Share price as of December 31 € 147.95 (4.4) % 154.76 127.94 97.60 100.08 28 Market capitalization as of December 31 € mn 66,600 (0.4) % 66,880 51,949 35,936 5) 36,743 5) 29 Other Data Return on equity after income tax 6) % 16.4 0.5 pts 15.9 12.9 7.8 11.0 Third-party assets under management as of December 31 € mn 764,621 0.1 % 763,855 742,937 584,624 564,714 60 1) Total revenues comprise Property-casualty segment’s gross premiums written, Life/Health segment’s statutory premiums, Banking segment’s operating revenues and Asset Management segment’s operating revenues.
Consolidated Financial Statements 127 Detailed Index 128 consolidated Financial Statements 134 Notes to the consolidated Financial
In 2007, gross premiums written increased by 1.4 % to � 44.3 billion, reflecting our selective underwriting policy, a diligent risk selection and focus on profitable growth.
Life/health Our product portfolio comprises a variety of life and health insurance solutions for private customers, as well as products for corporate provision needs. Ranging from life insurance policies to complicated pension management issues.
Allianz Group The Allianz Group is one of the leading integrated financial services providers worldwide. With over 181,000 employees, the Allianz Group serves more than 80 million customers in more than 70 countries. We are able to offer our clients a wide range of insurance and finance products as well as extensive advisory capacity through our sub - sidiaries under strong and well-known brands. We operate and manage our activities primarily through four operating segments: Property-Casualty, Life/Health, Banking and Asset Management.
Statutory premiums � mn 49,367 47,421 48,272 Operating profit � mn 2,995 2,565 2,094 Net income � mn 1,991 1,643 1,358
Operating revenues � mn 3,259 3,044 2,722 Operating profit � mn 1,359 1,290 1,132 Net income � mn 498 404 244 080358_02_Umschlag_englisch.indd 2 01.04.2008 13:55:04 Uhr
1) After elimination of transactions between Allianz Group companies in different geographic regions and different segments.
Asset Management Our business activities in the asset management business consist of products and services both for third-party investors and for the Allianz Group’s insurance operations. We conduct our retail asset management business primarily under the brand name “Allianz Global Investors”.
1) Compound annual growth rate (“CAGR”) ist the year-over-year growth rate over a multiple-year period. 2) Does not include minority interests.
Operating profit at record level and high quality net income of � 8.0 billion.
Operating revenues � mn 5,721 7,088 6,318 Operating profit � mn 773 1,422 704 Net income � mn 377 918 1,037
Unfortunately this was ignored in the knee-jerk reaction of the markets when financial sector valuations plunged in the second half of 2007. Our strong financial performance was not rewarded by the markets at the end of the year. Based on the share price, 2007 was a disappointing year for you, the investors. I can well understand that you have become impatient in this respect. It must be remembered, however, that the 4.4 % loss in value occurred in an environment in which the European insurance index lost 10.0 % and the European banking index fell 8.9 %. So we did somewhat better in comparison, demonstrating that our sustainable earnings performance stood out from the crowd despite all the general scepticism towards financials. Most analysts surveyed by Bloomberg are of the same view. End of February 2008 74 % of them recommend the Allianz share as a buy, with a target price of � 168 on average.
In Italy and France we bought out the outstanding minority interests in Allianz RAS and AGF. Allianz AG was converted into a company governed by European law. We are now in a position to create a coherent and streamlined structure in Europe, with rapid reporting channels, clear-cut responsibility and transparent objectives. We have reorganized Dresdner Bank and returned it to profitability. In the midst of these radical changes we increased the number of our customers from some 64 to 80 million between 2002 and 2007.
As far as our strategy is concerned, the focus for 2008 is definitely on implementation. We are stepping up the pace of change and we are striving to achieve noticeable improvements for our customers and distribution systems.
– We are bolstering personnel management capabilities while striving for and fostering an ambitious culture of leadership and performance. We seek to become the employer of choice for talented job-seekers.
The Supervisory Board met in total six times during the 2007 financial year. The ordinary meetings were held in March, May, September and December. The Supervisory Board also met on two further occasions: in January 2007 it held an extraordinary meeting in relation to the offers to acquire the minority interest in AGF and Allianz Lebensversicherungs -AG. There was also a constitutive meeting following fresh election of the Supervisory Board by the 2007 ordinary General Meeting. In between meetings the Board of Management kept us informed in writing of important issues at all times. Additionally, the chairman of the Supervisory Board was continually kept up to date on major developments and decisions.
All the Board of Management reports on the business situation and all the presentations on particular issues were accompanied by written supporting documentation, all of which was sent to each Supervisory Board member prior to the meeting for preparation purposes. The same applied to all the financial statements and auditor’s reports.
Whenever management actions described in more detail in this report required the approval of the Supervisory Board or one of its committees due to the requirements of legislation, the Statutes or the rules of procedure, resolutions were passed in this respect. Furthermore, the Supervisory Board did not raise any reservations against granting its approval.
the market disruption on the risk situation and liquidity. We also discussed with the Board of Management the valuation issues and the further course of action in the wake of the market disruption.
In addition to the regular reporting, at the March 2007 meeting we received detailed reports on progress on the reorganization of our German insurance business and progress made in establishing the new operating model.
In every Supervisory Board meeting throughout financial year 2007 (except the extraordinary meeting in January 2007 and the constitutive meeting following the ordinary General Meeting), the Board of Management reported on turnover and results in the Group. The Board also gave further details on how business was running in each individual business segment and reported on the financial situation. This was then discussed within the Supervisory Board.
We were kept continually up to date by the Board of Management on current equity investment projects. At the meetings in March and May, the integration of Allianz’s Italian operations through combination of our Italian insurance companies Riunione Adriatica di Sicurtà (RAS), Allianz Subalpina and Lloyd Adriatico into Allianz S.p.A. was explained to us. We also followed the structural changes at Allianz of America as reported by the Board of Management at the March meeting of the financial year, as well as the closer coordination of Allianz Life and Fireman’s Fund Insurance Company under the umbrella of Allianz of America. We were also regularly kept up-to-date about the business and financial position of Dresdner Bank. At the meeting in March 2007 we reviewed the concept of integrated financial services provider and the new distribution initiative. This envisages the introduction of Allianz agencies with Dresdner Bank employees. We continuously consulted with the Board of Management on the status of significant litigation. In the March 2008 meeting the Supervisory Board dealt with Compliance topics on the basis of a presentation of the Board of Management. Through the written and verbal report by the Board of Management we formed a detailed picture of the structure and organization of the Compliance function
within the Allianz Group. Allianz SE has concluded management control and transfer-of-profit agreements with Allianz Investment Management SE as well as Allianz Argos 14 GmbH, both with registered offices in Munich, Germany. On the basis of the written and verbal explanations provided by the Board of Management, the Supervisory Board granted the required approval to both agreements.
We welcomed the decision of the Board of Management to offer Allianz shares to employees of the Allianz Group in 24 countries on preferential terms. The Standing Committee has consented to the use of Authorized Capital 2006/II for issue of the employee shares.
We were involved in the further development of corporate governance standards in the organization. On December 20, 2007 the Board of Management and the Supervisory Board issued our Declaration of Compliance in accordance with § 161 of the German Stock Corporation Act (Aktiengesetz) and put it up on the company website on a permanent basis where it can be consulted at will. Allianz SE is in compliance with all recommendations of the Government Commission German Corporate Governance Code in the June 14, 2007 version of the Code.
Further explanations on corporate governance in the Allianz Group are available in the combined Board of Management and Supervisory Board report on pages 10 to 14 of this annual report. 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 in December 2007 it also set up a Nomination Committee. The committees prepare the discussion and adoption of resolutions in the plenary session. Furthermore, in appropriate cases, authority to take decisions has been delegated to 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.
Deputy Chairpersons of the Supervisory Board Dr. Gerhard Cromme Claudia Eggert-Lehmann
Nomination Committee Dr. Henning Schulte-Noelle (Chairman) Dr. Gerhard Cromme Dr. Franz B. Humer
In 2007, the Standing Committee held four meetings and three telephone conference calls. These related primarily to the offers to the external shareholders of AGF and Allianz Lebensversicherungs-AG, corporate governance issues, preparation for the ordinary General Meeting, the employee share purchase program and review of the Supervisory Board’s efficiency. In the course of the financial year, resolutions requiring approval for the following issues were adopted: making the tender offer to the minority shareholders of AGF, use of Authorized Capital 2006/I to create the shares offered as consideration and use of Authorized Capital 2006/II for the issue of employee shares.
The Personnel Committee met on four occasions. The meetings dealt with staffing matters as well as the structure and amount of Board of Management remuneration. In this context the Personnel Committee also dealt with the new suggestion by the German Corporate Governance Code to limit severance pay for Board of Management members if their employment ends prematurely and adopted the resolution to comply with this suggestion.
The newly established Nomination Committee held no meetings in the last financial year. Allianz SE is following the new recommendation of the German Corporate Governance Code to establish this type of committee (No. 5.3.3 of the Code). The Nomination Committee comprises the Supervisory Board chairman and two other shareholder representatives elected by the shareholder side. The committee is responsible for drawing up selection criteria for shareholder representatives on the Supervisory Board, seeking suitable candidates for the election of shareholder representatives to the Supervisory Board and proposing suitable Supervisory Board candidates to the Supervisory Board for its election proposals to the General Meeting.
The Supervisory Board was kept regularly and comprehensively up-to-date on the workings of the different committees.
The newly elected Supervisory Board has elected Dr. Henning Schulte-Noelle as chairman. The Supervisory Board elected as deputy chairpersons Dr. Gerhard Cromme upon proposal of the shareholder representatives and Ms. Claudia EggertLehmann upon proposal of the employee representatives.
Mr. Jan R. Carendi resigned from the Board of Management on expiry of his term of office at year-end 2007. The Supervisory Board thanked Mr. Carendi for his successful work for the Allianz Group. The Supervisory Board has appointed Mr. Oliver Bäte to the Board of Management effective Janu-
ary 1, 2008. Mr. Bäte has taken up the newly created position of Chief Operating Officer. In this capacity on the Board of Management he is responsible for the Operational Transformation Program and the functions of the Chief Administrative Officer of the Allianz SE holding. In the context of these changes, the Board of Management has also changed assignments such that Dr. Gerhard Rupprecht is additionally given responsibility for Switzerland and Austria; Mr. Enrico Cucchiani is in future additionally responsible for the insurance market in South America; Dr. Werner Zedelius’ area of responsibility is extended to include the Middle East and North Africa; and Mr. Clement B. Booth takes responsibility for the NAFTA markets, in addition to his current responsibilities. The Global Life project was assigned to Mr. JeanPhilippe Thierry and the Customer Focus initiative was placed with Dr. Zedelius. The Board of Management informed us in detail of the changes in areas of responsibility.
As a European Company, Allianz SE is subject to special European SE regulations and the German law implementing the European Company, in addition to German stock corporation law. This gives rise to some differences with the structure of an Aktiengesellschaft (stock corporation), primarily in relation to the Supervisory Board. The main features of the Company’s existing corporate constitution, in particular the two-tier board system (Board of Management and Supervisory Board), as well as the principle of equal employee representation on the Supervisory Board, have been maintained in Allianz SE. For further details on the differences between a German stock corporation and a European Company with registered office in Germany, please refer to our website under www.allianz.com/allianz-se.
The Board of Management manages Allianz SE and Allianz Group. It currently comprises 11 members from different countries, making it as international as Allianz itself. Its responsibilities include setting business objectives and strategic direction, coordinating and supervising the operating entities, as well as implementing and supervising an effective risk management system. The Chairman of the Board of Management coordinates the Board’s activities. As a consequence of the transformation into Allianz SE, the position of the chairman was strengthened by providing him with a right of veto under the Statutes with respect to the Board of Management’s decisions. If he objects to a decision, that decision is cancelled. However, the chairman of the Board of Management cannot impose any decision against the majority vote on the Board of Management. In the event of a tied vote, the chairman has the casting vote. Rules of procedure specify in more detail the work of the Board of Management. In these rules the Board has in particular regulated the specific responsibilities of Board members, matters reserved for the whole Board and other ways to pass decisions.
Corporate Governance and Remuneration Report Good Corporate Governance and transparency are key elements for gaining the trust of our shareholders, business partners and employees.
The conversion of the Company into an SE has brought noteworthy changes to the Supervisory Board. The German Co-Determination Act (Mitbestimmungsgesetz) no longer applies. The size and the members of the Supervisory Board are now based on the European general regulations on SE’s. These regulations have been implemented by provisions in the Statutes and by the Agreement Concerning the Participation of Employees in Allianz SE, which was signed on September 20, 2006 with representatives of European Allianz employees. This agreement can be found on our website under www.allianz.com/allianz-se.
The size of the Supervisory Board is stipulated in the Statutes as 12 members appointed by the General Meeting. Six of these twelve members are appointed on the proposal of the employees. General Meetings are bound to accept the proposals of the employees.
In accordance with the Agreement Concerning the Participation of Employees in Allianz SE, the seats for the 6 employee representatives are arranged in proportion to the number of Allianz employees in the EU member states. The Supervisory Board currently in office, which was elected at the 2007 General Meeting, consists of 4 employee representatives from Germany and one each from France and the United Kingdom. The current term of the Supervisory Board terminates at the end of the ordinary General Meeting in 2012.
The Supervisory Board oversees and advises the Board of Management on managing the business. Furthermore, the Supervisory Board is responsible for appointing the members of the Board of Management, determining their pay and reviewing Allianz SE’s and Allianz Group’s annual financial statements. The Supervisory Board takes all decisions based on a simple majority. The special decision requirements for the appointment of members to the Board of Management contained in the German Co-Determination Act and the requirement 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. Under Art. 42 of the SE Regulation, 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.
A part of the Supervisory Board’s activities is delegated to the following committees of the Supervisory Board.
The Standing Committee is responsible for the approval of certain transactions that need to be approved by the Supervisory Board. These include, in particular, 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 periodic review of the Company’s Corporate Governance. It submits proposals for examining the efficiency of the Supervisory Board’s activities to the Supervisory Board plenary session.
The Personnel Committee is responsible for personnel matters concerning members of the Board of Management. It prepares the appointment of members of the Board of Management, takes decisions concerning their contracts with the Company including their remuneration and is involved in long-term succession planning for the Board of Management.
risk management organisation and related Group policies. It also addresses the Group’s overall risk and specific risk developments. This committee is also responsible for prior verification of any particular risk-related statements within the annual financial statements and management report, and for reporting to the Audit Committee on the results of this preliminary review.
The members of the Supervisory Board and its committees can be found on pages 22 and 6 of this report.
In the course of the transformation of the Company into an SE, an SE works council consisting of currently 39 employee representatives from 26 EU member states, the European Economic Area (EEA) and from Switzerland was elected to represent the European Allianz employees. The SE works council mainly has information and consultation rights regarding cross-border matters within Europe affecting Allianz Group. As such, the SE works council, in simple terms, is a company-wide representative body for European employees with special responsibility for cross-border matters 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 represented by proxies appointed by Allianz. The proxies appointed by Allianz exercise the voting rights exclusively on the basis of the instructions given by the shareholder. We constantly promote the use of e-mail and Internet services. Members of the Supervisory Board are elected in General Meetings. As regards the election of employee representatives, General Meetings are bound by the proposals of the employees. General Meetings also approve actions taken by the Board of Management and the Supervisory Board. The General Meeting decides on the appropriation of earnings, capital transactions, approval of intercompany agreements, the remuneration of the Supervisory Board, and on changes to the Company’s Statutes. Unless at least half of the share capital is represented in adopting a resolution on a change to the Statutes, such resolutions require a majority of at least two thirds of the votes cast, in accordance with European regulations and the Statutes. Each year, an ordinary General Meeting takes place at which the Board of Management and Supervisory Board give an account of the preceding financial year. For special decisions, the German Stock Corporation Act provides for the calling of an extraordinary General Meeting.
In compliance with special provisions applying to insurance companies (§ 341 k (2) of the German Commercial Code (Handelsgesetzbuch, HGB)), the auditor for the annual financial statements and the auditor for the review of the half year financial report are appointed by the Supervisory Board and not by the General Meeting. The Supervisory Board’s Audit Committee carries out the preparatory work for the appointments. The statutory audit of the financial statements covers the Company financial statements of
The German Corporate Governance Code (the “Code”) is effective as amended dated June 14, 2007. Besides repeating important legal provisions, the Code also contains recommendations and suggestions for proper corporate governance. There is no legal obligation to comply with these standards. Under § 161 of the German Stock Corporation Act, listed companies are, however, obliged to make a declaration of compliance following the terms of the Code’s recommendations on the basis “comply or explain”.
2. Since the last Declaration of Compliance dated December 18, 2006, which referred to the German Corporate Governance Code in its June 12, 2006 version, Allianz SE has complied with all recommendations made by the Government Commission on the German Corporate Governance Code then in force.
Munich, December 20, 2007 Allianz SE For the Board of Management: signed Michael Diekmann signed Dr. Paul Achleitner For the Supervisory Board: signed Dr. Henning Schulte-Noelle”
As our shares are listed on the New York Stock Exchange (NYSE) we are subject to U.S. corporate governance rules, insofar as these apply to foreign issuers.
At management level in Allianz SE and in the larger Group companies, we have established Disclosure Committees. In the Allianz SE Disclosure Committee first drafts of the financial reports are reviewed and discussed by the heads of the relevant units. In this way the Disclosure Committee assists the Board of Management and particularly the Chairman of the Board of Management and the Chief Financial Officer in providing their certifications of the financial statements to the SEC, as laid down in the Sarbanes-Oxley Act.
The remuneration components of the Board of Management are described below: Fixed salary Base salary is a fixed amount which is normally reviewed every 3 years and reflects the individual’s role as well as the market context. The salary is paid in twelve monthly installments. The 2007 base pay levels of the Board of Management are shown on page 17.
Performance-based remuneration To achieve an appropriate balance of components linked to short term financial performance and those linked to longterm success and shareholder value creation a three-tier incentive system has been put in place. An overview is set out below: Three-tier incentive system
Short-Term and Mid-Term bonus plans All members of the Board of Management are eligible to participate in the annual (short-term) and three-year (midterm ) bonus plans.
Details of the annual bonus amounts paid to each member of the Board of Management are shown in the Remuneration table on page 17.
Although an interim assessment of the objectives takes place once a year, these projections are only provisional and informative in nature. Mid-term bonus target levels for members of the Board of Management are set by the Personnel Committee. For the 2007 – 2009 plan, the target bonus amounts to approximately 128.0 % of base salary over the three-year performance period. The maximum achievement is set at 140.0 % of target performance. Details of the mid-term bonus amounts accrued for each member of the Board of Management are shown on page 17.
In exceptional circumstances, the Personnel Committee can decide to award bonuses moderately above maximum level. It can also decide to reduce bonuses where warranted and in exceptional circumstances could reduce them to zero. Any material exercise of discretion outside the maximum range will be explained in the Remuneration Report.
