainable insurance and investment (more information on our Progress in Sustainable Development starting on page 59). We are continuously monitoring the nature of our customer relationships and our investment and insurance product portfolio to understand the potential implications and impact of our actions for society and the environment.
We are pleased to be rated one of the strongest financial institutions in terms of capital: In March 2013, Standard & Poor’s raised the outlook for our AA rating to “stable”. It allows us to offer our clients outstanding security in a volatile global business environment. We intend to maintain our strong capital position through prudent management of our balance sheet, an ongoing focus on operating profitability and a cautious stance on large-scale acquisitions. We will be looking out for further consolidation opportunities in attractive markets and segments where we see a clear complementary fit with our portfolio and capabilities. In this context we expect to generate significant value through disciplined allocation of capital to businesses and markets promising sustainable returns at or above our hurdle rate.
To secure our leadership in the world’s preeminent markets for insurance and asset management, we will focus on growing with our existing customers. We will continue to drive best practice in underwriting, investment management and client service between our operating entities globally. At the same time we will further increase the pace of investments in our digital offering and processing capabilities.
In each of our business activities we strive to reach the scale necessary to offer an unparalleled development platform for our employees and ensure an outstanding product offering and service for our customers and business partners. Consequently, we are evolving our structures to ensure that we capture the full potential of our global organization. For example, as of 1 January 2014, a new holding named “Allianz Worldwide Partners” (AWP) will steer the activities of Allianz Global Assistance, Allianz Global Automotive, Allianz France International Health and Allianz Worldwide Care. AWP thus coordinates our activities in the B2B2C business, where we develop products with corporate clients which they offer to their own customers or employees.
Safeguarding the strategic pillars of our business and focused on growth and scale, we are confident that over the coming years we will build what we aim to be – the world’s strongest financial community.
Michael Diekmann Chairman of the Board of Management Dr. Dieter Wemmer Finance, Controlling, Risk Dr. Maximilian Zimmerer Investments, Global Life/Health Dr. Christof Mascher Operations, Allianz Worldwide Partners Oliver Bäte Insurance Western & Southern Europe, Global Property-Casualty Gary Bhojwani Insurance USA Dr. Werner Zedelius Insurance German Speaking Countries, Banking, Human Resources Manuel Bauer Insurance Growth Markets Jay Ralph Asset Management Worldwide Clement Booth Global Insurance Lines & Anglo Markets Dr. Helga Jung Insurance Iberia & Latin America, Legal & Compliance, Mergers & Acquisitions 1 For further information about the remuneration structure, including target setting and performance assessment, please refer to the Remuneration Report starting on page 37.
target setting and mOnitOring The Allianz Group steers its operating entities and business segments via an integrated management and control process. This starts with the definition of a business-specific strategy and goals, which are discussed and agreed between the Holding and operating entities. According to this strategy, a three-year plan is prepared by the operating entities and aggregated to form the financial plans for the business divisions and the Allianz Group. The Supervisory Board then approves the plan and sets corresponding targets for the Board of Management. The performance-based remuneration of the Board of Management is linked to short-, mid- and long-term targets to ensure effectiveness and emphasize sustainability. For further details, please refer to the Remuneration Report starting on page 37.
This plan also forms the basis for our capital management. We continuously monitor our business performance against these targets through monthly reviews to ensure that appropriate measures can be taken in the event of negative developments. During these reviews, we monitor key operational and financial metrics. Operating profit and net income are the main financial performance indicators across all business segments for the Allianz Group. In addition, we also use segment-specific figures such as the combined ratio for Property-Casualty, in-force and new business margins and margin on reserves for Life/Health and the cost-income ratio for
This chapter highlights Allianz’s sustainability performance and presents major developments in the areas of Business, Environment, People and Ethics in 2013.1
AlliAnz BrAnd The Allianz brand3 plays a key role in driving sustainable business growth. Altogether, we work with more than 600,000 Allianz ambassadors such as employees, agents and partners towards creating a One Allianz experience for our customers. In line with this goal, our Allianz branded revenues stood at approximately 82 % (2012: 83 %) of total revenues in 2013. Our one-brand vision leaves room for our renowned specialty brands such as PIMCO and Euler Hermes that use Allianz as their reference and build brand equity transfer for our mutual benefit. Allianz is one of the most successful financial services brands in the Interbrand 100 Best Global Brands Ranking 2013: Our brand again demonstrated growth in value, increasing by 8 % to approximately USD 6.7 bN (2012: USD 6.2 bN).
Our customers expect free choice across a variety of different access channels to Allianz. Therefore, we invest in real-time customer interaction and corresponding technology to stay connected to consumers and improve our customer service. One particular focus in our retail business is on making Allianz products and services easy to find and to purchase, be it from Allianz agents and partners or online. For example, offer innovations such as FastQuote from Allianz Italy allow customers to receive a competitive motor quote simply and quickly based on only two data feeds.
Customer BAse Overall, our customer base has grown from approximately 78 million customers insured by Allianz worldwide in 2012 to more than 83 million customers in 2013. The increase was mainly due to the acquisition of Yapı Kredi in Turkey with around 3 million customers and an organic growth of approximately 2 million customers.
Customer foCus The loyalty of our customers is a key factor for sustainable growth. As part of our customer-focused activities, we use key feedback tools, such as the Net Promoter Score (NPS). NPS is a measurement of customers ’ willingness to recommend Allianz and has been established as our key global metric for customer loyalty in about 40 Allianz companies worldwide representing around 90 % of gross premiums written.
Sustainability in proprietary investments We strive to invest sustainably across all asset classes over time. The practical implementation of sustainability in proprietary asset management involves integrating ESG factors into our investment process through research, corporate and country analysis, asset manager selection, monitoring and risk management. Moreover, concerns about climate change are changing the way assets are managed and are giving rise to new and alternative asset classes: − As large institutional investors, insurance companies are important players in the financing of a low-carbon economy. We are one of the leading investors in renewables with a strong portfolio in wind energy and solar power amounting to € 1.7 bN in 2013 (2012: € 1.3 bN). Renewables have an attractive risk-return profile that fits well with our long-term investment strategy. We are gradually expanding our investments in this sector with a planned investment volume of around € 400 MN per year.
− As part of Allianz’s Climate Change Strategy, we are an early investor in the carbon market. The Rimba Raya project in Borneo (Indonesia), which will prevent the emission of 90 million tons of CO2 over a 30-year period, is Allianz’s third carbon investment in emerging markets. We are also using the credits from these direct investments to offset our own carbon footprint.
Sustainability in third-party asset management Allianz manages a growing portfolio of Sustainable and Responsible Investments (SRI). At the end of 2013, assets under management in our SRI funds for PIMCO totaled € 78.2 bN (2012: € 49.1 bN) and AllianzGI € 17.5 bN (2012: € 15.3 bN), bringing the total to € 95.7 bN, which is 6 % of our total third-party assets under management. At the heart of our ESG strategies lay strong ESG research capabilities, engagement with the companies we invest in and pursuit of active share ownership through proxy voting.
Sustainability in underwriting As a leading industrial insurer globally and one of the world’s top life insurers, it is important that we demonstrate leadership to our customers, the industry as a whole and wider society in embedding ESG issues into our insurance business. Effective research and risk management are crucial to mitigating ESG risks. To support our local insurance entities in assessing ESG risks, we have agreed to establish an ESG Impact Desk. Entities will be required to consult this Desk in the event that their transactions trigger key ESG issues within our sensitive business areas. We will continue to work on integrating ESG issues into our insurance business in 2014.
Green solutions We offer our private and commercial customers over 150 green products and services that mitigate the negative effects of climate change or take its environmental impact into account. We are able to report on their contribution to our overall financial performance for the first time and in 2013 revenues totaled more than € 1.1 bN.
Your Allianz 49 Business Operations and Markets 56 Strategy and Steering 59 Progress in Sustainable Development
CArBon reduCtion strAtegy We are committed to reducing our environmental impact. We have a target to reduce our carbon emissions per employee by 35 % by 2015 against a 2006 baseline. Since 98 % of the Group’s emissions come from energy, travel and paper, we are focusing our activities on these three areas. Because energy use is the largest contributor to our carbon footprint, we also have a specific energy target: to reduce energy consumption per employee by 10 % by 2015 against a 2010 baseline.
Energy 57.3 Travel 37.1 Paper 3.9 Water 0.2 Waste 1.5 1 KPMG Wirtschaftsprüfungsgesellschaft AG has provided limited assurance on the 2013 environmental performance information. For further information, please refer to www.allianz.com/sustainability.
Total travel – plane, train, car in tkm 967,210 931,356 953,717 Total paper in metric 1 KPMG Wirtschaftsprüfungsgesellschaft AG has provided limited assurance on the 2013 environmental performance information. For further information, please refer to www.allianz.com/sustainability.
2 2012 and 2011 figures have been adjusted reflecting a methodology change for reporting on energy from renewable sources and 2012 figures were adjusted for error corrections.
As part of our overarching climate change strategy and in addition to our carbon reduction target, we have been a carbon neutral business since 2012, by offsetting our emissions through our own carbon investment projects.
People 4 our emPloyees Our employees’ exceptional commitment and ambition to provide excellent service to our customers are crucial to our success. We place great emphasis on fostering employee engagement, strong leadership and technical expertise among an increasingly diverse workforce of 147,627 employees as of 31 December 2013 (31 December 2012: 144,094 employees) 5.
Diversity Allianz recognizes the importance of having a diverse, inclusive workforce that is made up of employees from different backgrounds. We understand that promoting diversity is necessary for Allianz as a global company to be successful and we have implemented a number of initiatives to support this. Consistent with our Code of Conduct, Allianz has a zero-tolerance policy against discrimination and harassment in the workplace. As part of the effort on the advancement of women at Allianz, in 2008 we set ourselves the global target of increasing the share of women in the talent pools for executive positions to 30 % by 2015. A top management sponsorship program for women and flexible work-life programs, such as part-time employment or job sharing, are part of supporting actions taken in several 4 More information can be found online at www.allianz.com/sustainability/people.
countries. We are also committed to having 30 % of management positions in Germany held by women by the end of 2015.
Share of women in overall workforce 52.8 52.5 52.3 1 Figures based on the number of employees in Allianz’s core business. Excluded are fully consolidated companies which are considered as pure financial investments and companies classified as held for sale.
Age struCture in % Average age – Allianz Group 40.1 39.8 emPloyment relAtionshiP in % Permanent employees 93.3 93.5 Temporary employees 6.7 6.5 Full-time employees 88.5 87.6 Part-time employees 11.5 12.4 emPloyee QuAlifiCAtion in % University degree 45.3 44.5 Vocational training 31.6 31.3 Other qualification 23.1 24.2 emPloyee turnover Total external recruitment 23,477 21,324 Total external leavers 21,115 19,815 1 Figures based on the number of employees in Allianz’s core business. Excluded are fully consolidated companies which are considered as pure financial investments and companies classified as held for sale.
Community engAgement We donate money to address social, environmental and cultural issues relevant to Allianz and the societies in which we operate. In 2013 we donated € 18.6 MN (2012: € 20.4 MN) to support local communities. We also offer our employees the possibility to donate in the event of natural catastrophes. Furthermore, we have an international network of 13 Allianz affiliated corporate foundations.
We offer a number of employee volunteering opportunities in local communities, for example My Finance Coach, which fosters financial literacy among youth and reached more than 150,000 students in Germany alone in 2013, and the leadership development program Social OPEX, in which 59 employees from 21 Allianz subsidiaries shared their expertise with 24 socially-committed organizations.
Our integrity calls upon us to make only promises we can keep and take only risks we can manage. Good corporate governance and transparency are key to gaining and keeping the trust of our stakeholders.
ComPliAnCe mAnAgement In 2013, we continued with measures to further strengthen the effectiveness of compliance management by enhancing quality assurance, global reporting on compliance risks and independent reviews of key elements of our compliance program. Allianz applies its general operational risk management approach to assess corruption and fraud risks. Additional assessments and on-site reviews are combined with the new Compliance Quality Assurance Program. Rolled out in 2012, the program consists of self-assessments, on-site reviews and monitoring via reporting. It verifies the implementation and effectiveness of Allianz’s Compliance Management System, which includes the Anti-Corruption Program, across the Group.
BRIGHTER ECONOMIC CONDITIONS DuRING THE YEAR After a subdued start to 2013 the world economy gained momentum starting in the second quarter, thanks mainly to an improved picture in industrialized countries. Particularly encouraging was the return to positive economic growth in the Eurozone following six negative quarters in a row. In the United States and the U.K., overall output picked up again after only tepid growth at the start of the year. In addition, the economic recovery in Japan continued on a broader footing thanks to expansionary monetary and fiscal policies. By contrast, economic growth in most emerging markets remained fairly subdued, taking their pre-crisis growth rates as a yardstick. All in all, global economic output is likely to have grown by 2.3 % in 2013, well below the 10-year average of close to 3 %.
Gross domestic product (GDP) in industrialized countries increased by about 1.1 % on average last year. While both the United States and Japan registered fairly solid growth of close to 2 %, real GDP in the Eurozone contracted on average by 0.4 % in 2013. As in previous years, economic performance varied widely within the currency area. Countries like Greece and Italy experienced a strong contraction, while Austria, Belgium and the Slovak Republic registered positive, albeit weak, growth. The economic impact emanating from the European debt crisis continued to exert a dampening effect on the German economy. Following an already moderate expansion of 0.7 % in 2012, real GDP grew only 0.4 % in 2013. Emerging markets expanded by 4.4 % on average, with economic growth in emerging Asian markets coming in at 6.2 %.
