Development of the operating cost income ratio in %Structure of Group-internal investments by segments ¤403 bn
That is the lesson we have learned in 2002. It was an extraordinarily bad year, without doubt. But we did not waste it, because we used what margin we had to make the hard decisions necessary to restore our business to sustained profitability.
It was with regret that we learned of Dr. Henning Schulte-Noelle’s decision to resign from the Board of Management and his chairmanship with effect as of the end of the Annual General Meeting on April 29, 2003. Dr. Schulte-Noelle headed our company for more then 11 years and during that time maintained a record of outstanding achievement. We have expressed our appreciation to Dr. Schulte-Noelle for his successful performance and his trust and cooperation. We propose the upcoming Annual General Meeting elect Dr. Schulte-Noelle to the Supervisory Board.
In connection with his intended departure from the Board of Management of Dresdner Bank, Professor Dr. Bernd Fahrholz has asked us to release him prematurely from his mandate on the Allianz Board of Management; the Supervisory Board has acceded to his request. Previously, we had already approved the request of Mr. Leonhard H. Fischer to end his mandate as member of the Board of Management before its expiration. We have expressed our gratitude to Professor Dr. Fahrholz and to Mr. Fischer for their dedicated work in a difficult market context.
H I N R I C H F E D D E R S E N Member of the Federal Steering Committee ver.di – Vereinte
V I C E N T E TA R D Í O B A R U T E L Allianz Compañía de Seguros y Reaseguros, Barcelona
Company Ltd. ■ Allianz Bulgaria Life Insurance Company Ltd. ■ Commercial Bank „Bulgaria Invest“
3. We foster the entrepreneurial spirit of our local group companies while providing the leverage of a global institution.
_ increasing our asset gathering capabilities by building customer-specific, multi-channel distribution platforms.
The Group Center supports the business units in this continuous optimization process. The jointly acquired experience then flows into mandatory operational targets. For example, this involves determining of the cost and claim quotas a unit will have to achieve in future periods to attain a sustainable increase in EVA and thereby meet, if not exceed, the expectations of our shareholders.
A recent addition are the Allianz ratings. At the same time, we made the information available to a broader public. Now, private investors can attend our telephone conferences live on the Internet, a service previously reserved for institutional investors. Our telephone Investor Line for private investors remains available 24 hours a day, seven days a week, to provide information about Allianz and the Allianz share.
Shareholders’ equity, reserves and solvency On December 31, 2002, the shareholders’ equity of the Allianz Group amounted to 21.8 billion euros, minus 23,588,411 treasury shares at a purchase price of 6.0 billion euros. Shareholders’ equity was thus 9.9 billion euros lower than in the previous year, which is mainly due to the extraordinary weakness in the capital markets. Over 70 percent of this reduction in shareholders’ equity can be attributed to substantially lower unrealized gains and losses from securities held for sale.
Borrowing In May 2002, Allianz launched its first subordinated bond issue with a volume of 2 billion euros, a 6.125 percent coupon and a 20-year maturity. This bond can be recalled for the first time after ten years and thereafter at the end of each quarter. If no call for redemption is issued after ten years, a variable interest rate is applied.
Banks In 2002, this sector experienced considerable difficulties. Defaults on loans and, as a result, higher write-offs due to the lackluster economy took their toll on lending institutions. The downturn had a serious impact on the earnings of the banking industry. The nose dive on the stock markets exacerbated the situation since commission surpluses and trading income dwindled. In particular, business in the area of new issues and merger and acquisition consulting for corporate clients disappeared virtually completely.
Bond markets The performance of fixed-interest securities was positive. Substantial funds from the stock market were reinvested in the bond market. This resulted in a significant increase in the prices of bonds. Between the spring and September of 2002, the yields on ten-year government bonds in the U.S.A. dropped from 5.3 percent to under 4 percent. The comparable decrease on European bond markets was somewhat less extreme. The yield on such securities fell from 5.2 to 4.4 percent during the same period and ended the year slightly above 4 percent. Both the U.S. Federal Reserve and the European Central Bank reacted to the threats to the economy in the fourth quarter with another half-point cut in the fund rate, which made investment in bonds less attractive within a short-term timeframe.
In the following breakdown according to countries and regions, transactions between reporting units are not consolidated. In order to present a clear picture of our business operations, we have adjusted reported results by eliminating the amortization of goodwill and extraordinary items primarily relating to tax regulations for the year 2000.
SGD investments at the end of the year amounted to 21.3 billion euros. The corresponding income came to 2.4 billion euros, up from 0.5 billion euros a year earlier. This improvement was primarily due to capital gains on shares sold in the context of the acquisition of Dresdner Bank.