The following table sets out the total fixed remuneration, perquisites and annual bonus. For reasons of transparency, the proportional bonus accrued for each member of the Board of Management of Allianz SE for the first year of the three-year bonus plan 2007 – 2009 is shown in the remuneration table: Board of Management Fixed salary Perquisites 1)
2007 Change from previous year previous year 2007 Change from previous year 2007 Change from previous year
3) Estimated amount for 2007 following interim assessment - the actual performance assessment can only take place at the end of the three-year period. 4) Retired from Board of Management on December 31, 2007. For three-year bonus actual proportional amount paid in 2008.
The GEI awards are accounted for as cash settled plans by the Allianz Group. Therefore, the Allianz Group accrues the fair value of the GEI awards as compensation expense over the vesting period. Upon vesting, any changes in the fair value of the unexercised SARs are recognized as compensation expense. The GEI compensation expense in 2007 amounted to, in � thousand, for Mr. Diekmann 1,626, for Dr. Achleitner 1,212, for Mr. Booth 660, for Mr. Carendi 966, for Mr. Cucchiani 981, for Dr. Faber 1,128, for Dr. Perlet 1,136, for Dr. Rupprecht 1,112, for Mr. Thierry 456, for Dr. Walter 2,864 and for Dr. Zedelius 1,039. SAR can be exercised once the two-year vesting period has expired on the condition that the Allianz SE stock price is at least 20.0 % above the price at which the SAR were granted (strike price). Also, the price of the 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. The RSU are released on the first trading day after the end of a five-year vesting period.
The total remuneration of the Board of Management for fiscal year 2007 amounted to � 39 million (2006: � 41 million).
Remuneration for Allianz Group mandates and for mandates from outside the Allianz Group If a member of the Board of Management holds a mandate in another company the full compensation amount is transferred to Allianz SE if the company is owned by Allianz. If the mandate is from a company outside the Allianz Group, 50.0 % of the compensation received is normally paid to Allianz SE. The compensation paid by companies outside the Allianz Group is shown in the Annual Reports of the companies concerned.
Pensions and similar benefits The pension agreements for members of the Board of Management up to 2004 provided for retirement benefits of a fixed amount that were not linked to the increases in salary or variable pay. With effect from 2005, Allianz SE changed from this defined benefit arrangement to a contributionbased system. The respective pension rights that existed at that point in time were frozen. As a result of the change, since 2005, annual contributions have been made by the Company instead of the former increase amendments. Interest is accrued on the contributions with a minimum guaranteed rate of 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 the same year. The company reviews the level of contributions annually. The contribution payments are guaranteed only as required for further regular financing of accrued pension rights resulting from defined benefit promises existing on December 31, 2004. In the case of an insured event, the accumulated capital is converted to equivalent annuity payments which are then paid out for the rest of the member’s life or if applicable to dependents. The increase in reserves for pensions (current service cost) includes the required expenditures for further financing of accrued pension rights as well as the contribution payments for the new contribution-based system.
When a mandate of a member of the Board of Management ends, a pension may become payable at the earliest upon reaching the age of 60, except for cases of occupational or general disability for medical reasons, or in case of death whereby a pension becomes payable to the dependents. If the mandate is terminated for other reasons before retirement age has been reached, a pension promise is maintained if non-forfeitable. This does not include, however, a right to pension payments beginning immediately.
The Allianz Group paid � 4 million (2006: � 4 million) to increase pension reserves and reserves for similar benefits for active members of the Board of Management. On December 31, 2007, pension reserves and reserves for similar benefits to members of the Board of Management who were active at that date, amounted to � 25 million (2006: � 23 million).
If service is terminated as a result of a so-called “change of control”, the following separate regulation applies: A change of control requires that a shareholder of Allianz SE acting alone or together with other shareholders holds more than 50.0 % of voting rights in Allianz SE. If the appointment of a member of the Board of Management is unilaterally revoked by the Supervisory Board as a result of such a change of control within a period of twelve months after the event, or if the member terminates service by resignation due to a substantial decrease in managerial responsibilities and, without giving cause for termination, all contracted benefits will be payable in the form of a lump-sum for the duration of the employment contract. The amount to be paid is based on the fixed salary at the time of the change of control, the annual and current three-year bonus, in each case discounted according to market conditions at the time of payment. A target achievement of 100.0 % is the basis for the annual and three-year bonus. If the remaining duration of the service contract is not at least three years at the time of change of control, the lump-sum payment in respect of fixed salary and annual 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 lump-sum payment decreases correspondingly. For the equity-based remuneration the member is treated as having retired. These regulations are also effective if the Board of Management mandate is not extended within two years after the change of control.
The members of the Supervisory Board receive a � 500 attendance fee for each Supervisory Board or committee meeting that they attend in person. This sum remains unchanged if several meetings occur on one day or when various meetings are held on consecutive days. The total expenditure for attendance fees in 2007 amounted to � 33,000.
Performance-based remuneration The Group’s earnings-per-share increased by 5.34 % compared to 2006 and by 96.45 % in relation to the financial year 2004. This meant that the regular remuneration for the short-term performance-based component for each member of the Supervisory Board amounted to � 8,100 and the longterm performance-based component to � 24,000.
Michael Diekmann, Allianz SE, Munich Vicente Tardío Barutel, Allianz Companía de Seguros y Reaseguros, Barcelona Enrico Cucchiani, Allianz SE, Munich
Gerhard Rupprecht, Allianz SE, Munich Herbert Walter, Dresdner Bank, Frankfurt/Main Charles Kavitsky, Allianz of America, Novato
We believe that this is the way to maximize our value and inspire maximum confidence in our customers, our investors, employees and society. Allianz strives to be the first choice of all stakeholders, in ways that can be measured objectively. If we attain this goal, we will simultaneously achieve another objective, namely to be one of the top ten international financial services providers in terms of market capitalization.
We see ourselves as a service provider who helps our customers manage risks and opportunities, thereby creating value for all stakeholders in the company. Our strategic approach is underpinned by three elements: our fundamental principles, our operational strengths and the development of profitable areas of growth.
– We promote entrepreneurial decision-making in our local units and back these decisions up with an efficient global infrastructure.
Through implementation of our “3+One” program we have laid a stable foundation in the past five years for refocusing our operational system. 3+One remains in effect and has not yet reached a stage where our expectation of realizable sustainable performance has been fulfilled. Nevertheless, the results so far have made it possible for us to tackle the next stage. The management team is now in a position to improve Allianz’s competitive advantages and company value even more than before by focusing on our current initiatives, “Sustainability”, “Customer Focus” and “Ideas to success” as well as our new business model. As they are closely interlinked, each on and reinforces the others.
– Our sustainability initiative is now in its fourth year and has made a substantial contribution to the operational excellence of almost all our insurance companies. Its objective was to identify and implement first-class solutions throughout the Group in terms of product range, processes and service in the insurance business and to oblige all companies to achieve the highest standards.
– We are rolling out our new business model market by market. It separates control of production from distribu-
Allianz Group Annual Report 2007 Strategy tion while focusing on the customer, based on efficient market management. Its operational implementation will boost efficiency substantially and enable us to identify and respond to changing customer requirements more rapidly and more precisely. It will also pave the way for our subsidiary companies to tap into future opportunities for growth, i.e. customer wishes as they emerge, or those that have yet to be identified.
Allianz is aiming strategically at new trends and areas of growth, including those that have so far been neglected by the competition. For example, we analyze carefully emerging trends in the healthcare market, in assistance services and in new or secondary distribution channels and we are preparing to meet this demand.
We are seeing a cross-border scenario where particular customer segments with similar circumstances of life and patterns of demand are growing more rapidly than others. Differences between markets and product lines are observably diminishing. As a service provider that intends to continue its organic growth in the future it is therefore becoming increasingly important to specifically address particular customer groups.
Climate change, which is commonly perceived only as a risk factor, is also a business opportunity for us. Allianz is investing in renewable energy and our bank acts as a trader in emission rights. We finance and insure this area of growth. Our technology center assess the extent to which new projects can be implemented.
By following our fundamental principles, systematically applying our operational strength and tapping into future areas of growth, Allianz is on the right path to establish itself as the world’s most trusted financial services provider.
– We will propose to increase the dividend significantly to � 5.50.
1 year 3 years 5 years 10 years 2007 2005–2007 2003–2007 1998–2007
We would like our shareholders to benefit from our business performance and will therefore propose at the annual general meeting to increase the dividend by 44.7 % to � 5.50 (2006: � 3.80). As in the previous year, the increase in the dividend is significantly higher than the rise in net income. Thus, the dividend yield at year end 2007 rises to 3.7 % and the payout ratio to 31 %. In September 2007, the Allianz share was included in the DivDAX, an index comprising the 15 DAX companies with the highest dividend yields.
Please refer to page 106 of this annual report and visit www.
Regional breakdown as of December 31, 2007 in % of subscribed capital
Our annual general meeting for the financial year 2006 again generated keen interest. About 4,400 shareholders attended the event in the Munich Olympic Hall. The proportion of share capital represented at the general meeting went up by another 3 % to 42 %. Shareholders from outside Germany contributed in particular to this increased attendance. For detailed information about the annual general meeting, visit www.allianz.com/agm.
In 2007 we again received numerous awards for the quality of our Investor Relations, which took first or second place in the three leading assessments of European insurance companies. In the “German Investor Relations Prize”, awarded for the first time in 2007 and covering every sector, the IR team took second place and the Head of IR was awarded first place.
Number of shares outstanding as of December 31 450,150,000 432,150,000 406,040,000 Weighted number of shares outstanding 442,544,977 410,871,602 389,756,350 Share price as of December 31 � 147.95 154.76 127.94 High for the year � 178.64 156.75 129.70 Low for the year � 133.92 111.20 89.72 Share price performance in the year % (4.4) 21.0 31.1 Market capitalization as of December 31 � bn 66.6 66.9 51.9 Average number of shares traded per day mn 4.2 3.3 3.1
– www.allianz.com/investor-relations has up-to-date shareholder information on the performance of the Allianz Group and Allianz shares.
– There is also important information on our AGM services at www.allianz.com/agm. Please register to receive your invitation to the annual general meeting by e-mail; this helps us to save costs and is environmentally friendly.
For telephone enquiries, our “Allianz Investor Line” is available: Written enquiries
Group Management Report 73 Liquidity and Capital Resources 73 Organization 73 Liquidity Resources 73 Debt and Capital Funding 76 Allianz Group Consolidated Cash Flows 77 Risk Report 77 Risk Governance Structure 78 Internal Risk Capital Framework 82 Capital Management 84 Concentration of Risks 85 Market Risk 88 Credit Risk 91 Actuarial Risk 93 Business Risk 93 Other Risks 95 Outlook 96 Allianz Group Success Factors 96 The Allianz Group’s Business Model 99 Legal Structure 100 Important Group Organizational Changes 101 Value-Based Management 103 Our Employees 106 Corporate Responsibility and Sustainability 108 Global Diversification of our Insurance Business 120 Other Information 120 Principal Accountant Fees and Services 121 Statements in accordance with § 315 (4) of the
– High quality asset base and a strong capitalization with shareholders’ equity of � 47.8 billion.
2) Compound annual growth rate (“CAGR”) is the year-over-year growth rate over a multiple-year period. 3) Does not include minority interests.
Our total revenues were up 1.5 % to � 102.6 billion. Foreign currency translation effects were a significant feature of fiscal year 2007, depressing total revenues by � 1.8 billion. Total internal revenue growth 2) amounted to 2.6 %. While Life/Health and Asset Management grew strongly, with revenues increasing by 6.3 % and 13.3 % respectively, on an internal basis, Property-Casualty premiums grew modestly. In contrast, the Banking segment was heavily impacted by the turbulence in financial markets, which led to a significant shortfall in net trading income.
2) Internal total revenue growth excludes the effects of foreign currency translation as well as acquisitions and disposals. Please refer to page 125 for a reconciliation of nominal total revenue growth to internal total revenue growth for each of our segments and the Allianz Group as a whole.
Property-Casualty Gross premiums written of � 44.3 billion were up 1.4 % on an external basis and 1.1 % on an internal basis. With � 635 million, our acquisitions in Russia and Kazakhstan contributed significantly to revenue growth. Foreign currency translation effects had a negative impact of � 448 million.
We maintained our selective underwriting policy, focusing on diligent risk selection and profitable growth. In several of our core European markets, pricing trends were flat or negative, limiting the growth opportunities. Conversely, we were able to take advantage of strong profitable growth opportunities in emerging markets 3) which now make up more than 9 % of total gross premiums written.
Life/Health At � 49.4 billion, statutory premiums were up by 4.1 %, ahead of expectations. Based on internal growth, revenues were up 6.3 %. We achieved double-digit growth rates in most of our markets worldwide, with substantial contributions from emerging markets in New Europe and Asia-Pacific. While the situation in the United States remained challenging, other established markets such as France and Italy also experienced dynamic growth, in Germany, though we grew more slowly, we clearly outperformed the market.
3) New Europe, Asia-Pacific, South America, Mexico and Middle East and Northern Africa.
Life/Health Operating profit grew dynamically by 16.8 % to almost � 3.0 billion with most operations contributing to this growth. The key drivers behind this improvement were strong revenue growth, especially in the second half of the year. Our investment result also contributed significantly based on a higher asset base that led to higher dividend and interest payments. Furthermore the expense result and the technical result improved as well.
Asset Management Operating profit increased by 5.3 % to � 1.4 billion as we continued to benefit from a growing asset base and tight cost control. Investments in business expansion and infrastructure projects to secure future growth resulted in operating expenses increasing at a slightly higher rate than operating revenues. This is reflected in a 0.7 percentage point increase in our cost-income ratio, which is still at a very competitive level of 58.3 %.
Non-operating items amounted to an income of � 653 million, up � 716 million. Compared to 2006, net capital gains were slightly lower, and interest expense from external debt was higher. These negative impacts were more than compensated by lower restructuring charges.
The remaining net unrealized gains on equity securities amounted to � 11.0 billion, net of tax and policyholder participation.
Restructuring charges amounted to � 216 million, � 608 million less than last year. In 2006, restructuring charges stemmed primarily from our restructuring plan for the Allianz Group’s insurance operations in Germany. The charges in 2007 related mainly to the restructuring of our local subsidiaries in Italy, and the set-up of a shared IT services infrastructure in Europe.
The charge of � 429 million in 2006 was related to reclassification of policyholder participation in tax benefits arising in connection with tax-exempt income in the Life/Health segment. In the segment reporting, this effect is represented within operating items.
Primarily due to the RAS minority buy-out completed in 2006 and the AGF minority buy-out in 2007, minority interests were � 541 million lower.
Income (loss) before income taxes and minority interests in earnings 7,261 3,102 714 865 (354) (20) 11,568
In the second half of 2007, the crisis in the mortgage market in the United States, triggered by serious disruption of credit quality, led to a revaluation of credit risks. As a result, prices for various asset-backed securities (“ABS”), even for those with a high rating, were devalued significantly. Primarily, this affected collateralized debt obligations (“CDO”), and residential mortgage-backed securities especially those originating in the United States (“U.S. RMBS”). Furthermore, this turbulence in the financial markets resulted in illiquidity in the primary markets where the placement of structured products e.g. asset-backed commercial papers (“ABCP”) almost came to a near stop. The liquidity shortage prompted central banks to provide the capital markets with additional liquidity.
Of our average Property-Casualty asset base, ABS made up � 4.9 billion, as of December 31, 2007, which is around 5 %. CDOs accounted for � 0.2 billion of this amount, of which � 8 million are subprime-related. Unrealized losses on CDOs of � 2 million were recorded in our equity. Realized losses of � 12 million were reflected in the segment’s income.
Dresdner Bank is engaged in various business activities involving structured products. These comprise asset-backed securities of the trading book, credit enhancements, conduits, leveraged buy-out commitments and structured investment vehicles. Furthermore, Dresdner Bank has sold credit protection for third party ABS and has re-insured these positions with monoline insurers (“monoliners”).
The CAFE structures, primarily contain certain assets for which the Bank provides protection. Furthermore, the Bank is entitled to take assets that run the risk of being downgraded out of the portfolio. Thus, the Bank can only be drawn on if significant rating deteriorations occur. During the second half of 2007, the exposure was reduced significantly to � 0.1 billion.
Under the CIRC structures, Dresdner Bank provides second loss protection, whereas the first loss stays with the client. Additionally, the Bank is entitled to sell the portfolio to the market, if the value of this portfolio falls below a pre-defined threshold. Here as well, the exposure was reduced and as of December 31, 2007, was a notional amount of � 2.8 billion.
Conduits A conduit is a special purpose entity that securitizes its financial assets, e.g. receivables, by means of commercial papers.
Since the late nineties, Dresdner Bank arranges the securitization of third party and own asset portfolios through assetbacked commercial paper programmes (“ABCP”) via several conduits. The underlying pool of assets exhibits a good quality, with 74 % having at least an A rating. Furthermore, none of the underlying assets are CDOs or subprime-related. Dresdner Bank has provided liquidity back-up lines of � 12.4 billion of which � 8.4 billion were undrawn, as of Decem-
Dresdner Bank provides credit lines for these transactions, the bulk of which are typically syndicated. In the second half of 2007, Dresdner Bank has reduced its LBO exposure to � 4.5 billion containing drawn and undrawn amounts, which includes � 1.1 billion of loans held within Dresdner Bank’s loan portfolio. In 2007, provisions were recorded for this business of � 30 million.
Structured Investment Vehicles (“SIV”) A structured investment vehicle is an entity that primarily invests in long-term, high quality securities. The investments are refinanced by medium term notes (“MTN”) or commercial papers (“CP”).
1) On March 18, 2008, Dresdner Bank and K2 Corporation entered into an agreement through which Dresdner Bank will provide a support facility to the Structured Investment Vehicle, K2. The agreement, which consists of a U.S.$1,500,000,000 committed revolving mezzanine credit facility and a ‘backstop’ facility, follows the announcement by Dresdner Bank on February 21, 2008 that it intended to offer support to K2 . The mezzanine credit facility provides K2 with immediate additional liquidity, allowing K2 to draw-down funds for terms up to the maturity date of its longest dated senior debt obligations. Under the terms of the backstop facility, Dresdner Bank has undertaken to provide to K2 firm prices at which it will purchase assets from K2 in the event that K2 is unable to obtain better prices for such assets on the open market. The aggregate of such prices provided by Dresdner Bank will at all times equate to an amount that ensures K2 has sufficient funds to repay its senior debt in full.
Recently Adopted and Issued Accounting Pronouncements and Changes in the Presentation of the Consolidated Financial Statements
The Board of Management and the Supervisory Board propose that the available net earnings of Allianz SE of � 2,475,825,000 for the fiscal year 2007 be appropriated as follows: – Distribution of a dividend of � 5.50 per no-par share entitled to a dividend: � 2,475,825,000.
The unappropriated retained earnings result from the individual financial statements set up according to the German commercial code (“HGB”) of Allianz SE.
