I N S U R A N C E | A S S E T M A N A G E M E N T | B A N K I N G
+One SUSTAINABLE IMPROVEMENT OF OUR COMPETITIVE POSITION AND OUR COMPANY VALUE
Share price as of December 317) € 154.76 21.0 % 127.94 97.60 100.08 80.80 28 Market capitalization as of December 31 € mn 66,880 28.7 % 51,949 35,9368) 36,7438) 22,0398) 29 Other data
1) Total revenues comprise Property-Casualty segment’s gross premiums written, Life/Health segment’s statutory premiums, Banking segment’s operating revenues and Asset Management segment’s operating revenues.
7) Retrospectively adjusted for transactions affecting our share capital, specifically capital increases. 8) Excluding treasury shares.
9) Does not include minority interests. 10) Due to changes in methodology, comparable data is only available for the years ended December 31, 2005 and 2006.
November 9, 2007 Announcement of third quarter results 2007 Interim report third quarter 2007
In 2006 Allianz set an earnings record, yet at the same time went through a period in which, as seldom before, there wasmuch disagreement as to the course of the company, especially in Germany. The response to the repositioning of our German subsidiaries wasmixed. Some praised us for our courage in introducing far-reaching reforms at an appropriate time and for our systematic approach to implementing these reforms, while others voiced criticism, particularly for cutting jobs in Germany at a time of rising Group profits.
Neither of these viewpoints does justice to the truth; only time will tell whether we can summon up the energy when it matters to emerge victorious from the competition for customer, employee and investor loyalty. The steps we are taking are simply a response to this battle for market leadership, which is being played out on a global level and is becoming increasingly intense.
Perhaps youmay still recall the promisemy colleagues and I on the Board of Management made after the shock of 2002? We said we would make every possible effort to regain Allianz's position among the world leaders in its field. Significantmilestones were reached along this path in fiscal 2006. We are now number one in property and casualty insurance, credit insurance and in assistance services. In asset management and life insurance we are among the top five worldwide. Our banking business in Germany has improved considerably and is generating healthy earnings for the company in excess of the cost of capital. Apart from that, we are the only European financial services provider operating with real success in Central and Eastern Europe, Asia-Pacific and the United States for its shareholders’ benefit.
So what does this mean for you, the owners of Allianz? The value of the Allianz share rose by 21.0% to € 154.76 in 2006. In addition we propose to increase the dividend per ordinary share certificate from € 2.00 to € 3.80, an increase of 90.0%.
Nomatter how encouraging these results are, one cannot deny the fact that other international financial service providers have also done well. When comparing ourselves with the competition, what is important for us is not just the financial results, but the relationship between operating results and the trend in themarket share. It is in this area in particular that we still have some work to do in order to continue building our position as leader in a sustainablemanner. We did not perform as planned with the growth of our annuities business in the United States and with themarketing of life insurance products via bank cooperation agreements in Italy. We are therefore putting particular effort into both these endeavors.
In our view themost important event in fiscal 2006 was themerger of the Italian RAS into Allianz and the conversion of our company into a Societas Europaea. This has created an elegant and clear structure, reinforced the capital base and shortened cross-border processes, enabling us to perform even better and act with greater speed. If we will be able to complete the acquisition fromminority shareholders of all the shares that we do not already own in our subsidiaries AGF and Allianz Leben, as announced in January 2007, our position in our European homemarket will continue to strengthen, creating the foundations of a company which, in terms of its coverage, customer orientation and performance, will be second to none. By taking this step we have not only created better conditions, leading to more growth and higher earnings, but have also demonstrated over recent years our ability to derive maximum benefit from thesemeasures and to be systematic in our approach to and implementation of our projects. I am quite sure that a lean organizational structure centered on our customers will further improve our international competitiveness in the years to come.
The fact that our Customer Focus initiative is no longer just a catchphrase but reality, strengthensmy belief in this. The introduction of a new operatingmodel worldwide will also add considerable momentum to our plans and will result in our corporate culture beingmore consistent from the point of view of our customers. This will enable us, evenmore so than before, to pursue profitable growth even in saturatedmarkets and higher revenue per customer through a combination of innovation, service and quality.
This work plan shows we still have a long way to go before we become the world’s leading financial services provider, a company that keeps promises and exceeds expectations. Yet all themen and women working within Allianz –more than 160,000 worldwide – are nevertheless confident, as I am, that we will have continued success along the way. Many of these people are also Allianz shareholders, whichmeans they have an additional way of participating in the success of the company while at the same time having the same interest as you in excellent customer service and outstanding business results. In 2006 our employees showed you that they had understood the urgency of the task. They possess courage, skills and drive and are determined to see Allianzmove forward. My sincere thanks goes out to our employees and representatives for their outstanding commitment – and I hope I may also offer this appreciation on your behalf.
We will continue to work hard on ways to improve our results on a sustainable basis, and we will pay close attention to our customers’ changing requirements and new developments within the business. One thing is certain: our flexible strategy and the strength of our resources will enable us at all times to take advantage of new business opportunities. This is already the case today, and we will continue with the same passion tomorrow. We will never forget our ultimate commitment to you, which is to sustainably increase the value of your investment.
Merger of RAS into Allianz AG, transformation of Allianz AG into a European Company (SE)
At our meetings in March, May, September and December, the Management Board kept us informed of progress in the reorganization of our German insurance business. We appraised ourselves with the new business organization headed up by the insurance holding company for Germany, Allianz Deutschland AG, and concerned ourselves with Allianz Beratungs- und Vertriebs-AG, the consulting andmarketing company responsible for all sales activity. Finally we were consulted on the concept for business locations and employment in Germany and its implementation.
In January and February 2007 in two extraordinary telephone conference calls and one extraordinary meeting of the Standing Committee as well as an extraordinary meeting of the Supervisory Board we dealt with the tender offer to buy theminority interests in the French Allianz subsidiary AGF. At the same time we considered the decision by Allianz Deutschland AG to make an offer to purchase theminority shareholdings in Allianz Lebensversicherungs-AG. Both transactions were approvingly noted by the Supervisory Board. The Standing Committee gave its formal consent to purchase 100% of AGF. In addition, the Standing Committee gave its approval to the Management Board’s decision to exercise Authorized Capital 2006/I in order to create the Allianz shares offered as part of the consideration for the acquisition of AGF shares. Again in March 2007 and on the basis of a presentation of the Management Board we concerned ourselves in the Supervisory Board plenum with the tender offer to theminority shareholders in AGF and Allianz Lebensversicherungs-AG.
In every Supervisory Boardmeeting throughout financial year 2006 (except the constitutive meeting of the Allianz SE Supervisory Board) the Management Board reported on turnover and results in the group and gave further details on how business was running in each individual business segment and reported on the financial situation. This was then discussed in the Supervisory Board. The Management Board explained that the capital base was further strengthened and that the group’s high rating was once again assured.
As in previous years, we unanimously welcomed the decision of the Management Board to offer Allianz shares to employees of the Allianz Group in 22 different countries at preferential terms.
Wewere involved in the further development of corporate governance standards in the organization on an ongoing basis. On December 18, 2006 the Management Board and the Supervisory Board issued our declaration of compliance in accordance with Section 161 of the German Stock Corporation Act (Aktiengesetz) and put it up on the company website on a permanent basis where it can be consulted at will. Allianz SE is in compliance with all recommendations of the Government Commission German Corporate Governance Code, also those in the June 12, 2006 version of the Code.
In our December meeting, without the presence of the Management Board, wemonitored once again the efficiency of our work. We worked on the implementation of measures agreed upon in the previous year to improve efficiency and discussed further possibilities to improve the workings of the Supervisory Board, in particular to improve the efficiency of the work done in the committees.
Audit Committee Dr. Gerhard Cromme (Chairman) Dr. Wulf H. Bernotat Igor Landau Jean-Jacques Cette Jörg Reinbrecht
Explanations appending to the management report's statements in accordance with section 289 paragraph 4 and section 315 paragraph 4 of the German Commercial Code
For the first time in financial year 2006 the German Act on the Implementation of the EU Takeover Directive of July 8, 2006 lays down in section 289 paragraph 4 and section 315 paragraph 4 of the German Commercial Code (Handelsgesetzbuch) supplementary information obligations relating to themanagement report. The Supervisory Board is obliged to make a statement relating to this in accordance with section 171 paragraph 2 sentence 2 of the German Stock Corporation Act. The Management Board has provided the necessary information and it can be found on pages 110 to 112. We concur with the explanations provided by the Management Board and in addition would like to point out the following: Allianz SE issues registered shares with restricted transferability. Under German stock corporation law in case of registered shares only those persons who appear in the share register are deemed by the company to be shareholders. This is particularly important for such things as taking part in general meetings andmaking use of voting rights. Appearing in the share register also facilitates direct communications with the shareholders. In this way, for instance, all shareholders can be personally invited to attend general meetings. The restriction on share transferability goes right back to the creation of Allianz in 1890. This practice is widespread in the insurance industry in Germany. In accordance with the Statutes, the company will only withhold the approval necessary for transfer of shares when this is for extraordinary reasons and is considered to be in the interest of the company. For several decades no such case has occurred. With the standardization of share transfer processes, the restriction on share transferability does not cause any delay in the registration in the share register and does not impede in any way the quotation of the shares on stock exchanges.
The rules explained on page 112 of this report whereby holders of profit participation certificates may cancel their participation certificates on change of
The employee representatives on the Allianz SE Supervisory Board were nominated in the Agreement concerning the Participation of Employees in Allianz SE signed on September 20, 2006, and appointed by the local court of Munich on October 27, 2006. The employee representatives on the Allianz SE Supervisory Board are Ms Claudia Eggert-Lehmann and Ms Margit Schoffer as well as Mr Jean-Jacques Cette, Mr Godfrey Robert Hayward, Mr Jörg Reinbrecht and Mr Rolf Zimmermann. For the first time employee representatives from EU states outside Germany have been appointed as
Supervisory Boardmembers of Allianz SE and these are Mr Cette from France and Mr Hayward from the UK.
The Supervisory Board would like to thank all Allianz Group employees for the great effort they have put into our business over the past year.
The conversion to an SE and our ongoing efforts to ensure high corporate governance standards have been warmly welcomed by our customers and shareholders as well as by the public. Furthermore, the special interest shown by analysts and institutional investors indicates that corporate governance matters can also have an impact on the overall rating of a corporation.
The regulatory framework for corporate governance was subject to changes during the last year. An important point was the regulation by law regarding the individual disclosure of the compensation of themembers of the board of management by the German “Vorstandsvergütungsoffenlegungsgesetz” and the corresponding changes in the German Corporate Governance Code.
On October 13, 2006 with effectiveness of the crossborder merger of the Italian Riunione Adriatica di Sicurtà S.p.A. (RAS) with and into Allianz AG, Allianz AG changed its legal form to a European Company. Beside the German company law, special European SE regulations and the German law implementing the European Company are now applicable to Allianz SE. This has resulted in a couple of changes that mainly relate to the Supervisory Board. Themain features of the company’s existing corporate governance structure, in particular the two-tier board system consisting of the Board of Management and the Supervisory Board, as well as the principle of equal employee representation on the Supervisory Board, have beenmaintained in Allianz SE. For further details on the differences between a German stock corporation and a European stock corporation with registered seat in Germany, please refer to our web site under www.allianz.com/allianz-se.
An overview of the composition of the board of management can be found on page 23 of this report.
Supervisory Board The conversion of the company into an SE has brought noteworthy changes to the supervisory board. The German law on co-determination (“Mitbestimmungsgesetz”) does no longer apply. The size and the composition of the supervisory board is now determined in line with the European framework regulations on SE’s. To amaterial extent, these regulations have been implemented by an agreement on employee representation at Allianz SE, which was signed on September 20, 2006 with representatives of the European Allianz employees. This agreement can be found on our web site under www.allianz.com/allianz-se.
A part of the supervisory board’s activities is delegated to the following committees of the supervisory board.
The composition of the supervisory board and its committees can be found on page 22 and 6 to 7 of this report.
SE Works Council In the course of the transformation of the company into an SE, an SE works council consisting of employee representatives from up to 26 EUmember states, the European Economic Area (EEA) and from Switzerland was elected to represent the European Allianz employees. The SE works council hasmainly information and consultation rights regarding cross border matters within Europe affecting the Allianz Group. As such, the SE works council, in simple terms, is a company-wide representative body for the European employees with special responsibility for cross border matters within Europe affecting Allianz. Details of the SE works council are contained in the agreement on participation of employees in Allianz SE dated September 20, 2006.
General Meeting At the general meeting, the shareholders exercise their rights. In the course of taking decisions, each share provides one vote (“one share – one vote”). To ensure the exercise of the shareholder’s rights we provide to our shareholders the possibility to follow the general meeting on the internet and vote through proxy holders. We constantly promote the use of e-mail and internet services. The general meeting elects themembers of the supervisory board. As regards the election of employee representatives, the general meeting is bound to the proposals of the employees. The General Meeting decides on the approval of the actions of the Management Board and the Supervisory Board. It decides on the appropriation of net earnings, on capital measures, on the approval of company agreements, on the remuneration of the Supervisory Board, and on changes to the company’s articles of association. Each year, an ordinary general meeting takes place at which the management board and supervisory board give an account of the preceding financial year. The German Stock Corporation Law provides for calling an extraordinary general meeting in special cases.
Further developments in Corporate Governance Further developments in corporate governance are mainly driven by the European guidelines and initiatives. On January 20, 2007, the German rules implementing the European Transparency Directive became effective. These lead to changes in the obligations relating to publications and notifications, for example, of percentage of voting rights or for calling the general meeting as well as in the area of accounting standards. From financial year 2007 onwards the board of management has to give a specific assurance that the annual and interim financial statements as well as the corresponding consolidated financial statements and management reports impart a true picture of the actual circumstances.
The declaration of compliance with the German Corporate Governance Code pursuant to section 161 of the German Stock Corporation Act, issued by Allianz SE on December 18, 2006, is as follows: “1. Allianz SE will comply with all the recommendations made by the Government Commission of the German Corporate Governance Code (Code version as of June 12, 2006).
Our two listed group companies Allianz Lebensversicherungs-AG and Oldenburgische Landesbank AG issued own declarations of compliance in December 2006. Allianz Lebensversicherungs-AG discloses therein a deviation from the recommendation concerning performance-based remuneration for its Supervisory Board. Oldenburgische Landesbank AG will in future comply with all recommendations except the recommendation of a self-retention on its Directors&Officers insurance.
As our stock is listed on the New York Stock Exchange we are subject to US corporate governance rules, insofar as these apply to foreign issuers.
In accordance with the applicable US legislation, our Audit Committee has established procedures for dealing with complaints relating to accounting standards and financial reporting as well as special procedures to ensure the independence of the external auditors. The Allianz SE Supervisory Board has determined that Dr. Wulf Bernotat, Dr. Gerhard Cromme and Mr. Igor Landau fulfill the requirements laid down by US legislation for the co-called “Audit Committee Financial Expert”.
Performance-based remuneration This component consists of an annual and amid-term three-year bonus that are both dependent on performance and success, and limited in their amounts.
The amount of equity-based remuneration shown represents solely a mathematically calculated reference value. If and when the equity-based remuneration component actually leads to payout depends on the future evolution of the share price and the strike price on the exercise date. The exercise of SARs is possible, at the earliest, two years after their grant. RSUs will be exercised by the Company after five years. In relation to the exercise of SARs, the Board of Management has voluntarily committed to always hold the rights until the end of the plan as long as the share price has not already reached the definedmaximum relevant to the exercise of the specific SARs. The exercises, the number of rights issued and the evolution of the value of equity-based remuneration are shown in the consolidated income statement.
1) Paid in 2007 for fiscal year 2006. 2) Proportional amount accrued for fiscal year 2006.
The following table sets forth the equity-based remuneration each individual member of the Board of Management received in 2006.
The RSUs are exercised on the first day after the expiration of a five-year blocking period, i.e. May 17, 2011, at the price of the Allianz SE share at that date. For further information on the RSU please see Note 48 of the consolidated financial statements.
The total remuneration of the Board of Management for fiscal year 2006 amounted to € 41.2 million (2005: € 37.1 million).
Pensions and similar benefits The pension agreements for members of the Board of Management up to 2004 stipulated retirement benefits of a fixed amount that was not linked to the evolution of fixed or variable remuneration components. These pension agreements were examined and revised at irregular intervals. Effective 2005, Allianz SE changed to a contribution-oriented system. The rights from the respective pension promises existing at that point in time were frozen. As a result of the change, since 2005, annual contributions have beenmade by the Company instead of the former increase amendments. 2.75% per year is guaranteed as theminimum interest rate applicable to these contributions. In case of an insured event, the accumulated capital is converted to equal annuity payments which are then paid out for the rest of themember’s life. If the net return on investment exceeds the actuarial interest rate, a corresponding profit share will be credited in the following year. The amount of the contribution payment will be revised yearly. The contribution payments are guaranteed only as required for further regular financing of accrued pension rights resulting from defined benefits promises existing on December 31, 2004. The increase in reserves for pensions (service cost) includes the required expenditures for further financing of accrued pension rights as well as the contribution payments for the new contribution-oriented system.
When amandate of the Board of Management ends, an old age pensionmay become payable at the earliest upon completion of the 60th year of age, except for cases of professional or general disability for medical reasons, or survivors’ pensions in the case of death. If the mandate is terminated for other reasons before the retirement age has been reached, a non-forfeitable pension promise is maintained. This does not include, however, a right to pension payments beginning immediately.
The following table sets forth the current service cost and contributions arising with the current pension plans according to IAS 19, excluding the current service cost for the old pension plan redeemed as of December 31, 2004, for each individual member of the Board of Management of Allianz SE in 2006.
The additional current service cost in 2006 according to IAS 19 for the frozen old pension plan amounted to, in € thousand, for Mr. Diekmann € 166, for Dr. Achleitner € 257, for Dr. Faber € 134, for Dr. Perlet € 138, for Dr. Rupprecht € 174, for Dr. Walter € 383 and for Dr. Zedelius € 89.
Termination of service Formermembers of the Board of Management who leave the Board after at least a five-year term of membership are entitled to a transition payment for a period of six months. This consists of monthly fixed payments to the amount of the last paid fixed salary and the proportionate annual bonus on the basis of 100% target achievement.
Themembers of the Supervisory Board receive a € 500 attendance fee for each Supervisory Board or committee meeting that they personally attend. This sum remains unchanged if several meetings occur on one day or when variousmeetings are held on consecutive days. The total expenditure for attendance fees in 2006 amounted to
Each individual member of the Supervisory Board of Allianz AG (up to October 13, 2006) received the following remuneration.
Agent commissions Onemember of the Supervisory Board receives smallscale commission payments for peripheral agent activities.
Dr. Wulf H. Bernotat Chairman of the Board of Management E.ON AG
Norbert Blix until October 13, 2006 Vice Chairman Employee, Allianz Versicherungs-AG
Dr. Diethart Breipohl until October 13, 2006 Former Member of the Board of Management of Allianz AG
Jean-Jacques Cette since October 27, 2006 Secretary of the Group commission AGF, Assurances Générales de France
Hinrich Feddersen until October 13, 2006 Former Member of the Board of Management at ver.di
Franz Fehrenbach until October 13, 2006 Chairman of the Supervisory Board Robert Bosch GmbH
Dr. Franz B. Humer President of the Board of Management and Chief Executive Officer F. Hoffmann-La Roche AG
2. We know that the sustainability of our success is based on our reputation, our acceptance by society and our appeal as a company employing high-performing individuals.
