The German Securities Trading Act obliges issuers to announce immediately any information which has a substantial potential price impact, irrespective of the communicated schedules. It is therefore possible that we will announce key figures of quarterly and fiscal year results ahead of the dates mentioned above.
Annual Report 2007 I N S U R A N c E | A S S E T M A N A G E M E N T | B A N K I N G
2) Total revenues and operating profit for the year ended December 31, 2003 do not reflect the reporting changes effective January 1, 2006. 3) The Allianz Group uses operating profit to evaluate the performance of its business segments and the Group as a whole. 4) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized. 5) Excluding treasury shares. 6) Based on average shareholders‘ equity. Average shareholders‘ equity has been calculated based upon the average of the current and the preceding year’s shareholders’ equity.
Content 1 Letter to the Shareholder 4 Supervisory Board Report 10 corporate Governance and Remuneration Report 22 Supervisory Board and Board of Management 24 International Executive committee 26 Strategy 28 Allianz Share
Group Management Report 33 Detailed Index 34 Executive Summary and Outlook 44 Property-casualty Insurance
After the unexpectedly severe crisis on financial markets in the wake of the U.S. terrorist attacks in 2001, Allianz changed its fundamental approach with 3+One. It served our company well to undergo a period where it had to dramatically improve its operating performance. We now operate at a much higher level. 3+One turned potential for creating value into an enormous surge in earnings, as shown in our excellent operating profits. Our Group companies work together more closely than ever before to create the solutions that are best from a global viewpoint available throughout the value chain. Low-margin non-core businesses were sold, as in Canada or Venezuela. From 2002 to 2007 we selectively invested around � 3 billion in developing growth markets such as India, China and Russia. We are now more successful than any other European financial services provider in the markets of Central and Eastern Europe as well as Asia-Pacific.
Furthermore, we comply with the voluntary recommendations of the German Corporate Governance Code with the exception that shareholder representatives on the Supervisory Board are, in principle, not elected to staggered terms,
The additional current service cost in 2007 according to IAS 19 for the frozen pension plan amounted to, in � thousand, for Mr. Diekmann 162, for Dr. Achleitner 246, for Dr. Faber 134, for Dr. Perlet 0, for Dr. Rupprecht 175, for Dr. Walter 326 and for Dr. Zedelius 85.
Members of the Board of Management who leave the Board after serving a term of at least five years are entitled to a transition payment for a period of six months. The amount payable is calculated on fixed salary and a proportion of the annual target bonus and it is paid in monthly installments.
The structure of the Supervisory Board’s remuneration was ratified by the Annual General Meeting in 2005; on the conversion of Allianz AG into Allianz SE in 2006 it was adopted without changes. It complies with the recommendation or suggestion of the German Corporate Governance Code under which members of the Supervisory Board shall receive fixed as well as performance-based compensation that
Loans to members of the Board of Management and Supervisory Board Loans granted by Dresdner Bank AG and other Allianz Group companies to members of the Board of Management and Supervisory Board totaled � 71,451 on the date of balance (December 31, 2007). Loans are provided at standard market conditions or at the conditions as applied to employees. The repaid amounts of loans amounted to � 27,361 in 2007. Moreover, overdraft facilities were granted to members of the Board of Management and Supervisory Board as part of existing account relationships, likewise corresponding to conditions according to market standard or those applied to employees.
Jean-Philippe Thierry, Allianz SE, Munich Wolfram Littich, Allianz Elementar, Vienna Helmut Perlet, Allianz SE, Munich
Still for the most part unknown to large sections of the population are the really groundbreaking advances being made in healthcare and medical technology. Genetic diagnosis, stem cell therapy and “electronic health”, to name just a few examples, will revolutionize the health market. Although these approaches are highly effective, contributionbased healthcare systems can hardly afford them. We are making intensive efforts in this respect, since we wish to offer our customers solutions that give them access to the top-tier segment of the healthcare market.
Dow Jones EURO STOXX 50 2.9 9 50 Dow Jones EURO STOXX Insurance 23.0 1 16
Communication with investors is very important to us. During our roadshows over the past year we spent 47 days visiting 496 investors in 28 cities. For the first time we also saw investors in Dubai and Abu Dhabi. This afforded our investors many opportunities to discuss the current business situation and to clarify outstanding questions. Besides our analysts’ conference, our “Capital Markets Day” again raised major interest. We delivered an in-depth view of our position in the growth markets of China, India, Russia and Hungary, as well as presenting our initiative called “Ideas to success” (”i2s”), which motivates our employees to act in innovative ways. We increased the number of meetings with analysts and institutional investors by 21 % to 426; in addition, the Investor Relations team responded to some 8,500 enquiries from private investors in the year under review.
