Annual Report, For the fiscal year ended December 31, 2005
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 20-F

 


 

(Mark One)

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

or

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2005

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period                      to                     

 

or

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell report                     

 

Commission file number 1-15154

 


 

ALLIANZ AKTIENGESELLSCHAFT

(Exact name of registrant as specified in its charter)

 


 

Federal Republic of Germany

(Jurisdiction of incorporation or organization)

 

Königinstrasse 28, 80802 Munich, Germany

(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class


 

Name of Each Exchange on Which Registered


Ordinary Shares (without par value)*   The New York Stock Exchange, Inc.
* Not for trading, but only in connection with the listing of American Depositary Shares, pursuant to the requirements of the New York Stock Exchange.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 


 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock at December 31, 2005:

 

Ordinary shares, without par value

   405,298,397 shares

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

YES  x        NO  ¨

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

YES  ¨        NO  x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES  x        NO  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    x   Accelerated filer    ¨   Non-accelerated filer    ¨

 

Indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17  ¨        Item 18  x

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES  ¨        NO  x

 



Table of Contents

TABLE OF CONTENTS

 

Item


   Page

TABLE OF CONTENTS

   i

Presentation of Financial and Other Information

   1

Cautionary Statement Regarding Forward-Looking Statements

   2

ITEM 1.

 

Identity of Directors, Senior Management and
Advisors

   3

ITEM 2.

 

Offer Statistics and Expected Timetable

   3

ITEM 3.

  Key Information    3
   

Selected Consolidated Financial Data

   3
    Dividends    5
    Exchange Rate Information    5
    Risk Factors    6

ITEM 4.

 

Information on the Company

   12
   

The Allianz Group

   12
   

Insurance Operations

   12
   

Banking Operations

   13
   

Asset Management
Operations

   14
   

Competition

   15
   

International Presence

   15
   

Allianz-RAS Merger/European Company (SE)

   18
   

Reorganization of German Insurance Operations

   19
   

Property-Casualty Insurance Reserves

   19
   

Selected Statistical Information Relating to Our Banking Operations

   33
   

Regulation and Supervision

   53

ITEM 4A.

 

Unresolved Staff Comments

   58

ITEM 5.

 

Operating and Financial Review and Prospects

   58
   

Critical Accounting Policies and Estimates

   58
   

Changes to Accounting and Valuation Policies

   66
   

Introduction

   66
   

Executive Summary

   67
   

Allianz Group’s Consolidated Results of Operations

   69
   

Allianz Group’s Consolidated Assets, Liabilities and Shareholders’ Equity

   74
   

Effects of Recently Adopted Accounting Pronouncements

   78
   

Recently Issued Accounting Pronouncements

   79
   

Events After the Balance Sheet Date

   79
   

Property-Casualty Insurance Operations

   80
   

Property-Casualty Operations by Geographic Region

   85
   

Our Largest Markets &
Companies

   88
   

Life/Health Insurance Operations

   90
   

Life/Health Operations by Geographic Region

   94
   

Our Largest Markets & Companies

   98
   

Banking Operations

   100
   

Banking Operations by Division

   105
   

Banking Operations by Geographic Region

   106
   

Asset Management Operations

   107
   

Liquidity and Capital Resources

   113
   

Investment Portfolio Impairments, Depreciation and Unrealized Losses

   119
   

Tabular Disclosure of Contractual Obligations

   124
   

Expected Developments

   125

ITEM 6.

 

Directors, Senior Management and Employees

   126
    Corporate Governance    126
    Board of Management    128
    Supervisory Board    131
    RAS Merger and the Future Allianz SE—Anticipated Changes in the Corporate Constitution    135
   

Compensation of Directors and Officers

   135
    Board Practices    139
    Share Ownership    139
    Employees    139
   

Stock-based Compensation Plans

   139
   

Employee Stock Purchase Plans

   140

ITEM 7.

 

Major Shareholders and Related Party Transactions

   140
    Major Shareholders    140
    Related Party Transactions    141

 

i


Table of Contents

TABLE OF CONTENTS

 

Item


   Page

ITEM 8.

  Financial Information    141
   

Consolidated Statements and Other Financial Information

   141
    Legal Proceedings    141
    Dividend Policy    141
    Significant Changes    141

ITEM 9.

  The Offer and Listing    141
    Trading Markets    141
    Market Price Information    142

ITEM 10.

  Additional Information    143
    Articles of Association    143
    Capital Increase    144
    Material Contracts    144
    Exchange Controls    144
    German Taxation    145
    United States Taxation    147
    Documents on Display    149

ITEM 11.

 

Quantitative and Qualitative Disclosures About Market Risk

   149
   

Risk Governance Structure

   149
    Market Risk Measurement    159
   

Allianz Group Market Risk Exposure Estimates

   160

Item


   Page

ITEM 12.

 

Description of Securities Other than Equity Securities

   162

ITEM 13.

 

Defaults, Dividend Arrearages and Delinquencies

   162

ITEM 14.

 

Material Modifications to the Rights of Security Holders and Use of Proceeds

   162

ITEM 15.

  Controls and Procedures    163

ITEM 16A.

 

Audit Committee Financial Expert

   163

ITEM 16B.

  Code of Ethics    163

ITEM 16C.

 

Principal Accountant Fees and Services

   163

ITEM 16D.

 

Exemptions from the Listing Standards for Audit Committees

   164

ITEM 16E.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

   165

ITEM 17.

  Financial Statements    166

ITEM 18.

  Financial Statements    166

ITEM 19.

  Exhibits    166

Index to the Consolidated Financial Statements and Schedules

    

 

ii


Table of Contents

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

 

In this Annual Report, the terms “we,” “us” and “our” refer to Allianz Aktiengesellschaft (or Allianz AG, and together with its consolidated subsidiaries, the Allianz Group), unless the context requires otherwise.

 

Unless otherwise indicated, when we use the term “consolidated financial statements,” we are referring to the consolidated financial statements (including the related notes) of Allianz AG as of December 31, 2005 and 2004 and for each of the years in the three-year period ended December 31, 2005, which have been audited by KPMG Deutsche Treuhand-Gesellschaft AG Wirtschaftsprüfungsgesellschaft. The consolidated financial statements have been prepared in accordance with the new and revised International Financial Reporting Standards, effective January 1, 2005, as adopted under European Union regulations in accordance with clause 315a of the German Commercial Code, which we refer to herein as “IFRS” or “2005 IFRS.” IFRS differs in certain respects from accounting principles generally accepted in the United States of America (U.S. GAAP). For a discussion of significant differences between IFRS and U.S. GAAP and a reconciliation of net income and shareholders’ equity under IFRS and U.S. GAAP, you should read Note 47 to the consolidated financial statements. In addition, the amounts set forth in some of the tables may not add up to the total amounts given in those tables due to rounding.

 

References herein to “$”, “U.S.$” and “U.S. dollars” are to United States dollars and references to “€” and “Euro” are to the Euro, the single currency established for participants in the third stage of the European Economic and Monetary Union (or EMU), commencing January 1, 1999. We refer to the countries participating in the third stage of the EMU as the “Euro zone.”

 

For convenience only (except where noted otherwise), some of the Euro figures have been translated into U.S. dollars at the rate of $1.2139 = €1.00, the noon buying rate in New York for cable transfers in Euros certified by the Federal Reserve Bank of New York for customs purposes on March 31, 2006. These translations do not mean that the Euro amounts actually represent those U.S. dollar amounts or could be converted into U.S. dollars at those rates. See “Key Information—Exchange Rate Information” for information concerning the noon buying rates for the Euro from January 1, 2001 through March 31, 2006.

 

Unless otherwise indicated, when we use the terms “gross premiums,” “gross premiums written” and “gross written premiums,” we are referring to premiums (whether or not earned) for insurance policies written during a specific period, without deduction for premiums ceded to reinsurers, and when we use the terms “net premiums,” “net premiums written” and “net written premiums,” we are referring to premiums (whether or not earned) for insurance policies written during a specified period, after deduction for premiums ceded to reinsurers. When we use the term “statutory premiums,” we are referring to gross premiums written from sales of life insurance policies as well as gross receipts from sales of unit-linked and other investment-oriented products, in accordance with the statutory accounting practices applicable in the relevant insurer’s home jurisdiction.

 

Unless otherwise indicated, we have obtained data regarding the relative size of various national insurance markets from annual reports prepared by SIGMA, an independent organization which publishes market research data on the insurance industry. In addition, unless otherwise indicated, insurance market share data are based on gross premiums written and statutory premiums for our Property-Casualty and Life/Health segments, respectively. Data on position and market share within particular countries are based on various third party and/or internal sources as indicated herein.

 

1


Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report includes “forward-looking statements” within the meaning of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. These include statements under “Information on the Company,” “Operating and Financial Review and Prospects,” “Quantitative and Qualitative Disclosures About Market Risk” and elsewhere in this annual report relating to, among other things, our future financial performance, plans and expectations regarding developments in our business, growth and profitability, and general industry and business conditions applicable to the Allianz Group. These forward-looking statements can generally be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or other similar terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections about future events. These forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that may cause our actual results, performance or achievements or those of our industry to be materially different from or worse than those expressed or implied by these forward-looking statements. These factors include, without limitation:

 

    general economic conditions, including in particular economic conditions in our core business areas and core markets;

 

    function and performance of global financial markets, including emerging markets;

 

    frequency and severity of insured loss events, including terror attacks, environmental and asbestos claims;

 

    mortality and morbidity levels and trends;

 

    persistency levels;

 

    interest rate levels;

 

    currency exchange rate developments, including the Euro/U.S. dollar exchange rate;

 

    levels of additional loan loss provisions;

 

    further impairments of investments;

 

    general competitive factors, in each case on a local, regional, national and global level;

 

    changes in laws and regulations, including in the United States and in the European Union;

 

    changes in the policies of central banks and/or foreign governments;

 

    the impact of acquisitions, including related integration and restructuring issues; and

 

    terror attacks, events of war, and their respective consequences.

 

2


Table of Contents

PART I

 

ITEM  1. Identity of Directors, Senior Management and Advisors

 

Not applicable.

 

ITEM 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

ITEM 3. Key Information

 

Selected Consolidated Financial Data

 

We present below our selected financial data as of and for each of the years in the five-year period ended December 31, 2005. We derived the selected financial data for each of the years in the five-year period ended December 31, 2005 from our audited annual consolidated financial statements, including the notes to those financial statements. All the data should be read in conjunction with our consolidated financial statements and the notes thereto.

 

We prepare our annual audited consolidated financial statements in accordance with 2005 IFRS, which introduced a number of new and revised IFRS effective January 1, 2005. Some of these new and revised IFRS required retrospective application to all years of a company’s financial statements. As a result, the financial statements for the Allianz Group previously issued in connection with our Annual Report on Form 20-F for the year ended December 31, 2004 have been revised to retrospectively apply 2005 IFRS, and are included herein. Retrospective application has the effect of applying 2005 IFRS to prior periods as if those accounting principles had always been used. This Annual Report on Form 20-F for the year ended December 31, 2005 is prepared in accordance with 2005 IFRS. Our selected financial data as of and for each of the years ended December 31, 2004, 2003 and 2002 is also presented below in accordance with 2005 IFRS. The selected financial data as of and for the year ended December 31, 2001 is, however, presented below in accordance with IFRS effective as of December 31, 2004 (or “pre-2005 IFRS”) and accordingly does not reflect the retrospective application of 2005 IFRS, due to the unreasonable effort or expense required to prepare such information, in particular resulting from the implementation for such year of the new impairment criteria of IAS 39 revised, Financial Instruments: Recognition and Measurement.

 

IFRS differ in certain significant respects from U.S. generally accepted accounting principles, which in this Annual Report on Form 20-F we refer to as “U.S. GAAP.” For a description of the significant differences between IFRS and U.S. GAAP as they relate to us and a reconciliation of our net income and shareholders’ equity under IFRS to U.S. GAAP, see Note 47 to our audited annual consolidated financial statements included herein.