3. We promote entrepreneurial decision-making in our local units and back these decisions up with an efficient global infrastructure.
4. We wish to expand in business segments in which we can earnmore than our capital costs on a sustainable basis.
5. We will only satisfy our customers in the long term by offering them an entire range of outstanding products and services for their financial needs, including all-in solutions. For this reason we will also be increasing our offer of banking services in strategically important markets.
An extremely influential factor observable in almost every country on Earth is the way society is ageing. People are living longer and the birth rates have been significantly lower since the end of the baby-boom years following the end of the SecondWorldWar. The proportion of elderly people will inevitably become larger over the next 30 years, and the proportion of working population is declining relative to the pensioner
generation. We have been addressing this trend for some time now, principally by offering differentiated product ranges in life and health insurance and in asset management. In addition, we have recently introduced pan-European pension products and assistance services for elderly customers. We will also launch special solutions to enable our customers to benefit from their assets throughout their post-retirement life and to pass on asmuch wealth as possible to the next generation.
Another major trend is the growing importance of building up assets. This is increasing in emerging markets, including as a supplement to pay-as-you-go state-run social security systems whose performance declines as society ages. We are acting on this trend by investing in alternative financial forms, including private/public co-financing of infrastructure projects (private/public partnerships), investment in unlisted companies (private equity) and investment in highgrowth industries such as biotechnology and renewable energy. Wealth Management for high net worth individuals, a part of our banking business which we are further expanding, points in the same direction.
Lastly, we attachmajor significance to climate change. It affects actuarial practice because it demonstrably increases the risk of natural disaster. Yet it also offers business opportunities, such as the trade of emissions rights or investment in renewable energy.
We are convinced that our strategic initiatives and measures will make a substantial contribution towards Allianz further strengthening its reputation as a leading global financial services provider. This will boost customer loyalty, profitability and ultimately also our market value on a sustainable basis.
Wewould like our shareholders to benefit from the improved business development and will therefore propose at the annual general meeting the payment of a dividend of € 3.80 per share, which represents an increase of € 1.80 or 90% per share. Because of the higher number of shares, the dividend payout will rise by 102% to € 1,642million.
In 2006 our stock market capitalization grew by € 15 billion to € 66.9 billion. Allianz continues to be one of Europe’s financial services providers with the highest market capitalization. As a result it has bolstered its weighting withinmajor indices; it is now the secondranking security within the German blue chip index DAX (previously ranked third). Our share is also included in the calculation of the Dow Jones EURO STOXX 50 and the MSCIWorld and appears in the sustainability indices FTSE-4-Good and the Advanced Sustainable Performance Index. Allianz is number one among the insurance stocks in the Dow Jones Sustainability Index which has global coverage. For more information, visitwww.allianz.com/ sustainability.
Allianz has approximately 439,000 shareholders and, as such, is one of the biggest publicly held corporations in Europe. As before, 100% of our shares are held in free float. Investors in Germany hold 47% of our stock. 53% of the capital stock is in the hands of shareholders from outside Germany, 5% points more than in the previous year. The proportion of Allianz shares held by institutional investors rose from 86% to 89%, with private investors holding 11% of our capital stock. For up-to-date information on our shareholder structure, visit www.allianz.com/investor-relations.
Regional breakdown as of December 31, 2006 in % of subscribed capital
Ordinary General Meeting in May 2006 showed a higher proportion of capital stock represented compared to the previous year. It rose to 39 % (35%). At the Extraordinary General Meeting in February presence was as high as 42%. For detailed information about the Annual General Meeting, visitwww.allianz.com/agm.
Return on equity after income taxes2) % 15.6 12.6 7.8 1) In comparison with Dow Jones EURO STOXX 50; source: Bloomberg. 2) Based on average shareholders’ equity. Average shareholders’ equity has been calculated based upon the average of the current and preceding year’s shareholders’ equity.
Internet • www.allianz.com/investor-relations has up-to-date shareholder information on the performance of the Allianz Group and Allianz shares.
• There is important information on our AGM services atwww.allianz.com/agm. Please register to receive your invitation to the Annual General Meeting by e-mail; this helps to save costs and is environmentally friendly.
Written enquiries Allianz SE Investor Relations Koeniginstrasse 28 80802 Muenchen Germany
Pronouncements and Changes in the Presentation of the Consolidated Financial Statements 39 Recommendation for Appropriation of Profit 39 Events After the Balance Sheet Date 39 Outlook 42 Property-Casualty Insurance Operations 42 Earnings Summary 46 Property-Casualty Operations by Geographic Region 48 Life/Health Insurance Operations 48 Earnings Summary 52 Life/Health Operations by Geographic Region 54 Banking Operations 54 Earnings Summary 57 Banking Operations by Division 57 Banking Operations by Geographic Region 58 Asset Management Operations 58 Third-Party Assets Under Management of the Allianz Group 60 Earnings Summary 63 Corporate Activities 63 Earnings Summary 65 Balance Sheet Review 65 Consolidated Balance Sheets 66 Total Equity 66 Total Assets and Total Liabilities 66 Insurance Assets and Liabilities 68 Banking Assets and Liabilities 68 Off-Balance Sheet Arrangements 69 Liquidity and Capital Resources 69 Organization 69 Liquidity Resources 69 Debt and Capital Funding 72 Capital Requirements and Ratings 73 Allianz Group Consolidated Cash Flows 74 Risk Report 74 Risk Governance Structure 75 Risk Capital 75 Internal Risk Capital 77 Risk Measurement 79 Market Risk Measurement 82 Credit Risk Measurement 84 Actuarial Risk Measurement 85 Business Risk Measurement 86 Management of Other Risks 87 Risk Monitoring by Third Parties 87 Outlook 88 Allianz Group Success Factors 88 The Allianz Group’s Business Model 91 Legal Structure: Conversion into Allianz SE Completed 92 Important Group Organizational Changes 94 Value-Based Management 95 Our Employees 99 Global Compact and Sustainability Risks 100 Global Diversification 102 Our Largest Insurance Markets and Companies 109 Other Information 109 Principal Accountant Fees and Services 110 Statements in Accordance with Section 315
Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Allianz Group’s core business and core markets, (ii) performance of financial markets, including emergingmarkets, (iii) the frequency and severity of insured loss events, (iv) mortality andmorbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults, (vii) interest rate levels, (viii) currency exchange rates including the Euro/U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, includingmonetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganizationmeasures, and (xiv) general competitive factors, in each case on a local, regional, national and/or global basis. Many of these factors may bemore likely to occur, or more pronounced, as a result of terrorist activities and their consequences.
Thematters discussed hereinmay also be affected by risks and uncertainties described from time to time in Allianz SE’s filings with the U.S. Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statement.
• Group operating profit was up 30% and exceeded the € 10 billion mark. – Property-Casualty underwriting profitability stands out with a combined ratio of 92.9%. – Operating profit in Life/Health grew by 23%. – Milestone achieved for cost-income ratio of below 80% in Banking. – Asset Management performed strongly again, further improving operating profit to € 1.3 billion.
• Net income grew by 60% to € 7.0 billion. • Shareholder’s equity stands at € 50.5 billion, up almost 28%
Goodwill amortization, net of tax. Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.
1) The Allianz Group operates and manages its activities primarily through four operating segments: Property-Casualty, Life/Health, Banking and Asset Management. Effective January 1, 2006, in addition to our four operating segments and with retrospective application, we introduced a fifth business segment named Corporate. For detailed information on the Allianz Group, our activities and structures, as well as the environment in which we operate please see “Allianz Group Success Factors” on pages 88 to 99. Furthermore, effective January 1, 2006, we implemented certain other revisions to our consolidated financial statements. For detailed information on all revisions please see Note 3 to our consolidated financial statements. All revisions are intended to enhance the reader’s understanding of our financial results and to use a more consistent presentation with that of our peers. We have retrospectively applied these revisions to our consolidated financial statements as of and for the years ended December 31, 2005 and 2004, as previously issued in connection with our Annual Report 2005, without any impact on our consolidated net income and shareholders’ equity for these years.
Our total revenues remained stable at € 101.1 billion. This result reflects the net effect of substantial operating revenue growth in our Banking and Asset Management segments, flat Property-Casualty gross premiums written, combined with a decline in Life/Health statutory premiums. Total internal revenue growth amounted to 0.5%.2)
2) Internal total revenue growth excludes the effects of foreign currency translation as well as acquisitions and disposals. Please see page 114 for a reconciliation of nominal total revenue growth to internal total revenue growth for each of our segments and the Allianz Group as a whole.
Banking Operating revenues were up substantially by 12.2% to € 7.1 billion in 2006. All income categories contributed to this strong development, with doubledigit growth rates in Dresdner Bank’s net interest income and net trading income. Both operating divisions at Dresdner Bank recorded considerably higher revenues than a year ago.
Asset Management Based on our consistent strong investment performance, we again ranked in the top quartile based on net inflows in 2006 compared to our peer companies. With net inflows of € 36 billion and market-related appreciation of € 43 billion, we achieved our growth target for third-party assets of above 10%, excluding currency conversion effects. Overall, our thirdparty assets amounted to € 764 billion as of December 31, 2006, up 2.8% from a year earlier, after unfavorable exchange rate effects of € 57 billion. Our strong asset base was a key factor in repeating double-digit operating revenue growth while facing a challengingmarket environment.
Life/Health Wewere again successful in growing our operating profit which increased in 2006 by 22.5% to € 2.6 billion. While continuing to grow our asset base, we 1) The Allianz Group uses operating profit to evaluate the performance of its business segments and the Allianz Group as a whole. Please see page 113 for further information.
2) Under our Sustainability Program, we systematically search for best practices in product and service offerings, and processes across our insurance companies. The highest standard is then made obligatory for all companies.
further improved our investment, expense and technical margins. Our policyholders also benefit from profit growth as, in 2006, we were able to credit themwith a higher participation amount than last year. Our Sustainability Program2) was also an important contributing factor to operating profit growth in Life/ Health.
Themost significant capital gains resulted from the sale of our shareholdings in Schering AG and in Eurohypo AG in the first half of 2006, as well as from the disposal of Four Seasons Health Care Ltd. in the second half. Overall, the impact from realized gains/losses and impairments of investments (net) increased € 829 million to € 2.7 billion.
an equity-linked loan which was issued as a component of financing the cash tender offer for the outstanding RAS shares.
We grew net income by 60.3% to € 7.0 billion. This development was primarily driven by our operating profit growth, reflecting the high quality of our earnings.
Income tax expenses of € 2.0 billion benefited from the tax-exemption of the significant capital gains, and the capitalization of the Allianz Group’s total corporate tax credits as a consequence of the new German Reorganization Tax Act (SEStEG) which entered into force in December 2006. Following this tax law change, current income tax expenses were reduced by € 571 million. Please see Note 41 to our consolidated financial statements for further information. As a result of the above, our effective tax rate declined to 19.5% from 26.3%.
Minority interests in earnings were down € 97million to € 1.3 billion. This was primarily a result of the acquisition of theminority interest in RAS.
1) See Note 50 to our consolidated financial statements for further details. 2) Includes goodwill amortization. Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.
The following table summarizes the total revenues, operating profit and net income for each of our segments for the years ended December 2006, 2005 and 2004, as well as IFRS consolidated net income of the Allianz Group.
Income (loss) before income taxes and minority interests in earnings 6,166 2,271 1,526 425 (1,999) (560) 7,829
For information on recently adopted and issued accounting pronouncements please see Note 3 to our consolidated financial statements.
The Board of Management and the Supervisory Board propose that the available net earnings of Allianz SE of € 2,008,618,258.00 for the fiscal year 2006 be appropriated as follows: • Distribution of a dividend of € 3.80 per no-par share entitled to a dividend: € 1,642,170,000.00
See “Outlook – Significant Expected Investments” below and Note 52 to the consolidated financial statements.
The Allianz Group expects to continue improving its financial position during the next years.
Within the same time period within our PropertyCasualty segment we are striving to maintain a strong combined ratio of less than 94% on average. In Life/ Health we aim to achieve an average new business margin greater than 3%.1) We are also confident of an average return on risk-adjusted capital in our Banking segment of above 15%. For our Asset Management segment, we are targeting average annual growth of third-party assets of 10%, excluding foreign currency conversion effects.
As always, natural catastrophes and adverse developments in the capital markets, as well as the 1) New business margin according to the definition of European Embedded Value.
On January 18, 2007, Allianz SE announced its intention to launch a tender offer to acquire the outstanding shares in Assurances Générales de France S.A. (or “AGF”, and together with its subsidiaries, the “AGF Group”) that it does not already own. The tender offer is not and will not bemade to the public in the United States and cannot be accepted from there. The Allianz SE shares offered in the offer have not been and will not be registered under the U.S. Securities Act of 1933, as amended, andmay not be offered or sold in the United States absent registration or an applicable exemption from registration.
In addition, Allianz AZL Vermögensverwaltung GmbH& Co. KG, a subsidiary of Allianz Deutschland AG, Allianz SE’s wholly-owned German insurance holding company, launched a tender offer on February 28, 2007 to acquire the approximately 9% of outstanding shares of Allianz Lebensversicherungs-Aktiengesellschaft (or “Allianz Leben”) that Allianz does not already own. Allianz AZL Vermögensverwaltung GmbH & Co. KG will offer € 750.00 in cash per Allianz Leben share.
The Board of Directors of AGF has welcomed the proposed transaction. To achieve 100% ownership of AGF, Allianz SE intends to implement a squeeze-out immediately following the completion of the tender offer. In the event it will not be in a position to implement a squeeze-out, Allianz could envisage implementing a merger of AGF and Allianz which would then be proposed to both AGF and Allianz shareholders. The acceptance period for the tender offer is currently scheduled to end on April 20, 2007.
This will allow Allianz to simplify the implementation of Group-wide initiatives and to strengthen our position in our core homemarkets and business lines. Completing the acquisition of theminority interests of the Allianz Group’s largest operating entities positions us to further streamline our group structure across regions and business units.
The cash consideration required for the two transactions of approximately € 7.5 billion, which amount depends primarily on the acceptance rate of the cash tender offers, is planned to be funded internally by the Allianz Group. However, to bridge possible time gaps until the necessary liquidity is available, bridge loans from different financial institutionsmay be used. With the additional approximately € 3.0 billion share consideration paid to AGF shareholders, the total acquisition cost for the AGF and Allianz Lebenminority shareholdings is expected to amount to approximately
Economic outlook – Little or no business cycle burdens for financial service providers
The business prospects for financial service providers remain positive against this background.
The high provision required for longevity, health and care makes it necessary for the citizen to save more for retirement during his or her working life. Asset Management benefits as a result. This business sector is already well developed in the United States and Europe, not least because the post-war baby boom generation has been accumulating assets for retirement for quite some time. Asset saving is now also becoming a focus of attention in Asia, as demographic problems are similarly aggravating here andmany emergingmarkets are experiencing rises in income that permit asset accumulation for old age.
At Allianz Sach within Germany, we closely monitored pricing development in order to maintain profitability. Premiums in ourmotor business were down, reflecting largely lower prices. The development in our casualty lines primarily due to increased sales of accident insurance products with premium refunds, however, compensated partially for the decline inmotor. An additional factor contributing to the lower premiums within Germany was that the Allianz Group’s PropertyCasualty subsidiaries outside of Germany reduced their internal reinsurance cessions to Allianz SE.
In somemarkets, such as the United States and Spain, we recorded increasing volumes while being able to maintain stable, profitable prices. Two lines of business contributing to the increased business volume at Fireman’s Fund Insurance Company (or “Fireman’s Fund”) in the United States were the crop insurance business and specialty casualty lines. The positive development in Spain was attributable to higher sales across all lines of business.
The decrease of € 207 million in Switzerland reflected an increase in gross premiums written at Allianz Suisse due to a favorable development in our motor business and lower premium volume at ART. At ART, in 2005, we benefited from a large single premiummulti-year contract.
Within New Europe, the increase in gross premiums written took place in a well-performing economy. Our distribution network captured a significant part of the growingmarket potential. The expanded sales capacity in Poland was the key driver for the growth of our property-casualty portfolio. In contrast, in Hungary, we were willing to forego volume for better prices and thereby protect our profitability.
In South America, our operations benefited predominantly from growth in our Brazilianmotor business driven by a continued good performance of the fleet business and an increase of new car sales.
At Allianz Global Corporate & Specialty gross premiums written were down € 142million to € 2,802 million. This development was to a large extent brought about by foregoing business volume as a result of declining prices mainly in Europe.
Overall, claims and insurance benefits incurred (net), at € 24,672 million in 2006, were down 2.6% from a year ago. As a result, our calendar year loss ratio improved by 2.2 percentage points to 65.0%. The difference between the improvement of our loss ratio based on accident year compared to that based on calendar year is due to lower run-offs in 2006 compared to 2005. We continued to deliver positive net development on prior years’ loss reserves primarily in Italy, France, the United Kingdom and within our credit insurance business. Partially, we attribute this positive development to themeasures we are undertaking in the context of our Sustainability Program, such as improved claimsmanagement processes inmany companies.
Interest and similar income rose by € 349 million to € 4,096 million, reflecting higher dividends received, improved yields from debt securities due to slightly higher coupon payments, and our growing asset base.
Realized gains/losses (net) from investments, shared with policyholders, declined by € 227 million to € 46million. In 2005, realizations from available-for-sale equity investments in connection with accident insurance products with premium refunds in Germany were exceptionally high due to a strategy change at the fundmanaging these assets. This had an impact of a similar, but opposite, magnitude on changes in reserves for insurance and investment contracts (net), which amounted to a net expense of € 425 million in 2006 compared to a net expense of € 707 million a year earlier.
Non-operating items, in aggregate, resulted in a gain of € 1,291 million, up € 267 million from a year ago. This improvement is principally the result of increased realized gains which were only partially offset by higher impacts from impairments of investments and restructuring charges.
Non-operating impairments of investments (net) rose by € 98million to € 175 million, to a large extent brought about by impairments of available-for-sale equity securities in the second quarter of 2006 at Allianz Sach following at that time the downward trend in the equity capital markets.
Income tax expenses rose by 15.0% and amounted to 2,075 million. Our effective tax rate declined from 29.3% to 27.4%, largely due to the capitalization of corporate tax credits in Germany.
The following table sets forth our Property-Casualty insurance segment’s income statement, loss ratio, expense ratio and combined ratio for the years ended December 31, 2006, 2005 and 2004.
Income from financial assets and liabilities held for trading (net)2) 83 32 20 Realized gains/losses (net) from investments, not shared with policyholders3) 1,746 1,148 997 Impairments of investments (net), not shared with policyholders4) (175) (77) (107) Amortization of intangible assets (1) (11) (403)
Gross premiums written Premiums earned (net) Combined ratio € mn € mn € mn € mn € mn € mn
Travel Insurance and Assistance 1) We have combined the activities of Allianz Global Risks Re and Allianz Marine & Aviation, previously presented separately under Specialty lines, the corporate customer business of Allianz Sach, previously included within Germany, as well as the activities of Allianz Global Risks US, previously included within the United States, within the newly established operating entity Allianz Global Corporate & Specialty. In addition, we reclassified the Life/Health business assumed by Allianz SE, previously included within Germany, and now present it within Other in the Life/Health breakdown by geographic region (please see “Life/Health Insurance Operations – Life/Health Operations by Geographic Region”). Prior year balances have been adjusted to reflect these reclassifications and allow for comparability across periods.