The primary drivers on the financial markets in 2013 were once again the ultra-loose monetary policy of major central banks and the gradual easing of the European sovereign debt crisis. The financial markets took a hefty knock in the summer months after the Federal Reserve sketched out a possible timetable for a gradual phasing-out of its bond-purchasing program. This not only pushed up yields in the United States, but above all exerted downward pressure on the currencies of those emerging markets with a poor economic scorecard. Countries with yawning current account deficits like India and Turkey proved particularly vulnerable. In December, the Federal Reserve finally announced the first step towards a gradual normalization of its monetary policy – a reduction in the volume of its monthly bond purchases by USD 10 BN to USD 75 BN from January 2014. On the other side of the Atlantic, the European Central Bank lowered its key interest rate in two steps from 0.75 % to 0.25 % over the course of 2013 and continued to signal its readiness to lower key interest rates further and even offer, yet again, exceptionally long terms for financing operations. Yields on 10-year German government bonds ended the year at 1.9 %, an increase of about 60 basis points compared with a year earlier. Despite this increase, spreads on debt-ridden Economic and Monetary Union (EMU) countries narrowed considerably. Buoyed not least by the ongoing low interest rate environment, stock markets rallied. Following an initial depreciation against the U.S. Dollar in the first quarter of 2013, the Euro gained in strength over the remainder of the year. Progress in solving the European sovereign debt crisis and the economic stabilization of the Eurozone have been key factors in shoring up confidence in the Euro.
Low interest rates and financial market volatility were still a major challenge. As a result, investment returns stayed rather low, putting the sector’s profitability under pressure. Furthermore, regulatory developments continued to have a significant impact. Most importantly, the final agreement on Solvency II in November 2013 paved the way for its introduction on 1 January 2016 and reduced somewhat the regulatory uncertainty that has beleaguered the industry in recent years.
In the property-casualty sector, overall market conditions were basically unchanged from the previous year. Stable premium growth in advanced markets was underpinned by moderate rate increases and the gradual improvement of economic activity, for example in the United States and Germany. On the other hand, many markets in southern Europe, for example Italy and Spain, remained in reverse gear with continuous declines in premium income. Premium growth in emerging markets generally proved robust, despite turbulent financial markets. In particular, premium increases in China and Latin America recorded double-digit growth rates. Overall, according to our own market estimates and based on preliminary figures, global premiums grew around 4.5 % in 2013 (adjusted for foreign currency translation effects).
For the asset management industry as a whole, 2013 was a favorable year, although it was a further year of uncertainty in capital markets with volatility remaining at elevated levels. The announcement of the Federal Reserve in May that it would start to take a reduction of its asset purchases into consideration, led to an increase in interest rates. The yield on 10-year U.S. government bonds increased from 1.6 % at the end of May 2013 to around 3 % at the end of the year. As a result of the interest rate increase, valuations for fixed income assets declined, while equities recorded a strong performance. On a global basis, equities rose by 29 % last year.
Executive Summary of 2013 Results − Revenues increased to € 110.8 bn. − Operating profit grew 7.8 % to € 10,066 mn. − Net income increased to € 6,344 mn. − Solvency ratio remained strong at 182 %.1
Earnings summary economic And industry environment in 2013 The world economy gained momentum in 2013, mainly due to a pickup in industrialized countries. The primary drivers of the financial markets in 2013 were once again the ultra-loose monetary policy of major central banks and the gradual easing of the European sovereign debt crisis. While equity markets recorded a strong performance, persistent low interest rates continued to put pressure on the insurance industry’s investment returns. The announcement by the Federal Reserve that it would start to consider a reduction of its asset purchases not only pushed up yields in the United States but also exerted downward pressure on the currencies of emerging markets such as Turkey and Brazil. The Euro strengthened against the U.S. Dollar and selected emerging market currencies over the course of the year.
Annual Report 2013 Allianz Group 67 guarantees in the persistent low interest rate environment. By contrast, risk protection products fared better due to a rising awareness of a protection gap.
Property-Casualty Life/Health Asset Management Corporate and Other Internal growth 1 Total revenues include € (303) mn (2012: € (229) mn) from consolidation.
Life/Health statutory premiums amounted to € 56.8 bn, an increase of 9.1 % on an internal basis. Strong single premium increases from unit-linked and savings products more than compensated for the premium declines in selected markets where we were impacted by regulatory changes or took further profitability and risk management actions.
Total revenues from our Banking operations (reported in our Corporate and Other business segment) decreased by € 39 mn to € 551 mn, mainly as a result of a lower net interest result.
Our non-operating result improved by € 196 mn to a loss of € 422 mn. This was mainly due to lower amortization of intangible assets and lower interest expenses from external debt.
Our non-operating investment result decreased from € 809 mn to € 663 mn. This was driven by a decline in our income from financial assets and liabilities carried at fair value through income as well as lower realizations, which was partly offset by lower impairments.
Non-operating interest expenses from external debt declined by € 90 mn to € 901 mn due to the low interest rate environment. New issuances have had lower funding costs compared to bonds that matured or were redeemed.
Non-operating acquisition-related expenses improved by € 68 mn to € 33 mn, mainly due to lower PImCO B-unit expenses.
Asset Management recorded a strong operating profit of € 3,161 mn – growth of 7.0 %. On an internal basis, operating profit grew by 10.1 %. This was mainly driven by higher operating revenues and to a lesser extent by lower restructuring charges compared to 2012. The costincome ratio improved by 0.6 percentage points to 55.9 %.
Net income increased by € 786 mn – from € 5,558 mn to € 6,344 mn – driven by our strong operational performance, a lower effective tax rate and an improved non-operating result. Net income attributable to shareholders and non-controlling interests amounted to € 5,996 mn (2012: € 5,231 mn) and € 348 mn (2012: € 327 mn), respectively. Our largest non-controlling interests in net income related to Euler Hermes and PImCO.
The Board of Management and the Supervisory Board propose that the net earnings (“Bilanzgewinn”) of Allianz SE of € 3,068,573,879.31 for the 2013 fiscal year shall be appropriated as follows: − Distribution of a dividend of € 5.30 per no-par share entitled to a dividend: € 2,404,893,952.80
Interest and similar income 20,918 21,084 Operating income from financial assets and liabilities carried at fair value through income (net) (1,866) (721) Operating realized gains/losses (net) 3,333 3,215 Interest expenses, excluding interest expenses from external debt (421) (486) Operating impairments of investments (net) (298) (421) Investment expenses (905) (876)
Fee and commission income 10,492 9,812 Other income 209 214 Claims and insurance benefits incurred (net) (47,802) (48,873) Change in reserves for insurance and investment contracts (net) 2 (13,990) (14,360) Loan loss provisions (86) (111) Acquisition and administrative expenses (net), excluding acquisition-related expenses (22,832) (21,945) Fee and commission expenses (3,038) (2,895) Restructuring charges (170) (268) Other expenses (106) (94) Reclassification of tax benefits – 17 Operating profit (loss) 10,066 9,337
Income (loss) before income taxes 9,644 8,719 Income taxes (3,300) (3,161) Net income (loss) 6,344 5,558
AlliAnz issued A cHf 500 mn undAted suBordinA ted Bond In January 2014, Allianz SE issued a subordinated bond in the amount of CHF 500 mn with no scheduled maturity, but with ordinary call rights of Allianz beginning in July 2019. The coupon of 3.25 % p.a. is fixed until July 2019.
The applicable requirements of the German Accounting Standard 20 (“Deutscher Rechnungslegungs Standard – DRS”) are incorpo- rated in the Group Management Report 2013.
In 2013, the reportable segment “Global Assistance” was renamed “Allianz Worldwide Partners”. For further information, please refer to
Other parts of the Group Management Report The following information also forms part of the Group Management Report: − Statement on Corporate Management pursuant to § 289a of the HGb starting on pagE 32,
− Takeover-related Statements and Explanations starting on pagE 34 and the
Business segment overview Our Property-Casualty business offers a wide range of products and services for both private and corporate clients. Our offerings cover many insurance classes such as motor, accident/disability, property and general liability. We conduct business worldwide in more than 50 countries. We are also a global leader in travel insurance, assistance services and credit insurance. We distribute our products via a broad network of agents, brokers, banks and other strategic partners, as well as through direct channels.
Adjusted for foreign currency translation and (de-)consolidation effects, our gross premiums written decreased by 0.3 %. The positive price effect of 0.8 % was more than offset by the negative volume effect of 1.1 %, mainly driven by the changed structure in our crop business in the United States. Excluding the reduction in our U.S. crop business, our internal growth was positive and amounted to 2.5 %. We experienced solid growth in Latin America, Turkey, at Allianz Global Assistance and in Germany.
Analyzing internal premium growth in terms of price and volume, we use four clusters based on 2013 internal growth over 2012: Cluster 1: Overall growth – both price and volume effects are positive.
Cluster 3: Overall decline – either price or volume effects are negative.
In Latin America we recorded gross premiums of € 2,350 MN, up 11.0 % on an internal basis. The main driver was Brazil with all lines of business contributing to our growth.
In the United Kingdom we generated gross premiums of € 2,274 MN. On an internal basis, we expanded by 2.8 % with volume growth mainly driven by our commercial motor line and tariff increases across all commercial lines, in particular in our liability and motor business.
In Central and Eastern Europe gross premiums stood at € 2,477 MN, up 6.3 % on an internal basis. The growth was largely attributable to higher volumes in our motor, personal accident and health business in Russia, which outweighed a negative price effect.
In Switzerland gross premiums went up to € 1,489 MN. Our internal growth of 1.1 % was supported by higher volumes, mainly in our motor and commercial property business. However, this was partly offset by an overall negative price effect.
In France gross premiums amounted to € 4,174 MN – up 0.5 % on an internal basis. This was driven by tariff increases across all lines of business, which more than compensated for volume losses.
In Spain gross premiums rose to € 1,958 MN. Despite the difficult market conditions we recorded internal growth of 0.3 %. We generated higher volumes in our motor, property and liability lines, which offset the effect of declining tariffs.
cluster 3 In the United States gross premiums decreased to € 2,058 MN. On an internal basis, gross premiums dropped by 39.7 %, largely due to the expected reduction in our crop business and, to a lesser extent, declines in our commercial lines, which continue to be impacted by our strict underwriting discipline. The overall price effect was positive.
Operating profit amounted to € 5,268 MN, up € 654 MN and driven by a strong underwriting result.
The combined ratio improved by 1.9 percentage points to 94.3 %.
Premiums earned (net) 42,047 41,705 Accident year claims (29,402) (29,698) Previous year claims (run-off) 1,689 1,207
Our accident year loss ratio stood at 69.9 %, down 1.3 percentage points compared to the previous year. However, net losses from natural catastrophes were up from € 715 MN to € 1,218 MN, increasing their impact by 1.2 percentage points to 2.9 %. While 2012 was burdened primarily by Storm Sandy, 2013 was severely impacted by floods in Central and Eastern Europe and hailstorms in Germany.
The following operations contributed positively to the development of our accident year loss ratio: United States: 1.2 percentage points. This was largely driven by the absence of the negative impacts of 2012 – the high natural catastrophe losses recorded from Storm Sandy and the severe drought in the crop business.
The following operations contributed negatively to the development of our accident year loss ratio: Germany: 0.9 percentage points. The negative impact was due to higher losses from natural catastrophes. However, the attritional claims ratio was lower than in 2012 due to a favorable price momentum – particularly in our motor business.
Reinsurance: 0.2 percentage points. This was entirely driven by higher losses from natural catastrophes. Adjusted for these, the underlying loss ratio was lower than in 2012.
Interest and similar income (net of interest expenses) dropped by € 180 MN. This was driven by lower income on debt securities – mainly due to lower yields. The average asset base 1 grew by 1.7 % from € 100.9 BN to € 102.6 BN.
Operating realized gains and losses (net) decreased by € 99 MN to € 69 MN as last year’s result benefited from gains related to portfolio adjustments.
Fee and commission income 1,226 1,165 Other income 47 35 Fee and commission expenses (1,141) (1,088) Other expenses (21) (23) Restructuring charges (61) (146) Other result 50 (57)
Gross premiums written 1 46,579 46,889 Ceded premiums written (3,982) (4,727) Change in unearned premiums (550) (457) Premiums earned (net) 42,047 41,705 Interest and similar income 3,595 3,770 Operating income from financial assets and liabilities carried at fair value through income (net) (76) (46) Operating realized gains/losses (net) 69 168 Fee and commission income 1,226 1,165 Other income 47 35 Operating revenues 46,908 46,797
Global Insurance Lines & Anglo Markets 9 15,969 16,577 16,363 16,541 11,970 12,564 1,785 1,854
Middle East and North Africa 67 68 73 68 46 48 8 5 1 This reflects gross premiums written on an internal basis, adjusted for foreign currency translation and (de-)consolidation effects.
2 The combined ratio 2013 at Germany and Reinsurance PC was impacted by a one-off effect related to the commutation of internal reinsurance resulting in a 0.9 percentage point improvement in the combined ratio for Germany and an increase of 2.3 percentage points in Reinsurance PC. This had no impact at Group level.
3 Includes “Münchener und Magdeburger Agrarversicherung AG” with gross premiums written of € 32 mn, premiums earned (net) of € 14 mn and operating loss of € 1 mn for 2013, and gross premiums written of € 33 mn, premiums earned (net) of € 15 mn and operating profit of € 6 mn for 2012.
7 Contains € 11 mn and € 16 mn operating profit for 2013 and 2012, respectively, from a management holding located in Luxembourg.
Global Insurance Lines & Anglo Markets 9 92.5 93.2 63.3 65.2 29.2 28.0
8 The reserve strengthening for asbestos risks in 2012 at Fireman’s Fund Insurance Company of € 71 mn had no impact on the financial results of the Allianz Group and Fireman’s Fund’s combined ratio under IFRS.