To the extent the Company holds treasury shares on the day of the Annual General Meeting, which are not entitled to dividends pursuant to § 71 b of the German Stock Corporation Act (Aktiengesetz), the amount attributable to such shares shall be carried forward to new account.
In the following section we present the expected developments of certain key financial indicators. Among other factors, our expectations are based on the economic and industry outlook described below.
We are not in a position to confirm the 15 % average return on risk adjusted capital (“RoRAC”) target for the period 2007 – 2009 for our Banking segment. We do not expect that the years 2008 and 2009 will make up for the shortfall in 2007. Due to the uncertainty of future development of the credit markets and the high volatility of market prices, both triggered by the current financial markets turbulence, the projection of earnings is only possible within a non-meaningful broad range. In addition, a negative impact from additional mark-downs on our trading portfolio particularly in U.S. RMBS and CDOs has to be expected in the first quarter of 2008. We base this assessment on the development of credit indices and other observable marks on which we base our valuations. Additional write-downs cannot be ruled out and may affect future quarterly results. However, we expect that the prices will bottom out during 2008. We do not feel comfortable to predict the timing more precisely. However, we stick with our ambition to show annual RoRACs of 15 % or above for our Banking segment in the future.
Increased uncertainty Global economic growth will be less buoyant in 2008 than in previous years. The industrialized countries in particular are likely to see growth down by around half a percentage point on 2007. However, growth in emerging market economies should decline to a lesser extent. Financial markets will not return to calmer waters until uncertainty is dispelled about the nature of the economic risks originating from the U.S. housing crisis. Monetary policy in Europe and the U.S. will then also need to confront the looming risk of inflation.
Overall, economic momentum in industrialized countries at almost 2 % will be more subdued than in 2007. Our forecast for Japan is 1.5 % (2.1 %), for Germany and the euro zone about 1.8 %. In the case of Germany this is a significant slowdown compared to 2.5 % growth in 2007. In the U.S. we also expect rather modest growth of almost 2 % in the shadow of the housing crisis. U.S. growth began to slow in 2007, coming in at 2.2 %. The weak U.S. Dollar will boost U.S. exports in 2008 and, together with the expansive monetary and
an ag em en t R ep or t fiscal policy, will bolster the economy. At the same time, falling house prices are likely to dampen consumer spending, eliminating any significant boost from the consumption side.
The many uncertainties will also cast a shadow over the financial markets. However, we expect the economy to pick up again in the second half of the year, buoying equity prices. Interest rates will probably rise only moderately, especially as inflation should fall again in the second half of 2008. The U.S. Dollar will likely recover from its record lows against the euro during the year.
In the Property-Casualty segment there are opportunities for expansion due to rises in income and assets in emerging markets. However, in established markets competition for market share is intense, and our demand for profitability limits growth.
Banks will feel the consequences of the U.S. housing crisis in 2008 as well. However, the improved economic outlook for the second half of the year should give a renewed impetus to business. On the other hand a flat interest-rate curve and the generally rather modest prospects for growth indicate only a slight upwards trend.
1) Before elimination of transactions between Allianz Group companies in different geographic regions and different segments.
Property-Casualty Insurance Operations – Emerging markets contributed more than � 4 billion to steadily growing premiums. – Sustainable profitability maintained throughout the cycle. – Excellent combined ratio achieved.
Gross premiums written were 1.4 % ahead of previous year at � 44,289 million. Our acquisitions in Russia and Kazakhstan contributed significantly to premium volume, while large foreign currency translation effects almost offset this increase. Therefore, on an internal basis, premiums grew by 1.1 %. Furthermore, in 2007, our strategy of selective underwriting proved to be again successful as we were able to limit pricing impacts while at the same time achieving slight organic growth.
The revenue development remained mixed across our different regions. We recorded strong premium growth of � 962 million in our emerging markets 1) which compensated for flat or even negative revenue trends in the more mature markets. This shows that our strategy of expansion into emerging markets is paying off. Together, these markets contributed � 4,286 million (2006: � 3,324 million) or 9.2 % (2006: 7.2 %) to total gross premiums written.
In Spain, revenues increased by � 123 million. Here, our operations outperformed the market in all lines of business despite the difficult situation in the motor market. Main contributions came from industrial and personal lines.
At � 6,299 million operating profit was above the targeted level. Compared to 2006, a year that was characterized by exceptionally low losses from natural catastrophes, operating profit growth was relatively flat at 0.5 %.
Claims and insurance benefits incurred were up by 3.3 % to � 25,485 million and the calendar year loss ratio was up by 1.1 percentage points to 66.1 %. Of the total claims � 774 million (2006: � 211 million), or 2.0 percentage points of the loss ratio, were attributable to severe losses from natural catastrophes such as Kyrill, the floods in the United Kingdom and storms in several parts of the world. Also contributing to the rise were higher large claims incurred at AGCS as well as our newly consolidated entities in Russia and Kazakhstan.
Acquisition and administrative expenses were almost stable, up 0.2 % to � 10,616 million. These expenses also contain significant investments in group initiatives. Our administrative costs came down, showing that our tight cost control and efficiency measures have started to pay-off. Slightly higher acquisition costs stem from an increase in profitable, higher-commission business and the acquisition of our
Russian subsidiaries. In total, our expense ratio of 27.5 % was down 0.4 % on the previous year.
Our combined ratio increased by 0.7 percentage points to 93.6 % .
Interest and similar income was up by 9.2 % to � 4,473 million, as the higher asset base resulted in a rise in dividends received and increased interest income.
Net realized gains from investments decreased significantly by 17.9 % to � 1,433 million from a year earlier largely as a result of the sale of our participation in Schering AG and the disposal of a real estate portfolio in Austria at that time. Conversely, no major single sales transactions were recorded in 2007.
Ceded premiums written (5,320) (5,415) (5,529) Change in unearned premiums (416) (309) (485) Premiums earned (net) 38,553 37,950 37,685 Interest and similar income 4,473 4,096 3,747 Income from financial assets and liabilities designated at fair value through income (net) 2) 136 106 132 Income from financial assets and liabilities held for trading (net), shared with policyholder 2) 8 — — Realized gains/losses (net) from investments, shared with policyholders 3) 46 46 273 Fee and commission income 1,178 1,014 989
Claims and insurance benefits incurred (net) (25,485) (24,672) (25,331) Changes in reserves for insurance and investment contracts (net) (339) (425) (707)
Acquisition and administrative expenses (net) (10,616) (10,590) (10,216) Fee and commission expenses (967) (721) (775)
3) The total of these items equals realized gains/losses (net) in the segment income statement included in Note 5 to the consolidated financial statements. 4) The total of these items equals impairments of investments (net) in the segment income statement included in Note 5 to the consolidated financial statements. 5) Represents claims and insurance benefits incurred (net) divided by premiums earned (net). 6) Represents acquisition and administrative expenses (net) divided by premiums earned (net).
The following table sets forth our Property-Casualty gross premiums written, premiums earned (net), operating profit, combined ratio, loss ratio and expense ratio by geographic region for the years ended December 31, 2007, 2006 and 2005. Consistent with our general practice, these figures are presented before consolidation adjustments, representing the elimination of transactions between Allianz Group companies in different geographic regions and different segments.
Germany 10,746 11,427 11,647 9,245 9,844 10,048 1,628 1,479 1,765 Italy 5,229 5,396 5,369 4,902 4,935 4,964 719 816 741 France 5,086 5,110 5,104 4,422 4,429 4,375 486 420 227 United Kingdom 2,236 2,396 2,449 1,989 1,874 1,913 208 281 268 Spain 2,136 2,013 1,873 1,820 1,675 1,551 253 252 217 Switzerland 1,804 1,805 2,012 1,595 1,706 1,708 218 228 153
Portugal 283 287 304 246 258 275 38 36 32 Greece 79 74 71 50 46 46 9 10 11 Western and Southern Europe 1) 3,269 3,269 3,325 2,768 2,819 2,863 482 550 494
Russia 2) 678 30 24 574 4 12 7 1 2 Hungary 580 575 598 502 499 523 73 68 63 Poland 367 283 235 246 200 160 24 20 12 Romania 341 291 219 155 132 125 11 11 11 Slovakia 319 288 300 273 251 251 112 52 82 Czech Republic 249 253 242 183 179 160 41 29 27 Bulgaria 103 95 91 70 70 37 16 16 14 Croatia 86 70 60 63 53 45 2 4 2 New Europe 3) 2,723 1,885 1,769 2,067 1,388 1,313 256 184 213 Other Europe 5,992 5,154 5,094 4,835 4,207 4,176 738 734 709
Credit Insurance 1,762 1,672 1,725 1,268 1,113 997 496 442 420 Travel Insurance and Assistance Services 1,139 1,044 991 1,093 1,008 934 97 90 77 Subtotal 46,353 46,220 46,301 38,553 37,950 37,685 6,296 6,271 5,138 Consolidation 6) (2,064) (2,546) (2,602) — — — 3 (2) 6 Total 44,289 43,674 43,699 38,553 37,950 37,685 6,299 6,269 5,142
Germany 91.6 92.9 89.4 64.8 65.1 63.0 26.8 27.8 26.4 Italy 94.8 91.8 93.6 71.2 68.8 69.3 23.6 23.0 24.3 France 97.3 99.2 102.0 70.9 71.0 74.0 26.4 28.2 28.0 United Kingdom 99.6 95.7 96.2 66.3 64.1 65.4 33.3 31.6 30.8 Spain 91.4 90.3 91.4 71.6 71.0 71.4 19.8 19.3 20.0 Switzerland 95.1 92.8 97.8 69.5 69.3 74.9 25.6 23.5 22.9
Portugal 91.6 91.2 92.8 65.9 64.4 67.0 25.7 26.8 25.8 Greece 88.7 92.4 82.0 58.2 57.7 49.7 30.5 34.7 32.3 Western and Southern Europe 1) 95.4 90.2 91.2 67.4 61.7 63.2 28.0 28.5 28.0
Specialty lines Allianz Global Corporate & Specialty 96.0 92.2 122.4 67.9 62.5 91.1 28.1 29.7 31.3 Credit Insurance 76.5 77.6 67.0 47.9 49.7 41.3 28.6 27.9 25.7 Travel Insurance and Assistance Services 93.7 101.8 93.3 58.1 58.7 60.3 35.6 43.1 33.0 Subtotal — — — — — — — — — Consolidation 6) — — — — — — — — —
– Strong operating profit growth, almost reaching � 3 billion. – Asset base increased to � 350.0 billion.
At � 49,367 million statutory premiums increased by 4.1 % over the prior year, despite impacts from unfavorable foreign currency movements of � 1,062 million. On an internal basis, statutory premiums were up by 6.3 %.
In Asia-Pacific, premiums increased by � 905 million or 24.2 %. We recorded dynamic growth all over the region. In Taiwan, which, with � 476 million, contributed the most to premium growth in this region, we recorded dynamic sales of unit-linked products. Furthermore, our local bancassur-
Our income from investments again was the largest absolute contributor to operating profit growth. It improved based on a higher asset base resulting from inflows of funds. These inflows more than compensated the impact from unfavorable foreign currency movements, higher interest rates and a stock market that weakened towards the end of the year. Thus, interest and similar income increased by 3.4 % due to higher interest payments on debt securities as well as higher dividend payments on equity securities.
fair values 2) in � bn 1) For further information on the composition of our Life/Health asset base please refer to page 67. 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.
Net realized gains on investments improved by � 492 million coming from an already high level in the prior year that was marked by a major single transaction namely the disposal of our participation in Schering AG. In the current year, gains stemmed from several transactions that mostly generated higher realized gains on equities and real estate. However, these gains were offset by net impairments on investments due to write-downs on public stock shares. The considerably increased net loss from financial assets and liabilities carried at fair value through income of � 584 million stemmed largely from freestanding derivatives in connection with our German life insurance business.
Ceded premiums written (644) (840) (942) Change in unearned premiums (61) (221) (168) Statutory premiums (net) 48,662 46,360 47,162 Deposits from SFAS 97 insurance and investment contracts (27,853) (25,786) (27,165) Premiums earned (net) 20,809 20,574 19,997 Interest and similar income 13,417 12,972 12,057 Income/loss from financial assets and liabilities carried at fair value through income (net), shared with policyholders 2) (945) (361) 258 Realized gains/losses (net) from investments, shared with policyholders 3) 3,579 3,087 2,523 Fee and commission income 701 630 507
2) The total of these items equals income from financial assets and liabilities carried at fair value through income (net) in the segment income statement included in Note 5 to the consolidated financial statements.
3) The total of these items equals realized gains/losses (net) in the segment income statement included in Note 5 to the consolidated financial statements. 4) The total of these items equals impairments of investments (net) in the segment income statement included in Note 5 to the consolidated financial statements. 5) The total of these items equals restructuring charges in the segment income statement included in Note 5 to the consolidated financial statements. 6) Represents acquisition and administrative expenses (net) divided by statutory premiums (net).
The following table sets forth our Life/Health statutory premiums, premiums earned (net), operating profit and statutory expense ratio by geographic region for the years ended December 31, 2007, 2006 and 2005. Consistent with our general practice, these figures are presented before consolidation adjustments, representing the elimination of transactions between Allianz Group companies in different geographic regions and different segments.
Belgium 664 597 601 310 302 327 Netherlands 399 424 381 137 146 144 Austria 396 380 343 288 283 262 Portugal 115 98 83 73 66 60 Greece 105 98 91 65 62 54 Luxembourg 83 58 47 26 30 25 Western and Southern Europe 3) 1,762 1,655 1,546 899 889 872
South Korea 2,188 2,054 1,752 975 986 972 Taiwan 1,812 1,336 1,347 72 107 136 Indonesia 224 115 69 49 38 31 Malaysia 126 107 106 104 88 73 Other 288 121 35 18 37 10 Asia-Pacific 4,638 3,733 3,309 1,218 1,256 1,222 South America 78 147 141 40 42 36 Other 5) 418 439 455 373 393 390 Subtotal 49,583 47,641 48,522 20,809 20,574 19,997 Consolidation 7) (216) (220) (250) — — — Total 49,367 47,421 48,272 20,809 20,574 19,997
Germany Life 695 521 347 5.8 9.1 8.1 Germany Health 2) 164 184 159 9.8 9.3 9.1 Italy 372 339 334 5.8 6.4 5.4 France 632 582 558 15.4 12.6 15.1 Switzerland 66 50 55 10.6 9.9 8.7 Spain 104 92 71 9.2 9.3 7.4
Belgium 68 62 76 10.1 12.5 12.1 Netherlands 44 50 41 9.8 18.4 13.5 Austria 40 29 35 11.8 12.1 9.4 Portugal 25 25 13 26.5 15.1 19.1 Greece 6 13 7 20.7 22.6 25.9 Luxembourg 4 5 5 10.8 12.2 14.4 Western and Southern Europe 3) 184 182 166 12.1 14.8 13.3
Poland 10 6 3 19.7 17.6 33.3 Slovakia 29 16 8 16.8 18.2 24.4 Hungary 13 12 10 20.4 25.7 26.9 Czech Republic 10 9 6 18.0 20.1 21.5 Croatia 2 4 3 17.1 20.4 22.7 Bulgaria 4 3 3 15.0 14.2 10.5 Romania — — 1 33.8 39.3 28.0 Russia (7) — — 99.5 28.1 —
South Korea 286 64 20 14.4 13.9 16.6 Taiwan 26 14 11 2.9 5.0 4.3 Indonesia 6 3 1 12.7 19.3 25.0 Malaysia 12 10 2 17.2 19.9 14.0 Other (30) (10) (7) 17.0 18.4 37.7 Asia-Pacific 300 81 27 10.2 11.2 12.0 South America — 1 2 32.6 16.9 17.7 Other 5) 30 74 92 — 6) — 6) — 6)
– Operating profit at � 730 million despite financial markets turbulence. – Net trading loss of � 461 million caused by markdowns on asset-backed securities. – Profitability of Private & Corporate Clients division further improved.
At � 730 million, operating profit was down by 46.1 %, including the above mentioned markdowns on asset-backed securities of � 1.3 billion experienced in a number of business lines of the Investment Bank due to the financial markets turbulence. The remaining shortfall in these business lines was also related to the credit crisis. Significant expense savings of � 597 million partly compensated this development. As these savings could not outweigh the decline in revenues, our cost-income ratio increased by 9.3 percentage points to 89.0 %.
Loan loss provisions showed gross releases and recoveries of � 645 million and at the same time new provisons of � 513 million leading to net releases of � 132 million in 2007 (2006: net additions of � 27 million). We recorded releases and recoveries on a high level reflecting our conservative risk approach in the past. Following the approval of new internal models for expected losses which we also use for Basel II, our assumptions regarding the provisioning for the general loan loss provision turned out to be more cautious than necessary and were revised accordingly.
Net realized gains decreased by � 422 million to � 70 million. In the previous year, we recorded large gains from the sale of Dresdner Bank’s remaining shareholding in Munich Re as well as from the disposal of Eurohypo AG.
Restructuring charges declined from � 422 million to � 51 million. In 2006, higher charges were incurred in connection with the “New Dresdner Plus” reorganization programme.
The decline in net income by 58.9 % to � 366 million resulted mainly from lower operating profit as previously described.
Although we recorded lower income before income taxes and minority interests in earnings, our income taxes decreased by only 1.7 % to � 232 million leading to an effective tax rate of 35.2 % (2006: 19.5 %). The especially low effective tax rate in 2006 was caused mainly by the capitalization of corporate tax credits. In 2007 the German tax reform led to a negative one-off effect of � 137 million due to the revaluation of the net deferred tax assets. In addition, no deferred tax assets were recognized for losses from markdowns on asset backed securities.
Income statement and cost-income ratios for the Banking segment and Dresdner Bank
Income before income taxes and minority interests in earnings 714 660 1,275 1,209 1,526 1,455 1) We have enhanced the presentation of revenues and operating profit stemming from trades in shares of Allianz SE and its affiliates. From 2007 onwards, these results are eliminated on Dresdner Bank level, whereas in 2006 they were adjusted on segment level only. At Dresdner Bank this led to reduced operating revenues and reduced operating profit of �6 mn and �6 mn, respectively, compared to the figures as stated in 2006. As a result income taxes decreased by �3 mn. All other changes are related to rounding.
2) Represents interest and similar income less interest expense. 3) Represents fee and commission income less fee and commission expenses. 4) The total of these items equals income from financial assets and liabilities carried at fair value through income (net) in the segment income statement included in Note 5 to the consolidated financial statements.
Private & Corpo1 ) Our reporting by division reflects the organizational changes within Dresdner Bank effective starting with 1Q 2007, resulting in two operating divisions, Private & Corporate Clients (“PCC”) and Investment Banking (“IB”). PCC combines all banking activities formerly provided by the Personal Banking and Private & Business Banking (including Private Wealth Management) divisions as well as our activities with medium-sized business clients from our former Corporate Banking division. IB, with Global Banking and Capital Markets, unites the activities formerly provided by the Dresdner Kleinwort Wasserstein division and the remaining activities of the former Corporate Banking division. Prior year balances have been adjusted accordingly to reflect these reorganization measures and allow for comparability across periods.