• Statutory premium growth held back by Italy and the United States.
Asia-Pacific and Rest of World 1) After elimination of transactions between Allianz Group companies in different geographic regions and different segments.
Asia-Pacific 1) Before elimination of transactions between Allianz Group companies in different geographic regions and different segments.
Many of our operating entities worldwide, especially in the growthmarkets of Asia-Pacific and New Europe, increased their statutory premiums with high doubledigit growth rates. In 2006, these twomarkets, in aggregate, contributed 9.6% of our total statutory premiums, compared to 7.8% in 2005. But also most of our establishedmarkets continued to grow dynamically, such as Germany Life at 6.4% and France at 9.6%. However, these increases were offset by marked declines particularly in the United States and Italy of 21.2% and 8.1%, respectively. Overall, our statutory premiums, at € 47,421 million in 2006, were slightly down 1.8% on a nominal basis and 1.6% on an internal basis compared to 2005. Our new businessmix showed an increase in
recurring premium products and a decrease in single premium business compared to last year. Given that in the year of sale, a recurring premium contract only contributes a fraction of a single premium contract to annual premiums, this change in new businessmix had a negative impact on statutory premium growth year-onyear in 2006. The new recurring premium contracts will however increase premiums in subsequent years.
At our life operating entities of AGF Group in France, we generated statutory premium growth to € 5,792 million. This positive development was brought about by strong sales of unit-linked contracts, particularly related to several newly-launched products. Growth was achieved both through our proprietary financial advisors network and partnerships with independent advisors.
Within Asia-Pacific, statutory premiums in South Korea increased to € 2,054 million as we recorded strong sales of equity-indexed annuity products and in our variable annuity business. In China, growth was also significant, albeit starting from a low base. Here, we began to benefit from our strategic partnership with Industrial and Commercial Bank of China Ltd. We have received further sales licenses and expanded our branch network.
Most of our life operating companies exhibited operating profit growth, with the highest absolute increases at our operations in Germany, the United States, South Korea, France and Spain. In addition, we experienced a solid increase in aggregate operating profit within New Europe.
2) Please see “Global Diversification – Our Largest Insurance Markets and Companies – Life/Health Insurance Operations – United States – Outlook” and “Global Diversification – Our Largest Insurance Markets and Companies – Life/Health Insurance Operations – Italy – Outlook” for information on certain measures to regain growth momentum in the United States and Italy.
Our improved investmentmargin was brought about by significantly higher interest and similar income, and the growth in aggregate realized gains/losses and impairments of investments (net). Interest and similar income increased primarily due to higher dividends received from available-for-sale equity investments in Germany and France. In addition, our U.S. operations benefited from higher yields on bonds and growth in asset base. Significant realized gains resulted from the sale of our shareholdings in Schering AG and the disposal of Four Seasons Health Care Ltd. Partially offsetting was the unfavorable net development in our income from financial assets and liabilities carried at fair value through incomemainly as Germany Life exhibited significant negative effects from the accounting treatment for certain derivative instruments. In the United States, an increase inmarket interest rates had an additional negative impact. Furthermore, increased investment expenses stemmed predominantly from the weaker U.S. Dollar compared to the Euro.
Consequently, together with the decline in statutory premiums (net), our statutory expense ratio increased to 9.6% from 8.4% a year ago. Excluding the adjustments described above, our statutory expense ratio would only have increased 70 basis points from 8.7% in 2005 to 9.4% in 2006.
Claims and insurance benefits incurred (net), and changes in reserves for insurance and investment contracts (net), in aggregate, resulted in charges of € 28,150 million, up 1.0% over 2005. While premiums were lower than in 2005, this development in particular reflects the investment income on our assets which benefits our policyholders.
Overall charges of € 140 million were recorded for operating restructuring charges in 2006. These charges were incurred in connection with the reorganization of our German insurance operations.1)
Minority interests in earnings remained stable at € 416 million. Higherminority interests in earnings at AGF Group in France, reflecting its increased earnings after income taxes, were offset by lowerminority interests in earnings at RAS Group in Italy, stemming from its decreased earnings after income taxes and the acquisition of theminority interest in RAS.
Realized gains/losses (net) from investments, not shared with policyholders2) 195 208 17 Amortization of intangible assets (26) (13) (168) Non-operating restructuring charges3) (34) (18) (24) Non-operating items 135 177 (175)
2) The total of these items equals realized gains/losses (net) in the segment income statement included in Note 5 to the consolidated financial statements. 3) The total of these items equals restructuring charges in the segment income statement included in Note 5 to the consolidated financial statements. 4) Represents acquisition and administrative expenses (net) divided by statutory premiums (net).
The following tables set forth our life/health statutory premiums, premiums earned (net), statutory expense ratio and operating profit by geographic region for the years ended December 31, 2006, 2005 and 2004. Consistent with our general practice, these figures are presented before consolidation adjustments, representing the elimination of transactions between Allianz Group companies in different geographic regions and different segments.
Russia 28.1 — — — — — Cyprus — — 17.9 — — —
At € 2,841 million, we grew net fee and commission income by 5.5% over the 2005 level. This development wasmainly a result of our growing securities business in PBC which benefited from both higher turnover-related commissions and increased assets under management.
expenses, our cost-income ratio improved significantly to 79.6% in 2006, down 11.8 percentage points compared to 2005.
Within our loan loss provisions we continued to benefit from the improved quality of our loan portfolio. In aggregate, loan loss provisions experiencedmoderate net additions of € 27 million, compared to net releases of € 113 million a year ago. Net releases in the prior year were driven by recoveries and substantial releases in connection with the wind-down of the IRU. Our coverage ratio1) improved to 61.5% as of December 31, 2006 from 56.8% a year ago.
In aggregate, the impact from non-operating items declined from € 825million profit to a loss of € 146 million, as expected.
1) Represents total loan loss allowance as a percentage of total non-performing loans and potential problem loans.
Net income amounted to a strong € 895 million, evidencing the high quality of our earnings. Our significantly improved operating profit almost compensated for the expected decline in non-operating items.
2) Please see “Allianz Group Success Factors—Important Group Organizational Changes – “Neue Dresdner Plus” Reorganization Program” and Note 49 to our consolidated financial statements for further information.
Income from financial assets and liabilities designated at fair value through income (net)4)
Income (loss) before income taxes and minority interests in earnings 1) Consists of Dresdner Bank and non-Dresdner Bank banking operations within our Banking segment, as well as the elimination of trading income (net) of € 6 mn at Dresdner Bank resulting from Dresdner Bank’s trading activities in Allianz SE shares during the year ended December 31, 2006.
5) For the Banking segment, total revenues are measured based upon operating revenues. 6) Represents operating expenses divided by operating revenues.
2) The Corporate Other division contains income and expense items that are not assigned to Dresdner Bank’s operating divisions. These items include, in particular, impacts from the accounting treatment for derivative financial instruments which do not qualify for hedge accounting as well as provisioning requirements for country and general risks. For the years ended December 31, 2006, 2005 and 2004 the impact from the accounting treatment for derivative financial instruments which do not qualify for hedge accounting on Corporate Other’s operating revenues amounted to € (47) mn, € (214) mn and € 7 mn, respectively. With effect from the first quarter of 2006, the majority of expenses for support functions and central projects previously included within Corporate Other have been allocated to the operating divisions. Additionally, the non-strategic Institutional Restructuring Unit was closed down effective September 30, 2005, having successfully completed its mandate to free-up risk capital through the reduction of non-strategic risk-weighted assets. Furthermore, effective in the first quarter of 2006, and as a result of Dresdner Bank restructuring its divisions, the Institutional Restructuring Unit’s 2005 and 2004 results of operations were reclassified into Corporate Other. Prior year balances have been adjusted accordingly to reflect these reclassifications and allow for comparability across periods.
3) Presentation not meaningful. 4) Consists of non-Dresdner Bank banking operations within our Banking segment, as well as the elimination of trading income (net) of € 6 mn at Dresdner Bank resulting from Dresdner Bank’s trading activities in Allianz SE shares in the year ended December 31, 2006.
The following table sets forth our banking operating revenues and operating profit by geographic region for the years ended December 31, 2006, 2005 and 2004. Consistent with our general practice, these figures are presented before consolidation adjustments, representing the elimination of transactions between Allianz Group companies in different segments.
• Strong net inflows of € 36 billion despite challenging capital market environment.
A key success factor continued to be our competitive investment performance. The overwhelmingmajority of the third-party assets wemanage again outperformed their respective benchmarks in 2006. Market-related appreciation was € 43 billion. Net inflows and positive market effects were partly offset by negative currency conversion effects of € 57 billion, resulting primarily from a weaker U.S. Dollar versus the Euro. Overall, on a Eurobasis, our third-party assets increased by € 21 billion2) to € 764 billion as of December 31, 2006, compared to € 743 billion as of December 31, 2005.
We operate our third-party asset management business primarily through Allianz Global Investors (or “AGI”). As of December 31, 2006, AGI managed approximately 94.6% (2005: 95.2%) of the Allianz Group’s third-party assets. The remaining third-party assets are managed by Dresdner Bank (approximately 2.7% and 2.3% as of December 31, 2006 and December 31, 2005, respectively) and other Allianz Group subsidiaries (approximately 2.7% and 2.5% as of December 31, 2006 and December 31, 2005, respectively).
1) Source: Own internal analysis and estimates. 2) Including a negative deconsolidation effect of € 1 bn.
2) Consists of third-party assets managed by Dresdner Bank (approximately € 21 bn and € 17 bn as of December 31, 2006 and 2005, respectively) and by other Allianz Group companies (approximately € 20 bn and € 19 bn as of December 31, 2006 and 2005, respectively).
Third-party assets under management – Fair values by investment category in € bn
Ourmajor achievements in 2006 included: • Allianz/PIMCO Funds were named “Best Mutual Fund Family” in the 2006 Lipper/Barron’s Fund Families Survey.
Third-party assets under management – Composition of fair value development in € bn
Effective January 1, 2007, our German retail fund company dit and our German special fund company dresdnerbank investmentmanagement Kapitalanlagegesellschaft mbH (or “dbi”) were merged to form Allianz Global Investors Kapitalanlagegesellschaft mbH. In connection with this merger, the new brand image of the combined company will focus on the global expertise and presence of AGI.
The results of operations of our Asset Management segment are almost exclusively represented by AGI, accounting for 98.2% of our total Asset Management segment’s operating revenues for the year ended
The following table sets forth the composition of AGI’s net fee and commission income for the years ended € mn € mn € mn
Net fee and commission 1) Source: Bundesverband Investment und Asset Management (or “BVI”), an association representing the German investment fund industry.
Net income reached € 395 million, exceeding previous year’s level by 68.8%. Primarily as a result of higher taxable income in the United States income tax expenses increased 117.3% to € 276 million, representing a rise of our effective tax rate from 31.1% to 38.3%.
Effective January 1, 2006, in addition to our four operating segments Property-Casualty, Life/Health, Banking and Asset Management, and with retrospective application, the Allianz Group introduced a fifth segment named Corporate. Activities included in the Corporate segment were previously reported in the PropertyCasualty segment. Generally, the Corporate segment includes all Group activities that are not allocated to one of our operating segments, in particular: Holding Function Comprises Group Center functions carried out by the Allianz Group’s holding company Allianz SE, as well as regional management companies and special investment vehicles. In particular, the Holding Function works with the operating entities to guide the Allianz Group towards effective operation using a common set of values and corporate governance processes. It supports the growth of the Allianz Group’s businesses through its risk, corporate finance, treasury, financial control, communication, legal, human resources strategy and technology functions.
Private Equity Includes the income and expense items associated with the private equity investments held in particular by Allianz Capital Partners GmbH and Allianz Private Equity Partners GmbH.
While operating loss, down € 50million to € 831 million in 2006, remained relatively stable, net expenses from non-operating items declined significantly by € 962 million. As a result, loss before income taxes and minority interests in earnings was down € 1,012 million to € 987 million.
Operating profit (loss) Non-operating items € mn € mn € mn € mn € mn € mn
Operating profit The considerable decrease in operating loss stemmed primarily from higher interest and similar income due to higher dividends received from equity investments. Further key operating items included within Holding Function are administrative expenses to run our Group Center, expenses associated with our pension plans, and expenses for certain Allianz Group-wide growth initiatives.
Operating profit Operating profit decreased € 35million from the 2005 level. In August 2006, the Allianz Group acquired 100.0% of MAN Roland Druckmaschinen AG. The full consolidation of this private equity investment had impacts of a similar magnitude both on operating revenues and operating expenses, namely income and expenses from fully consolidated private equity investments.
Non-operating items Non-operating items improved from a loss of € 9 million to a gain of € 299 million. The disposal of Four Seasons Health Care Ltd. (or “Four Seasons”) in August 2006 contributed € 287 million to this development.
ASSETS Cash and cash equivalents 33,031 31,647 Financial assets carried at fair value through income 156,869 180,346
Loans and advances to banks and customers 408,278 336,808 Financial assets for unit linked contracts 61,864 54,661 Reinsurance assets 19,360 22,120 Deferred acquisition costs 19,135 18,141 Deferred tax assets 4,727 5,299 Other assets 38,893 42,293 Intangible assets 12,935 12,958 Total assets 1,053,226 989,288
In 2006, we again significantly increased our shareholders’ equity which increased to € 50.5 billion as of December 31, 2006, up 27.8% froma year earlier, primarily driven by our strong net income.
The following graph sets forth the development of our shareholders’ equity.
1) Does not include minority interests. Please see Note 23 to the consolidated financial statements for further information.
Paid-in capital increasedmainly due to the issuance of approximately 25.1 million new Allianz SE shares from the capital increase in October 2006 for the execution of themerger of RAS with and into Allianz AG (now Allianz SE).
Life/Health reserves for insurance and investment contracts were up € 9.3 billion to € 278.7 billion, primarily stemming from higher aggregate policy reserves for longduration insurance contracts. Similarly, the assets backing these reserves also grew, in particular reflected in increased investments. Life/Health investments, at € 187.8 billion as of December 31, 2006, were € 7.5 billion higher than a year ago, excluding affiliates. Thereof, equity investments amounted to € 42.2 billion, € 9.2 billion higher than a year ago, primarily from upward trends in equity capital markets. In contrast, debt securities were down slightly by € 1.8 billion to € 138.8
billion principally due to increasedmarket interest rates and, as a result, downward trends in fixed income indices. Financial liabilities and assets for unit-linked contracts each increased € 7.2 billion to € 61.9 billion, reflecting our sales successes with unit-linked insurance and investment contracts. In aggregate, premiums collected for unit-linked insurance and investment contracts amounted to € 14.3 billion.
The following graph sets forth the development of our Life/Health asset base.
Property-Casualty reserves for loss and loss adjustment expenses decreased by € 1.6 billion to € 58.7 billion. Important contributors to this decline were the positive net development on prior years’ loss reserves primarily in Italy, France, the United Kingdom and within our credit insurance business, as well as the weakening of the U.S. Dollar and Australian Dollar relative to the Euro. The assets backing our property-casualty insurance reserves grewmodestly. In the segment’s investments, excluding affiliates, we recorded a slight decline to € 79.3 billion, of which debt securities amounted to € 52.3 billion and equity investments to € 19.1 billion.
2) Does not include affiliates at € 9.5 bn and € 7.5bn as of December 31, 2006 and 2005, respectively.
3) Includes debt securities at € 3.2 bn and € 1.7 bn as of December 31, 2006 and 2005, respectively, equity securities at € 0.4 bn and € 0.4 bn as of December 31, 2006 and 2005, respectively, and derivative financial instruments at € 0.1 bn and € – bn as of December 31, 2006 and 2005, respectively.
The following graph sets forth the development of our Banking segment’s loans and advances to banks and customers.
1) Includes loan loss allowance at € (1.0) bn and € (1.6) bn as of December 31, 2006 and 2005, respectively.
Our Banking segment’s financial assets and liabilities carried at fair value through income, in aggregate, declined to € 67.3 billion from € 83.8 billion, as we reduced the volume of our debt securities trading business.
In the ordinary course of business, the Allianz Group enters into arrangements that, under IFRS, are not recognized on the consolidated balance sheet and do not affect the consolidated income statement. Such arrangements remain off-balance sheet as long as the Allianz Group does not incur an obligation from them or become entitled to an asset itself. As soon as an obligation is incurred, it is recognized on the Allianz Group’s consolidated balance sheet, with the corresponding loss recorded in the consolidated income statement. However, in such cases, the amount recognized on the consolidated balance sheet may or may not, inmany instances, represent the full loss potential inherent in such off-balance sheet arrangements. The importance of such arrangements to the Allianz Group as it concerns liquidity, capital resources or market and credit risk support, is not significant. Additionally, the Allianz Group does not rely on off-balance sheet arrangements as a significant source of revenue. Similarly, the Allianz Group has not incurred significant expenses from such arrangements and does not reasonably expect to do so in the future.
Distinct areas in which the Allianz Group is involved in off-balance sheet arrangements as of December 31, 2006, which are all conducted through the normal course of our business, include various irrevocable loan commitments, leasing commitments, purchase obligations and various other commitments. Additionally, we extendmarket value guarantees to customers, as well as execute indemnification contracts under existing service, lease or acquisition transactions. See Note 46 to our consolidated financial statements for further information.
The Allianz Group and its subsidiaries continued to be well capitalized. During the course of 2006, our strengthened capital base has been recognized by Standard & Poor’s.
As of December 31, 2006, themajority of Allianz SE’s external debt financing was in the form of debentures andmoneymarket securities.
Our total certificated liabilities outstanding as of December 31, 2006 and 2005 were € 54,922million and € 59,203 million, respectively. Of the certificated liabilities outstanding as of December 31, 2006, € 33,542million are due within one year. See Note 21 to our consolidated financial statements for further information. Our total participation certificates and subordinated liabilities outstanding as of December 31, 2006 and 2005 were € 16,362 million and € 14,684 million, respectively. Of the participation certificates and subordinated liabilities as of December 31, 2006, € 1,481 million are due within one year. See Note 22 to our consolidated financial statements for further information. Additionally, see Note 43 to our consolidated financial statements for information regarding how we use certain derivatives to hedge our exposure to interest rate and foreign currency risk related to certificated and subordinated liabilities.
On December 20 , 2006, we repaid the RWE exchangeable bond issued in 2001. The issue amount of € 1,075 million was repaid in shares as the share price of RWE AGwas above the exercise price. Additionally, on May 2, 2006, we repaid the € 1,446 million equity-linked loan issued in the third quarter of 2005 in connection with financing the Allianz-RASmerger. Our use of commercial paper as a short-term financing instrument was reduced by 18.2% to € 0.9 billion in 2006 from € 1.1billion in 2005. However, interest expense on commercial paper increased to € 47.0 million (2005: € 31.3 million) due to increasing interest rates in 2006 and higher average usage.
Under our MTN program, Allianz Finance II B. V. issued € 1.5 billion of senior bonds on November 23, 2006, guaranteed by Allianz SE, with a coupon rate of 4.00% The maturity of the bond is November 23, 2016.
