1 Letter to the Shareholder 4 Supervisory Board Report 10 Statement on Corporate Management, Corporate
Consolidated Financial Statements 211 Detailed Index 212 Consolidated Financial Statements 219 Notes to the Consolidated Financial Statements 266 Supplementary Information to the Consolidated
Allianz Group is one of the leading global financial services providers and offers insurance and asset management solutions to approximately 75 million customers worldwide.
Share price as of December 31, 2009 | ▶ page 34
Increase in net income from continuing operations | ▶ page 109
Net income from continuing operations 4) € mn 4,740 13.2 % 4,186 7,991 7,843 — 109 Net income (loss) from discontinued operations, net of income taxes 4) € mn (395) (93.8) % (6,373) 723 467 — 110
5) Proposal. 6) Based on average shareholders‘ equity. Average shareholders‘ equity has been calculated based upon the average of the current and the preceding year’s shareholders’ equity. 7) Based on net income from continuing operations after minority interests.
Life/Health • Double-digit revenue growth to € 50.8 billion • Investment results recovered
Asset Management • Net inflows of € 84 billion compared to net zero in the previous year • Outstanding operating profit of € 1.4 billion
Statutory premiums by regions as of December 31, 2009 (December 31, 2008) 1)
1) After elimination of transactions between Allianz Group companies in different geographic regions and different segments. 2) Gross premiums written from our specialty lines have been allocated to the respective geographic regions. 3) Based on the origination of assets. 4) Consists of third-party assets managed by other Allianz Group companies (approximately € 24 bn as of December 31, 2009 and € 22 bn as of December 31, 2008, respectively) and
No one predicted the recent economic crash with any accuracy. But when it took place, we were rewarded for having previously made our business model weatherproof. This is reflected in our 2009 financial numbers: Results in life insurance are good overall and results in asset management are excellent. But we are not fully satisfied with the performance of the property and casualty segment, where we face ongoing severe price competition. Our capital base remained comfortable. Even in the most turbulent times, we were never in danger of falling below our ambitious target ratio of 150 % to 170 % of the regulatory requirement. The fact that we have retained a Standard & Poor’s rating of “AA” with a “stable outlook” is the best testament to this. This is the top rating in the European primary insurance industry.
I am convinced that this environment will give your Allianz the chance to take advantage of its existing strengths for future opportunities. The fundamental robustness of our business model allows us to cope with any challenge, as the crisis has shown. We are better prepared than ever to fulfil our core mission, namely to reduce the effects of unpredictable events in a period of great uncertainty. That makes us a somewhat conservatively predisposed, but therefore reliable and soughtafter partner, particularly following our recent experience weathering this crisis. We want to use these strengths to position your company at the centre of a strong financial community – together with you, our employees, our distribution partners and our customers worldwide.
I am certain that integrity and the idea of a truly strong financial community, which unites the interests of all parties under the rubrics of “security” and “earnings stability”, will be key factors in determining success in the years to come – and perhaps also an indicator of what we refer to as the new fundamental conditions. We, your Allianz, will meet these demands.
We continue to work on refining our business model and creating an attractive value proposition for all stakeholders.
• In asset management we will benefit from the significant increase in cash inflows experienced in 2009. We expect net cash inflows again in 2010, which will allow us to strengthen and build on our excellent position.
During the fiscal year 2009, the Supervisory Board observed the duties incumbent upon it in accordance with the law and the Statutes. We supervised the management of the company and advised the Board of Management concerning the running of the business. We were directly involved in all decisions of fundamental importance to the company.
Wide Range of Topics Discussed in the Plenary Supervisory Board Meetings
In every Supervisory Board meeting in the fiscal year 2009 (except the January 2009 conference call), the Board of Management reported on turnover and results in the Group. The Board of Management also gave further details on how business was running in each individual operating segment and reported on the financial situation. The Board of Management informed us regularly about the status of the Hartford investment, the U.S. life insurance business, Allianz Banking and the development of the credit insurance business at Euler Hermes and advised us of the status of major legal disputes.
In connection with the amendments to the German Stock Corporation Act brought about by the Accounting Law Modernisation Act, the Supervisory Board established that Dr. Humer (until December 31, 2009), Dr. Bernotat and Mr. Landau are to be considered independent and expert members of the audit committee, pursuant to § 100 (5) of the German Stock Corporation Act. At this meeting the Supervisory Board also discussed the succession of Dr. Humer,
On December 17, 2009 the Board of Management and the Supervisory Board issued our Declaration of Compliance in accordance with § 161 of the German Stock Corporation Act (Aktiengesetz). The Declaration was posted to the company website, where it is available to shareholders at all times. Allianz SE is in compliance with all recommendations of the June 18, 2009 version of the Government Commission German Corporate Governance Code.
Further explanations on Corporate Governance in the Allianz Group are available in the combined Board of Management and the Supervisory Board Statement on Corporate Management including the report on Corporate Governance beginning on page 10. The Allianz website at www.allianz.com/corporate-governance also contains further information on Corporate Governance.
In order to exercise its functions efficiently, the Supervisory Board has set up an Audit Committee, a Standing Committee, a Personnel Committee, a Risk Committee and a Nomination Committee. The committees prepare the discussion and adoption of resolutions in the plenary session. Furthermore, in appropriate cases, the authority to adopt resolutions has been delegated to the committees themselves. The Conciliation Committee no longer exists because the German Co-Determination Act (Mitbestimmungsgesetz), which provides for such a committee, does not apply to Allianz SE. The current members of these committees are set out in the following list.
Personnel Committee Dr. Henning Schulte-Noelle (Chairman) Dr. Gerhard Cromme Rolf Zimmermann
Standing Committee Dr. Henning Schulte-Noelle (Chairman) Dr. Gerhard Cromme Dr. Wulf H. Bernotat (since January 1, 2010) Dr. Franz B. Humer (until December 31, 2009) Karl Grimm Rolf Zimmermann
In the 2009 fiscal year, the Standing Committee held three regular meetings. These related primarily to Corporate Governance issues, preparation for the ordinary General Meeting, the employee share purchase program and review of the Supervisory Board’s efficiency. During the fiscal year, the committee passed resolutions requiring approval on the use of Authorized Capital 2006/II for the issue of employee shares as well as the granting of loans to managers and Board members.
In compliance with special provisions applying to insurance companies (§ 341 k (2) of the German Commercial Code), the statutory auditor and the auditor for the review of the half year financial report are appointed by the Supervisory Board of Allianz SE and not by the General Meeting. The Supervisory Board has appointed KPMG AG Wirtschaftsprüfungsgesellschaft, Munich, as statutory auditor for the annual accounts and the consolidated financial statements as well as for the review of the half year financial report. KPMG audited the financial statements of Allianz SE and Allianz Group as well as the respective management reports and issued an audit certificate thereon without any reservations. The consolidated financial statements were prepared in accordance with § 315 a of the German Commercial Code (Handelsgesetzbuch) on the basis of international financial reporting standards IFRS, as applied in the European Union. The half year financial report and the other quarterly financial statements were also reviewed by KPMG.
The final financial statements and KPMG auditor’s reports were examined on March 17, 2010 by the Audit Committee and in the Supervisory Board plenary session. The auditors took part in these discussions. They gave an account of the main findings of the audit and were available for any questions or further information.
Dr. Franz B. Humer resigned his position as shareholder representative on the Supervisory Board of Allianz SE effective December 31, 2009. We are grateful to Dr. Humer for his valuable contributions to the work of the Supervisory Board. By resolution of December 28, 2009, the local court (Amtsgericht) of Munich named Mr. Peter Sutherland, through to the end of 2009 Chairman of BP p.l.c., London, as Dr. Humer’s successor on the Supervisory Board until the next General Meeting. The Supervisory Board will nominate Mr. Sutherland for election to the Supervisory Board at the General Meeting in 2010. The current term of the Supervisory Board expires following the ordinary General Meeting in 2012.
Dr. Helmut Perlet stepped down from the Board of Management of Allianz SE on August 31, 2009 and has retired. The Supervisory Board expressed its gratitude to Dr. Perlet for his work. In his more than 36 years of involvement with the Allianz Group, Dr. Perlet has played a major role in shaping today’s Allianz. In addition, Mr. Jean-Philippe Thierry stepped down from the Board of Management of Allianz SE on December 31, 2009 and has retired. The Supervisory Board expressed its gratitude to Mr. Thierry for his achievements with the Allianz Group.
Dr. Gerhard Rupprecht will retire at the end of the year 2010. Dr. Werner Zedelius, currently responsible for Growth Markets, will take over Dr. Rupprecht‘s board responsibility for Germany, Switzerland and Austria on January 1, 2011. The Supervisory Board has appointed Mr. Manuel Bauer, who is currently responsible for the Allianz region Central and Eastern Europe, Middle East and North Africa, to the Board of Management as of January 1, 2011. Mr. Bauer is to assume responsibility for Growth Markets.
Statement on Corporate Management pursuant to § 289 a of the German Commercial Code (HGB) and Corporate Governance Report
The size of the Supervisory Board is stipulated in the Stat­ utes as twelve members appointed by the General Meeting. Six of these twelve members are appointed on the proposal of the employees. The General Meeting is bound to accept the proposals of the employees.
In accordance with the Agreement Concerning the Partici­ pation of Employees in Allianz SE, the seats for the six employee representatives are arranged in proportion to the number of Allianz employees in the EU member states. The Supervisory Board currently in office comprises four employee representatives from Germany and one each from France and the United Kingdom. The last election of the Supervisory Board took place in 2007 for a term until the end of the ordinary General Meeting in 2012.
The Board of Management’s committees, the Group Finance Committee, the Group Risk Committee and the Group Capi­ tal Committee, are made up of Board members. The task of the Group Finance Committee is the preparation and moni­ toring of the principles of the Group­wide investment policy as well as Group financing and intra­Group capital man­ agement. The Group Risk Committee is responsible for establishing and overseeing a Group­wide risk manage­ ment and risk monitoring system, including dynamic stress tests. The Group Capital Committee submits proposals to the Board of Management concerning risk strategy and the strategic asset allocation and risk allocation within the Group. Together with Boards of other Group companies, the Board has also formed the Compensation Committee and the International Executive Committee as permanent Group commissions. The Group commissions have the task of preparing decisions reserved for the entire Board of Man­ agement of Allianz SE, submitting proposals for resolutions and ensuring the exchange of information within the Group. The responsibilities and composition of the Board of Man­ agement Committees and the Group commissions are set out in the respective rules of procedure, which require the approval of the Board of Management.
The Board of Management reports regularly and compre­ hensively to the Supervisory Board on business develop­ ment, the financial position and earnings, budgeting and achievement of objectives, compliance issues, and on the strategy and existing risk exposure. Pursuant to the recom­ mendation of the German Corporate Governance Code, the Supervisory Board has issued a reporting order which more closely defines the information and reporting requirements of the Board of Management.
The Supervisory Board holds four regular meetings in March, in April or May, in September and in December. Additionally, extraordinary meetings may be convened as needed. The committees also hold regular meetings. The Supervisory Board takes all decisions based on a simple majority. The special decision requirements for the ap­ pointment of members to the Board of Management con­ tained in the German Co­Determination Act and the re­ quirement for a Conciliation Committee no longer apply to an SE. In the event of a tied vote, the casting vote lies with the chairman of the Supervisory Board. The chairman of the Supervisory Board of Allianz SE may only be a shareholder representative. In the event of a tied vote, if the chairman of the Supervisory Board is not present, the casting vote lies with the deputy chairperson from the shareholder side. Another deputy chairperson is elected on the proposal of the employee representatives, but he has no casting vote.
The Audit Committee has five members. Three members are nominated by the shareholders and two members are nominated by the employee representatives on the Super­ visory Board. The chairman of the committee is also elected by the Supervisory Board. The Audit Committee is respon­ sible for an initial review of the Company’s and the Group’s annual financial statements, management reports (includ­ ing the risk report) and the dividend proposal. In addition, it reviews the quarterly reports. The Audit Committee over­ sees the financial reporting process and the effectiveness of the internal control system, the risk management system and the internal audit system and deals with issues of compliance. Finally, the Audit Committee is an important contact for the external auditors, whose independence and additional services it also monitors.
Allianz follows the suggestion of the German Corporate Governance Code under which the chairperson of the Audit Committee is expected to be independent and should not be a former member of the Board of Management whose terms expired less than two years ago. Furthermore, at least one independent member of the Audit Committee must have expertise in the fields of accounting or auditing. The Supervisory Board has determined that Dr. Wulf H. Bernotat, Mr. Igor Landau and Dr. Franz B. Humer, who has left the Supervisory Board on December 31, 2009, meet these requirements. The Audit Committee has created rules of procedure which specify in greater detail the committee’s tasks and functions in coordination with the Supervisory Board’s rules of procedure.
The Standing Committee has five members that are elected by the Supervisory Board. Its members include the chair­ man of the Supervisory Board as well as two members nom­ inated by the shareholder side and two nominated by the employee side of the Supervisory Board. One of the mem­ bers nominated by the employee side to the Standing Com­ mittee shall be the Supervisory Board deputy chairperson that had been elected upon proposal of the employee side. The Chairman of the Supervisory Board also serves as chair­ man of this committee. The Standing Committee is respon­ sible for the approval of certain transactions that need to be approved by the Supervisory Board. These include, in par­ ticular, certain capital transactions and acquisitions or divestments. Furthermore, it is responsible for preparation of the Declaration of Compliance pursuant to § 161 of the German Stock Corporation Act (Aktiengesetz, AktG) as well as for the regular review of the Company’s Corporate Gover­ nance. It submits proposals for examining the efficiency of the Supervisory Board’s activities to the Supervisory Board plenary session.
The members of the Personnel Committee include the chairman of the Supervisory Board as well as one member each, elected by the Supervisory Board, upon nomination by the employee representatives and the shareholder repre­ sentatives of the Supervisory Board. The Chairman of the Super visory Board also serves as chairman of this committee. The Personnel Committee is responsible for personnel matters concerning members of the Board of Management
Statement on Corporate Management, Corporate Governance Report and Remuneration Report Allianz Group Annual Report 2009 as well as the preparation of the Supervisory Board’s plenary session in this area. It prepares the appointment of mem­ bers of the Board of Management as well as the decision of the plenary session on the remuneration system and the overall remuneration of the individual members of the Board of Management; it also submits proposals for resolutions to the plenary session. The committee is involved in the long­ term succession planning for the Board of Management.
In December 2007, in compliance with No. 5.3.3 of the German Corporate Governance Code, the Supervisory Board established a Nomination Committee comprising the chair­ man of the Supervisory Board and two other shareholder representatives elected by the shareholder side. The Chair­ man of the Supervisory Board also serves as chairman of this committee. The committee is responsible for drawing up selection criteria for shareholder representatives on the Supervisory Board, seeking suitable potential shareholder representatives for election and proposing them to the Supervisory Board for its election proposals to the General Meeting. In addition to the statutory requirements, the com­ mittee ensures compliance with the Code’s recommenda­ tions on the composition of the Supervisory Board and also monitors the diversity of its members.
The members of the Supervisory Board and its committees can be found on pages 7 and 30 of this report.
The SE works council exists to represent the interests of European Allianz employees. It currently consists of 34 employee representatives from 26 EU member states, signa­ tory states to the European Economic Area (EEA) and Swit­ zerland. The SE works council mainly has information and consultation rights regarding cross­border matters within Europe affecting Allianz Group. As such, the SE works coun­ cil is a company­wide representative body for European employees with special responsibility for cross­border mat­ ters within Europe affecting Allianz. Details of the SE works council are contained in the Agreement Concerning the Participation of Employees in Allianz SE dated September 20, 2006.
Shareholders exercise their rights in General Meetings. When adopting resolutions, each share grants one vote. To facilitate shareholders’ participation, we allow shareholders to follow General Meetings on the Internet and to be repre­ sented by proxies appointed by Allianz. The proxies ap­ pointed by Allianz exercise the voting rights exclusively on the basis of the instructions given by the shareholder. The option of voting by mail or online also exists. Allianz con­ stantly promotes the use of e­mail and Internet services.
In compliance with special provisions applying to insurance companies, the statutory auditor and the auditor for the review of the half year financial report are appointed by the Supervisory Board of Allianz SE and not by the General Meeting. The Supervisory Board’s Audit Committee carries out the preparatory work for the appointments. The statu­ tory audit of the financial statements covers the Company financial statements of Allianz SE and the consolidated financial statements of the Allianz Group.
To ensure maximum transparency, we inform our share­ holders, financial analysts, media and the general public regularly about the Company’s situation. The financial statements of Allianz SE and the Allianz Group’s consoli­ dated financial statements and management reports are published within 90 days after the end of each financial year. In addition, half year financial report and the quarterly financial reports of the Allianz Group provide information to shareholders and third parties. The half year financial report and the quarterly financial reports are subject to a review by the auditor. Information is also made available at the General Meeting, in press conferences and analysts’ con­ ferences, as well as on the website of the Allianz Group. The Allianz website also provides access to a financial calendar that lists the dates of major publications and events such as annual reports, quarterly reports and general meetings.
Statement on Corporate Management – Allianz Compliance and Anti-Money Laundering Program
On December 17, 2009, the Board of Management and the Supervisory Board issued the Declaration of Compliance of Allianz SE with the German Corporate Governance Code as follows: “Declaration by the Board of Management and the Super­ visory Board of Allianz SE on the recommendations of the Government Commission on the German Corporate Gover­ nance Code in accordance with § 161 of the German Stock Corporation Act (AktG)
2. Since the last Declaration of Compliance dated Decem­ ber 18, 2008, which referred to the German Corporate Governance Code in its June 6, 2008 version, Allianz SE has complied with all recommendations made by the Government Commission on the German Corporate Governance Code then in force.
Furthermore, we also comply with all voluntary recommen­ dations of the German Corporate Governance Code.
Following the delisting of the Allianz shares from the New York Stock Exchange (NYSE) on October 26, 2009 and our deregistration with the U.S. Securities and Exchange Com­ mission that took effect on January 29, 2010, we are no longer subject to those U.S. corporate governance rules for foreign issuers that are connected to a listing on the U.S. exchanges.
Nevertheless, we will largely maintain these standards, which we introduced in previous financial years. The inter­ nal control system in the area of financial reporting will continue to be comprehensively documented and regularly reviewed for effectiveness.
The Disclosure Committees established at the level of man­ agement of Allianz SE and of major Group companies will continue to carry out their defined tasks. In the Disclosure Committee of Allianz SE, the heads of relevant departments review and discuss the draft financial statements. The Dis­ closure Committee thus supports the Board of Management in financial reporting and the submission of the Responsi­ bility Statement.
Shares held by Members of the Supervisory Board and Board of Management
The total holdings of members of the Board of Management and the Supervisory Board in Allianz SE as at December 31, 2009 amounted to less than 1 % of the Company’s issued stock.
All information provided is part of the Group Management Report. It was prepared in accordance with the requirements of the German Commercial Code (HGB) and International Financial Reporting Standards (IFRS). It also takes account of the recommendations of the German Corporate Gover­ nance Code.
The remuneration of the Board of Management and senior executives is designed to be competitive for Allianz’ scope of business activities, operating environment, and per­ formance relative to peers. The remuneration program’s overall goal is to support and encourage sustained value­ oriented management.