Overall, earnings after taxes were down slightly to 33 (34) million euros, chiefly because of significantly lower investment income.
The 16.6-percent increase in premium income was significantly higher that the 11 percent estimated for the average market and can be attributed to well-structured and efficient marketing activities. In 2002, the representive network was woven more tightly and rendered more efficient. The chief growth driver was automobile insurance, which contributed two-thirds to revenues.
Premium income in the rest of Europe rose 13.6 percent to 4.8 billion euros. With premium income of 1 billion euros, the Netherlands delivered the best performance, followed by Ireland with 860 million euros and Austria with 852 million euros. In the Netherlands, we achieved especially high premium growth through rate adjustments as well as through reinforcement of our position in the international market for fire insurance and brisk new business in the area of automobile insurance.
_ Fireman’s Fund Insurance Company (FFIC) is our most important source of revenues in the NAFTA region (North American Free Trade Agreement).
A L L I A N Z M A R I N E & AV I AT I O N
_ Allianz Marine & Aviation is our European insurer that specializes in transportation, shipping and aviation risks.
Asia-Pacific Region – 9 – 5 – 66 2) Earnings after taxes, before amortization of goodwill and minority interests, net of extraordinary tax items in 2000
Earnings before taxes and amortization of goodwill dropped from 558 million euros to 83 million euros. After amortization of goodwill, taxes and minority interests, net income amounted to 19 (229) million euros.
_ Our health insurer is Allianz Private Krankenversicherungs-AG (formerly Vereinte Krankenversicherung AG).
The cancellation rate remained at a very low level of 3.7 (3.6) percent.
The number of insured increased slightly by 0.2 percent to 2.27 million.
The claims ratio improved to 71.0 (73.1) percent, which is indicative of the fact that our claims and health management is beginning to take effect.
The additional premium income is attributable to the restructuring of our sales organization, which clearly improved the productivity of our sales force. In Spain, there was also less demand for traditional unit-linked life insurance, Eurovida’s core business. Instead, many customers opted for products with guaranteed components. As a result, we expanded our product offerings considerably . Despite these efforts, the high growth rate of Eurovida slowed down. The company reported total revenues in the amount of 127 million euros.
The expense ratio climbed to 7.3 (4.2) percent. In 2001, high non-recurring revenues resulted in an exceptionally low expense ratio.
To restore the profitability of Dresdner Bank as quickly as possible and on a sustainable basis, the Turnaround 2003 program was launched in the fall of 2002. This program has three components: 1. The newly created Institutional Restructuring Unit (IRU) is intended to unwind Dresdner Bank's lending commitments that are of no strategic importance or involve impaired loans. Primarily, this concerns borrowers in North and South America as well as in Germany. Over the medium term, this will release risk capital in the order of up to 3 billion euros over the coming years.
_ In China, a market with excellent growth prospects for fund managers, our joint venture Guotai Junan Allianz Fund Management Co. was the first fund manager with foreign participation to be granted a business license. The cooperation brought together the distribution network of our partner, Guotai Junan Securities, with our expertise in risk and portfolio management, product design and controlling.
Our business model is based on spreading income and risks, both with respect to the different asset classes as well as the regional structure or our business. Nonetheless, business prospects for the current fiscal year will to a great extent depend on the development of the capital and currency markets. We expect inflows in the fixed-income business to continue at a satisfactory level while demand in the equity business is likely to recover. The comprehensive cost-cutting measures taken in the year under review should produce further results in 2003, and we expect a clear improvement of our overall operating result. However, due to high acquisition -related expenses, our after-tax result will once again be negative.
In the insurance business, we calculate risk capital for premium, reserve, investment and credit risks. Within these risk categories, we distinguish between the following types of risks: _ actuarial risks. In property and casualty insurance these include the premium and reserve risks for the various insurance lines. Reinsurance is considered separately. In the case of life insurance, we calculate the insurance provisions required.
Organizational risk controlling In terms of organization, we limit our investment risks through a clear separation of management and controlling functions. Within the Allianz Group, risk management is implemented in cooperation with the local units in a top-down bottom-up process. The Allianz Finance Committee, which is made up of members of the Allianz Board of Management, delegates far-reaching decision-making authority to the regional Finance Committees, which monitor activities in their respective regions or countries. The duties and responsibilities at each decision-making level are defined by guidelines issued at the Group level. These guidelines are then applied by the regional Finance Committees, which formulate specific local investment guidelines. These are adapted according to national legislation and the nature of the local insurance and capital markets. Operational responsibility for investment portfolios lies with the local units.