– The Allianz Newsletter informs you promptly by e-mail about news and events of the Allianz Group. You can register at www.allianz.com/newsletter-e.
Our operating profit increased to an outstanding level of � 10.9 billion, up 5.1 % compared to the record level of the previous year, despite negative foreign currency translation effects of � 0.2 billion. Our well diversified portfolio compensated successfully for the negative impact of the financial markets turbulence.
In aggregate non-operating items were down by � 28 million driven by lower net realized gains not to be shared with policyholders in the United States.
Net interest income grew by 12.9 % to � 2,987 million. Private & Corporate Clients (“PCC”) as well as the Investment Bank (“IB”) contributed positively to this improvement with � 61 million and � 142 million, respectively. In the PCC division we saw higher income from the deposit business due to higher volumes and margins. This was partially offset by lower income from the loan business. The IB improved its result from the loan business and and leveraged finance activities.
Income from financial assets and liabilities designated at fair value through income (net) 4) 33 33 53 53 (7) (6)
The impressive track record of our asset management business continued in 2007, with the vast majority of our thirdparty assets under management again outperforming their respective benchmarks. Operating profit grew – at constant exchange rates – by 12.8 % to � 1,359 million. Negative foreign currency translation effects amounted to � 96 million.
– PIMCO was awarded “Best Third-Party Provider of Fixed Income Portfolio Management Services in Asia” from Euromoney Private Banking Survey 2007.
Deferred purchases of interests in PIMCO (488) (488) (523) (523) (677) (677)
Property-Casualty liabilities In 2007, reserves for loss and loss adjustment expenses decreased by � 1.8 billion to � 56.9 billion. Important contributors to this decline were the positive development on prior years’ loss reserves primarily in Italy, France, the United Kingdom, Australia and within the credit insurance business, as well as foreign currency translation effects.
Life/Health assets Our Life/Health asset base grew by 2.5 % to � 350.0 billion. This development stemmed primarily from increased loans and advances to banks and customers, up 6.3 % to � 91.2 billion. Investments decreased slightly by 1.7 % to � 184.6 billion, excluding affiliates. Thereof, equity investments amounted to � 41.2 billion, � 1.0 billion lower than the last year as the upward market trend was reduced by higher realized gains. Debt securities were down by � 1.2 billion to � 137.6 billion principally due to increased market interest rates and, as a result, downward trends in fixed income indices. Financial assets for unit-linked contracts increased by � 4.2 billion to � 66.1 billion reflecting our sales success with unit-linked insurance and investment contracts. In
The Allianz Group is involved with a variety of SPEs including asset securitization entities, investment funds and investment conduits. The Allianz Group is involved in asset securitization entities through arranging, facilitating, and in certain cases, managing investment conduits for banking customers in connection with asset-backed security transactions where the SPEs receive the underlying assets, such as trade or finance receivables from the Allianz Group’s banking customers and securitizes such assets to provide customers with cost-efficient financing.
Super senior bonds, a subset of the ‘AAA’ class, are senior to all other classes with respect to both repayment and loss, including subordinate ‘AAA’ classes.
Interest expense � 51.2 mn 4.00 % bond issued by Allianz Finance B.V., Amsterdam Volume � 1.5 bn Year of issue 2006 Maturity date 11/23/2016
Interest expense � 16.2 mn Total interest expense for participation certificates � 16.2 mn 5. Issues that matured in 2007 5.75 % bond issued by Allianz Finance B.V., Amsterdam Volume � 1.1 bn Year of issue 1997/2000 Maturity date 7/30/2007
Interest expense � 37.0 mn 4.625 % bond issued by Allianz Finance II B.V., Amsterdam Volume � 1.1 bn Year of issue 2002 Maturity date 11/29/2007
As our internal risk capital model considers the change in economic fair value of our assets and liabilities, it is crucial to accurately estimate the fair value of each item. For certain assets and liabilities, we apply a mark-to-model approach without having available a current market price for that instrument or similar instruments. For our liabilities, the accuracy of fair values also depends on the quality of the actuarial cash flow estimates. Despite these limitations, we believe the estimated fair values are appropriately assessed in the aggregate.