11 The business division Allianz Worldwide Partners includes the legal entities of Allianz Global Assistance and Allianz Worldwide Care as well as the reinsurance business of Allianz Global Automotive and income and expenses of a management holding. The set-up of this division will be further enhanced during the following quarters. The reinsurance business of Allianz Global Automotive contributed with gross premiums written of € 83 mn, premiums earned (net) of € 35 mn and an operating loss of € 24 mn for 2013 and with gross premiums written of € 2 mn, premiums earned (net) of € 0.3 mn and an operating loss of € 1 mn for 2012. The operating profit of Allianz Worldwide Partners includes Global Automotive central costs. Operating profit slightly up on an underlying basis.
Business segment overview Allianz offers a broad range of life, health, savings and investment -oriented products, including individual and group life insurance contracts. Via our distribution channels – mainly tied agents, brokers and bank partnerships – we offer life and health products to both private and corporate clients. As one of the worldwide market leaders in life business we serve customers in more than 45 countries.
The growth in premiums was predominantly driven by strong single premium unit-linked product sales in Italy and Taiwan. It was supported by an increase in single premium business with savings products including traditional endowment and annuity products in Germany. This was partly offset by sizeable declines in South Korea and Switzerland where profitability and risk management actions limited volumes, and in Poland due to regulatory changes.
Overall, we recorded a higher proportion of single premiums over recurring premium business compared to 2012.
In Latin America, premiums were up 31.0 % to € 329 mn. This growth was driven by Mexico, where we recorded increased premiums from a large annuity contract and higher sales of investment-oriented products with single premiums. In Colombia, premiums decreased as several large contracts were not renewed.
Premiums in Spain increased 14.0 % to € 1,225 mn. This was mainly driven by strong sales of investment-oriented and unit-linked products distributed through the bancassurance and agent channels. Increased premiums in the traditional business also contributed to this growth.
In our German life business, premiums grew 12.0 % to € 17,000 mn. This growth was largely driven by a strong increase in single premium business with savings products including traditional endowment and annuity products, while our business with recurring premiums was stable. Premiums in our German health business remained broadly unchanged at € 3,264 mn. The strong business in supplementary coverage compensated for decreased business in full health care coverage.
In France, we recorded a premium increase of 6.7 % to € 8,511 mn. This growth was largely driven by our employee benefit products, individual health business and the strong performance of the partnerships business in individual life. France experienced a beneficial shift of its traditional life business towards unit-linked products.
Premiums in the United States increased to € 7,317 mn, representing growth of 3.9 %. This was primarily driven by stronger fixedindexed annuity sales, where we gained positive momentum partially as a result of distribution and product promotions starting in the third quarter of 2013. This was partly offset by a decline in the variable annuity business. Both business lines were impacted by product changes in reaction to low interest rates in mid-2012 that initially resulted in a considerable drop in sales.
Premiums in Central and Eastern Europe declined to € 913 mn, representing a drop of 21.0 %. This largely relates to Poland where regulatory changes led to a significant decrease in deposit business. In Hungary, the increase in single premium unit-linked products as a result of a sales campaign partly offset this decline.
Operating profit decreased by € 234 mn to € 2,709 mn, mainly as a result of the € 899 mn decline in the operating investment result, which was burdened by the net of adverse foreign currency and financial derivatives impacts. However, this decline was partly offset by lower allocations to policy reserves.
Operating realized gains and losses (net) amounted to € 3,293 mn. The increase of € 249 mn was driven by higher realized gains on debt securities and equities.
Operating impairments of investments (net) decreased from € 428 mn in 2012 to € 331 mn. This represents an improvement of € 97 mn as the previous year was burdened by higher equity impairments, mainly on our investments in financial sector assets.
Net income decreased by € 93 mn to € 1,941 mn, consistent with our operating performance, while a slightly improved effective tax rate contributed positively.
Ceded premiums written (648) (693) Change in unearned premiums (332) (248) Statutory premiums (net) 55,804 51,406 Deposits from insurance and investment contracts (31,223) (27,013) Premiums earned (net) 24,581 24,393 Interest and similar income 16,766 16,832 Operating income from financial assets and liabilities carried at fair value through income (net) (1,829) (727) Operating realized gains/losses (net) 3,293 3,044 Fee and commission income 646 534 Other income 157 154 Operating revenues 43,614 44,230
Claims and insurance benefits incurred (net) (20,096) (20,386) Changes in reserves for insurance and investment contracts (net) (13,556) (13,971) Interest expenses (81) (84) Operating impairments of investments (net) (331) (428) Investment expenses (839) (759) Acquisition and administrative expenses (net) (5,603) (5,316) Fee and commission expenses (251) (228) Restructuring charges (50) (27) Other expenses (98) (88) Operating expenses (40,905) (41,287)
Margin on reserves 2 in basis points 58 67 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.
Statutory premiums 1 Premiums earned (net) Operating profit (loss) Margin on reserves 2
4 On 12 July 2013, Allianz acquired Yapı Kredi Bank’s 93.94 % shareholding in the Turkish property-casualty insurance company Yapı Kredi Sigorta, including its life and pension insurance subsidiary Yapı Kredi Emeklilik.
Asset Management − Strong operating profit of € 3.2 bn. − Cost-income ratio improved to 55.9 %. − Third-party net outflows of € 12 bn in 2013. − Total assets under management at € 1,770 bn.
Total assets under manage ment as of 31 December in € bn 1,770 1,852 thereof: Third-party assets under manage ment as of 31 December in € bn 1,361 1,438
Business segment overview Allianz offers Asset Management products and services for third-party investors and the Allianz Group’s insurance operations. We serve a wide range of retail and institutional clients worldwide with investment and distribution capacities in all major markets. Based on total assets under management, we are one of the largest asset managers in the world that manages third-party assets with active investment strategies.
Assets under management Development of total assets unDer management € bn
Fixed income Equities Other Changes 1 Prior year figures have been restated to reflect the retrospective application of the amended standard IAS 19 – Employee Benefits, effective as of 1 January 2013. For further information, please refer to note 4 to the consolidated financial statements.
2 As of 1 January 2013, all restructuring charges are presented within operating profit and all prior year figures have been adjusted to conform to the current accounting presentation.
In 2013, we recorded net outflows of total assets under management of € 14 bn. Of these, € 12 bn were related to third-party assets under management and € 2 bn to Allianz group assets. In the second half of 2013 the rise in interest rates, especially in the United States, led to a decline in valuations for fixed income assets, while equities globally recorded a strong performance. These developments and the respective volatile global bond markets resulted in fixed income net outflows especially in the second half of 2013, which more than offset the strong fixed income net inflows in the first half of the year. Overall, net outflows stemmed from the United States and related to traditional fixed income products, while our non-traditional fixed income products and equities recorded net inflows in 2013.
The major driver behind the development of total assets under management was unfavorable foreign currency translation effects of € 68 bn due to the strong depreciation of the U.S. Dollar against the Euro.1
Favorable market effects accounted for an increase of € 1bn in total assets under management. This was entirely driven by a strong positive market return of € 27 bn on equities and was mostly offset by a negative impact of € 26 bn on fixed income.
1 Based on the location of the asset management company. 2 “America” consists of the United States, Canada and Brazil (approximately € 823 bn, € 11 bn and € 3 bn third-party assets under management as of 31 December 2013, respectively). 3 “Other” consists of third-party assets managed by other Allianz Group companies (approximately € 32 bn as of 31 December 2013 and € 28 bn as of 31 December 2012, respectively).
The regional allocation of third-party assets under management shifted slightly. Europe’s share rose by 3.4 percentage points, mainly due to a reallocation of some third-party assets under management from the United States to Europe and a positive market return driven by equities. America’s share decreased by 3.1 percentage points, due to the strong depreciation of the U.S. Dollar against the Euro, net outflows, the negative market return on fixed income assets and the reallocation of assets.
The split of third-party assets under management between our retail and institutional clients 2 shifted slightly – up one percentage point for retail clients (37 %) and down one percentage point for institutional clients (63 %).
Outperforming third-party assets under management Underperforming third-party assets under management 1 The investment performance is based on Allianz Asset Management account-based, asset-weighted three-year investment performance of third-party assets versus the primary target including all accounts managed by portfolio managers of Allianz Asset Management. For some retail funds, the net of fee performance is compared to the median performance of the corresponding Morningstar peer group (first and second quartile mean outperformance). For all other retail funds and for all institutional accounts, the gross of fee perfor mance (revaluated based on closing prices) is compared to the respective benchmark based on different metrics.
The overall investment performance of our Asset Management business was on a high level, with 85 % of our assets outperforming their respective benchmarks (31 December 2012: 92 %). An outstanding 90 % of PIMCO assets outperformed their respective benchmarks. 55 % of AllianzGI assets outperformed their respective benchmarks.
Our income from financial assets and liabilities carried at fair value through income (net), was down by € 3 Mn due to reduced levels of seed money in 2013.
Our net income increased by € 115 Mn, or 6.4 % to € 1,925 Mn. This was largely consistent with our strong operating performance.
Fee and commission expenses (1,484) (1,310) Net fee and commission income 7,127 6,731 Net interest income 1 12 24 Income from financial assets and liabilities carried at fair value through income (net) 13 16 Other income 10 15 Operating revenues 7,162 6,786
Business segment overview Corporate and Other encompasses the reportable segments Holding & Treasury, Banking and Alternative Invest ments. Hold­ ing & Treasury includes the management of and support for Allianz Group’s businesses through its strategy, risk, corporate finance, treasury, financial reporting, controlling, communica­ tion, legal, human resources and technology functions. Our banking products offered in Germany, Italy, France, the Nether­ lands and Bulgaria complement our insurance product port folio. We also provide global alternative investment management services in the private equity, real estate, renewable energy and infrastructure sectors, mainly on behalf of the Allianz Group.
Our net loss decreased from € 1,854 mn to € 1,334 mn. This improvement was supported by a higher non-operating investment result, lower interest expenses from external debt and a decline in amortization of intangible assets. Our reduced operating loss also contributed to this development.
Our net interest result increased from € (169) mn to a net loss of € 63 mn. Interest and similar income increased by € 33 mn to € 278 mn due to the resumption of interest payments on our silent participation in Commerzbank, but partly offset by lower interest income from other debt instruments. Our interest expenses, excluding interest expenses from external debt, decreased by € 73 mn to € 341 mn as rates and internal borrowing diminished.
Administrative expenses (net), excluding acquisition-related expenses, grew by € 93 mn to € 684 mn, mainly due to higher pension costs as a result of lower discount rates.
During the second half of 2013 we reduced restructuring provisions mainly related to our data center consolidation project by € 34 mn.
In 2013, we incurred restructuring charges of € 88 mn almost completely related to the closure of the Allianz Bank’s business operations. In this context, it is worth mentioning that our restructuring charges have been presented within the operating profit since the beginning of 2013. Excluding the restructuring charges, the operating result in Banking would have improved from 2012 by € 31 mn to a loss of € 3 mn in 2013.
Our net interest, fee and commission result decreased by € 33 mn to € 545 mn due to a lower net interest result. Because of the low interest rate environment and a reduction in our exposure to government bonds, the net interest result was down by € 37 mn to € 332 mn. Our net fee and commission income increased by only € 4 mn to € 213 mn as the effects of growth in sales of insurance and investment-oriented products in Italy and the closure of Allianz Bank’s business operations in Germany essentially offset each other.
Our operating income from financial assets and liabilities carried at fair value through income (net) dropped by € 6 mn to € 8 mn.
Outlook 2014 − Global economic activity poised to pick up in 2014. − Allianz Group operating profit outlook in the range of € 10.0 BN, plus or minus € 0.5 BN.
Overview: 2013 results versus previous year outlook 1 2013 results versus previous year outlook for 2013 outlook 2013 – as per annual report 2012 results 2013 allianz Group Operating profit of € 9.2 bn, plus or minus € 0.5 bn. Operating profit of € 10.1 bn. Maintenance of strong capital and solvency ratios. Regulatory solvency ratio of 182 % (2012 (as published): 197 %; 2012 (pro forma restated): 181 %).“aa” Standard & Poor’s rating with “stable” outlook (revised upward from “negative” in March 2013). Allianz remains one of the highest-rated insurance groups.
Return on equity, after income taxes, of 11.9 % (2012 (as published): 10.5 %; 2012 (restated): 11.1 %). Proposed dividend at € 5.30 (2012: € 4.50) per share. Payout ratio of 40 %.
Profitable growth. We recorded growth of 7.8 % in operating profit compared to the previous year, driven by improvements in the Property-Casualty and Asset Management business segments and partially offset by a lower Life/Health contribution.
Investment strategy focused on generating attractive returns and minimizing vulnerability to price fluctuations.
Operating investment result decreased by € 1.0 bn (4.7 %) mainly as a result of the low interest environment and unfavorable foreign currency effects. Non-operating investment result fell by € 0.1 bn.
Operating investment income (net) declined by 5.6 % to € 3.0 bn.
Accident year loss ratio excluding claims from natural catas trophes improved from 69.5 % to 67.0 %. Expense ratio increased slightly from 27.9 % to 28.4 %, mainly driven by the change in the crop business structure in the United States, the regulatory changes in Brazil (policy collection fee) and the acquisition of the activities of Gan Eurocourtage in France.
life/HealtH Revenues at 2012 level. Statutory premiums of € 56.8 bn, compared to € 52.3 bn in 2012. Growth driven by strong sales in the unit-linked business without guarantees.
Prioritizing profitability over growth, taking further product and pricing actions as necessary.
Cost-income ratio at or below 60 %. Cost-income ratio improved by 0.6 percentage points to 55.9 %.
1 For more detailed information on the previous year outlook for 2013, please see the Annual Report 2012 starting on page 157.
Financial markets will probably remain under the spell of monetary policy in 2014. We expect to see a gradual exit from crisis mode, led by the U.S. central bank reining in its asset purchases. Nevertheless, given its concerns about money market rates, banking liquidity and lending growth, the European Central Bank might actually slightly ease further – despite the recovery in the Eurozone – before eventually starting to exit from its very expansionary policy stance in late 2014. Even though monetary policy would still remain highly accommodative, the first steps towards an exit could well be accompanied by pronounced swings in the equity, bond and currency markets.