 

3


Table of Contents
At or For the Years ended December 31,    2005

    2005

    Change
from prev.
year


    2004

    2003

    2002

    2001(2)

 
     $(1)         %                  
     (in millions, except per share data)  

Income statement

                                          

Total revenues(3)

                                          

Property-Casualty

   53,486     44,061     0.6     43,780     43,420              

Life/Health

   58,424     48,129     6.5     45,177     42,319              

Banking

   7,569     6,235     (3.3 )   6,446     6,704              

Asset Management

   3,318     2,733     18.4     2,308     2,226              

Consolidation

   (317 )   (261 )         (836 )   (929 )            
    

 

 

 

 

 

 

Total Group

   122,480     100,897     4.2     96,875     93,740       (4)     (4)

Operating profit

                                          

Property-Casualty

   5,052     4,162     4.6     3,979     2,397              

Life/Health

   1,946     1,603     13.0     1,418     1,265              

Banking

   1,026     845     44.2     586     (396 )            

Asset Management

   1,375     1,133     32.4     856     716              
    

 

 

 

 

 

 

Total Group

   9,399     7,743     13.2     6,839     3,982       (4)     (4)

Earnings from ordinary activities before taxes(5)

   9,566     7,880     54.6     5,096     3,866     (3,991 )   1,768  

Net income (loss)(5)

   5,317     4,380     93.3     2,266     2,691     (3,243 )   1,585  

Balance sheet

                                          

Investments

   343,437     282,920     13.9     248,327     231,397     228,111     345,302  

Loans and advances to banks and customers

   408,851     336,808     (10.7 )   377,223     378,295     329,195     300,967  

Total assets

   1,211,328     997,881     0.8     990,318     933,213     848,752     942,986  

Shareholders’ equity before minority interests

   47,933     39,487     31.6     29,995     27,993     21,046     31,613  

Minority interests in shareholders’ equity

   9,244     7,615     (1.1 )   7,696     7,266     7,965     17,349  

Reserves for insurance and investment contracts

   435,956     359,137     10.0     326,380     309,460     303,258     299,512 (6)

Liabilities to banks and customers

   376,693     310,316     (11.0 )   348,484     332,906     284,598     312,725  

Returns

                                          

Return on equity after taxes(7)

   12.6 %   12.6 %   4.8 pts     7.8 %   11.0 %   (12.5 )%   4.7 %

Return on equity after taxes and before goodwill amortization(7)

   12.6 %   12.6 %   1.0 pts     11.6 %   16.5 %   (8.3 )%   6.9 %

Share information

                                          

Basic earnings per share(5)

   13.64     11.24     81.6     6.19     7.96     (11.71 )   6.51  

Diluted earnings per share(5)

   13.52     11.14     80.8     6.16     7.93     (11.71 )   6.51  

Weighted average number of shares outstanding

                                          

Basic

   389.8     389.8     6.5     365.9     338.2     276.9     277.8  

Diluted

   393.3     393.3     6.8     368.1     339.8     276.9     277.8  

Shareholders’ equity per share

   147     121     17.5     103     104     105     176  

Dividend per share

   2.43     2.00     14.3     1.75     1.50     1.50     1.50  

Dividend payment

   984     811     20.3     674     551     374     364  

Share price(8)

   155.31     127.94     31.1     97.60     100.08     80.80     237.10  

Market capitalization

   63,061     51,949     44.6     35,936 (9)   36,743 (9)   22.039 (9)   64,156 (9)

Other data

                                          

Employees

   177,625     177,625     0.6     176,501     173,750     181,651     179,946  

Third-party assets under management

   901,851     742,937     27.0     584,624     564,714     560,588     620,458  

U.S. GAAP consolidated data

                                          

Net income (loss)

   4,483     3,693     28.2     2,881     2,245     (1,260 )   4,246  

Basic earnings per share

   11.33     9.33     18.6     7.87     6.71     (4.79 )   16.30  

Diluted earnings per share

   11.24     9.26     18.3     7.83     6.70     (4.79 )   16.30  

Shareholders’ equity

   53,877     44,383     33.0     33,380     30,825     22,836     31,655  

Shareholders’ equity per share

   138     114     25.3     91     91     83     114  

(1) Amounts given in Euros have been translated for convenience only into U.S. dollars at the rate of $1.2139 = €1.00, the noon buying rate in New York for cable transfers in Euros certified by the Federal Reserve Bank of New York for customs purposes on March 31, 2006.
(2) Our selected financial data as of and for the year ended December 31, 2001 is presented in accordance with pre-2005 IFRS.
(3) 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.
(4) Not previously presented as net income and total income were the relevant performance measures used by the Allianz Group in such years.
(5) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.
(6) Represents amounts included in the “Insurance reserves” line-item under pre-2005 IFRS. Under 2005 IFRS, this line-item has been replaced with “Reserves for insurance and investment contracts” in our consolidated financial statements pursuant to the Allianz Group’s adoption of IFRS 4, Insurance Contracts, as discussed further in Note 3 to our consolidated financial statements.
(7) Based on average shareholders’ equity before minority interests. Average shareholders’ equity before minority interests has been calculated based upon the average of the current and preceding year’s shareholders’ equity before minority interests.
(8) Retrospectively adjusted for transactions affecting our share capital, specifically capital increases.
(9) Excluding treasury shares.

 

4


Table of Contents

Dividends

 

The following table sets forth the annual dividends paid per ordinary share and American Depositary Share (or “ADS”) equivalent for 2001 through 2005. The table does not reflect the related tax credits available to German taxpayers. See “Additional Information—Taxation—German Taxation—Taxation of Dividends.”

 

     Dividend per
  ordinary share  


   Dividend paid per
  ADS equivalent  


        $       $

2001

   1.50    1.42    0.150    0.142

2002

   1.50    1.76    0.150    0.176

2003

   1.50    1.82    0.150    0.182

2004

   1.75    2.27    0.175    0.227

2005(1)

   2.00    2.43    0.200    0.243

(1) Dividend amounts given in Euros have been translated for convenience only into U.S. dollars at the rate of $1.2139 = €1.00, the noon buying rate in New York for cable transfers in Euros certified by the Federal Reserve Bank of New York for customs purposes on March 31, 2006. See “Presentation of Financial and Other Information.”

 

Although the ability to pay future dividends will depend upon our future earnings, financial condition (including our cash needs), prospects and other factors, we do not presently anticipate any changes to our current dividend policy. However, you should not assume that any dividends will actually be paid or make any assumptions about the amount of dividends which will be paid in any given year. See “Financial Information—Dividend Policy.”

 

Exchange Rate Information

 

The table below sets forth, for the periods indicated, information concerning the noon buying rates for the Euro expressed in U.S. dollars per €1.00. No representation is made that the Euro or U.S. dollar amounts referred to herein could be or could have been converted into U.S. dollars or Euros, as the case may be, at any particular rate or at all.

 

    High

  Low

  Period
average(1)


 

Period

end


    ($ per €1.00)

2001

  0.9535   0.8370   0.8952   0.8901

2002

  1.0485   0.8594   0.9454   1.0485

2003

  1.2597   1.0361   1.1321   1.2597

2004

  1.3625   1.1801   1.2478   1.3538

2005

  1.3476   1.1667   1.2400   1.1842

October

  1.2148   1.1914   1.1955   1.1995

November

  1.2067   1.1667   1.1894   1.1790

December

  1.2041   1.1699   1.1772   1.1842

2006

               

January

  1.2287   1.1980   1.2069   1.2158

February

  1.2100   1.1860   1.2009   1.1925

March

  1.2197   1.1886   1.2028   1.2139

(1) Computed using the average of the noon buying rates for Euros on the last business day of each month during the relevant annual period or on the first and last business days of each month during the relevant monthly period.

 

On March 31, 2006, the noon buying rate for the Euro was $1.2139.

 

5


Table of Contents

Risk Factors

 

You should carefully review the following risk factors together with the other information contained in this annual report before making an investment decision. Our financial position and results of operations may be materially adversely affected by each of these risks. The market price of our ADSs may decline as a result of each of these risks and investors may lose the value of their investment in whole or in part. Additional risks not currently known to us or that we now deem immaterial may also adversely affect our business and your investment.

 

Interest rate volatility may adversely affect our results of operations.

 

Changes in prevailing interest rates (including changes in the difference between the levels of prevailing short- and long-term rates) can affect our insurance, asset management and banking results.

 

Over the past several years, movements in both short- and long-term interest rates have affected the level and timing of recognition of gains and losses on securities held in our various investment portfolios. An increase in interest rates could substantially decrease the value of our fixed income portfolio, and any unexpected change in interest rates could materially adversely affect our bond and interest rate derivative positions. Results of our asset management business may also be affected by movements in interest rates, since management fees are generally based on the value of assets under management, which fluctuate with changes in the level of interest rates.

 

The short-term impact of interest rate fluctuations on our life/health insurance business may be reduced in part by products designed to partly or entirely transfer our exposure to interest rate movements to the policyholder. While product design reduces our exposure to interest rate volatility, changes in interest rates will impact this business to the extent they result in changes to current interest income, impact the value of our fixed income portfolio, and affect the levels of new product sales or surrenders of business in force. In addition, reductions in the investment income below the rates assumed in product pricing, or below the regulatory minimum required rates in countries such as Germany and Switzerland, would reduce or eliminate the profit margins on the life/health insurance business written by our life/health subsidiaries.

 

In addition, the composition of our banking assets and liabilities, and any mismatches resulting from that composition, cause the net income of our banking operations to vary with changes in interest rates. We are particularly impacted by changes in interest rates as they relate to different maturities of contracts and the different currencies in which we hold interest rate positions. A mismatch with respect to maturity of interest-earning assets and interest-bearing liabilities in any given period can have a material adverse effect on the financial position or results of operations of our banking business.

 

Market risks could impair the value of our portfolio and adversely impact our financial position and results of operations.

 

We hold a significant equity portfolio, which represented approximately 16% of our Group’s own investments at December 31, 2005, excluding trading portfolios. Fluctuations in equity markets affect the market value and liquidity of these holdings. We also have real estate holdings in our investment portfolio, the value of which is likewise exposed to changes in real estate market prices and volatility.

 

Most of our assets and liabilities are recorded at fair value, including trading assets and liabilities, financial assets and liabilities designated at fair value through income, and securities available-for-sale. Changes in the value of securities held for trading purposes and financial assets designated at fair value through income are recorded through our consolidated income statement. Changes in the market value of securities available-for-sale are recorded directly in our consolidated shareholders’ equity. Available-for-sale equity and fixed income securities, as well as securities classified as held-to-maturity, are reviewed regularly for impairment, with write-downs to fair value charged to income if there is objective evidence that the cost may not be recovered. See “Operating and Financial Review and Prospects—Critical Accounting Policies and Estimates” and Note 2 to our consolidated financial statements for further information concerning our significant accounting and valuation policies.

 

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Market and other factors could adversely affect goodwill, deferred policy acquisition costs and deferred tax assets; our deferred tax assets are also potentially impacted by changes in tax legislation.

 

Business and market conditions may impact the amount of goodwill we carry in our consolidated financial statements. As of December 31, 2005, we have recorded goodwill in an aggregate amount of €12,023 million, of which €1,625 million relates to our banking business, €6,604 million to our asset management business and €3,794 million relates to our insurance business.

 

As the value of certain parts of our businesses, including in particular our banking and asset management businesses, are significantly impacted by such factors as the state of financial markets and ongoing operating performance, significant declines in financial markets or operating performance could also result in impairment of other goodwill carried by us and result in significant write-downs, which could be material. No impairments were recorded for goodwill in 2005.

 

The assumptions we made with respect to recoverability of deferred policy acquisition costs (or “DAC”) are also affected by such factors as operating performance and market conditions. DAC is incurred in connection with the production of new and renewal insurance business and is deferred and amortized generally in proportion to profits or to premium income expected to be generated over the life of the underlying policies, depending on the classification of the product. If the assumptions on which expected profits are based prove to be incorrect, it may be necessary to accelerate amortization of DAC, even to the extent of writing down DAC through impairments, which could materially adversely affect results of operations. No impairments were recorded for DAC in 2005.

 

As of December 31, 2005, we had a total of €14,596 million in net deferred tax assets and €14,621 million in deferred tax liabilities. The calculation of the respective tax assets and liabilities is based on current tax laws and IFRS and depends on the performance of the Allianz Group as a whole and certain business units in particular. At December 31, 2005, €5,018 million (2004: €5,337 million) of deferred tax assets depended on the ability to use existing tax-loss carry forwards.