Asset Management Operations – Internal growth of 8.1 % in third-party assets under management. – Strong profitability based on growing asset base and tight cost control. – Cost-income ratio at a very competitive 58.3 %.
1) AGI account-based, asset-weighted 3-year investment performance of 3rd party assets vs. benchmark including all equity and fixed income accounts managed on a discretionary basis by equity and fixed income managers of AGI (including direct accounts, Spezialfonds and CPMs of Allianz with AGI Germany). For some retail funds the net of fee performance is compared to the median performance of an appropriate peer group (Micropal or Lipper; 1st and 2nd quartile mean out-performance). For all other retail funds and for all institutional accounts performance is calculated gross of fees using closing prices (revaluated) where appropriate and compared to the benchmark of each individual fund or account. Other than under GIPS, the performance of closed funds/accounts is not included in the analysis. Also not included: WRAP accounts and accounts of Caywood Scholl, AGI Taiwan, AGI Korea, AGF AM and RAS AM.
In the fixed income business, especially in the second half of the year, we again generated a very strong overall investment performance, showing that our long-term approach pays off. We also further improved our investment performance in the equity business.
Third party assets under management increased by 8.1 % on an internal basis. This growth was driven by net inflows and positive market effects, which in aggregate contributed � 62 billion. However, the continuing decline of the U.S. Dollar outweighed most of that asset growth.
Of the net inflows, � 12.4 billion are attributable to fixed income investments, whereas there were outflows of � 2.4 billion from equity investments.
1) Based on the origination of assets. 2) Consists of third-party assets managed by Dresdner Bank (approximately � 18 bn and � 21 bn as of December 31, 2007 and 2006, respectively) and by other Allianz Group companies (approximately � 22 bn and � 20 bn as of December 31, 2007 and 2006, respectively).
Major awards received during the year reflect our success in the asset management business in 2007: – Morningstar has named PIMCO´s Bill Gross and team the “2007 Fixed-Income Fund Manager of the year”. Bill Gross is the first fund manager ever to receive three Morningstar Fund Manager of the year awards.
– Allianz Global Investors Germany was awarded with five stars again according to “Capital” magazine ranking.
The aggregate net loss from non-operating items declined to � 492 million, down � 64 million compared to the prior year period. Acquisition related expenses declined by 7.7 %. to � 491 million. This was mainly driven by a positive foreign exchange effect of � 48 million. In real terms, acquisition related expenses grew 1.2 %, mainly due to valuation effects of PIMCO LLC Class B Units (or “Class B Units”) as a result of increased operating performance at PIMCO. This outweighed the lower number of outstanding Class B Units in 2007 as compared to 2006. As of December 31, 2007, the Allianz Group had acquired 43,917 of the 150,000 Class B Units1) originally outstanding. Going forward, we expect acquisition-related expenses to be mainly driven by the number of Class B Units outstanding and our operating profit development at PIMCO.
Due to the minority buy-outs of AGF and RAS, minority interests in earnings reduced by � 27 million to � 22 million.
2) Represents interest and similar income less interest expense and investment expenses. 3) For the Asset Management segment, total revenues are measured based upon operating revenues.
Corporate Activities – Operating loss declined by � 506 million driven by higher investment result.
The operating loss declined significantly due to higher current investment income and lower expenses. This improvement along with a positive trading result and a further increased level of realized gains led to a much lower loss before taxes, whereas the negative tax effects almost off-set these positive developments. Net income thus slightly improved by � 21 million to a net loss of � 158 million.
Net income Net income decreased to � 10 million. This development was mainly attributable to the non-operating loss. Furthermore, net income was impacted by higher taxes and increased minority interests in earnings.
Balance Sheet Review – Shareholders’ equity of � 47.8 billion. – Strong net income of � 8.0 billion partially offset by various impacts following minority buy-outs.
ASSETS Cash and cash equivalents 31,337 33,031 Financial assets carried at fair value through income2) 185,461 198,992
LIABILITIES AND EQUITY Financial liabilities carried at fair value through income 126,053 121,822 Liabilities to banks and customers 336,494 376,565 Unearned premiums 15,020 14,868 Reserves for loss and loss adjustment expenses 63,706 65,464 Reserves for insurance and investment contracts 292,244 287,032 Financial liabilities for unit linked contracts 66,060 61,864 Deferred tax liabilities 3,973 4,588 Other liabilities 49,324 49,764 Certificated liabilities 42,070 54,922 Participation certificates and subordinated liabilities 14,824 16,362 Total liabilities 1,009,768 1,053,251
2) As of December 31, 2007, � 23,163 mn are pledged to creditors and can be sold or repledged (2006: � 90,211 mn). 3) As of December 31, 2007, � 7,384 mn are pledged to creditors and can be sold or repledged (2006: � 3,156 mn).
in � mn 1) Does not include minority interests of � 3.6 bn, of � 7.2 bn and of � 8.4 bn as of December 31, 2007, 2006 and 2005, respectively. Please see note 23 to the consolidated financial statements for further information. Includes retrospective correction as of January 1, 2005 of � 0.8 bn. Please see note 3 to the consolidated financial statements for further information.
In 2007, our shareholders’ equity slightly decreased by 3.8 % to � 47.8 billion. Additions to the shareholders’ equity were primarily the 2007 net income of � 8.0 billion and a capital increase of � 2.8 billion raised as part of financing the AGF minority buy-out. The accounting treatment of the goodwill related to the minority buy-outs amounting to � 7.0 billion together with the transfer on disposal of unrealized gains and losses to realized of � 2.5 billion were the largest downward movements. Furthermore foreign currency translation effects of � 1.4 billion and the dividend payment of � 1.6 billion contributed to the overall reduction in our shareholders’ equity.
Total assets and liabilities decreased by � 48.9 billion and � 43.5 billion, respectively. In the following sections we analyze important developments within the balance sheets of our Life/Health, Property-Casualty and Banking segments as presented on page 162. Relative to the Allianz Group’s total assets and total liabilities, we consider the total assets and total liabilities from our Asset Management segment as immaterial and have, accordingly, excluded these assets and liabilities from the following discussion. Our Asset Management segment’s results of operations stem primarily from its business with third-party assets. Please see pages 60 and 61 for further information on the development of our thirdparty assets.
Property-Casualty assets Our property-casualty asset base decreased by � 2.2 billion to � 97.6 billion. In the segment’s investments, excluding affiliates, we recorded a decline of � 5.6 billion to � 73.7 billion. Thereof, debt securities decreased by � 2.0 billion to � 50.3 billion as a result of higher interest rates which had direct negative impact on the fair value. Equity investments were down � 2.6 billion to � 16.5 billion mainly caused by a strategic decision to actively decrease our equity exposure in order to reduce equity gearing.
Life/Health asset base fair values 1) in � bn 1) Loans and advances to banks and customers, held-to-maturity investments, and real estate held for investment are stated at amortized cost. Investments in associates and joint ventures are stated at either amortized cost or equity, depending upon, among other factors, our ownership percentage. For further information see note 2 to the consolidated financial statements.
4) Includes debt securities of � 9.3 bn and � 7.3 bn as of December 31, 2007 and 2006, respectively, equity securities of � 3.3 bn and � 2.9 bn as of December 31, 2007 and 2006, respectively, and derivative financial instruments of � (4.5) bn and � (4.4) bn as of December 31, 2007 and 2006, respectively.
Group Management Report Allianz Group Annual Report 2007 aggregate, statutory premiums collected for unit-linked insurance and investment contracts amounted to � 17.3 billion.
Life/Health liabilities Life/Health reserves for insurance and investment contracts were up 1.8 % to � 283.1 billion including an increase of 3.0 % or � 7.6 billion in aggregate policy reserves mainly from domestic business partly offset by a decrease in provisions for premium refunds of 9.2 % or � 2.6 billion, triggered for the most part by subsidiaries in France, Germany and Italy.
Banking loans and advances to banks and customers in � bn 1) Includes loan loss allowance of � (0.8) bn and � (1.0) bn as of December 31, 2007 and 2006, respectively.
2) Due to changes in the presentation of financial instruments we retrospectively adjusted figures for 2006. For further information see Note 3 to our consolidated financial statements.
In the ordinary course of business, the Allianz Group enters into arrangements that, under IFRS, are not recognized on the consolidated balance sheet and do not affect the consolidated income statement. Such arrangements remain offbalance sheet as long as the Allianz Group does not incur an obligation from them or become entitled to an asset itself. As soon as an obligation is incurred, it is recognized on the Allianz Group’s consolidated balance sheet, with the corresponding loss recorded in the consolidated income statement. However, in such cases, the amount recognized on the consolidated balance sheet may or may not, in many instances, represent the full loss potential inherent in such off-balance sheet arrangements. The Allianz Group does not rely on off-balance sheet arrangements as a significant source of revenue. The types of off-balance sheet arrangements that Allianz is involved in are described below.
In the normal course of business, we enter into various irrevocable loan commitments, leasing commitments, purchase obligations and various other commitments. We also extend market value guarantees to customers, as well as execute indemnification contracts under existing service, lease or acquisition transactions. Fee income from issuing guarantees is not a significant part of our total income, and losses incurred under guarantees and income from the release of related provisions were insignificant for each of the last three years For further information, see Note 46 to our consolidated financial statements.
In providing these services, the Allianz Group may in some instances have a financial interest in such financing structures. However, the risk of financial loss may be mitigated through participations in such losses by other third party investors.
The Allianz Group also engages in establishing and managing investment fund SPEs with a goal of developing, marketing and managing these funds. During the establishment phase of these funds, the Allianz Group may provide initial capital for the SPEs to acquire securities until either sufficient thirdparty investors purchase participations in the funds or the SPEs are terminated. Certain of these SPE’s funds’ obligations may include capital maintenance and/or performance guarantees given to the investors. The guarantees we provide differ both in terms of amount and duration according to the relevant arrangements. The Allianz Group receives fee and commission income from investors for the management of these SPEs.
As required under IFRS, the Allianz Group consolidates an SPE when the substance of the relationship between Allianz and the SPE indicates that the SPE is controlled by Allianz. The following table presents the assets held by all SPEs for which the Allianz Group controls the SPE by means other than a majority voting interest. Therefore, these SPEs are consolidated in the Allianz Group’s consolidated financial statements as of December 31, 2007.
Structured finance transactions 12,413 Corporate notes, German bund securities, lease receivables, cash funds 12,413 —
Investment funds 1,739 Hedge fund units, bonds, investment funds and derivatives 1,739 —
Other 469 Real estate, equity instruments and cash and cash equivalents 469 —
Investment funds Guarantee obligations 2,039 1,852 Investment funds Investment manager and/or equity holder
Other Client financing transaction 1,684 1,390 note positions, committed liquidity facilities (whether drawn or not), or guarantee notionals. It describes a worst case scenario without considering the asset rating, available collateral, other types of protection or hedging activities that can and do significantly reduce the economic exposure of these SPEs to the Allianz Group. The non-consolidated SPEs are aggregated based on principal business activity, as reflected in the first column. The nature of the Allianz Group’s interest in these SPEs can take different forms, as described in the second column.
The Group’s liquidity facilities and capital maintenance guarantees as of December 31, 2007 are summarized above as with a “maturity less than 1 year”.
Investment funds – guarantee obligations — — — 1,852 — — 1,852
Vehicles used for CBO and CDO transactions — 1 — — — — 1 1) The notes category primarily consists of CDOs and CLOs. 2) Maximum amount of liquidity facility which could but must not be drawn.
The following table provides the years to maturity of the Allianz Group’s maximum exposure to loss in the non-consolidated SPEs.
Years to maturity Less than 1 1-3 3-5 Over 5 Equity Total � mn � mn � mn � mn � mn � mn
Investment funds – guarantee obligations 1,852 — — — — 1,852
Vehicles used for CBO and CDO transactions 1 — — — — 1
As of December 31, 2007, the weighted average life of K2 cash assets is 3.34 years, and the weighted average life of K2 credit derivative assets is 3.89 years.
K2 raised its funding by issuing shares, subordinated capital notes (“CN”), commercial paper (“CP”) and mid-term notes (“MTN”). K2’s senior funding is broken down in the following categories: European commercial paper (“E-CP”), European mid-term notes (“E-MTN”), U.S. commercial paper (“US-CP”) and U.S. mid-term notes (“US-MTN”). The weighted average life of K2’s senior liabilities is 0.56 years as of December 31, 2007. Due to the extraordinary disruption of CP/MTN markets that started in 2007, liquidity has temporarily been provided by Dresdner Bank through buy/sell-back financing on armslength conditions.
The maximum limit of the losses to be borne by capital note holders currently amounts to �1.3 billion. Dresdner Bank currently holds �47 million or 3.5% of the capital notes. The variable interests that Dresdner Bank holds in K2 consist of capital note coupons and investment management fees.
In addition, Dresdner Bank provides K2 with a committed liquidity facility amounting to �102 million. The obligation to fund K2 under the committed liquidity facility is at the request of K2 and is subject to certain conditions precedent being met. Terms that would limit Dresdner Bank’s obligation to provide K2 funding include the standard conditions regarding enforceability (e.g., that the facility does not contravene applicable law and that no liquidity event of K2’s default is outstanding or would result from the making of the liquidity advance). There are several other liquidity providers, each of whose facility ranks pari passu with Dresdner Bank’s facility and the terms and conditions of the facilities are similar in all material respects.
Our liquidity resources result from the operations of our Property-Casualty, Life/Health, Banking and Asset Management segments, as well as from capital raising activities. In the context of a financial services company, where our working capital is largely representative of our liquidity, we believe our working capital is sufficient for our present requirements.1)
Allianz owns several finance companies. We execute our external debt financing and other corporate financing purposes primarily through two of these companies: Allianz Finance B.V. and Allianz Finance II B.V., both incorporated in the Netherlands.
1) For further information regarding the management of our liquidity risk please refer to our Risk Report on page 94.
Our total certificated liabilities outstanding as of December 31, 2007 was � 42,070 million (December 31, 2006: � 54,922 million). Of these, � 28,523 million are due within one year.2) Our total participation certificates and subordinated liabilities outstanding as of December 31, 2007 were � 14,824 million (December 31, 2006: � 16,362 million). Thereof, � 1,476 million are due within one year.3)
In December 2003, Allianz SE (then Allianz AG) established a Medium Term Note (or “MTN”) program which was established for the purposes of external and internal debt issuance. The aggregate volume of debt issued by Allianz Finance B.V. and Allianz Finance II B.V. for the years ended December 31, 2007 and 2006 was � 0.3 billion and � 2.3 billion, respectively. As of December 31, 2007, Allianz SE had money market securities outstanding with a carrying value of � 2,929 million.
On March 9, 2007 we redeemed 64.35 % of the Basket Index Tracking Equity Linked Securities (“BITES”) exchangeable bond, representing � 0.8 billion notional, issued in February 2005, with Munich Re shares.
2) See Note 21 to our consolidated financial statements for further information. 3) See Note 22 to our consolidated financial statements for further information.
On April 2, 2007, Allianz Finance II B.V. issued USD 400 million of senior bonds, guaranteed by Allianz SE, with a floating coupon rate. The maturity of this bond is April 2, 2009.
1) See Note 52 to our consolidated financial statements for further information on this early redemption.
Allianz SE‘s issued debt as of December 31, 2007 and 2006 1)
Interest expense in 1. Senior bonds 5.0 % bond issued by Allianz Finance B.V., Amsterdam Volume � 1.6 bn Year of issue 1998 Maturity date 3/25/2008
Interest expense � 120.5 mn 6.5 % bond issued by Allianz Finance II B. V., Amsterdam Volume � 1 bn Year of issue 2002 Maturity date 1/13/2025
Interest expense � 8.3 mn Total interest expense for exchangeable bonds � 8.3 mn 4. Participation certificates Allianz SE participation certificate Volume � 85.1 mn
Positive net cash flow provided by operating activities was � 12.7 billion in 2007, down � 8.0 billion from a year ago. This decline resulted primarily from higher net outflows for collateralized refinancing activities in the banking segment.
Lower net cash outflow used in investing activities, at � 4.6 billion in 2007 compared to � 34.9 billion in the prior year, was mainly attributable to an increase in both available-forsale investments and change in other loans and advances to banks and customers .
Overall, cash and cash equivalents decreased by � 1.7 billion to � 31.3 billion as of December 31, 2007.
The Allianz Group holds cash and cash equivalents in more than 30 different currencies, although such cash and cash equivalents are held primarily in Euros, U.S. Dollars and Swiss Francs.1)
1) See Note 6 to our consolidated financial statements for additional information on the Allianz Group’s cash and cash equivalents.
Risk Report Allianz risk management is designed to add value by focusing on both risk and return.
As a provider of financial services, we consider risk management one of our core competencies. It is therefore an integrated part of our business processes. The key elements of our risk management are: – Promotion of a strong risk culture supported by a robust risk governance structure.
Two additional Board of Management level committees focus on the Group’s risk exposure. The Group Risk Committee monitors the Allianz Group’s risk profile and availability of capital in an effort to maintain an adequate relationship between return on investment and risk. Its role is to provide for comprehensive risk awareness within the Allianz Group and to continually improve risk control. It also defines risk standards and establishes risk limits. Furthermore, it is responsible for recommending and coordinating measures to mitigate risk. The Group Finance Committee makes decisions about investments and market risks, while complying with the Allianz Group’s risk framework.
Group Risk is also responsible for monitoring the accumulation of specific types of risks across business lines, in particular with respect to natural disasters and business counterparties.
The risk governance structure is further complemented by Group Audit, Group Compliance and Legal Services functions. On a periodic basis, Group Audit independently reviews the risk governance implementation, performs quality reviews of risk processes and tests adherence to business standards. Group Legal Services seek to mitigate legal risks with support from other departments. Legal risks include legislative changes, major litigation and disputes, regulatory proceedings and contractual clauses that are unclear or construed differently by the courts. The Allianz Group’s objective is to ensure laws and regulations are observed, to react appropriately to all impending legislative changes or new court rulings, to attend to legal disputes and litigation, and to provide legally appropriate solutions for transactions and business processes.
Allianz Group’s risk landscape is continually evolving due to changes in our environment. In order to adapt, the Trend Assessment Committee is responsible for early recognition of new risks and opportunities evaluating long-term trends that may have a significant impact on the Allianz Group’s risk profile. In addition, the Allianz Climate Core Group is a panel of internal experts that examines the possible effects of climate change on our business developing risk management strategies and identifying potential opportunities resulting from climate change.
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 covered 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 our covered business based on values (i) under current best estimate conditions and (ii) 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.
The degree to which diversification can be realized depends in part on the level of relative concentration of those risks. For example, the greatest diversification is in general obtained in a balanced portfolio without any disproportionately large exposures to any one or more risks. In addition, the diversification effect depends upon the relationship between sources of risks. The degree of relationship between two sources of risk is referred to as correlation, characterized by a value between “– 1” and “+1”. Where possible, we develop correlation parameters for each pair of risks through statistical analysis of historical data. If sufficient historical data is unavailable, we use conservative professional judgment, ruling out negative correlations, and, in general, we set the correlation parameters to represent the level of interdependency of risks under adverse conditions.