Overall profitability for the property-casualty sector – although benefiting from a continuing gradual market hardening – is expected to remain stable in 2014, with low yields working their way through to earnings, prices increasing modestly and reserve releases dwindling somewhat but helped by the benign inflationary environment.
In the life sector, we expect premium growth to recover, too. In mature markets, better economic prospects and a new product mix will help to lift top-line growth. In emerging markets strong growth will be mainly driven by rising incomes and social security reforms. All in all, we expect that global premium revenue will rise in the 3.5 % – 4.5 % range in 2014 (adjusted for foreign currency translation effects).
Throughout 2013, investors demonstrated a growing risk appetite by, among other actions, shifting their asset allocation towards equities, multi-asset or solutions-oriented fixed income strategies. Although equities may remain vulnerable to setbacks in the near future due to the rising valuations, higher interest rates and global demographic trends on the other hand, will increase the attractiveness of bonds. This holds true in particular for liability-driven investors or for the growing number of retirees in the developed world looking for a stable stream of income.
Improving economic conditions in certain developed markets as well as trends in client demand represent a positive environment for further asset management industry growth. At the same time, industry profitability is expected to remain challenged as asset flows into passive products and growing expenses from higher distribution or marketing costs put pressure on operating margins, and the effects of increased regulatory oversight and reporting take their toll.
In such an environment a money manager’s ability to grow is dependent on providing innovative client-focused investment solutions, delivering above-benchmark investment results, offering comprehensive investment products and services, its ability to prudently and holistically respond to client needs and upping the scale and efficiency of operations.
Overview: outlook and assumptions 2014 outlook 2014 allianz Group Operating profit of € 10.0 bn, plus or minus € 0.5 bn. Protection of shareholders’ investments, while continuing to provide attractive returns and dividends. Selective profitable growth.
property-Casualty Growth in gross premiums written by more than 3.0 %. Operating profit in the range of € 5.1 bn to € 5.7 bn. Combined ratio below 96 % over the cycle. Pressure on operating investment income (net) due to reinvestments in a low interest rate environment.
− A 100 basis point increase or decrease in interest rates would, respectively, either raise or lower operating profits by approximately € 0.1 BN in the first year following the rate change. This does not include fair value changes in interest rate sensitive positions that are reported in our income statement.
− A 10 % weakening or strengthening of the U.S. Dollar versus our planned exchange rate of 1.35 to the Euro would have a negative or positive impact on operating profits of approximately € 0.3 BN, respectively.
lower level mainly due to lower expected performance fees and lower average assets under management. In the Life/Health business segment, operating profitability will remain under pressure due to low yields. However, we expect an increase compared to the 2013 results, which were burdened by negative one-off effects.
As our product and service offerings differ from country to country, information about the development of our sales markets and modifications to our product portfolio also varies. Overall, we expect our market and product mix to remain relatively unchanged in 2014. In the Life/ Health business segment, in line with expected market trends, we could see a fall in premiums from life insurance products with guarantees.
In 2013, we exceeded our operating profit target, reaching € 10.1 BN. In 2014, we envisage operating profit of € 10.0 BN, plus or minus € 0.5 BN, as we expect a lower level of performance fees and lower average assets under management in the Asset Management business segment, partially compensated for by an expected increase in the Life/Health business segment.
Premium growth in 2014 will be mainly driven by our global insurance lines, the Anglo markets, emerging countries in Latin America and Asia, as well as by improvements in some of our core markets such as Germany, Italy and France.
We believe the overall slow rise in prices we witnessed in 2013 to continue in 2014, contributing to the expected growth in our gross premiums. However, as in previous years, we will keep focusing on achieving outstanding underwriting results by adhering to our strict underwriting discipline and will be willing to accept a lower top line if target margins cannot be achieved.
For 2014, we anticipate keeping the combined ratio below 96 % over the cycle (2013: 94.3 %). This rests on our expectation that the aggregate effect of improvements in pricing, claims management and productivity will more than compensate for underlying claims inflation. Despite the high volatility of natural catastrophes in recent years, we assume such claims will be in line with their expected average level in 2014.
As the low interest rate environment is likely to persist, investment income will remain under pressure due to the rather short duration of investments in the Property-Casualty business segment. We will continue to take measures to adapt our investment strategy to ongoing market conditions.
As in 2013, we will continue to actively work on mitigating the impacts of the difficult market conditions, particularly low interest rates. This includes product and distribution actions, expense and asset/liability management as necessary, while exploring options to further optimize the use of capital. Still, it must be noted that market and accounting volatility along with the level of net harvesting can significantly affect the Life/Health business segment results and make precise predictions difficult.
After the strong profit growth recorded in previous years, we do not anticipate this development continuing in 2014 – mainly due to a lower expected level of performance fees and a lower expected average U.S. Dollar. Asset driven revenues are also likely to remain under their 2013 level as a result of the expected lower average assets under management. Additionally, the transfer of certain asset management entities from the Asset Management to the Life/Health business segment and Banking reportable segment will negatively impact our profitability. Therefore, we envisage our operating profit to be in the range of € 2.5 BN and € 2.9 BN in 2014 (2013: € 3.2 BN).
We expect to maintain a cost income ratio of 60 % or below in 2014 (2013: 55.9 %), supported by our focus on expense discipline and operational excellence.
Corporate and otHer Our Corporate and Other business segment recorded an operating loss of € 1.0 BN in 2013. Due to improving results from our banking activities and slightly deteriorating operating results of the Holding & Treasury reportable segment – mainly driven by our technology investments – we predict an operating loss in the range of € 1.0 BN to € 1.2 BN for Corporate and Other (including consolidation) in 2014.
As we continuously strive to protect our investors’ capital and provide attractive returns and dividends, we aim to strike a balance between payout, solvency and sustainability when determining our dividend proposal. For 2013, we consider a payout ratio of 40 % of net income attributable to shareholders to allow us to retain the capital needed to support our growth and provide an attractive dividend. This policy is reflected in our proposed dividend of € 5.30 per share.
In 2014, we will reevaluate our target payout ratio of 40 %.
Overall, at the date of issuance of this Annual Report and given current information regarding natural catastrophes and capital market development – in particular foreign currency, interest rates and equities – the Board of Management has no indication that the Allianz Group is facing any major adverse developments.
1 As of 1 January 2013, our shareholders’ equity decreased by € 3.2 bn due to the amendments to IAS 19. Prior year figures have been restated to reflect the retrospective application of the amended standard IAS 19 – Employee Benefits, effective as of 1 January 2013. For further information, please refer to note 4 to the consolidated financial statements.
Conglomerate SolvenCy1 € bn 12/31/2013 12/31/2012 as published 12/31/2012 pro forma restated
Solvency ratio Eligible capital Requirement 1 Off-balance sheet reserves are accepted by the authorities as eligible capital only upon request. Allianz SE has not submitted an application so far. Excluding off-balance sheet reserves, the solvency ratio as of 31 December 2013 would be 173 % (2012 (pro forma restated): 171 %; 2012 (as published): 188 %).
After reflecting the negative impact of a change in accounting for pensions (pro forma restated), our conglomerate solvency ratio strengthened by one percentage point despite the redemption of a subordinated bond. Compared to year-end 2012 (as published), our conglomerate solvency ratio dropped by 15 percentage points to 182 %. This was mainly due to amendments to IAS 19,4 which reduced the Group’s eligible capital for solvency purposes by € 4.0 bn as of 1 January 2013. In 2013, negative currency translation adjustments and the above-mentioned redemption of a subordinated bond further decreased our eligible capital by € 1.0 bn and € 1.5 bn (converted 4 For further details on the amendments to IAS 19, please refer to note 4 to the consolidated financial statements.
Annual Report 2013 Allianz Group 93 value), respectively. These effects were only partly offset by our net income (net of the proposed dividend). In total, our eligible capital was down from € 48.4 bn to € 46.5 bn, including off-balance sheet reserves of € 2.3 bn (31 December 2012: € 2.2 bn). The required funds increased by € 1.0 bn to € 25.6 bn, mainly due to higher aggregate po licy reserves in Life/Health and growth in our Asset Management business. As a result, our eligible capital exceeded the minimum legally stipulated level by € 20.9 bn.
In the following sections, we show the asset allocation for our insurance and banking portfolio and analyze important developments in the balance sheets of our business segments.
As of 31 December 2013, total assets amounted to € 711.5 bn and total liabilities were € 658.7 bn. Compared to year-end 2012, total assets and total liabilities increased by € 17.1 bn and € 17.2 bn, respectively.
market environment of different aSSet ClaSSeS The financial markets showed a mixed picture in 2013. Equity markets rallied, in particular during the second half of the year, fueled by the low interest rate environment. In contrast, selected major bond markets faced increasing government bond yields as the market anticipated an attenuation of the ultra-loose monetary policy of the Federal Reserve.
German and particularly U.S. government bond yields considerably increased in 2013 – although starting from very low levels. In contrast, Italian and Spanish government bond yields decreased compared to 2012, with Spanish government bond yields showing the higher movement.
Corporate credit spreads for A-rated debtors remained on a very low level in Europe and narrowed slightly in the United States during 2013.
StruCture of inveStmentS – portfolio overview Effective from this annual report, we changed the presentation of our investment portfolio in our Group Management Report. From now on, we also include investments of banking and asset management, which were excluded in the former presentation. We believe this will simplify a comparison with the figures presented in the notes to the financial statements. As a result, the following portfolio review covers all Allianz Group assets held for investment. The previous year’s figures have been adjusted accordingly. Due to this change, our total investment portfolio was up by € 24.0 bn as of 31 December 2012 to € 531.5 bn (previously published: € 507.5 bn).
Investment portfolio as of 31 December 2013: € 536.7 bn [as of 31 December 2012: € 531.5 bn] in %
Compared to the adjusted figures of 31 December 2012, our investment portfolio increased by € 5.2 bn to € 536.7 bn. This increase was primarily driven by a larger gross exposure to equities and, to a lesser extent, by higher real estate investments. It was partly offset by lower net cash investments.
Our exposure to real estate held for investment grew from € 9.7 bn to € 10.8 bn due to new investments and still accounted for 2 % of our investment portfolio.
Our cash and other investments decreased from € 11.7 bn to € 9.8 bn, primarily as a result of new investments. Please refer to Liquidity and Funding Resources from page 99 onwards for further information on our liquidity position.
The vast majority of our investment portfolio comprises diversified debt instruments, which remained almost unchanged at € 480.6 bn (31 December 2012: € 480.4 bn). Reinvested interest flows offset declines in the fair value of our bonds, which were triggered by rising interest rates and adverse currency effects as well as realizations. Given the growth of our total investment portfolio, the share of debt investments decreased by one percentage point to 89 %.
Management Discussion and Analysis 64 Business Environment 66 Executive Summary of 2013 Results 71 Property-Casualty Insurance Operations 78 Life/Health Insurance Operations 82 Asset Management 85 Corporate and Other 92 Balance Sheet Review 99 Liquidity and Funding Resources 104 Reconciliations
Our government bond exposure remained almost flat at € 179.6 bn (31 December 2012: € 177.4 bn), representing 37 % of our fixed income portfolio. During 2013 we increased our exposure to supranational bonds and decreased our exposure to Italy. Our sovereign exposure in Italy and Spain equaled 6.0 % and 0.6 % of our fixed income portfolio, respectively. The corresponding unrealized gains (gross) amounted to € 1,922 mn in Italy and € 144 mn in Spain. Our government bond exposure in Portugal remained limited and we reduced substantially all our remaining exposure in Greece and Ireland at the beginning of the year.
Our corporate bond portfolio increased from € 107.1 bn to € 116.3 bn as new investments exceeded fair value declines.
1 Excluding self-originated German private retail mortgage loans. For 2 %, no ratings were available.
Our fixed income portfolio also includes 4 % of asset-backed securities (AbS), which amounted to € 18.4 bn, down € 1.1 bn. This decrease was driven by a reduction of mortgage-backed securities (mbS) issued by U.S. agencies, which are backed by the U.S. government. Their share declined from 21 % to 13 % of our AbS securities. Overall, 73 % of our AbS were related to mbS and 97 % of the AbS portfolio received an investment grade rating, with 87 % rated “AA” or better (31 December 2012: 88 %).
Income from financial assets and liabilities carried at fair value through income (net) worsened from a loss of € 511 mn to a loss of € 1,842 mn. This was primarily driven by the net of negative foreign currency effects and financial derivatives that are used to protect against equity and foreign currency fluctuations as well as to manage duration and other interest rate-related exposures, in particular in our German Life/Health business. The appreciation of the Euro against selected emerging markets currencies and the rise in interest rates were the main drivers. In addition, the drop also includes the absence of income from The Hartford warrants, which were sold in April 2012.
Realized gains and losses (net) remained almost stable at € 4,285 mn as lower realizations on equities and real estate were almost offset by higher realizations on debt securities.
Investment expenses increased by € 29 mn to € 905 mn, driven by new real estate investments.
Property-Casualty assets Compared to year-end 2012, our asset base in Property-Casualty decreased by € 4.3 bn to € 101.0 bn. This decrease, which primarily affected debt securities and loans and advances to banks and customers, was driven almost equally by net flows, market and foreign currency effects.
Debt securities 67.0 69.8 Cash and cash pool assets 4 4.9 5.1
3 These do not include affiliates of € 8.9 bn and € 8.8 bn as of 31 December 2013 and 31 December 2012, respectively.
Property-Casualty liabilities development of reServeS for loSS and loSS adjuStment expenSeS1 € bn b a c d 12/31/2013 12/31/2012
+ 13.9 a Loss and loss adjustment expenses paid in current year relating to previous years b Loss and loss adjustment expenses incurred in previous years c Foreign currency translation adjustments and other changes, changes in the consolidated subsidiaries of the Allianz Group and reclassifications d Reserves for loss and loss adjustment expenses in current year
1 After business segment consolidation. For further information about changes in the reserves for loss and loss adjustment expenses for the Property-Casualty business segment, please refer to note 19 to the consolidated financial statements.