 

Changes in German or other tax legislation or regulations or an operating performance below currently anticipated levels may lead to a significant impairment of deferred tax assets, in which case we could be obligated to write-off certain tax assets. Tax assets may also need to be written-down if certain assumptions of profitability prove to be incorrect, as losses incurred for longer than expected will make the usability of tax assets more unlikely. Any such development may have a material adverse impact on our results of operations.

 

Loss reserves for our property-casualty insurance and reinsurance policies are based on estimates as to future claims liabilities. Adverse developments relating to claims could lead to further reserve additions and materially adversely impact our results of operations.

 

In accordance with industry practice and accounting and regulatory requirements, we establish reserves for loss and loss adjustment expenses related to our property-casualty insurance and reinsurance businesses, including property-casualty business in run-off. Reserves are based on estimates of future payments that will be made in respect of claims, including expenses relating to such claims. Such estimates are made both on a case-by-case basis, based on the facts and circumstances available at the time the reserves are established, as well as in respect of losses that have been incurred but not reported (or “IBNR”) to the Allianz Group. These reserves represent the estimated ultimate cost necessary to bring all pending reported and IBNR claims to final settlement.

 

Reserves, including IBNR reserves, are subject to change due to a number of variables which affect the ultimate cost of claims, such as changes in the legal environment, results of litigation, changes in medical costs, costs of repairs and other factors such as inflation and exchange rates, and our reserves for asbestos and environmental and other latent claims are particularly subject to such variables. Our results of operations depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we use in setting the prices for products and establishing the liabilities for obligations for technical provisions and claims. To the extent that our actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, we may be required to

 

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increase our reserves, which may materially adversely affect our results of operations.

 

Established loss reserves estimates are periodically adjusted in the ordinary course of settlement, using the most current information available to management, and any adjustments resulting from changes in reserve estimates are reflected in current results of operations. We also conduct reviews of various lines of business to consider the adequacy of reserve levels. Based on current information available to us and on the basis of our internal procedures, our management considers that these reserves are adequate at December 31, 2005. However, because the establishment of reserves for loss and loss adjustment expenses is an inherently uncertain process, there can be no assurance that ultimate losses will not materially exceed the established reserves for loss and loss adjustment expenses and have a material adverse effect on our results of operations. See “Information on the Company—Property-Casualty Insurance Reserves.”

 

Actuarial experience and other factors could differ from that assumed in the calculation of life/health actuarial reserves and pension liabilities.

 

The assumptions we make in assessing our life/health insurance reserves may differ from what we experience in the future. We derive our life/health insurance reserves using “best estimate” actuarial practices and assumptions. These assumptions include the assessment of the long-term development of interest rates, investment returns, the allocation of investments between equity, fixed income and other categories, policyholder bonus rates (some of which are guaranteed), mortality and morbidity rates, policyholder lapses and future expense levels. We monitor our actual experience of these assumptions and to the extent that we consider that this experience will continue in the longer term we refine our long-term assumptions. Similarly, estimates of our own pension obligations necessarily depend on assumptions concerning future actuarial, demographic, macroeconomic and financial markets developments. Changes in any such assumptions may lead to changes in the estimates of life/health insurance reserves or pension obligations.

 

We have a significant portfolio of contracts with guaranteed investment returns, including endowment and annuity products for the German market as well as certain guaranteed contracts in other markets. The amounts payable by us at maturity of an endowment policy in Germany and in certain other markets include a “guaranteed benefit,” an amount that, in practice, is equal to a legally mandated maximum rate of return on actuarial reserves. If interest rates should remain at current historically low levels, we could be required to provide additional funds to our life/health subsidiaries to support their obligations in respect of products with higher guaranteed returns, or increase reserves in respect of such products, which could in turn have a material adverse effect on our results of operations.

 

In the United States, we have a significant portfolio of contracts with guaranteed investment returns indexed to equity markets. We enter into derivative contracts as a means of mitigating the risk of investment returns underperforming guaranteed returns. However, there can be no assurance that the hedging arrangements will satisfy the returns guaranteed to policyholders, which could in turn have a material adverse effect on our results of operations.

 

Our financial results may be materially adversely affected by the occurrence of catastrophes.

 

Portions of our property-casualty insurance may cover losses from unpredictable events such as hurricanes, windstorms, hailstorms, earthquakes, fires, industrial explosions, freezes, riots, floods and other man-made or natural disasters, including acts of terrorism. The incidence and severity of these catastrophes in any given period are inherently unpredictable.

 

Although we monitor our overall exposure to catastrophes and other unpredictable events in each geographic region, each of our subsidiaries independently determines its own underwriting limits related to insurance coverage for losses from catastrophic events. We generally seek to reduce our exposure to these events through the purchase of reinsurance, selective underwriting practices and by monitoring risk accumulation. However, such efforts to reduce exposure may not be successful and claims relating to catastrophes may result in unusually high levels of losses and could have a material adverse effect on our financial position or results of operations.

 

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We have significant counterparty risk exposure.

 

We are subject to a variety of counterparty risks, including:

 

General Credit Risks. Third-parties that owe us money, securities or other assets may not pay or perform under their obligations. These parties include the issuers whose securities we hold, borrowers under loans made, customers, trading counterparties, counterparties under swaps, credit default and other derivative contracts, clearing agents, exchanges, clearing houses and other financial intermediaries. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure or other reasons.

 

Reinsurers. We transfer our exposure to certain risks in our property-casualty and life/health insurance business to others through reinsurance arrangements. Under these arrangements, other insurers assume a portion of our losses and expenses associated with reported and unreported losses in exchange for a portion of policy premiums. The availability, amount and cost of reinsurance depend on general market conditions and may vary significantly. Any decrease in the amount of our reinsurance will increase our risk of loss. When we obtain reinsurance, we are still liable for those transferred risks if the reinsurer cannot meet its obligations. Therefore, the inability of our reinsurers to meet their financial obligations could materially affect our results of operations. Although we conduct periodic reviews of the financial statements and reputations of our reinsurers, including, and as appropriate, requiring letters of credit, deposits or other financial measures to further minimize our exposure to credit risk, reinsurers may become financially unsound by the time they are called upon to pay amounts due.

 

Many of our businesses are dependent on the financial strength and credit ratings assigned to us and our businesses by various rating agencies. Therefore, a downgrade in our ratings may materially adversely affect relationships with customers and intermediaries, negatively impact sales of our products and increase our cost of borrowing.

 

Claims paying ability and financial strength ratings are a factor in establishing the competitive position of insurers. Our financial strength rating has a significant impact on the individual ratings of key subsidiaries. If a rating of certain subsidiaries falls below a certain threshold, the respective operating business may be significantly impacted. A ratings downgrade, or the potential for such a downgrade, of the Allianz Group or any of our insurance subsidiaries could, among other things, adversely affect relationships with agents, brokers and other distributors of our products and services, thereby negatively impacting new sales, adversely affect our ability to compete in our markets and increase our cost of borrowing. In particular, in those countries where primary distribution of our products is done through independent agents, such as the United States, future ratings downgrades could adversely impact sales of our life insurance products. Any future ratings downgrades could also materially adversely affect our cost of raising capital, and could, in addition, give rise to additional financial obligations or accelerate existing financial obligations which are dependent on maintaining specified rating levels.

 

Rating agencies can be expected to continue to monitor our financial strength and claims paying ability, and no assurances can be given that future ratings downgrades will not occur, whether due to changes in our performance, changes in rating agencies’ industry views or ratings methodologies, or a combination of such factors.

 

If our asset management business underperforms, it may experience a decline in assets under management and related fee income.

 

While the assets under management in our asset management segment include a significant amount of funds related to our insurance operations, third-party assets under management, particularly following the acquisitions of PIMCO in May 2000, Nicholas-Applegate in January 2001 and Dresdner Bank in July 2001, represent the majority. Results of our asset management activities are affected by share prices, share valuation, interest rates and market volatility. In addition, third-party funds are subject to withdrawal in the event our investment performance is not competitive with other asset management firms. Accordingly, fee income from the asset management business might decline if the level of our third-party assets under management were to decline due to investment performance or otherwise.

 

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The individual or combined impact of any of the events mentioned above could also cause an impairment of goodwill and result in significant write-downs, which could be material.

 

Increased geopolitical risks following the terrorist attack of September 11, 2001, and any future terrorist attacks, could have a continuing negative impact on our businesses.

 

After September 11, 2001, reinsurers generally either put terrorism exclusions into their policies or drastically increased the price for such coverage. Although we have attempted to exclude terrorist coverage from policies we write, this has not been possible in all cases, including as a result of legislative developments such as the Terrorism Risk Insurance Act (or “TRIA”) in the United States. Furthermore, even if terrorism exclusions are permitted in our primary insurance policies, we may still have liability for fires and other consequential damage claims that follow an act of terrorism itself. As a result we may have liability under primary insurance policies for acts of terrorism and may not be able to recover a portion or any from our reinsurers.

 

At this time, we cannot assess the future effects of terrorist attacks, potential ensuing military and other responsive actions, and the possibility of further terrorist attacks, on our businesses. Such matters have significantly adversely affected general economic, market and political conditions, increasing many of the risks in our businesses noted in the previous risk factors. This may have a material negative effect on our businesses and results of operations over time.

 

Changes in existing, or new, government laws and regulations, or enforcement initiatives in respect thereof, in the countries in which we operate may materially impact us and could adversely affect our business.

 

Our insurance, banking and asset management businesses are subject to detailed, comprehensive laws and regulation as well as supervision in all the countries in which we do business. Changes in existing laws and regulations may affect the way in which we conduct our business and the products we may offer. Changes in regulations relating to pensions and employment, social security, financial services including reinsurance business, taxation, securities products and transactions may materially adversely affect our insurance, banking and asset management businesses by restructuring our activities, imposing increased costs or otherwise.

 

Regulatory agencies have broad administrative power over many aspects of the financial services business, which may include liquidity, capital adequacy and permitted investments, ethical issues, money laundering, privacy, record keeping, and marketing and selling practices. Banking, insurance and other financial services laws, regulations and policies currently governing us and our subsidiaries may change at any time in ways which have an adverse effect on our business, and we cannot predict the timing or form of any future regulatory or enforcement initiatives in respect thereof. Also, bank regulators and other supervisory authorities in the EU, the United States and elsewhere continue to scrutinize payment processing and other transactions under regulations governing such matters as money-laundering, prohibited transactions with countries subject to sanctions, and bribery or other anti-corruption measures. If we fail to address, or appear to fail to address, appropriately any of these changes or initiatives, our reputation could be harmed and we could be subject to additional legal risk, including to enforcement actions, fines and penalties. Despite our best efforts to comply with applicable regulations, there are a number of risks in areas where applicable regulations may be unclear or where regulators revise their previous guidance or courts overturn previous rulings. Regulators and other authorities have the power to bring administrative or judicial proceedings against us, which could result, among other things, in suspension or revocation of our licenses, cease-and-desist orders, fines, civil penalties, criminal penalties or other disciplinary action which could materially harm our results of operations and financial condition.

 

Effective January 2005, reinsurance companies in Germany such as Allianz AG are subject to specific legal requirements regarding the assets covering their technical reserves. These assets are required to be appropriately diversified to prevent a reinsurer from relying excessively on any particular asset. The introduction of these requirements anticipated the implementation of EU Reinsurance Directive (2005/68/EC) which was adopted in November 2005. The implementation of the directive’s provisions that have not yet been

 

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implemented in Germany effective January 2006 is expected to occur by the end of 2006. Although Allianz AG expects to meet the new requirements of the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or “BaFin”) once fully implemented, there can be no assurances as to the impact on Allianz AG of any future amendments to or changes in the interpretation of the laws and regulations regarding assets covering technical reserves of reinsurance companies, which could require Allianz AG to change the composition of its asset portfolio covering its technical reserves or take other appropriate measures.

 

In addition, currently discussions on a new solvency regime for insurance companies in the EU (Solvency II) are ongoing. As those discussions are in a preliminary stage, its potential future impact for capital requirements can not currently be assessed. For more information, see “Information on the Company—Regulation and Supervision.”

 

In addition, changes to tax laws may affect the attractiveness of certain of our products that currently receive favorable tax treatment. Governments in jurisdictions in which we do business may consider changes to tax laws which could adversely affect such existing tax advantages, and if enacted, could result in a significant reduction in the sale of such products.