On January 18, 2007, Allianz SE announced its intention to acquire the outstanding shares in AGF that it does not already own. In addition, Allianz AZL Vermögensverwaltung GmbH & Co. KG, a subsidiary of Allianz Deutschland AG, Allianz SE’s wholly-owned German insurance holding company, announced its intention to acquire the approximately 9% of outstanding shares of Allianz Leben that Allianz Deutschland AG does not already own. The cash consideration required for the two transactions of approximately € 7.5 billion, which amount depends primarily on the acceptance rate of the cash tender offers, is planned to be funded internally by the Allianz Group. However, to bridge possible time gaps until the necessary liquidity is available, bridge loans from different financial institutionsmay be used. See “Executive Summary and Outlook – Outlook – Significant Expected Investments” for further information.
The following table sets forth Allianz SE’s issued debt as of December 31, 2006 and 2005.1)
2) Excludes € 85 mn related to a private placement which was due in 2006.
The following table describes Allianz SE’s issued debt outstanding as of December 31, 2006 at nominal values. For further information, see Note 21 and 22 to our consolidated financial statements.
Interest expense € 63.8 mn 5.0% bond issued by Allianz Finance B.V., Amsterdam Volume € 1.6 bn Year of issue 1998 Maturity date 3/25/2008
Interest expense € 52.6 mn 5.625% bond issued by Allianz Finance II B.V., Amsterdam Volume € 0.9 bn Year of issue 2002 Maturity date 11/29/2012
Interest expense € 51.1 mn 4.00% bond issued by Allianz Finance B.V., Amsterdam Volume € 1.5 bn Year of issue 2006 Maturity date 11/23/2016 SIN A0G180
Interest expense in 2006 5.5% bond issued by Allianz SE Volume € 1.5 bn Year of issue 2004 Maturity date Perpetual Bond SIN A0A HG3
Interest expense € 83.9 mn 4.375% bond issued by Allianz Finance II B. V., Amsterdam Volume € 1.4 bn Year of issue 2005 Maturity date Perpetual Bond SIN A0DX0V
Interest expense € 62.8 mn 5.375% bond issued by Allianz Finance II B. V., Amsterdam Volume € 0.8 bn Year of issue 2006 Maturity date Perpetual Bond SIN A0GNPZ ISIN DE000A0GNPZ3 Interest expense € 38.2 mn
Volume € 1.3 bn Year of issue 2005 Maturity date 2/18/2008 SIN A0DX0F
Total interest expense for exchangeable bonds € 14.8 mn 4. Participation certificates Allianz SE participation certificate Volume € 85.1 mn
Interest expense € 6.2 mn Total interest expense for participation certificates € 6.2 mn 5. Issues that matured in 2006 1.25% exchangeable bond issued by Allianz Finance II B.V., Amsterdam Exchangeable for RWE AG shares Volume € 1.1 bn Year of issue 2001 Maturity date 12/20/2006 Current exchange price € 50.16
Received option premium at issue € 178.1 mn Total interest expense for matured issues € 38.0 mn Total interest expense € 722.5 mn 1) Bonds and exchangeable bonds issued or guaranteed by Allianz SE in the capital market.
Certain of the operating entities within the Allianz Group are subject to legal restrictions on the amount of dividends they can pay to their shareholders. Furthermore, regulators imposeminimum capital rules on the level of both the Allianz Group’s operating entities and the Allianz Group as a whole. See Note 23 to our consolidated financial statements for detailed information on our capital requirements.
As of December 31, 2006, Allianz SE had the following ratings with themajor rating agencies: Allianz SE ratings as of December 31, 20061)
Change in cash and cash equivalents for the years ended December 31, in € mn 1) Includes effect of exchange rate changes on cash and cash equivalents of € (78) mn, € 72 mn and € (24) mn in 2006, 2005 and 2004, respectively.
• As a provider of financial services, we consider risk management one of our core competencies. It is therefore an integrated part of our business processes.
• Risks arise for a number of reasons, including insufficient information concerning possible adverse developments affecting our business targets or plans.
Within our risk governance policy, operating units assume independent responsibility for their own risk control, as it is ultimately they who have to respond quickly to risk changes in amarket-orientedmanner. In 2006, local riskmonitoring was further strengthened through the establishment of local risk committees and risk control functions in our major operating units headed by a local Chief Risk Officer.
Insurance, banking and asset management are all heavily influenced by legal factors; legislative changes in particular have a primary influence on our activities. Limitation of these legal risks is a major task of our Legal Department, carried out with support from other departments. Our objective is to ensure laws and regulations are observed, to react appropriately to all impending legislative changes or new court rulings, to attend to legal disputes and litigation, and to provide legally appropriate solutions for transactions and business processes.
The principle of independent risk oversight is wellestablished within the Allianz Group. There is a clear distinction between active risk taking by line management functions, on the one hand, and risk oversight conducted by independent functions, on the other. The latter role not only consists of independent risk identification, assessment, reporting andmonitoring, but also includes analyzing alternative courses of action and proposing recommendations to the Risk Committee and the Boards of Directors of the local operating units or the Board of Management of Allianz SE.
The Group Risk Policy defines theminimum requirements that are binding on all operating units. Specific minimum risk standards for our PropertyCasualty, Life/Health, Banking and Asset Management segments, as well as on specific risk topics such as risk capital modeling, translate these requirements into action. These standards are implemented by the operating units worldwide and are monitored on a regular basis by Group Risk through a structured riskbased diagnostic process.
We employ a value-based approach (Economic Value Added or “EVA”®1), among other approaches, to manage our business activities, which are conducted through our local operating units. Risk capital, which is required to protect against unexpected losses, is one of the key parameters of this approach.
Internal risk capital, as described below, forms the central element for our local risk-oriented control performancemeasurement processes. However, in managing our capital position we have to consider additional conditions imposed by our regulator (the BaFin) and rating agencies.
As a Financial Conglomerate based in the European Union, our regulatory solvency capital requirements are defined by the EU Financial Conglomerate Directive (or “FCD”), which was issued in 2002 and transposed into German national law effective at the end of 2005.
In addition to internal risk capital analysis, we perform regular stress tests, which act as early-warning indicators inmonitoring the regulatory solvency capital ratios for the AllianzGroup.We also apply regular stress tests on a local operating unit level in order tomonitor capital requirements imposed by regulators and rating agencies locally.
Internal risk capital, which is the capital required to protect against unexpected economic losses, is a key parameter of our EVA®-approach, consistently applied to all segments. In 2006, we used an integrated internal risk capital model to assess and allocate quantitative risk for our major insurance companies as well as for our banking subsidiary, Dresdner Bank. This process allows us to consistently aggregate risk capital for all segments on the Group level within our internal risk capital framework. By using our internal risk capital model, we endeavor to evaluate risksmore precisely in an effort to optimize allocation of capital within the Allianz Group.
current and adverse market conditions using statistical models. Internal risk capital results per category are aggregated in amanner that takes diversification effects across risk categories and/or regions into account. The required internal risk capital is determined on a quarterly basis.
Our internal risk capital covers the specific assets and liabilities listed below: • Assets Bonds, mortgages, investment funds, loans, floating rate notes, equities, real estate, conventional options, and swaps,
• Liabilities Cash flow profile of all technical reserves as well as deposits and issued securities.
Themodel takes substantially all of our derivatives into account, in particular when such instruments are entered into as part of the operating unit’s regular businessmodel (e.g. Dresdner Bank or Allianz Life Insurance Company of North America) or if they are of such amagnitude that they have a significant impact on the resulting risk capital (e.g. hedges of Allianz SE or in the Life/Health segment, if material obligations to policyholders are hedged through financial derivatives).
The internal risk capital model allows us to evaluate the risk to which we are exposed by using statistically-based methods. The individual characteristics of our operating units and the specific nature of their risks are taken into account by reflecting local management rules such as investment strategies and policyholder participation rules in the Life/Health segment and establishing risk parameters based on past developments affecting each such unit.
The Allianz Group-wide internal risk capital after Group diversification effects and before minority interests, as calculated pursuant to our internal risk capital model discussedmore fully above under “Value-at-risk approach” amounted to € 35.8 billion as of December 31, 2006.
Total internal risk capital as of December 31, 2006, before and after Group diversification (before minority interests) in € bn
The risk profile of the Allianz Group is actively managed. Under the “3+One” program, we have reduced internal risk capital from € 43.5 billion as of December 31, 2002 to € 35.8 billion as of December 31, 2006, thereby strengthening the Allianz Group’s capitalization. The overall decrease of internal risk capital in 2006 was due to a decline inmarket risk, resulting from an increase in interest rates, which in turn, decreases our exposure to risk in connection with theminimum guaranteed credits that wemust provide to policyholders for some of our Life/Health products.
Total internal risk capital development as of December 31 after Group diversification (before minority interests) in € bn 1) 2004 and 2005 figures adjusted as coverage of internal risk capital model has been extended.
As an integrated financial service provider we are exposed to a wide range of different risks in our PropertyCasualty, Life/Health, Banking, Asset Management and Corporate segments. Although these risks are different in nature and each of these sources of risk has distinct statistical properties internal risk capital sets a common standard for measuring the degree of risk taking, thus making them comparable.
4) The internal risk capital calculation for the Asset Management segment at Group level is based on a standard model of Standard & Poor’s. This approach does not provide separate risk capital figures for market risk. Approximately 99% of the investments held by the Asset Management segment’s units are held for the benefit of third parties and, therefore, do not result in significant market risk for Allianz. As a result, the risk capital calculated for the Asset Management segment is allocated to business risk in its entirety.
The Allianz Group’s non-trading portfolios contain all non-trading activities of the Banking segment as well as the financial assets and liabilities of the PropertyCasualty and Life/Health segments. The Allianz Group holds and usesmany different financial instruments in managing its businesses.
Property-Casualty, Life/Health and Corporate segments Most of the Allianz Group’s insurance-related equity investments are intended to be held for the long-term, where our internal risk capital model is used to regularly align the insurance business’ risk-bearing capacity with the economic risks it faces by taking into account shorttermmarket developments.
The Property-Casualty and Life/Health segments are exposed to interest rate risk due to their investments in fixed income instruments, in particular bonds, loans and mortgages serving as collateral for policyholder obligations that are different in terms of maturity and size. Our internal risk capital model provides management with information regarding the cash flow profiles of the segments’ liabilities, which allows for active asset-liability management andmonitoring. While the potential cash flow payments related to our liabilities in the Property-Casualty segment are typically shorter in nature than the financial assets backing them, the opposite usually holds true for our Life/Health segment, which provides us with a natural hedge at the Allianz Group level. In our Life/Health segment, risks are mitigated by policyholder participation, though there exist guarantees in that wemust credit minimum rates for individual contracts. The valuation of these guarantees, which take into account the interaction of assets and policyholder obligations, forms an integral part of our riskmanagement framework. Our primary interest rate exposure is the risk that interest rates in Germany, France, United States, Italy and South Korea may fall below the guaranteed credit minimums for certain of our Life/Health policies in thosemarkets. In 2006, this interest rate risk decreased as interest rates increased in the Euro-zone and the United States and as the difference between interest rates and the average guaranteed levels also increased.
Interest rate risk in the Corporate segment primarily arises in connection with securities issued to fund the capital requirements of the Allianz Group. These securities include structured products that might be partly repaid in the form of equity participations held in
our asset portfolio. Some of the securities issued qualify as eligible capital for existing regulatory solvency requirements to the extent they constitute subordinated debt or are perpetual in nature.
The primary exposures for foreign exchange risk are related to the U.S. Dollar, Swiss Franc and KoreanWon. Local laws generally require that the insurance policy obligations of the Allianz Group’s subsidiaries and the investments covering them are in the same currency. When this is not the case (e.g. in Switzerland, obligations to policyholders resulting from life insurance contracts are partly backed by Euro-dominated bonds), the resulting foreign exchange risk is generally hedged against the local currency. Hedge efficiency is monitored by the local riskmanagers. As a result, currency fluctuations in connection with foreign subsidiaries have only a minor impact on the Property-Casualty and Life/ Health segments’ riskmanagement strategies locally, and active management of currency risks is performed centrally at the Allianz Group level within the Corporate segment.
Property-Casualty, Life/Health and Corporate segments The Allianz Group’s insurance business does not generally engage in trading activities. With the adoption of IAS 39, however, we are exposed to market risks due to trading positions not only in respect of the banking business but also in respect of the insurance business. However, derivatives used in the Allianz Group’s insurance operations are principally used for portfolio hedging and not for trading purposes.
For the purpose of setting internal limits and risk management, Dresdner Bank calculates a value-at-risk with a confidence level of 95% and a one-day holding period. While the value-at-risk for regulatory purposes is based on volatilities derived from equally weighted time series, the value-at-risk for internal use is based on volatilities derived from exponentially weighted time series, which assigns a greater weight to themost recent market developments. Therefore, unlike the value-at-risk calculation required by the BaFin, which is based on historical market data, we thus assign greater weight to themost recent market fluctuations. By doing so, we endeavor to reflect current market trends in the value-at-risk calculation on a timely basis.
Value-at-risk statistics (Dresdner Bank) – 99% confidence level, 10-day holding period –
Average High Low € mn € mn € mn € mn € mn € mn € mn € mn 1) No diversification effects are taken into account because the high and low values were measured on different dates.
Group Risk’s credit riskmethodology is comparable to one of themost widely used approaches in this area.
We performMonte-Carlo simulations to obtain the loss profile of a given portfolio – its loss probability distribution. The loss profile serves as the basis of our credit riskmeasure.
1) Internal risk capital is calculated as value-at-risk with a one-year holding period and a confidence level of 99.97%.
2) The internal risk capital calculation for the Asset Management segment at Group level is based on a standard model of Standard & Poor’s. This approach does not provide separate risk capital figures for market risk. Approximately 99% of the investments held by the Asset Management segment’s units are held for the benefit of third parties and, therefore, do not result in significant market risk for Allianz. As a result, the risk capital calculated for the Asset Management segment is allocated to business risk in its entirety.
In the Property-Casualty, Life/Health and Corporate segments credit risk arising from reinsurance counterparties are considered separately from issuer and counterparty risks arising from our asset investment activities, though the samemethodology is applied.
Reinsurance credit risk We take steps to limit our liability from insurance business by ceding part of the risks we assume to the international reinsurancemarket. When selecting our reinsurance partners, we consider only companies with strong credit profiles. To manage this credit risk, we compile Allianz Group-wide data on receivables from insurance losses. As of December 31, 2006, approximately 80% of the Allianz Group’s reinsurance recoverables were distributed among reinsurers with an investment grade rating. Additionally, more than 79% were distributed among reinsurers that have been assigned at least an “A” rating by Standard & Poor’s. We may also require letters of credit, deposits or other financial measures to furtherminimize our exposure to credit risk. See Note 10 to our consolidated financial statements for further information.
Fixed income investments by rating class as of December 31, 2006 in € bn
We use our customers’ credit ratings as the central element for our approval,monitoring and control process. In this process, the various creditworthiness characteristics of our customers are represented in the formof rating classes. To categorize the default probability of a borrower, we use a systemwith 16 different rating classes. The first six classes correspond to “investment grade” and classes VII to XIV signify “non-investment grade”. Rating classes XV and XVI are default classes according to the Basel II definition.We assess and endeavor to improve our rating procedures on an ongoing basis.
Overall portfolio view by rating class as of December 31, 2006 (Dresdner Bank) in %
Investment grade Non-investment grade Default 12/05 12/06 12/05 12/06 12/05 12/06 12/05 12/06 12/05 12/06
I - III IV - VI VII - X XI - XIV XV - XVI
Of Dresdner Bank’s lending activities measured by limits as of December 31, 2006, 29% (2005: 32%) were accounted for by the Private & Business Clients divisions and 71% (2005: 68%) by the Corporate & Investment Banking division.
Premium risk is defined as an unexpected high loss volume resulting in an insufficient coverage from premiums. Premium risk is subdivided into catastrophe risk (CAT risk) and non-catastrophe risk (non-CAT risk). We primarily quantify andmanage premium risks using actuarial models used to calculate premiums and tomonitor claim patterns. Natural disasters such as earthquakes, storms and floods represent a special challenge for risk management. In order to measure such risks and better
In order to manage exposures due to natural catastrophes, the Management Board of Allianz SE has defined an earnings volatility limit for these exposures. These limitations are based at both the operating unit and Group levels and define the amount Allianz is willing to lose in any such event with an occurrence probability of once in 250 years.
Reserve risk quantifies the risk of loss resulting from deviations between payments for incurred losses that have not yet been definitively settled and the reserves established to cover these payments, whichmay be due to the use of an insufficient basis for the calculation of reserves. We measure andmanage reserve risks by constantly monitoring the development of the provisions for insurance claims that have been submitted but not yet settled in all companies, and change the provision for reserves as necessary. To the extent available, we use assumptions approved by supervisory authorities and actuarial associations to enhance our models.
1) Loss ratios for the years ended December 31, 1997 to 2003 do not reflect the reporting changes effective January 1, 2006.
Mortality risk is the risk associated with variability in policyholder benefits resulting from the unpredictability of the (non)incidence of death and the timing of its occurrence. For modelingmortality risk within our internal risk capital framework we distinguishmortality level, trend and calamity risk. Biometric assumptions, such as life expectancy, play a significant role. To the extent available, we use assumptions approved by supervisory authorities and actuarial associations to enhance our models.
Corporate Business risks 91 80 1) Internal risk capital is calculated as value-at-risk with one-year holding period and confidence level of 99.97%.
Liquidity risk is the risk that short-term current or future payment obligations cannot bemet or can only bemet on the basis of altered conditions, along with the risk that in the event of a company liquidity crisis, refinancing is only possible at higher interest rates or that assets may have to be liquidated at a discount. Liquidity risk does not include the risk of a change inmarket prices due to a worsening of themarket liquidity of assets, as this is a component of market risk analyzed through our internal risk capital model.
Group Risk identifies and assesses this risk qualitatively as part of a quarterly evaluation. On the basis of this evaluation, Group Risk creates an overview of local and global risks which also includes reputational risks, analyses the risk profile of the Allianz Group and regularly informsmanagement about the current situation.
Supervisory authorities and rating agencies are additional riskmonitoring bodies. Supervisory authorities stipulate theminimumprecautions and capital requirements that wemustmeet in individual countries and on an international level. Rating agencies evaluate the relationship between the required risk capital of a company and its available safeguards. In the agencies’ evaluation of capital resources, they consider equity shown in the balance sheet, minority interests and other items representing additional securities in times of crisis. As of December 31, 2006, this total was at a level that corresponds to our current ratings. As of December 31, 2006, the insurer financial strength of the Allianz SE was rated by Standard & Poor’s as “AA-” (outlook positive), by A. M. Best as “A+” (outlook stable), and by Moody’s as “Aa3” (outlook stable).
We plan to continue to strengthen our riskmanagement system in 2007. We strive to constantly improve our accumulationmonitoring systems for accumulating risk-related data, particularly those related to natural andman-made catastrophes. We are continuing to develop ourmodeling for natural catastrophes and to combine results with geographical information systems. We also continue to develop ourmonitoring and early warning systems related to “Emerging Risks”, which are new and developing or existing risks that are difficult to quantify in terms of frequency and severity of potential losses. Therefore, these Emerging Risks are generally characterized bymajor uncertainty. Discontinuities in the evolution of a risk are often driven by scientifictechnological, socio-political or legal and regulatory changes.