Strategic principles: • The total remuneration is designed to be appropriate to attract and retain highly qualified executives. Its compo­ sition and the proportions of fixed versus performance­ based remunerations vary with different levels of respon­ sibility. Generally, as an executive’s influence on the results of the Group/business division/operating entity increases, the proportion of remuneration “at risk” rises, as well as that linked to longer­term performance.
• Performance­based remuneration is awarded for achiev­ ing the Allianz Group’s financial and strategic goals consistent with shareholder interests. The goals measure quantitative and qualitative business results as well as behaviors such as the role modeling of the Allianz Leader ship Values and compliance with the Code of Conduct.
The remuneration of the Board of Management is set by the Supervisory Board. Its structure is regularly reviewed and discussed. The last review was carried out in December 2009 and resulted in certain adjustments, effective from January 1, 2010, as described later in this report.
The Supervisory Board reviews the goals regularly to ensure they remain appropriate in the context of the strategic priorities of the Group.
Three-year bonus (mid-term) The mid­term bonus plan aims to make a sustained in­ crease in the value of the company a priority concern of executive management across the Group. Bonus payouts under the plan depend on the attainment of financial and strategic goals over the defined three­year performance period. Performance is assessed and, if appropriate, a mid­ term bonus paid after the completion of the three­year performance period. Certain exceptions apply, for example in the event of retirement. The Supervisory Board sets the target mid­term bonus for members of the Board of Man­ agement. For the 2007 to 2009 plan, it amounts to approxi­ mately 128 % of the 2007 base salary over the three­year performance period. The maximum bonus achievable is capped at 140 % of the target mid­term bonus.
Equity-related remuneration (long-term) The Allianz Group Equity Incentive (GEI) program consists of virtual stock options, known as Stock Appreciation Rights (SAR) and virtual stock awards, known as Restricted Stock Units (RSU).
The Supervisory Board decides annually on the offer of any long­term incentives and the appropriate allocation to each member of the Board of Management. The number of SAR and RSU awarded is based on each Board Member’s desig­ nated role, the performance of the Group and, where appli­ cable, that of their respective business division. The calcula­ tion basis for the annual GEI grant cannot exceed the sum of base salary and annual target bonus.
The RSU have a five­year vesting period, at the end of which they are automatically released.
Pensions and similar benefits Until 2004, pension arrangements for members of the Board of Management yielded fixed amounts. This means retire­ ment benefits were not linked to increases in salary or vari­ able pay. Allianz SE introduced a contribution­based system effective January 1, 2005, with the accrued pension rights under the old plan frozen at that time. The minimum guar­ anteed interest rate on contributions amounts to 2.75 % per annum. Should the net annual return from the invested contribution exceed 2.75 %, the full increase in value is credited to the members in the same year.
The Supervisory Board reviews the level of contributions annually. In recognition of market norms the Supervisory Board decided on an adjustment of the rate of pension contributions to recognize long tenure on the Board with effect from January 1, 2009. Therefore, the regular pension contribution increases from currently 30 % to 37.5 % of fixed salary after five years and to 45 % after ten years of service on the Board of Management of Allianz SE.
Contributions are guaranteed only as required for the fur­ ther regular financing of the accrued pension rights from defined benefit promises per December 31, 2004. In case of an insured event, the accumulated capital is converted to an equivalent annuity payable until death of the plan par­ ticipant or, where applicable, to dependents. The increase in reserves for pensions (i.e. current service cost) includes the required expenditures for the further financing of accrued pension rights as well as the contributions for the new plan.
A pension can earliest be received from age 60, except for cases of occupational or general disability for medical rea­ sons, when a pension may become payable earlier­on, or death, when a pension may be paid to dependents. If a man­ date ends before retirement age for other reasons, a pension promise is maintained when vesting requirements are met.
Miscellaneous Members of the Board of Management also receive certain perquisites. These mainly consist of contributions to acci­ dent and liability insurances and the provision of a com­ pany car. Each member of the Board of Management is responsible for income tax on these perquisites. Where applicable, a travel allowance for non­resident Board Mem­ bers is provided. For 2009 the total value of the perquisites amounted to € 0.6 million (2008: € 0.7 million).
1) Broad range reflects travel allowances for non-German resident Board Members. 2) Actual bonus paid in 2010 for fiscal year 2009. 3) Three-year bonus tranche accrued for 2009 for each member. 4) The new remuneration structure and the target variable remuneration effective January 1, 2010 (see page 23) were confirmed to Board members via their new contracts dated and signed on December 9, 2009. Therefore, the SAR and RSU 2010 are deemed to have been granted to participants as part of their 2009 remuneration. Consequently, the remuneration table includes the SAR and RSU granted on March 12, 2009 as well as a best estimation of the SAR and RSU grants delivered in March 2010.
6) Dr. Helmut Perlet retired from the Board of Management of Allianz SE on August 31, 2009. Therefore, amounts given here are pro-rata. As required by the terms of his service contract, Dr. Perlet received a transition payment for a period of six months after termination of service calculated on the basis of his fixed salary and a proportion of the annual target bonus. The monthly transition payment was reduced by pension payments made during this period. His pro-rata annual bonus for 2009 awarded as part of his transition payment amounts to € 525,000 and will be paid in March 2010.
Three­year bonus payouts per member of the Board of Management as well as their corresponding adjusted total remuneration amounts (in parentheses) for the year 2009 are as follows: Michael Diekmann € 1,040 (5,604) thousand, Dr. Paul Achleitner € 680 (3,749) thousand, Oliver Bäte € 450 (3,118) thousand, Clement B. Booth € 787 (3,698) thousand, Enrico Cucchiani € 714 (3,421) thousand, Dr. Joachim Faber € 738 (3,751) thousand, Dr. Christof Mascher € 62 (1,004) thousand, Dr. Helmut Perlet € 629 (2,059) thousand, Dr. Gerhard Rupprecht € 675 (3,338) thousand, Jean­Philippe Thierry € 579 (2,507) thousand, Dr. Herbert Walter € 200 (238) thousand, Dr. Werner Zedelius € 723 (4,002) thousand.
The GEI is accounted for as a cash-settled plan. Any changes in fair value of the grants are accrued as compensation expense over the relevant vesting period. Upon vesting, any changes in the fair value of the unexercised SAR are recognized as compensation expense. The GEI compensation expense in 2009 amounted to € 10,026 thou, for Mr. Diekmann € 1,302 thou, for Dr. Achleitner € 913 thou, for Mr. Bäte € 294 thou, for Mr. Booth € 560 thou, for Mr. Cucchiani € 864 thou, for Dr. Faber € 903 thou, for Dr. Mascher € 389 thou, for Dr. Perlet € 711 thou, for Dr. Rupprecht € 863 thou, for Mr. Thierry € 335 thou, for Dr. Walter € 1,873 thou and for Dr. Zedelius € 1,018 thou. SAR are released to plan participants upon expiry of the vesting period, assuming all other exercise hurdles are taken. For SAR granted until and including 2008, the vesting period was two years. For SAR granted from 2009, the company has extended vesting to four years. SAR can be exercised on the condition that the price of the Allianz SE stock is at least 20 % above their strike price at time of grant. Also, the price of the Allianz SE stock must have exceeded the Dow Jones EURO STOXX Price Index (600) over a period of five consecutive trading days at least once during the plan period. RSU are released to plan participants on the first trading day after the end of the five-year vesting period. 1) The new remuneration structure and the target variable remuneration effective January 1, 2010 (see page 23) were confirmed to Board members via their new contracts dated and signed on December 9, 2009. Therefore, the SAR and RSU 2010 are deemed to have been granted to participants as part of their 2009 remuneration. Consequently, the remuneration table includes the SAR and RSU granted on March 12, 2009 as well as a best estimation of the SAR and RSU grants delivered in March 2010.
Allianz Group paid € 4 million (2008: € 4 million) to increase reserves for pensions and similar benefits for active mem­ bers of the Board of Management. On December 31, 2009, reserves for pensions and similar benefits for members of the Board of Management active at that date, amounted to € 28 million (2008: € 29 million).
In 2009, remuneration and other benefits totaling € 4 mil­ lion (2008: € 7 million) were paid to retired members of the Board of Management and dependents. Additionally, reserves for current pensions and accrued pension rights totaled € 52 million (2008: € 47 million).
Termination of service Board Members leaving the Allianz SE Board after serving a term of at least five years are entitled to a six­month transi­ tion payment. The payment is calculated based on the fixed salary and a proportion of the annual target bonus. An Allianz pension, where immediately payable, is taken into account.
Statement on Corporate Management, Corporate Governance Report and Remuneration Report Allianz Group Annual Report 2009 the lump­sum payment in respect of fixed salary and an­ nual bonus is increased to correspond to a term of three years. If the member reaches the age of 60 before the three years have elapsed, the lump­sum payment decreases cor­ respondingly. For the equity­based remuneration the mem­ ber is treated as having retired. These regulations are also effective if the Board of Management mandate is not ex­ tended within two years after the change of control.
For other cases of early termination of appointment to the Board of Management, service contracts do not contain any special rules.
Allianz SE complies with the provisions of rule 4.2.3 sections 4 and 5 of the German Corporate Governance Code setting out suggestions on severance payment caps in case of pre­ mature termination of Board of Management contracts without serious cause. Thus, our service contracts provide that payments for early termination shall neither exceed the value of two times annual compensation, nor the pay­ ments due for the remaining term of the contract. For this purpose, the annual compensation is defined as the remu­ neration paid in the previous year with any mid­term bonus being calculated on a pro­rata basis (severance payment cap). In case of early termination due to a change of control, pay­ ments shall not exceed 150 % of the severance payment cap.
New Remuneration System for the Board of Management effective January 1, 2010 The remuneration system for the members of the Board of Management was reviewed by the Supervisory Board last year on the basis of the new regulations on board remu­ neration in force since August 2009. The structure of the performance­related remuneration was adjusted taking into particular account the aspect of sustainability. In addition, certain changes to the target structure for the performance­based remuneration were decided. With the approval of all members of the Board of Management, these adjustments were implemented through amendment of service contracts with effect from January 1, 2010. This ensures the uniformity of the remuneration structure.
The total remuneration consists of fixed and performance­ related remuneration, with the ratio of the annual fixed to target variable remuneration remaining at 25:75. The key components of the performance­related remuneration are retained; its composition, however, has been amended compared to the previous year in the interest of a stronger alignment with the long­term success of the company. Under the new system, the variable target remuneration consists of the following components in equal parts: a per­ formance­related cash payment after one year (annual bonus), a performance­related cash payment after three years (three­year bonus) and an equity­related award (pay­ out after five years). This strengthens the remuneration element that is based on a multiple­year performance as­ sessment (three­year bonus) at the expense of the annual bonus. The level of the fixed remuneration and the total performance­related target remuneration remain un­ changed compared to the previous year.
Each year, the Supervisory Board agrees performance goals (targets) for the variable remuneration with the members of the Board of Management. These are documented in a target letter (performance contract) which sets out the quantitative and qualitative targets for the upcoming finan­ cial year and, every three years, for a three­year period. The general conditions for the variable remuneration compo­ nents are set forth in the globally applicable rules of the Allianz Sustained Performance Plan (ASPP).
1) All members of the Board of Management except Dr. Achleitner (remuneration target € 3,200) and the Chairperson.
The maximum target achievement for the variable remu­ neration is limited to 165 % (cap). Thus, the Supervisory Board can set the performance­related remuneration based on its assessment of the corresponding target achievement in the range of 0 % to a maximum of 165 % of target variable remuneration. Additionally, the increase in value of the RSU is limited to a maximum of 200 % of the share price at grant.
The target structure for the performance­related remu­ neration was also realigned and the target­setting process simplified. Quantitative and qualitative targets are set for the measurement of performance of the annual bonus. The quantitative targets consist of Group targets, weighted at 50 %, and targets for the business division or corporate center function within the responsibility of the respective Board member, weighted at 25 %.
Annual targets for the Group are based on consolidated operating profit and consolidated net income for the re­ spective financial year; prior year reference to Economic Value Added (EVA®) is omitted. Annual quantitative targets for the business divisions are based on operating profit. For each corporate center, relevant functional targets, e.g. for the solvency ratio or investment results, are set.
For the three­year bonus, quantitative three­year targets focus on portfolio development, as measured by growth and profit. At Group level, reference is made to the average growth rate in the three­year performance period and the return on capital, based on the consolidated operating profit and consolidated net income for the last financial year within this three­year period. The assessment of the business divisions’ business development is made on the basis of their average growth over 2010 to 2012 as well as the return on capital, based on operating profit.
The Supervisory Board assesses the target achievement on the basis of the set three­year­targets and qualitative sus­ tainability criteria.
December 21, 2009 which implements in Germany the remuneration standards for the financial sector developed by the Financial Stability Board (FSB) for the G20 member states.
Below the Board of Management, the same general Allianz governance standards and best practice guidelines to determining executive remuneration apply.
The amount of equity-related remuneration depends on the sustained performance of the Allianz SE stock over the fouryear period from RSU grant date until expiry of the vesting period.
The entitlement to a transition payment for the first six months after leaving the Board of Management after having served a term of at least five years does not apply to new appointments from January 1, 2010 onwards. For existing service contracts, a six month non-compete clause has been added to the provisions governing the transition payment.
The remuneration system complies with both the new statutory requirements as well as the remuneration circular of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) dated
Target categories for performance-based cash remuneration (2010 annual targets and three-year targets for 2010 to 2012)
Basis at Group level: 2010 – 2012 average growth 2012 return on capital (based on operating profit and net income)
• Profitable growth • Strengthening of competitiveness • Development of market management
(including e. g. addressing the sales channel conflicts, increasing the focus on younger customer segments and continued profitable customer base growth)
Allianz Group Annual Report 2009 Statement on Corporate Management, Corporate Governance Report and Remuneration Report
Allianz’ global governance frameworks and minimum standards are centrally managed. This ensures global con­ sistency and allows for timely updates to reflect changing business needs and evolving regulatory requirements. It also allows for continuous improvement in sustainable performance management and exemplary governance principles.
Executives below the Board of Management are more directly responsible for specific lines of business or product groups. Likewise, their remuneration is more closely aligned with their specific country or regional business operating envi­ ronments. Consequently, there is a higher degree of variation in remuneration practices and levels. However, the same principles and general structure described for the Board of Management apply here as well.
Additionally, depending on the specific market, Allianz operates a number of pension and flexible benefit plan solutions, particularly also deferred compensation schemes which may help enhance participants’ retirement income.
The 2009 group­wide ratio of fixed versus performance­ based remuneration at target for senior executives who may assume positions of high risk in the sense of the above­ mentioned BaFin Circular (including the Allianz SE Board of Management) is approximately 49 % : 51 %.
Statement on Corporate Management, Corporate Governance Report and Remuneration Report Allianz Group Annual Report 2009
The structure of the remuneration of the Supervisory Board complies with the German Corporate Governance Code. Its members receive fixed as well as performance­based remu­ neration, also reflecting the long­term performance of the business. The performance­based remuneration uses earn­ ings­per­share as a performance measure, which is both appropriate and effective.
• Total remuneration is set at an appropriate level based on the scale and scope of the Supervisory Board mem­ bers’ duties and responsibilities and on the Company’s activities, business and financial situation.
• Balance is maintained between fixed remuneration and short­term and long­term performance based compo­ nents in order to adhere to the principles of neutrality and independence of the Supervisory Board members while at the same time providing adequate performance incentives.
• Remuneration conforms to the individual functions and responsibilities of the Supervisory Board members such as chair or vice­chair or committee mandates.
The basic remuneration is made up of fixed remuneration and two performance­based components. Chairperson, Deputy Chairpersons and/or committee Chairpersons or members receive additional remuneration as described later in this section.
The maximum possible remuneration (excluding atten­ dance fees) for the year 2009 amounted to € 222,000 for the Chairman of the Supervisory Board, and to € 148,000 for the other Supervisory Board members.
The total remuneration for the Supervisory Board members, including attendance fees, amounted to € 1,491,086 in 2009, compared to € 1,080,000 in 2008. Accordingly, the average annual remuneration for the Supervisory Board members increased to € 123,400 (2008: € 90,000). No performance­ based remuneration was awarded for 2008.
The following table sets out the individual remuneration for the Supervisory Board for 2009. Previous year figures are shown for reasons of transparency.
Board of Allianz SE. When granted, these loans are provided at standard market conditions or on the same conditions that apply to employees. Overdraft facilities are granted to members of the Board of Management and Supervisory Board as part of existing account relationships, again in line with standard market conditions or those applied to employ­ ees. These overdrafts are made in the ordinary course of business on terms comparable to loans and overdrafts made available to individuals in peer groups. They do not involve any more than normal risks threatening repayment and do not present any other unfavorable features. Loans and over­ drafts to members of the Board of Management are set ac­ cording to the conditions prevailing for Allianz employees.
Loans to members of the Board of Management and Supervisory Board On the date of balance (December 31, 2009), there were no outstanding loans granted by Allianz Group companies to members of the Board of Management and Supervisory
Dr. Henning Schulte-Noelle Chairman Former Chairman of the Board of Management, Allianz AG
Rolf Zimmermann Vice Chairman since March 11, 2009 Employee, Allianz Deutschland AG
Dr. Franz B. Humer until December 31, 2009 President of the Administrative Board, F. Hoffmann-La Roche AG
Oliver Bäte Chief Operating Officer until September 9, 2009 Controlling, Reporting, Risk since September 1, 2009
Enrico Cucchiani Insurance Europe I (South Europe & South America) until December 31, 2009 Insurance Europe (& South America) since January 1, 2010
Dr. Gerhard Rupprecht Insurance German Speaking Countries Director responsible for Work and Social Welfare
International Executive Committee Allianz Group Annual Report 2009 15 Jacques Richier, Allianz France, Paris 16 Michael E. LaRocco, Fireman’s Fund Insurance Company, Novato 17 Ulrich Rumm, Allianz Deutschland AG, Munich 18 Werner Zedelius, Allianz SE, Munich 19 Bruce Bowers, Allianz Asia Pacific, Singapore 20 Axel Theis, Allianz Global Corporate & Specialty, Munich 21 Vicente Tardío Barutel, Allianz Companía de Seguros y Reaseguros, Barcelona 22 Massimo Michaud, Allianz S.p.A., Milan 23 Michael Diekmann, Allianz SE, Munich 24 Wolfram Littich, Allianz Elementar, Vienna 25 Enrico Cucchiani, Allianz SE, Munich 26 Kamesh Goyal, Bajaj Allianz Life, Pune 27 Andrew Torrance, Allianz Insurance PLC, London 28 Joachim Faber, Allianz SE, Munich 29 Clemens von Weichs, Allianz Re, Munich
40 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Thomson Reuters Datastream Up-to-date information on the development of the Allianz share price is available at www.allianz.com/share.
Insurance stocks were weaker than broad-based indices, as the creditworthiness of some countries was viewed with considerable scepticism in the final quarter. Insurers, as major investors, were hurt by this development. As a result, the STOXX Europe 600 Insurance was up just 12.9 %, while the Allianz share price increased by 16.2 % to € 87.15 as it got a significant boost in the last weeks of trading from the release of our third-quarter results. The majority of analysts polled by Bloomberg take a positive view of our share. Upon publication of the results for the fiscal year 2009 two-thirds of analysts recommended buying the Allianz share. The average target price was € 99.