 

Our business may be negatively affected by adverse publicity, regulatory actions or litigation with respect to the Allianz Group, other well-known companies and the financial services industry generally.

 

Adverse publicity and damage to our reputation arising from failure or perceived failure to comply with legal and regulatory requirements, financial reporting irregularities involving other large and well-known companies, increasing regulatory and law enforcement scrutiny of “know your customer” anti-money laundering and anti-terrorist-financing procedures and their effectiveness, regulatory investigations of the mutual fund and insurance industries, and litigation that arises from the failure or perceived failure by Allianz Group companies to comply with legal and regulatory requirements, could result in increased regulatory supervision, affect our ability to attract and retain customers, maintain access to the capital markets, result in suits, enforcement actions, fines and penalties or have other adverse effects on us in ways that are not predictable.

 

Changes in value relative to the Euro of non-Euro zone currencies in which we generate revenues and incur expenses could adversely affect our reported earnings and cash flow.

 

We prepare our consolidated financial statements in Euro. However, a significant portion of the revenues and expenses from our subsidiaries outside the Euro zone, including in the United States, Switzerland and the United Kingdom, originates in currencies other than the Euro. We expect this trend to continue as we expand our business into growing non-Euro zone markets. For the year ended December 31, 2005, approximately 35.8% of our gross premiums written in our property-casualty segment and 34.2% of our statutory premiums in our life/health segment originated in currencies other than the Euro.

 

As a result, although our non-Euro zone subsidiaries generally record their revenues and expenses in the same currency, changes in the exchange rates used to translate foreign currencies into Euro may adversely affect our results of operations.

 

While our non-Euro assets and liabilities, and revenues and related expenses, are generally denominated in the same currencies, we do not generally engage in hedging transactions with respect to dividends or cash flows in respect of our non-Euro subsidiaries.

 

The share price of Allianz AG has been and may continue to be volatile.

 

The share price of Allianz AG has been volatile in the past and may continue to be volatile due in part to the high volatility in the securities markets generally, and in financial institutions’ shares in particular, as well as developments which impact our financial results. Factors other than our financial results that may affect our share price include but are not limited to: market expectations of the performance and capital adequacy of financial institutions generally; investor perception of as well as the actual performance of other financial institutions; investor perception of the success and impact of our strategy; a downgrade or rumored downgrade of our credit ratings; potential litigation or regulatory action involving the Allianz Group or any of the industries we have exposure to through our

 

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insurance, banking and asset management activities; announcements concerning the bankruptcy or other similar reorganization proceedings involving, or any investigations into the accounting practices of, other insurance or reinsurance companies, banks or asset management companies; and general market volatility.

 

The benefits that Allianz AG may realize from the contemplated merger with RAS S.p.A. and from Allianz AG’s conversion into a European Company (Societas Europaea) in connection therewith could be materially different from our current expectations.

 

The benefits that Allianz AG may realize from the merger with its Italian subsidiary, RAS S.p.A., and from Allianz AG’s conversion into a European Company (Societas Europaea, or “SE”) in connection therewith could be materially different from our current expectations. For more information about this transaction, see “Information on the Company – Allianz-RAS Merger / European Company (SE).” However, our estimates of the benefits that we may realize as a result of the merger and conversion to an SE involve subjective judgments that are subject to uncertainties. A variety of factors that are partially or entirely beyond our control could cause actual results to be materially different from what we currently expect, and any synergies that we realize from the merger and conversion to an SE therefore could as a result be materially different from our current expectations.

 

ITEM 4. Information on the Company

 

The Allianz Group

 

We are among the world’s largest financial services providers.

 

  Founded in 1890, with 115 years of experience in the financial services industry and operations in over 70 countries worldwide, we continue our legacy of commitment in providing financial security to our more than 60 million customers across the globe.

 

  We are among the world’s largest financial services providers, offering insurance, banking and asset management products and services through property-casualty, life/health, banking and asset management business segments.

 

  We are the largest German financial institution, based on market capitalization at March 1, 2006(1).

 

Allianz AG, a stock corporation organized in the Federal Republic of Germany under the German Stock Corporation Act, is the ultimate parent company of the Allianz Group. It was incorporated as Allianz Versicherungs-Aktiengesellschaft in Berlin, Germany on February 5, 1890. Our registered office is located at Königinstrasse 28, 80802 Munich, Germany, telephone (49)(89) 3800-0. See “– Allianz-RAS Merger / European Company (SE)” for information on the conversion of Allianz AG into a European Company (SE) upon completion of the contemplated merger with Riunione Adriatica di Sicurtà S.p.A. (or “RAS”) to become Allianz SE.

 

Insurance Operations

 

  We are one of the leading insurance groups in the world. We rank number one in the German property-casualty and life insurance markets based on gross premiums written and statutory premiums, respectively, in 2005(2).

 

  Of the more than 70 countries in which we operate, we are among the largest insurance companies in a number of them, including France, Italy, Spain, Switzerland and the United Kingdom.

 

In our Property-Casualty segment, we provide a wide array of products, including, among others, motor, homeowners, travel and other personal lines products. Furthermore, we are a leading provider of commercial and industrial coverage to enterprises of all sizes, including many of the world’s largest companies. Through our specialty lines of business, we offer credit insurance, marine, aviation and industrial transport insurance, international industrial risks reinsurance, as well as travel insurance and assistance services, which we manage on a worldwide basis.

 

 


(1) Source: Deutsche Börse Group.
(2) Source: Gesamtverband der Deutschen Versicherungswirtschaft e.V. (or “GDV”) and our own internal analysis and estimates. The GDV is a private association representing the German insurance industry.

 

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Our Life/Health segment provides, among others, traditional life, endowment, annuity, including equity-indexed annuities, and term insurance products. Additionally, we serve individuals with a wide range of health, disability and related coverage and provide group life, group health and pension products to employers.

 

Within our home market of Europe, France, Germany, Italy, Spain, Switzerland and the United Kingdom comprise our primary insurance markets, with Germany as our most important single market, although we operate in almost every European country. We also consider the United States as one of our primary markets. Please see “– International Presence” for a breakdown of selected operating entities within our primary markets and others.

 

We distribute our property-casualty and life/health insurance products through a broad network of self-employed full-time tied agents, part-time tied agents, brokers, banks and other channels. The particular distribution channels we use vary based on product and geographic market. Within our primary market of Germany, we rely predominantly on full-time tied agents. Our insurance products are marketed in Germany primarily under the “Allianz” brand name. In other countries, we operate through our subsidiary insurers’ brand names, which are identified as part of the Allianz Group.

 

Allianz AG, the parent company of the Allianz Group, acts as the Allianz Group’s reinsurer for almost all of our insurance operations, other than international industrial risks reinsurance. For the years ended December 31, 2005, 2004 and 2003, Allianz AG assumed 39.6%, 37.6% and 39.1%, respectively, of all reinsurance ceded by Allianz Group companies, while Munich Re is our primary third-party reinsurer. Allianz AG also provides centralized advice to subsidiaries on structuring their own reinsurance programs and establishing lists of permitted reinsurers. In addition, the Allianz Group, through Allianz AG, has a pooling concept in place whereby natural catastrophe reinsurance cover is offered to Allianz Group’s subsidiaries allowing the Allianz Group to benefit from internal diversification effects. Allianz AG also assumes a relatively small amount of reinsurance from external cedents.

 

Please see the respective sections of “Operating and Financial Review and Prospects” for breakdowns of our insurance operations by geographic region, including gross premiums written, statutory premiums, earnings and various key performance indicators, as well as a description of our largest property-casualty and life/health markets and companies.

 

Banking Operations

 

  Dresdner Bank is one of the largest banks in Germany, based on total assets at December 31, 2005.

 

Our banking operations consist primarily of those of Dresdner Bank, through which we offer a wide range of private, commercial and investment banking products and services for corporate, governmental and individual customers, primarily in the European market. Please see “– International Presence” for a breakdown of selected operating entities within our primary markets and others.

 

While Dresdner Bank focuses on selected geographic regions worldwide, Germany is its primary market, which contains 66.1% of its loan portfolio. The largest credit exposures to borrowers in Germany are loans to private individuals (including self-employed professionals) at 58.2%; this category represented 38.5% of Dresdner Bank’s total loans outstanding at December 31, 2005. Dresdner Bank operates and distributes its products primarily through 959 branch offices, of which 927 are located in Germany and 32 outside of Germany. In 2005, we conducted our Dresdner Bank operations through six divisions:

 

    Personal Banking provides personalized financial services such as payments transactions, financing, investment advice, financial planning and insurance products.

 

    Private & Business Banking provides access for its worldwide clients to its range of private banking services, such as wealth management, portfolio management, real estate investment advice and trust and estate advice, as well as business banking advisory services to assist corporate clients in arranging their private and business finances in an integrated and customized manner.

 

    Corporate Banking offers corporate loans, structured financing, as well as treasury, securities and insurance products, and provides corporate customers with cash management solutions, payment services, global documentary services and advice on occupational pension plans.

 

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    Dresdner Kleinwort Wasserstein (or “DrKW”) offers corporate finance advisory services on mergers and acquisitions, divestitures, restructurings and other strategic matters, and provides securities underwriting and market-making, securitization products and services, securities and derivatives trading, portfolio management, and other capital markets products and services.

 

    Institutional Restructuring Unit (or “IRU”) closed down effective September 30, 2005 having successfully completed its mandate to free-up risk capital through the reduction of risk-weighted assets.

 

    Corporate Other contains income and expense items that are not directly assigned to our operating divisions, such as income and expenses from the Dresdner Bank-wide treasury function, as well as provisioning requirements for country and general risks.

 

In November 2005, we announced that, effective 1Q 2006, we will reorganize our banking business. Our newly-formed Private & Business Clients division will combine all banking activities formerly provided by the Personal Banking and Private & Business Banking divisions. Additionally, our Corporate Banking and DrKW divisions will be combined within a single organizational unit, Corporate & Investment Banking, to further improve the leverage of the market potential in our corporate client and capital markets business. In the future, we expect to increase the part of banking products sold through insurance agents.

 

Please see “Operating and Financial Review and Prospects—Banking Operations” for a breakdown of our banking operations by division and geographic region, respectively.

 

Asset Management Operations

 

  Allianz Global Investors is one of the largest asset managers in the world, based on total assets under management.

 

Our asset management operations act as a global provider of institutional and retail asset management products and services to third-party investors and provide investment management services to our insurance operations. We managed approximately € 743 billion of third-party assets on a worldwide basis at December 31, 2005, which includes fixed income, equity, money market and sector products, as well as alternative investments.

 

We conduct our retail asset management business primarily through our operating companies worldwide under the brand name, Allianz Global Investors (or “AGI”). In our institutional asset management business, we operate under the brand names of our investment management entities; AGI serves as an endorsement brand. Please see “– International Presence” for a breakdown of selected operating entities within our primary markets and others.

 

We serve a comprehensive range of retail and institutional asset management clients. Our institutional clients include corporate and public pension funds, insurance and other financial services companies, governments and charities, financial advisors and private individuals.

 

The particular distribution channels we use vary by product and geographic market. In Europe and the United States, AGI markets and services its institutional products through specialized personnel located primarily in its Frankfurt, London, Munich, Paris and Milan, as well as San Francisco, San Diego and Newport Beach (California) offices. European retail distribution is provided primarily through the proprietary channels of the Allianz Group, including branch bank advisors, full-time agents employed by affiliated insurance companies and other Allianz Group financial planners and advisors. In the United States, AGI asset managers also offer a wide range of retail products. AGI has committed substantial resources to the expansion of the third-party asset management business in the Asia-Pacific region with offices in Tokyo, Hong Kong, Shanghai, Singapore, Taipei, Seoul and Sydney.

 

For a discussion of investment portfolios of our insurance, banking and asset management operations, which we refer to as “group’s own investments”, see “Operating and Financial Review and Prospects – Executive Summary – Allianz Group’s Consolidated Assets, Liabilities and Shareholders’ Equity – Group Asset Allocation.”

 

 

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Competition

 

    We believe that we are well-positioned in our markets to anticipate and successfully respond in the face of competitive forces within our various operations.

 

    Insurance Competition is most pronounced in our more mature markets (Germany, France, Italy and the United States), while in recent years, competition in emerging markets has also increased as large insurance and other financial services participants from more developed countries have sought to establish themselves in markets perceived to offer higher growth potential, and as local institutions have become more sophisticated and have sought alliances, mergers or strategic relationships with our competitors.