In 2007, the Group Risk function at Allianz SE plans to embark on amulti-year project to consolidate all Allianz Group-related risk information, calculations and analysis onto one technology platform. This platform will be centrally hosted and available to support risk staff both in the Group Center and in the operating units around the world. Data from a data warehouse for both finance and risk data will be included on the platform to provide consistency between both areas. It will also be subject to a rigorous but flexible changemanagement process designed to serve as a Solvency II platform.
We are monitoring the Solvency II Project to prepare for the anticipated changes to the European insurance solvency requirements. In particular, we are continuously updating themethodology of our internal riskmodel to meet future requirements on internal models resulting from this project.
We are one of the leading insurance groups in the world and rank number one in the German property-casualty and life insurancemarkets based on gross premiums written and statutory premiums, respectively, in 2006.1)
In order to further strengthen ourmarket position and maintain profitable growth we have launched two comprehensive programs for our insurance segments: the Sustainability Program and the Customer Focus Initiative. Under our Sustainability Program, we systematically search for best practices in product and service offerings, and processes across our organization. The highest standard is thenmade obligatory for all Allianz Group companies. The objective of our Customer Focus Inititative is to take amore customer-oriented approach towards our product and service offerings, and our flexibility and awareness. In addition, we are undertaking various reorganizationmeasures.1)
Allianz SE, the Allianz Group’s parent company, acts on an arm’s length basis as our reinsurer for most of our insurance operations, other than international industrial risks reinsurance. Allianz SE assumed 33.3%, 35.6% and 38.1% of all reinsurance ceded by Allianz Group companies for the years ended December 31, 2006, 2005 and 2004, respectively. Allianz SE also assumes a relatively small amount of reinsurance from external cedents. We also cede risk to third-party reinsurers, of which Munich Re is our primary partner.
Our business activities in this segment consist of asset management products and services both for third-party investors and for the Allianz Group’s insurance operations. As of December 31, 2006, wemanaged € 764 billion of third-party assets on a worldwide basis, which includes fixed income, equity, moneymarket and sector products, as well as alternative investments. We are one of the five largest asset managers in the world.4)
2) Based on total assets as of December 31, 2006. 3) Please see “Important Group Organizational Changes – “Neue Dresdner
4) Based on total assets under management as of December 31, 2006.
We conduct our retail asset management business primarily through our operating companies worldwide under the brand name “Allianz Global Investors”. In our institutional asset management business, we operate under the brand names of our investmentmanagement entities; Allianz Global Investors serves as an endorsement brand.
We serve a comprehensive range of retail and institutional asset management clients. Our institutional customers include corporate and public pension funds, insurance and other financial services companies, governments and charities, and financial advisors.
Our distribution channels vary by product and geographic market. In Europe and in the United States, Allianz Global Investors markets and services its institutional products through specialized personnel located in Frankfurt, London, Munich, Paris, Milan, San Francisco, San Diego and Newport Beach (California). Retail products in Europe are mostly distributed through proprietary Allianz Group channels such as branch bank advisors, full-time agents employed by affiliated companies and other Allianz Group financial planners and advisors. With themerger of Deutscher Investment-Trust Gesellschaft für Wertpapieranlagen mbH (or “dit”) and dresdner bank investment management Kapitalanlagegesellschaft mbH (or “dbi”) into Allianz Global Investors Kapitalanlagegesellschaft mbH, we combined our institutional business with our retail business in Germany in order to implement the existing integrated asset management business model into one entity.
In the United States, Allianz Global Investor’s local asset management operating entities offer a wide range of retail products. We have committed substantial resources to the expansion of the third-party asset management business in the Asia-Pacific region with offices in Tokyo, Hong Kong, Shanghai, Singapore, Taipei, Seoul and Sydney. We expect this region to become an increasingly important market.
Our competitive investment performance has resulted in themajority of our third-party assets outperforming their respective benchmarks in 2006.
Concurrent with themerger, and in order to provide the merger consideration to RAS shareholders, Allianz completed a capital increase involving the issuance of approximately 25.1 million new Allianz SE shares. In accordance with themerger plan, the remaining RAS shareholders received 3 new Allianz SE shares in exchange for 19 RAS shares. Prior to themerger date, Allianz AG had purchased in a voluntary cash tender offer certain of the RAS ordinary shares and RAS savings shares that were not already held by Allianz AG. The total consideration for the acquisition of the outstanding RAS shares amounted to approximately € 6.4 billion, which includes the approximately € 2.7 billion paid to acquire RAS shares in the voluntary cash tender offer.
February 8, 2006 Allianz AG shareholders approve the merger plan at the extraordinary shareholders’ meeting.
September 20, 2006 Agreement concerning participation of employees in Allianz SE signed.
October 13, 2006 Allianz AG’s legal form changed to a Societas Europaea, new company name Allianz SE. Capital increase effective (3 new Allianz SE shares for 19 RAS shares).
As a consequence of themerger, Allianz SE now holds 100% of its property-casualty and life/health subsidiaries in Switzerland (Allianz Suisse VersicherungsGesellschaft and Allianz Suisse LebensversicherungsGesellschaft ) and in Austria (Allianz Elementar Versicherungs-Aktiengesellschaft and Allianz Elementar Lebensversicherungs-Aktiengesellschaft) through holding companies. These subsidiaries were formerly held jointly by Allianz AG (now Allianz SE) and RAS, with RAS holding themajority. Also due to implementation of themerger, Allianz SE now directly holds majority interests in the Portuguese insurance subsidiary, Compañhía de Seguros Allianz Portugal S.A., and in the Spanish insurance subsidiary, Allianz Compañía de Seguros y Reaseguros S.A.
• Topmanagement team in place. • Agreement on key points between the works councils and themanagement of Allianz Deutschland AG and itsmain subsidiaries.
3) For further information see Note 49 to our consolidated financial statements.
In the second half of 2006, we commenced the reorganization of the Allianz Group’s international corporate and specialty insurance business by creating Allianz Global Corporate & Specialty AG, a wholly-owned subsidiary of Allianz SE. This unit houses the activities of the former Allianz Global Risks Re and Allianz Marine & Aviation operating entities, the corporate customer business of Allianz Sach, as well as Allianz Risk Transfer in Switzerland, under the umbrella of one Munich-based company. In the future, we also plan to integrate other local corporate and specialty insurance activities in selected locations into Allianz Global Corporate & Specialty AG in order to offer a comprehensive range of riskmanagement solutions and specialist expertise from one source. The new organization is designed to facilitate a clear client focus, while it reduces complexity, increases efficiency and promotes globally consistent management practices.
• Investment Banking, withGlobal Banking andCapital Markets, unites the activities formerly provided by the Dresdner KleinwortWasserstein division and the remaining activities of the former Corporate Banking division.
The goal of the “Neue Dresdner Plus” program is to re-position Dresdner Bank to further develop its advisory services and sales activities for private clients as well as to create a single source for groups and institutional clients. As of December 31, 2006, Dresdner Bank Group’s provisions for restructuring amounted to € 379 million. In 2006, Dresdner Bank Group recorded restructuring charges for all restructuring programs of € 422 million.1)
In order to capture the potential for regional synergies, the Allianz Group has commenced a reorganization of the business lines in the United States by strengthening the role of the Allianz of America Inc. holding company in an effort to create expense and distribution synergies between the different businesses in the United States. This regionalization is designed to allow our U.S. companies to leverage all of the available resources and assets and to enable Allianz Life United States and Fireman’s Fund tomore effectively anticipate and deliver on customer needs. The respective management teams of each company will be able to draw upon the resources of Allianz of America to provide customers with highquality solutions, maximize cross-selling opportunities, simplify services, and leverage combined assets while driving a performance-based culture. The goal of the reorganization is to optimize the ability of both companies to improve their market positions.
The goal of our value-basedmanagement approach is to consistently meet our shareholders’ return expectations over the long run. Furthermore, we want shareholders, employees, customers and other stakeholders to profit from the value our company creates.
What do wemean when we talk about the creation of value? The capital used by a companymust yield a higher return than a comparable alternative investment. In order to accomplish this objective and tomeasure our success, we apply the EVA®1) (Economic Value Added) concept, adapted to our specific needs, across the Allianz Group. EVA® involves comparing profit with the cost of capital, representing the return an investor can expect from an alternative investment with comparable risk. EVA® – whether positive or negative – is the difference between profit and the cost of capital. A positive EVA®
EVA® is an all-encompassing tool for the coordination and direction of our enterprise and gives our internal management approach with a capital market orientation.
It is our role to provide that the sum of our risks is affordable for the Group and that the achieved return justifies the amount of capital employed. Therefore we assign available capital on the basis of a risk-return profile and the value of our operating entities. Using this process, our companies can only ensure that they receive growth capital if they: • operate in a profitablemarket or business; • transform theirmarket position into one allowing for 1) EVA® is a registered trademark of Stern Stewart & Co. 2) For detailed information on the determination of our internal risk capital please see pages 75 to 76 of our risk report.
The requirement to meet the cost of capital is just the minimumwe demand. Over themedium-term, our objective is to generate a return of 15% or more on the capital employed. Therefore, our companies must determine what business activities will increase their value and concentrate their efforts and resources on these activities. Further, new value drivers must be created, for example, through new products, more costeffective processes and optimized distribution channels. Local managementmust also prevent value from being diminished along the value chain. If value diminishes, countermeasuresmust be immediately implemented.
Inmeasuring our success, weminimize the impact of equity market fluctuations by basing our calculations on “normalized” long-term average returns.
Due to our strong net income our EVA®, after minority interests, reached € 3,528 million in 2006 and the return on risk adjusted capital3) was 21.3%.
Because EVA® is an important factor inmanaging our business, senior management compensation is based on this measurement to a significant extent4) Our incentivebasedmanagement compensation system helps to make the continuous increase in the value of the Allianz Group a priority across our entire organization.
3) Return on risk adjusted capital represents normalized profit divided by average risk adjusted capital.
4) For detailed information on the remuneration of the board of management and of the supervisory board see our remuneration report on pages 15 to 20.
To a greater extent than in the past we support an international outlook, together with closer networking of local units with headquarters. Our legal transformation into a European company underlines this approach. We actively promote multicultural teams of experts to engage in cross-border team efforts or in virtual collaboration, such as projects involving product development or sales. Our strategic initiatives – Customer Focus, Operating Efficiency, Innovation and the realization of our new operatingmodel – are projects that have major significance for our business. They represent the transformation of the Allianz Group into a financial services provider operating across the globe. A company that understands how to satisfy customer needs and achieve optimum cooperation across borders and sectors, and which is able to deal with the changes in eachmarket rapidly and innovatively.
The aim is for our entire organization to reach a common understanding on attitudes that are important for realizing our strategic objectives. Human Resources has initiated numerous supportive measures and processes to enable our committed employees to play a key role in promoting change at the Allianz Group and to derive maximumbenefit for themselves and their career from this transformation. This essentially involves developing a new culture of leadership and performance, as well as investing in opportunities for staff development.
Themost important aspect here is for our managers to act as role models for this performance culture; they must promote it and be the driving force behind change. Our leadership values provide the framework, and are mandatory worldwide. Ourmanagers, more than 5,000 of them, are surveyed each year about the extent to which these values have been implemented and how effective they are in the work of the local managers. The fact that the response rate was 84% in the 2006 survey, on a par with the high level of previous years, is considered by us as confirmation that these leadership values are important to our management and that discussion of this topic remains lively.
The culture of dialogue embodied by these communication standards is one actively pursued by members of the Allianz SE Board of Management. Regular employee forums in the Group companies and “+One Forums”, at which the heads of the subsidiary in a region discuss strategic issues with the Allianz Chairman and other Boardmembers, assist inmakingmore visible the changes that have already beenmade, and highlight areas where change is still needed.
measure this throughout the Group is the willingness of customers to recommend us. Bottom-up Net Promoter Score is the standardizedmethod by which we regularly and systematically measure how satisfied a customer has been with our service after some significant interaction (such as complaint, policy management or loss adjustment). Customers are contacted by phone and asked to report on their experience with Allianz and its staff in that specific situation. The replies convey to the employee in question and, as a summary of the responses, to Allianz overall, what remains to be done to promote customer satisfaction and loyalty evenmore and to increase their willingness to recommend us to others.
In 2006, we launched our Operational Excellence (OPEX) Black Belt Programwith the aim of providing even better support for our change processes. This program trains managers and experts as certified changemanagers (Change Agents) using the OPEXmethod. They are deployed on-site at their own units, where they manage major projects aimed particularly at improving customer orientation and process efficiency. Our longer-term objective is for 1% of the workforce to pass through this program. In 2006, OPEX was used to initiate 32 projects in 11 Group companies. OPEX is based on the Six Sigma method, well-known from quality management in the manufacturing sector. We have adapted it to the requirements of an international financial services provider.
Another tool for promoting a performance culture is the program offered by the Allianz GroupManagement Institute (AMI Group). The task of AMI is to communicate the Allianz Group’s strategy to our management worldwide. AMI also has the task of developing our topmanagers and candidates for senior positions. This group of individuals is familiarized with the latest developments, prepared for more advanced management responsibilities, andmaintains a management dialog with the top level of management in the Holding company or in Allianz Group subsidiaries. Allianz SE Boardmembers are closely integrated into the AMI program – as project patrons, as speakers and as sponsors involved in the details of program design. In the year under review, AMI organized programs in which 615 managers and executives participated.
AMI sessions often produce important imput to solving the challenges currently being faced by the Allianz Group. Our executive high-potentials participating in the Allianz Excellence Program deal with strategic projects for resolving business policy issues within international teams, and then present their results and proposals to the Board of Management. The strategic initiatives Sustainability, Customer Focus and Innovation are examples of their output.
Promotion of talent along specific business lines and optimum deployment of human resources are essential elements of our new operatingmodel and for the crossborder and cross-sector cooperation of our staff, and the fact that the demographic age-shift taking place in society will in future place limits on HR resources. To achieve even better results in this area we have introduced a new talent assessment and development concept. This will be standardized across the Group, and lays down the skills that a candidate for one of our key positionsmust possess. The system stores information about the knowledge, experience and development potential held by our junior managers and provides the internal and external benchmarks required for this purpose. This platform enables us to identify systematically who can be considered as a candidate for a senior position, and in particular indicates the specific skills a candidate possesses that will further strengthen our strategic initiatives and allow him or her to prove themselves in different areas of business andmarkets. The concept is already being used in succession planning conducted at Holding Board level. In 2007, it will be gradually introduced to the local units and its application broadened.
With a view to positioning ourselves even better in the external labor markets, we have launched a standard worldwide eRecruiting solution: a particularly userfriendly internet portal for applicants. This makes faster decision-making possible and intensifies communication with the candidates, which in turn promotes the success and efficiency of HR work.
eRecruiting can also be used to earmark applicants for positions that have not yet been announced. A precursor tool is currently used by 13 Group companies and has already resulted in about 2,000 appointments in 2006 alone; in addition, about 45,000 interested candidates have newly registered in the talent pool. A further 23 Allianz Group companies will work with this eRecruiting solution over the next few years.
We promote cooperation between employees of different cultural origins and those of different ages, levels of experience and abilities. We believe diversity is the ideal way to boost our capacity for innovation and find viable solutions to varied and constantly changingmarkets. Our Diversity Guidelines define the specific framework for successful, non-discriminatory cooperation, both internally and with persons outside the company. The international character of the Holding company is increasing with the conversion of Allianz AG into a European company, and this favors its involvement in cross-border projects and initiatives. We are using this development to promote talent. At the start of 2007 employees from 40 countries were working at the SE Holding, andmore than 20% of the Holding workforce are not German by origin.
We support the international mobility of our staff and managers. Cross-border placements play amajor role, especially in our strategic initiatives. A recently launched staff exchange program enables managers and experts from all over the world to work together on teams involving these strategic projects for between sixmonths and two years. As a result, international expertise flows directly into these projects. When their employees return to the parent companies that placed them, these companies benefit from their new knowledge and additional experience.
Our Group companies also maintain relations with a large number of educational establishments around the globe in order to interest talented individuals from a wide range of origins in working for our company. Our continuing education and trainee programs are open to anyone who has the ability and skills to be successful in our firm.
We have a substantial need for well-trained staff and this need will continue to increase. On the one hand this is a result of the fundamental process of change taking place within the Allianz Group, which will continue for some years. All the projects and strategic initiatives connected with this process require a considerable deployment of highly qualified andmotivated staff. On the other hand there is increasingly intense competition to acquire qualified employees due to low and constantly declining birth rates in our key markets. We are meeting this competition head-on and are investing substantial resources on recruitment and on continuing to educate and equip our employees. Wemake a great effort to support our staff with processes, work tools and IT for HR work so they canmeet the increasing expectations of customers and shareholders.
Our remuneration systems are geared towards offering bothmanagers and staff incentives for implementing the Allianz Group’s business strategy in a targeted and efficient manner, and to contribute to our performance culture. We determine the variable components of salary by agreeing individual targets and thenmonitoring whether these have beenmet. In recent years we have steadily expanded the proportion of variable salary components on all levels and, within the scope of the options available under local legislation, have also adjusted these components to reflect conditions in individual business areas and at specific levels of responsibility. We believe that by doing so we will achieve significantly better focus of all business units on joint objectives and on the objectives of the individual employee. Where the opportunity arises and it is considered good economic sense, the variable component of remuneration will be further extended.
As an additional incentive to contribute to the Allianz Group’s performance, an employee stock purchase offer was again launched in 2006. This gave 124,000 employees in 22 countries the opportunity to acquire Allianz SE shares on preferential terms. The average investment volume per participating employee rose by 11% to € 3,053
Senior management again participated in the Group Equity Incentive Program, made up of virtual shares and options. The potential yield depends on the development of the Allianz SE share price. The calculation takes into account the Economic Value Added (or “EVA®”) of the Allianz Group and the EVA® of the Group company in question, as well as fulfillment of objectives in relation to the risk capital applied. The Group Equity Incentive Programmeets all requirements and recommendations of the German Corporate Governance Code. More detailed information on stock-based remuneration and
Climate change, nanotechnology and viruses with the potential to cause a pandemic are present-day risks to which a financial enterprise could be particularly susceptible. Detecting such risks at an early stage is not only a requirement for our riskmanagement but is also part of our social responsibility for sustainable development.
The particularly destructive natural disasters in fiscal year 2005, which are partially attributable to climate change, have led us to adjust our riskmanagement to the new risk exposure. At the same time, new regulations relating to climate change open up additional business opportunities. In order to be in a better position to assess risks and opportunities, and because we are convinced that transparency also benefits our customers in this regard, we urge disclosure of climate-related risks. We are signatories to the Carbon Disclosure Project (for more information about this, visitwww.cdproject.net) andmake use of the Enhanced Analytics Initiative (further information atwww.enhancedanalytics.com) so that, as an investor, we are in a better position to identify risks that are not apparent from financial figures but which are nonetheless of material significance.
In January 2006, Allianz adopted a climate strategy involving an action program containing about 80 measures, applicable to the whole Group. We set ourselves three objectives: 1. We wish to improve our identification of climaterelated risks in the insurance, banking and asset management lines of business and to quantify them as precisely as possible. This will be achieved by the end of 2007. We will be guided by sustainability criteria throughout this process.