“Reserves for loss and loss adjustment expenses” to the line item “Reserves for insurance and investment contracts”, which led to a reclassification effect of € (2.9) bn.1 Foreign currency translation adjustments and other changes amounted to € (1.2) bn. Excluding both effects, the net reserves decreased by € 1.2 bn.
1 For further information on changes in presentation, please refer to note 4 to the consolidated financial statements.
Loans and advances to banks and customers 89.9 94.1 Financial assets for unit-linked contracts 4 81.1 71.2 Life/Health asset base 487.0 472.3 1 This comprises assets of € 1.7 bn and € 1.7 bn and liabilities (including the market value lia bility option) of € (5.9) bn and € (5.2) bn as of 31 December 2013 and 31 December 2012, respectively.
2 These do not include affiliates of € 0.8 bn and € 0.7 bn as of 31 December 2013 and 31 December 2012, respectively.
4 Financial assets for unit-linked contracts represent assets owned by, and managed on behalf of, policyholders of the Allianz Group, with all appreciation and depreciation in these assets accruing to the benefit of policyholders. As a result, the value of financial assets for unit-linked contracts in our balance sheet corresponds to the value of financial liabilities for unit-linked contracts. The International Financial Reporting Standards (IFRS) require the classification of any contract written by an insurance company either as an insurance contract or as an investment contract, depending on whether an insurance component is included. This requirement also applies to unit-linked products. In contrast to unit-linked investment contracts, unit-linked insurance contracts include coverage for significant mortality or morbidity risk.
finanCial aSSetS for unit-linked ContraCtS1 € bn b a c 12/31/2013 12/31/2012
Financial assets for unit-linked contracts Changes 1 Financial assets for unit-linked contracts represent assets owned by, and managed on behalf of, policyholders of the Allianz Group, with all appreciation and depreciation in these assets accruing to the benefit of policyholders. As a result, the value of financial assets for unit-linked contracts in our balance sheet corresponds to the value of financial liabilities for unit-linked contracts. The International Financial Reporting Standards (IFRS) require the classification of any contract written by an insurance company either as an insurance contract or as an investment contract, depending on whether an insurance component is included. This requirement also applies to unit-linked products. In contrast to unit-linked investment contracts, unit-linked insurance contracts include coverage for significant mortality or morbidity risk.
Life/Health liabilities Life/Health reserves for insurance and investment contracts grew by € 9.9 bn, or 2.6 %, to € 390.9 bn in 2013. The € 15.7 bn increase in aggregate policy reserves was mainly driven by our operations in Germany (€ 9.3 bn), the United States (€ 2.5 bn before currency effects), Luxembourg and Italy (€ 0.7 bn each). Reserves for premium refunds decreased by € 2.2 bn due to lower unrealized gains to be shared with policyholders. The currency impact of € (3.6) bn mainly resulted from the weaker U.S. Dollar (€ (2.3) bn) and Asian currencies (€ (0.9) bn).1 1 Based on the closing rate on the respective balance sheet dates.
Asset Management assets The Asset Management business segment’s results are derived primarily from third-party asset management. In this section, we refer only to the business segment’s own assets.1
The main components of the business segment’s asset base were cash and cash pool assets and debt securities. Overall, the Asset Management asset base increased from € 3.8 bn to € 4.4 bn, entirely driven by higher cash and cash pool assets.
3 Including cash and cash equivalents, as stated in our business segment balance sheet, of € 1.5 bn and € 4.2 bn and receivables from cash pooling amounting to € 0.7 bn and € 0.2 bn, net of liabilities from securities lending and derivatives of € (0.2) bn and € (0.1) bn, as well as liabilities from cash pooling of € (7.0) bn and € (4.7) bn as of 31 December 2013 and 31 December 2012, respectively.
1 For further information on the development of these third-party assets, please refer to the Asset Management chapter.
2 For further information on Allianz SE debt as of 31 December 2013, please refer to notes 22 and 23 to the consolidated financial statements.
Liquidity management and funding of Allianz SE Allianz SE is responsible for managing the funding needs of the Group, maximizing access to liquidity sources and minimizing borrowing costs. Restrictions on the transferability of capital within the Group result mainly from the capital maintenance rules under applicable company laws and the regulatory solvency capital requirements applicable for regulated group companies.
LiQUiDitY resoUrCes AnD Uses Allianz SE ensures adequate access to liquidity and capital for our operating subsidiaries. The main sources of liquidity available for Allianz SE are dividends received from subsidia ries and funding provided by capital markets. We define liquidity resources as assets that are readily available – namely cash, money market investments as well as highly liquid government bonds. The major uses of funds include paying interest expenses on our debt funding, operating costs, internal and external growth investments as well as dividends to our shareholders.
Our insurance operations also carry a high proportion of liquid investments which can be converted into cash to pay for claims. Generally, our investments in fixed income secu rities are sequenced to mature when funds are expected to be needed.
The overall liquidity of our insurance operations depends on capital market developments, interest rate levels and our ability to realize the market value of our investment portfolio to meet insurance claims and policyholder benefits. Additional factors affecting the liquidity of our Property- Casualty insurance operations include the timing, frequency and severity of losses underlying our policies as well as policy renewal rates. In our Life operations, liquidity needs are generally influenced by trends in actual mortality rates compared to the related assumptions underlying our life insurance reserves. They are also affected by the impact of market returns or crediting rates and by the behavior of our life insurance clients, for example regarding the level of surrenders and withdrawals.
No expiry date for Conditional Capital 2010 (issuance in case option or conversion rights are exercised)
Please refer to page 35 regarding authorizations to issue and repurchase shares.
mAtUritY strUCtUre oF ALLiAnz se’s senior AnD sUBorDinAteD BonDs As oF 31 DeCemBer 2013 nominal value in € Bn
Senior bonds Subordinated bonds 1 € 1.5 bn subordinated bond called for redemption effective January 15, 2014.
Long-term debt funding As of 31 December 2013, Allianz SE had senior and subordinated bonds in a variety of maturities outstanding reflecting our focus on long-term financing. As the cost and availability of external funding may be negatively affected by general market conditions or by matters specific to the financial services industry or the Allianz Group, we seek to reduce refinancing risk by actively steering the maturity profile of our funding structure.
Equity funding As of 31 December 2013, the issued capital registered at the Commercial Register was € 1,168,640,000. This was divided into 456,500,000 registered shares with restricted transferability. As of 31 December 2013, Allianz SE held 2,761,795 (2012: 2,777,438) own shares.
Allianz SE has the option to increase its equity capital base according to authorizations provided by our shareholders. The following table outlines Allianz SE’s capital authorizations as of 31 December 2013:
Annual Report 2013 Allianz Group 101 senior AnD sUBorDinAteD BonDs issUeD or gUArAnteeD BY ALLiAnz se 1
1 For further information on Allianz SE debt (issued or guaranteed) as of 31 December 2013, please refer to notes 23 and 24 to the consolidated financial statements.
Funding in currencies other than the Euro enables us to diversify our investor base or to take advantage of favorable funding costs in those markets. Funds raised in non-Euro currencies are incorporated in our general hedging strategy. As of 31 December 2013, approximately 9.3 % (2012: 13.4 %) of long-term debt was issued or guaranteed by Allianz SE in currencies other than the Euro.
CUrrenCY ALLoCAtion oF ALLiAnz se’s senior AnD sUBorDinAteD BonDs nominal value in € mn as of 31 December Euro Non-Euro Total
Short-term debt funding Short-term funding sources available are the Medium-Term Note Program and the Commercial Paper Program. As of 31 December 2013, Allianz SE had money market securities outstanding with a carrying value of € 869 MN: a € 311 MN decrease in the use of commercial paper compared to the previous year-end. Interest expenses on money market secu rities decreased to € 3.7 MN (2012: € 11.4 MN) due to a lower level of short-term interest rates on average in 2013.
Further potential sources of short-term funding allowing the Allianz Group to fine-tune its capital structure are letter of credit facilities and bank credit lines.
AlliAnz SE bondS1 outStAnding AS of 31 dEcEmbEr 2013 And intErESt ExpEnSES in 2013 1. SEnior bondS2 4.0 % bond issued by Allianz Finance ii b.V., Amsterdam Volume € 1.5 bn Year of issue 2006 Maturity date 11/23/2016
Interest expenses € 66.3 mn 5.75 % bond issued by Allianz Finance ii b.V., Amsterdam Volume € 2.0 bn Year of issue 2011 Maturity date 7/8/2041 iSin dE 000 A1gnAH1 Interest expenses € 116.4 mn 5.625 % bond issued by Allianz SE Volume € 1.5 bn Year of issue 2012 Maturity date 10/17/2042 iSin dE 000 A1rE1Q3 Interest expenses € 86.2 mn 5.5 % bond issued by Allianz SE 4 Volume € 1.5 bn Year of issue 2004 Maturity date pErpEtuAl bond
Interest expenses € 84.5 mn 4.375 % bond issued by Allianz Finance ii b.V., Amsterdam Volume € 1.4 bn Year of issue 2005 Maturity date pErpEtuAl bond
Interest expenses € 63.5 mn 5.375 % bond issued by Allianz Finance ii b.V., Amsterdam Volume € 0.8 bn Year of issue 2006 Maturity date pErpEtuAl bond iSin dE 000 A0g npz 3 Interest expenses € 43.0 mn 5.5 % bond issued by Allianz SE Volume uSd 1.0 bn Year of issue 2012 Maturity date pErpEtuAl bond
Interest expenses € 42.5 mn 4.75 % bond issued by Allianz SE Volume € 1.5 bn Year of issue 2013 Maturity date pErpEtuAl bond iSin dE 000 A1Y cQ2 9 Interest expenses € 13.6 mn Total interest expenses for subordinated bonds € 516.0 mn 3. iSSuES rEdEEmEd in 2013 8.375 % bond issued by Allianz SE Volume uSd 2.0 bn Year of issue 2008 Maturity date pErpEtuAl bond
CAsh AnD CAsh eQUiVALents € mn as of 31 December 2013 2012
Net cash flow provided by operating activities amounted to € 23.2 bN, up by € 4.4 bN compared to the previous year. Net cash flow provided by operating activities is comprised of net income plus adjustments for non-cash charges, credits and other items included in net earnings and cash flows related to the net change in operating assets and liabilities. Net income after adding back non-cash charges and similar items increased by € 0.2 bN to € 8.8 bN in 2013. Additionally, operating cash flows from net changes in operating assets and liabilities, including other items, grew by € 4.1 bN to € 14.4 bN. This was driven by higher reserves for insurance and investment contracts in our Life/ Health business, mainly in Germany and the United States. We also recorded net cash inflows from financial assets and liabilities held for trading as well as higher positive net changes from our operating receivables/payables. Lower reserves for losses and loss adjustment expenses in particular in our Property-Casualty business in the United States – as a result of the changed structure in our crop business – partially offset these effects.
Net cash outflow used in investing activities increased by € 7.9 bN to € 22.8 bN in 2013. This rise was mainly attributable to higher net cash outflows for available-for-sale investments at our Banking business in Italy and our Life/Health operation in the United States.
Corporate and Other Total revenues (Banking) 551 590 consisting of: Interest and similar income 613 719 Income from financial assets and liabilities carried at fair value through income (net) 8 14 Fee and commission income 475 456 Interest expenses (281) (350) Fee and commission expenses (262) (247) Consolidation effects (Banking within Corporate and Other) (2) (2)
Allianz’s risk profile is relatively stable over time as it is driven by Allianz’s risk appetite and steered by risk management practices and limits – which are described later in this report.
“stable”. With this rating, Allianz remains one of the highestrated insurance groups in the world.
− Finally, the Group has the additional advantage of being well diversified, both geographically and across a broad range of products.
For the benefit of shareholders and policyholders alike, our aim is to ensure that the Allianz Group is adequately capitalized at all times and that all operating entities meet their respective capital requirements. Furthermore, risk capital and cost of capital are important aspects for making business decisions.
Our internal risk capital model plays a significant role in the management of capital. In addition, we take into account the external requirements of regulators and rating agencies. While capital requirements imposed by regulators constitute a binding constraint, meeting rating agencies’ capital requirements and maintaining strong credit ratings are strategic business objectives of the Allianz Group. We closely monitor the capital positions of the Group and operating entities and apply regular stress tests based on standard adverse scenarios. This allows us to take appropriate measures to ensure our continued capital and solvency strength. Due to our effective capital management, the Allianz Group is well capitalized and met its internal and regulatory solvency targets as of 31 December 2013.
congloMeRate solvency 1 € Bn as of 31 December 2013 2012
Allianz Group has one of the highest ratings amongst its peers. The following table provides evidence of the sustainable financial strength of Allianz SE and our ability to meet ongoing obligations.
Detailed discussions of risk capital movements are provided in the sections that follow.
Overall, our internal model solvency ratio increased from 199 % to 222 %. This strong growth was attributable to two effects. First, an increase in our available capital – which was mostly driven by accumulated net income and the increasing present value of future profits. Second, to a decrease of € 1.2 bn in our required internal risk capital. This was mainly due to positive market effects, in particular, rising interest rates, rating improvements as well as reduced credit risk exposure.