 

    Banking We are subject to competition from both bank and non-bank institutions that provide financial services and, in some of our activities, from government agencies. Substantial competition exists among a large number of commercial banks, savings banks, other public sector banks, brokers and dealers, investment banking firms, insurance companies, investment advisors, mutual funds and hedge funds to provide the types of banking products and services that we offer in our banking operations.

 

    Asset Management Competition stems from all major international financial institutions and peer insurance companies, which have large, multi-jurisdictional and multi-product asset management operations and compete for both retail and institutional clients.

 

International Presence

 

The following table sets forth selected Allianz Group companies by geographic region at December 31, 2005, including our ownership percentage. It does not contain all subsidiaries of the Allianz Group, nor does it indicate whether an interest is held directly or indirectly by the Allianz AG. Further, the ownership percentage presented in the following table includes equity participations held by dependent enterprises of the Allianz Group in full, even if the Allianz Group’s ownership in the dependent enterprise is below 100%. Please see Note 48 to our consolidated financial statements for a more extensive list of Allianz Group operating subsidiaries.

 

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LOGO 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 Asset Management segment’s operating revenues.

 

Business segments

 

LOGO Property-Casualty

 

LOGO Life/Health

 

LOGO Banking

 

LOGO Asset Management

 

    GERMANY      

Germany

     

LOGO

  Allianz Capital Partners GmbH   100.0 %

LOGO

  Allianz Dresdner Bauspar AG   100.0 %

LOGO

  Allianz Global Investors Advisory GmbH   100.0 %

LOGO

  Allianz Global Investors AG   100.0 %

LOGO

  Allianz Global Risks
Rückversicherungs-AG
  100.0 %

LOGO

  Allianz Lebensversicherungs-Aktiengesellschaft   91.0 %

LOGO

  Allianz Marine & Aviation Versicherungs-AG   100.0 %

LOGO

  Allianz Private Krankenversicherungs-Aktiengesellschaft   100.0 %

LOGO

  Allianz Versicherungs-Aktiengesellschaft   100.0 %

LOGO

  Bayerische Versicherungsbank AG (was merged in January 2006 retroactively effective October 1, 2005 into Allianz Versicherungs-Aktiengesellschaft)   100.0 %

LOGO

  DEGI Deutsche Gesellschaft für Immobilienfonds mbH   94.0 %

LOGO

  Deutsche Lebensversicherungs-AG   100.0 %

LOGO

  Deutscher Investment-Trust Gesellschaft für Wertpapieranlagen mbH   100.0 %

LOGO

  Dresdner Bank AG   100.0 %

LOGO

  dresdnerbank investment management Kapitalanlagegesellschaft mbH   100.0 %

LOGO

  Euler Hermes Kreditversicherungs-AG   100.0 %

LOGO

  Frankfurter Versicherungs-AG (was merged in January 2006 retroactively effective October 1, 2005 into Allianz Versicherungs-Aktiengesellschaft)   100.0 %

LOGO

  Oldenburgische Landesbank AG   89.4 %

LOGO

  Reuschel & Co. Kommanditgesellschaft   97.5 %

 

    EUROPE      

Austria

     

LOGO

  Allianz Elementar Lebensversicherungs-Aktiengesellschaft   100.0 %

LOGO

  Allianz Elementar Versicherungs-Aktiengesellschaft   100.0 %

Belgium

     

LOGO  LOGO

  AGF Belgium Insurance S.A.   100.0 %

France

     

LOGO

  AGF Asset Management S.A.   99.9 %

LOGO

  Assurances Générales de France
IART S.A.
  100.0 %

LOGO

  Assurances Générales de France
Vie S.A.
  100.0 %

LOGO

  Assurances Générales de France   61.0 %

LOGO

  Banque AGF S.A.   100.0 %

LOGO

  Euler Hermes SFAC S.A.   100.0 %

LOGO

  Mondial Assistance S.A.S.   100.0 %

Greece

     

LOGO

  Allianz General Insurance
Company S.A.
  100.0 %

LOGO

  Allianz Life Insurance Company S.A.   100.0 %

Ireland

     

LOGO

  Allianz Irish Life Holdings p.l.c.   66.4 %

LOGO

  Allianz Worldwide Care Ltd.   100.0 %

Italy

     

LOGO  LOGO

  ALLIANZ SUBALPINA S.p.A. SOCIETA’ DI ASSICURAZIONI E RIASSICURAZIONI   98.0 %

LOGO  LOGO

  Lloyd Adriatico S.p.A.   99.7 %

LOGO

  RAS ASSET MANAGEMENT Socièta di gestione del risparmio S.p.A.   100.0 %

LOGO  LOGO

  Riunione Adriatica di Sicurtà S.p.A.   76.3 %

Luxemburg

     

LOGO

  Allianz Global Investors
Luxembourg S.A.
  100.0 %

LOGO

  Dresdner Bank Luxembourg S.A.   100.0 %

Netherlands

     

LOGO

  Allianz Nederland
Levensverzekering N.V.
  100.0 %

LOGO

  Allianz Nederland
Schadeverzekering N.V.
  100.0 %

Portugal

     

LOGO  LOGO

  Companhia de Seguros Allianz
Portugal S.A.
  64.8 %

Spain

     

LOGO  LOGO

  Allianz CompanÍa de Seguros y
Reaseguros S.A.
  99.9 %

Switzerland

     

LOGO

  Allianz Risk Transfer AG   100.0 %

LOGO

  Allianz Suisse Lebensversicherungs-Gesellschaft   100.0 %

LOGO

  Allianz Suisse Versicherungs-Gesellschaft   100.0 %

LOGO

  Dresdner Bank (Schweiz) AG   99.8 %

LOGO

  ELVIA Reiseversicherungs-Gesellschaft AG   100.0 %

 

16


Table of Contents

United Kingdom

     

LOGO

  Allianz Cornhill Insurance plc.   98.0 %(1)

LOGO

  Four Seasons (JDM) Ltd. (former: Four Seasons Health Care Ltd.)   100.0 %

LOGO

  RCM (UK) Ltd.   100.0 %

 

    EMERGING MARKETS (EUROPE)      

Bulgaria

     

LOGO

  Allianz Bulgaria Insurance and Reinsurance Company Ltd.   78.0 %

LOGO

  Allianz Bulgaria Life Insurance Company Ltd.   99.0 %

LOGO

  Commercial Bank Allianz Bulgaria Ltd.   99.6 %

Croatia

     

LOGO  LOGO

  Allianz Zagreb d.d.   80.1 %

Czech Republic

     

LOGO  LOGO

  Allianz pojist’ovna, a.s.   100.0 %

Hungary

     

LOGO  LOGO

  Allianz Hungária Biztosító Rt.   100.0 %

Poland

     

LOGO

  TU Allianz Polska S.A.   100.0 %

LOGO

  TU Allianz Polska Zycie S.A.   100.0 %

Romania

     

LOGO

  Allianz Tiriac Insurance S.A.   51.6 %

Russian Federation

     

LOGO

  Insurance Joint Stock Company “Allianz”   100.0 %

Slovakia

     

LOGO  LOGO

  Allianz-Slovenská poist’ovna a.s.   84.6 %

 

    THE AMERICAS      

Argentina

     

LOGO  LOGO

  AGF Allianz Argentina Compania de Seguros Generales S.A.   100.0 %

Brazil

     

LOGO  LOGO

  AGF Brasil Seguros S.A.   72.5 %

Colombia

     

LOGO

  Colseguros Generales S.A.   100.0 %

Mexico

     

LOGO

  Allianz México S.A. Compañía de Seguros   100.0 %

United States

     

LOGO

  Allianz Global Investors of America L.P.   97.0 %

LOGO

  Allianz Global Investors Distributors LLC   100.0 %

LOGO

  Allianz Global Risks US Insurance Company   100.0 %

LOGO

  Allianz Life Insurance Company of North America   100.0 %

LOGO

  Fireman’s Fund Insurance Company   100.0 %

LOGO

  NFJ Investment Group L.P.   100.0 %

LOGO

  Nicholas Applegate Capital Management LLC   100.0 %

LOGO

  Oppenheimer Capital LLC   100.0 %

LOGO

  Pacific Investment Management Company LLC   85.0 %

LOGO

  RCM Capital Management LLC   100.0 %

Venezuela

     

LOGO  LOGO

  Adriática de Seguros C.A.   97.0 %

 

    ASIA-PACIFIC/AFRICA      

Australia

     

LOGO

  Allianz Australia Limited   100.0 %

China

     

LOGO

  Allianz Dazhong Life Insurance Company Ltd.   51.0 %

LOGO

  Allianz Global Investors Hong Kong Ltd.   100.0 %

LOGO

  Allianz Insurance (Hong Kong) Ltd.   100.0 %

Indonesia

     

LOGO

  PT Asuransi Allianz Utama Indonesia Ltd.   75.4 %

LOGO

  PT Asuransi Allianz Life Indonesia p.l.c.   99.8 %

Japan

     

LOGO

  Allianz Fire and Marine Insurance Japan Ltd.   100.0 %

LOGO

  Dresdner Kleinwort Wasserstein (Japan) Limited   100.0 %

Laos

     

LOGO  LOGO

  Assurances Générales du Laos Ltd.   51.0 %

South Korea

     

LOGO

  Allianz Global Investors Korea Limited   100.0 %

LOGO

  Allianz Life Insurance Co. Ltd.   100.0 %

Malaysia

     

LOGO

  Allianz General Insurance Malaysia Berhad p.l.c.   98.7 %

LOGO

  Allianz Life Insurance Malaysia Berhad p.l.c.   100.0 %

Singapore

     

LOGO

  Allianz Insurance Company of Singapore Pte. Ltd.   100.0 %

Taiwan

     

LOGO

  Allianz President Life Insurance Co. Ltd.   50.0 %(2)

LOGO

  Allianz Global Investors Taiwan (SITE) Ltd.   100.0 %

Egypt

     

LOGO

  Allianz Egypt Insurance Company S.A.E.   85.0 %

LOGO

  Allianz Egypt Life Company S.A.E.   96.0 %

 

 


(1) 99.99 % of the voting share capital.
(2) Controlled by the Allianz Group.

 

17


Table of Contents

Allianz-RAS Merger / European Company (SE)

 

    Reducing complexity and increasing profitability and customer service.

 

On September 11, 2005, Allianz AG announced its intention to merge Riunione Adriatica di Sicurtà S.p.A. (or “RAS”, and taken together with its subsidiaries, the “RAS Group”) with and into Allianz AG. This merger is part of a comprehensive transaction, resulting in the full acquisition of RAS by Allianz AG. In connection with this transaction Allianz AG will convert into a European Company (Societas Europaea or “SE”) and subsequently adopt the corporate name Allianz SE(1). As a preparatory step, Allianz AG placed a voluntary tender offer to purchase all RAS ordinary shares and RAS savings shares it did not already own. The offer period began on October 20 and the acceptance period closed on November 23, 2005. Through this voluntary tender offer, Allianz AG purchased 139,719,262 RAS ordinary shares at a price of €19 per share and 328,867 RAS savings shares at a price of €55 per share. As another preparative step of the merger, RAS will, prior to the effectiveness of the merger, contribute its business with the exception of the participation in certain foreign subsidiaries to a newly incorporated (in October 2005), wholly-owned Italian subsidiary that, subsequently to the merger, will continue the corporate name “RAS S.p.A.”.

 

By fully integrating RAS, Allianz AG expects to increase profitability and customer service and to take a significant step forward in reducing complexity of the entire Allianz Group. In 2005, the Allianz Group generated €5.4 billion in gross premiums written and €9.3 billion in statutory premiums from its Italian property-casualty and life/health insurance operations, respectively. Additionally, Italy is the Allianz Group’s second most important European insurance market after Germany. The Allianz Group is represented in Italy by RAS and Lloyd Adriatico. Taken together, RAS and Lloyd Adriatico are the third-largest property- casualty and second-largest life insurer in the Italian market, based on gross premiums written and statutory premiums, respectively, in 2004(2).