Allianz (excluding dividends) 16.2 (2.2) (11.6) Allianz (including dividends) 22.0 0.7 (9.7)
Number of shares outstanding as of 12/31 453,900,000 453,050,000 450,150,000 Weighted number of shares outstanding 450,845,024 450,161,145 442,544,977 Share price as of 12/31 € 87.15 75.00 147.95 High of the year € 88.36 145.92 178.64 Low of the year € 48.68 46.64 133.92 Share price performance in the year % 16.2 (49.3) (4.4) Market capitalization as of 12/31 € bn 39.6 34.0 66.6 Average number of shares traded per day (Xetra) mn 3.0 4.9 4.1
Basic earnings per share € 9.53 (5.43) 18.00 Price-earnings ratio 9.1 — 8.2
During 2009, the market capitalization of Allianz increased by more than € 5 billion to € 39.6 billion. This makes our company one of the most highly valued financial services providers in the world. The company’s strength and the strength of its share are reflected in the weighting of Allianz shares in the major German, European and world indices. Allianz is number one among the 35 insurers represented in the STOXX Europe 600 Insurance. At year-end 2009 our shares had a weighting of 14 % in this index. We are also among the top companies in the MSCI World Financials index.
Our holistic entrepreneurial approach has long been recognized and has resulted in our stock’s inclusion in major sustainability indices, including the Dow Jones Sustainability Index and the FTSE4Good. This is testimony to the attractiveness of Allianz shares for investors taking a socially responsible approach to investment. Please visit www.allianz.com/sustainability for more information on the topic of sustainability or read about it in our chapter “Allianz Group Profile” on page 55 in this Annual Report.
In order to concentrate on the most liquid market, we decided to delist from the European exchanges in London, Paris, Milan as well as the Swiss Exchange. Listings were discontinued at the end of 2009 and the beginning of 2010, respectively. Allianz also discontinued its listing on the New York Stock Exchange (NYSE). Since its withdrawal from the NYSE on October 26, 2009, Allianz has continued its American Depositary Receipt (ADR) program in the U.S. over-thecounter market and is listed on the OTCQX trading platform, the premium sector for OTC trades. Allianz shares continue to be traded on all German exchanges and on Xetra.
With around 485,000 shareholders Allianz is one of the largest publicly owned corporations in Europe. All of our shares continue to be held in free float. At the end of the year, 85 % were held by institutional investors and 15 % by private investors. The breakdown by country shows that 32 % of Allianz shares were held by German investors, while 68 % were held by non-German investors. The number of shareholders rose by about 11,000 compared to the previous year, an increase of 2 %.
Regional breakdown as of December 31, 2009 in % of subscribed capital
Our Annual General Meeting for the financial year 2008 was held on April 29, 2009 in Munich. Although presence at shareholder meetings of the DAX 30 companies decreased in 2009, it rose at the Allianz Annual General Meeting by 0.5 percentage points to 40.7 % of the subscribed capital. Of this, 27.5 % were investors from outside of Germany and 13.2 % were shareholders domiciled in Germany.
Presence at the Annual General Meeting in % of subscribed capital 1) Extraordinary General Meeting.
Communication with investors is very important to us. In the year under review, we visited institutional investors in 29 cities in Europe, Asia, the U.S. and Canada during our roadshows. We allocated 45 days to this exchange about our strategy and about our business in a changed environment. This gave many investors the opportunity to clarify outstanding questions in personal meetings with members of the Board of Management or our Investor Relations team. We held roadshows in Beijing, Shanghai, Helsinki and Lisbon for the first time and made new contacts there. Including discussions held at our Munich headquarters, we met with analysts and institutional investors a total of 386 times during the year under review.
Our annual analysts’ conference and the teleconferences on our quarterly results attracted considerable interest once again. We also made presentations about Allianz and its strategy at ten investor conferences.
Our dialogue with private shareholders is another key component of our Investor Relations work. The number of inquiries we processed from this group of investors was around 8,500, approximately at the same level as in the previous year.
• Please visit www.allianz.com/investor-relations for up-to-date information on the performance of the Allianz Group and the Allianz share. We broadcast all our analysts’ conferences live and make them available as recordings and podcasts afterwards.
• You can access Investor Relations releases on a number of different communication channels. Please subscribe to receive our newsletter, RSS Newsfeed or SMS service at www.allianz.com/services.
• To learn about our wide range of services for the Annual General Meeting, please visit www.allianz.com/agm. You can also register there to receive your invitation conveniently via e-mail in the future rather than by post. You can also order your ticket to the Annual General Meeting online and, if you wish, print it yourself. These time-saving and environmentally friendly services were in strong demand in recent years.
Our Allianz Investor Line is available for telephone inquiries from 8 a.m. to 8 p.m. CET Monday to Friday.
Hong Kong. Just one of our investment centers. The Hong Kong stock market is about to open. It is followed a few hours later by Frankfurt, then New York. The 5,000 Allianz Global Investors employees manage a total of € 1.2 trillion. They work in a global network that combines local capital market expertise with a global knowledge of asset management. As a network, they are always open for business. When the trading day ends at one exchange, it’s already under way again somewhere else.
Group Management Report 120 Property-Casualty Insurance Operations 120 Earnings Summary 126 Property-Casualty Operations by Business Division 128 Life/Health Insurance Operations 128 Earnings Summary 132 Life/Health Operations by Business Division 134 Asset Management 134 Assets under Management 135 Earnings Summary 138 Corporate and Other 138 Earnings Summary Holding & Treasury 139 Earnings Summary Banking 139 Earnings Summary Alternative Investments 146 Reconciliations 146 Reconciliation of Income from Continuing Operations before Income Taxes to Operating Profit 148 Composition of Total Revenues 148 Composition of Total Revenue Growth 149 Balance Sheet Review 149 Shareholders’ Equity 149 Regulatory Capital Adequacy 150 Total Assets and Total Liabilities 158 Off-Balance Sheet Arrangements 159 Property-Casualty Insurance Reserves 171 Liquidity and Funding Resources 171 Organization 171 Liquidity Resources 173 Strategic Funding 173 Debt Funding Costs 176 Allianz Group Consolidated Cash Flows 178 Risk Report 178 Turbulent Markets in 2009 178 Allianz Risk Management Framework 179 Risk Governance Structure 181 Internal Risk Capital Framework 185 Capital Management 188 Concentration of Risks 189 Market Risk 191 Credit Risk 194 Underwriting Risk 197 Business Risk 198 Other Risks 200 Protecting the Value of Allianz in Times of Crisis 201 Assessment of the Overall Risk Profile 202 Disclosures relating to Financial Instruments 202 Risk Management Priorities for 2010
As an integrated and globally operating financial services provider, we own strong and well-known brands which offer our clients value by providing a wide range of insurance and financial products, as well as an extensive advisory capacity, through our multi-channel distribution structures. We consider ourselves well-positioned to anticipate and successfully respond to competitive forces affecting our various operations.
• Allianz is active in more than 70 countries, with over 80 % of Allianz branded turnover.
Our brand management process includes strategy setting, brand positioning, brand building and brand monitoring.
As part of our Customer Focus activities we have globally established key tools such as Net Promoter Score (NPS) and Complaint Management to continuously listen to our customers, identify their needs, learn from them and act accordingly.
We have two main ways of using NPS in Allianz: Firstly we benchmark ourselves on customer loyalty every year against competitors within each market. In 2009 this was done in 57 regional markets worldwide. Management commitment to customer orientation is underlined by the fact that CEO targets include the achievement of relative NPS improvement towards loyalty leadership.
In addition, we started to use NPS to measure the satisfaction of our distributors to ensure they are fully enabled to serve our customers according to their needs.
In 2009, our focus in Human Resources (HR) was on: • adopting the principles of the new Target Operating Model (TOM) in the HR function, while supporting the implementation of TOM in our operating entities
• substantially strengthening our efforts as a preferred employer internally and externally
The objective of our Allianz Talent Management initiative is to systematically ensure that, when required, we have the right talent in the right place to meet our current and future business challenges.
The incentive structure is designed to optimally balance risk and opportunity in different performance scenarios and business circumstances. Respective maximum achievement levels (“caps”) apply to all of these instruments.
Allianz continues to offer flexible benefit solutions, particularly deferred compensation schemes, in numerous countries. Equally, Allianz offers flexible working arrangements, part-time employment, medical care for employees’ families, childcare and even permanent sports facilities in a number of locations. For legal, market and cultural reasons, the package of employee benefits we offer is determined locally and thus varies between countries and companies.
As in prior years, we again offered a global Employee Stock Purchase Plan in 2009 which, subject to certain conditions, provides eligible employees with an opportunity to acquire Allianz SE shares at preferential terms. The program aims to promote share ownership amongst employees, and to increase their financial awareness and interest in the company ’s strategy and performance. Around 92,000 employees in 21 countries were eligible to participate in the global Employee Stock Purchase Plan. Around 16,000 employees accepted the offer. Allianz employees in total represent 8.19 % of our shareholders and own 1.09 % of Allianz shares.
For our senior leadership, we continued to offer our Group Equity Incentives program. Approximately 700 top managers and future leaders worldwide participated in the Group Equity Incentives program in 2009. For more detail, including the report on the remuneration of the members of the Board of Management, please see our Remuneration Report on pages 17 to 26.
Allianz Group Profile Group Management Report Allianz Group Annual Report 2009
In Germany, notably, new Allianz employer-branding campaigns by our domestic insurance companies resulted in a strong improvement in all significant rankings marked by an award publicly recognizing Allianz as a top company in “Best Brand Campaigns and Best Employer Websites” (DAPM-Awards 2009).
• common accessibility standards (buildings, websites, workstations including ergonomics) in order to create workplaces that welcome and integrate people with disabilities
• careers in sales for pensioners (selected companies such as Allianz Portugal)
Allianz Group Annual Report 2009 Group Management Report Allianz Group Profile
Investing in Learning and Development Supporting the activities to nurture and grow our talent base is our Allianz Management Institute (AMI). Founded in 1999 the AMI just celebrated its 10th anniversary and was reaccredited by the European Foundation for Management Development (EFMD) with its prestigious CLIP (Corporate Learning Improvement Process) award for corporate universities. AMI provides a consistent business orientation and capability training for leadership at a global (AMI Group) as well as regional and local levels via so-called Academies or equivalent. A total of 5,542 1) leaders and high potentials participated in training via the AMI academies in 2009, representing a 14 % growth over 2008 (4,860 participants). In 2009, the AMI network grew to incorporate training and development activities through five academies: AMI Group, AMI Germany, AMI Asia, AMI AGCS Academy, AMI OPEX Academy. Programs offered by the flagship academy, AMI Group, increased from 20 to 36, serving all together 644 participants.
We have continued to implement OPEX (Operational Excellence ), the Allianz version of ‘Six Sigma’, as a core tool in support of our various transformation programs. OPEX aims at substantially increasing process efficiency while at the same time improving customer service capability. OPEX is founded on systematic training and certification activities. In 2009, we had 4,295 staff trained as OPEX Blue Belts (first level qualification), and 907 trained as Black Belts (advanced level).
Engaged employees Employee engagement, at leadership and staff levels alike, is a key success factor for achieving our business targets and for enhancing our customer focus ability. While engagement is positively affected by all of the measures above, measuring and monitoring engagement trends is crucial to planning the proper activities to further improve skills and morale.
To complement the managers’ views with those of the general workforce, we have also again conducted a global Employee Engagement Survey, expanding the scope to 39 companies (up from 24 in 2008). Again, the high participation rate (79 %) confirms the importance of this measure. The results of both surveys show a high degree of commonly shared perceptions of our corporate culture. All companies are charged with turning their respective results into concrete action plans to address specific employee engagement issues.
In Germany, Allianz Deutschland won the “InnoWard”, an award for special educational achievements, by the “Berufsbildungswerk der Deutschen Versicherungswirtschaft” (BWV – Institute for Professional Apprenticeship for the German Insurance Industry).
Allianz China Life won the “100 Best Human Resources Management Companies”, the “100 Best training companies”, as well as the “TOP 50 Work Place” award by China Business Journal.
In the UK, Euler Hermes, was presented the “Investors in People” award, a national recognition for excelling in their training efforts for employees.
Our Allianz Life Insurance company in Indonesia was the winner of the “Human Capital Index 2009 for the Financial Service Industry”, a leading national contest to determine the top employer of choice in the market.
Finally, Allianz Australia received the 2009 Employer of Choice for Women citation. This citation is available through the Equal Opportunity for Women in the Workplace Agency (EOWA), and is a public acknowledgement of organizations who support and advance women in the workplace.
Our product portfolio includes a wide array of propertycasualty and life/health insurance products for both private and corporate customers.
• Endowment • Annuity • Term • Disability • Investment-oriented products • Private health insurance
Our more mature insurance markets (e.g. Germany, France, Italy and the United States) are highly competitive. In recent years, we have also experienced increasing competition in emerging markets, as large insurance companies and other financial services providers from more developed countries have entered these markets to participate in their high growth potential. In addition, local institutions have become more experienced and have established strategic relationships, alliances or mergers with our competitors.
Business Operations and Steering The Allianz Group’s insurance and asset management businesses provide a comprehensive product range through multiple sales channels. We manage and steer our operations via four segments and ten divisions.
AIM is responsible for contributing to capital efficiency by maximizing risk adjusted investment return based on given risk limits and Group targets. Thus AIM covers three major tasks: • identifying the liability requirements by defining the possible risk free return
• developing and implementing the Group’s (strategic) asset allocation by defining the systematic risk taking (beta)
• driving tactical investment decision making as a basis for additional, skill-based returns (alpha)
Investment decisions are developed into asset management mandates. By this means, AIM is mandating and controlling asset managers but does not manage assets. They are organized in five regional investment hubs (Milan, Minneapolis, Munich, Paris and Singapore) to cover all major markets and time zones. Each of the hubs is headed by a regional
Chief Investment Officer (CIO). Every insurance entity belongs to a hub, its chief investment manager reports to the regional CIO. While AIM works very closely with the operating entities (several of the CIOs and chief investment managers being themselves members of local Boards), investment decision making and risk taking is driven in regular, formal committees organized by AIM.
We are one of the four largest active asset managers in the world. Total assets managed by our Asset Management operations as of December 31, 2009 were € 1,202 billion. 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.
Furthermore, we have expanded our engagement in China by increasing the participation in our joint venture, Guotai Allianz Finance Management. We have positioned ourselves in India with the creation of Bajaj Allianz Global Investors, a joint venture with Bajaj.
• Hedge fund of funds • Commodity funds • Certificate funds • Real estate • Structured products
Re ta il a nd in st itu tio na l c lie nt s
Our distribution channels vary by product and geographic market. In Europe and in the United States, AGI markets and services its institutional products through specialized operations and personnel. Retail products in Europe are mostly distributed through proprietary Allianz Group channels. In the United States, AGI’s local asset management operating entities also offer a wide range of retail products.
In the asset management business, competition for retail and institutional clients comes from all major international financial institutions and peer insurance companies offering asset management products and services.
From January 1, 2010, some responsibilities in the Board of Management changed: Europe I and Europe II were merged into Europe and Anglo Broker & NAFTA Markets/Global Lines was re-configured to form Anglo Broker Markets & Global Lines and NAFTA Markets. Furthermore the Assistance business (Mondial) was separated from Europe II and integrated into the Chief Operating Officer’s division.
To arrive at the normalized profit we smooth the impact of equity market fluctuations by basing our calculations on “normalized” long-term average returns.
Allianz Group Annual Report 2009 Group Management Report Business Operations and Steering
• maintain an orientation and competency that fits within the long-term strategy of the Allianz Group; and
All Allianz Group companies are responsible for generating a return on their risk capital that covers at least their cost of capital. Profits exceeding the cost of capital can be retained by the operating entities to finance further organic growth. That means, that our most profitable entities have direct access to considerable funds. If these funds are not required to finance their organic growth, they will be upstreamed to the holding company.
Based on the net income our EVA® after minority interests, reached € 1,757 million in 2009 (2008: € 2,783 million1)). The return on risk adjusted capital 2) in 2009 was 15.1 % (2008: 18.6 %1)).
As we look to the future, we remain concerned about the fragility of the economy, the excess liquidity and volatility in financial markets, the level of public debt, and the continuing soft cycle in the property-casualty markets. We will continue to steer Allianz through these challenging times, consistently following our strategy and adhering to our management priorities and fundamental principles. In doing so, we will position ourselves to benefit from the opportunities referred to below.
The rise of developing markets is another area of opportunity. Demand for financial products tends not to increase significantly until broad sections of the population have
A growing number of customers want to make their own decisions – and also have access to the information required to do so. By offering improved access to all Allianz products irrespective of the sales channel, we intend to make ourselves more attractive to precisely this growing group of individuals whose decisions are entirely selfdetermined.
For the next three years we have set the following priorities with the intention of delivering the “Best of Allianz ” at all times: 1. Become the partner of choice for all stakeholders 2. Drive profitable growth 3. Strengthen our competitiveness 4. Increase market and customer focus 5. Maintain capital management discipline
We can only continue to thrive if Allianz manages to balance the interests of all of our key stakeholders: customers, employees, investors and the public.
Only our investors provide us with the capital necessary to grow our businesses. In these times of high uncertainty we must strive not only to protect their investments but continue to provide attractive returns and dividends. This matters even more as, during the crisis, our industry as a whole has unduly suffered from a reduction in investors’ confidence. We are constantly monitoring investors’ sentiment and are striving to address their suggestions and concerns in a timely fashion. Our disclosure practices are constantly kept at a best practice level and our investor relations efforts have repeatedly been rated at the top of the class.
In property-casualty we will only grow where target margins can be achieved. But we will also work more aggressively across our distribution formats to increase sales productivity and customer retention. Adjusting management and sales incentives to more clearly reflect our aspiration to achieve continuous net growth in profitable clients will become a key success factor.
Across all our businesses and geographies we need to strengthen our ability to access new sources of profitable growth. Both in mature and developing markets our opportunities are and will remain plentiful, whether through helping to fund our growing pension deficits, providing state-of-the-art asset accumulation products or offering effective risk transfer solutions in an environment of decreasing financial security.
Building a truly customer-focused organization also calls for a higher level of efficiency and cost discipline. New technologies allow for better and more reliable customer service at lower costs. Allianz will continue adapting its business models, products and customer interactions accordingly. Hence we are going to accelerate our efforts to drive efficiencies, reduce complexity and leverage new web-based technology along the entire value chain in order to achieve productivity benchmarks.
In asset management we plan to accelerate business growth by further investing in distribution, risk management, technology, innovative products and solutions, also leveraging out strong life pensions know-how. Our competitive bar remains top quartile positions versus our peers in product quality, customer loyalty and shareholder return over a full market cycle.
We have created the foundations for Allianz to become a customer-centric organization through our customer focus and innovation programs. Going forward we are further strengthening our customer segmentation and the delivery of segment-specific offerings.
At all important points of contact, we are measuring the propensity of our customers and distribution partners to recommend our products and services to others. And we have been tying our frontline managers’ incentives to systematically improving the service experiences of our clients.
Furthermore, we are creating a channel architecture which allows customers and distribution partners to experience more targeted value propositions, service offerings and price positions which are easy to understand and consistently delivered.
Under the conditions of a “New Normal” economic regime we have continued to protect our net asset value and carefully balance cash generation and investment opportunities. Moreover, we are managing the transition to the new Solvency II framework. And we are leveraging this process to place state-of-the-art risk management technology into the hands of our business leaders for even better day-to-day decision making.
Finally, in order to reinforce these objectives we have tied managements’ qualitative and quantitative targets and incentives to these priorities and principles in a holistic and consistent way.