– Substantially all of our derivatives (options, swaps and futures), in particular if they form part of the operating entity’s regular business model (e.g., at Dresdner Bank or Allianz Life United States) or if they have a significant impact on the resulting internal risk capital (e.g., hedges of Allianz SE or in the Life/Health segment, if material obligations to policyholders are hedged through financial derivatives). Typically, embedded derivatives contained in a host contract are also included.
2) As commodity risk is not significant on the Group level, it is covered in our internal risk capital model within currency risk. 3) 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. 4) Reinsurance credit risk also covers the premium risk which our credit insurance entity Euler Hermes is exposed to due to its business model, as this type of risk is a special form of credit risk. 5) In the Banking segment, credit risks include default and migration risks arising from the lending and securities business and our derivatives trading activities; for the latter, settlement risk is additionally taken into account. Furthermore, credit risks include country (and transfer) risk.
For smaller insurance operating entities that have an imma -terial impact on the Group risk profile, and for the Asset Management segment, we assign internal risk capital requirements based on an approach similar to Standard & Poor’s standard model, using the same risk categories as for our internal risk capital model, thereby allowing us to consistently aggregate internal risk capital for all segments to the Group level. More specifically, approximately 99 % of the investments managed by the Asset Management segment are held for the benefit of either third parties or Allianz Group insurance entities and, therefore, do not result in significant market and credit risk for the Asset Management segment. As a result, the internal risk capital requirements for the Asset Management segment only reflect businesws risk. Furthermore, Dresdner Bank represents substantially all of the internal risk capital of our Banking segment accounting for 96 % of our total Banking segment’s internal risk capital. Therefore, the detailed risk discussion in the Banking segment below relates to Dresdner Bank only.
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. 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 non-Euro denominated assets and liabilities held at the Group level in currencies different to Euro. This currency risk is monitored and managed centrally at the Allianz Group level by Group Corporate Finance & Treasury and is, therefore, mostly allocated to the Corporate segment.
We assume that model parameters derived from historical data can be used to characterize future possible risk events; if future market conditions differ substantially from the past, as in the case of the 2007 credit crisis for which there was no precedent, then our VaR approach may be too conservative or too liberal in ways that can not be predicted. Our ability to back-test the model’s accuracy is limited because of the high confidence level of 99.97 % and one-year holding period.
Furthermore, as historical data is used to calibrate the model, it cannot be used for validation. Instead, we validate the model and parameters through external reviews by independent consulting firms focusing on methods for selecting parameters and control processes. Overall, we believe that our model adequately assesses the risks to which we are exposed.
The Allianz internal risk capital model plays a significant role in solvency management and capital allocation. Our aim is to ensure that the Allianz Group is adequately capitalized at all times, even following a significant adverse event, and that all operating entities meet their respective capital requirements. In addition, we employ a value-based approach (Economic Value Added or “EVA”®), among other approaches, to measure and manage our business activities as well as to optimize capital allocation across the Allianz Group. Internal risk capital is a key parameter of our EVAapproach.
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 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. In doing so, we take into account the benefits of a single operating entity being part of a larger, diversified Group.
Allocated internal risk capital by risk category (total portfolio before minority interest) in � mn
Under the EU Financial Conglomerates Directive, a supplementary European Union directive, a financial conglomerate is defined as any financial parent holding company that, together with its subsidiaries, has significant cross-border and cross-sector activities. The Allianz Group is a financial conglomerate within the scope of the Directive and related German law. The law requires that a financial conglomerate calculates the capital needed to meet its solvency requirements on a consolidated basis.
At December 31, 2007, based on the current status of discussion, our eligible capital for the solvency margin required for our insurance segments and our banking and asset management business is � 45.5 billion (2006: � 49.5 billion 1)) including off-balance sheet reserves 2) , surpassing the minimum legally stipulated level by � 16.6 (2006: � 23.4 billion). This margin results in a preliminary cover ratio 3) of 157 % at December 31, 2007 (2006: 190 %). The decrease of 8.1 % in eligible capital was primarily driven by a decrease of shareholders ’ equity due to the buy-out by Allianz of the minority interests in AGF. See Note 23 to our consolidated financial statements for further information with respect to capital requirements.
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, 2007, the financial strength of Allianz SE was rated by Standard & Poor’s as “AA” (stable outlook), by A. M.
2) Off-balance sheet reserves represent the difference between the fair value and the amortized cost of real estate used by third parties and investments in associates and joint ventures, net of deferred taxes, policyholders’ participation and minority interests.
Disproportionately large risks that might accumulate and have the potential to produce substantial losses (e.g., natural catastrophes or credit events) are closely monitored on a standalone basis (i.e., before the diversification effect) and are subject to a global limit framework. For example, the Management Board of Allianz SE has implemented a framework of natural catastrophe limits at both the operating entity and Group levels in an effort to reduce potential earnings volatility and restrict potential losses from events having an occurrence probability of once in 250 years. Group limits are linked to the planned operating profit and the limits on operating entity level are based on the PropertyCasualty net asset value. Traditional reinsurance coverage and dedicated financial transactions on Group level are examples of two instruments to mitigate the peak risks and to limit the impact of adverse conditions on our financial results and shareholders’ equity.
Similarly, the Group monitors and limits credit exposures to single obligors and groups. We identify and measure risk concentrations in terms of non-diversified internal risk capital in line with the risk categories covered in our internal risk capital model. In the subsequent sections all risks are presented before and after diversification and concentrations of single sources of risk are discussed accordingly.
In the following, we present our Group-wide internal risk capital related to market risks.
1) Foreign currency risks are mainly allocated to the Corporate segment (please see “Internal Risk Capital Framework – Scope” for further information).
2) As commodity exposure is limited to the Banking segment only and not significant on the Group level, it is covered in our internal risk capital model within currency risk.
As previously discussed, we determine internal risk capital figures on a quarterly basis. The table below presents the average internal risk capital for market risk calculated over the four quarters of 2007 and 2006, as well as the high and low quarterly internal risk capital amounts calculated in both years.
The Allianz Group holds and uses many different financial instruments in managing its businesses. Grouped according to our internal risk capital model categories, the following are the most significant market risks in terms of market values: equity price risk (including common shares and preferred shares), interest rate risk (from bonds, loans and mortgages) and currency risk (especially the impact of foreign exchange rate movements on the net asset value of our non-Euro denominated operating entities).
The interest rate risk to which the Property-Casualty and Life/Health segments are exposed arises from the net position between our insurance liabilities and the investments in fixed income instruments, in particular bonds, loans and mortgages, backing policyholder obligations that are different in terms of maturity and size. Our internal risk capital model provides management with information regarding the cash flow profiles of the segments’ liabilities, which allows for active monitoring and management of our assets and liabilities. While the potential payments related to our liabilities in the Property-Casualty segment are typically shorter in maturity than the financial assets backing them, the opposite usually holds true for our Life/Health segment, which provides us with a natural hedge at the Allianz Group level.
Dresdner Bank’s VaR model, which is used to evaluate capital adequacy for regulatory purposes and which produces the input for the Group’s internal risk capital model, applies a confidence level of 99 % and a 10-day holding period. This
The VaR for market risks within Dresdner Bank’s trading portfolio is calculated based on the industry-standard and Basel II compliant confidence level of 99 % and holding period of 10 days. The Dresdner Bank diversified VaR amounted to � 44 million at December 31, 2007, compared to � 57 million at December 31, 2006. This decrease was mainly caused by lower interest rate risks due to an adjusted risk exposure.
VaR statistics for market risks within Dresdner Bank’s trading portfolio (99 % confidence level, 10-day holding period)
� mn � mn � mn � mn � mn � mn � mn � mn 1) The high and low values for non-diversified VaR can not be reasonably calculated as a sum, since the single values are measured on different dates.
On the level of the Corporate segment we are exposed to foreign currency risk because some of our subsidiaries’ local currencies are different from the Euro. If non-Euro foreign exchange rates decline against the Euro, from a
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 (“EAD”) and loss given default (“LGD”). These measurements are all estimated using statistical analysis and professional judgment. Our aggregation methodology is comparable to approaches widely used in the industry known as “structural model”. In a structural model, a counterparty is deemed to have defaulted when the value of its total assets is lower than its total liabilities. Since changes in the asset value of a company determine whether it defaults or migrates from one credit class to another, the correlation between different firms’ asset values determines the correlation between the firms’ defaults and migrations. Estimating these parameters allows us to aggregate credit risk across individual obligors using Monte-Carlo simulations to obtain the loss profile of a given portfolio – i.e., its loss probability distribution. The loss profile is the basis of our internal credit risk capital model.
We monitor and manage credit risks pursuant to a limit system applicable to the entire Allianz Group. The limit system aggregates major risks having Group-wide significance such as credit insurance, lending, reinsurance recoverables and our fixed income investments and serves as the basis for controlling the risk on an Allianz Group-wide basis.
In spite of the overall difficult credit market worldwide in the second half of 2007, our internal credit risk capital remained rather stable in 2007 in comparison with 2006, mainly due to risk mitigating measures such as the closing of a noninvestment grade commercial paper portfolio at Dresdner Bank early in 2007.
We take steps to limit our liability from insurance business by ceding part of the risks we assume to the international reinsurance market. When selecting our reinsurance partners, we consider only companies with strong credit profiles.
We may also require letters of credit, cash deposits or other financial measures to further mitigate our exposure to credit risk. To manage the related credit risk, we compile Allianz Group-wide data on potential and actual recoverables in respect of reinsurance losses. At December 31, 2007, 77 % of the Allianz Group’s reinsurance recoverables were distributed among reinsurers that had been assigned at least an “A” rating by Standard & Poor’s. Non-rated reinsurance recoverables represented 23 % of the total reinsurance recoverables at December 31, 2007, which is a reduction of 8 % in non-rated exposure from December 31, 2006. Reinsurance recoverables without Standard & Poor’s rating include exposures to brokers, companies in run off and pools, where no rating is available, and companies rated by A.M. Best.
Investment credit risk As of December 31, 2007, our operating entities in the U.S. accounted for 20 % of the non-diversified internal risk capital allocated to our Property-Casualty, Life/Health and Corporate segments for credit investment risk.
Fixed income investments by rating class as of December 31, 2007 fair values in � bn
Actuarial risks consist of premium and reserve risks in the Property-Casualty segment as well as biometric risks in our Life/Health segment. In the Banking and Asset Management segments, actuarial risks are not relevant. Although the Corporate segment provides some guarantees that transfer small parts of the actuarial risk away from local entities, such risk is primarily transferred by internal reinsurance and allocated to the Property-Casualty segment.
2) Allianz SE has a conditional commitment to make capital payments to Fireman’s Fund Insurance Co. In particular, Allianz SE is required to make these payments in case of future negative developments of the reserves for the year 2003 and before. They are limited to US Dollar 1.1 billion.
The table below presents the average internal risk capital calculated for actuarial risks over the four quarters of 2007 and 2006, as well as the high and low quarterly internal risk capital amounts calculated in both years.
A substantial portion of the Property-Casualty segment’s non-diversified internal actuarial risk capital was assigned to our operating entities in Germany, Italy, France and the U.S. (47 % as of December 31, 2007).
Premium risk Premium risk represents risk that, during a one-year time horizon, underwriting profitability is less than expected. Such 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.
Average, high and low allocated internal actuarial risk capital by source of risk (total portfolio before minority interests and after Group diversification)
� mn � mn � mn � mn � mn � mn loss potential net of reinsurance for European windstorm is approximately � 900 million, measured at a probability level of once in 250 years (i.e., 0.4 %).
The operating entities identify and evaluate relevant operational risks and control weaknesses through a bottom-up approach via a structured self assessment. Complementing our pro-active local management approach, operational losses are collected in a central loss database and an analysis of the causes for significant losses is used to enable the operating entities to implement measures to avoid or reduce future losses. The measures adopted may include revising processes, improving failed or inappropriate controls, installing comprehensive security systems and strengthening emergency plans. This structured reporting is designed to provide comprehensive and timely information to senior management of the relevant local operating entities.
There are certain risks that cannot be fully quantified across the Group using our internal risk capital model. For these risks, we also pursue a systematic approach with respect to identification, analysis, assessment and monitoring. In general, the risk assessment is based on qualitative criteria or scenario analyses. The most important of these other risks include liquidity, reputational and strategic risk.
Corporate 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.
Liquidity risk in our insurance segments is a secondary risk following external events, such as natural disasters, that are generally reflected in our internal risk capital model. Therefore, limiting and monitoring of the associated primary risks (such as through the use of reinsurance) also helps limit our liquidity risk related to such events. The quality of our investments also provides comfort that we can meet high liquidity requirements in unlikely events. Furthermore, in the case of an extraordinary event, a portion of the applicable payments may usually be made with a certain time lag, which reduces the risk that short-term current payment obligations cannot be met. We employ actuarial methods for estimating our liabilities arising from insurance contracts. In the course of standard liquidity planning we reconcile the cash flows from our investment portfolio with the estimated liability cash flows. These analyses are performed on the operating entity level and aggregated at the Group level. Excess liquidity is centrally pooled on the Group level and can be transferred to single operating entities if necessary.
Banking segment In this segment, the treasury function is responsible for liquidity management and the risk function is responsible for monitoring liquidity risk for regulatory as well as internal purposes. Liquidity risk monitoring includes a reporting process for limit breaches and provisions for emergency planning. Liquidity risk measurement is based on Dresdner Bank’s liquidity management system, which models the maturities of all cash flows under different scenario assumptions and compiles a maturity mismatch profile (i.e., net cash flow for different maturities) taking into account available prime-rated securities as additional source of liquidity. Limits on liquidity gaps are established to manage short-term liquidity risk. Funding ratio limits are established for managing medium- and long-term structural liquidity risk for maturities of more than one year.
In 2007, we reviewed the risk factor incorporated within the model used to derive business risk capital for the Asset Management segment. As a result, a level of conservatism within this factor will be reduced starting in 2008 to better reflect the risk capital needs of this segment.
fore, reputational risk can both cause and result from losses in all risk categories such as market or credit risks.
Group Risk identifies and assesses this risk qualitatively as part of a quarterly evaluation. On the basis of this evaluation, Group Risk creates an overview of local and global risks which also includes reputational risks, analyses the risk profile of the Allianz Group and regularly informs management about the current situation.
In 2007, a key initiative started to consolidate infrastructure and to establish a best practice technical platform. Once fully operational, this platform will allow for efficient and auditable processes and enhanced capabilities to analyze, aggregate and manage risks across the Group.
In early 2008, we introduced our enhanced internal risk capital model for the purpose of quarterly risk reporting and risk related-performance measurement EVA in the Life/ Health segment. The enhanced model is part of an integrated approach addressing also the calculation of Market
– Motor (liability / own damage) – Liability – Homeowner – Accident –Travel and assistance
Allianz Group Success Factors Founded in 1890 and with 117 years of experience in the financial services industry, the Allianz Group is committed to providing financial security to a broad base of customers ranging from private individuals to large multinational corporations. Beyond the quality of our financial performance a number of other activities and factors are important to the sustainable growth of our competitive strength and company value. These include, but are not limited to, our diversified business model, the reduction of organizational complexity, our value-based management approach, the monitoring of our non-financial performance and of crucial importance, our employees.
We are one of the leading insurance groups in the world and rank number one in the German property-casualty and life insurance markets based on gross premiums written and statutory premiums, respectively.1) We are also among the largest insurance companies in a number of the other countries in which we operate. Our product portfolio includes a wide array of property-casualty and life/health insurance products for both private and corporate customers.
2) For a more detailed discription of our geographic diversification, please refer to page 108.
Our banking activities are primarily conducted through the Dresdner Bank Group (or “Dresdner Bank”), one of the leading commercial banks in Germany1), accounting for 94.8 % of our total Banking segment’s operating revenues in fiscal year 2007 (2006: 96.0 %). While Dresdner Bank focuses on selected geographic regions worldwide, Germany is its primary market. Dresdner Bank is present in the world’s major financial centers and operates its banking business mainly through 1,074 (as of December 31, 2007) branch offices, of which 1,019 are located in Germany and 55 outside of Germany.
The Investment Banking division, known as Dresdner Kleinwort, focuses on German and multinational groups, financial investors and institutions requiring access to the capital markets and to global banking services.
We are subject to competition from both bank and non-bank institutions that provide financial services and, in some of our activities, also from government agencies. Substantial competition exists among a large number of commercial banks, saving banks, other public sector banks, brokers and dealers, investment banking firms, insurance companies investment advisors, mutual funds and hedge funds that provide the types of banking products and services that our banking operations offer.
– Systematic – Sector funds – Country funds – Stocks Plus
– Money Market – Low Duration – Real Return – Global – Investment Grade – Diversified Income – High Yield – Emerging Markets – Convertible Bonds
– Life-cycle concepts – Multi-asset solution – Variable-annuity products – Asset/Liability management – Risk management concepts
We are one of the five largest asset managers in the world.1)
– Sustainabilty Property-Casualty and Life/Health – Customer Focus & Innovation – Distribution – Operational Transformation Program – Global Talent Management the NAFTA Markets division was integrated into Anglo Broker Markets / Global Lines.
Under the umbrella of our “+One” transformation program, a number of ongoing initiatives are being energetically pursued with the goal of establishing Allianz as a trusted provider of a full range of global financial services, which delivers sustainable, profitable growth.
We have in place a Sustainability Program for our PropertyCasualty and Life/Health segments. This program is designed to identify and redefine best practices for products, processes and services to make them common practice throughout the Group’s insurance operations as well as to enhance the Group’s distribution and client management.
The target of the Global Talent Management initiative is to systematically optimize global recruiting, development and reward processes to maximize talent quality and performance in the Group.
On July 10, 2007, the Allianz Group completed the squeezeout procedure for AGF and now holds 100 % of the shares of AGF. As a result, the AGF shares are no longer listed on the Paris stock exchange Euronext.
Concurrent with the AGF transaction, and in order to provide the share component of the consideration to AGF shareholders, Allianz completed a capital increase involving the issuance of approximately 16.97 million new Allianz SE shares. The total cash component of the consideration for the acquisition of the outstanding AGF shares amounted to approximately � 7.1 billion.
On February 21, 2007 Sistema and Allianz signed a share purchase agreement, whereby Allianz became a major shareholder of ROSNO Group, one of the four leading insurance companies in Russia. Allianz now holds approximately 97 % in ROSNO, which is active in the Property-Casualty, Life/ Health and Asset Management businesses. With this acquisition, we expanded our number one position in Central and Eastern Europe and will become by far the most important foreign majority owner of an insurance company in our strategic market Russia.