As of 31 December 2013, the Group-diversified internal risk capital before non-controlling interests of € 23.6 bn (2012: € 24.8 bn) represented a diversification benefit of approximately 32 %2 (2012: 33 %) across risk categories and segments. Group-diversified internal risk capital is broken down as follows: 1 Available capital is calculated under consideration of liquidity premium and yield curve extension for the Life/Health business segment as described in the section Yield curve and liquidity premium assumptions. on page 108. 2 Diversification before tax.
inteRnal Risk caPital Model Our internal risk capital model is based on a Value-at-Risk (VaR) approach using a Monte Carlo simulation. Following this approach, we determine the maximum loss in the portfolio value of our businesses in the scope of the model within a specified timeframe (“holding period”) and probability of occurrence (“confidence level”). We assume a confidence level of 99.5 % and apply a holding period of one year. In the risk simulation, we consider market, credit, insurance and other business events (“sources of risk”) and calculate the portfolio value based on the net fair value of assets and liabilities under potentially adverse conditions.
Valuation assumption: replicating portfolios Since efficient valuation and advanced, timely analysis is desired, we replicate the liabilities of our Life/Health insurance business. This technique enables us to represent all options and guarantees, both contractual and discretionary, by means of standard financial instruments. Using the replicating portfolio we determine and revalue these liabilities under all potentially adverse Monte Carlo scenarios.
Actuarial assumptions Our internal risk capital model also includes non-market assumptions on claims trends, inflation, mortality, longevity, morbidity, policyholder behavior, expense, etc. We use our own internal historical data for actuarial assumptions wherever possible and also consider recommendations from the insurance industry, supervisory authorities and actuarial associations. The derivation of our actuarial assumptions is based on generally accepted actuarial methods. Within our internal risk capital and financial reporting framework comprehensive processes and controls exist for ensuring the reliability of those assumptions.1 1 For additional information regarding our internal controls over financial reporting, please refer to the chapter Controls over Financial Reporting and Risk Capital from page 123 onwards.
Risk and Opportunity Report and Financial Control 105 Risk and Opportunity Report 123 Controls over Financial Reporting and Risk Capital
Our internal risk capital model covers: − All of our major insurance operations.
Internal risk capital related to our European banking operations is allocated to the Corporate and Other business segment, based on the approach applied by banks under the local requirements with respect to the Basel regulation (Basel II/III standards). It represents an insignificant amount of approximately 1.7 % (2012: 1.6 %) of total pre-diversified internal risk capital. Therefore, risk management with respect to banking operations is not discussed further.
As described previously, insurance liability values are derived from replicating portfolios of standard financial market instruments in order to allow for effective risk management. This replication is subject to the set of available replicating instruments and might therefore be too simple or restrictive to capture all factors affecting the change in value of liabilities. Nevertheless, we believe that the liabilities are adequately represented by the replicating portfolios due to our stringent data and process quality controls.
Model uPdates in 2013 In 2013 we kept the central risk capital models for all risk categories stable and performed only the regular exposure and assumption updates. The only local model update with material impact at Group level is the introduction of Surplus funds together with a Going Concern Reserve at Allianz Lebensversicherungs-AG in line with Solvency II and BaFin methodology. The introduction increases the Group’s capital requirement by € 0.4 bn, mainly affecting equity and credit spread risk.
Internal risk assessment concentRation of Risks As we are an integrated financial services provider offering a variety of products across different business segments and geographic regions, diversification is key to our business model. Diversification helps us manage our risks efficiently by limiting the economic impact of any single event and by contributing to relatively stable results and risk profile in general. Therefore, our aim is to maintain a balanced risk profile without any disproportionately large risks.
We also closely monitor concentrations and accumulation of non-market risks already on a stand-alone basis (i.e. before the diversification effect) within a global limit framework in order to avoid substantial losses from single events (e.g. natural catastrophes, credit events).
In order to manage counterparty concentration risk, we run a Group-wide country and obligor group limit management framework (CRisP 1), which covers credit and equity exposures and is based on data used by the investment and risk experts at Group and operating entity levels. This limit framework forms the basis for discussions on credit actions and provides notification services with a quick and broad communication of credit-related decisions across the Group. Clearly defined processes ensure that exposure concentrations and limit utilizations are appropriately monitored and managed.
The setting of country and obligor exposure limits from the Group’s perspective (i.e. the maximum concentration limit) takes into account the Allianz Group’s portfolio size and structure as well as our overall risk strategy.
It is the ultimate responsibility of the Board of Management to decide upon limit budgets. The Board of Management delegates authorities for limit setting and modification to the Group Risk Committee and Group Chief Risk Officer by clearly defining maximum limit amounts. All limits are subject to annual review and approval according to the delegated authorities.
quantifiaBle Risks in the inteRnal caPital Model The quantifiable risks that are considered in the risk model refer to market, credit, underwriting, business and operational risk. In the following sections, the evolution of the risk types in 2013 is explained.
Market risk As an inherent part of our insurance operations, we collect premiums from our customers and invest them in a wide variety of assets. Therefore, the Allianz Group holds and uses many different financial instruments. The resulting investment portfolios ultimately cover the future claims and benefits to our customers. In addition, we invest shareholders’ capital, which is required to support the risks underwritten. As the fair values of our investment portfolios depend on financial markets, which may change over time, we are exposed to market risks.
In order to limit the impact of any of these financial market changes and to ensure that assets adequately back policyholder liabilities we have several measures in place. One of these, for example, is asset/liability management linked to the internal model framework incorporating risks as well as return aspects stemming from our insurance obligations. In addition, we are selectively using derivatives to either hedge our portfolio against adverse market movements or to reduce our reinvestment risk, e.g. by using forwards or swaptions. Furthermore, we have a limit system in place comprising global indicators like strategic asset allocation benchmarks, as well as more detailed limits, in order to operatively manage and limit risks. The limit system is defined at Group level separately for the Life/Health and the Property-Casualty business segments and is based on a variety of different risk measures including Financial VaR, equity and interest rate sensitivities as well as investment limits around a benchmark portfolio approved by the Board of Management. Our limit-setting process ensures that prevailing statutory restrictions regarding the composition of investments are taken into account. This means that in case certain investments are restricted by statutory requirements to a certain amount – e.g. a given percentage of total investments – our internal limit referring to those investments cannot exceed the required percentage. Most statutory restrictions apply at local level, where processes ensure bottom-up that the statutory restrictions are binding constraints. Based on this process, guidelines are derived within the group center for certain investments, e.g. concerning the use of derivatives, and the compliance with those is controlled by the respective risk and controlling functions.
2 Further information on derivatives used for hedging can be found in note 43 to the consolidated financial statements.
Furthermore, we have put in place standards for hedging activities due to exposures to fair value options embedded in life insurance products. Life/Health operating entities carrying these exposures are required to follow these standards, including making a conscious
AllocAted internAl mArket risk cApitAl by business segment And source of risk (totAl portfolio before tAx And non-controlling interests)
Share of total Group- internal risk capital 42.4 % 43.1 %
Our total pre-diversified internal market risk capital showed a decrease, mainly driven by market movements. In particular, rising interest rates and reduced volatilities lead to lower sensitivities of options and guarantees making our Life/Health business segment the biggest contributor to the reduction in market risk. With respect to equity risk, improved hedging activities as well as higher policyholder participation more than offset a higher equity exposure due to rising markets and additional investments. Overall, this resulted in a decrease in equity risk.
impAct of stAndArd finAnciAl scenArios on internAl cApitAl rAtios (totAl port folio before non-controlling interests And After tAx And group diversificAtion)
Internal capital ratio 222 199 Interest rates up by 1 % 230 220 Interest rates down by 1 % 194 177 Equity prices up by 30 % 232 210 Equity prices down by 30 % 210 188 Combined down scenarios 182 165
Interest rate risk As interest rates may fall below the rates guaranteed to policyholders in some Life/Health markets and given the long duration of insurance obligations, we are specifically exposed to interest rate risk when we have to reinvest maturing assets prior to the maturity of life contracts. This interaction of investment strategy and obligations to policyholders forms an integral part of our internal risk capital model. In addition, our asset/liability management approach is closely linked to the internal risk capital framework and designed to achieve investment returns over the long term in excess of the obligations related to insurance and investment contracts.
These risks are reflected in the internal risk capital results and managed by interest rate sensitivity limits. A significant part of the Life/Health business segment’s pre-diversified internal risk capital for interest rate risk lies in Western Europe – 80.2 % as of 31 December 2013 (31 December 2012: 79.8 %) – mainly to cover traditional life insurance products with guarantees.
As of 31 December 2013, our investments excluding unit-linked business that are sensitive to changing equity markets – amounting to a market value of € 35.3 bn – would lose € 9.3 bn in value assuming equity markets declined by 30 %. 2
Credit spread risk Our internal model framework fully acknowledges the risk of declining market values for our fixed income assets – such as bonds – due to the widening of credit spreads. However, for internal risk management and appetite, we also take into account the underlying economics of our business model. For example, the cash flows of our insurance liabilities are to a large degree predictable, limiting to a great extent the risk that we would be forced to sell these bonds prior to maturity at a loss and allowing us to keep the bonds until the maturity date. Therefore, we reflect this in our model using a Counter 1 The stated market value includes all investments whose market value is sensitive to interest rate movements (excluding unit-linked business) and therefore is not based on classifications given by accounting principles.
Cyclical Premium approach and view the more relevant risk to be credit risk rather than credit spread. The advantage of being a longterm investor therefore gives us the opportunity to invest in bonds yielding spreads over the risk free return and earning this additional yield component.
Our internal credit risk modeling framework covers counterparty risk and country risk. Counterparty risk arises from our fixed income investments, cash positions, derivatives, structured transactions, receivables from Allianz agents and other debtors – as well as reinsurance recoverables and credit insurance. 3 Country risk exposure is calculated as cross-border exposure to all obligors domiciled abroad from each operating entity perspective.
The internal credit risk capital model is a state-of-the-art tool which provides bottom-up analysis. The major drivers of credit risk for each instrument are exposure at default, ratings, seniority, collaterals and maturity. Additional parameters assigned to obligors are migration probabilities and obligor asset correlations reflecting dependencies within the portfolio. Ratings are assigned to single obligors via an internal rating approach which is based on long-term ratings from rating agencies. It is dynamically adjusted using market implied ratings and the most recent information.
Credit risk capital for the Group decreased due to the stabilizing credit environment and active portfolio management that aims to further improve risk diversification. Additionally, the decrease in Life/ Health and Corporate business segments is driven by a reduction of non-investment grade exposures as well as the divestment of strategic assets.
Base case 5,918 7,061 Rating down by 1 notch 7,062 8,349 Rating down by 2 notches 8,404 9,879 1 A notch is referred to rating sub-classes, such as "AA+", "AA", "AA-" at Standard & Poor's scale or "Aa1", "Aa2", "Aa3" at Moody’s scale.
allianz coMPonents of cRedit Risk exPosuRe allianz coMPonents of cRedit Risk descRiPtion investMent PoRtfolio Premiums collected from our customers and shareholders’ capital, which is required to support the risks under written, are invested to a great extent in fixed income instruments. These investment portfolios ultimately cover the future claims to our customers. However, for certain life insurance products, losses due to credit events can be shared with the policyholder, as described in the context of market risks.
Government & Agency Covered Bond Corporate Banks aBs / MBs Short-term Loan Other Total
Credit risk – reinsurance As of 31 December 2013, 2.5 % (31 December 2012: 2.1 %) of our total Group pre-diversified internal credit risk capital was allocated to reinsurance exposures – of which 59.1 % (2012: 57.5 %) was related to reinsurance counterparties in the United States and Germany.
A dedicated team selects our reinsurance partners focusing on companies with strong credit profiles. We may also require letters of credit, cash deposits or other financial measures to further mitigate our exposure to credit risk. As of 31 December 2013, 80.6 % (31 December 2012: 76.4 %) of the Allianz Group’s reinsurance recoverables were distributed among reinsurers that had been assigned at least an "A"
rating by Standard & Poor’s. As of 31 December 2013, non-rated reinsurance recoverables represented 17.9 % (31 December 2012: 21.7 %). Reinsurance recoverables without a Standard & Poor’s rating include exposures to brokers, companies in run-off and pools – where no rating is available – as well as companies rated by A.M. Best.
By thoroughly managing our credit risk on the basis of our limit management and the credit risk modeling frameworks, we have composed a well-diversified credit portfolio. Our long-term investment strategy to hold investments through the cycle to maturity enables us to keep our portfolio stable even under adverse market conditions. It also gives us the opportunity to earn planned excess returns throughout the entire holding period of the investments. In our credit insurance business proactive credit management actions offer opportunities to keep losses from single credit events below expected levels and therefore strongly support writing business that contributes to a balanced Group credit portfolio.
Underwriting risk Underwriting risk consists of premium and reserve risks in the Property -Casualty business segment as well as biometric risks in the Life/ Health business segment. For the Asset Management business segment and our banking operations underwriting risks are not relevant. The table below presents the average pre-diversified internal risk capital calculated for underwriting risks stemming from our insurance business over the four quarters of 2013 versus 2012, as well as the high and low quarterly internal risk capital amounts calculated in both years. 1 1 Prior year figures changed compared to last year's report due to reporting on pre-diversified basis compared to Group-diversified in 2012.
Underwriting risk – Property-Casualty Our Property-Casualty insurance businesses are exposed to premium risk related to the current year’s new and renewed business as well as reserve risks related to the business in force.
We face the risk that underwriting profitability is lower than expected. The volatility of the underwriting profitability measured over one year defines our premium risk.
1 Represents claims and insurance benefits incurred (net) divided by premiums earned (net).
Premium risk is subdivided into natural catastrophe risk, terror risk and non-catastrophe risk. We calculate premium risk based on actuarial models that are used to derive loss distributions. Premium risk is actively managed by the Allianz Group and its local operating entities. Assessing the risks as part of the underwriting process is a key element of our risk management framework. There are clear underwriting limits, and restrictions are centrally defined and in place across the Group. In addition to the centrally defined underwriting limits, the local operating entities have limits in place that take into account their business environments. In addition, risks are mitigated by external reinsurance agreements. All these measures contribute to the limitation of risk accumulation.