We achieve long term success by taking advantage of the major growth opportunities that present themselves to Allianz. The current environment is confirmation that the need for robust and highly ethical investment and insurance services will continue to grow strongly.
Via Mondial Assistance Group, we are the worldwide leader of travel insurance and assistance services, based on turnover1). Mondial Assistance is one of our fast growing entities, entering new markets and successfully developing highly sophisticated new products. Some services provided by Mondial are sold with our insurance products, thus enriching our global portfolio.
Selected markets motor/non-motor as % of total property-casualty gross premiums traditional/non-traditional as % of total life statutory premiums 2)
2) We define IFRS-premiums as “traditional” and deposits from insurance and investment contracts as “non-traditional”. This applies also for the following pages. 3) Customer figures are not directly comparable to financial figures. In addition, Country specifics are excluded (e. g. Microinsurance Clients, Pension Funds Clients and Pet Plan Clients). This applies also for the following pages.
Through Allianz Private Kranken, we provide a wide range of health insurance products, including full private health care coverage, supplementary health and care insurance as well as foreign travel medical insurance. Our health insurance business with its two basic products – full health care coverage and supplementary insurance – will be impacted by the German health care reform in the coming years. We expect the demand for full health care coverage to grow slightly. However, we believe that supplementary insurance
For us, globalization is more than just a buzzword; it is rooted in the reality of our day-to-day business. We are confident that we can best strengthen and build upon our market position in established markets, and participate in rapid growth in the emerging markets, by adhering to high standards worldwide. In general, our legal entities are organized by country. Additionally, we also have global insurance business lines such as Allianz Global Corporate & Specialty, Mondial Assistance Group, Credit Insurance, Reinsurance and Allianz Worldwide Care. Our local legal entities and our global lines are grouped in different business divisions.1)
Allianz Group Annual Report 2009 Group Management Report Local Presence and Global Diversification will further increase. The strategic cooperation of Allianz Private Krankenversicherungs-AG with the newly formed KKH-Allianz, resulting from the merger of Allianz Betriebskrankenkasse with the Kaufmännische Krankenkasse (KKH), extended our sales channel for supplementary products.
We expect the Swiss insurance market to remain competitive. However, we also expect to take advantage of our efficiency, effectiveness and distinct customer focus. In life as well as in property-casualty, we will offer new and innovative products to our customers. It is worthy of note that we extended our range of products through the direct sales channel Allianz24.ch
Allianz Austria will continue to put profitibility first and we believe that there is a good mid-term growth potential for the Austrian market, when financial market conditions improve further.
Italy We serve the Italian market predominantly through Allianz S.p.A , which is the company dedicated to our agent channel. Besides our agents network, we distribute our products through Genialloyd (a leading company in direct business), Allianz Bank, with its associated Financial Advisors network (one of the top 5 in the market) and the bancassurance channel (Unicredit as main partner).
We expect the Italian property-casualty and life market to remain very challenging. However, we also expect to benefit from our technical know-how, IT infrastructure and strong brand. We continue to focus on customer service, efficiency enhancement and adherence to profitable underwriting in property-casualty. In life/health as well as in propertycasualty, we will seek to deliver further product innovations to our customers.
Besides motor, which is our largest line of business, we offer products for property and liability protection, life and health coverage in both Spain and Portugal, as well as workers compensation in Portugal only. We distribute our products through more than 11,000 agents and brokers in Spain, and more than 3,600 in Portugal. In both countries, we also rely on bank distribution partners such as Banco Popular in Spain and BPI in Portugal.
In 2009, Spain and Portugal were severely hit by the economic recession. The property-casualty market was most affected by the crisis in both countries. While the Spanish life/health market grew, the market decreased in Portugal where customers preferred bank products over insurance investment products.
In our property-casualty business, stiff price competition in the motor and commercial insurance markets and lower client turnover in the sectors most affected by the crisis were addressed with a cautious underwriting policy and further efficiency improvements. This includes the implementation of a single IT platform for Spain and Portugal, which allowed our companies to grow their customer base while maintaining competitive levels of profitability.
France In France we operate through Allianz France, formerly known as Assurances Générales de France (AGF) Group, a major participant in insurance and financial services. Our sales force of more than 2,200 agents, 2,700 life consultants, 350 health consultants, 1,200 brokers, more than 1,000 independent financial advisors and many partnerships serves more than 5 million clients. In September 2009, AGF was successfully re-branded to Allianz France. Allianz activities in France encompass many areas, including property-casualty insurance, life/health insurance, asset management and banking.
We consider the life business to be a growth area. However, a highly competitive market imposes continuously increasing demands on product innovations. As with propertycasualty, we focus on operating profitability.
Turkey We serve the Turkish market by our entities Allianz Sigorta A.S. and Allianz Hayat ve Emeklilik A.S. In January 2009 we successfully launched the Allianz brand.
We offer a wide variety of property-casualty products, both in retail markets (distributed mainly via agents) and in commercial markets (distributed mainly via brokers). We also provide life insurance and pension solutions to our customers.
In all three markets, Allianz is focused on property-casualty with motor generally being the largest individual line of business.
In both Brazil and Colombia, we are also one of the leading health insurers. Additionally, we also offer life insurance in Colombia. Distribution is primarily done via brokers.
We believe that the markets in which we are present in South America offer the potential for future growth. We expect an increase in insurance demand.
Africa In Africa we serve the market through Allianz Africa, formely known as AGF Afrique, the specialist of Allianz in sub-Saharan Africa.
We are present in ten sub-Saharan countries with our local subsidiaries, including 400 employees and additional partners in bordering countries. We serve the market via a multi-channel distribution network consisting of agents, local and international brokers, as well as direct and bancassurance partnerships. With this capacity, we provide both insurance and reinsurance coverage. We offer propertycasualty products in all African countries where we are present. Life products are offered by our operating entities in Burkina Faso, Ivory Coast, Cameroon, Madagascar and Senegal.
One of our main achievements in 2009 was the opening of a property-casualty subsidiary in Ghana.
We intend to consider further business opportunities in Africa when appropriate.
United States Our property-casualty insurance business in the United States is conducted through Fireman’s Fund Insurance Company (Fireman’s Fund) as well as the U.S. operations of Allianz Global Corporate & Specialty (AGCS). Our life and annuity business is run through Allianz Life Insurance Company of North America (Allianz Life U.S.).
In order to better capitalize on our experience in the U.S. property and casualty business, we are in the early stages of an investment in our systems infrastructure. We are doing this to further increase efficiency and make it easier to do business with us. We will leverage these capabilities to expand our presence in the small commercial as well as personal motor and property markets. Here our product offerings have grown as we released our first general market property and motor products, both branded under the Allianz name. Along with our continued focus on niche market strengths, these actions will allow us to address a 1) Including brokers and independent agents.
We expect the U.S. life insurance market to remain challenging in 2010. Whilst the U.S. industry is past the worst of the turmoil, we expect life insurance sales to recover only gradually, particularly in the annuity market. We continue to believe that the U.S. demographic development presents a compelling opportunity in the retirement market. In addition, to position ourselves for this opportunity we will further strengthen our distribution network and value proposition to our policyholders.
Ireland In Ireland, Allianz p.l.c. offers a wide variety of propertycasualty products for both commercial and private customers. The products are distributed through brokers, banks and direct channels (internet and telephone based). We continued to promote the growing direct channel with enhanced mobile phone and internet offerings during 2009.
United Kingdom We serve the market in the United Kingdom primarily through our subsidiary Allianz Insurance plc. In 2009, we focused on enhancing the new retail division for personal and specialty products in order to better serve our customers.
Operating in a highly competitive market, Allianz Insurance plc continues to concentrate on active cycle management in order to support operating profitability. We seek to capitalize on growth opportunities that offer a profitable correlation between premium rates and risks and forego premium growth in areas which do not offer an adequate risk return.
Allianz Global Corporate & Specialty Allianz Global Corporate & Specialty is the dedicated insurer for corporate and specialty clients in numerous industries and countries around the world. We operate our corporate and specialty business in approximately 70 countries. Through Allianz Global Corporate & Specialty, we offer property, liability and engineering insurance solutions to large corporate clients as well as specialty coverage, like marine, aviation, energy, global automotive and financial lines.
Credit Insurance Through our subsidiary Euler Hermes, the global leader in credit insurance1), we underwrite credit insurance in major markets around the world. Euler Hermes provides enterprises with protection against the risk of non-payment of receivables and insolvency. Additionally, Euler Hermes has developed a comprehensive range of services for the management of companies’ accounts receivables.
1) Source: Own estimate based on information from International Credit Insurance and Surety Association, ICISA.
In 2008 and 2009, we saw significant deteroriations of the credit insurance market with high losses due to the global financial crisis. This has led to the need to implement much more restrictive underwriting rules and to cut extensively exposures in higher risk classes, which has reduced our total premium volume. In 2009, our credit business was extensively re-priced to counteract the negative effect of the financial crisis. As a safety net, we have increased our reinsurance cover. The commercial and risk action plans taken in 2009 will produce their full impact in 2010 and should generate a significant improvement of Euler Hermes’ financial results.
For credit insurance, we see growth potential in Europe, North America and the emerging markets. By providing high quality services, maintaining a comprehensive information database, and high financial strength rating, Euler Hermes aims to consolidate its leadership.
Allianz Worldwide Care Allianz Worldwide Care (AWC) is our specialist health insurer based in Dublin offering international health products to expatriates worldwide and to high net worth individuals in emerging markets. We retail our products mainly via brokers and agents, but also have a direct internet and call center offering. 2009 was another year of growth for AWC. Healthy levels of profitability were maintained via a tight control on expenses, rigorous underwriting discipline, and implementing process improvements, all of which should have AWC well positioned for 2010.
Asia-Pacific We consider Asia-Pacific to be one of our major growth regions, and our operations there to be among the leading international players. Allianz has been present in the region since 1917, when we began providing fire and marine insurance in the coastal cities of China. Today, Allianz is active in all key markets of the region, offering its core businesses of property-casualty insurance, life/health insurance and asset management. With more than 13,000 employees, Allianz serves over 5.5 million customers in the region. We offer a full suite of products through our distribution network of approximately 70,000 agents in the region. In most countries we operate through multiple distribution channels.
In the Asia-Pacific region we maintain property-casualty operations in Malaysia, Indonesia and other Asia-Pacific countries and key markets, including China, Thailand, Japan, Hong Kong, Singapore and Laos. In Indonesia, we are one of the leading micro-insurers with more than 230,000 people insured.
Our South Korean operation markets a wide range of life and health insurance products – and in recent years developed a leading position in equity-indexed products. Allianz Taiwan Life sells investment-oriented products mainly through bank distribution tie-ups.
Property-Casualty Life/Health Market position by gross premiums written: I. Position 1 II. Position 2 to 5 III. Position 6 to 10 IV. not in the top 10
In 2009, our multi-distribution approach once more turned out to be a solid pillar of our business activities. We will continue to enhance our distribution model using new and existing channels with a special focus on the build up of our tied agents sales force as well as new innovate approaches, like the integation of our tied agents units with our bank branches in Poland. Furthermore we plan to keep the existing focus on process optimization and tight cost control in all of our markets. In Life we plan to strengthen our bancassurance business with diversified bank partners and our own Allianz Banks. We believe that market conditions will be more competitive in the future, but despite the challenging economic environment in New Europe we are confident of continuing our growth and success story in a region that still shows enormous potential for the future.
Middle East and North Africa To extend our worldwide presence and to set the course for further growth, we established entities in the Middle East/ North Africa (MENA). The central office in Bahrain directs Allianz units in Egypt, Lebanon, Pakistan, Saudi Arabia, Bahrain, Qatar, India and Sri Lanka.1)
The primary role of Group Financial Control includes setting the internal control policy and determining the scope of our system of internal controls to ensure we minimize financial misstatement risk. It is also responsible for ensuring that any internal control weaknesses that are identified are remedied and for assessing the significance for the Group of the sum of weaknesses identified at the level of local operating entities.
At the local level, operating entities within the scope of our system of internal control are individually responsible for adhering to the Group’s internal control policy and creating local Financial Reporting and Disclosure Committees that are similar to the Group level committee. The operating entities’ Chief Executive Officers and Chief Financial Officers provide periodic sign-offs to the management of Allianz SE certifying the effectiveness of their local system of internal control as well as the completeness, accuracy and reliability of financial data reported to the Group.
Internal control approach A top-down, risk based approach is used to establish the scope of our system of internal control. On an annual basis we conduct a combined qualitative and quantitative analysis of the Allianz Group’s consolidated financial statements and disclosures to identify those accounts most susceptible to fraud or errors. Once these significantaccounts are determined, further analysis identifies those operating entities with the highest contributions toward the consolidated account balances. These are required to implement, maintain and assess a system of internal control (in-scope operating entities).
At the local level, in-scope operating entities identify processes and risk scenarios for the significant accounts defined by the Group that could lead to material financial misstatements based on a combination of the likelihood of the risk scenario occurring and the potential magnitude of any resulting error. In general, risk scenarios which are reasonably likely to occur and with a potential magnitude of greater than 1 % of the Group’s consolidated pre-tax income are considered significant risks at the Group level. In addition to this quantitative threshold, qualitative considerations such as account composition are an integral part of
Controls and Procedures Group Management Report Allianz Group Annual Report 2009 the risk identification process. For each significant risk identified within each process, controls are in place that mitigate the likelihood and potential magnitude of a financial misstatement resulting from occurrence of the risk (process level controls).
Financial reporting processes are also heavily dependent upon and driven by IT systems. Such systems are integrated into the initiation, recording, processing and reporting of financial transactions and are therefore closely linked to the overall financial reporting process. Consequently, the role of IT and its corresponding controls (“IT controls”) is crucial to achieve our objective of establishing a strong system of internal control which is mandatory at all operating entities.
Group Audit and local internal audit functions continuously assure the overall quality of our system of internal control through monitoring and assessing its effectiveness.
Expansion to other areas We are currently following a strategy to establish enhanced internal control environments similar to our system of internal control over financial reporting to selected management reporting processes and other areas. By the end of 2010, for example, enhanced controls should be applied to the computation of the Market Consistent Embedded Value (MCEV). The Allianz Group management views a strong internal control environment as a key factor for successful business development and establishing the trust of external parties.
In other words, the culture provides a proper environment for the operations of the Allianz Group’s financial reporting and related committees. Complex accounting areas described in the section that follows are especially sensitive to the estimates and assumptions we apply. As can be understood from the following pages, we have processes and committees in place to ensure consistency and soundness of judgments. The committees, none of which are chaired by the CFO of the Allianz Group, ensure that judgmental decisions and selection of assumptions are discussed in an open setting among experts, and inconsistencies are identified and resolved.
Reserves for loss and loss adjustment expenses, insurance and investment contracts and deferred aquisition costs
• reserves for loss and loss adjustments expenses of € 64,441 million mainly for our Property-Casualty operations, including run-off business and reinsurance business assumed,
• deferred acquisition costs of € 20,623 million for both insurance operations.
The Life/Health reserves are particularly dependent on crucial assumptions about, e.g. the life expectancy of an insured individual (mortality and longevity risk) or the development of interest rates and investment returns (asset-liability mismatch risk). These assumptions also have an impact on the presentation of costs arising from the origination of insurance business (acquisition costs and sales inducements) and the value of acquired insurance business (present value of future profits).
The evaluation of whether our financial assets are subject to impairments may also involve significant management judgment. For example, we maximize current publicly available information relating to the issuer, the particular security and its related market to consider impairment loss events affecting our financial assets. While loss events such as breaches of contract and bankruptcy generally occur as a matter of fact, other impairment loss events, including whether an issuer is experiencing significant financial 1) Please refer to the consolidated financial statements, Note 2 Summary of significant accounting policies and for further details to Note 12 Deferred acquisition costs and Note 20 Reserves for insurance and investment contracts.
2) For a very detailed overview of the loss reserving process regarding our Property-Casualty operations including also a description of prior years’ loss reserve development, please refer to the Property-Casualty Insurance Reserves section of the Balance Sheet Review on pages 159 – 170, and to Note 2 Summary of significant accounting policies and to Note 19 Reserves for loss and loss adjustment expenses.
Allianz Group Annual Report 2009 Group Management Report Controls and Procedures difficulty, may require more subjective consideration. To the extent we are required to measure impairment losses on the basis of estimated future cash flows for a particular security, we apply judgment in applying a combination of internal data and information available from third-party sources such as credit rating agencies. 1)
In general, operating entities assume responsibility for assessing fair values and evaluating impairments of financial instruments. This process is consistent with our decentralized organizational structure and reflects the fact that local managers are often best suited to analyze securities trading in local markets. Nevertheless, those local operating entities are responsible for adhering to the Group’s internal control policy regarding financial reporting and disclosure. They must report all impairment decisions on debt securities to the Group Financial Reporting department, which then reviews them for consistency and resolves discrepancies.
In addition to goodwill, we have a smaller portion of other intangible assets, many of which were acquired in 2009. At year end, these intangible assets primarily consisteed of a brand name associated with a private equity investment (€ 286 million), long-term distribution agreements with Commerzbank AG (€ 620 million), and costs incurred to acquire customer relationships (€ 352 million). Although certain of these intangible assets (with a definitive useful life) are amortized, all of these assets are subject to essentially the same recoverability assessments as goodwill.
All of the assumptions and the related valuation techniques require the application of significant judgment. Moreover, assumptions may need to change as economic, market and business conditions change. As such, we must continually evaluate external conditions and the operating performances of our business units to determine if an assessment of carrying value is required.
Given the significance and inherent uncertainties around estimates of recoverable values, we also perform other high level plausibility tests. For example, we perform sensitivity analyses with regards to discount rates and/or key value drivers of the business plans to identify where particular rigor over particular assumptions is warranted. We also review market-based business transaction multiples where available. This information is used to assess reasonableness since directly comparable market value information is not generally available. Although we believe short term fluctuations in our market capitalization do not reflect the longterm value of the aggregate of our business units, we also compare our market capitalization to the aggregate of our business unit realizable values as a high level test of the entire process.
Income tax expense consists of current taxes on taxable income actually charged to the individual Allianz Group companies and changes in deferred tax assets and liabilities, excluding taxes directly recognised in equity.
Allianz Group Annual Report 2009 Group Management Report Controls and Procedures
As part of our risk capital framework, we measure and allocate internal risk capital to protect against unexpected economic losses. This requires the quantification of the risks inherent in our business activities. By estimating the economic fair value of assets and liabilities, we also determine the capital which is available to cover these risks. As described previously in the risk report, the aggregation of the risks across Allianz Group also involves estimating the benefit from the diversified nature of our operations. The economic valuation of the assets and liabilities as well as the internal risk capital calculation and aggregation make use of models and other techniques which require the application of a significant number of estimates and assumptions applied to risk and financial data, both internally and externally derived. Inadequate controls over the risk capital process would leave us exposed to risk factors we did not fully anticipate or correctly evaluate in quantitative models.
2) Please refer to the consolidated financial statements Note 2 Summary of significant accounting policies and Note 47 Pensions and similar obligations for details on the assumptions.
Controls and Procedures Group Management Report Allianz Group Annual Report 2009
The risk capital framework has already been used for several years to steer our business. We are constantly reviewing and improving our internal risk capital model and risk processes, in particular given the uncertainty surrounding changes of regulatory requirements and their interpretation. In addition, the risk landscape continuously evolves. As such, the framework must also evolve but the pace of any changes requires constant balancing of a need for consistency with commensurate reliability.