In order to realize the potential for operational and strategic synergies, we continued to pursue the reorganization projects started in recent years and complemented these with additional new activities: Reorganization of German Insurance Operations
We continued the reorganization of our German insurance operations which was announced in 2005, by consolidating our major insurance subsidiaries under the Allianz SE wholly-owned holding company Allianz Deutschland AG and revising our regional sales and service structure. This process is part of our ongoing effort to simplify structures and reduce complexity within the Allianz Group, enabling us to react to changes in our markets with greater speed, focus and flexibility. Our goal is to create one joint presence of our insurance operations, with customers perceiving Allianz as one unit with comprehensive high quality services geared toward the customer’s needs. The reorganization is part of our strategy to further develop our leading position in the German insurance market.
At the beginning of 2007, we completed negotiations with the works councils, such negotiations being an important prerequisite for the implementation of the new operating model.
EVA® is an all-encompassing tool for coordination and steering which connects our internal management approach with a capital market orientation. To create the EVA® we calculate normalized profit minus capital charges. Whereby capital charges are defined as our capital multiplied with our cost of capital.
To get the normalized profit we minimize the impact of equity market fluctuations by basing our calculations on “normalized” long-term average returns.
It is our role to be attentive that the sum of our risks is affordable for the Group and that the achieved return justifies the amount of capital employed. Therefore we assign available capital to our operating entities based on their a risk-return profile and their strategic position. Using this process, our companies can only ensure that they receive growth capital if they: – operate in a profitable market or business; – transform their market position into sustainable creation of value and a leading market position; – maintain an orientation and competency that fits within the long-term strategy of the Allianz Group; and – are able to generate distributable earnings in an amount that is at least equal to their cost of capital.
The requirement to meet the cost of capital is just the minimum we demand. Over the medium-term, our objective is to generate a return of 15 % or more on the capital employed.
Therefore, our companies must determine what business activities will increase their value and concentrate their efforts and resources on these activities. Further, new value drivers must be created, for example, through new products, more cost-effective processes and optimized distribution channels. Local management must also prevent value being 1) For detailed information on the determination of our internal risk capital please see pages 78 to 81 of our risk report.
2) Return on risk adjusted capital represents normalized profit divided by average risk adjusted capital.
We aim to be the employer of choice for top-performing talents. While we have already laid the foundations, we must step up our efforts to achieve this. Our international presence, our commitment to diversity and our business approach offer ambitious employees excellent career opportunities that not everyone yet associates with Allianz. Boosting our management resources, investing in recruitment, and developing and promoting our future leaders, experts and sales force are the core goals of our human resources management. This is geared towards implementing our strategy (see page 26) on a sustainable basis. This means, for example, that each employee must adapt to increasingly cooperate across business segments. We are comprehensively preparing our employees for this and other responsibilities. As referenced in the Shareholders‘ Letter of this annual report, human resources management is one of Allianz‘s four most important initiatives in 2008.
We are introducing a new operating model throughout Allianz Group and we must therefore ensure that our human resources management operates on a consistent basis worldwide.
– clear development criteria and goals, – more attractive development opportunities, – better matching of individual career objectives with the needs of the company.
program was geared towards the new responsibilities. Some 25 workshops were held in 2007, each spanning several days, and were attended by a total of 540 international managers and executives.
The AMI Group is dedicated to three principal tasks: – Regardless of the employee‘s own position in the hierarchy, there is not only a need to engage in continuing education, but also an obligation to do so. There are programs which prepare managers for contributing to Allianz outside their own responsibilities. Others prepare management for more demanding tasks. These include the „Allianz Excellence Program“, in which international teams work on business policy issues commissioned by the Board of Management. Their results are then discussed with the Board of Management for practical implementation.
– Talent management is also an aspect of the established AMI Group strategy meetings (Campus Programs) between members of the Board of Management of Allianz SE and local management. The benefits are mutual. Seminar attendees become better acquainted with the strategic requirements of the Group and can in turn present their own ideas to the Board of Management of Allianz SE.
OPEX, the Allianz version of Six Sigma, helps us to increase the skills and employment options of our staff. This program trains managers and experts as certified change agents. They manage major projects aimed particularly at improving customer orientation and process efficiency. Those with the most OPEX experience are employed increasingly in change management. More than 2,000 employees have now completed the first stage of OPEX training and almost 500 more have reached the master level “black belt“. Our longer-term objective is for 1 % of the workforce to achieve black belt status.
Diversity is important if a company wishes to attract and retain talented individuals. The company also benefits overall from different cultures, which reflect the reality of the company and therefore our customer base. We promote teamwork among employees from different backgrounds, ages, genders and levels of experience. Our Global Diversity Council, consisting of 15 top managers and headed by a member of the Allianz SE Board of Management, Clement B.
Booth, follows three basic principles in its work: zero tolerance of any type of discrimination, promotion of diversity at the workplace, and leveraging our diversity for new business opportunities.
Our strategic goals for Allianz over the next few years are challenging and require the full focus and commitment of the entire workforce. We expect our managers to embody corporate values; they must be the driving force behind sustainable implementation of our strategy, guided by our leadership values. These indicate how we wish to work with our customers and employees.
How is our leadership culture experienced in practice, and what can we improve to make continuous progress? Pointers are provided by our Leadership Culture Survey, an annual survey of more than 6,000 of our managers in 65 Group companies. In 2007 it was conducted for the fifth time. The high response rate, unchanged at 84 %, is an indicator that our leadership values are perceived as being important and our management is committed to the company and its objectives. Our study is not only intended as a snapshot. If the feedback indicates that there are weaknesses in management or implementation of the strategy is deficient, we take corrective action. We work in this fashion year after year on our leadership culture.
We follow a similar procedure with the results of our employee surveys, which were conducted in 18 subsidiaries together with the Leadership Culture Survey in 2007. They provide information about the performance orientation, satisfaction and loyalty of the workforce. The results indicate marked strengths such as a high degree of mutual trust, something that is crucial to the imminent changes. The results also highlight what still needs to be improved.
The Group Equity Incentive Program, an important element in our management pay structure, was again set up in 2007. A total of some 800 of our top managers and those who, based on outstanding performance, may in future be promoted to top management, participate in this program. We cover with this in more detail, together with the Board of Management’s pay, on pages 15 to 19.
Total payments made by the Group to its employees worldwide in 2007 amounted to � 9.7 (10.2) billion. Of this figure, � 2.5 billion or 25.8 % was solely performance-related. Social security contributions, pensions and other additional employee benefits amounted to � 2.7 (2.7) billion.
On October 13, 2006 Allianz changed its legal form from a German stock corporation into a Societas Europaea (SE). The SE works council was constituted on January 24, 2007. It replaced the previous Allianz European works council and has 39 members from 26 European countries. Rolf Zimmermann (Germany) was elected as the first chairman. He also chairs the Management Committee of the SE works council. The other committee members come from the UK, Italy and the Netherlands.
We do this through adopting a dual approach. On one hand we are guided by the ten principles of the UN’s Global Compact (for more information about this, visit www.unglobalcompact.
Some of the issues we worked on during 2007 are described below.
Climate change is a risk factor of the utmost significance for financial service providers, but it is also a business opportunity. We explain to customers the risks they incur and highlight strategies to avoid these risks. In 2006 we published our climate strategy, which comments on business opportunities, risk management and communication about climate.
Allianz has developed micro-insurance products in cooperation with state-sponsored and non-government organisations. These products are aimed at alleviating poverty in emerging markets and developing countries. Property, life and health insurance is available, offering cover for just a few eurocents per month. In 2007 we gained more than 250,000 customers in India, Indonesia and Egypt with this product.
Please see our Sustainability Report: www.allianz.com/ sustainability for further information on this issue and our Knowledge platform:
We operate in the German market mainly through our insurance companies Allianz Versicherungs-Aktiengesellschaft (“Allianz Sach”), Allianz Lebensversicherungs-Aktiengesellschaft (“Allianz Leben”) and Allianz Private Krankenversicherungs-Aktiengesellschaft (“Allianz Private Kranken”). In addition, Allianz Beratungs- und Vertriebs-AG serves as a distribution company. All entities are organized under the umbrella of the holding company Allianz Deutschland AG.3) At the end of 2007, Allianz Deutschland AG had a total of 19.8 million customers.
As the market leader in Germany based on gross premiums written in 2007 4) , Allianz Sach develops and provides propertycasualty.
For life insurance, with Allianz Leben we are also market leader based on statutory premiums in 2007.4) In addition to Allianz Leben, we operate through a variety of smaller operating entities in the German market.
Our German results of operations also include our propertycasualty assumed reinsurance business, which is primarily attributable to Allianz SE.
In Germany, we have more than 100 years of experience in the insurance business. Today, together with Dresdner Bank and Allianz Global Investors we offer a complete spectrum of financial services.
4) Source: Based on data provided by German Insurance Association, GDV
We offer products not only for all three insurance lines but also with a clear focus on products combining coverage from life, health and property-casualty insurance to better deliver on customer needs. In addition we distribute products from Dresdner Bank and Allianz Global Investors Germany.
Our products are distributed mainly through a network of full-time tied agents, while distribution through our new bankagencies and brokers is increasing.
For property-casualty, we offer a wide variety of insurance products for financial coverage of risks for private and business clients. Our main lines of business are motor liability and own damage, accident, general liability and property insurance.
For property-casualty business, we see Germany being a rather mature market with a high degree of competition. One of the key challenges is achieving growth while also maintaining an appropriate level of profitability. To deliver all-encompassing service in emergency cases we will further develop our assistance-services for individuals and corporate customers.
For our life business, we assume strong growth opportunities as we see an increasing demand for private retirement products and retirement provisions in general.
Allianz S.p.A. completed (RAS, Lloyd Adriatico and Subalpina) – December 3: AGF Belgium changed its name to Allianz
Belgium S.A. – November 21: Announcement of AGF Asset Management name change to Allianz Global Investors (France) SA effective January 1, 2008.
In France, we operate through the Assecurances Générales de France (AGF) Group, a major participant in insurance and financial services. We are ranked third in the French property-casualty market and eighth in the life/health insurance market, based on gross premiums written and statutory premiums, respectively, in 2006.2) AGF’s activities encompass several areas, including: property-casualty insurance, life/health insurance, asset management and banking.
The acquisition of the minority interest in AGF carried out in 2007 is designed to reduce the complexity of our organization and to allow us to further implement Allianz Group-wide programs and initiatives, as well as to strengthen our market position in France.3)
In October 2007, the former operations of the RAS S.p.A., Lloyd Adriatico S.p.A. and Allianz Subalpina S.p.A were integrated into one single company, Allianz S.p.A., in an effort to better serve the Italian market with a broad range of insurance and financial products, more effective customer service and best practice solutions. Allianz S.p.A. is the second4) largest Italian insurance group based on gross premiums written and statutory premiums written, respectively.
Operations 1) Further information is available at www.allianz.com 2) Source: French Insurers Association, FFSA. 3) Please see “Allianz Group Success Factors – Legal structure – AGF minorities buy-out procedure completed” for further information. 4) Source : Italian Insurers Association, ANIA
Furthermore, we market our products through AGF Banque. An important portion of our life statutory premiums in France is generated through the sale of unit-linked policies.
We operate in most major personal and commercial propertycasualty lines in Italy. The most important one is motor. Other important business lines are fire, general liability and personal accident insurance. We sell our products through traditional and direct sales channels as well as via our joint-venture Credit RAS.
We view the Italian market, having a lower penetration rate for non-motor insurance products compared to other European markets, as a potential growth market. The currently weak economic environment in Italy, however has led to slower market growth compared to past trends. Additionally, several regulatory reforms, such as the so-called “Bersani Law”, aimed at increasing competition and reducing market prices might challenge insurers ‘ profitability.
Nevertheless, we seek to grow via a multi-channel distribution strategy that comprises of agents, bancassurance and financial advisors.
We serve the Swiss property-casualty market through Allianz Suisse and Allianz Risk Transfer AG. Allianz Suisse acts as the umbrella brand for our four general legal entities in Switzerland. Based on gross premiums written in 2006, Allianz Suisse ranks fourth in Switzerland.1)
We conduct our life/health operations in this region primarily through Allianz Suisse Lebensversicherungs-Gesellschaft and Phénix Vie. In aggregate, these operating entities represent the sixth largest life insurance provider in Switzerland based on statutory premiums in 2006.1)
We serve the Spanish property-casualty market through our operating entities Allianz Compañía de Seguros y Reaseguros S.A. and Fénix Directo S.A. We rank third in the Spanish market, based on gross premiums written in 2007.2)
United Kingdom We serve the market in the United Kingdom primarily through our subsidiary Allianz Insurance plc. (formerly Allianz Cornhill Insurance plc.).
1) Source : Statistics of the Swiss Federal Bureau of Private Insurers 2) Source: Research and Statistics Bureau of Spanish Insurers and Pension Funds,
The most important lines of business in the Netherlands are motor and fire insurance. Our Dutch subsidiary distributes its products through independent agents and brokers.
Our Irish subsidiary offers a wide variety of products, mainly motor and property insurance for commercial and private customers, distributing predominantly through brokers and banks as well as telephone- and internet-based direct sales channels.
Market conditions in Spain are characterized by intense price competition especially in the motor business. Nevertheless, we expect further above market growth in the property-casualty segment, also supported by our direct sales channel.
In life/health insurance business we experience profitable growth. Despite recent tax reforms resulting in many life products losing their tax privileges, we expect to sustain our competitive position.
Operating in a highly competitive market, Allianz Insurance continues to concentrate on active “cycle management”, whereby we seek to capitalize on growth opportunities that offer a profitable correlation between premium rates and risks and forego premium growth in areas with increasing pricing pressures, as a measure to support operating profitability.
We are the leading property-casualty international insurance company in New Europe, based on gross premiums written in 20062), which we believe is one of the fastest growing insurance markets in the world. We serve the market through our operating subsidiaries in Hungary, the Czech Republic, Slovakia, Poland, Bulgaria, Romania, Croatia, Ukraine and Russia. Further expansion in the region has begun with the acquisition of ATF Polis insurance company in Kazakhstan.
Our presence in “New Europe” dates back to the acquisition of the Hungarian state-run insurance company Hungaria Biztosito in 1989. Today, we operate our business in this region through more than 25 companies in 10 countries, and we are the largest foreign insurer based on statutory premiums and gross premiums written in 2006 2), respectively. We offer life, health, property and casualty insurance, as well as pension fund products.
Motor business products and, increasingly, other personal lines continue to be the primary source of our growth. We also expect to expand and further develop our sales network. We believe we are well-positioned to capture the opportunities from the growing demand that we expect for property-casualty insurance products.
New Europe represents one of the fastest growing life insurance markets in the world, primarily resulting from low penetration levels. In anticipation of the expected growth, we continue to strengthen our sales capacity and product range.
1) Further information is available at www.allianz.com 2) Source: South Korean Life Insurance Association.
Since 2006 Allianz has sold life insurance products in Australia under the company name Allianz Australia Life Insurance Ltd.
We offer a full suite of products through our distribution network of approximately 320,000 agents in the region. Another important distribution channel is via our bank partners.
Our South Korean operations market a wide range of life insurance products. Due to the interest rate risk and a favorable equity market in South Korea, Allianz Life Korea has increasingly shifted its focus to variable and equity-indexed products. Allianz Taiwan Life primarily sells investment-oriented products through its bank channels.
We conduct our property-casualty operations in Brazil through our subsidiary AGF Brasil Seguros S.A. Based on gross premiums written in 2007, we are the eighth-largest property-casualty insurance provider in Brazil.2) We also sell property-casualty products in Colombia and Argentina.
Our largest life operation in this region is in Colombia. We also operate a health and a small life portfolio in Brazil.
Operations 1) Further information is available at www.allianz.com 2) Source: Based on data provided by National Association for Private Insurance Companies, FENASEG 3) Source: Own estimate based on information from International Credit
Insurance and Surety Association, ICISA 4) Source: Own estimate based on published annual reports.
Fireman’s Fund expects to continue to grow in its target markets by enhancing customer solutions introducing new products and services, and leveraging cross selling through strengthened distribution management.
After a slowdown in business in 2006 and 2007, Allianz Life US is taking measures to grow its annuity products business by expanding distribution with broker-dealers, banks and wirehouses, designing channel-specific products and also reinforcing development of fixed-indexed and variable products.
We expect growth in the property-casualty business to continue, primarily in Brazil and Argentina, mainly driven by the motor market.
We expect that growth rates in the South American life insurance market will remain attractive over the coming years.
Euler Hermes provides enterprises protection against the risk of non-payment of receivables and customer insolvency. Euler Hermes has developed a comprehensive range of services for the management of companies’ accounts receivables.
For credit insurance we see growth potential in Europe, North America and the emerging markets. By providing high quality services, maintaining an information database and high financial strength rating, Euler Hermes wants to consolidate its leadership.
The table set forth below contains aggregate fees billed for each of the last two fiscal years by KPMG DTG or KPMG DTG and the world wide member firms of KPMG International (or “KPMG”) in the following categories: (i) Audit Fees, which comprise fees billed for services rendered for the audit of the Allianz Group’s consolidated financial statements, the statutory audits of the financial statements of Allianz SE and its subsidiaries or services the are normally provided in connection with statutory and regulatory filings or engagements; (ii) Audit-Related Fees, which comprise fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the financial statements and which are not reported under (i): (iii) Tax Fees, which comprise fees billed for professional services rendered for tax advice and tax compliance; and (iv) All Other Fees, which comprise fees billed for all other products and services provided other than the services reported under (i) through (iii).
KPMG billed the Allianz Group an aggregate of � 9.8 million in 2007 and � 8.1 million in 2006 for assurance and related services. These services consisted primarily of advisory and consulting services related to accounting and financial reporting standards and financial due diligence services.
KPMG billed the Allianz Group an aggregate of � 4.2 million in 2007 and � 6.0 million in 2006 for professional services, primarily for tax advice.
Statements in accordance with § 315 (4) of the German Commercial Code and Explanations
Under German stock corporation law in case of registered shares only those persons who appear in the share register are deemed by the company to be shareholders (§ 67 (2) German Stock Corporation Act). This is particularly important for such things as taking part in general meetings and making use of voting rights. Appearing in the share register also facilitates direct communications with the shareholders. In this way, for instance, all shareholders can be personally invited to attend general meetings.
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.
There are no shares with special rights conferring powers of control.
Legislation and provisions of the Statutes applicable to the appointment and removal of members of the Board of Management and to amendments of the Statutes
The members of the Board of Management of Allianz SE are appointed by the Supervisory Board for a maximum term of five years (Article 9 (1), Article 39 (2) and Article 46 SE Regulation, §§ 84, 85 German Stock Corporation Act, § 5 (3) of the Statutes). Re-appointments, in each case for a maximum of five years, are permitted. A simple majority of the votes cast in the Supervisory Board is required to appoint members of the Board of Management. In the case of a tie, the vote of the Chairperson of the Supervisory Board, who pursuant to Art. 42 sentence 2 SE Regulation must be a shareholder representative, is decisive (§ 8 (3) of the Statutes). If the Chairperson does not participate in the vote, the Deputy Chairperson has the casting vote, provided that the Deputy Chairperson is a shareholder representative. A Deputy Chairperson who is an employee representative has no casting vote (§ 8 (3) of the Statutes). These provisions make sure that the shareholder side of the Supervisory Board has the right to finally decide in case of a tie.