The Allianz Group’s available capital is based on published shareholders’ equity adjusted to reflect the full economic capital base available to absorb any unexpected volatility in results of operations. For example, the present value of future profits in the Life/Health segment and hybrid capital are added to shareholders’ equity, whereas goodwill and other intangible assets are subtracted therefrom.
1) The figure for available capital in 2006 has been adjusted. See Note 3 to our consolidated financial statements for further information.
We have allocated a significant part of the Life/Health segment ’s non-diversified internal risk capital for interest rate risk to Western Europe (47 % as of December 31, 2007), mainly to cover traditional life insurance products. Traditional products sold in Western Europe generally feature policyholder participation in the profits (or losses) of the insurance company issuing the contract, subject to a minimum guaranteed crediting rate. In particular, our Life/ Health contracts in Germany, France, Switzerland and Austria comprise a significant level of policyholder participation, limiting all sources of risk, including market, credit, actuarial and cost risks, which would otherwise be borne by Allianz. On the other hand, in accordance with the guarantees related to these arrangements, we must credit minimum rates for individual contracts (e.g., in Germany, France, U.S., Italy and South Korea). As interest rates may fall below the guaranteed crediting rates in those markets, we are exposed to interest rate risk. The valuation of these guarantees, which take into account the interaction of investment strategy and obligations to policyholder, forms an integral part of our internal risk capital model.
The primary Corporate risks are interest rate, equity and foreign currency risks. The Corporate segment manages the equity investments of Allianz SE and its finance subsidiary holding companies, as well as securities issued to fund the capital requirements of the Allianz Group. The issued securities include structured products that might be partly repaid with equity participation securities held in our asset portfolio. Some of the securities issued qualify as eligible capital for existing regulatory solvency requirements to the extent they constitute subordinated debt or are perpetual in nature.
We limit the credit risk of our fixed income investments by setting high requirements on the creditworthiness of our issuers, by diversifying our investments and by setting limits for credit concentrations. We track the limit utilization by consolidating and monitoring our exposure across individual debtors and across all investment categories and business segments on a monthly basis. At December 31, 2007, approximately 95 % of the fixed income investments of the insurance companies of the Allianz Group had an investment grade rating and approximately 90 % of these investments were distributed among obligors that had been assigned at least an “A” rating by Standard & Poor’s.
In line with the observed portfolio quality, our total volume of problem loans and potential problem loans (measured by usage), which are two additional indicators for the quality of the loan portfolio, decreased from approximately � 2.0 billion at December 31, 2006 to � 1.8 billion at December 31, 2007.
In addition to our bankassurance activities, the distribution of Dresdner Bank products through our German insurance agents network is of increasing importance. By offering both insurance and banking services in 120 (as of December 31, 2007) selected agencies, an innovative and successful distribution channel is evolving.
The Allianz Group is modernizing its entire organization following a shared Target Operating Model (“TOM”). In order to drive these change processes and to take best practice experience into account, an Operational Transformation
The “Agreement Concerning the Participation of Employees in Allianz SE“ also regulates corporate decisions of the Supervisory Board of Allianz SE. The Supervisory Board consists of 12 members, half of whom represent the shareholders and the other half the employees. Four of the current employee representatives are from Germany, with one each from the UK and France.
Apart from this work on social issues, our commitment to facing the challenges in today‘s society has for many years been demonstrated by the three major Allianz foundations. These foundations have demonstrated continuous success in the contributions they have made in Germany (environment), all of Europe (culture) and in the USA (social initiatives).
The majority of our life/health business in this region is conducted in South Korea through Allianz Life Insurance Co. Ltd. (Allianz Life Korea) and in Taiwan through Allianz Taiwan Life Insurance Company. Allianz Life Korea was the sixth-largest life insurance company in South Korea based on statutory premiums in 2007.2) We also maintain operations in Malaysia, Indonesia, as well as in China, Thailand, Pakistan and India.
Our property-casualty insurance business in the United States is operated through Fireman’s Fund Insurance Company (Fireman’s Fund). Our Life and annuity business is operated through Allianz Life Insurance Company of North America (Allianz Life US).
N ot es 128 Consolidated Balance Sheets 129 Consolidated Income Statements 130 Consolidated Statements of Changes in Equity 131 Consolidated Statements of Cash Flows
Balance as of January 1, 2005, as previously reported 19,433 5,893 (2,634) 7,303 29,995 7,696 37,691
Investments in associated enterprises and joint ventures are generally accounted for using the equity method of accounting, in which the results and the carrying amount of the investment represent the Allianz Group’s proportionate share of the entity’s net income and net assets, respectively. The Allianz Group accounts for all material investments in associates on a time lag of no more than three months. Income from investments in associated enterprises and joint ventures is included in interest and similar income.