3. We sponsor cooperation with scientific institutes with an acknowledged involvement in these areas.
The Allianz Climate Core Group, comprisingmanagers from the relevant business units, is responsible for the action program. The “task force” is chaired by the Chief Risk Officer at Dresdner Bank. He reports to the chairman of Allianz SE and to a Holding Board for each of the business segments Insurance and Asset Management. Further information on the subject is available on our website atwww.allianz.com/sustainability and www.allianz.com/climate.
As an integrated financial services provider we offer insurance, banking and asset management products and services from a single source to more than 60 million customers in over 70 countries. We are one of the leading insurers and financial services providers worldwide. Based on our market capitalization2) we are the largest financial institution in Germany.
� � � � Austria � � Luxembourg � � � Belgium � � � � Netherlands � � � � France � � � Portugal � � � � Germany � � � � Spain � � � Greece � � � � Switzerland � � Ireland � � � United Kingdom � � � � Italy � � Turkey
‰ December 18: Merger of dit and dbi in our Asset Management segment.
‰ October 2: Introduction of a limited edition index-linked life insurance product in Bulgaria, Croatia, Czech Republic, Poland, Romania and Slovakia.
1) Please see pages 225 to 228 for a breakdown of selected operating entities. 2) As of March 1, 2007. Source: Deutsche Börse Group.
The Americas – We are well-positioned in the United States, the largest insurance market of the world. Overall, our American operations take place in attractive markets.
‰ December 7: AlIianz Life United States announced the full integration of operations between its retail broker/dealer subsidiaries, USAllianz Securities® and Questar Capital Corporation. The organization will operate under the Questar Capital name.
‰ January 24: AlIianz is the first western joint-venture insurer to introduce insurance products in Indonesia, which comply with the rules of the Islamic law, Sharia.
‰ January 27: AlIianz and Industrial and Commercial Bank of China Ltd. (or “ICBC”) announce strategic investment and partnership agreement. AlIianz acquires a 2.5% interest in ICBC.
Germany Operations We operate in the German propertycasualty market through operating entities combined under the umbrella of Allianz VersicherungsAktiengesellschaft (or “Allianz Sach”). Allianz Sach is the market leader in Germany based on gross premiums written in 2006.2) Our results of operations presented under Germany also include our property-casualty assumed reinsurance business, primarily attributable to Allianz SE.
Outlook With Germany being a rather maturemarket with a high degree of competition, one of the key challenges is managing the trade-off between achieving growth while maintaining profitability. We are currently reorganizing our major German operating entities. The new structure is designed to further develop our leading position in the German insurancemarket by a joint presence, thus allowing us to provide an enhanced customer orientation and improved service, while at the same time cutting costs in the long-term through reduced complexity.3)
France Through the companies of AGF Group, we ranked third in the property-casualty market in France, based on gross premiums written in 2005.4)
Products and Distribution The broad range of “AGF” brand products for both individuals and corporate customers, including property, injury and liability insurance, are distributed primarily through a network of general agents, brokers and other direct sales channels.
The proposed acquisition of theminority interest in AGF is expected to reduce the complexity of our organization and allows us to further implement Allianz Group-wide programs and initiatives, as well as to strengthen our market position in France.5)
Outlook The Italian non-motor market, which has a lower penetration rate for insurance products compared to other Europeanmarkets, represents a potential market for growth. Among other channels, we also view distribution through direct operations as a growth channel.
RAS S.p.A., Lloyd Adriatico S.p.A. and Allianz Subalpina S.p.A. have launched the project to integrate the Allianz Group’s operations in Italy. The integration is designed to allow Allianz to serve the Italianmarket, its second largest based on gross premiums written 2006, with a broad range of insurance and financial products and withmore effective customer service. We are also implementing this integration to seek to benefit from the 1) Please see pages 225 to 228 for the Allianz Group’s ownership percentages in the consolidated operating subsidiaries mentioned.
2) Source: German Insurance Association, GDV. 3) Please see “ Allianz Group Success Factors – Important Group Organizational
United Kingdom Operations We serve themarket in the United Kingdom primarily through our subsidiary Allianz Cornhill Insurance plc. (or “Allianz Cornhill”) and rank seventh based on gross premiums written in 2005.1) In 2006, Allianz Cornhill further strengthened its market position in the United Kingdom through the acquisition of the remaining interest in PremierLine Direct Ltd. and the acquisition of Home & Legacy Holdings Ltd.
Effective April 30, 2007, Allianz Cornhill Insurance plc. will change its company name to Allianz Insurance plc. in order to benefit from the “Allianz” brand.
Outlook In the very competitive market environment in Switzerland, we will continue to put profitability first while expecting to achieve attractive growth.
Products and Distribution In Spain, we offer a wide variety of personal and commercial property-casualty insurance products, with an emphasis onmotor business, comprising approximately two-thirds of our gross premiums written in Spain in 2006.
Outlook Market conditions in Spain are characterized by the continuation of intense price competition in motor business.
Western and Southern Europe Operations We conduct property-casualty operations inmost of the other Western and Southern European countries, of which, based on gross premiums written in 2006, the largest are our operations in the Netherlands, Austria and Ireland.
Products and Distribution Themost important lines of business of Allianz Nederland Schadeverzekering N.V. in the Netherlands are motor and fire insurance. Our Dutch subsidiary distributes its products through independent agents and brokers.
Allianz Elementar Versicherungs-Aktiengesellschaft in Austria offers a broad range of products to individual and group customers primarily through salaried sales forces, tied agents and brokers.
New Europe Operations We are the leading international insurance company in Central and Eastern Europe, based on gross premiums written in 20051) which we believe is one of the fastest growing insurancemarkets in the world. We serve themarket through our operating subsidiaries in Hungary, the Czech Republic, Slovakia, Poland, Bulgaria, Romania and Croatia. We also sell property-casualty insurance in Russia through our subsidiaries embraced under Allianz Russia and our participation in Russian People’s Insurance Society “Rosno”.
United States Operations Our operations in the United States are organized under the umbrella of Allianz of America Inc., which comprises a group of operating entities underwriting a wide, but focused, variety of lines of business.
Products and Distribution Through Fireman’s Fund Insurance Company (or “Fireman’s Fund”), we underwrite personal, commercial and specialty lines. Fireman’s Fund’s business strategy focuses on specific markets. The personal lines address the needs of high net worth customers. The commercial business targets a core set of industries offering specialized products and services. Our specialty products are sold through local distribution channels which allows us to tailor our products and services to our customer’s needs.
In addition, we are currently undertaking certain reorganizationmeasures in the United States. We expect these measures will help us to strengthen ourmarket position.2)
Outlook Allianz Australia expects to continue to employ market segmentation technique, which includes diversifying its portfolio outside of the traditionally cyclical areas.
South America Operations We conduct our property-casualty operations in Brazil through our subsidiary AGF Brasil Seguros S.A. Based on gross premiums written in 2006, we are the seventh-largest property-casualty insurance provider in Brazil.1) We also sell property-casualty products in Colombia, Argentina and Venezuela.
Products and Distribution In Brazil, we write primarily automobile insurance, but also fire, transportation and other lines. Distribution is organized primarily through independent agents and brokers. In Colombia, Venezuela and Argentina we also market a broad range of products.
Allianz Global Corporate & Specialty primarily combines the Allianz Group’s international corporate insurance business.2)
Products and Distribution Euler Hermes provides enterprises protection against the risk of non-payment of receivables and customer insolvency. Thereby, we help companies of all sizes, wherever they trade, to safeguard and grow their business. In addition, through Allianz Global Corporate & Specialty, we offer a variety of other specialty lines of business, namely marine, aviation and industrial transport insurance, international industrial risks reinsurance, and throughMondial Assistance Group, we offer travel insurance and assistance services. In contrast to our other insurance businesses, we manage and offer these services on a worldwide basis.
Leben”) is themarket leader for life insurance based on statutory premiums in 2006.4) In addition to Allianz Leben, we operate through a variety of smaller operating entities in the Germanmarket.
Germany Health Operations Through Allianz Private Krankenversicherungs -Aktiengesellschaft (or “Allianz Private Kranken”), we are the third-largest private health insurer in Germany based on statutory premiums in 20054) with more than twomillion customers.
Products and Distribution Allianz Private Kranken provides a wide range of health insurance products, including full private healthcare coverage for salaried employees and the self-employed, supplementary insurance for individuals insured under statutory health insurance plans, supplementary care insurance as well as foreign travel medical insurance. Allianz Private 1) Source: Own estimate based on published annual reports. 2) Please see “Allianz Group Success Factors – Important Group Organizational
Products and Distribution We provide a broad range of life and health insurance products, including short-term investment and savings products. An important portion of our life statutory premiums in France is generated through the sale of unit-linked policies.
The proposed acquisition of theminority interest in AGF is designed to allow us to reduce the complexity of our organizational andmanagement structures, permitting us to further implement Allianz Group-wide programs and initiatives, as well as strengthen ourmarket position in France.3)
Outlook RAS S.p.A., Lloyd Adriatico S.p.A. and Allianz Subalpina S.p.A. have launched the project to integrate the Allianz Group’s operations in Italy. The integration is designed to allow Allianz to serve the Italianmarket, its third largest based on statutory premiums in 2006, with a broad range of insurance and financial products and withmore effective customer service. We are also implementing this integration to seek to benefit from the announced deregulation of insurance distribution in Italy.
Switzerland Operations We conduct our life/health operations in Switzerland primarily through Allianz Suisse Lebensversicherungs-Gesellschaft and Phénix Vie. In aggregate, these operating entities represent the sixth largest life insurance provider in Switzerland based on statutory premiums in 2005.5)
Spain Operations We conduct our life/health operations in Spain through Allianz Compañía de Seguros y Reaseguros S.A. and through Eurovida, our joint venture with Banco Popular.
Products and Distribution Our Spanish insurance subsidiaries offer a broad product portfolio, consisting primarily of traditional life insurance, annuities, pension and unit-linked products, which are mainly distributed by agents and through our bank channel.
Western and Southern Europe Operations We conduct life/health insurance operations inmost of the other Western and Southern European countries, of which, based on statutory premiums 2006, the largest are in Belgium and the Netherlands.
Products and Distribution AGF Belgium Insurance S.A. markets a wide range of life insurance products mainly through brokers. In the Netherlands, we also offer a broad range of life insurance products and have a strong position in the unit-linkedmarket.
New Europe Operations We are present in all key markets in this region and are one of the top four international life insurance providers, based on statutory premiums in
Products and Distribution In 2006, we continued to expand our product range and sales capacity throughout New Europe. We follow amulti-channel distribution approach and sell both unit-linked and traditional life insurance products. In the fourth quarter of 2006, our companies in the region launched a limited-edition index-linked life insurance product across sixmarkets. In 2006, our Hungarian insurer, Allianz Hungária Biztositó Rt., opened its own retail bank and has become an integrated financial services provider.
United States Operations In the United States, we are represented by Allianz Life Insurance Company of North America (or “Allianz Life United States”) which is, as with our property-casualty business in the United States, also 1) Source: Own estimate based on published annual reports.
Outlook Allianz Life United States is takingmeasures to grow its annuity products business by expanding distribution with broker-dealers, banks and wire-houses, designing channel-specific products, and also reinforcing product development of variable products and fixed-indexed products. For example, since November 2006, Allianz Life United States has entered into broker-dealer marketing agreements, having signed six in 2006 addingmore than 10,000 agents. In addition, we are confident that our reorganizationmeasures previously described will also help us to strengthen our market position.3)
Asia-Pacific Operations In Asia-Pacific, the majority of our operations are conducted in South Korea through Allianz Life Insurance Co. Ltd. (or “Allianz Life Korea”). Allianz Life Korea is the fifth-largest life insurance company in South Korea based on statutory premiums in 2005.4) We are also represented in Taiwan by Allianz President Life Insurance Co. Ltd. (or “Allianz Life Taiwan”) and maintain operations in Malaysia, Indonesia, as well as other Asia-Pacific countries, including China, Thailand and India.
Products and Distribution Our South Korean operations market a wide range of life insurance products. Due to the very low interest rate environment and a favorable equity market in South Korea, Allianz Life Korea has increasingly shifted its focus to variable life products. Allianz Life Taiwan sells term life, whole life and endowment products. In addition, Allianz Life Taiwan increasingly offers investment-linked products.
2) Source: LIMRA. 3) Please see “Important Group Organizational Changes – Reorganization in the United States” for further information. 4) Source: South Korean Life Insurance Association.
China is a strategic market for the Allianz Group and our partnership with Industrial and Commercial Bank of China Ltd. emphasizes our long-term commitment to the market and also offers a platform for our strategic expansion in China.
South America Operations Our largest life operation in this region is in Colombia. We also operate a small life portfolio in Brazil.
Products and Distribution Our life insurance activities in Colombia include traditional group life insurance as well as investment-oriented products like savings, pensions and annuity products.
Outlook We estimate that growth rates in the South American life insurancemarket will remain attractive over the coming years. Accordingly, we seek to expand our presence in life insurance beyond our Colombian subsidiary.
KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (or “KPMG DTG“) serves as the external auditing firm for the Allianz Group.
2) Fees attributable to KPMG DTG for audit fees were € 24.7 mn (2005: € 26.3 mn), audit-related fees € 3.6 mn (2005: € 3.6 mn), tax fees € 2.7 mn (2005: € 1.0 mn) and all other fees € 3.6 mn (2005: € 3.7 mn) for the year ended December 31, 2005.
KPMG billed the Allianz Group an aggregate of € 7.0 million in 2006 and € 12.1 million in 2005 for other services, which consisted primarily of general consulting services and other services under the guidance of Allianz Groupmanagement.
The share capital of Allianz SE was € 1,106,304,000 as of December 31, 2006; it was divided into 432,150,000 registered no-par value shares. All shares carry the same rights and obligations. Each no-par value share grants one vote. Each shareholder’s share in the Company’s profit is determined in proportion to the share in the share capital held by it (Section 60 German Stock Corporation Act (Aktiengesetz, AktG)). Pursuant to Article 3 Paragraph 1 of the Statutes, shareholders shall not have the right to receive share certificates.
Amendments to the Statutes must be resolved upon by the General Meeting. In the case of an SE, the resolution amending the Statutes must be passed with amajority of at least two thirds of the votes cast, unless the laws and regulations in the SE’s country of domicile provide for or permit a greater majority (Article 59 Paragraph 1 SE
Supervisory Board in order to issue the new shares to employees of Allianz SE and its Group companies as well as for fractional amounts (Article 2 Paragraph 4 of the Statutes).
‰ The Company has a conditional capital in the amount of € 250,000,000; this conditional capital increase is only carried out to the extent that conversion or option rights resulting from bonds which Allianz SE or its subsidiaries have issued on the basis of the authorization granted by the General Meeting of February 8, 2006 are exercised, or conversion obligations arising from such bonds are fulfilled (Article 2 Paragraph 6 of the Statutes).
‰ There is furthermore conditional capital in the amount of € 5,632,000; this conditional capital increase is only carried out to the extent that conversion or option rights resulting from bonds which Allianz SE or its subsidiaries have issued on the basis of the authority granted by the Annual General Meeting of May 5, 2004 are exercised, or conversion obligations arising from such bonds are fulfilled (Article 2 Paragraph 5 of the Statutes).
The Board of Management has the authority to buy back Allianz shares on the basis of the authorization of the Extraordinary General Meeting of February 8, 2006 to acquire treasury shares for other purposes (Section 71 Paragraph 1 No. 8 AktG). On that basis, the Company is authorized, on or before August 7, 2007, to acquire treasury shares; together with other treasury shares that are in the possession of Allianz SE or which are attributable to it under Sections 71a et sequ. AktG, such sharesmay not exceed 10% of the share capital at any time. The shares acquired according to this authorizationmay be used, under exclusion of subscription rights, for any legally admissible purposes and in particular those specified in the authorization. There is also an authorization to acquire treasury shares for the purposes of securities trading (Section 71 Paragraph 1 No. 7 AktG).
especially useful for Dresdner Bank giving it the possibility to deal in Allianz stock.
Under the terms and conditions of the participation certificates issued by Allianz SE, the participation certificate holders are entitled to call for redemption of the participation certificates and to demand payment of a redemption amount per participation certificate of 122.9% of the average official price (Einheitskurs) of the Allianz share on the Munich Stock Exchange for the last threemonths prior to termination of the participation certificate relationship, if an enterprise acquires a majority shareholding in Allianz SE. These rules correspond to usual market practice and protect in an adequate way the interests of holders of participation certificates.
We believe that trends in the underlying profitability of our business can bemore clearly identified without the fluctuating effects of the realized capital gains and losses or impairments of investment securities, as these are largely dependent onmarket cycles or issuer-specific events over which we have little or no control, and can and do vary, sometimesmaterially, across periods. Further, the timing of sales that would result in such gains or losses is largely at our discretion. Similarly, we exclude restructuring charges because the timing of the restructuring charges are largely within our control, and accordingly their exclusion provides additional insight into the operating trends of the underlying business.
Operating profit should be viewed as complementary to, and not a substitute for, income before income taxes and minority interests in earnings or net income as determined in accordance with IFRS.
Income before income taxes and minority interests in earnings 10,323 7,829 5,044 1) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized
We further believe that an understanding of our total revenue performance is enhanced when the effects of foreign currency translation as well as acquisitions and disposals (or “changes in scope of consolidation”) are excluded. Accordingly, in addition to presenting “nominal growth”, we also present “internal growth”, which excludes the effects of foreign currency translation and changes in scope of consolidation. The following table sets forth the reconciliation of nominal total revenue growth to internal total revenue growth for each of our segments and the Allianz Group as a whole for the years ended December 31, 2006 and 2005.
Allianz Group Consolidated Financial Statements 116 Consolidated Balance Sheets 117 Consolidated Income Statements 118 Consolidated Statements of Changes in Equity 119 Consolidated Statements of Cash Flows
Segment 198 43 Derivative financial instruments 204 44 Fair value of financial instruments 205 45 Related party transactions 206 46 Contingent liabilities, commitments, guarantees, and assets pledged and collateral 210 47 Pensions and similar obligations 213 48 Share-based compensation plans 219 49 Restructuring plans 222 50 Earnings per share 223 51 Other information 223 52 Subsequent events 225 Selected subsidiaries and other holdings 231 Auditors’ Report 232 Glossary 243 Index
ASSETS Cash and cash equivalents 6 33,031 31,647 Financial assets carried at fair value through income1) 7 156,869 180,346
LIABILITIES AND EQUITY Financial liabilities carried at fair value through income 14 79,699 86,842 Liabilities to banks and customers 15 361,078 310,316
Participation certificates and subordinated liabilities 22 16,362 14,684 Total liabilities 996,336 942,186
Total liabilities and equity 1,053,226 989,288 1) As of December 31, 2006, € 90,211 mn are pledged to creditors and can be sold or repledged (2005: € 77,954 mn). 2) As of December 31, 2006, € 3,156 mn are pledged to creditors and can be sold or repledged (2005: € 5,079 mn).