 

Following completion of the tender offer and further purchases of RAS shares outside the tender offer, the Allianz Group increased its ownership to 76.3% of the total ordinary and savings shares of RAS at December 31, 2005 from 55.4% at December 31, 2004. The total cost to the Allianz Group of the tender offer and the additional purchases of RAS shares outside the tender offer, including transaction-related costs, amounted to approximately €2.7 billion. Thereof, €2.2 billion, in aggregate, was secured in 3Q 2005 from equity-based financing and the issuance of an equity-linked loan. In this context, approximately €1.1 billion was placed out of authorized capital without pre-emptive rights and a €1.1 billion equity-linked loan was executed with a variable redemption amount linked to the share price of Allianz AG, which can be settled, at the Allianz Group’s option, in cash or 10.7 million Allianz AG shares. The remaining amount was financed through internal funds.

 

On December 15 and 16, 2005, the Board of Management of Allianz AG and the Board of Directors of RAS accomplished the merger plan for the merger of RAS with and into Allianz AG. This merger plan was notarially certified on December 16, 2005. On February 3, 2006, the extraordinary shareholders’ meetings of holders of RAS ordinary shares and holders of RAS savings shares and on February 8, 2006, the extraordinary shareholders’ meeting of Allianz AG agreed to the merger plan. Against the resolution of the shareholders’ meeting of Allianz AG regarding the agreements to the merger plan and the capital increase to implement the merger, contestation suits have been filed. The entry of the merger in the commercial register of Allianz AG may only take place once the competent court rejects the lawsuits, or if such lawsuits are withdrawn or if the competent court rules finally and conclusively that the lawsuits do not prevent the entry of the merger in the commercial register (so-called “Freigabeverfahren”). We are confident that we will achieve the entry of the merger in the course of such release ruling. As a further prerequisite for the effectiveness of the merger and the accompanying conversion of Allianz AG into an SE,

 


(1) The SE is a legal form based on European Community law and was introduced into the EU by the enactment of the Council Regulation (EC) No. 2157/2001 of October 8, 2001 on the Statute for a European Company (the “SE Regulation”). Since Allianz SE will keep its registered office in Germany, it will be governed by the SE Regulation, the applicable German law supplementing the SE Regulation and relevant German law applicable to German stock corporations, in particular the German Stock Corporation Act.
(2) Source: Italian Insurers Association, ANIA.

 

18


Table of Contents

a procedure for the employee involvement in decisions of the Allianz SE must be conducted. We expect the merger to become effective in September 2006 at the earliest.

 

The exchange ratio for the remaining RAS shares is 3 Allianz AG shares for 19 RAS ordinary shares or 19 RAS savings shares. To implement the merger, the remaining RAS shares will be exchanged for Allianz AG shares through an increase of Allianz AG’s issued capital by up to €64.3 million, which was approved by the extraordinary shareholders’ meeting on February 8, 2006. The capital increase will be accomplished by the issuance of up to 25,123,259 new registered no-par value Allianz AG shares. Allianz AG expects the cost of the entire transaction, including the voluntary tender offer, to be approximately €5.9 billion. However, this amount may vary, depending upon the market price of Allianz AG shares at the time of the share exchange.

 

Reorganization of German Insurance Operations

 

    Enhanced customer orientation and service, cost reduction and reduced complexity.

 

As part of our repositioning plan, in September 2005, we announced our decision to reorganize our major German operating entities which are active in our insurance operations. The new structure is designed to further develop our leading position in the German insurance market by a joint presence, thus allowing us to provide an enhanced customer orientation and improved service, while at the same time cutting costs in the long-term through reduced complexity.

 

In Germany, and through the end of 2005, our property-casualty and our life/health insurance operations were essentially conducted through five different corporations, each with its own sales organization. This structure had grown historically and had become complex. Consequently, and effective November 2005, the German insurance operations have been consolidated under a new holding company, Allianz Deutschland AG. This new holding company is a wholly-owned subsidiary of Allianz AG, the future Allianz SE. Allianz Versicherungs-AG (property-casualty insurance), Allianz Lebensversicherungs-AG (life insurance) and Allianz Private Krankenversicherungs-AG (health insurance) are subsidiaries of Allianz Deutschland AG since November 2005. In connection with this reorganization, on January 30, 2006, and effective October 1, 2005, two property-casualty subsidiaries, Frankfurter Versicherungs-AG and Bayerische Versicherungsbank AG, were merged into Allianz Versicherungs-AG. Prior to this, Allianz Versicherungs-AG had increased its interest in Bayerische Versicherungsbank AG in November 2005 from 90 % to 100 %. In addition, the sales activities of the said German property-casualty and life/health insurance companies are to be consolidated into a separate sales company as the fourth subsidiary of Allianz Deutschland AG.

 

Effective January 1, 2006, the previous regional structure of the property-casualty operations in Germany as well as of the branch offices of Allianz Lebensversicherungs-AG and Allianz Private Krankenversicherungs-AG has been replaced by the establishment of four sales and service regions, which include the “northwest” (Schleswig-Holstein, Hamburg, Bremen, Lower Saxony, North Rhine-Westphalia), the “northeast” (Mecklenburg-Western Pommerania, Brandenburg, Berlin, Saxony-Anhalt, Saxony, Thuringia), the “southwest” (Hesse, Rhineland-Palatine, Baden-Wuerttemberg, Saarland) and the “southeast” (Bavaria).

 

Property-Casualty Insurance Reserves

 

General

 

The Allianz Group establishes property-casualty loss reserves for the payment of losses and loss adjustment expenses (or “LAE”) on claims which have occurred but are not yet settled. Loss and LAE reserves fall into two categories: individual case reserves for reported claims and reserves for incurred but not reported (or “IBNR”) claims.

 

Case reserves for reported claims are based on estimates of future payments that will be made in respect of claims, including LAE relating to such claims. Such estimates are made on a case-by-case basis, based on the facts and circumstances available at the time the reserves are established. The estimates reflect the informed judgment of claims personnel based on general insurance reserving practices and knowledge of the nature and value of a specific type of claim. These case reserves are regularly re-

 

19


Table of Contents

evaluated in the ordinary course of the settlement process and adjustments are made as new information becomes available.

 

IBNR reserves are established to recognize the estimated cost of losses that have occurred but where the Allianz Group has not yet been notified. IBNR reserves, similar to case reserves for reported claims, are established to recognize the estimated costs, including expenses, necessary to bring claims to final settlement. Since nothing is known about the occurrence, the Allianz Group relies on its past experience, adjusted for current trends and any other relevant factors.

 

IBNR reserves are estimates based on actuarial and statistical projections of the expected cost of the ultimate settlement and administration of claims. The analyses are based on facts and circumstances known at the time, predictions of future events, estimates of future inflation and other societal and economic factors. Trends on claim frequency, severity and time-lag in reporting are examples of factors used in projecting the IBNR reserves. IBNR reserves are reviewed and revised periodically as additional information becomes available and actual claims are reported.

 

The process of estimating loss and LAE reserves is by nature uncertain due to the large number of variables affecting the ultimate amount of claims. Some of these variables are internal, such as changes in claims handling procedures, introduction of new IT systems or company acquisitions and divestitures. Others are external, such as inflation, judicial trends and legislative changes. The Allianz Group attempts to reduce the uncertainty in reserve estimates through the use of multiple actuarial and reserving techniques and analysis of the assumptions underlying each technique.

 

Within the Allianz Group, loss and LAE reserves are estimated by local operating entity, and within each entity by line of business. In addition, actuaries at Allianz AG use a variety of methods to oversee and monitor reserve levels set by the local companies. These methods include independent reserve reviews, peer reviews of local reserve analyses, monitoring of quarterly loss data and assessments of local actuarial reserving processes. Meetings are held quarterly of the Group Reserve Committee, consisting of the Group CEO, Group CFO, Head of Group Financial Reporting, Head of Group Accounting and the Group Chief Actuary to oversee this control process. This central control process serves not only to ensure that the total loss and LAE reserves for the Allianz Group are reasonable, but also to improve the consistency and quality of reserve analyses across the Allianz Group.

 

During 2005, there were no significant changes in the mix of business written. Moreover, there were no material changes to the amount and type of reinsurance placed in respect of the Allianz Group’s business.

 

On the basis of currently available information, management believes that the Allianz Group’s property-casualty loss and LAE reserves are adequate. However, the establishment of loss reserves is an inherently uncertain process, and accordingly, there can be no assurance that ultimate losses will not differ from these estimates.

 

Loss and LAE Composition by Region and Line of Business

 

The time required to learn of and settle claims is an important consideration in establishing reserves. Short-tail claims, such as automobile property damage claims, are typically reported within a few days or weeks and are generally settled within two to three years. Medium-tail claims such as personal and commercial motor liability claims generally take four to six years to settle, while long-tail claims, such as general liability, workers compensation, construction and professional liability claims take longer to settle.

 

20


Table of Contents

The following table breaks down the loss and LAE reserves of the Allianz Group, gross of reinsurance ceded, by region and line of business for the year ended December 31, 2005, on an IFRS basis. The credit, travel and marine & aviation lines are written on a world-wide basis through multiple legal entities in several countries, and as a result, are not included in the regional totals.

 

Loss and LAE Reserves by Region and Line of Business(1)

as of December 31, 2005

 

    Gross of Reinsurance

   

Automobile

Insurance


 

General

Liability


  Property

 

Other

Short-Tail

Lines(2)


 

Other

Medium-Tail

Lines(3)


 

Other

Long-Tail

Lines(4)


  Total

    € mn   € mn   € mn   € mn   € mn   € mn   € mn

Germany(5)

  4,558   2,185   726   —     4,216   1,280   12,965

France(5)

  2,176   1,897   1,158   298   3,197   —     8,726

Italy

  4,163   1,574   448   158   409   15   6,767

United Kingdom

  1,035   420   618   55   214   932   3,274

Switzerland(5)

  823   236   146   73   1,235   764   3,277

Spain

  1,036   264   135   2   258   —     1,695

Rest of Europe

  2,750   1,036   486   182   430   471   5,355

NAFTA Region(6)

  469   5,059   3,001   14   996   1,533   11,072

Asia-Pacific Region

  1,384   379   219   3   146   671   2,802

South America, Africa and Rest of World

  165   56   111   2   75   —     409
   
 
 
 
 
 
 

Subtotal of regions

  18,559   13,106   7,048   787   11,176   5,666   56,342
   
 
 
 
 
 
 

Credit insurance

  —     —     —     1,012   93   —     1,105

Travel insurance and assistance services

  —     —     —     128   —     —     128

Marine & aviation

  —     —     —     —     1,804   867   2,671
   
 
 
 
 
 
 

Subtotal of specific business (global)

  —     —     —     1,140   1,897   867   3,904
   
 
 
 
 
 
 

Allianz Group Total

  18,559   13,106   7,048   1,927   13,073   6,533   60,246
   
 
 
 
 
 
 

(1) By jurisdiction of individual Allianz Group subsidiary companies.
(2) Other Short-Tail Lines are comprised of health, credit insurance, crop and hail.
(3) Other Medium-Tail Lines are comprised of personal accident, legal protection, marine hull, aviation hull, construction, packages, pools, multi-peril lines, assumed reinsurance and other business.
(4) Other Long-Tail Lines are comprised of workers compensation, marine third party liability and aviation third party liability.
(5) For Germany, France and Switzerland, Other Medium-Tail business consists primarily of assumed business.
(6) For the NAFTA Region, Other Long-Tail business consists primarily of workers’ compensation in the United States.

 

The Allianz Group estimates that loss and LAE reserves consist of approximately 20% short-tail, 51% medium-tail and 29% long-tail business.

 

21


Table of Contents

Reconciliation of Beginning and Ending Loss and LAE Reserves

 

The following table reconciles the beginning and ending reserves of the Allianz Group, including the effect of reinsurance ceded, for the property-casualty insurance segment for each of the years in the three-year period ended December 31, 2005 on an IFRS basis.