Natural disasters, such as earthquakes, storms and floods, represent a significant challenge for risk management due to their accumulation potential and occurrence volatility. In order to measure such risks and better estimate the potential effects of natural disasters, we use special modeling techniques in which we combine data about our portfolio (such as the geographic distribution and characteristics of insured objects and their values) with simulated natural disaster scenarios to estimate the magnitude and frequency of potential losses. Where such stochastic models do not exist, we use deterministic scenario-based approaches to estimate probable losses.
The Group’s net exposure to natural catastrophes remained within our risk appetite in 2013. The top five perils contributing to the natural catastrophe risk capital were: European windstorm, U.S. hurricane, German hail as well as Californian and German earthquakes as of December 2013.
Reserve risk We estimate and hold reserves for past claims that have not yet been settled. If the reserves are not sufficient to cover claims to be settled in the future due to unexpected changes, we would experience losses. The volatility of past claims measured over a one-year time horizon defines our reserve risk. An indicator of this coverage is the amount of net surplus 1 compared to the initial reserves.2
In general, our operating entities constantly monitor the development of reserves for insurance claims on a line of business level.3 In addition, the operating entities generally conduct annual reserve uncertainty analyses based on similar methods used for reserve risk calculations. The Allianz Group performs regular independent reviews of these analyses and Group representatives participate in the local reserve committee meetings.
Underwriting risk – Life/Health Underwriting risks of our Life/Health operations (biometric risks) include mortality, disability, morbidity and longevity risks.
Underwriting risk arises from lower profitability than expected. As profitability calculations are based on several parameters, like historical loss information, assumptions on inflation or on mortality and morbidity, the realized parameters can differ from the ones used for the calculation. For example, higher inflation than that incorporated in the calculations may lead to a loss. However, deviations can 1 Net surplus represents the cumulative surplus from re-estimating the reserves for loss and loss adjustment expenses for previous years’ claims and includes foreign currency translation adjustments. For further information, please refer to note 19 to the consolidated financial statements.
2 This figure is provided on a calendar year basis in note 19 to the consolidated financial statements. 3 For further information, please refer to note 19 to the consolidated financial statements. 4 For further information about insurance risk in the Life/Health business segment, please refer to note 20 to the consolidated financial statements.
Business risk Business risks include cost risks and policyholder behavior risks. Cost risks are associated with the risk that expenses incurred in administering policies are higher than expected, or that new business volume decreases to a level that does not allow Allianz to absorb its fixed costs.
Policyholder behavior risks are risks related to the unpredictability and adverse behavior of policyholders in exercising their different contractual options: early termination of contracts, surrenders, partial withdrawals, renewals and annuity take-up options. Assumptions on policyholder behavior are set according to accepted actuarial methods and are based on our own historical data to the extent available, otherwise they are based on industry data or expert judgment.
Allianz has developed a Group-wide consistent operational risk management framework that focuses on the early recognition and proactive management of operational risks in all business and supporting functions. The framework defines roles and responsibilities, risk processes and methods and has been implemented in our major operating entities. Local risk managers ensure this framework is implemented in their respective operating entities. These identify and evaluate relevant operational risks and control weaknesses via a structured self-assessment. Furthermore, operational risk events are collected in a central loss database. An analysis of the causes of signif- icant losses is carried out to provide comprehensive and timely information to senior management and operating entities so they can implement measures aimed at avoiding or reducing future losses.
Property-Casualty 1,268 1,287 Life/Health 917 914 Asset Management 586 576 Corporate and Other 385 249 Total Group internal credit risk capital 3,156 3,026 Share of total Group internal risk capital 7.4 % 6.7 %
Major failures and disasters which could cause a severe disruption to our working environment, facilities and personnel represent significant operational risks for the Allianz Group and its operating entities. Our Business Continuity Management (bCM) framework strives to protect critical business functions from these shocks and enables them to carry out their core tasks on time and at the highest standard. Regularly enhanced, bCM activities and knowledge are embedded in the company’s risk management processes.
Dedicated minimum-security standards are in place for IT systems across the Allianz Group to ensure the proper use and protection of the Group’s information assets. With respect to financial statements, our internal control system is designed to mitigate operational risks.1
In general, we aim to reduce operational failures by documenting and sharing relevant methods, procedures, structures and processes in a comprehensive and timely manner across the Group, which is one of the fundamental principles of the Allianz Group Risk Policy.
By measuring our operational risk and further developing mitigation actions to manage the root causes we see the opportunity to reduce our operational risk exposure.
This risk is evaluated and analyzed quarterly in the same way as reputational risk, as described below. To ensure proper implementation of strategic goals in the current business plan, strategic controls are carried out by monitoring respective business targets. We also constantly monitor market and competitive conditions, capital market requirements, regulatory conditions, etc. to decide whether to make strategic adjustments. In addition, strategic decisions are discussed in various Board of Management level committees (e. g. Group Capital Committee, Group Risk Committee, Group Finance Committee ). The assessment of the associated risks is a fundamental element in these discussions.
The main goal of planning and managing Allianz SE’s liquidity position is to ensure that we are always able to meet payment obligations. To comply with this objective, the liquidity position of Allianz SE is monitored and forecasted on a daily basis. Strategic liquidity planning over time horizons of 12 months and three years is reported to the Board of Management regularly.
With the support of Group Communications, Group Compliance and the ESG Office 1, Group Risk defines sensitive business areas and applicable risk guidelines, which are mandatory for all operating entities in the Allianz Group. All affected Group and operating entity functions cooperate in the identification of reputational risk. Group Communications is responsible for the risk assessment, based on a Group-wide methodology. Single reputational risk management decisions are integrated in the overall risk management framework and reputational risks are identified and assessed as part of a quarterly Top Risk Assessment, during which senior management also decides on a risk management strategy and related actions. In addition, reputational risk is managed on a case-by-case basis. Single cases with a potential impact on other operating entities or the Group have to be reported to Allianz SE for pre-approval.
Risk ManageMent fRaMewoRk As a provider of financial services, we consider risk management to be one of our core competencies. It is therefore an integral part of our business process. Our risk management framework covers, on a risk based approach, all operations including IT, processes, products and departments/subsidiaries within the Group. The key elements of our risk management framework are: − Promotion of a strong risk management culture supported by a robust risk governance structure.
For the benefit of shareholders and policyholders alike, our risk management framework adds value to Allianz SE and its operating entities through the following four primary components: Risk underwriting and identification: A sound risk underwriting and identification framework forms the foundation for adequate risk taking and management decisions such as individual trans action approvals, new product approvals and strategic or tactical asset allocations. The framework includes risk assessments, risk standards, valuation methods and clear minimum standards for underwriting.
Risk goveRnance stRuctuRe As a key element of our risk management framework, Allianz’s approach to risk governance enables integrated management of our local and global risks and ensures that our risk profile remains consistent with our risk strategy and our capacity to bear risks.
− The Group Risk Committee defines risk standards and forms the major limit-setting authority within the framework set by the Board of Management.
Group Risk Group Risk is headed by the Group Chief Risk Officer and reports to the Board member responsible for Finance, Controlling and Risk. Group Risk supports the aforementioned Allianz Group committees responsible for risk oversight through the analysis and communication of risk management related information and by facilitating the communication and implementation of committee decisions.
The operating entities’ Board of Management is responsible for setting and approving an operating entity risk strategy during the annual Strategic and Planning Dialogues with the Group and ensuring operating entity adherence to this risk strategy.
All business line management functions with direct profit and loss responsibility (i.e. first line of defense, or “risk-taking units”) are in charge of active risk-return management through adherence to delegated limits and the operating entity policy framework. Second line of defense functions, where possible, support business functions in proactive risk management.
Our third priority is to ensure that we also meet the emerging requirements being defined for G-SIIs, focusing especially in 2014 on developing a Recovery Plan.
cliMate change and societal challenges Global warming threatens to change our climate. We are well aware that climate change could result in a range of compound risks and opportunities that affect our entire business. We have been implementing a Group-wide strategy covering climate-related risks and opportunities for our business and our customers. We finance and insure low-carbon energy projects, such as wind and solar, offer customers Green Solutions and provide them with advice on weatherrelated risk reduction. We incorporate environmental, social and governance factors into our asset management and reduce and offset our own carbon emissions.
Further future challenges and opportunities1 The success of our business is heavily affected by a variety of global, long-term issues. To ensure our sustainable and profitable growth, our strategy places a high priority on monitoring, analyzing and responding to the challenges and opportunities these issues present, today and tomorrow.
By consistently following our Group strategy, we are confident that the Allianz Group is in a privileged position to build on this trust and deal with the challenges and opportunities ahead.
1 For further information on the Cautionary note regarding forward-looking statements, please refer to the chapter Outlook 2014 from page 87 onwards.
In July 2013, Allianz was identified as global systemically important insurer (G-SII). Policy measures applicable to G-SIIs include recovery and resolution planning requirements, enhanced groupwide supervision and – most likely – harmonized and potentially higher capital requirements. In any event, administrative costs relating to recovery and resolution planning measures will increase.
In addition, Solvency II in particular may heavily impact longterm savings businesses and may also make investments in equities and other asset classes less attractive.
However, these regulatory trends could open up major opportunities as greater capital needs and regulation may lead to sector consolidation where only financially sound insurance companies will survive.
As previously described, the Group has a well-established strategy and planning process with all Group operating entities which allows us to understand and respond to local risks and opportunities. This strong diversification across markets, business segments and customer groups gives Allianz a powerful lever to identify new opportunities and manage risks.
Capital allocation, ensuring that capital is available and allocated appropriately to finance growth initiatives and leveraging the Group's diversification benefits: In 2013, through our focus on capital allocation, we increased dividend payments from our operating entities to further allow the Group to support the financing of growth initiatives. The introduction of further refined return on capital metrics at the level of lines of business further supports the Group’s strategic decision making.
Our approach can be summarized as follows: − We use a top-down, risk-based approach to determine the accounts and operating entities that should fall under the scope of our internal control system over financial reporting. The methodology is described in our ICOFR manual. During the scoping process, materiality and susceptibility to a misstatement are considered simultaneously. The final results are documented in the list of operating entities under the scope of ICOFR as well as in the list of significant accounts. In addition to the quantitative
Determination of significant accounts and operating entities to be covered by system of internal control.
Identification of risk scenarios that could result in a material financial misstatement.
Implementation of key controls that prevent or detect errors or fraud resulting from risk scenarios.
During 2013, we worked on further improving the internal control environment around the computation of our internal risk capital in anticipation of the future Solvency II regime. We will continue to make refinements as the Solvency II requirements evolve.
* One success factOr in business is wOrking with nature. nOt against it.
Our goal is to continually improve our service while doing business in a responsible way. For that reason, we have always attached great importance to forward-looking investments, which lay the foundations for profitable and sustainable growth in our segments.
Notes to the Consolidated Balance Sheets 168 7 Cash and cash equivalents 168 8 Financial assets carried at fair value through income 172 10 Loans and advances to banks and customers 172 11 Reinsurance assets 173 12 Deferred acquisition costs 174 13 Other assets 176 14 Non-current assets classified as held for sale 176 15 Intangible assets 181 16 Financial liabilities carried at fair value through income 181 17 Liabilities to banks and customers 182 18 Unearned premiums 182 19 Reserves for loss and loss adjustment expenses 187 20 Reserves for insurance and investment contracts 190 21 Financial liabilities for unit-linked contracts 191 22 Other liabilities 192 23 Certificated liabilities 193 24 Subordinated liabilities 127 Consolidated BalanCe sheets 128 Consolidated inCome statements 129 Consolidated statements of Comprehensive inCome 130 Consolidated statements of Changes in equity 131 Consolidated statements of Cash flows 134 notes to the Consolidated finanCial statements Notes to the Consolidated Income Statements 196 26 Premiums earned (net) 196 27 Interest and similar income 197 28 Income from financial assets and liabilities carried at fair value through income (net) 198 29 Realized gains/losses (net) 198 30 Fee and commission income 198 31 Other income 199 32 Income and expenses from fully consolidated private equity investments 200 33 Claims and insurance benefits incurred (net) 200 34 Change in reserves for insurance and investment contracts (net) 201 35 Interest expenses 201 36 Loan loss provisions 201 37 Impairments of investments (net) 201 38 Investment expenses 201 39 Acquisition and administrative expenses (net) 202 40 Fee and commission expenses 202 41 Other expenses 202 42 Income taxes
Note as of 31 December as of 31 December as of 1 January assets Cash and cash equivalents 7 11,207 12,437 10,492 Financial assets carried at fair value through income 1 8 7,245 7,283 8,466
Loans and advances to banks and customers 10 116,800 119,369 124,738 Financial assets for unit-linked contracts 81,064 71,197 63,500
Non-current assets classified as held for sale 14 147 15 14 liabilities and eQUitY Financial liabilities carried at fair value through income 16 6,013 5,397 6,610 Liabilities to banks and customers 17 23,109 22,425 22,155
Reserves for loss and loss adjustment expenses 19 66,566 72,540 68,832 Reserves for insurance and investment contracts 20 404,072 390,985 361,956 Financial liabilities for unit-linked contracts 21 81,064 71,197 63,500
Total liabilities and equity 711,530 694,447 641,322 1 As of 31 December 2013 and 2012, no financial assets carried at fair value through income are pledged to creditors and can be sold or repledged.