The following statements are made pursuant to § 315 (4) of the German Commercial Code: Composition of share capital
Shares may only be transferred with the consent of the Company. Pursuant to § 2 (2) of the Statutes, the Company will withhold a duly applied approval only, if it deems this to be necessary in the interest of the Company on exceptional grounds. The applicant will be informed about the reasons.
Shares acquired by employees of the Allianz Group as part of the employee share purchase program are in principle subject to a one-year lock-up period; outside Germany, the lock-up period may in some cases be up to five years for tax reasons. In some countries the employee shares are held throughout the lock-up period by a bank, an other natural person or a legal entity as trustee, in order to ensure that the lock-up period is observed. Nevertheless, employees may instruct the trustee on exercising voting rights, or have power-of-attorney granted to them to exercise such voting rights. Providing lock-up periods contributes to the employee share purchase programs’ purpose to commit employees to the Company and let them participate in the performance of the stock price.
In making appointments it is essential to ensure in particular that the members of the Board of Management have the reliability and professional competence needed to manage an insurance company. A person cannot be become a member of the Board of Management if he or she is already appointed as business manager in two insurance undertakings, pension funds, insurance holding companies or insurance special purpose vehicles. However, the supervisory authority may grant exceptions in case of mandates held within the same group (§§ 121 a, 7a German Insurance Supervision Act (Versicherungsaufsichtsgesetz, VAG)). The intention of appointing a member to the Board of Management must be notified to the Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht ) (§§ 121 a, 13 d No. 1 German Insurance Supervision Act). Members of the Board of Management may be dismissed by the Supervisory Board if there is an important reason (§ 84 (3) German Stock Corporation Act).
• The Board of Management is also authorized to increase the Company’s share capital on or before February 7, 2011, upon approval of the Supervisory Board, by issuing new registered no-par value shares against contributions in cash, on one or more occasions, up to a total of € 5,880,296.96 (Authorized Capital 2006/II). The Board of Management may exclude the shareholders’ subscription rights, upon the approval of the Supervisory Board, in order to issue the new shares to employees of Allianz SE and its Group companies as well as for fractional amounts (§ 2 (4) of the Statutes).
• The Company’s share capital is conditionally increased by up to € 250,000,000; this conditional capital increase is only carried out to the extent that conversion or option rights resulting from bonds issued by Allianz SE or its subsidiaries on the basis of the authorization of the General Meeting of February 8, 2006 are exercised, or that conversion obligations tied to such bonds are fulfilled (§ 2 (6) of the Statutes).
These authorizations to issue convertible bonds or bonds with warrants, to issue new shares out of authorized capital or to acquire and use treasury shares enable the Board of Management to raise capital swiftly and flexibly taking advantage of attractive financing opportunities as and when they arise on the markets and, for example, offer Allianz stock as consideration when making acquisitions of participations. Furthermore Allianz stock can be offered to employees of the Allianz Group. The authority to deal in own stock for trading purposes gives credit institutions that are majority owned by Allianz SE the possibility to deal in Allianz stock.
The following essential agreements of the Company are subject to a change of control following a takeover bid: Our reinsurance contracts in principle include a provision under which both parties to the contract have an extraordinary termination right in case that the other party to the contract merges or its ownership or control situation changes materially. Agreements with brokers regarding services in connection with the purchase of reinsurance coverage also provide for termination rights in case of a change of control. Such clauses are market standard.
If an enterprise acquires a majority shareholding in Allianz SE, the participation certificates issued by Allianz SE, and terminated by it as per December 31, 2009, provided for a right of the holders 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 three months prior to termination of the participation certificate relationship.
For further details please refer to the Remuneration Report on pages 17 to 29.
KPMG AG Wirtschaftsprüfungsgesellschaft (KPMG AG) serves as the external auditing firm for the Allianz Group.
Fees billed by KPMG AG and affiliated entities and KPMG AG and the world wide member firms of KPMG International (KPMG) are disclosed in four categories: Fees billed
KPMG billed the Allianz Group an aggregate of € 35.5 million (2008: € 50.5 million) in connection with professional services rendered for the audit of the Allianz Group’s consolidated financial statements, statutory audits of the financial statements of Allianz SE and its subsidiaries and services normally provided by KPMG in connection with statutory and regulatory filings or engagements. These services consisted mainly of periodic review engagements and the annual audit.
KPMG invoiced the Allianz Group an aggregate of € 2.6 million (2008: € 7.5 million) for other products and services, which consisted primarily of services under the guidance of Allianz Group management and general consulting services.
KPMG is the main auditing firm for Allianz Group and assigned in more than 75 % of all audit-related tasks. Auditing firms other than KPMG billed the Allianz Group an aggregate of € 12.3 million (2008: € 10.4 million).
Paris. “Allianz, avec vous de A à Z”. In Paris, the city of passion, two slogans have become one. Assurances Générales de France, the French face of Allianz, has been wooing customers with “AGF avec vous” for ten years. Allianz in turn advertises its expertise worldwide with the slogan “ Allianz, from A to Z”. As can be seen in the caption above, we’ve combined these slogans for the launch of the Allianz France brand.
Newport. A small town with big capital. PIMCO has its home in upscale Newport Beach. A view of the Pacific and no city noise. But the volume of assets that PIMCO manages for its customers –1 trillion U.S. Dollars – makes it clear that this is no provincial asset manager. PIMCO has offices in New York, Toronto, London, Munich, Hong Kong, Singapore, Tokyo and Sydney. Its bond funds are among the largest in the world. And what’s that got to do with Allianz? PIMCO is an Allianz Global Investors company.
Gross domestic product in the industrialized nations slid by an average of more than 3 % in 2009 as a whole. The emerging markets saw a small increase, with Asian emerging markets delivering by far the best performance with growth in the region of 5 %, testimony to the increasing clout of these markets on the global stage.
Market conditions in 2009 were initially characterized by a climate of uncertainty, even fear. Then, from a low point in March, financial markets surged upwards and the industry’s balance sheets recovered and capital positions were restored. By-and-large, this occurred against a background of asset risk-reduction and without recourse to new capital. Nevertheless, the industry’s operating environment remains fragile due to weak demand, surplus capital and impending regulatory changes.
However, the European sector’s market capitalization fared better. For the year as a whole it increased by approximately 20 % (and by an astonishing 110 % from its low in March) to € 323 billion.
Our activities are operated and managed through four reportable segments: Property-Casualty, Life/Health, Asset Management and Corporate and Other.
Reconciliation of net income (loss) presentation € mn € mn € mn 2008 format: Net income from continuing operations 4,692 3,967 7,316 Minority interests in net income from continuing operations 48 219 675 2009 format: Net income from continuing operations 4,740 4,186 7,991 2008 format: Net income (loss) from discontinued operations, net of income taxes and minority interests in earnings (395) (6,411) 650 Minority interests in net income (loss) from discontinued operations — 38 73 2009 format: Net income (loss) from discontinued operations, net of income taxes (395) (6,373) 723 2008 format: Net income (loss)2) 4,297 (2,444) 7,966 Minority interests in net income from continuing operations 48 219 675 Minority interests in net income (loss) from discontinued operations — 38 73 2009 format: Net income (loss) 4,345 (2,187) 8,714
In addition, we changed certain accounting policies with impact on the consolidated income statements. These changes relate to Group Equity Incentive (GEI) expenses, expenses of Alternative Investment managers, and foreign currency gains and losses. 3)
2) Reflects net income (loss) attributable to shareholders in the 2009 format. 3) For further details on changes in presentation and accounting policies please refer to
Allianz delivered solid results in 2009. Life/Health performed very well and Asset Management delivered excellent results, while soft markets negatively impacted business development in the Property-Casualty segment.
1) Total revenues comprise statutory gross premiums written in Property-Casualty and in Life/Health, operating revenues in Asset Management and total revenues in Corporate and Other (Banking).
Gross premiums written from Property-Casualty insurance, at € 42,523 million, were down by 2.0 %. Adjusted for foreign currency and consolidation effects, this translates into a decline of 0.9 %. In a soft market and an overall recessionary environment, we were able to achieve a positive price impact on revenues. We maintained our selective underwriting which led to lower premium volume.
2) Total revenues include € (117) mn, € 117 mn and € 144 mn from consolidation for 2009, 2008 and 2007, respectively.
In 2009, we managed to continuously increase our operating profit through each of the four consecutive quarters.
Operating profit in � mn 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
On a year-over-year basis, operating profit was down slightly by 2.0 % to € 7,182 million, a very strong result given the challenging economic environment. Considerable profit improvements in Life/Health and Asset Management nearly outweighed the decline in operating profit from Property- Casualty insurance and the increased loss from Corporate and Other. Operating profit development in both insurance segments was to a large extent driven by our investment results.
In the Asset Management segment we profited from the recovery of the financial markets and strong net inflows. Operating revenues amounted to € 3,689 million, up 20.3 % on an internal basis, primarily driven by higher fee and commission income. In particular, performance fees were high and mainly driven by our fixed-income business.
In Property-Casualty, operating profit fell by 28.0 % to € 4,064 million. Lower net investment income explained approximately one third of the decline in operating profit, primarily because of lower interest rates and, in addition, lower dividend yields. Our underwriting result declined as the combined ratio increased by 2.0 percentage points to 97.4 %. This development was mainly attributable to Germany, Italy and France as well as our credit insurance business.
While the non-operating loss remained stable at € 1,854 million, its composition changed significantly compared to the previous year.
Following the capital market recovery net impairments were down by € 2,302 million to € 994 million, by far the biggest movement within non-operating items. Net realized gains decreased by 39.1 % to € 1,617 million as the 2008 result benefited from closed forward sales. The largest realized gain in 2009 stemmed from the sale of 3.2 billion ICBC shares which resulted in a gain of approximately € 0.7 billion.
5) Intangible assets in relation to fully consolidated private equity investments have been fully deducted from the available funds for the first time.
Net income attributable to shareholders grew to € 4,297 million, after a loss of € 2,444 million last year.
The effective tax rate amounted to 11.0 % compared to an expected tax rate of 29.9 %. The effect of tax free transactions, mainly realized capital gains, accounted for 11.2 percentage points of the difference. In addition, tax income of prior years, mainly due to a favorable court ruling led to a reduction of the effective tax rate by further 9.4 percentage points.
Earnings per share from discontinued operations 1) See Note 4 to our consolidated financial statements for detailed information on the impact.
Acquisition and administrative expenses (net), excluding acquisition-related expenses (19,919) (18,054) (18,432) Fee and commission expenses (2,212) (2,344) (2,197) Operating restructuring charges (15) 1 (16)
Net income from continuing operations 4,740 4,186 7,991 Net income (loss) from discontinued operations, net of income taxes (395) (6,373) 723 Net income (loss) 4,345 (2,187) 8,714
Net income (loss) attributable to: Minority interests in earnings 48 257 748 1) Total revenues comprise statutory gross premiums written in Property-Casualty and in Life/Health, operating revenues in Asset Management and total revenues in Corporate and Other (Banking).
2) In the segment reporting certain tax benefits are shown as operating income in order to properly reflect the policyholder participation in tax benefits. IFRS requires that the Allianz Group Consolidated Income Statement presents all tax benefits in the tax line, irrespective of the policyholders.
To the extent Allianz SE holds own shares on the day of the Annual General Meeting, which are not entitled to dividends pursuant to § 71 b AktG, the amount attributable to such shares shall be carried forward.
1) First estimates as of mid March 2010 indicate a net loss of between € 170 mn and € 190 mn for Allianz Group.
Outlook 2010 – Economic environment remains challenging for financial services providers. – Allianz Group operating profit for 2010 around the same level as 2009.
Outlook in Annual Report 2008 Results 2009 Outlook in Annual Report 2008 Results 2009
Operating profit of € 7,182 million compared to € 7,329 million in 2008.
We will maintain a defensive port folio, managed under a sustainable investment strategy and generating a reliable stream of coupons and dividend yields.
Operating revenues increased by 27.5 % and operating profit by 51.3 %.
Statutory premium growth in all major life markets, except for France. The decline in France was mainly driven by exceptionally high group insurance contracts in 2008.
Economies without over-indebted private and public sectors will tend to recover more quickly than countries where consolidation is of the essence. This also explains why the emerging but in some cases heavily indebted, economies of Eastern Europe are getting back into their stride more slowly than the Asian emerging markets with their surpluses. The robust performance in key Latin American countries is a positive surprise.
The financial market crisis had a substantial impact on asset prices. First and foremost, the flight to safety triggered a dramatic slide in government bond yields. We do not expect yields to languish permanently at a low level. We expect to see a slight pickup in inflation, hefty government bond issuance weighing heavily on capital markets and a gradual reining in of expansionary monetary policy. In a somewhat more friendly economic environment, all of this will serve to push up capital market yields. The economic recovery will provide a positive boost to stock markets.
Developments in the property and casualty insurance business are closely linked to economic trends. Any impetus from new business is likely to remain generally weak given the subdued economic outlook. Some segments, such as the credit insurance sector, are still feeling the direct impact of the financial crisis. Given that most insurance companies have been relatively successful in mastering the crisis – and that they were not hit by any major catastrophes in 2009 either – the market is still awash with sufficient capacity, meaning that prices, too, look set to remain under pressure.
The outlook for the life insurance segment is marred primarily by the fact that many consumers have adopted a very cautious stance when it comes to making long-term premium commitments due to what remains a difficult economic environment and in the face of rising unemployment. Extremely low long-term interest rates are no help in this respect either. The financial crisis has left its marks on the long-term foundations of the life and health insurance business. However, rising government debt highlights just how crucial it is for individuals to make their own additional provisions for their retirement and healthcare. The overhaul of social welfare systems must continue even after the financial crisis has run its course. Retirement provision founded on several pillars is an absolute must and capital cover is indispensible in this regard.
This situation will mean good long-term business prospects for asset management. It will not be enough to simply tag along after the inevitable ups and downs of the markets. With experience of the financial crisis under their belts, customers are demanding active investment strategies that can guarantee long-term returns. The fund industry will have to make sure that it has the right solutions on hand to win these customers over.
As pointed out earlier in this section, the numerous government stimulus programs in place will continue to have an expansionary impact on the economy in 2010, however the effects of these programs will gradually start to peter out, and the markets will become more volatile again. Financial services providers will continue to face an uncertain operating environment. The outlook provided here assumes that there will be no deepening of the financial crisis, and there is only a limited likelihood of severe shocks such as major geo-political tensions or sovereign debt crises in large industrial countries.
We show the operating profit outlook for the Group and each segment, together with the main sensitivity factors and their possible impacts. The operating profit outlook for the Group reflects a stabilizing diversification effect that is inherent in our global, multi-segment portfolio.
Assumptions Our outlook is based on the following assumptions: • Further stabilization of the overall economic environment, and a return to moderate growth; • slightly increasing interest rates; • no interest rate whip, no severe disruptions of the capital markets.
We foresee no major changes with regard to business mix or profitability contributions, whereas we anticipate that some positive and negative effects observed in 2009 will not recur in 2010. Despite the assumed further stabilization of the overall economy, we anticipate that there will be pressure on investment results and that this will be partially offset by better operational performance in the business segments.
Property-Casualty insurance Underwriting prices in Property-Casualty insurance are dependent on market cycles, which vary from country to country. Overall, we expect that gross premiums written will increase only slightly, due to the continuation of the soft cycle and our strict underwriting discipline.
We believe that over the cycle, a combined ratio of 96 % is possible, and we forecast that our combined ratio for 2010 will improve towards that mark. A 1 %-point change in the combined ratio would have an operating profit impact in 2010 of around € 0.4 billion.
Life/Health insurance Revenues increased in 2009 by more than € 5 billion to € 50.8 billion, with strong growth in Germany and Italy being boosted by non-recurring effects. We expect statutory premiums to reach around € 47 billion in 2010.
Asset Management Our Asset Management business was a strong outperformer in 2009. Massive net inflows and a strong market return brought our third party assets under management to record levels. Net fee and commission income increased by 25 %, driven by high performance fees, boosted operating profit by more than 50 % to € 1.4 billion.
In 2010 we expect further strong inflows, especially into fixed-income products. However, it should be borne in mind that net fee and commission income, including performance fees, is highly dependent on market values, investment performance and business mix.
Outlook for 2011 and beyond We believe that the results and financial position of the Allianz Group will continue to improve in the coming years. However, because of the volatile economic environment, it is not possible to make reliable predictions beyond 2010.
On a nominal basis, revenues declined by 2.0 % or € 864 million to € 42,523 million. The main reasons for the decline were the change in our U.S. Crop Insurance Program with a negative effect of € 406 million, an unfavorable foreign currency translation effect of € 316 million and the sale of parts of the Swiss health business. These effects were partially compensated by the consolidation of our subsidiary in Turkey from July 2008, with a positive effect of € 246 million.
2) After elimination of transactions between Allianz Group companies in different geographic regions and different segments. Gross premiums written from our specialty lines have been allocated to the respective geographic regions.
Property-Casualty Insurance Operations – Development in gross premiums written reflects recession and selective underwriting. – Combined ratio of 97.4 %. – Solid operating profit of € 4.1billion in a difficult environment.
Cluster 1 In Italy we recorded revenues of € 4,190 million. The internal decline in premiums, excluding the renewal rights transfer of large corporate customer business to AGCS, was 10.5 % and mainly stemmed from lower average premiums in the motor business which continued to be impacted by the so-called “Bersani law”. Strong tariff increases implemented in the last quarter of the year could not compensate for this effect in 2009. Volume growth in our non-motor business was burdened by the consequences of the financial crisis. We stood by our underwriting rules and active portfolio cleaning in order to maintain our top position in the market with regards to profitability. This resulted in a decrease in volume. We estimate the negative price effect on premiums written to be 2.0 %.
Revenues in the United States declined by 9.4 %, mostly in our crop business (impact of € 172 million) due to lower commodity prices. In addition we recorded lower volume in personal and commercial business. Prices overall continued to decline in 2009, even though at a slower rate. We estimate the negative price effect on premiums written to be 1.6 %. Yet, we still saw an improvement in conditions during the course of the year. On a nominal basis revenues were down by 20.3 % to € 3,521 million. This development was mainly due to changes in our Crop Insurance Program where a proportion of the gross business that previously passed-through our books is now being passed directly from the scheme administrator to third parties. The effect on our net premiums written is zero. Together with the internal transfer of marine business to AGCS, this led to a significantly higher nominal reduction of gross premiums written.
Gross premiums written in France amounted to € 3,368 million. Excluding the effect of the transfer of large corporate customer business from our French entity to AGCS, we recorded a decline of 0.9 % on an internal basis. We accepted the loss of some volume, particularly in our business with small- and medium-sized enterprises and our personal non-motor business. However, volume losses were nearly counterbalanced by price increases in almost all business lines prompted by unsatisfactory profitability. The estimated positive price effect on premiums written was 2.1 %.
In our credit insurance business premiums declined by 7.3 % to € 1,672 million. Volume was down by 17.6 % or € 317 million following a deliberate and drastic reduction of our exposure in high risk classes as well as a fall in the business turnover of our customers. At the same time, we increased prices by an average of 10.3 %.
In New Europe, revenues amounted to € 2,615 million. On an internal basis, excluding a negative foreign currency translation impact of € 338 million, the decline was 2.9 % and was driven by a fall in new car sales and reduced premium levels, especially in our motor business as prices came under pressure in a highly competitive market.