 

Reconciliation of Loss and LAE Reserves

 

     Year Ended December 31,

 
     2005

    2004

    2003

 
     € mn     € mn     € mn  

Balance as of January 1

   55,536     56,644     60,054  

Less reinsurance recoverable

   (10,029 )   (12,049 )   (14,588 )
    

 

 

Net

   45,507     44,595     45,466  
    

 

 

Plus incurred related to:

                  

Current year

   26,418     25,643     25,712  

Prior years

   (1,166 )(1)   (446 )   279  
    

 

 

Total incurred

   25,252     25,197     25,991  
    

 

 

Less paid related to:

                  

Current year

   (11,762 )   (11,374 )   (11,860 )

Prior years

   (10,787 )   (11,818 )   (13,155 )
    

 

 

Total paid

   (22,549 )   (23,192 )   (25,015 )
    

 

 

Effect of foreign exchange and other

   1,467     (469 )   (1,822 )

Effect of (divestitures)/acquisitions(2)

   1     (624 )   (25 )

Net balance at end of year

   49,678     45,507     44,595  

Plus reinsurance recoverable

   10,568     10,029     12,049  
    

 

 

Balance as of December 31

   60,246     55,536     56,644  
    

 

 


(1) The €1,166 million of favorable development during 2005 was the result of many individual developments by region and line of business. See “—Changes in Loss and LAE Reserves During 2005.”
(2) Reserves for loss and LAE of subsidiaries acquired (or disposed) are shown during the year of acquisition (or disposition). The divestiture of €624 million in 2004 was driven primarily by the sale of Allianz Insurance Company of Canada in December 2004.

 

22


Table of Contents

Changes in Loss and LAE Reserves During 2005

 

As noted above, loss and LAE reserves of the Allianz Group at December 31, 2005 included €1,166 million reduction in incurred loss and LAE relating to prior years, representing 2.6% of net loss and LAE reserves at January 1, 2005. The following table provides a breakdown of this amount by region.

 

Changes in Loss and LAE Reserves During 2005

 

     Net Reserves as of
December 31,
2004


   Net Development in
2005 related to
Prior Years


    in%(1)

 
     € mn    € mn        

Germany

   8,601    (216 )   (2.5 )

France

   7,256    5     0.1  

Italy

   6,105    (212 )   (3.5 )

United Kingdom

   2,463    (251 )   (10.2 )

Switzerland

   2,799    (57 )   (2.0 )

Spain

   1,266    (46 )   (3.6 )

Rest of Europe

   6,745    (252 )   (3.7 )

NAFTA Region

   5,833    85     1.5  

Asia-Pacific Region

   2,255    (71 )   (3.2 )

South America, Africa and Rest of World

   224    (9 )   (4.0 )
    
  

 

Subtotal of regions

   43,548    (1,024 )   (2.4 )

Credit insurance

   811    (213 )   (26.3 )

Travel insurance and assistance services

   120    (15 )   (12.2 )

Marine & aviation

   1,029    85     8.3  
    
  

 

Allianz Group Total

   45,507    (1,166 )   (2.6 )
    
  

 


(1) In percent of net reserves as of December 31, 2004

 

Within each region, these reserve developments represent the sum of amounts for individual companies and lines of business. Because of the multitude of these reviewed segments, it is not feasible, or meaningful, to provide detailed information regarding each segment (e.g., claim frequencies, severities and settlement rates). We discuss below the major highlights of the reserve developments during the past year as they are recognized at the operating entities. Most of these companies analyze loss and LAE reserves on a gross basis. Therefore, the discussion is based on gross loss and LAE reserves in the local currency of the company before consolidation and converted to Euro for uniform presentation. Consequently, individual amounts in the following discussion, which are based on significant developments of our major operating entities, do not fully reconcile to those in the above table, which are based on net loss and LAE reserves and net developments during 2005.

 

Germany

 

In Germany, gross loss and LAE reserves developed favorably during 2005 by approximately €216 million, or 2.0% of reserves at January 1, 2005.

 

At Sachgruppe Deutschland (or “SGD”), the property-casualty insurance group of the Allianz Group in Germany, gross loss and LAE reserves developed favorably by €11 million. This development was the result of multiple effects.

 

Favorable developments included:

 

    €24 million for engineering due to the settlement of two large losses from 2001 with no payments and a refined methodology applying actuarial evaluations to more homogeneous sub-portfolios; and

 

   

€51 million in aggregate as a result of minor movements of less than €10 million each in legal protection, personal accident with

 

23


Table of Contents
 

premium refund, homeowners, household, indexed property, engineering, motor, fire and business interruption and other insurance products.

 

Offsetting unfavorable developments include:

 

    €60 million for refining the actuarial analysis of general liability into more homogeneous sub-portfolios including an offsetting effect from favorable development on large losses; and

 

    €13 million for personal accident based on a first-time standalone analysis of annuity claims.

 

Also during 2005, Allianz AG, the Allianz Group company underwriting primarily intra-Allianz Group reinsurance, experienced €48 million of favorable reserve development. This amount was the result of favorable developments, and partially offseting unfavorable developments. In many cases, these developments were the direct result of corresponding developments in reserves on the underlying business of the Allianz Group companies that were ceded to Allianz AG.

 

Favorable developments included:

 

    €65 million for business written on behalf of large international accounts for Allianz Versicherungs-AG due to re-estimations based on updated assumptions derived from direct business;

 

    €56 million on property in Western Europe to allow for accelerating reporting patterns for large surplus contracts;

 

    €15 million on participation in credit business from Euler Hermes; and

 

    €14 million on business assumed from Fireman’s Fund Insurance Company (or “Fireman’s Fund”).

 

Offsetting adverse developments included:

 

    €25 million on facultative business following an updated reserve analysis;

 

    €22 million for World Trade Center claims re-estimated based on more detailed information on open claims and on retrocessional covers;

 

    €22 million based on an updated review of reserves for HIV contaminated blood reserves;

 

    €18 million on deferred underwriting year accounts for Middle-East and North Africa business in run-off;

 

    €14 million on marine & aviation fronting business on an underwriting year basis as well as an increase in connection with hurricane Ivan in 2004; and

 

    €13 million based on a reassessment of reserves for one claim in facultative business.

 

Allianz Global Risks Re, which provides reinsurance for the international corporate business of the Allianz Group companies worldwide, experienced a favorable development of €157 million during 2005, arising from a range of factors. Similar to Allianz AG, reserve developments for Allianz Global Risks Re are often attributable to developments in the underlying business of the Allianz Group companies underwriting the international corporate business.

 

Favorable developments at Allianz Global Risks Re included:

 

    €137 million on property business, resulting largely from favorable developments in the major markets of France, England, United States and Germany;

 

    €40 million on energy and engineering following re-estimation in particular for United States and England; and

 

    €11 million for releasing IBNR on a stop loss treaty in run-off;

 

These have been partially offset by strengthening liability reserves by € 21 million due to a general increase in reported losses and, in particular, for two individual large claims as well as an adverse foreign currency exchange effect of €23 million.

 

France

 

In France, gross loss and LAE reserves developed favorably by €180 million, or 2.1% of the reserves at January 1, 2005.

 

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At AGF IART, favorable reserve developments of €202 million were partially offset by €99 million unfavorable developments.

 

Favorable developments at AGF IART included:

 

    €147 million on property business from agents, brokers and international corporate business, due to reductions in the estimated ultimate loss;

 

    €35 million for annuities; and

 

    €20 million for pecuniary losses.

 

Offsetting unfavorable developments at AGF IART included:

 

    €35 million for natural catastrophe claims in agents business arising from government decrees on 2003 drought damages in France;

 

    €21 million for motor third party liability agents business mainly due to court decisions on cases for claims from prior accident years;

 

    €17 million arising from local brokerage general liability business attributable to medical liability business which is in run-off;

 

    €14 million for natural catastrophe overseas, reflecting further development during 2005 on claims arising from an earthquake in Guadeloupe at the end of 2004; and

 

    €12 million for international transport business.

 

Italy

 

As a result of a combination of reserve developments at four operating entities, the gross loss and LAE reserves developed favorably in Italy by €242 million, or 3.8% of the reserves at January 1, 2005.

 

At RAS S.p.A., favorable developments of €46 million were attributable to the following factors:

 

    €23 million due to decrease in frequency in motor third party liability;

 

    €18 million for indirect business; and

 

    €18 million due to other lines of business.

 

These favorable developments were partially offset by adverse development of €21 million for general liability.

 

Allianz Subalpina, a consolidated subsidiary of RAS S.p.A., exhibited favorable development of €25 million during 2005, mainly consisting of €8 million for property, €6 million for personal accident and an additional €8 million for general liability, motor third party liability and credit.

 

Genialloyd, a consolidated subsidiary of RAS S.p.A. specializing in motor business, exhibited a favorable development of €13 million during 2005, due to an accelerated settlement of smaller claims.

 

Lloyd Adriatico experienced favorable development of €165 million mainly driven by a favorable development of €135 million in motor third party liability due to a significant decrease in volatility. Furthermore, Lloyd Adriatico experienced favorable development of €25 million in its personal accident, property, general liability and other motor lines.

 

United Kingdom

 

In the United Kingdom, gross loss and LAE reserves developed favorably during 2005 by €327 million, or 10.7%, of the reserves at January 1, 2005.

 

At Allianz Cornhill, gross loss and LAE reserves developed favorably during 2005 by €344 million due primarily to the following factors:

 

    €83 million on commercial property and €41 million on industrial property as a result of the release of reserves on individual large claims and due to a reduction of reserves for weather related events from accident year 2004, which were by nature very uncertain at the end of 2004;

 

    €54 million on specialized insurance programs or schemes due to favorable experience on the creditor and all risks accounts;

 

    €50 million on commercial motor due to generally favorable claims experience, as well as revised claim payment patterns on bodily injury claims observed in a claims process review;

 

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    €32 million on personal motor due to a release of reserves for potential late reported large losses at year-end 2004;

 

    €29 million on commercial liability benefiting from the same bodily injury development as that of motor claims; and

 

    €23 million in run-off of industrial business arising from several large reductions on individual losses.

 

At AGF U.K., a company in run-off reserves for loss and loss adjustment expenses, developed unfavorably by €15 million.

 

Switzerland

 

In Switzerland, gross loss and LAE reserves experienced favorable development of €39 million, or 1.3% of the reserves at January 1, 2005.

 

At Allianz Suisse Versicherungs-Gesellschaft, gross loss and LAE reserves developed favorably by €24 million due to the following factors:

 

    €24 million for revised assumptions for tail development in motor and liability business; and

 

    €7 million release in LAE reserves due to an improved cost allocation procedure resulting in allocating less loss adjustment expenses.

 

These favorable developments were partly offset by an increase of €7 million for assumed reinsurance.

 

Loss and LAE reserves of Allianz Risk Transfer, the Allianz Group company selling conventional reinsurance as well as a variety of alternative risk transfer products, developed favorably by €7 million primarily due to the favorable development on a large traditional quota-share reinsurance contract.

 

Spain

 

Gross loss and LAE reserves for Allianz Seguros developed favorably by €49 million, or 3.6% of the reserves at January 1, 2005. Favorable development of €58 million attributable to the reduction in frequency and average claim cost in motor business was partly offset by €13 million unfavorable development arising from a court decision affecting one large loss.

 

Rest of Europe

 

Loss and LAE reserves in other European Allianz Group companies developed favorably by €287 million, or 4.0% of the reserves at January 1, 2005. This figure represents the net result of unfavorable as well as favorable developments for numerous individual companies. Since the business is written in different currencies, these developments were also affected by foreign exchange rate movements.

 

Allianz Irish Life Holdings p.l.c. experienced favorable development of €105 million. Favorable court decisions and declining claim frequencies contributed to a €45 million surplus in commercial and personal motor. The case estimate savings in property led to another €15 million surplus. Further favorable developments included €20 million in commercial liability and €10 million in credit insurance.

 

Gross loss and LAE reserves for Allianz Slovenská experienced favorable development of €82 million in 2005, due primarily to:

 

    €40 million for motor due to the improvement managing salvages and the enhancement in the calculation of IBNR reserves; and

 

    €40 million for lower participation in the loss and LAE reserves for claims from the former state insurer in motor.

 

Gross loss and LAE reserves for Allianz Nederland Schade experienced favorable development of €59 million in 2005, due primarily to:

 

    €28 million for motor business from the former Zwolsche Algemeene portfolio and due to a decrease in claim frequency;

 

    €26 million from property caused by a lower frequency and a low number of large claims; and

 

    €12 million for engineering and marine business.

 

NAFTA Region

 

For the entire NAFTA region, Allianz Group’s gross loss and LAE reserves developed unfavorably

 

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during 2005 by €906 million, or 10.3% of the reserves at January 1, 2005. The largest Allianz Group companies in this region are Fireman’s Fund and Allianz Global Risks U.S. Insurance Company (or “AGR U.S.”).