Income before income taxes and minority interests in earnings 10,323 7,829 5,044
Basic earnings per share 50 17.09 11.24 6.19 Diluted earnings per share 50 16.78 11.14 6.16
Paid-in capital 129 — — — 129 — 129 1) During the year ended December 31, 2006 unrealized gains and losses (net) arising during the year included in shareholders’ equity are net of deferred tax benefit of € 478 mn (2005: deferred tax charge of € 568 mn; 2004: deferred tax charge of € 868 mn).
Summary Net cash flow provided by (used in) operating activities 20,265 47,311 1,293 Net cash flow provided by (used in) investing activities (34,450) (22,922) (9,155) Net cash flow provided by (used in) financing activities 15,647 (8,442) (2,014) Effect of exchange rate changes on cash and cash equivalents (78) 72 (24) Change in cash and cash equivalents 1,384 16,019 (9,900) Cash and cash equivalents at beginning of period 31,647 15,628 25,528 Cash and cash equivalents at end of period 33,031 31,647 15,628
Cash flow from investing activities: Proceeds from the sale, maturity or repayment of: Financial assets designated at fair value through income 7,207 9,981 1,332 Available-for-sale investments 118,747 137,915 124,481 Held-to-maturity investments 336 534 781 Investments in associates and joint ventures 730 3,938 1,876 Assets held for sale 2,253 792 — Real estate held for investment 1,376 1,091 890 Loans and advances to banks and customers (purchased loans) 8,365 5,195 3,739 Property and equipment 453 113 667
Cash flow from financing activities: Policyholders’ account deposits 13,234 14,118 10,364 Policyholders’ account withdrawals (8,432) (5,560) (4,232) Net change in liabilities to banks and customers 13,524 (19,167) (14,597) Proceeds from the issuance of certificated liabilities, participation certificates and
Net cash flow provided by (used in) financing activities 15,647 (8,442) (2,014)
Significant non-cash transactions: Settlement of exchangeable bonds issued by Allianz Finance II B.V. with shares: Available-for-sale investments (1,074) — (989) Certificated liabilities (1,074) — (989)
Novation of quota share reinsurance agreement: Reinsurance assets (1,111) (1,117) — Deferred acquisition costs 76 76 — Payables from reinsurance contracts (1,035) (1,041) —
Effects from the merger of RAS with and into Allianz AG (Note 4): Revenue reserves (2,362) — — Minority interests (1,659) — — Paid-in capital 3,653 — — Unrealized gains and losses (net) 368 — —
Basis of presentation The consolidated financial statements of the Allianz Group have been prepared in conformity with International Financial Reporting Standards (“IFRS”), as adopted under European Union (“EU”) regulations in accordance with section 315a of the German Commercial Code (“HGB”). IFRS as adopted by the EU offers certain options for applying IFRS standards. The Allianz Group’s application of these options results in no material differences between IFRS as adopted by the EU and IFRS as adopted by the International Accounting Standard Board (“IASB”).
IFRS does not provide specific guidance concerning all aspects of the recognition andmeasurement of insurance and reinsurance contracts. Therefore, as envisioned in IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, the provisions embodied under accounting principles generally accepted in the United States of America (“US GAAP”) have been applied to those aspects where specific guidance is not provided by IFRS 4, Insurance Contracts. See Note 3 regarding changes to IFRS effective January 1, 2006. The consolidated financial statements are presented inmillions of Euro (€).
Principles of consolidation The consolidated financial statements of the Allianz Group include those of Allianz SE, its subsidiaries and certain investment funds and special purpose entities (“SPEs”). Subsidiaries, investment funds and SPEs, hereafter “subsidiaries”, which are directly or indirectly controlled by the Allianz Group, are consolidated. Subsidiaries are consolidated from the date control is obtained by the Allianz Group. Subsidiaries are consolidated until the date that the Allianz Group no longer maintains control. The Allianz Group has used interim financial statements for certain subsidiaries whose fiscal year is other than December 31, but not exceeding a lag of threemonths. The effects of intraAllianz Group transactions have been eliminated.
For business combinations with an agreement date before March 31, 2004, minority interests are recorded at theminority’s proportion of the pre-acquisition carrying amounts of the identifiable assets and liabilities.
Acquisitions and disposals of minority interests are treated as transactions between equity holders. Therefore, any difference between the acquisition cost or sale price of theminority interest and the carrying amount of theminority interest is recognized as an increase or decrease of equity.
Foreign currency translation and transactions The individual financial statements of each of the Allianz Group’s subsidiaries are prepared in the prevailing currency in the environment where the subsidiary conducts its ordinary activities (its functional currency). Transactions recorded in currencies other than the functional currency (foreign currencies) are recorded at the rate of exchange on the date of the transaction. At the balance sheet date, monetary assets and liabilities recorded in foreign currencies are translated into the functional currency using the closing exchange rate and non-monetary assets and liabilities are translated at historical rates.
Currency gains and losses arising from foreign currency transactions are reported in investment expenses.
Fair value of financial assets and liabilities The fair values of financial instruments traded in active markets (such as publicly traded derivatives and trading and available-for-sale investments) are based on quoted market prices or dealer price quotations on the last exchange trading day prior to the balance sheet date. The quotedmarket price used for financial assets held by the Group is the current bid price; the quotedmarket price used for financial liabilities is the current ask price.
Use of estimates and assumptions The preparation of consolidated financial statements requires the Allianz Group tomake estimates and assumptions that affect items reported in the consolidated balance sheets and consolidated income statements, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Themost significant accounting estimates are associated with the reserves for loss and loss adjustment expenses, reserves for insurance and investment contracts, loan loss allowance, fair value and impairments of financial instruments, goodwill, deferred acquisition costs, deferred taxes and reserves for pensions and similar obligations.
under reinsurance contracts assumed, investments in associates and joint ventures, and real estate held for investment.
Available-for-sale investments are securities that are not classified as held-to-maturity, loans and advances to banks and customers, or financial assets carried at fair value through income. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, which are the difference between fair value and cost or amortized cost, are included as a separate component of shareholders’ equity, net of deferred taxes and the latent reserve for premium refunds to the extent that policyholders will participate in such gains and losses on the basis of statutory or contractual regulations when they are realized. Realized gains and losses on securities are generally determined by applying the average cost method at the subsidiary level.
Investments in associated enterprises and joint ventures are generally accounted for using the equity method of
Loans are placed on non-accrual status when the payment of principal or interest is doubtful based on the credit assessment of the borrower. Non-accrual loans consist of loans on which interest income is no longer recognized on an accrued basis, and loans for which a specific provision is recorded for the entire amount of accrued interest receivable. When a loan is placed on non-accrual status, any accrued interest receivable is reversed against interest and similar income. Loans can only be restored to accrual status when interest and principal payments are made current (in accordance with the contractual terms), and future payments in accordance with those terms are reasonably assured. When there is a doubt regarding the ultimate collectibility of the principal of a loan placed in non-accrual status, all cash receipts are applied as reductions of principal. Once the recorded principal amount of the loan is reduced to zero, future cash receipts are recognized as interest income.
Loan loss allowance is recognized for loans for which there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the loan, and that loss event has an impact on the estimated future cash flows of the loan that can be reasonably estimated. If there is objective evidence that a loan is impaired, a loan loss allowance is recognized as the difference between the loan’s carrying amount and the present value of future cash flows, which includes all contractual interest and principal payments, discounted at the loan’s original effective interest rate. The loan loss allowance is reported as a reduction of loans and advances to banks and customers. Provisions for contingent liabilities, such as guarantees, loan
Loans with an outstanding balance greater than € 1mn are considered to be individually significant, and they are assessed individually to determine whether an impairment exists. Individually significant loans that are not impaired, as well as loans that are not individually significant, are grouped with loans evidencing similar credit characteristics and are collectively assessed for impairment. Loans impaired individually or collectively are eliminated from further testing to ensure that there is no duplication of impairment. The following allowances comprise the total loan loss allowance.
Loans are charged-off when all economically sensible means of recovery have been exhausted. At the point of charge-off, the loan, as well as any specific allowance associated with the loan, is removed from the consolidated balance sheet or a charge may be recorded to directly charge-off the loan. A charge-off may be full or partial. Subsequent to a charge-off, recoveries, if any, are recognized as a credit to the loan loss provisions.
The loan loss provisions are the amount necessary to adjust the loan loss allowance to a level determined through the process described above.
DAC generally consist of commissions, underwriting expenses and policy issuance costs, which vary with and are directly related to the acquisition and renewal of insurance contracts. These acquisition costs are deferred, to the extent they are recoverable, and amortized over the life of the related contracts.
• incremental to amounts the Allianz Group credits on similar contracts without sales inducements, and
• higher than the contract’s expected ongoing crediting rates for periods after the inducement.
Property and equipment includes real estate held for use, equipment and software.
Equipment is carried at cost less accumulated depreciation and impairments. Depreciation is generally computed using the straight-linemethod over the estimated useful lives of the assets. The estimated useful life of equipment ranges from 2 to 10 years, except for purchased information technology equipment, which is 2 to 8 years.
The Allianz Group conducts an annual impairment test of goodwill during the 4th quarter or more frequently if there is an indication that goodwill is not recoverable. For the purpose of impairment testing, goodwill is allocated to each of the Allianz Group’s cash generating units that is expected to benefit from the business combination. The impairment test includes comparing the recoverable amount to the carrying amount, including goodwill, of all relevant cash generating units. A cash generating unit is impaired if the carrying amount is greater than the recoverable amount. The impairment of a cash generating unit is equal to the difference between the carrying amount and recoverable amount
The brand name “Dresdner Bank” has an indefinite life, as there is no foreseeable end to its economic life; therefore, it is not subject to amortization and it is recorded at cost less accumulated impairments. The fair value of this brand name, registered as a trade name, was determined using a royalty savings approach.
Financial liabilities held for trading primarily consist of derivative financial instruments with negative fair values that do not meet the criteria for hedge accounting and obligations to deliver assets arising from short sales of securities, which are carried out in order to benefit from short-term price fluctuations. The securities required to close out short sales are obtained through securities borrowing or reverse repurchase agreements.
Financial liabilities designated at fair value through income are recorded at fair value with changes in fair value recorded directly in net income for the period.
Unearned premiums For short-duration insurance contracts, such as property-casualty contracts, in accordance with SFAS 60, premiums written to be earned in future years are recorded as unearned premiums. These premiums are earned in subsequent years in relation to the insurance coverage provided. Deferred policy acquisition costs for short-duration insurance contracts are amortized over the periods in which the related premiums are earned.
IBNR reserves are established to recognize the estimated cost of losses that have occurred but where the Allianz Group has not yet been notified. IBNR reserves, similar to case reserves for reported claims, are established to recognize the estimated costs, including expenses, necessary to bring claims to final settlement. Since nothing is known about the occurrence, the Allianz Group relies on its past experience, adjusted for current trends and any other relevant factors. IBNR reserves are estimates based on actuarial and statistical projections of the expected cost of the ultimate settlement and administration of claims. The analyses are based on facts and circumstances known at the time, predictions of future events, estimates of future inflation and other societal and economic factors. Trends in claim frequency, severity and time lag in reporting are examples of factors used in projecting the IBNR reserves. IBNR reserves are reviewed and revised periodically as additional information becomes available and actual claims are reported.
There is no adequate statistical data available for some risk exposures in liability insurance, such as environmental and asbestos claims and large-scale individual claims, because some aspects of these types of claims become known very slowly and continue to evolve. Appropriate provisions have beenmade for such cases based on the Allianz Group’s judgment and an analysis of the portfolios in which such risks occur. These provisions represent the Allianz Group’s best estimate. The reserves for loss and loss adjustment expenses for asbestos claims in the United States were reviewed by independent actuaries during the year end of 2005; current reserves reflect subsequent loss developments and reestimation of initial reserves.
The aggregate policy reserves for traditional participating insurance contracts are computed in accordance with SFAS 120 using the net level premium method. Themethod uses assumptions for mortality, morbidity and interest rates that are guaranteed in the contract or used in determining the policyholder
dividends (or “premium refunds”). DAC and PVFP for traditional participating insurance products are amortized over the expected life of the contracts in proportion to estimated gross margins (“EGMs”) based upon historical and anticipated future experience, which is determined on a best estimate basis and evaluated regularly. The present value of EGMs is computed using the expected investment yield. EGMs include premiums, investment income including realized gains and losses, insurance benefits, administration costs, changes in the aggregate reserves and policyholder dividends (or “premium refunds”). The effect of changes in EGMs are recognized in net income in the period revised.
Aggregate policy reserves include liabilities for guaranteedminimumdeath, and similar mortality and morbidity benefits related to non-traditional contracts, annuitization options, and sales inducements. These liabilities are calculated based on contractual obligations using actuarial assumptions. Contractually agreed sales inducements to contract holders include persistency bonuses, and are accrued over the period in which the insurance contract must remain in force to qualify for the inducement.
Liabilities for puttable equity instruments include the minority interests in shareholders’ equity of certain consolidated investment funds. These minority 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 (a “puttable instrument”). These liabilities are required to be recorded at redemption amount with changes recognized in net income.
Revenue reserves include the retained earnings of the Allianz Group and treasury shares. Treasury shares are deducted from shareholders’ equity. No gain or loss is recognized on the sale, issuance, acquisition or cancellation of these shares. Any consideration paid or received is recorded directly in shareholders’ equity.
Premiums earned (net) Property-casualty insurance premiums 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
Revenues for universal life-type and investment contracts, such as universal life and variable annuity contracts, represent charges assessed against the policyholders’ account balances for the front-end loads, net of the change in unearned revenue liability, cost of insurance, surrenders and policy administration and are included within premiums earned (net). Benefits charged to expense include benefit claims incurred during the period in excess of policy account balances and interest credited to policy account balances.
Fee and commission income and expenses In addition to traditional commission income received on security transactions, fee and commission income in the securities business also includes commissions received in relation to private placements, syndicated loans and financial advisory services. Other fees reflect fees from underwriting business (new issues), commissions received for trust and custody services, for the brokerage of insurance policies, and fees related to credit cards, home loans, savings contracts and real estate. Fee and commission income is recognized in Allianz Group’s Banking segment when the corresponding service is provided.
Distribution and servicing fees are recognized as the services are performed. Such fees are generally based on percentages of themarket value of assets under management.
Administration fees are recognized as the services are performed. Such fees are generally based on percentages of themarket value of assets under management.
Income taxes Income tax expense consists of the current taxes on profits actually charged to the individual Allianz Group subsidiaries and changes in deferred tax assets and liabilities.
The calculation of deferred tax is based on temporary differences between the Allianz Group’s carrying amounts of assets or liabilities in its consolidated balance sheet and their tax bases. The tax rates used for the calculation of deferred taxes are the local rates applicable in the countries concerned; changes to tax rates already adopted prior to or as of the consolidated balance sheet date are taken into account. Deferred tax assets are recognized only to the extent it is probable that sufficient future taxable income will be available for realization.
In the Allianz Group’s Banking segment, derivative financial instruments are used both for trading purposes and to hedge against movements in interest rates, currency exchange rates and other price risks of investments, loans, deposit liabilities and other interest sensitive assets and liabilities.
For derivative financial instruments used in hedge transactions that meet the criteria for hedge accounting (“accounting hedges”) , the Allianz Group designates the derivative financial instrument as a fair value hedge, cash flow hedge, or hedge of a net investment in a foreign entity. The Allianz Group documents the hedge relationship, as well as its riskmanagement objective and strategy for entering into various hedge transactions. The Allianz Group assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative financial instruments that are used for hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items.
Cash flow hedges 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 shareholders’ equity, and are recognized in net income when the offsetting gain or loss associated with the hedged item is recognized. Any ineffectiveness of the cash flow hedge is recognized directly in net income.
The Allianz Group discontinues hedge accounting prospectively when it is determined that the derivative financial instrument is no longer highly effective, when the derivative financial instrument or the hedged item expires, or is sold, terminated or exercised, or when the Allianz Group determines that designation of the derivative financial instrument as a hedging instrument is no longer appropriate. After a fair value hedge is discontinued, the Allianz Group continues to report the derivative financial instrument at its fair value, but changes in the fair value of the hedged item are no longer recognized in net income. After hedge accounting for a cash flow hedge is discontinued, the Allianz Group continues to record the derivative financial instrument at its fair value; any net unrealized gains and losses accumulated in shareholders’ equity are recognized when the planned transaction occurs. After a hedge of a net investment in a foreign entity is discontinued, the Allianz Group continues to report the derivative financial instrument at its fair value and any net unrealized gains or losses accumulated in shareholders’ equity remain in shareholders’ equity until the disposal of the foreign entity.
Reclassifications For reasons of comparability with the current reporting year, some prior-year amounts were adjusted in the consolidated balance sheet and the consolidated income statements through reclassifications that do not affect net income or shareholders’ equity.
Certain immaterial amounts of unearned premiumwere previously netted against DAC in the consolidated balance sheets and against the related amortization
account in the income statements. All periods have now been presented on a gross basis.
In December 2004, the IASB issued an amendment to IAS 19, Employee Benefits, relating to the recognition of actuarial gains and losses and disclosure requirements for defined benefits plans. The amendment allows the Allianz Group the election to adopt an accounting policy to recognize actuarial gains and losses in the period in which they occur outside of net income. The Allianz Group did not elect to utilize this option; however, this amendment requires additional disclosure requirements with respect to defined benefit plans that have been incorporated into the consolidated financial statements for the year ended December 31, 2006.
In April 2005, the IASB issued an amendment to IAS 39, Financial Instruments: Recognition and Measurement, related to the cash flow hedge accounting of intragroup transactions. The Allianz Group adopted this amendment as of January 1, 2006 with nomaterial effect on its financial results or financial position.
In March 2006, the International Financial Reporting Interpretations Committee (“IFRIC”) issued IFRIC 9, Reassessment of Embedded Derivatives. The Interpretation clarifies whether a reassessment should bemade regarding whether an embedded derivative needs to be separated from the host contract after the initial hybrid contract has been recognized. IFRIC 9 concludes that reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. IFRIC 9 is effective for annual periods beginning on or after June 1, 2006. As the interpretation is consistent with the Allianz Group’s existing policy, there is no expected impact on the Allianz Group’s financial results or financial position.
“management approach”). IFRS 8 requires explanations of how the segment information is prepared as well as reconciliations of total reportable segment revenues, total profits or losses, total assets, total liabilities, and other amounts disclosed for reportable segments to corresponding amounts recognized in the entity’s financial statements. IFRS 8 applies to annual financial statements for periods beginning on or after January 1, 2009. IFRS 8 will have no impact on the Allianz Group’s financial results or financial position. The Allianz Group is currently evaluating the potential impact, if any, that the adoption of IFRS 8 will have on the Group’s segment reporting.
In November 2006, the IFRIC issued IFRIC 11, Group and Treasury Share Transactions. IFRIC 11 addresses the application of IFRS 2 to share-based payment arrangements in three cases. When an entity chooses or is required to buy its own equity instruments to settle the share-based payment obligation, the arrangement should be accounted for as equity-settled share-based payment transactions. When a parent grants employees of a subsidiary rights to its equity instruments, assuming the transaction is recorded as an equity-settled transaction in the consolidated financial statements, the subsidiary would also record the transaction as an equity-settled transaction in its financial statements. When a subsidiary grants its employees rights to equity instruments of its parent, the subsidiary should record the transaction as a cash-settled share-based payment transaction. IFRIC 11 is effective for annual periods beginning on or after March 1, 2007. The interpretation does not impact the Allianz Group’s consolidated financial statements.