Allianz Group Annual Report 2009 Group Management Report Property-Casualty Insurance Operations
The segment’s operating profit was down by 28.0 % and amounted to € 4,064 million. Our underwriting result decreased by € 728 million to € 866 million. Lower net investment income explained approximately one third of the decline in operating profit, primarily because of lower interest rates and, in addition, lower dividend yields.
The combined ratio stood at 97.4 %. The increase of 2.0 percentage points compared to year-end 2008, stemmed from an increase in our accident year loss ratio of 0.5 percentage points to 72.3 % and an increase in our expense ratio of 0.5 percentage points to 27.9 %. Run-off ratio was 2.8 %, one percentage point lower than last year.
Property-Casualty Insurance Operations Group Management Report Allianz Group Annual Report 2009
• Our operations in Germany added 0.6 percentage points to our combined ratio development mainly driven by non-recurring effects. These included an exceptionally high number of tap water claims in the first quarter 2009 as a result of the strong winter and strengthening of reserves for some large claims. In addition, our claims handling processes are not yet working smoothly following restructuring. However, we observed some recovery in particular in the fourth quarter.
• Italy still suffers from the so called “Bersani law” which put average premiums and commissions under pressure. Moreover, the earthquake in the Abruzzo mountains and the introduction of the so called “Milan tables” (new invalidity tables for bodily injury claims) had further negative impact. With its market still under pressure, Italy’s impact on our combined ratio development was an increase of 0.4 percentage points.
• Our credit insurance business added another 0.1 percentage points to the development of our combined ratio. The credit insurance business was impacted by a strong increase in claims frequency worldwide. In addition, revenues declined for the reasons mentioned above. Nonetheless, in the second half of 2009 claims frequency steadily improved following some commercial actions and drastic reduction in risk exposure. A slight recovery of the macroeconomic environment also helped.
Natural catastrophe claims accounted for € 447 million (1.2 percentage points impact on accident year loss ratio) in 2009 compared to € 667 million (1.8 percentage points impact) in the prior year. The most significant event in 2009 was windstorm “Klaus”, mainly affecting our operations in France with € 131 million net impact on the Group and an impact of 0.3 percentage points on our accident year loss ratio.
In contrast operating impairments of investments (net) were down by € 362 million to € 75 million. This recovery reflected the improvement in market conditions during 2009 after the financial crisis that had severely affected us in 2008.
Similarly, operating income from financial assets and liabilities carried at fair value through income (net) was up by € 109 million amounting to € 118 million.
Changes in reserves for insurance and investment contracts (premium refunds) amounted to € (253) million in 2009 after an income of € 158 million last year following negative investment performance.
Changes in reserves for insurance and investment contracts (premium refunds) (253) 158 (148) Operating net investment income 3,117 3,695 3,780
Loan loss provisions (18) (17) (6) Operating impairments of investments (net) (75) (437) (67)
Acquisition and administrative expenses (net) (10,540) (10,478) (10,631) Fee and commission expenses (995) (1,141) (967) Other expenses — (2) (13)
2008 inter- € mn € mn € mn € mn € mn € mn € mn € mn € mn € mn € mn
Credit Insurance 1,672 1,804 1,762 1,672 1,804 1,111 1,360 1,267 13 145 496 Travel Insurance and Assistance Services 1,355 1,227 1,139 1,355 1,227 1,307 1,196 1,093 95 107 96
Group, increasing our holding to approximately 97 %. Effective May 21, 2007, we consolidated Progress Garant for the first time. 11) Contains income and expense items from a management holding. 12) Represents elimination of transactions between Allianz Group companies in different geographic regions.
Travel Insurance and Assistance Services 95.5 93.4 93.8 60.1 57.6 58.2 35.4 35.8 35.6
With the recovery of capital markets from the second quarter onwards, we capitalized on returning consumer confidence in life insurance and investment products in our major markets. As consumers were still cautious about bearing investment risks following the financial crisis, products with minimum guarantees and participating components were preferred. Our statutory premiums grew by 11.3 % or € 5,158 million on a nominal basis and 10.4 % on an internal basis. Pure unit-linked business was still impacted by consumer aversion to equity and investment risk. Our premiums from traditional products fell by € 217 million or 1.0 % on a nominal basis and 1.6 % on an internal basis.
Statutory premiums by regions as of December 31, 2009 (December 31, 2008) 2)
3) The order of countries follows to our business division structure as presented on pages 57 - 62. 4) Before elimination of transactions between Allianz Group companies in different geographic regions and different segments.
In the United States, we have made significant changes in our product portfolio. Our new products have a more balanced risk-reward profile between us and our customers. Despite the suspension of our variable annuity living benefit riders, our premiums increased to € 6,507 million. The increase amounted to 2.0 %. Strong sales of fixed index annuity products offset the impact of lower sales of traditional fixed annuity and variable annuity products. However variable annuity sales picked up in the fourth quarter as new riders were successfully launched in August.
Business in New Europe was still impacted by recession. Lower disposable income decreased customer demand for savings products in most countries. However, higher demand for single premium investment products in Poland offset declines in other countries in the region. Growth amounted to 1.6 %. Due to unfavorable currency effects, premiums decreased on a nominal basis by 9.6 % to € 1,032 million.
Interest and similar income net of interest expenses amounted to € 13,844 million, equating to an annual yield for equities of 3.0 % and for debt 2) of 4.7 %. We recorded an increase of € 355 million mainly due to a growing debt portfolio, which outweighed negative effects from lower interest rates.
1) Recorded in net gain from financial assets and liabilities carried at fair value through income.
Net gain from financial assets and liabilities carried at fair value through income increased significantly to € 716 million. Recovering equity markets and narrowing of credit spreads resulted in positive results in fair value. While the trading result decreased significantly, positive contributions from assets accounted for under the fair value option, mainly in France and the U.S., impacted the operating profit positively by € 1,098 million.
Changes in reserves for insurance and investment contracts (net) amounted to € 8,299 million, € 3,177 million higher than in 2008. This was driven by an increase in reserves for premium refunds to policyholders as a consequence of significantly higher investment income.
1) For further information on the composition of our Life/Health asset base please refer to page 155.
2) Loans and advances to banks and customers, held-to-maturity investments, and real estate held for investment are stated at amortized cost. Investments in associates and joint ventures are stated at either amortized cost or equity, depending upon, among other factors, our ownership percentage. For further information see note 2 to the consolidated financial statements.
Ceded premiums written (548) (588) (644) Change in unearned premiums (52) (54) (61) Statutory premiums (net) 50,173 44,973 48,662 Deposits from insurance and investment contracts (28,144) (22,742) (27,853) Premiums earned (net) 22,029 22,231 20,809 Interest and similar income 13,971 13,772 13,417 Operating income from financial assets and liabilities carried at fair value through income (net) 716 (309) (1,135) Operating realized gains/losses (net) 1,755 874 3,579 Fee and commission income 491 571 701
Loan loss provisions (75) (13) 3 Operating impairments of investments (net) (1,663) (5,747) (824)
€ mn € mn € mn € mn € mn € mn € mn € mn
South America 43 190 78 43 190 36 183 40 Turkey 4) 83 18 — 37 40 35 17 — Europe I incl. South America 10,015 7,287 10,801 9,969 7,309 1,432 1,675 1,584
Global Life 182 — — 182 — 4 — — Europe II incl. Africa 8,711 9,164 7,731 8,711 9,164 3,410 3,408 2,248
NAFTA 6,557 6,111 6,968 6,217 6,111 689 802 672 AZ Reinsurance LH 350 294 313 350 294 343 291 292 Anglo Broker Markets/Global Lines 5) 6,907 6,405 7,281 6,567 6,405 1,032 1,093 964
New Europe 1,032 1,141 1,039 1,159 1,141 581 608 506 Middle East 101 88 70 98 88 95 82 64 Growth Markets 5,330 4,694 5,748 5,379 4,694 1,969 1,867 1,789 1) Statutory premiums are gross premiums written from sales of life insurance policies as well as gross receipts from sales of unit-linked and other investment-oriented products, in accordance with the statutory accounting practices applicable in the insurer’s home jurisdiction.
– Assets under management reached € 1,202 billion. – Net inflows of € 84 billion compared to net zero in the previous year. – Outstanding operating profit of € 1.4 billion.
Compared to year-end 2008, the performance of Allianz Global Investors’ assets under management remained robust for equity products, 63 % of which (December 31, 2008: 62 %) achieved an outperformance against benchmarks, despite the strong negative impact of the financial crisis. Our fixed-income products performed strongly with 83 % (December 31, 2008: 48 %) outperforming their respective benchmarks.
Net fee and commission income amounted to € 3,590 million, an increase of 24.9 %. Thereof, management fees grew by € 326 million to € 3,641 million, maintaining stable margins with the growth of the assets we manage. Nevertheless, weaker markets in the first and second quarter had a negative impact on the average volume of assets under management in 2009, with a corresponding effect on management fee income.
Administrative expenses amounted to € 2,288 million, up € 320 million or 16.3 %. At constant exchange rates (effect of € 48 million) and excluding cominvest (effect of € 97 million ), the increase would have amounted to € 175 million or 8.9 %, mainly driven by higher performance-related expenses following the strong profit growth.
1) Represents fee and commission income less fee and commission expenses. 2) Represents interest and similar income less interest expenses. 3) Represents operating expenses divided by operating revenues.
Interest expenses, excluding interest expenses from ex­ ternal debt, decreased by € 203 million to € 445 million, also affected by the decline in interest rates.
Banking and Alternative Investments.1) – Operating loss of € 1,028 million in the Corporate and Other segment, increased mainly due to lower net interest, foreign currency exchange effects and the loss in the Banking business.
Interest and similar income 359 819 745 Operating income from financial assets and liabilities carried at fair value through income (net) (122) 135 55 Fee and commission income 209 53 72 Other income — 1 15
Interest expenses, excluding interest expenses from external debt (445) (648) (542) Loan loss provisions — — — Investment expenses (81) (150) (164) Administrative expenses (net), excluding acquisition-related expenses (574) (531) (615) Fee and commission expenses (195) (9) (3) Other expenses — — — Operating expenses (1,295) (1,338) (1,324)
Operating revenues from our Banking business amounted to € 1,114 million, a decrease of € 311 million compared to last year. This development was driven by significantly lower interest rate levels, leading to a decrease in interest and similar income of € 281 million. In addition, banking operations generated lower fee income (down € 41 million) mainly in Germany and Italy that was only partly compensated by higher trading income in France.
The definitions for non-operating income from financial assets and liabilities held for trading (net), realized capital gains and losses (net) and impairments of investments (net) state the general treatment in the segments. However, there are special cases which are different from this general treatment: • Property-Casualty insurance business: the line items are generally booked within the non-operating items; they can be classified as operating items if they are shared with the policyholders which occurs in the context of a casualty insurance product with premium refunds issued in the German market.
• Life/Health insurance business: the line items are generally booked within operating profit; they can be classified as non-operating items if they stem from an investment where the results are not shared with the policyholders, for example strategic investments.
Operating profit should be viewed as complementary to, and not a substitute for income from continuing operations before income taxes or net income as determined in accordance with IFRS.
Non-operating realized gains/losses (net) and impairments of investments (net) 623 (640) 2,085 Non-operating income from financial assets and liabilities carried at fair value through income (net) 148 72 (94) Income (loss) from fully consolidated private equity investments (net) (232) 79 50 Interest expenses from external debt (905) (945) (1,051) Non-operating restructuring charges (183) (130) (166) Acquisition-related expenses (406) (245) (504) Amortization of intangible assets (125) (23) (17) Reclassification of tax benefits (774) (24) (60) Income from continuing operations before income taxes 5,328 5,473 10,563
Fee and commission expenses (200) (193) (233) Consolidation effects (Banking within Corporate and Other) (2) — 2
Nominal growth 1) We adjusted our internal growth figure for the change in our Crop Insurance Programm with an impact of € 406 mn as it is considered as a deconsolidation effect.
2) We adjusted our figures for 2008 according to the change in our accounting policy with regard to the presentation of foreign currency gains and losses. Those are now reported within “Income from financial assets and liabilities carried at fair value through income (net)”.
Balance Sheet Review – Strong solvency ratio of 164 %. – Shareholders’ equity of € 40.2 billion.
Market environment of different asset classes 2009 saw a recovery in the markets although a continuation of the negative trend of 2008 at the beginning of the year was a cause for concern. Massive combined support by governments and central banks saved the world’s finance system from collapse. Despite positive signs throughout 2009, the crisis is still not over: short­term interest rates are still very low and bail­out programs will need to be financed.
Allianz Group’s asset portfolio mainly derives from our core business of insurance. The following asset allocation repre­ sents the insurance segments and the Corporate and Other segment.
Balance Sheet Review Group Management Report Allianz Group Annual Report 2009
Overall, the Group’s investment portfolio increased by € 43.7 billion compared to 2008. This increase was both market­driven as well as by growth from our underlying operating business, primarily from the Life/Health entities. In contrast to 2008, markets moved favourably: equity mar­ kets rose and credit spreads almost reached end­2007 levels.
Fixed-income portfolio as of December 31, 2009: � 364.81) billion (as of December 31, 2008: � 315.8 billion)
1) Including € 14.2 billion subordinated debt securities; thereof € 11.3 bn related to our exposure in banks as of December 31, 2009.
2) 4 %-pts. are mainly seasoned self-originated German Private Retail Mortgage Loans and 3 %-pts. are short-term deposits at banks.
3) Includes € 7.6 bn U.S. Agency MBS. 4) Type of covered bond issued in Germany.
Real estate Our exposure to real estate instruments held for invest­ ments remained at € 7.5 billion. While in 2009 investment opportunities in real estate have been limited, we plan to raise our holdings of alternative assets, amongst them real estate, over the next years. We consider our long­term and flexible investment horizon a clear advantage in this area.
In 2009 we earned a total investment result of € 18,537 mil­ lion, an increase of more than 60 % compared to 2008. The increase mainly reflects lower impairments from equities. Our overall investment result for both equities and corpo­ rate bonds gained important relief from recovering markets.
Some 63 % of covered bonds are German Pfandbriefe backed by either public sector loans or mortgage loans. On these as well as on all other covered bond exposures, a cushion against house price deterioration and payment defaults is provided by minimum required security buffers and volun­ tary over­collateralization.
Realized gains and losses remained rather stable compared to 2008, on a level of € 3.4 billion, however with a lower focus in non­operating result. In the middle of the financial crisis in 2008 we closed forward sales mainly in the property­ casualty segment which had already been locked­in in 2007. In 2009, while markets calmed, we returned to a more nor­ mal harvesting level especially in life/health. One of our major transactions in 2009 was the sale of 50 % of our stake in ICBC where we realized a gain of € 0.7 billion.
only small impairments had to be recorded. We recorded debt impairments in 2009 on our exposure in the CIT Group as well as in a few subordinated bonds. However, a proof of our high quality investment portfolio is that we have only recorded an average of 8 basis points of impairments throughout the last 5 years.
Investment expenses would have been held constant but for the slight increase prompted by the increase in assets under management.
As of December 31, 2009, the segment’s gross reserves for loss and loss adjustment expenses increased by 0.2 % to € 55.7 billion. On a net basis reserves were up 1.5 % to € 48.5 billion. Foreign currency translation effects and other changes accounted for a € 0.6 billion increase.
Further details of property­casualty reserves are disclosed at the end of this chapter.
Of our Property­Casualty asset base, asset­backed securities (ABS) made up € 4.3 bil lion as of December 31, 2009, which is less than 5 % of our asset­base. CDOs accounted for € 15 mil­ lion of this amount.
1) Loans and advances to banks and customers, held-to-maturity investments, and real estate held for investment are stated at amortized cost. Investments in associates and joint ventures are stated at either amortized cost or equity, depending upon, among other factors, our ownership percentage.
2) Comprises assets of € 0.2 bn and € 0.3 bn and liabilities of € (0.1) and € (0.1) bn as of December 31, 2009 and December 31, 2008 respectively.
Debt securities 182.5 153.6 Cash and cash pool assets 5) 6.0 11.0
Within our Life/Health asset base, ABS amounted to € 15.9 billion as of December 31, 2009, which is less than 5 % of total Life/Health assets. Thereof, € 0.9 billion are CDOs.
4) Do not include affiliates of € 1.8 bn and € 2.5 bn as of December 31, 2009 and December 31, 2008, respectively.
Our financial assets for unit­linked contracts amounted to € 57.0 billion. Unit­linked insurance contracts increased by € 6.8 billion, which was largely attributable to a favorable fund performance, a reduced but still significant premium inflow and decreased surrenders. Unit­linked investment contracts stayed nearly unchanged.
Development of reserves for insurance and investment contracts in € bn
Life/Health reserves for insurance and investment contracts increased in 2009 by € 25.1 billion or 8.7 % to € 313.0 billion. The increase was mainly driven by higher aggregate policy reserves. Major contributors were our operations in Ger­ many (€ 6.7 billion), Italy (€ 3.9 billion), France (€ 2.4 billion) and the U.S. (€ 1.9 billion excluding currency effects). The first time consolidation of Allianz Thailand in the second quarter added € 2.0 billion. Our reserves for premium re­ funds were up by € 6.8 billion due to the recovery of financial markets. Foreign currency losses of € 0.6 billion resulted primarily from the decline of the U.S. Dollar versus the Euro (€ (1.2) billion), partly balanced by the increase in Korean Won (€ 0.5 billion).
Asset Management liabilities Our liabilities amounted to € 4.2 billion (up 4.7 %), mainly driv­ en by higher provisions due to favorable development of our Asset Management business.
1) For further information on the development of these third-party assets please refer to page 134.
Debt securities 13.3 11.0 Cash and cash pool assets 5) 1.3 2.6
ABS in our Corporate and Other asset base, amounted to € 0.6 billion as of December 31, 2009, which is around 1.5 % of our Corporate and Other asset­base.
The decrease within the certificated liabilities from € 14.8 billion to € 14.1 billion was mainly driven by a reduction of the Allianz SE issued debt outstanding6) in this investment category of € 1.4 billion. On the other hand, Group internal certificated liabilities increased by € 1.0 billion.
The Allianz Group enters into various commitments in­ cluding loan commitments, leasing commitments, pur­ chase obligations and other commitments. These commit­ ments amounted to € 10,922 million as of December 31, 2009. In addition, the Allianz Group issued letters of credit and other financial guarantees, market guarantees and indemnification contracts in the amount of € 3,294 million in 2009. Further, the Allianz Group has contingent liabilities due to involvements in legal, regulatory and arbitration proceedings. Please refer to note 46 of our consolidated financial statements for details on the various commitments, guarantees and contingent liabilities.
The Allianz Group is also invested in special purpose vehicles including, to a small extent, structured finance transactions. The Allianz Group fully reflects these vehicles when it controls them. If the Allianz Group does not control the vehicles, the respective involvements are recorded as assets (or liabilities) in the consolidated financial state­ ments. The Allianz Group is then exposed to a loss generally comprising the total amount of the investments. In 2009, the Allianz Group was particularly invested in certain CDOs with an amount of € 863 million. Please refer to note 44 of our consolidated financial statements for more details on our investments.
The Allianz Group establishes property­casualty loss reserves for the payment of losses and loss adjustment expenses (or “LAE”) on claims which have occurred but are not yet fully settled. Loss and LAE reserves fall into two categories: indi­ vidual case reserves for reported claims and reserves for incurred but not reported (or “IBNR”) claims.