– 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 � 9,848,296.96 (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 has a conditional capital in the amount of � 250,000,000; this conditional capital increase is only carried out to the extent that conversion or option rights resulting from bonds which Allianz SE or its subsidiaries have issued on the basis of the authorization granted by the General Meeting of February 8, 2006 are exercised, or conversion obligations arising from such bonds are fulfilled (§ 2 (6) of the Statutes).
– There was as of December 31, 2007 furthermore conditional capital in the amount of � 5,632,000; all option rights resulting from bonds which Allianz SE or its subsidiaries have issued on the basis of the former authority granted by the General Meeting of May 5, 2004 have been exercised until expiry of the option term on February 15, 2008 so that this conditional capital has been fully carried out.
By way of resolution of the General Meeting on 2 May 2007 domestic or foreign credit institutions within the meaning of § 71 (1) No. 7 of the German Stock Corporation Act, that are majority owned by the Company, are authorized, to acquire treasury shares of Allianz SE for the purposes of securities trading. The authorization is valid on or before 1 November 2008. 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.
Under the terms and conditions of the participation certificates issued by Allianz SE, the participation certificate holders are entitled to call for redemption of the participation certificates and to demand payment of a redemption amount per participation certificate of 122.9 % of the average official price (Einheitskurs) of the Allianz share on the Munich Stock Exchange for the last three months prior to termination of the participation certificate relationship, if an enterprise acquires a majority shareholding in Allianz SE. These rules correspond to usual market practice and protect in an adequate way the interests of holders of participation certificates.
Bilateral credit agreements in some cases provide for termination rights in case of an acquisition of control of at least 30 % of the voting rights within the meaning of § 29 (2) German Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, WpÜG). In case such termination rights are being exercised the respective credit lines would have to be replaced by new credit lines at conditions then applicable.
Group Management Report Allianz Group Annual Report 2007 because the responsibilities as a Board Member are significantly reduced without the Board Member’s fault, the member of the Board of Management shall receive his or her contractual remuneration for the remaining term of the service contract in the form of a one-off payment. To the extent the remaining term of the service contract is less than three years, the one-off payment is generally increased with regard to fixed remuneration and the annual bonus in line with a term of 3 years. This applies accordingly if a mandate in the Board of Management that is coming to an end and is not extended within two years of a change of control.
The previous analysis is based on our consolidated financial statements and should be read in conjunction with those statements. The Allianz Group uses operating profit to evaluate the performance of its business segments and the Group as a whole. The Allianz Group considers the presentation of operating profit to be useful and meaningful to investors because it enhances the understanding of the Allianz Group’s underlying operating performance and the comparability of its operating performance over time. Operating profit highlights the portion of income before income taxes and minority interests in earnings attributable to the on-going core operations of the Allianz Group. To better understand the on-going operations of the business, we exclude the effects of acquisition-related expenses and the amortization of intangible assets, as these relate to business combinations; and we exclude interest expense from external debt and income from financial assets and liabilities held for trading (relating to exchangeables on external debt) as these relate to our capital structure.
Realized gains/losses and impairments of investments (net) 2,538 2,682 1,853 Income from financial assets and liabilities held for trading (net) (35) (134) (403) Interest expense from external debt (1,051) (775) (787)
Acquisition-related expenses (506) (532) (687) Amortization of intangible assets (17) (51) (50) Reclassification of policiyholder participation in tax benefits arising in connection with tax-exempt income (60) (429) — Income before income taxes and minority interests in earnings 11,568 10,323 7,829
thereof: Allianz Global Investors 6.3 — (7.5) 13.8 thereof: Dresdner Bank 12.8 — (0.1) 12.9 thereof: Allianz Global Investors 11.7 (0.7) (0.9) 13.3
Diekmann Dr. Achleitner Bäte Booth Cucchiani Dr. Faber Dr. Perlet Dr. Rupprecht Thierry Dr. Walter Dr. Zedelius
Notes to the Consolidated Financial Statements 134 1 Nature of operations and basis of presentation 134 2 Summary of significant accounting policies 147 3 Recently adopted and issued accounting pronouncements and changes in the presentation of the consolidated financial statements 160 5 Segment reporting
Supplementary Information to the Consolidated Income Statements 203 24 Premiums earned (net) 204 25 Interest and similar income 205 26 Income from financial assets and liabilities carried at fair value through income (net) 206 27 Realized gains/losses (net) 207 28 Fee and commission income 208 29 Other income 208 30 Income from fully consolidated private equity investments 209 31 Claims and insurance benefits incurred (net) 210 32 Change in reserves for insurance and investment contracts (net) 211 33 Interest expense 211 34 Loan loss provisions 211 35 Impairments of investments (net) 211 36 Investment expenses 212 37 Acquisition and administrative expenses (net) 213 38 Fee and commission expenses 213 39 Other expenses 214 40 Expenses from fully consolidated private equity investments 214 41 Income taxes
Loans and advances to banks and customers 9 396,702 423,765 Financial assets for unit linked contracts 66,060 61,864
Reserves for loss and loss adjustment expenses 17 63,706 65,464 Reserves for insurance and investment contracts 18 292,244 287,032 Financial liabilities for unit linked contracts 19 66,060 61,864 Deferred tax liabilities 41 3,973 4,588
Participation certificates and subordinated liabilities 22 14,824 16,362 Total liabilities 1,009,768 1,053,251
Claims and insurance benefits incurred (gross) (46,409) (45,523) (46,802) Claims and Insurance benefits incurred (ceded) 3,287 3,226 4,032 Claims and insurance benefits incurred (net) 31 (43,122) (42,297) (42,770) Change in reserves for insurance and investment contracts (net) 32 (10,685) (11,375) (11,176)
Expenses from fully consolidated private equity investments 40 (2,317) (1,381) (572)
Total income and expense recognized directly in shareholders’ equity — 370 1,601 2,744 4,715 590 5,305
Total recognized income and expense for the year — 4,750 1,601 2,744 9,095 1,976 11,071 Paid-in capital 2,183 — — — 2,183 — 2,183
Total recognized income and expense for the year — 7,267 (1,175) 2,984 9,076 998 10,074 Paid-in capital 129 — — — 129 — 129
Unrealized gains and losses (net) arising during the year 1) — — — (1,123) (1,123) (41) (1,164) Transferred to net income on disposal 2) — — — (2,484) (2,484) (101) (2,585)
Total income and expense recognized directly in shareholders’ equity — (77) (1,378) (3,574) (5,029) (240) (5,269)
Cash flow from investing activities: Proceeds from the sale, maturity or repayment of: Financial assets designated at fair value through income 8,219 7,207 9,981 Available-for-sale investments 130,421 118,747 137,915 Held-to-maturity investments 317 336 534 Investments in associates and joint ventures 1,902 730 3,938 Non-current assets and disposal groups held for sale 4 2,253 792 Real estate held for investment 889 1,376 1,091 Loans and advances to banks and customers (purchased loans) 8,689 8,365 5,195 Property and equipment 607 453 113
Payments for the purchase or origination of: Financial assets designated at fair value through income (11,220) (9,680) (11,278) Available-for-sale investments (129,060) (131,290) (161,418) Held-to-maturity investments (301) (280) (255) Investments in associates and joint ventures (1,509) (491) (934) Non-current assets and disposal groups held for sale (1,073) — (178) Real estate held for investment (430) (860) (1,064) Loans and advances to banks and customers (purchased loans) (12,286) (10,598) (5,493) Property and equipment (832) (1,588) (1,126)
Cash flow from financing activities: Policyholders’ account deposits 12,810 13,234 14,118 Policyholders’ account withdrawals (9,365) (8,432) (5,560) Net change in liabilities to banks and customers 9,007 13,524 (19,167) Proceeds from the issuance of certificated liabilities, participation certificates and subordinated liabilities 59,191 103,429 115,422 Repayments of certificated liabilities, participation certificates and subordinated liabilities (71,627) (103,946) (111,737) Cash inflow from capital increases 115 98 2,159 Transactions between equity holders (7,326) (70) (2,932) Dividends paid to shareholders (1,995) (1,463) (1,403) Net cash from sale or purchase of treasury shares (34) (458) 2,061
Net cash flow provided by (used in) financing activities (9,642) 15,647 (8,442)
Significant non-cash transactions: Settlement of exchangeable bonds issued by Allianz Finance II B.V. with shares: Available-for-sale investments (812) (1,074) — Certificated liabilities (812) (1,074) —
Novation of quota share reinsurance agreement: Deferred acquisition costs 145 76 76 Payables from reinsurance contracts (2,324) (1,035) (1,041)
Effects from the merger of RAS with and into Allianz AG (Note 4): Revenue reserves — (2,362) — Minority interests — (1,659) — Paid-in capital — 3,653 — Unrealized gains and losses (net) — 368 —
Nature of operations Allianz SE and its subsidiaries (“the Allianz Group”) have global Property-Casualty insurance, Life/Health insurance, Banking and Asset Management operations in more than 70 countries, with the largest of its operations in Europe. The Allianz Group’s headquarters are located in Munich, Germany. The parent company of the Allianz Group is Allianz SE, Munich. It is recorded in the Commercial Register of the municipal court Munich under its registered address at Königinstraße 28, 80802 Munich.
Basis of presentation The consolidated financial statements of the Allianz Group have been prepared in conformity with International Financial Reporting Standards (“IFRS”), as adopted under European Union (“EU”) regulations in accordance with section 315a of the German Commercial Code (“HGB”). The consolidated financial statements of the Allianz Group have also been prepared in accordance with IFRS as issued by the International Accounting Standard Board (“IASB”). The Allianz Group’s application of IFRSs results in no differences between IFRS as adopted by the EU and IFRS as issued by the IASB. Within these consolidated financial statements, the Allianz Group has applied all standards and interpretations issued by the IASB that are compulsory as of December 31, 2007.
IFRS does not provide specific guidance concerning all aspects of the recognition and measurement of insurance and reinsurance contracts. Therefore, as envisioned in IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, the provisions embodied under accounting principles generally accepted in the United States of America (“US GAAP”) have been applied to those aspects where specific guidance is not provided by IFRS 4, Insurance Contracts. See Note 3 regarding changes to IFRS effective January 1, 2007. The consolidated financial statements are presented in millions of Euro (�).
A business combination occurs when the Allianz Group obtains control over a business. Business combinations are accounted for by applying the purchase method. The purchase method requires that the Allianz Group allocates the cost of a business combination on the date of acquisition by recognizing the acquiree’s identifiable assets, liabilities and certain contingent liabilities at their fair values. The cost of a business combination represents the fair value of the consideration given and any costs directly attributable to the business combination. If the acquisition cost of the business combination exceeds the Allianz Group’s proportionate share of the fair value of the net assets of the acquiree, the difference is recorded as goodwill. Any minority interest is recorded at the minority’s proportion of the fair value of the net assets of the acquiree.
For business combinations with an agreement date before March 31, 2004, minority interests are recorded at the minority ’s proportion of the pre-acquisition carrying amounts of the identifiable assets and liabilities.
For purposes of the consolidated financial statements, the results and financial position of each of the Allianz Group’s subsidiaries are expressed in Euro, the functional currency of the Allianz Group. Assets and liabilities of subsidiaries not reporting in Euro are translated at the closing rate on the balance sheet date and income and expenses are translated at the quarterly average exchange rate. Any foreign currency translation differences, including those arising from the equity method, are recorded directly in shareholders’ equity, as foreign currency translation adjustments.
Cash and cash equivalents Cash and cash equivalents include balances with banks payable on demand, balances with central banks, cash on hand, treasury bills to the extent they are not included in financial assets held for trading, checks and bills of exchange which are eligible for refinancing at central banks, subject to a maximum term of three months from the date of acquisition.
Real estate held for investment Real estate held for investment (i.e., real property and equivalent rights and buildings, including buildings on leased land) is carried at cost less accumulated depreciation and impairments. Real estate held for investment is depreciated on a straight-line basis over its estimated life, with a maximum of 50 years. When testing for impairment, the fair value of real estate held for investment is determined by the discounted cash flow method. Improvement costs are capitalized if they extend the useful life or increase the value of the asset; otherwise they are recognized as an expense as incurred.
Financial assets are either carried at fair value through income, or they are categorized into available-for-sale investments, held-to-maturity investments, loans and advances to banks and customers, financial assets for unitlinked assets or funds held by others under reinsurance contracts assumed.
Fair value of financial assets and liabilities The fair values of financial instruments that are traded in active markets are based on quoted market prices or dealer price quotations on the last exchange trading day prior to and including the balance sheet date. The quoted market price used for a financial asset held by the Group is the current bid price; the quoted market price used for financial liabilities is the current ask price. The impact of the Allianz Group´s own credit spread on financial liabilities carried at fair value is calculated by discounting future cash flows at a rate which incorporates the Allianz Group´s observable credit spread.
The fair values of financial instruments that are not traded in an active market are determined by using valuation techniques. The valuation techniques used are based on market observable inputs when available. Such market inputs include references to recently quoted prices for identical instruments from an active market, quoted prices for identical instruments from an inactive market, quoted prices for similar instruments from active markets, quoted prices for similar instruments from inactive markets. Market observable inputs also include interest rate yield curves, option volatilities and foreign currency exchange rates. Where observable market prices are not available, fair value is based on appropriate valuation techniques using non-market observable inputs. Valuation techniques include net present value techniques, the discounted cash flow method, comparison to similar instruments for which observable market prices exist and other valuation models. In the process, appropriate adjustments are made for credit and measurement risks.
For the portfolio of ABS-based products, primarily consisting of residential mortgage backed securities (“RMBS”) and collateralized debt obligations (“CDOs”) that were affected by the financial market crisis, the availability of price quotations from a functioning market were limited during the second half of 2007 and as of December 31, 2007. Therefore, the valuations for these financial instruments were derived based on the market values of similar financial instruments. The market quotations used were taken from other market participants and competitors, which management believes are representative of the market. If this were not possible due to a lack of price quotations, the vintage and ratingspecific valuations of the ABX.HE (Home Equity) index were used. The Allianz Group strictly adhered to these ABX.HE valuations.
Financial assets held for trading consist of debt and equity securities, promissory notes and precious metal holdings, which have been acquired principally for the purpose of generating a profit from short-term fluctuations in price, and derivative financial instruments with positive fair values that do not meet the criteria for hedge accounting. Financial assets held for trading are reported at fair value. Changes in fair value are recognized directly in net income for the period.
Impairment of available-for-sale and held-to-maturity investments A held-to-maturity or available-for-sale debt security is impaired if there is objective evidence that a loss event has occurred, which has impaired the expected cash flows, i.e. all amounts due according to the contractual terms of the security are not considered collectible. Typically this is due to deterioration in the creditworthiness of the issuer. A decline in fair value below amortized cost due to changes in risk free interest rates does not represent objective evidence of a loss event.
Loans and advances to banks and customers Loans and advances to banks and customers are financial assets with fixed or determinable payments, that are not quoted in an active market, are not classified as availablefor -sale investments or held-to-maturity investments, financial assets held for trading, or financial assets designated at fair value through income. Loans to banks and customers are initially recorded at fair value plus transaction costs, and subsequently recorded at amortized cost using the effective interest rate method. Interest income is accrued on the unpaid principal balance, net of charge-offs. Using the effective interest method, net deferred fees and premiums or discounts are recorded as an adjustment of interest income yield over the lifes of the related loans.
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007 under loans and advances to banks and customers. Interest income on reverse repo agreements is accrued over the duration of the agreements and is reported in interest and similar income.
Country risk allowances are established for transfer risk. Transfer risk is a measure of the likely ability of a borrower in a country to repay its foreign currency-denominated debt in light of the economic or political situation prevailing in the country. Country risk allowances are based on a country risk rating system that incorporates current and historical economic, political and other data to categorize countries by risk profile. Loans with specific allowances are excluded from the country risk rating system, and countries provided for within the country risk allowance are excluded from the determination of the transfer risk component of the general allowance. Country risk allowances are presented within the specific or general risk category, as appropriate.
Liabilities to banks and customers Liabilities to banks and customers include repurchase (“repo”) agreements and securities lending transactions. Repo transactions involve the sale of securities by the Allianz Group to a counterparty, subject to the simultaneous agreement to repurchase these securities at a certain later date, at an agreed price. If control of the securities remains with the Allianz Group over the entire lifetime of the transaction, the securities concerned are not derecognized by the Allianz Group. The proceeds of the sale are reported under liabilities to banks or customers. Interest expense from repo transactions is accrued over the duration of the agreements and reported in interest and similar expenses.
In securities lending transactions the Allianz Group generally receives cash collateral which is recorded as liabilities to banks or customers. Fees received are recognized as interest income.
For derivative financial instruments used in hedge transactions that meet the criteria for hedge accounting (“accounting hedges”), the Allianz Group designates the derivative financial instrument as a fair value hedge, cash flow hedge, or hedge of a net investment in a foreign entity. The Allianz Group documents the hedge relationship, as well as its risk management objective and strategy for entering into various hedge transactions. The Allianz Group assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative financial instruments that are used for hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items. Derivative financial instruments used in accounting hedges are recognized as follows: Fair value hedges Fair value hedges are hedges of a change in the fair value of a recognized financial asset or liability or a firm commitment due to a specified risk. Changes in the fair value of a derivative financial instrument, together with the share of the change in fair value of the hedged item attributable to the hedged risk are recognized in net income.
Cash flow hedges Cash flow hedges offset the exposure to variability in expected future cash flows that is attributable to a particular risk associated with a recognized asset or liability or a forecasted transaction. Changes in the fair value of a derivative financial instrument that represent an effective hedge are recorded in unrealized gains and losses (net) in shareholders ’ equity, and are recognized in net income when the offsetting gain or loss associated with the hedged item is recognized. Any ineffectiveness of the cash flow hedge is recognized directly in net income.
Hedges of a net investment in a foreign entity Hedge accounting may be applied to derivative financial instruments used to hedge the foreign currency risk associated with a net investment in a foreign entity. The proportion of gains or losses arising from valuation of the derivative financial instrument, which is determined to be an effective hedge, is recognized in unrealized gains and losses (net) in shareholders’ equity, while any ineffectiveness is recognized directly in net income.
Derecognition of financial assets and liabilities A financial asset is derecognized when the contractual rights to the cash flows from the financial asset expire or the Allianz Group transfers the asset and substantially all of the risks and rewards of ownership or transfers the asset and loses control of the asset. A financial liability is derecognized when it is extinguished.
DAC generally consist of commissions, underwriting expenses and policy issuance costs, which vary with and are directly related to the acquisition and renewal of insurance contracts. These acquisition costs are deferred, to the extent they are recoverable, and are subject to recoverability testing at the end of each accounting period.
Allianz Group Annual Report 2007 Notes to the Consolidated Financial Statements 97 and SFAS 120), DAC is amortized over the contract life of a book of contracts based on estimated gross profit (“EGP”) or estimated gross margin (“EGM”), as appropriate, based on historical and anticipated future experience, which is evaluated regularly.