The Allianz Group discontinues hedge accounting prospectively when it is determined that the derivative financial instrument is no longer highly effective, when the derivative financial instrument or the hedged item expires, or is sold, terminated or exercised, or when the Allianz Group determines that designation of the derivative financial instrument as a hedging instrument is no longer appropriate. After a fair value hedge is discontinued, the Allianz Group continues to report the derivative financial instrument at its fair value with changes in fair value recognized in net income, but changes in the fair value of the hedged item are no longer recognized in net income. After hedge accounting for a cash flow hedge is discontinued, the Allianz Group continues to record the derivative financial instrument at its fair value; any net unrealized gains and losses accumulated in shareholders ’ equity are recognized when the planned transaction occurs. After a hedge of a net investment in a foreign entity is discontinued, the Allianz Group continues to report the derivative financial instrument at its fair value and any net unrealized gains or losses accumulated in shareholders’ equity remain in shareholders’ equity until the disposal of the foreign entity.
Deferred acquisition costs Deferred acquisition costs (“DAC”), present value of future profits (“PVFP”) and deferred sales inducements comprise the deferred acquisition costs in the balance sheet.
For each individual defined benefit pension plan, the Allianz Group recognizes a portion of its actuarial gains and losses in income or expense if the unrecognized actuarial net gain or loss at the end of the previous reporting period exceeds the greater of: a) 10 % of the projected benefit obligation at
Share compensation plans The share-based compensation plans of the Allianz Group are required to be classified as equity settled or cash settled plans. Equity settled plans are measured at fair value on the grant date and recognized as an expense, with an increase in shareholders’ equity, over the vesting period. Equity settled plans include a best estimate of the number of equity instruments that are expected to vest in determining the amount of expense to be recognized. For cash settled plans, the Allianz Group accrues the fair value of the award as compensation expense over the vesting period. Upon vesting, any change in the fair value of any unexercised awards is recognized as compensation expense.
– Hedge accounting – Fair value disclosures including fair values determined if there is non-observable market data, “day 1” profit or loss, equity instruments at amortized costs and derecognition
In July 2007, IFRIC issued IFRIC 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. IFRIC 14 addresses how entities should determine the limit placed by IAS 19, Employee Benefits, on the amount of a surplus in a pension plan they can recognize as an asset, how a minimum funding requirement affects that limit and when a minimum funding requirement creates an onerous obligation that should be recognized as a liability in addition to that otherwise recognized under IAS 19. The interpretation is mandatory for annual periods beginning on or after January 1, 2008. Earlier application is permitted. The interpretation is expected to have no material impact the Allianz Group’s consolidated financial statements.
The following table summarizes the impact of correcting the Errors on the relevant line items of the face of the business segment information - consolidated balance sheets as of December 31, 2006: As of December 31, 2006 Prior to adjustment
Scope of consolidation In addition to Allianz SE, the consolidated financial statements for the period ended December 31, 2007, generally include all German and foreign operating companies in which Allianz SE directly or indirectly holds a majority of voting rights, or whose activites it can in some other way control. The companies are consolidated from the date on which Allianz SE is able to exercise control.
2) Represents interest and similar income less interest expense. 3) Represents fee and commission income less fee and commission expenses.
Credit risk exposure of loans to banks and customers designated at fair value through income The maximum credit exposure of the loans to banks and customers designated at fair value through income amounts to � 1,779 mn (2006: � 630 mn) as of December 31, 2007. The Allianz Group hedged the credit exposure using credit derivatives with a notional value of � 1,468 mn (2006: � 379 mn).
Government and government agency bonds 37,923 (554) 9,833 (304) 47,756 (858)
Government and government agency bonds Total unrealized losses amounted to � 1,496 mn at December 31, 2007. The Allianz Group holds a large variety of government bonds, mostly of OECD countries (Organization of Economic Cooperation and Development). Given the fact that the issuers of these bonds are backed by the fiscal capacity of the issuers and the issuers typically hold an “investment grade” country- and/or issue-rating, credit risk is not a significant factor. Hence, the unrealized losses on Allianz Group’s investment in government bonds were mainly caused by interest rate increases between the purchase date of the individual securities and the balance sheet date. Because the decline in fair value is attributable to changes in interest rates and, to a lesser extent, to instances of insignificant deterioration of credit quality, the Allianz Group does not consider these investments to be impaired at December 31, 2007.