Case reserves are based on estimates of future loss and LAE payments on claims already reported. Such estimates are made on a case­by­case basis, based on the facts and cir­ cumstances available at the time the reserves are established. The estimates reflect the informed judgment of claims personnel based on general insurance reserving practices and knowledge of the nature and value of a specific type of claim. These case reserves are regularly re­evaluated in the ordinary course of the settlement process and adjustments are made as new information becomes available.
During 2009, there were no significant changes in the mix of business written across Allianz Group. Moreover, there were no material changes to the amount and type of reinsurance placed in respect of the Group’s business.
On the basis of currently available information, manage­ ment believes that the Allianz Group’s property­casualty loss and LAE reserves are adequate. However, the establish­ ment of loss reserves is an inherently uncertain process, and accordingly, there can be no assurance that ultimate losses will not differ from these estimates. For more infor­ mation, see “Risk Factors – Loss Reserves for Allianz Group’s property­casualty insurance and reinsurance policies are based on estimates as to future claims liabilities. Adverse developments relating to claims could lead to further re­ serve additions and materially adversely impact Allianz Group’s results of operations.”
• Bornhuetter­Ferguson Method, which estimates loss and LAE using development patterns, observed losses and prior expected loss estimates.
• Frequency­Severity Methods, which produce separate estimates of the ultimate number and average size of claims. In addition, individual companies use a variety of other methods for certain lines of business.
Building on the local reserving process described above, Group Actuarial conducts a central process of reserve over­ sight. This process ensures that reserves are set at the local level in accordance with Group­wide standards of actuarial practice regarding methods, assumptions and data. The key components of this central oversight process are: • Minimum standards for actuarial loss reserving; • Regular central independent reviews by Group Actuarial of reserves of local operating entities and • Regular quantitative and qualitative reserve monitoring.
Balance Sheet Review Group Management Report Allianz Group Annual Report 2009 organization and structure, data, methods, and reporting. Group Actuarial monitors compliance with these minimum standards through a combination of diagnostic reviews – i.e. standardized qualitative assessment of the required components in the reserving process – and local site visits. Group Actuarial informs the local operating entity of areas requiring immediate remediation as well as areas for poten­ tial improvement, and coordinates with the local operating entities to address the relevant issues and implement improvements.
Regular central independent reviews by Group Actuarial of reserves of local operating entities Group Actuarial performs independent reviews of loss and LAE reserves for key local operating entities on a regular basis. This process is designed such that the largest entities by amount of reserves are reviewed once a year. Such a review typically starts with site visits to ensure that Group Actuarial updates their knowledge of the underlying business as well as the issues related to data and organization. Group Actuar­ ial then conducts an analysis of reserves using data provided by the operating entity.
Regular quantitative and qualitative reserve monitoring On a quarterly basis, Group Actuarial monitors reserve levels, movements and trends across the Allianz Group. This moni­ toring is conducted on the basis of quarterly loss data sub­ mitted by local operating entities as well as through partici­ pation in local reserve committees and frequent dialogue with local actuaries of each operating entity. This quarterly loss data provides information about quarterly reserve movements, as the information is presented by accident year and line of business, as defined by the local operating entity.
The oversight and monitoring of the Group’s loss reserves culminate in quarterly meetings of the Group Reserve Com­ mittee, which monitors key developments across the Group affecting the adequacy of loss reserves.
The analysis of loss and LAE reserves by actuaries and man­ agement is conducted by line of business and separately for specific claim type topics like asbestos claims. The origin year of losses is taken into consideration by analyzing each line of business also by accident year. While this determines the estimates of loss and LAE reserves by accident year as recorded in the balance sheet, the effect in the income statement in the respective calendar year combines the accident year loss ratio for the current year with the favor­ able or adverse development from prior years (“run­off”). In this section we first present the loss development by acci­ dent year followed by the resulting change for the five most recent calendar years.
The run­off triangle, also known as “loss triangle” is a tabu­ lar representation of loss­related data (such as payments, loss reserves, ultimate losses) in two, time­related dimen­ sions. One of these is the calendar year, while the other is the accident year (year of loss occurence). Run­off triangles – as the basis for measuring loss reserves – make clear how the loss reserves change over the course of time due to payments made and new estimates of the expected ultimate loss at the respective balance sheet date.
Reserves for loss and loss adjustment expenses for the individual accident years at the respective reporting date (net)
Calendar year earned premiums and ultimate loss ratio for the individual accident years at the respective reporting date (net)
The ultimate loss of an accident year comprises all pay­ ments made for that accident year up to the reporting date, plus the loss reserve at the reporting date. Given complete information regarding all losses incurred up to the balance sheet date, the ultimate loss status for each accident­year period would remain the same. In practice, however, the ultimate loss status (based on estimates) is exposed to fluctuations that reflect the growth in knowledge about the loss cases. We note that the loss ratio varies slightly from the reported loss ratio because the ultimate loss in the chart above is based on the sum of the payments plus the loss reserve, and not the incurred loss from the profit and loss account.
Given that the table below presents calendar year data and not, like the one above, accident year data, conditions and trends that have affected development of liability in the past may or may not necessarily occur in the future. Conse­ quently, conclusions about future results may not be de­ rived from information presented in this table.
Companies acquired or divested business during the period shown in the table, can lead to distortions in the cumulative surplus or deficiency. The table starts with the presentation of net and gross liabilities for unpaid claims and claims expenses as accounted, as of the respective date of the balance sheet. Over time, these liabilities are re­estimated. In addition, these liabilities will change if, through either acquisition, sale of a company or reclassification, entire new portfolios of claim payments and reserves are added to or subtracted from the data. In addition, changes in currency exchange rates can lead to distortions in the cumulative surplus or deficiency.
Allianz Group Annual Report 2009 Group Management Report Balance Sheet Review € mn € mn € mn € mn € mn € mn
Three years later 20,119 22,058 21,568 Four years later 22,926 24,807 Five years later 25,145 Six years later Liabilities re-estimated as of
Three years later 42,293 43,695 43,375 Four years later 41,315 43,183 Five years later 41,187 Six years later Cumulative surplus (deficiency)
Gross surplus after changes in the consolidated subsidiaries of the Allianz Group2) 5,514 8,316 7,817 4,388 1,355
Net surplus after changes in the consolidated subsidiaries of the Allianz Group2) 4,293 6,473 5,956 3,006 531 Net Surplus as a % of initial reserves 9.4% 13.0% 12.1% 6.2% 1.1%
The following table breaks down the loss and LAE reserves of the Allianz Group, in total and separately by IBNR and case reserves, gross of reinsurance, by line of business for the years ending December 31, 2007, 2008 and 2009, on an IFRS basis.
1) Gross/Net surplus represents the cumulative surplus from re-estimating the reserves for loss and loss adjustment expenses for prior years claims and includes foreign currency translation adjustments of gross €607 mn (2008: €313 mn) and net €536 mn (2008: €284 mn). This leads to an effective run off result excluding effects of foreign currency translation of gross €1,962 mn (2008: €2,241 mn) and net €1,067 mn (2007: €1,443) which can be found in the table for changes in the reserves for loss and loss adjustment expenses within this section. Please note that the 2008 numbers refer to the surplus presented in the consolidated financial statements 2008 and not the cumulative surplus of the calendar year 2008 presented in the table above.
2) Three major reclassifications occurred in 2008 in which the accident and health unit of AGF IART and the health unit from AZ Belgium were transferred from our Property & Casualty segment into our Life/Health segment and the AGF Brazil health unit was transferred from our Life/Health segment into our Property & Casualty segment, accounting for the €1,458 million gross effect and €1,371 net effect in 2008. The effect on the liability re-estimated consists of effects on paid and unpaid losses for prior years in the year of the transaction, while the effect of (divestitures)/acquisitions presented in the table “Reconciliation of Loss and LAE Reserves”, states the total amount of loss reserves being deconsolidated or consolidated for the first time.
When reviewing the foregoing tables, caution should be used in comparing the split between case and IBNR reserves across line of business. The portion of IBNR on total loss reserves varies by line of business due to different reporting and settlement patterns. For short­tail lines of business, such as property, claims are generally reported immediately after occurrence and settled in a period of only a few years, For long­tail lines of business, such as product liability, it is not unusual that a claim is reported years after its occur­ rence and settlement can also take a significant length of time, in particular for bodily injury claims.
2) Other comprises primarily Package/Multiple Perils, Legal Protection, Aviation and Travel Insurance lines of business.
Changes in Loss and LAE Reserves During 2009 As noted above, prior year loss and LAE reserves of the Allianz Group developed favorably during 2009 by € 1,962 million gross of reinsurance and € 1,067 million net of reinsurance, representing 3.5 % of gross reserves and 2.2 % of net reserves as of December 31, 2008. The following table provides a breakdown of these amounts by line of business.
Unfavorable developments included: • € 32 million at our German subsidiary, driven primarily by a correction in the expense allocation as well as by a reorganization of the data systems and claims settling policy that allowed for a refinement of the actuarial analysis.
General Liability For General Liability, net loss and LAE reserves developed favorably during 2009 by approximately € 77 million, or 0.9 % of reserves at December 31, 2008.
• € 39 million at our Italian entities, mainly due to strong upwards re­evaluations of case estimates. The entity conducted a restructuring of specialised functions with the effect of bringing a more uniform reserving policy across the whole of Italy. The impact of this was to in­ crease the case reserves for southern Italy to bring it in to a similar basis than the other areas.
• € 27 million at our UK entity. As in the case of the motor business, in 2009, we have continued to benefit from changes in claims patterns in terms of speed at which claims are notified, the improved manner in which re­ serves are handled by claims specialists and the savings realized on settlements, resulting in a surplus.
Property For Property, net loss and LAE reserves developed favorably during 2009 by approximately € 102 million, or 3.5 % of re­ serves at December 31, 2008.
Favorable developments included: • € 43 million at our UK entity given the fact that the entity was able to recover some amounts from other insurers, most notably the Buncefield oil refinery claims. Another element of the release came from amounts set up at the end of 2008 for possible late reported large claims and adverse weather related events in December 2008 (as they reserve on a “fast close” basis using end of November data) which did not in fact materialise; and
Workers Compensation / Employers Liability The net loss and LAE reserves developed favorably during 2009 on Workers Compensation/Employers Liability line of business by approximately € 52 million, or 1.2 % of reserves at December 31, 2008.
1) The wide range of interest rates is the result of the presentation of the above information by line of business thus each line reflecting interest rates used in various countries.
The following table shows total A&E loss activity for the past three years.
The main liquidity sources available for Allianz SE are cash flows received from operating subsidiaries and from capital market activities. Allianz SE centrally manages the liquidity reserve of the Group and ensures the efficient allocation of liquidity across Group members. The potential sources of external financing include the issuance of commercial papers, medium and long term notes and ordinary shares. In addition, Allianz SE has access to bank loans and longterm credit lines, which provide flexibility and allow Allianz SE to fine tune its financing structure.
In addition, the liquidity of our property-casualty insurance operations is affected by the frequency and severity of losses under its policies, as well as by policy renewal rates.
Within our asset management operations, our primary sources of liquidity include fees generated from asset management activities. These funds are primarily used for the payment of operating costs.
For our banking operations, the primary sources of liquidity include customer deposits, interbank loans and interest and similar income from our lending transactions. Our major uses of funds are for the issuance of new loans and advances to banks and customers, and the payment of interest on deposits and other operating costs.
No expiry date for Conditional Capital 2006 (issuance in case option or conversion rights are exercised)
In addition, the Board of Management has the following authorizations to buy back Allianz shares, which were granted by the General Meeting of April 29, 2009 and are valid until October 28, 2010: • For the purpose of securities trading by banks within Allianz Group: The trading position in shares acquired for this purpose shall not, at the end of any day, exceed 5 % of the share capital of Allianz SE. The treasury shares acquired, together with other treasury shares, shall at no time exceed 10 % of the share capital.
• For other purposes (§ 71 (1) no. 8 German Stock Corporation Act): The maximum volume of share buy-backs under this authorization is 45,305,000 shares, corresponding to 10 % of the share capital at the time of the authorization. Allianz Group's overall position of treasury shares may not exceed 10 % of the share capital at any time. Also derivatives may be used provided that such derivatives do not exceed 5 % of the share capital at the time of the authorization.
Liquidity and Funding Resources Group Management Report Allianz Group Annual Report 2009
As of December 31, 2009, the majority of Allianz Group’s external debt financing was made up of bonds and money market securities. Thereof, approximately one half was applicable to senior liabilities, and the other half was made up of profit participation certificates and subordinated liabilities.
Total certificated liabilities outstanding 7,962 9,544 thereof: due within one year 1) 1,765 5,191 Total participation certificates and subordinated liabilities outstanding 9,347 9,346 thereof: due within one year 2) 141 –
As of December 31, 2009, Allianz SE had money market securities outstanding with a carrying value of € 1,504 million 3), representing a decrease in the use of commercial paper as a short-term financing instrument of € 2,599 million compared with 2008. Interest expenses on commercial paper decreased to € 31.3 million (2008: € 142.8 million) also supported by lower interest rates and credit spreads as well as lower volumes outstanding in 2009. The average maturity of commercial papers is three months.
On July 15, 2009, Allianz Finance II B.V. issued a € 1.5 billion senior bond, guaranteed by Allianz SE, with a coupon rate of 4.75 %. The maturity of this bond is July 22, 2019.
With effect of December 31, 2009, the profit participation certificates issued by Allianz SE have been called for redemption. The repayment of € 121.5 million was due and paid out on January 4, 2010.
Allianz maintained its AA / Aa3 ratings for long-term senior issues and A1+ / P1 ratings for short-term issues in 2009. This has allowed Allianz to continue to fund short-term liquidity under the Euro Commercial Paper Program at an average rate below Euribor. In 2009, Allianz Group’s weighted cost of funding for all senior and subordinated bonds issued or guaranteed by Allianz SE was approxi-
Interest expense € 50.5 mn 5.0 % bond issued by Allianz Finance II B.V., Amsterdam Volume € 1.5 bn Year of issue 2008 Maturity date 3/6/2013 ISIN DE 000 A0T R7K 7 Interest expense € 76.1 mn 4.0 % bond issued by Allianz Finance II B.V., Amsterdam Volume € 1.5 bn Year of issue 2006 Maturity date 11/23/2016
Interest expense € 61.7 mn 4.75 % bond issued by Allianz Finance II B.V., Amsterdam Volume € 1.5 bn Year of issue 2009 Maturity date 7/22/2019 ISIN DE 000 A1A KHB 8 Interest expense € 32.6 mn Total interest expense for senior bonds € 220.9 mn 2. Subordinated bonds 3)
Interest expense € 112.2 mn 6.5 % bond issued by Allianz Finance II B. V., Amsterdam Volume € 1.0 bn Year of issue 2002 Maturity date 1/13/2025
2) Senior bonds and commercial papers provide for early termination rights in case of non-payment of amounts due under the bond (interest and principal) as well as in case of insolvency of the relevant issuer or, if applicable, the relevant guarantor (Allianz SE). The same applies to two subordinated bonds issued in 2002.
Interest expense € 84.0 mn 4.375 % bond issued by Allianz Finance II B. V., Amsterdam Volume € 1.4 bn Year of issue 2005 Maturity date Perpetual Bond
Interest expense € 63.1 mn issued by Allianz Finance II B. V., Amsterdam Volume € 0.8 bn Year of issue 2006 Maturity date Perpetual Bond ISIN DE 000 A0G NPZ 3 Interest expense € 46.3 mn issued by Allianz SE Volume USD 2.0 bn Year of issue 2008 Maturity date Perpetual Bond
Interest expense € 127.6 mn Total interest expense for subordinated bonds € 525.1 mn 3. Participation certificates 5)
Interest expense € 11.6 mn Total interest expense for participation certificates € 11.6 mn 4. Issues matured in 2009 Floating coupon rate bond issued by Allianz Finance II B.V., Amsterdam Volume USD 0.4 bn Year of issue 2007 Maturity date 4/2/2009
According to IFRS, our cash-flows are presented as follows 1): The disposal of Dresdner Bank to Commerzbank resulted in large deviations in almost all positions disclosed in the consolidated statement of cash flows.
Change in cash and cash equivalents for the years ended December 31, in € mn
1) For further information on the cash management please refer to pages 171 to 172. 2) Includes effect of exchange rate changes on cash and cash equivalents of € 21 mn, € 102 mn and € (115) mn in 2009, 2008 and 2007, respectively.
Net cash outflow used in investing activities increased by € 44.2 billion to € 50.4 billion in 2009 compared to an outflow of € 6.2 billion in the prior year, which is, to a large extent, also attributable to the Dresdner Bank disposal. In 2008 we recorded a net cash inflow of € 9.3 billion due to the inclusion of the cash flows from assets and liabilities of disposal groups classified as held-for-sale during the fourth quarter. The disposal of Dresdner Bank to Commerzbank resulted in a net cash outflow of € 27.0 billion in 2009 as Dresdner Bank’s cash balance of € 30.2 billion left the group. Net cash outflow used in investing activities of our continuing operations (excluding the cash impact from the disposal of Dresdner Bank) increased by € 19.1 billion. This was mainly driven by higher investments in available-for-sale securities and loans and advances to banks and customers resulting from substantial growth in the Life/Health segment.
Net cash inflow provided by financing activities amounted to € 3.7 billion in 2009 after a net cash outflow of € 11.3 billion in 2008, which included a cash outflow of our continuing business of € 2.8 billion. Contributing to this improvement were higher net cash inflows from policyholders’ accounts deposits/withdrawals stemming from the growth in our Life/Health segment. In addition we recorded lower net cash outflows from liabilities to banks and customers (2008 included redemption of a bridge loan at Allianz Holding France) as well as lower dividend payments to shareholders in 2009. Refinancing activities in certificated liabilities, participation certificates and subordinated liabilities fell after the disposal of Dresdner Bank.
Overall, cash and cash equivalents decreased by € 33.1 billion to € 6.1 billion as of December 31, 2009 largely due to the disposal of Dresdner Bank. For the cash and cash equivalents of our continuing operations we recorded a decline of € 2.9 billion to € 6.1 billion mainly stemming from our German Life/Health business.
• Consistent application of an integrated risk capital framework across the Group to protect our capital base and to support effective capital management.
• Integration of risk considerations and capital needs into management and decision-making processes through the attribution of risk and allocation of capital to the various segments.
This comprehensive framework ensures, that risks are properly identified, analyzed and evaluated. Allianz Group’s risk appetite is defined by a clear risk strategy and limit structure. Close risk monitoring and reporting allows us to detect deviations from our risk tolerance at an early stage.
The risk management practices of all financial institutions were put to the test during the turbulent markets of 2009. The Allianz risk management framework not only allowed Allianz to successfully meet the challenges but to also emerge as one of the strongest insurance groups in the industry by solvency and ratings for the benefit of shareholders and policyholders alike. This success was due in part to our continued focus on doing good risk and return business every day, but also to the definition of three highlevel risk objectives designed to meet the challenges directly. During 2009, we focused on the following objectives in direct response to the heightened market turbulence: • Protect our capital and solvency position and position our investment portfolio for continued market turbulence
In the following, we provide an overview of our Allianz risk management framework as well as the specific actions, which allowed Allianz to emerge from the market turbulence as one of the strongest companies in the industry.
As a provider of financial services, we consider risk management to be one of our core competencies. It is therefore an integrated part of our business processes. The key elements of our risk management framework are: Risk Report The Allianz risk management approach is designed to add value by focusing on both risk and return. The Allianz Group is well capitalized and its solvency ratio has a firm base.