For investment contracts, acquisition costs are only deferred if the costs are incremental. Acquisition costs are incremental if the costs would not have been incurred if the related contracts would not have been issued.
Shadow accounting Shadow accounting is applied to insurance and investment contracts with discretionary participating features, and SFAS 97 universal life type insurance contracts and SFAS 97 investment contracts. Shadow accounting is applied to DAC, PVFP, deferred sales inducements, unearned premium liabilities and the reserves for insurance and investment contracts to take into account the effect of unrealized gains or losses on insurance liabilities or assets in the same way as it is done for a realized gain or loss. These assets or liabilities are adjusted with corresponding charges or credits recognized directly to shareholders’ equity as a component of the related unrealized gains and losses.
For long-duration insurance contracts, in accordance with SFAS 97, amounts charged as consideration for origination of the contract (i.e. initiation or front-end fees) are reported as unearned premium. These fees are recognized using the same methodology as DAC amortization.
Unbundling The deposit component of an insurance contract is unbundled when both of the following conditions are met: 1. the deposit component (including any embedded surrender option) can be measured separately (i.e., without taking into account the insurance component); and 2. the Allianz Group’s accounting policies do not otherwise require the recognition of all obligations and rights arising from the deposit component.
Currently, the Allianz Group has no in-force insurance contracts for which all of the rights and obligations related to such contracts have not been recognized. As a result, the Allianz Group has not recognized an unbundled deposit component in respect of any of its insurance contracts, and accordingly the Allianz Group has not recorded any related provisions in its consolidated financial statements.
Bifurcation Certain of the Allianz Group’s universal life-type insurance contracts include options to replicate a market index (market value liability options or “MVLO”). These options are bifurcated from the insurance contracts and accounted for as derivatives.
There is no adequate statistical data available for some risk exposures in liability insurance, such as environmental and asbestos claims and large-scale individual claims, because some aspects of these types of claims become known very slowly and continue to evolve. Appropriate provisions have been made for such cases based on the Allianz Group’s judgment and an analysis of the portfolios in which such risks occur. These provisions represent the Allianz Group’s best estimate. The reserves for loss and loss adjustment expenses for asbestos claims in the United States were reviewed by independent actuaries during the year end of 2005; current reserves reflect subsequent loss developments and reestimation of initial reserves.
The aggregate policy reserves for traditional participating insurance contracts are computed in accordance with SFAS 120 using the net level premium method. The method uses assumptions for mortality, morbidity and interest rates that are guaranteed in the contract or used in determining the policyholder dividends (or “premium refunds”). DAC and PVFP for traditional participating insurance products are amortized over the expected life of the contracts in proportion to EGMs based upon historical and anticipated future experience, which is determined on a best estimate basis and evaluated regularly. The present value of EGMs is computed using the expected investment yield. EGMs include premiums, investment income including realized gains and losses, insurance benefits, administration costs, changes in the aggregate reserves and policyholder dividends (or “premium refunds”). The effect of changes in EGMs are recognized in net income in the period revised.
Contractually agreed sales inducements to contract holders include persistency bonuses, and are accrued over the period in which the insurance contract must remain in force to qualify for the inducement.
Reserves for premium refunds include the amounts allocated under the relevant local statutory or contractual regulations to the accounts of the policyholders and the amounts resulting from the differences between these IFRSs based financial statements and the local financial statements (“latent reserve for premium refunds”), which will reverse and enter into future profit participation calculations. Unrealized gains and losses recognized for available-for-sale investments are recognized in the latent reserve for premium refunds to the extent that policyholders will participate in such gains and losses on the basis of statutory or contractual regulations when they are realized. The profit participation allocated to participating policyholders or disbursed to them reduces the reserve for premium refunds.
France Life all sources of Profit 80 % Italy Life investments 85 % Switzerland Group Life all sources of Profit 90 % Individual Life all sources of Profit 100 %
1) additionally an adequate participation in all other sources of profit.
Liability adequacy tests are performed for each insurance portfolio on the basis of estimates of future claims, costs, premiums earned and proportionate investment income. For short duration contracts, a premium deficiency is recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs, and maintenance expenses exceeds related unearned premiums while considering anticipated investment income. For long duration contracts, if actual experience regarding investment yields, mortality, morbidity, terminations or expense indicate that existing contract liabilities, along with the present value of future gross premiums, will not be sufficient to cover the present value of future benefits and to recover deferred policy acquisition costs, then a premium deficiency is recognized.
Other assets Other assets primarily consist of receivables, prepaid expenses, derivative financial instruments used for hedging that meet the criteria for hedge accounting, and firm commitments, property and equipment, assets held for sale and other assets. Receivables are generally recorded at face value less any payments received, net of valuation allowances.
Real estate held for own use (e.g., real property and buildings, including buildings on leased land) is carried at cost less accumulated depreciation and impairments. The capitalized cost of buildings is calculated on the basis of acquisition cost and depreciated on a straight-line basis over a maximum of 50 years in accordance with their useful lives. Costs for repairs and maintenance are expensed as incurred, while improvements if they extend the useful life or increase the value of the asset are capitalized. An impair-
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007 ment is recognized when the recoverable amount of these assets is less than their carrying amount. Where it is not possible to identify separate cash flows for estimating the recoverable cost of an individual asset, an estimate of the recoverable amount of the cash generating unit to which the asset belongs is used.
The Allianz Group conducts an annual impairment test of goodwill during the 4th quarter or more frequently if there is an indication that goodwill is not recoverable. For the purpose of impairment testing, goodwill is allocated to each of the Allianz Group’s cash generating units that is expected to benefit from the business combination. The impairment test includes comparing the recoverable amount to the carrying amount, including goodwill, of all relevant cash generating units. A cash generating unit is impaired if the carrying amount is greater than the recoverable amount. The impairment of a cash generating unit is equal to the difference between the carrying amount and recoverable amount and is allocated to reduce any goodwill, followed by allocation to the carrying amount of any remaining assets. Impairments of goodwill are not reversed. Gains or losses realized on the disposal of subsidiaries include any related goodwill.
Similar to goodwill, an intangible asset with an indefinite life is subject to an annual impairment test, or more frequently if there is an indication that it is not recoverable. The impairment test includes comparing the recoverable amount to the carrying amount. Where it is not possible to identify separate cash flows for estimating the recoverable amount of an individual asset, the Allianz Group estimates the recoverable amount of the cash generating unit to which the intangible asset belongs. An intangible asset is impaired if the carrying amount is greater than the recoverable amount. The impairment of an intangible asset is equal to the difference between the carrying amount and recoverable amount.
Liabilities for puttable equity instruments include the minority interests in shareholders’ equity of certain consolidated investment funds. These minority interests qualify as a financial liability of the Allianz Group, as they give the holder the right to put the instrument back to the Allianz Group for cash or another financial asset (a “puttable instrument ”). These liabilities are required to be recorded at redemption amount with changes recognized in net income.
Any foreign curency translation differences, including those arising in the application of the equity method of accounting, are recorded as foreign currency translation adjustments directly in shareholders’ equity without affecting earnings.
Minority interests represent the proportion of equity that is attributable to minority shareholders.
Premiums earned and claims and insurance benefits paid Property-casualty insurance premiums are recognized as revenues over the period of the contract in proportion to the amount of insurance protection provided.
Health insurance premiums for long-duration contracts such as non-cancelable and guaranteed renewable contracts that are expected to remain in force over an extended period of time are recognized as earned when due. Premiums for short-duration health insurance contracts are recognized as revenues over the period of the contract in proportion to the amount of insurance protection provided.
Income from financial assets and liabilities carried at fair value through income (net) Income from financial assets and liabilities carried at fair value through income includes all investment income, and realized and unrealized gains and losses from financial assets and liabilities carried at fair value through income. In addition, commissions attributable to trading operations and related interest expense and transaction costs are included in this line item.
Fee and commission income and expenses In addition to traditional commission income received on security transactions, fee and commission income in the securities business also includes commissions received in
Pensions and similar obligations The Allianz Group uses the projected unit credit actuarial method to determine the present value of its defined benefit plans and the related service cost and, where applicable, past service cost. The principal assumptions used by the Allianz Group are included in Note 47. The census date for the primary pension plans is October or November, with any significant changes through December 31, taken into account.
Allianz Group Annual Report 2007 Notes to the Consolidated Financial Statements that date; or b) 10 % of the fair value of any plan assets at that date. Any unrecognized actuarial net gain or loss exceeding the greater of these two values is generally recognized in net periodic benefit cost in the consolidated income statement over the expected average remaining working lives of the employees participating in the plans.
Recently adopted accounting pronouncements (effective January 1, 2007) In August 2005, the IASB issued an amendment to IAS 1, Presentation of Financial Statements. The amendment requires additional disclosures relating to the Allianz Group’s capital. In addition, in August 2005, the IASB issued IFRS 7, Financial Instruments: Disclosures, relating to disclosure requirements for financial instruments. The Allianz Group adopted the amendments to IAS 1 and IFRS 7 as of January 1, 2007. The Allianz Group’s consolidated financial statements have been presented with the effect of these changes.
Impact of IFRS 7 on the Allianz Group’s consolidated financial statements
IFRS 7 applies to all risks arising from financial instruments. IFRS 7 requires disclosure of: (a) the significance of financial instruments for an entity’s financial position and performance
The scope of IFRS 7 includes recognized and unrecognized financial instruments. Recognized financial instruments are those financial assets and financial liabilities within the scope of IAS 39. Unrecognized financial instruments are financial instruments that are outside of the scope of IAS 39 but within the scope of IFRS 7. IFRS 7 requires to group financial instruments into classes that are appropriate to the nature of the information disclosed and take into account the characteristics of those financial instruments. The classes of financial instruments generated within Allianz Group are mainly in line with those according to IAS 39.
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007
Loans and advances to banks and customers Amortized cost Loans and receivables Financial assets for unit linked contracts Fair value — Other Assets
Derivative financial instruments used for hedging that meet the criteria for hedge accounting and firm commitments Fair value —
Financial liabilities held for trading Fair value Held for trading Financial liabilities designated at fair value through income Fair value Designated at fair value through income
Investment contracts with policyholders Fair value — Financial liabilities for unit linked contracts Fair value — Other Liabilities
Derivative financial instruments used for hedging purposes that meet the criteria for hedge accounting and firm commitments
Overall, IFRS 7 leads to enlarged disclosure requirements for financial instruments and associated risks. While some of the disclosures required by IFRS 7 were already included in the consolidated financial statements and notes in 2006, disclosures were added mainly in the appropriate notes dealing with financial instruments and include enlarged and more detailed information on: – Financial assets and financial liabilities designated at fair value through income including information on credit risk exposure
In March 2006, the International Financial Reporting Interpretations Committee (“IFRIC”) issued IFRIC 9, Reassessment of Embedded Derivatives. The Interpretation clarifies whether a reassessment should be made regarding whether an embedded derivative needs to be separated from the host contract after the initial hybrid contract has been recognized. IFRIC 9 concludes that reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. IFRIC 9 is effective for annual periods beginning on or after June 1, 2006. As the interpretation is consistent with the Allianz Group’s existing policy, there was no significant impact on the Allianz Group’s financial results or financial position.
In July 2006, the IFRIC issued IFRIC 10, Interim Financial Reporting and Impairment. IFRIC 10 address the potential conflict between requirements of IAS 34 and the requirements for recording impairment losses on goodwill in IAS 36 and certain financial assets in IAS 39. The interpretation prohibits the reversal of an impairment loss recognized in a previous interim period with respect to goodwill or an investment in either an equity instrument or a financial asset carried at cost. IFRIC 10 is effective for annual periods beginning on or after November 1, 2006. As the interpretation is consistent with the Allianz Group’s existing policy, there was no significant impact on the Allianz Group’s financial results or financial position.
IFRS 8 requires the identification of operating segments on the basis of internal reports that are regularly reviewed by the entity’s chief operating decision maker in order to allocate resources to the segment and assess its performance (i.e., the “management approach”). IFRS 8 requires explanations of how the segment information is prepared as well as reconciliations of total reportable segment revenues, total profits or losses, total assets, total liabilities, and other amounts disclosed for reportable segments to corresponding amounts recognized in the entity’s financial statements. IFRS 8 applies to annual financial statements for periods beginning on or after January 1, 2009. IFRS 8 will have no impact on the Allianz Group’s financial results or financial position. The Allianz Group is currently evaluating the potential impact, if any, that the adoption of IFRS 8 will have on the Group’s segment reporting.
In March 2007, the IASB issued amendments to IAS 23, Borrowing Costs. The main change from the previous version is the removal of the option of immediately recognizing as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. The cost of an asset will in future include all costs incurred in getting it ready for use or sale. The revised Standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after January 1, 2009. The amendment is expected to have no impact the Allianz Group’s consolidated financial statements.
In June 2007, IFRIC issued IFRIC 13, Customer Loyalty Programmes. IFRIC 13 addresses how companies, that grant their customers loyalty award credits (often called “points”) when buying goods or services, should account for their obligation to provide free or discounted goods or services if and when the customers redeem the points. Customers are implicitly paying for the points they receive when they buy other goods or services. Some revenue should be allocated to the points. Therefore, IFRIC 13 requires companies to estimate the value of the points to the customer and defer this amount of revenue as a liability until they have fulfilled their obligations to supply awards. IFRIC 13 is mandatory for annual periods beginning on or after July 1, 2008. Earlier
Notes to the Consolidated Financial Statements Allianz Group Annual Report 2007 application is permitted. The interpretation is expected to have no material impact the Allianz Group’s consolidated financial statements.
In September 2007, the IASB issued the revised IAS 1, Presentation of Financial Statements. The revised standard requires information in financial statements to be aggregated on the basis of shared characteristics and introduces a statement of comprehensive income. The revised standard gives preparers of financial statements the option of presenting items of income and expense and components of other comprehensive income either in a single statement of comprehensive income with subtotals, or in two separate statements.
The revisions also include changes in the titles of some of the financial statements to reflect their function more clearly. The new titles will be used in accounting standards, but are not mandatory for use in financial statements. Revised IAS 1 applies to annual financial statements for periods beginning on or after January 1, 2009. The Allianz Group is currently evaluating the potential impact, if any, that the adoption of revised IAS 1 will have on the presentation of the Group’s financial statements.
– Acquisition-related costs are generally recognised as expenses and are not included in goodwill.
– Contingent consideration must be recognised and measured at fair value at the acquisition date. Subsequent changes in fair value are recognised in accordance with other IFRSs, usually in profit and loss. Goodwill is no longer adjusted for those changes.
In February 2008, the IASB issued amendments to IAS 32, Financial Instruments: Presentation, and IAS 1, Presentation of Financial Statements. IAS 32 requires a financial instrument to be classified as a liability if the holder of that instrument can require the issue to redeem it for cash. The
Allianz Group Annual Report 2007 Notes to the Consolidated Financial Statements consequence is that some financial instruments that would usually be considered equity allow the holder to “put” the instrument and are, therefore, considered liabilities rather than equity. The amendments to IAS 32 address this issue and require entities to classify the following types of financial instruments as equity provided they have particular features and meet specific conditions: – puttable financial instruments (e.g., some shares issued by co-operative entities)
Changes in the presentation of the consolidated financial statements The Allianz Group has identified certain prior period errors through an analysis of various balance sheet accounts (the “Errors”). The Errors resulted primarily from the following issues: – Accounting for the purchase of Dresdner Bank in 2001 and 2002, which included realized gains and losses on investments which did not reflect the correct purchase price allocation for the Dresdner Bank opening balance sheet.
– Consolidation of dividends for special funds in the year 2001, which resulted in the recognition of amounts for reserves for premium refunds, that did not properly take into account the different financial years of the sponsor and the special funds.
– Other errors, related to the accounting for minority interests and reserves for premium refunds, occurred in combination with mergers.
The Errors were included in the Allianz Group’s financial statements for each of the years from 2001 through 2006. The Allianz Group quantified the Errors based on the amount of the error originating in the current year income statement, as well as the effects of correcting the error in the balance sheet at the end of the year (the “rollover” and “iron curtain” method of evaluating errors, respectively). The Allianz Group evaluated the Errors individually and in the aggregate, and concluded that they were immaterial to the financial statements for all years in which they were included.
The following table summarizes the effects of the Errors on net income as reported for the years 2005 and 2006, and the cumulative effect of the Errors on net income for the years 2001 through 2004.
Dresdner Bank purchase accounting (78) (42) (182) Special funds consolidation — — 29 Other — — (4)
As the majority of the Errors related to the years 2001 through 2004, and their correction has been determined to be immaterial, the Errors from these periods have been accounted for in 2007 by adjusting the opening balance sheet as of January 1, 2005. The Errors for 2005 and 2006 have been corrected through an out-of-period adjustment to net income in 2007.
Other assets (892) — — (892) Intangible assets (Goodwill) 306 (169) — 137
Reserves for insurance and investment contracts (Reserves for premium refunds) — (668) 3 (665) Deferred tax liabilities — (30) — (30) Shareholders’ equity
Reserves for insurance and investment contracts (Reserves for premium refunds) 287,697 (665) 287,032 Deferred tax liabilities 4,618 (30) 4,588 Shareholders’ equity
Reserves for insurance and investment contracts (Reserves for premium refunds) 278,701 (663) 278,038 Deferred tax liabilities 1,181 (22) 1,159
Deferred tax liabilities 83 — 83 Total liabilities 489,233 — 489,233 Asset Management Other assets 3,471 — 3,471 Intangible assets (Goodwill) 6,334 214 6,548
Deferred tax liabilities 46 — 46 Total liabilities 4,340 — 4,340 Total adjustments Other assets (892) Intangible assets (Goodwill) 137 Total assets (755) Reserves for insurance and investment contracts (Reserves for premium refunds) (665) Deferred tax liabilities (30) Total liabilities (695)1)
1) Group level equity adjustments of � (60) mn are not included in this table, as equity is not reported in the segment balance sheets.
The following table summarizes the impact that this reclassification has had on the previously reported financial statements: As of December 31, 2006 As previously reported
Financial assets carried at fair value through income 156,869 42,123 198,992 Collateral paid for securities borrowing transactions 41,031 (6,719) 34,312 Reverse repurchase agreements 139,413 22,206 161,619 Loans and advances to banks and customers 408,278 15,487 423,765
Financial liabilities carried at fair value through income 79,699 42,123 121,822 Collateral received for securities lending transactions 28,617 (6,719) 21,898
Liabilities to banks and customers 361,078 15,487 376,565 Total liabilities and equity 1,053,226 57,610 1,110,836 1) Excludes the correction of other errors.
The change in presentation from net to gross basis has had no effect on reported earnings or equity.
MAN Roland Druckmaschinen AG, Offenbach 100.0 7/18/2006 Corporate 144 Purchase Home & Legacy Limited, London 100.0 6/15/2006 Property-
36 Purchase 1) Classified as “held for sale” 2) At the date of first-time consolidation 2007 Significant acquisitions