Changes in the consolidated subsidiaries of the Allianz Group 3 68 240
Europe II 538 — 538 — Asia Pacific & Middle East 320 — 320 — Insurance Anglo, NAFTA Markets & Global Lines 425 — 436 —
Provisions Pensions and similar obligations 4,184 4,120 Employee related 2,956 3,120 Share-based compensation 1,761 1,898 Restructuring plans 541 887 Loan commitments 201 261 Other provisions 1,991 1,943
� mn 1) � mn 1) � mn 1) � mn 1) � mn 1) � mn 1) � mn � mn
In April 2007 16,974,357 new Allianz SE shares were issued for the execution of the minority buy-out of AGF shares. The increase in share capital due to the minority buyout of AGF amounts to � 43 mn; the additional paid-in capital increased by � 2,722 mn.
Banking Segment Income from financial assets and liabilities held for trading of the Banking segment comprises: � mn � mn � mn
In March 2005, Allianz Versicherungs-AG, among other German insurance companies, was fined by the German Federal Cartel Office (“Bundeskartellamt”) for alleged coordinated behaviour to achieve premium increases in parts of the commercial and industrial insurance business and subsequently filed an appeal against this decision. In August 2007, Allianz Versicherungs-AG withdrew its appeal and paid the fully reserved fine, which is of an immaterial amount for the Allianz Group.
Rental expense net of sublease rental income received of � 16 mn, for the year ending December 31, 2007, was � 429 mn (2006: � 518 mn; 2005: � 315 mn).
Therefore, the Allianz Group accrues the fair value of the Class B equity units as compensation expense over the vesting period. Upon vesting, any changes in the fair value of the Class B equity units are recognized as compensation expense. During the year ended December 31, 2007, the Allianz Group recognized compensation expense related to
Through the program “New Dresdner Plus”, Dresdner Bank Group plans to eliminate 2,480 positions. Approximately 1,000 employees had been terminated and approximately 300 additional employees had contractually agreed to leave Dresdner Bank Group pursuant to program “New Dresdner Plus” as of December 31, 2007.
Salaries and wages 9,741 10,230 9,582 Social security contributions and employee assistance 1,666 1,731 1,628 Expenses for pensions and other post-retirement benefits 1,028 1,005 855
Property-Casualty Life/Health Banking Asset Management Corporate Operating entity contributes a substantial portion of our total revenues within our primary geographic markets. Total revenues comprise Property-Casualty segment’s gross premiums written, Life/Health segment’s statutory premiums, Banking segment’s operating revenues and AssetManagement segment’s operating revenues.
Switzerland ◽ Alba Allgemeine Versicherungs-Gesellschaft, Basel 32 100.0 ◽ ◽ Allianz Risk Transfer AG, Zurich 309 100.0 ◽◽ Allianz Suisse Lebensversicherungs-Gesellschaft, Zurich 484 100.0 ◽ ◽ Allianz Suisse Versicherungs-Gesellschaft, Zurich 559 100.0 ◽ Compagnie d’Assurance de Protection Juridique S.A., Zug 13 100.0 ◽ Dresdner Bank (Schweiz) AG, Zurich 114 99.8 ◽ ELVIA Reiseversicherungs-Gesellschaft AG, Zurich 218 100.0 ◽ Selecta AG, Muntelier 2) 135 100.0 Taiwan ◽ Allianz Global Investors Taiwan Ltd., Taipei 27 100.0 ◽ Allianz Taiwan Life Insurance Co. Ltd., Taipei 63 99.6 United Kingdom ◽ Allianz (UK) Limited, Guildford 588 100.0 ◽ ◽ Allianz Insurance plc., Guildford 1,085 98.0 3)
Membership in comparable 1) supervisory bodies Membership in Group bodies Allianz Elementar Lebensversicherungs -AG (Chairman) (until February 7, 2008), Allianz Elementar Versicherungs-AG (Chairman) (until February 7, 2008), Allianz Investmentbank AG (Deputy Chairman) (until February 7, 2008)
Certificated liabilities Certificated liabilities comprise debentures and other liabi- lities for which transferable certificates have been issued.
Allianz Life USA 5, 118-119 Allianz Risk Transfer AG 112-113 Annual General Meeting 30 Appropriation of Profit 41
Consolidated Income Statements 217 Other Information 252 Joint Advisory Council and International Advisory Board 254 Mandates 258 Glossary 263 Index