Changes in the presentation of the consolidated financial statements The Allianz Group comprehensively reviewed its financial reportingmethodology to improve the transparency of its financial results and ensure consistency with its peers. As a result of this review, the Allianz Group implemented numerous revisions to its financial reporting that were effective on January 1, 2006. The Allianz Group’s financial reporting reflects reclassifications in the consolidated balance sheets and consolidated income statements, changes to segment reporting, changes to operating profit methodology and changes to the consolidated statements of cash flows that reflects the continuous review of our evolving business.
• The line items in the consolidated income statements include aggregations of items that allow the Allianz Group’s key performance indicators to be directly derived from the Allianz Group’s external financial results.
• The line items in the consolidated balance sheets include aggregations of items which are consistently presented within the line items in the consolidated income statements.
As a result, the Allianz Group’s previously reported consolidated balance sheets and consolidated income statements were reclassified to ensure consistency and comparability with the presentation as implemented on January 1, 2006. These reclassifications did not have an impact on the Allianz Group’s net income or shareholders’ equity for any previously reported period.
• Deferred acquisition costs, including present value of future profits and deferred sales inducements, are presented as a separate line item.
• Financial liabilities for puttable equity instruments have been reclassified to other liabilities.
• Deferred tax assets and deferred tax liabilities are presented on a net basis to the extent the requirements of IAS 12 for offset aremet.
The key changes to the previous presentation in the Allianz Group’s consolidated income statements are: • Interest and similar income includes share of earnings from investments in associates and joint ventures.
• Income from fully consolidated private equity investments and expenses from fully consolidated private equity investments are presented as separate line items in the consolidated income statements. Fully consolidated private equity investments include the Four Seasons Health Care Ltd., Wilmslow andMAN Roland Druckmaschinen AG, Offenbach.
• Fee and commission expenses and investment expenses are presented as separate line items.
• Amortization of intangible assets includes amortization of intangible assets previously included in other expenses.
• Restructuring charges are presented as a separate line item. Restructuring charges were previously presented in other expenses.
• Acquisition and administrative expenses (net) include a significant portion of the amounts previously reported in other income and other expense. Acquisition and administrative expenses (net) include other taxes previously included in taxes.
ASSETS Cash and cash equivalents 31,647 — 31,647 Financial assets carried at fair value through income 235,007 (54,661) 180,346
Loans and advances to banks and customers2) 336,808 — 336,808 Financial assets for unit linked contracts — 54,661 54,661 Reinsurance assets3) 22,120 — 22,120 Deferred acquisition costs — 18,141 18,141 Deferred tax assets 14,596 (9,297) 5,299
LIABILITIES AND EQUITY Financial liabilities carried at fair value through income 144,640 (57,798) 86,842 Liabilities to banks and customers4) 310,316 — 310,316 Unearned premiums — 14,524 14,524 Reserves for loss and loss adjustment expenses — 67,005 67,005 Reserves for insurance and investment contracts 359,137 (80,825) 278,312 Financial liabilities for unit linked contracts — 54,661 54,661 Deferred tax liabilities 14,621 (9,297) 5,324
Certificated liabilities 59,203 — 59,203 Participation certificates and subordinated liabilities 14,684 — 14,684
Shareholders’ equity 39,487 — 39,487 Minority interests 7,615 — 7,615 Total equity 47,102 — 47,102
Income from fully consolidated private equity investments — 598 598 — 175 175
1) Formerly “Other income from investments”. 2) Formerly “Fee and commission income, and income from service activities”. 3) Formerly “Insurance and investments contract benefits (net)”. 4) Formerly “Interest and similar expenses”. 5) Formerly “Other expenses from investments”. 6) Formerly “Amortization of goodwill”.
In addition, the Allianz Group reclassified its life and health reinsurance assumed business to the Life/Health segment. This business was previously reported in the Property-Casualty segment.
• Liabilities to banks and customers are reclassified as financing activities.
• Aggregate policy reserves for universal-life type insurance and investment contracts are reclassified as financing activities.
Effects on the Consolidated Financial Statements in the Year of Acquisition1)
Four Seasons Health Care Ltd., Wilmslow 8/18/2004 1633) 2 141 1) Consolidated in the business segments. 2) At the date of first-time consolidation. 3) Income from service agreements (not included in total revenues of the Allianz Group).
MAN Roland Druckmaschinen AG, Offenbach On July 18, 2006, the Allianz Group acquired 100.0% of MAN Roland Druckmaschinen AG, Offenbach at a purchase price of € 554 mn. MAN Roland is the world’s second largest manufacturer of printing systems. The impact of the acquisition of MAN Roland Druckmaschinen AG, Offenbach, net of cash acquired, on the consolidated statements of cash flows for the year ended December 31, 2006 was: As of December 31, 2006 € mn
Allianz of Canada, Inc., Toronto 9/12/2004 458 105 31 Allianz President General Insurance Co. Ltd., Taipeh 9/27/2004 69 10 4 ENTENIAL, Guyancourt 4/2/2004 — — (5)
Allianz Global Investors of America L.P., Delaware During the year ended December 31, 2005, the Allianz Group increased its interest in Allianz Global Investors of America L.P., Delaware, by 3.4% to 97.0%. The acquisition cost for the additional interest was € 209 mn. This transaction was accounted for as a transaction between equity holders; therefore, the Allianz Group recorded a decrease in shareholders’ equity of € 209 mn.
Bayerische Versicherungsbank AG, Munich (was merged in January 2006 retroactively effective October 1, 2005 into Allianz Versicherungs-Aktiengesellschaft, Munich) On November 15, 2005, the Allianz Group increased its interest in Bayerische Versicherungsbank AG, Munich, by 10.0% to 100.0%. The acquisition cost for the additional interest was € 22mn. This transaction was accounted for as a transaction between equity holders; therefore, the Allianz Group recorded an increase in shareholders’ equity of € 82 mn and a decrease of minority interest of
Allianz Global Investors of America L.P., Delaware In January, April and November 2004, the Allianz Group increased its interest in Allianz Global Investors of America L.P., Delaware, by a total of 9.7% to 93.6%, resulting in additional goodwill of € 583 mn. The acquisition cost for the additional interest was € 598 mn.
Property-Casualty The Allianz Group is the largest German propertycasualty insurance company based on gross premiums written during the year ended December 31, 2006. Principal product lines offered primarily within Germany include automobile liability and other automobile insurance, fire and property insurance, personal accident insurance, liability insurance and legal expense insurance. The Allianz Group is also among the largest property-casualty insurance companies in other countries, including France, Italy, the United Kingdom, Switzerland and Spain. The Allianz Group conducts its property-casualty insurance operations in these countries through five main groups of operating entities
Banking The Allianz Group’s banking operations primarily comprise the operations of the Dresdner Bank AG and subsidiaries, hereafter “Dresdner Bank Group”, whose principal banking products and services include traditional commercial banking activities such as deposit taking, lending (including residential mortgage lending) and cashmanagement, as well as corporate finance advisory services, mergers and acquisitions advisory services, capital andmoneymarket services, securities underwriting and securities trading and derivatives business on its own account and for its customers. The Allianz Group operates through the domestic and international branch network of the Dresdner Bank Group and through various subsidiaries both in Germany and abroad, some of which also have branch networks.
Asset Management The Allianz Group’s Asset Management segment operates as a global provider of institutional and retail asset management products and services to third-party investors and provides investmentmanagement services to the Allianz Group’s insurance operations. The Allianz Groupmanaged € 764 bn of third-party assets on a worldwide basis as of December 31, 2006, with key management centers in Munich, Frankfurt, London, Paris, Singapore, Hong Kong, Milan, Westport (Connecticut) and San Francisco, San Diego and Newport Beach (California). The United States is the Allianz Group’s largest geographic region for third-party assets under management accounting for approximately 57.1% (2005: 59.6% and 2004: 59.5%) of the total third-party assets under management. As measured by total assets under management at December 31, 2006, the Allianz Group is one of the five largest asset managers in the world.
Corporate The Corporate segment includes all group activities which are not allocated to a specific business segment. Further, the Corporate segment includes group funding and riskmanagement activities, such as the senior bonds, subordinated bonds andmoneymarket securities issued or guaranteed by Allianz SE and the related derivative financial instruments held by Allianz SE or one of its subsidiaries. The activities included in the Corporate segment were previously reported in the Property-Casualty segment.
As of December 31, 2006 € mn € mn € mn € mn € mn € mn
Asset Management Corporate Consolidation Group € mn € mn € mn € mn € mn € mn € mn € mn
Property-Casualty Life/Health Banking € mn € mn € mn € mn € mn € mn € mn € mn € mn
As of and for the years ended December 31, 2006 € mn € mn € mn
Operating profit (loss) Total assets € mn € mn € mn € mn € mn 7) Represents acquisition and administrative expenses (net) divided by premiums earned (net). 8) Includes the corporate customer segment business of Allianz Sach. 9) Does not include the corporate customer segment business of Allianz Sach, previously included within property-casualty Germany.
While these excluded items are significant components in understanding and assessing the Allianz Group’s consolidated financial performance, the Allianz Group believes that the presentation of operating results enhances the understanding and comparability of the performance of its operating segments by highlighting net income attributable to ongoing segment operations and the underlying profitability of its businesses. For example, the Allianz Group believes that trends in the underlying profitability of its segments can bemore clearly identified without the fluctuating effects of the realized capital gains and losses or impairments on investment securities, as these are largely dependent on market cycles or issuer-specific events over which the Allianz Group has little or no control, and can and do vary, sometimesmaterially, across periods. Further, the timing of sales that would result in such gains or losses is largely at the Allianz Group’s discretion. Operating profit is not a substitute for earnings from ordinary activities before taxes or net income as determined in accordance with IFRS. The Allianz Group’s definition of operating profit may differ from similar measures used by other companies, andmay change over time.
The following table sets forth the total revenues, operating profit and net income for each of our business segments for the years ended December 31, 2006, 2005 and 2004, as well as consolidated net income of the Allianz Group.
Gross premiums written1) 43,674 43,699 42,942 Ceded premiums written (5,415) (5,529) (5,299) Change in unearned premiums (309) (485) (258) Premiums earned (net) 37,950 37,685 37,385 Interest and similar income 4,096 3,747 3,615 Income from financial assets and liabilities designated at fair value through income (net)2) 106 132 5 Realized gains/losses (net) from investments, shared with policyholders3) 46 273 58 Fee and commission income 1,014 989 782
7) Represents the total of acquisition and administrative expenses (net) and claims and insurance benefits incurred (net) divided by premiums earned (net).
Statutory expense ratio4) in % 9.6 8.4 8.5 1) For the Life/Health segment, total revenues are measured based upon statutory premiums. Statutory premiums are gross premiums written from sales of life insurance policies, as well as gross receipts from sales of unit linked and other investment-oriented products, in accordance with the statutory accounting practices applicable in the insurer’s home jurisdiction.
Net fee and commission income1) 2,924 2,874 2,636 2,597 2,178 2,176
2) Represents interest and similar income less interest expense and investment expenses. 3) For the Asset Management segment, total revenues are measured based upon operating revenues. 4) The total of these items equals acquisition and administration expenses (net) in the segment income statement. 5) Consists of retention payments for the management and employees of PIMCO and Nicholas Applegate. These retention payments largely expired in 2005. 6) Includes primarily the impairment of the dit brand name and amortization charges relating to capitalized bonuses for PIMCO management. These amortization charges expired in 2005. Until December 31, 2005, these amortization charges were classified as acquisition-related expenses. Prior year balances have been reclassified to allow for comparability across periods.
Change in reserves for insurance and investment contracts — — (204) Interest expense, excluding interest expense from external debt2) (507) (534) (530) Loan loss provisions (5) — —
Income from financial assets and liabilities held for trading (net)1) (274) (441) (61) Realized gains/losses (net) 861 172 1,225 Impairments of investments (net) 32 (62) (505) Interest expense from external debt2) (775) (787) (831) Non-operating items (156) (1,118) (172)
Minority interests in earnings (16) (10) (28) Net income (loss) (179) (1,268) (807)
1) The total of these items equals income from financial assets and liabilities carried at fair value through income (net) in the segment income statement. 2) The total of these items equals interest expense in the segment income statement.
Supplementary Information to the Consolidated Balance Sheets 6 Cash and cash equivalents
Debt securities 14,414 10,686 Equity securities 3,834 3,476 Loans to banks and customers 639 —
Equity and debt securities held in financial assets held for trading are primarily marketable and listed securities. As of December 31, 2006, the debt securities include € 21,924 mn (2005: € 38,375 mn) from public-sector issuers and € 59,957 mn (2005: € 71,009 mn) from other issuers.
Government and government agency bonds 23,006 (260) 1,154 (29) 24,160 (289)
Corporate bonds Total unrealized losses amounted to € 772 mn at December 31, 2006. The Allianz Group holds a large variety of bonds issued by corporations mostly domiciled in OECD countries. For the vast majority of the Allianz Group’s corporate bonds, issuers and/or issues are of “investment grade”. Therefore, the unrealized losses on Allianz Group’s investment in corporate debt securities were primarily caused by interest rate increases between the purchase date of the individual securities compared to balance sheet date. As the decline in fair value is primarily attributable to changes in interest rates, the Allianz Group does not consider these investments to be impaired at December 31, 2006.
Available-for-sale Due in 1 year or less 12,924 12,925 Due after 1 year and in less than
Held-to-maturity Due in 1 year or less 206 208 Due after 1 year and in less than
Actual maturitiesmay deviate from the contractually definedmaturities, because certain security issuers have the right to call or repay certain obligations ahead of schedule, with or without redemption or early repayment penalties. Investments that are not due at a single maturity date are, in general, not allocated over various maturity buckets, but are shown within their final contractual maturity dates.
Investments in associates and joint ventures As of December 31, 2006, loans to associated enterprises and joint ventures and debt securities available-for-sale issued by associated enterprises and joint ventures held by the Allianz Group amounted to € 2,236 mn
Changes in the consolidated subsidiaries of the Allianz Group 68 240 83
Corporate customers 146,750 123,015 Private customers 59,505 59,316 Public authorities 7,297 4,539
As of December 31, 2006, unearned income related to discounts deducted from loan balances was € 69mn
During the year ended December 31, 2006, lease payments received were recognized as income in the amount of € 154 mn (2005: € 122 mn; 2004: € 42 mn). As of December 31, 2006 and 2005, an allowance for uncollectible lease payments was not recorded.
The following tables present information relating to the Allianz Group’s impaired and non-accrual loans: As of December 31, 2006 € mn € mn
Average balance of impaired loans 2,390 4,581 Interest income recognized on impaired loans 28 36 Interest income not recognized from non-accrual loans 86 102 Interest collected and recorded on non-accrual loans 7 4
As of December 31, 2006, the Allianz Group had € 34mn (2005: € 39 mn) of commitments to lend additional funds to borrowers whose loans are non-performing or whose terms have been previously restructured.
Unearned premiums 1,317 1,448 Reserves for loss and loss adjustment expenses 9,719 10,874 Aggregate policy reserves 8,223 9,772 Other insurance reserves 101 26
Changes in the consolidated subsidiaries of the Allianz Group — (26) (158) Foreign currency
Additions — — 47 Changes in the consolidated subsidiaries of the Allianz Group — — (4) Foreign currency
Transfer from insurance reserves — — 89 Cumulative effect adjustment due to implementation of
Derivative financial instruments used for hedging that meet the criteria for hedge accounting and firm commitments 463 849 Property and equipment
Real estate held for use € mn € mn € mn
Changes in the consolidated subsidiaries of the Allianz Group 73 (2) (70)
As a result of the agreements described in Note 45, the Allianz Group reclassified the carrying amount of its ownership interest in Eurohypo AG to assets held for sale during the year ended December 31, 2005. On the agreement date, as the fair value less costs to sell of the Eurohypo AG ownership interest was greater than the Allianz Group’s carrying amount, a gain or loss was not recognized. Therefore, both on December 15, 2005, the date of derecognition of the first tranche, and March 31, 2006, the date of derecognition of the second tranche, the Allianz Group recognized gains on disposal which are included in realized gains from associates and joint ventures for the years ended December 31, 2006 and 2005, respectively. The assets held for sale related to Eurohypo AG have been fully derecognized.
• the acquisition of 100.0% participation in MAN Roland Druckmaschinen AG, Offenbach,
• increasing the interest in Ann Arbor Annuity Exchange Inc., Ann Arbor, from 40.0% to 100.0%,
• increasing the interest in Roster Financial LLC, Quincy, from 49.0% to 100.0%.
Health segments to ensure consistency with the management responsibilities of the Board of Management. As a result, the Allianz Group has allocated goodwill to nine cash generating units in the PropertyCasualty segment, six cash generating units in the Life/ Health segment, three cash generating units in the Banking segment, one cash generating unit in the Asset Management segment and one cash generating unit in the Corporate segment. In addition, the brand name “Dresdner Bank” has been allocated to two cash generating units in the Banking segment and to one cash generating unit in the Asset Management segment.
The Allianz Group applies generally acknowledged valuation principles to determine the value in use. In this regard, the Allianz Group utilizes the capitalized earningsmethod to derive the value in use for all cash generating units in the Property-Casualty and Banking segments and for the Asset Management, Insurance Germany Health and Private Equity cash generating units. Generally, the basis for the determination of the capitalized earnings value is the business plan (“detailed planning period”) as well as the estimate of the
The terminal values are largely based on the expected profits of the final year of the detailed planning period. Where necessary, the planned profits are adjusted so that long term sustainable earnings are reflected. The financing of the assumed growth in the terminal values is accounted for by appropriate profit retention.
The discount rate is based on the capital asset pricing model. The assumptions, including the risk free interest rate, market risk premium, segment beta and leverage ratio, used to calculate the discount rates are consistent with the parameters used in the Allianz Group’s planning and controlling process, specifically those utilized in the calculation of Economic Value Added.
For all cash generating units in the Life/Health segment, with the exception of Insurance Germany Health, the Market Consistent Embedded Value, specifically Appraisal Value, approach is utilized to determine the value in use. The Market Consistent Embedded value is an industry-specific valuationmethod and is in compliance with the general principles of the discounted earningsmethods. The Market Consistent Embedded Value approach utilized is based on the Allianz Group’s Market Consistent Embedded Value guidelines.
The carrying amounts of goodwill and brand names allocated to Allianz Group’s cash generating units as of December 31, 2006 and 2005 are as follows: As of December 31, 2006 2005
Cash generating units Goodwill € mn Brand names € mn Goodwill € mn Brand names € mn
Life/Health Insurance Germany Life 634 — 634 — Insurance Germany Health 325 — 325 —
Financial liabilities held for trading Obligations to deliver securities 39,951 49,029 Derivative financial instruments 27,823 28,543 Other trading liabilities 10,988 8,820
Financial liabilities designated at fair value through income 937 450 15 Liabilities to banks and customers
Change in the consolidated subsidiaries of the Allianz Group — — — 1 — 1 (816) 192 (624)
€ mn € mn € mn € mn € mn € mn
Discounted loss and loss adjustment expenses As of December 31, 2006 and 2005, the Allianz Group Property-Casualty reserves for loss and loss adjustment expenses reflected discounts of € 1,377 mn and € 1,326 mn, respectively.