Risk evaluation, reporting and controlling Our comprehensive qualitative and quantitative risk reporting and controlling framework provides transparency and early warning indicators to senior management with regards to our overall risk profile as well as to whether or not our profile is within delegated limits and authorities. For example, risk dashboards, internal risk capital allocation and limit consumption reports are regularly prepared, communicated and monitored.
Risk strategy and risk appetite Our risk strategy clearly defines our risk appetite. It ensures that rewards are appropriate for the risks taken and that the delegated authorities are in line with our overall risk bearing capacity. The risk-return profile is improved through the integration of risk considerations and capital needs into management and decision-making processes. This also keeps risk strategy and business objectives consistent with each other and allows us to take opportunities within our risk tolerance.1)
• Approves Allianz Group Risk Policy • Defines Allianz Group Risk Strategy • Defines Group’s risk capital allocation and strategic asset allocation • Sets targets for solvency, leverage and rating of Allianz SE
• Prepares proposals for Board decisions regarding: • Allianz Group Risk Strategy • Group’s risk capital allocation and strategic asset allocation • Targets for solvency, leverage and rating of Allianz SE • Decides on escalations from Group Risk Committee and Group Finance Committee
• Assume responsibility for their own risk management • Manage risks proactively within Group policies and limits • Report local risk profiles to Group Risk
Committee and the Group Finance Committee and do not need the attention of the entire Board.
As a general principle, the “first line of defense” rests with business managers in the local operating entities and Allianz Investment Management units, who are responsible in the first instance for both the risks and returns of their decisions. Our “second line of defense” is made up of our independent, global risk management function headed by the Group Risk department (“Group Risk”).
Group Risk, which reports to the Chief Financial Officer, develops methods and processes for identifying, assessing and monitoring risks across the Allianz Group based on systematic qualitative and quantitative analysis and regularly informs the Board of Management of Allianz SE and senior management concerning the Allianz Group’s risk profile. Group Risk develops the Allianz risk management framework and oversees the operating entities’ adherence to the framework. The core elements of the risk framework are set down in the Allianz Group Risk Policy, which has been approved by the Board of Management of Allianz SE and which defines the minimum requirements for all operating entities within the Allianz Group. Additional risk standards, such as standards related to specific segments or risk categories, are in place for our operating entities worldwide. Group Risk is also responsible for operationally setting limits and monitoring the accumulation of specific types of risks across business lines, for example with respect to natural disasters and exposures to financial markets and counterparties.
In addition, Group Risk strengthens and maintains the Group’s risk network through regular and close interaction with the operating entities’ management and key areas such as the local finance, risk, actuarial and
Risk Report Group Management Report Allianz Group Annual Report 2009 investment areas. A strong risk network across the Group allows us to identify risks early and bring them to management ’s attention.
Within our decentralized organization, each of our local operating entities needs to individually adhere to external requirements (e.g., requirements imposed by local regulators ) as well as internal Group-wide standards (e.g., Groupwide underwriting standards). In particular, local operating entities assume responsibility for their own risk management, with risk functions and committees that are consistent with the Group structure. Independent risk oversight is a fundamental principle of our risk governance structure, with a clear separation between business functions that actively take decisions and assume risk responsibility, and independent risk oversight functions on the other hand. Risk oversight consists of independent risk identification, assessment, reporting and monitoring and also includes analyzing alternatives and proposing recommendations to the Risk Committees and local management or to the Board of Management of Allianz SE. The local risk departments performing the oversight role in our major operating entities are headed by a local Chief Risk Officer. Group Risk is represented in the local Risk Committees to enhance the risk dialogue between the Group and the operating entities.
Allianz Group’s risk landscape is continually evolving due to changes in our environment. In order to adapt, the Trend Assessment Forum is responsible for early recognition of new risks and opportunities and evaluating long-term trends that may have a significant impact on the Allianz Group’s risk profile. Furthermore, Allianz is an active member of the CRO Forum Emerging Risk Initiative that continuously monitors the industry-wide risk landscape and raises awareness of major risks which are relevant for the insurance industry.
We define internal risk capital as the capital required to protect against unexpected, extreme economic losses. We aggregate internal risk capital consistently across all business segments (Property-Casualty, Life/Health, Asset Managment as well as Corporate and Other), providing a common standard for measuring and comparing risks across the wide range of different activities that we undertake as an integrated financial services provider.
We use an internal risk capital model based on a Value-atRisk (“VaR”) approach, determining a maximum loss in the value of our portfolio of businesses within the scope of the model (the “covered business”) due to adverse market, credit, insurance and other business events, within a specified timeframe (“holding period”) and probability (“confidence level”). More specifically, we calculate the net fair asset value of each of our covered businesses based on values under current best estimate conditions and under adverse conditions defined by scenarios for each risk category. The required internal risk capital per risk category is defined as the difference between the value of the portfolio under the best estimate scenario and under the adverse scenario. Internal risk capital is determined on a quarterly basis and results per category are aggregated in a manner that takes into account the diversification effect across risk categories and regions.
To calculate internal risk capital using the VaR approach at the Allianz Group level, we assume a confidence level of 99.97 % and a holding period of one year, which is assumed to be equivalent to an “AA” rating of Standard & Poor’s. We apply a holding period of one year because it is generally assumed that it may take up to one year to identify a counterparty to whom we can transfer the assets and liabilities in our portfolio. This capital requirement is sufficient to cover losses in any one year equivalent to a 3-in-10,000 year event. Although our internal risk capital is based on extreme events, it can also be applied towards managing the risks resulting from reasonably possible smaller adverse events that could occur in the near-term, because the results allow us to analyze our exposure to each source of risk both separately and in aggregate.
1) For additional information regarding our financial reporting framework, please refer to the section “Controls and Procedures – Financial Reporting Framework”.
Possible losses resulting from inadequate or failed internal processes, from personnel and systems, or from external events, as well as unexpected changes in business assump - tions and unanticipated earnings fluctuations due to a decline in income without corresponding decrease in expenses
Minimum under - writing standards, natural catastrophe limits, reinsurance programs, etc.
Our internal risk capital model covers: • Substantially all of our major insurance operations.
For smaller insurance operating entities that have an immaterial impact on the Group’s risk profile, and for the Asset Management segment, we assign internal risk capital 1) The Corporate and Other segment includes our banking operations in Germany, Italy, France and New Europe (please see below for further information). 2) Foreign currency risks are mainly allocated to the Corporate and Other segment (please see below for further information). 3) The premium risk which our credit insurance entity Euler Hermes is exposed to due to its business model is also covered here, as this type of risk is a special form of credit risk. 4) Although the internal risk capital requirements for the Asset Management segment only reflect business risk (please see below for further information), the evaluation of market risk and credit risk on the account of third parties is an integral part of the risk management process of our local operating entities. 5) Premium catastrophe risk. 6) Premium non-catastrophe risk.
In addition to any local regulatory requirements, the Allianz Group’s policy is to require each operating entity to match the currency of their material assets and liabilities or to otherwise hedge foreign currency risk. From the perspective of the Group’s balance sheet, this leaves only an immaterial amount of currency risk at the individual operating entity level. As a result, our residual foreign currency risk results primarily from the fair value of the net asset value of our non-Euro operating entities and certain exposures to nonEuro denominated assets and liabilities held at the Group level. This currency risk is monitored and managed centrally at the Allianz Group level by Group Treasury & Corporate Finance and is, therefore, mostly allocated to the Corporate and Other segment.
As of December 31, 2008, Dresdner Bank qualified as heldfor -sale and discontinued operations. We refer to “discontinued operations” to mean the assets and liabilities held by Dresdner Bank upon its sale by Allianz to Commerzbank on January 12, 2009. Certain former assets and liabilities of Dresdner Bank, which Allianz retained and which were not transferred to Commerzbank, were not classified as discontinued operations. We generally present figures as of December 31, 2008 excluding discontinued operations. When excluding discontinued operations from our internal risk capital calculations, we also take into account the smaller diversification effect due to the discontinuation of certain banking operations.
In managing our capital position, we also consider additional external requirements of regulators and rating agencies. While capital requirements imposed by regulators constitute a binding constraint, meeting rating agencies’ capital requirements forms a strategic business objective of the Allianz Group. Typically, the rating agencies’requirements are stricter. Regulators and rating agencies impose minimum capital rules on the level of both the Allianz Group’s operating entities and on the Allianz Group as a whole.
Our objective is to maintain available capital at the Group level in excess of the minimum requirements that are determined by our internal risk capital model according to a solvency probability of 99.97 % over a holding period of one year. In support of this objective, we require each of our local operating entities to hold available capital resources allowing them to remain solvent at a lower confidence level of 99.93 % over the same one-year holding period. This approach is designed to ensure a consistent capital standard across the Group that helps mitigate potential constraints of capital fungibility – i.e., by requiring our local operating entities to hold such levels of capital resources, the Group is less likely to be required to allocate capital to a local operating entity that may have incurred a loss, and accordingly the Group is less likely to encounter constraints inherent in moving capital across the many different jurisdictions in which the Group conducts business. In addition, we take into account the benefits of a single operating entity being part of a larger, diversified Group.
1) Available capital and internal risk capital as of December 31, 2008 including discontinued operations were adjusted to reflect a pro-forma view, assuming the completion of the Dresdner Bank transaction prior to year end of 2008. For example, we removed hybrid capital and the pension deficit related to Dresdner Bank from available capital, deleted internal risk capital requirements of our discontinued operations and included those related to the shares and the silent participation in Commerzbank.
Allocated internal risk capital by segment 2) (total portfolio before minority interest) in € mn
As of December 31, 2009, the Allianz Group’s eligible capital for the solvency margin, required for the insurance segments and the asset management and banking business, was € 34.8 billion (2008: € 31.8 billion) including off-balance sheet reserves 3) of € 2.0 billion (2008: € 2.2 billion), surpassing the minimum legally stipulated level by € 13.6 billion (2008: € 11.5 billion). This margin resulted in a preliminary cover ratio 1) of 164 % (2008: 157 % 2)) as of December 31, 2009.
Rating agencies apply their own models to evaluate the relationship between the required risk capital of a company and its available capital resources. Assessing capital adequacy is usually an integral part of the rating process. At December 31, 2009, the financial strength of Allianz SE was rated by Standard & Poor’s as “AA” (stable outlook), by A. M. Best as “A+” (stable outlook), and by Moody’s as “Aa3” (stable outlook). As of December 31, 2009, Allianz SE had the best Standard & Poor’s rating among the internationally active primary insurance groups in Europe. Even during the 2008 and 2009 financial crisis, these ratings were confirmed and remained stable.
3) Off-balance sheet reserves are accepted by the authorities as eligible capital only upon request; Allianz SE has not yet submitted an application. The solvency ratio excluding off-balance sheet reserves would be 155 % (2008: 146 %).
5) Issuer credit rating. 6) Final ratings vary on the basis of the terms.
For example, stress test results on a Group level indicated that a 10 % price decline in our available-for-sale equity securities as of December 31, 2009 would have resulted in a € 0.9 billion decline in shareholders’ equity after minority interests. Assuming a parallel shift of the yield curve up by 100 basis points, shareholders’ equity after minority interests would have decreased by € 3.9 billion, if available-forsale fixed income securities are taken into account as of December 31, 2009.
Similarly, the Group monitors and limits credit exposures to single obligors and obligor groups using its overall limitsetting framework to ensure that its credit and counterparty risk profile is appropriately controlled. As a fundamental principle underlying the limit system, several risk criteria of a counterparty have to be taken into account: financial statements, creditworthiness, country and industry assignment, the current Allianz Group’s portfolio composition and the concentration a particular counterparty introduces within the portfolio. Counterparty limits serve not only to restrict the exposure, but also to identify open investment opportunities for the operating entities while at the same time taking into consideration the current port folio structure at the Group level.
Asset Management 3) — — — — — — — — — —
Share of total Group internal risk capital in % 42 45
Internal equity risk capital increased for the Corporate and Other segment, because shares and a silent participation in Commerzbank were transferred to Allianz SE as part of the
1) 2008 figures exclude discontinued operations. 2) Foreign currency risks are mainly allocated to the Corporate and Other segment (please see “Internal Risk Capital Framework – Scope” for further information). 3) The internal risk capital requirements for the Asset Management segment only reflect business risk (please see “Internal Risk Capital Framework – Scope” for further information). 4) The Corporate and Other segment includes our banking operations in Germany, Italy, France and New Europe (please see “Internal Risk Capital Framework – Scope” for further information).
We have allocated a significant part of the Life/Health segment ’s non-diversified internal risk capital for interest rate risk to Western Europe (74 % as of December 31, 2009), mainly to cover traditional life insurance products. Traditional products sold in Western Europe generally feature policyholder participation in the profits (or losses) of the insurance company issuing the contract, subject to a minimum guaranteed crediting rate and management discretion.
Average, high and low allocated internal market risk capital by source of risk (total portfolio before minority interests and after Group diversification)
Over quarterly results Over quarterly results Average High Low Average High Low € mn € mn € mn € mn € mn € mn 1) After complete sale of Dresdner Bank.
Although the internal risk capital requirements for the Asset Management segment only reflect business risk, the evaluation of market risk and credit risk on the account of third parties is an integral part of the risk management process of our local operating entities. Our Asset Management operating entities monitor market risks using VaR models, sensitivity analyses and stress tests that estimate the potential loss under extreme market conditions. All underlying models are regularly reviewed by the risk departments of the respective local operating entities.
The primary market risks in the Corporate and Other segment are interest rate, equity and foreign currency risks. The Corporate and Other segment manages the equity investments of Allianz SE including strategic participations and its finance subsidiary holding companies, as well as securities issued to fund the capital requirements of the Allianz Group. 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.
Due to the fact, that we manage our net interest rate risk exposure from a Group perspective, the assets and liabilities of the Corporate and Other segment are not necessarily matched in terms of interest rate duration. However, the internal interest rate risk capital, that is allocated to the Corporate and Other segment, adequately reflects the duration mismatch.
Following the sale of Dresdner Bank to Commerzbank on January 12, 2009, we do not consider market risk related to our Banking operations to be significant at the Group level.1)
• Default on local government debt or temporary suspension of payment obligations (“moratorium”), deterioration of economic or political conditions, expropriation of assets, inability to transfer assets abroad due to sovereign intervention, freezing of converted and unconverted sums of money, etc. (country risk including transfer and conversion risk).
Group Risk’s obligor credit risk management framework is comparable to those widely used in the industry and is based on internal ratings, estimates of exposure at default 1) Please see “Internal Risk Capital Framework – Scope” for further information.
Share of total Group internal risk capital in % 8 8 Group diversified
1) 2008 figures exclude discontinued operations. 2) The premium risk which our credit insurance entity Euler Hermes is exposed to due to its business model is also covered here, as this type of risk is a special form of credit risk. 3) The internal risk capital requirements for the Asset Management segment only reflect business risk (please see “Internal Risk Capital Framework – Scope” for further information). 4) The Corporate and Other segment includes our banking operations in Germany, Italy, France and New Europe (please see “Internal Risk Capital Framework – Scope” for further information).
Reinsurance recoverables by rating class 5) as of December 31, 2009 in € bn
2) Including discontinued operations. 3) The premium risk which our credit insurance entity Euler Hermes is exposed to due to its business model is also covered here, as this type of risk is a special form of credit risk. 4) Please see “Internal Risk Capital Framework – Scope” for further information. 5) Represents gross exposure broken down by reinsurer.
Average, high and low allocated internal underwriting risk capital by source of risk (total portfolio before minority interests and after Group diversification)
The table below presents the average internal risk capital calculated for underwriting risks over the four quarters of 2009 and 2008, as well as the high and low quarterly internal risk capital amounts calculated in both years.
Reserve risk Reserve risk represents the risk of adverse changes in the value of reserves over a one-year time horizon resulting from fluctuations in the timing and amount of claims settlement. The amount of net surplus 4) compared to the initial reserves is provided on a calendar year basis over the past five years in the section “Balance Sheet Review – PropertyCasualty Insurance Reserves“. Using approaches that are similar to the methods used for setting the reserves, we measure and manage reserve risks by constantly monitoring the development of the reserves for insurance claims.5) If necessary, we reestimate the reserves in line with actuarial standards.
3) Based on most recent estimates, exposures are calculated using either vendor or proprietary models developed by in-house experts. All models are subject to uncertainty arising from scientific assumptions and underlying data.
5) For further information, please refer to the section “Balance Sheet Review – PropertyCasualty Insurance Reserves“.
Premium risk is subdivided into catastrophe risk (CAT risk) and non-catastrophe risk (non-CAT risk). We primarily quantify and manage premium risk based on actuarial models that are used to derive loss distributions for each risk.
Natural disasters such as earthquakes, storms and floods represent a significant challenge for risk management due to their accumulation potential and occurrence volatility. In order to measure such risks and better estimate the potential effects of natural disasters, we use special modeling techniques in which we combine data about our portfolio (such as the geographic distribution and characteristics of insured objects and their values), with simulated natural disaster scenarios to estimate the magnitude and frequency of potential losses. Where such models do not exist 1) Please also refer to the section “Property-Casualty Insurance Operations – PropertyCasualty Operations by Business Division” for a regional breakdown of loss ratios over the past three years.
Biometric risk We consider mortality and longevity risks which can cause variability in policyholder benefits resulting from the unpredictability of the (non-)incidence of death and the timing of its occurrence. For modeling these risks within our internal risk capital model, we distinguish level, trend and calamity risk. Biometric assumptions, such as life expectancy, play a significant role.1)
1) For further information regarding biometric assumptions, please refer to “Internal Risk Capital Framework – Non-market assumptions”.
2) Please see Note 20 to our consolidated financial statements for additional information regarding concentration of insurance risk in the Life/Health segment.
Business risks consist of operational risks and cost risks. Operational risks represent the loss resulting from inadequate or failed internal processes, or from personnel and systems, or from external events, such as interruption of business operations due to a break-down of electricity or a flood, damage caused by employee fraud or the losses caused by court cases. Operational risks also include legal risk, whereas strategic risk and reputational risks are excluded in accordance with the requirements of Solvency II and Basel II. Cost risks consist of unexpected changes in business assumptions and unanticipated fluctuations in earnings arising from a decline in income without a corresponding decrease in expenses. They also include the risk of budget deficits resulting from lower revenues or higher costs than budgeted.
Internal business risk capital rose significantly in the Asset Management segment mainly driven by an increase in assets under management and the acquisition of cominvest.
3) 2008 figures exclude discontinued operations. 4) The internal risk capital requirements for the Asset Management segment only reflect business risk (please see “Internal Risk Capital Framework – Scope” for further information).
As discussed, because substantially all of the investments managed by the Asset Management operating entities are held for the benefit of either third parties or Allianz insurance entities, the internal risk capital requirements for the Asset Management segment only reflect business risk, which includes liquidity risk.1)
Corporate and Other segment On the Group level, liquidity risks arise mainly from capital requirements of subsidiaries and necessary refinancing of expiring strategic financial liabilities. The liquidity position of Allianz SE is monitored on a daily basis and reported to the Board of Management regularly. The main tools to limit unforeseen liquidity requirements are committed credit lines from banks, commercial paper facilities, mediumterm debt issuance programs, access to the market of sale and repurchase agreements (the so-called “Repo market”) as well as internal resources in the form of intra-Group loans and an international cash pooling infrastructure.