Liquidity risks As part of a Group liquidity policy, Treasury and Risk Control establishes principles for liquidity management. This policy meets both regulatory requirements and internal standards. The liquidity risk limits include a reporting process for limit breaches and provisions for emergency planning.
Risk monitoring by third parties Supervisory authorities and rating agencies are additional risk monitoring bodies. Supervisory authorities specify the minimum precautions that must be taken in individual countries and at the international level. Rating agencies determine the relationship between the required risk capital of a company and the available safeguards (more on this subject on page 25 of this Annual Report).
In the growth markets of central and eastern Europe, economic growth is expected to come to a total of 3.3 percent, up slightly from the comparable figure a year earlier. The impending entry of these countries into the European Union is having a stimulating effect. The overall situation for the insurance industry is favorable in this region since higher incomes, growing prosperity and gradual deregulation of the financial services sector are having a positive impact on our business.
The matters discussed herein may also involve risks and uncertainties described from time to time in Allianz AG’s filings with the U.S. Securities and Exchange
Change in cash and cash equivalents from the acquisition of consolidated affiliated companies – 10,787 12,114
E Q U I T Y A N D L I A B I L I T I E S Property/Casualty Life/Health
The following were the principal companies consolidated for the first time in 2001 4 Accounting and valuation policies
Debt instruments are written down if financial difficulties on the part of the issuer, a default or delay in interest service or repayment of principal or an impending or actual insolvency indicate that repayment of the principal can no longer be expected.
Investments held on account and at risk of life insurance policyholders These investments are comprised of investments funding unit-linked life insurance policies and investments covering obligations under policies where the benefits are index-linked. They are valued at market value on the balance sheet date. Group enterprises maintain and invest these investments separately from the Group’s own investments. Unrealized gains and losses arising from market valuations lead to a corresponding increase or decrease in the related insurance reserves.
The additions under capitalized value of life insurance portfolios include the amount of ¤525 mn for Allianz Lebensversicherungs-AG, Stuttgart, due to an increase of ownership interest from 40.5 % to
The fair value of individual securities can fall temporarily below their carrying value, but, provided there is no risk resulting from changes in financial standing, such securities are not written down in value.
The loan portfolio contains non-accrual loans of ¤10,452 (11,155) mn. The total amount of loans with provisions against the principal include ¤2,556 (2,935) mn of loans on which the Group continues accruing interest with a specific allowance against the total interest accrued. The interest income not recognized from loans on non-accrual status amounted to ¤470 (448) mn.
The majority of equities and fixedincome securities held in trading assets are marketable and listed securities. The fixed-income securities include ¤50,038 (42,432) mn from public-sector issuers, and ¤41,680 (49,061) mn from other issuers.
10 Cash and cash equivalents 12/31/2002 12/31/2001 ¤ mn ¤ mn
11Amounts ceded to reinsurers from the insurance reserves 12/31/2002 12/31/2001 ¤ mn ¤ mn
Liabilities due within one year totaled ¤126,757 (121,320) mn, those due after more than one year totaled ¤10,575 (14,082) mn.
Expenses for assistance to victims under joint and several liability and road casualties – 117 – 127
USD GBP Other 12/31/2002 12/31/2001 in ¤ mn in ¤ mn in ¤ mn ¤ mn ¤ mn
IV. Other securities *) Investments in conformity with EU insurance accounting guideline and after eliminating intra-Group transactions between segments
Investment expenses Depreciation and write-downs on investments – 2,273 – 1,104 – 2,853 – 1,319 – 5,126 – 2,423
The total amount of collateral pledged consists of the following assets: 12/31/2002
The fair value of a financial instrument is defined as the amount for which a financial instrument could be exchanged between two willing parties in the ordinary course of business. If market prices are not available, the fair value is based on estimates using the present value of future cash flows method or another appropriate valuation method. These methods are significantly influenced by the assumptions made, including the discount rate applied and the estimates of future cash flows. Specific financial instruments are discussed below.
Exercise period 4/2004 – 3/2009 4/2003 – 3/2008 4/2002 – 3/2007 4/2001 – 3/2006
A N T H O N Y S A L I M
Allianz Insurance Company (AIC) 48, 49 Allianz Lebensversicherungs-AG 8, 30, 35,
L Lending business 67, 75 Life and health insurance 29, 30, 35,
Net revenue from banking ¤bn 7.6 94.1 3.9 0.2 0.2 – – 36
Minority interest in equity ¤bn 8 – 52.9 17 16 13 12 8 116
Share price at year-end ¤ 91 – 65.9 266 399 334 316 238 20