2 As of 31 December 2013, € 2,112 mn (2012: € 2,460 mn) are pledged to creditors and can be sold or repledged.
Gross premiums written 72,051 72,086 Ceded premiums written (4,541) (5,336) Change in unearned premiums (882) (705) Premiums earned (net) 26 66,628 66,045 Interest and similar income 27 20,918 21,084 Income from financial assets and liabilities carried at fair value through income (net) 28 (1,842) (511) Realized gains/losses (net) 29 4,285 4,327 Fee and commission income 30 10,492 9,812
Income from fully consolidated private equity investments 32 726 788 Total income 101,416 101,759
Basic earnings per share (€) 50 13.23 11.56 Diluted earnings per share (€) 50 13.05 11.48
Consolidated statements of Comprehensive inCome consolidated statements of comprehensive income € mn
Foreign currency translation adjustments Reclassifications to net income (1) – Changes arising during the year (1,305) (84)
Cash flow hedges Reclassifications to net income 10 (2) Changes arising during the year (63) 67
Items that may never be reclassified to profit or loss Actuarial gains and losses on defined benefit plans (see note 4) 362 (1,816) Total other comprehensive income (4,328) 3,930
For further details concerning income taxes relating to components of the other comprehensive income, please see note 42.
Balance as of 1 January 2012, as previously reported 28,763 13,522 (1,996) 4,626 44,915 2,338 47,253
€ mn sUmmarY Net cash flow provided by operating activities 23,239 18,888 Net cash flow used in investing activities (22,802) (14,860) Net cash flow used in financing activities (1,435) (2,036) Effect of exchange rate changes on cash and cash equivalents (232) (47) Change in cash and cash equivalents (1,230) 1,945 Cash and cash equivalents at beginning of period 12,437 10,492 Cash and cash equivalents at end of period 11,207 12,437 cash flow from operating activities Net income 6,344 5,558 Adjustments to reconcile net income to net cash flow provided by operating activities
Share of earnings from investments in associates and joint ventures (146) (143) Realized gains/losses (net) and impairments of investments (net) of: Available-for-sale and held-to-maturity investments, investments in associates and joint ventures, real estate held for investment, loans and advances to banks and customers (3,674) (3,393) Other investments, mainly financial assets held for trading and designated at fair value through income 920 518
Depreciation and amortization 1,108 1,124 Loan loss provisions 86 111 Interest credited to policyholder accounts 4,163 4,790 Net change in: Financial assets and liabilities held for trading 300 (1,755) Reverse repurchase agreements and collateral paid for securities borrowing transactions 227 256 Repurchase agreements and collateral received from securities lending transactions 95 724 Reinsurance assets (207) (266) Deferred acquisition costs (720) (656) Unearned premiums 832 766 Reserves for loss and loss adjustment expenses (1,071) 1,101 Reserves for insurance and investment contracts 12,005 9,162 Deferred tax assets/liabilities 375 (68)
Consolidated statements of Cash flows – Continued consolidated statements of cash flows € mn cash flow from investing activities Proceeds from the sale, maturity or repayment of: Financial assets designated at fair value through income 1,451 2,076 Available-for-sale investments 120,354 124,720 Held-to-maturity investments 836 990 Investments in associates and joint ventures 457 211 Non-current assets classified as held for sale 24 276 Real estate held for investment 663 425 Loans and advances to banks and customers (purchased loans) 9,863 11,424 Property and equipment 200 229
Payments for the purchase or origination of: Financial assets designated at fair value through income (860) (1,121) Available-for-sale investments (143,928) (144,354) Held-to-maturity investments (653) (1,012) Investments in associates and joint ventures (850) (538) Non-current assets classified as held for sale – (229) Real estate held for investment (1,504) (1,112) Loans and advances to banks and customers (purchased loans) (6,940) (5,811) Property and equipment (1,484) (1,607)
Business combinations (note 5): Proceeds from sale of subsidiaries, net of cash disposed 81 – Acquisitions of subsidiaries, net of cash acquired (416) (8)
Change in other loans and advances to banks and customers (originated loans) (695) 330 Other (net) 599 251 Net cash flow used in investing activities (22,802) (14,860)
Consolidated statements of Cash flows – Continued consolidated statements of cash flows € mn sUpplementarY information on the consolidated statements of cash flows Income taxes paid (3,672) (2,233) Dividends received 1,355 1,156 Interest received 18,657 18,975 Interest paid (1,308) (1,503)
The consolidated financial statements of the Allianz Group for the year ended 31 December 2013 were authorized for issue by the Board of Management on 24 February 2014.
Scope of consolidation In line with IAS 27 and SIC 12, the consolidated financial statements of the Allianz Group comprise the financial statements of Allianz SE, its subsidiaries and certain investment funds and special purpose entities (SPEs). Subsidiaries, investment funds and SPEs, hereafter
Subsidiaries are consolidated as from the date on which control is obtained by the Allianz Group. Subsidiaries are consolidated up to the date on which the Allianz Group no longer maintains control. Accounting policies of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Allianz Group. The effects of intra-Allianz Group transactions have been eliminated.
Business combinations including acquisitions and disposals of non-controlling interests Business combinations are accounted for using the acquisition method. Non-controlling interests in the acquiree can be measured either at the acquisition date fair value or at the non-controlling interest’s proportionate share of the acquired’s identifiable net assets. This option is exercised on a case-by-case basis.
Investments in associates and joint ventures In general, if the Allianz Group holds 20 % or more of voting power in an investee but does not control the investee, it assumes to exercise significant influence, unless it can be clearly demonstrated that this is not the case. Investments in associates over which the Allianz Group exercises significant influence are generally accounted for using the equity method.
The Allianz Group accounts for all material investments in associates on a time lag of no more than three months. Income from investments in associates and joint ventures, which reflects the earnings rather than the distributions of the associate or jointly controlled entity, is included in interest and similar income. Profits or losses resulting from transactions between the Allianz Group and the associate or joint venture are eliminated to the extent of the interest in the associate or joint venture. Accounting policies of associates and joint ventures have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Allianz Group.
Translation to the presentation currency For the purposes of the consolidated financial statements, the results and financial position of each of the Allianz Group’s subsidiaries are expressed in Euro, the presentation currency of the Allianz Group.
Recognition Financial assets are generally recognized and derecognized on the trade date, i.e. when the Allianz Group commits to purchase or sell securities or incur a liability.
Offsetting Financial assets and liabilities are offset and the net amount presented in the balance sheet only when there is a legally enforceable right to offset the recognized amounts and there is an intention to either settle on a net basis, or to realize the asset and settle the liability simultaneously.
Cash flow hedges offset the exposure to variability in expected future cash flows that is attributable to a particular risk associated with a recognized asset or liability or a forecasted transaction. Changes in the fair value of a derivative financial instrument that represent an effective hedge are recorded in unrealized gains and losses (net) in other comprehensive income, and are transferred to the consolidated income statement when the offsetting gain or loss associated with the hedged item is recognized. Any ineffectiveness of the cash flow hedge is recognized directly in income from financial assets and liabilities carried at fair value through income (net).
Furthermore, 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 effective proportion of gains or losses arising from the valuation of the derivative financial instrument is recognized in foreign currency translation adjustments in other comprehensive income, while any ineffectiveness is recognized directly in income from financial assets and liabilities carried at fair value through income (net).
Annual Report 2013 Allianz Group 137 or exercised, or when the Allianz Group decides that hedge accounting is no longer appropriate.
Liabilities to banks and customers (Other liabilities) Amortized cost Reserves for insurance and investment contracts
Cash aND Cash eQuiVaLeNts Cash and cash equivalents include balances with banks payable on demand, balances with central banks, cash on hand, treasury bills to the extent they are not included in financial assets held for trading, as well as checks and bills of exchange which are eligible for refinancing at central banks, subject to a maximum term of three months from the date of acquisition.
fiNaNCiaL assets aND LiaBiLities CarrieD at fair VaLue throuGh iNCome Financial assets and liabilities carried at fair value through income include financial assets and liabilities held for trading and financial assets and liabilities designated at fair value through income. Financial assets and liabilities held for trading consist of debt and equity securities that have been principally acquired for the purpose of generating a profit from short-term fluctuations in price or for the purpose of selling in the near future as well as of derivative financial instruments, which include bifurcated embedded derivatives of hybrid financial instruments and of insurance contracts.
Financial assets and liabilities are designated at fair value through income to eliminate or significantly reduce an accounting mismatch. Subsidiaries must reach out to the Group Accounting and Reporting department for approval before designating any financial asset or liability as at fair value through income.
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 heldto -maturity, loans and advances, or financial assets carried at fair value through income. Available-for-sale investments are initially recognized and subsequently measured at fair value. Unrealized gains and losses, which are the difference between fair value and cost or amortized cost, are recognized 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 other comprehensive income 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.
Held-to-maturity investments Held-to-maturity investments are debt securities with fixed or determinable payments and fixed maturities for which the Allianz Group has the positive intent and ability to hold to maturity. These securities are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method.
LOANS AND ADVANCES tO bANkS AND CuStOmErS Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and which are not classified as financial assets held for trading, designated at fair value through income or designated as available for sale. Loans and advances are initially recognized at fair value. Subsequently, they are recorded at amortized cost using the effective interest method. Interest income is accrued on the unpaid principal balance, net of impairments. Using the effective interest method, net deferred fees and premiums or discounts are recorded as an adjustment of other interest income yield over the lives of the related loans.
rEINSurANCE ASSEtS Assets and liabilities related to reinsurance are reported on a gross basis. Reinsurance assets include balances expected to be recovered from reinsurance companies. The amount of reserves ceded to reinsurers is estimated in a manner consistent with the claim liability associated with the reinsured risks. To the extent that the assuming reinsurers are unable to meet their obligations, the respective ceding insurers of the Allianz Group remain liable to its policyholders for the portion reinsured. Consequently, allowances are made for receivables on reinsurance contracts which are deemed uncollectible.
For short-duration, traditional long-duration, and limited-payment insurance contracts, DAC is amortized in proportion to premium revenue recognized. For universal life-type and participating life insurance contracts as well as investment contracts with discretionary participation features, DAC is generally amortized over the life of a book of contracts based on estimated gross profits (EGP) or estimated gross margins (EGM), respectively. EGP and EGM are based on historical and anticipated experience, which is determined on a best estimate basis and evaluated at the end of each reporting period, with the effect of changes being recognized in the net income in the period revised.
Acquisition costs for unit-linked investment contracts without discretionary participation features accounted for under IAS 39 at fair value are deferred in accordance with IAS 18 if the costs are incremental. For non-unit-linked investment contracts without discretionary participation features accounted for under IAS 39 at amortized cost, acquisition costs that meet the definition of transaction costs under IAS 39 are considered in the aggregate policy reserves.
Annual Report 2013 Allianz Group 139 anticipated in the future from insurance contracts in force at the date of acquisition. It is amortized over the life of the related contracts.
Own-used property and equipment generally is carried at cost less accumulated depreciation and impairments. The assets are depreciated on a straight-line basis over their estimated useful lives.
Fixed assets of alternative investments 4 – 25 iNtaNGiBLe assets Intangible assets with indefinite useful lives mainly consist of goodwill resulting from business combinations. It is initially recorded at cost and subsequently measured at cost less accumulated impairments.
Intangible assets with finite useful lives primarily consist of distribution agreements. They are initially recorded at cost which generally is the purchase price plus directly attributable costs or, when acquired with business combinations, at fair value if the intangible asset is separable or arises from contractual or other legal rights and its fair value can be measured reliably. Distribution agreements are subsequently recorded at cost less accumulated depreciation and impairments. The assets generally are depreciated on a straight-line basis over their useful lives or contractual term.
For traditional long-duration contracts and limited-payment contracts, if actual experience regarding investment yields, mortality, morbidity, terminations or expense indicate that existing contract liabilities, along with the present value of future gross premiums, will not be sufficient to cover the present value of future benefits and to recover capitalized DAC, a premium deficiency is recognized.
For other long-duration contracts, if the present value of estimated gross profits or margins, plus unearned revenue liability if applicable, will not be sufficient to recover capitalized DAC, a premium deficiency is recognized.
Annual Report 2013 Allianz Group 141 reserVes for iNsuraNCe aND iNVestmeNt CoNtraCts Reserves for insurance and investment contracts include aggregate policy reserves, reserves for premium refunds and other insurance reserves.
The assumptions used for aggregate policy reserves are determined using current and historical client data, industry data, and in the case of assumptions for interest reflect expected earnings on assets, which back the future policyholder benefits. The information used by the Allianz Group’s actuaries in setting such assumptions includes, but is not limited to, pricing assumptions, available experience studies, and profitability analyses. The interest rate assumptions used in the calculation of deferred acquisition costs and aggregate policy reserves were as follows: iNterest rate assumptioNs
Reserves for premium refunds Reserves for premium refunds include the amounts allocated under the relevant local statutory or contractual regulations to the accounts of the policyholders and the amounts resulting from the differences between these IFRS-based financial statements and the local financial statements (latent reserve for premium refunds), which will reverse and enter into future profit participation calculations. Unrealized gains and losses recognized for available-for-sale investments are recognized in 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, based on and similar to shadow accounting. The profit participation allocated to participating policyholders or disbursed to them reduces the reserve for premium refunds.
Share-based compensation plans The share-based compensation plans of the Allianz Group are classified as either equity-settled or cash-settled plans. Equity-settled plans are measured at fair value on the grant date and recognized as an expense, with a corresponding increase to 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 a compensation expense over the vesting period. Upon vesting, any change in the fair value of any unexercised awards is also recognized as a compensation expense.
Financial liabilities for puttable equity instruments Financial liabilities for puttable equity instruments primarily include the non-controlling interests in shareholders’ equity of controlled mutual funds. These interests qualify as a financial liability of the Allianz Group, as they give the holder the right to put the instrument back to the Allianz Group for cash or another financial asset (puttable instrument). These liabilities are generally required to be recorded at the redemption amount with changes recognized in income.
premiums Premiums for short-duration insurance contracts are recognized as revenues over the period of the contract in proportion to the amount of insurance protection provided. Unearned premiums are calculated separately for each individual policy to cover the unexpired portion of written premiums.