 

At Fireman’s Fund, prior period gross loss and LAE reserve estimates increased by €920 million including an gross increase of €926 million as a result of a ground-up reserve study on asbestos and environmenal (or “A&E”) claims. The A&E net increase for Fireman’s Fund was €52 million for uncollectible reinsurance and ULAE, as loss and ALAE reserves after external reinsurance have been ceded to Allianz AG based on a coverage provided in 2002. The details of the A&E study and the transaction with Allianz AG are discussed below at “—Asbestos and Environmental Loss Reserves in the United States”. Unfavorable developments unrelated to A&E included:

 

    €49 million in medical malpractice driven by one large claim that was heavily reinsured; and

 

    €20 million in the surety business in run-off driven by a single account based on re-estimation of the cost to complete projects.

 

These adverse developments were offset by the following favorable developments:

 

    €40 million in workers compensation driven by a larger than expected impact from California workers’ compensation reforms as well as cost savings from our “3+One” project initiatives; and

 

    €9 million from the affiliated Jefferson Insurance Company driven by re-estimation of losses in other liability and commercial multi-peril lines.

 

AGR U.S., which underwrites large industrial accounts in the United States and through a newly- established branch office in Canada, experienced favorable developments of €21 million following indications of internal actuarial reserve studies during 2005 relating to property lines. AGR U.S. also experienced a favorable development of €14 million for general liability, which was entirely offset by an adverse development of the same amount in workers’ compensation.

 

Asia-Pacific

 

Gross loss and LAE reserves for the Asia-Pacific region developed favorably during 2005 by approximately €130 million or 5.2% of reserves at January 1, 2005. The largest Allianz Group property-casualty insurer in the region is Allianz Australia, representing approximately 93% of the region’s total reserves.

 

Allianz Australia experienced favorable development of €115 million during 2005. This result arose from partially favorable developments from different lines of business:

 

    €66 million from motor third party liability following favorable loss experience in Queensland and New South Wales due to the impact of prior years’ legislative changes;

 

    €44 million in property, fire and engineering businesses, where the development of a number of large claims was favorable during 2005;

 

    €34 million for general liability due to a reduction in claim costs following a significant legislative reform during 2002, as well as an improvement in its estimation method resulting in lower estimates;

 

    €14 million for workers’ compensation related to reductions in Western Australia and Tasmania to allow for favorable trends after legislative changes in 1999 and 2002 with an offsetting increase for a run-off portfolio developing favorably in total but being charged with increased assumptions for future inflation and the future number of mesothelioma claims; and

 

    €7 million for inwards reinsurance business, a portfolio in run-off, experiencing slower than expected reported claim costs.

 

Credit Insurance

 

Credit insurance is underwritten in the Allianz Group by Euler Hermes. During 2005, Euler Hermes experienced favorable development of €324 million, or 26.8% of the reserves at January 1, 2005. Of this amount, €134 million are attributable to Euler Hermes Germany due primarily to further refinement

 

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of the actuarial approach and simultaneously experiencing favorable loss trends. In France, the favorable development of €89 millions was mainly attributable to a decrease in IBNR for 2004 due to a better economic environment. Furthermore, in Italy, a favorable development of €27 million was mainly due to a release in reserves on two large claims, which developed better than expected. Lastly, a favorable development of €27 million in the United Kingdom was attributable to a lower-than-expected loss ratio in accident year 2004.

 

Marine & Aviation

 

Allianz Marine & Aviation consists of two legal entities located in Germany and France, as well as a branch office in the United Kingdom. Additional marine & aviation business is underwritten in other entities of the Allianz Group (e.g., Firemans’ Fund) and is reported in these respective entities.

 

Allianz Marine & Aviation gross loss and LAE reserves developed favorably by €152 million in France and unfavorably by €172 million in Germany resulting in a total of €20 million unfavorable development, or 1.0% of the reserves at January 1, 2005.

 

In Germany, the unfavorable development was due to a charge of €350 million to reflect the difference between the analysis based on underwriting year and accounting based on accident year. In the United Kingdom, blue water hull developed unfavorably by of €15 million. These effects are partly offset by the favorable development of aviation claims of €150 million, primarily for underwriting years 2003 and 2004, for business both in Germany and the United Kingdom and a further €20 million due to a favorable development for losses in German marine business.

 

In France, the favorable development was due primarily to revised estimates of ultimate losses in aviation and marine. A release of €108 million was attributable to aviation both in the United Kingdom and France, €20 million in marine in France and an additional €11 million favorable development in marine in the United Kingdom.

 

Changes in Historical Loss and LAE Reserves

 

The following table illustrates the development of the Allianz Group’s loss and LAE reserves, on an IFRS basis and gross of reinsurance, over the past nine years. Since the Allianz Group adopted IFRS in 1997, historical loss development data is available on an IFRS basis of accounting for the nine years 1997 to 2005 only.

 

Each column of this table shows reserves as of a single balance sheet date, with subsequent development of these reserves. The top row of each column shows gross reserves as initially established at the end of each stated year. The next section, reading down, shows the cumulative amounts paid as of the end of the successive years with respect to the reserve initially established. The next section shows the retroactive re-estimation of the initially established gross reserves for loss and LAE as of the end of each successive year. This re-estimation results primarily from additional facts and circumstances that pertain to open claims.

 

The bottom section compares the latest re-estimated gross reserves for loss and LAE to the gross reserves as initially established and indicates the cumulative development of the initially established gross reserves through December 31, 2005. For instance, the surplus (deficiency) shown in the table for each year represents the aggregate amount by which the original estimates of reserves at that year-end have changed in subsequent years. Accordingly, the cumulative surplus (deficiency) for a year-end relates only to reserves at that year-end and such amounts are not additive. Caution should be exercised in evaluating the information shown on this table, as each amount includes the effects of all changes in amounts for prior periods. For example, the portion of the development shown for year-end 1999 reserves that relates to 1997 losses is included in the cumulative surplus (deficiency) of the 1997 through 1999 columns.

 

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This table below presents calendar year data, not accident year data. Conditions and trends that have affected development of liability in the past may or may not necessarily occur in the future, and accordingly, conclusions about future results may not be derived from information presented in this table.

 

Changes in Historical Reserves for Unpaid Loss and LAE

Property-Casualty Insurance Segment

Gross of Reinsurance

 

    December 31,(1)

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn

Gross liability for unpaid claims and claims expenses

  33,259     38,899     50,980     53,680     61,033     59,204     55,889     55,529     60,246

Paid (cumulative) as of:

                                                   

One year later

  8,027     11,166     14,877     16,001     15,624     16,120     14,218     13,357      

Two years later

  12,062     17,598     22,497     22,889     24,069     23,739     20,987            

Three years later

  15,120     22,097     26,926     27,755     29,394     28,687                  

Four years later

  17,429     25,030     30,312     31,220     33,016                        

Five years later

  19,154     27,416     32,820     33,826                              

Six years later

  20,499     29,199     34,760                                    

Seven years later

  21,536     30,684                                          

Eight years later

  22,504                                                

Liability re-estimated as of:

                                                   

One year later

  32,825     40,807     51,378     54,577     57,738     55,836     54,050     56,311      

Two years later

  29,776     44,593     52,246     53,069     55,703     55,650     55,227            

Three years later

  31,558     45,325     50,819     51,495     55,820     57,119                  

Four years later

  32,001     44,027     49,293     52,016     57,130                        

Five years later

  31,321     42,824     49,992     53,234                              

Six years later

  30,147     43,659     50,970                                    

Seven years later

  31,141     44,364                                          

Eight years later

  31,988                                                

Cumulative surplus (deficiency)

  1,271     (5,465 )   10     446     3,903     2,085     662     (782 )    

Cumulative surplus (deficiency)
excluding impact of foreign exchange
(2)

  1,737     1,256     (977 )   (1,996 )   (1,415 )   781     1,767     1,589      

Percent

  5.2 %   3.2 %   (1.9 )%   (3.7 )%   (2.3 )%   1.3 %   3.2 %   2.9 %    

(1) Reserves for loss and LAE of subsidiaries sold are excluded in the above table. Reserves for loss and LAE of subsidiaries purchased are included as of the date of the acquisition.

 

(2) The cumulative surplus (deficiency) excludes the impact of foreign exchange and other effects.

 

In 2005, loss and LAE reserves increased by €4,717 million. A primary contributor to this increase was the number of natural catastrophes which occurred during 2005, in particular the U.S. hurricanes Katrina, Rita and Wilma, resulting in total estimated claims from natural catastrophes, net of reinsurance, of €1,090 million for the Allianz Group. Operating entities most affected by natural catastrophes in 2005 included Allianz Marine & Aviation, Allianz Global Risks Re, Allianz AG, Fireman’s Fund, Allianz Versicherungs-AG and Allianz Suisse. An additional factor which contributed to the increase in loss and LAE reserves in 2005 was the weakening of the Euro relative to U.S. dollar and Australian dollar, resulting in a total foreign currency exchange rate effect of €2,286 million. Reserve developments during 2005 are described in further detail in the preceding section “—Changes in Loss and LAE Reserves During 2005”.

 

The overall reduction in loss and LAE reserves from 2003 to 2004 was attributable to the then ongoing settlement and run-off of various U.S. business lines, and the appreciation of the Euro relative to U.S. dollar during these years.

 

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The overall decrease in loss and LAE reserves between December 31, 2002 and 2003 was attributable primarily to the strengthening of the Euro relative to the U.S. dollar, the British pound sterling and the Swiss franc during 2003. Reserves in these three currencies decreased by €2.8 billion during 2003 due to a stronger Euro and a reduction of reserves in U.S. dollar attributable to the exit from some business lines, including surety at Fireman’s Fund and general liability at AGR U.S.

 

The significant increase in the gross reserves for 2001 over 2000 was driven by gross incurred losses and loss adjustment expenses related to the terrorist attack of September 11, 2001. On a consolidated Allianz Group basis, the terrorist attack of September 11, 2001 resulted in net claims costs of approximately €1,500 million. Estimated losses are based on a policy-by-policy analysis as well as a variety of actuarial techniques, coverage interpretations and claim estimation methodologies, and include an estimate of incurred but not reported, as well as estimated costs related to the settlement of claims. These loss estimates are subject to considerable uncertainty. In connection with the terrorist attack of September 11, 2001, we recorded net claims expenses of approximately €1,500 million in 2001 for the Allianz Group on the basis of one occurrence.

 

On December 6, 2004, a New York jury rendered a verdict that the World Trade Center attack constituted two occurrences under the alleged terms of various coverages. At December 31, 2005, this decision had no adverse impact on the Allianz Group’s operating results. AGR U.S. has appealed this decision. The final implications of this decision for the Allianz Group will not be determined until the completion of further proceedings.

 

Discounting of Loss and LAE Reserves

 

As of December 31, 2005, 2004 and 2003, the Allianz Group consolidated property-casualty reserves reflected discounts of €1,326 million, €1,220 million and €1,261 million respectively.

 

Reserves are discounted to varying degrees in the United States, United Kingdom, Germany, Hungary, Switzerland, Portugal, France and Belgium. For the United States, the discount reflected in the reserves is related to annuities for certain long-tailed liabilities, primarily in workers’ compensation. For the other countries, the reserve discounts relate to annuity reserves for various classes of business. These classes include personal accident, general liability and motor liability in Germany and Hungary, workers’ compensation in Switzerland and Portugal, individual and group health disability and motor liability in France, health disability in Belgium and claims from employers’ liability in the United Kingdom. All of the reserves that have been discounted have payment amounts that are fixed and timing that is reasonably determinable. The following table shows, by country, the carrying amounts of reserves for claims and claim adjustment expenses that have been discounted, and the interest rates used for discounting for the years ended December 31:

 

     Discounted
Reserves in


   Amount of the
Discount


   Interest rate used for Discounting

     2005

   2004

   2005

   2004

   2005

  2004

     € mn    € mn    € mn    € mn         

France

   1,404    1,402    357    330    3.25%   3.25%

Germany

   445    407    298    278    2.75% to 4.00%   2.75% to 4.00%

Switzerland

   414    392    236    236    3.25%   3.25%

United States

   213    190    230    216    6.00%   6.00%

United Kingdom

   116    84    110    65    4.00% to 4.25%   4.25%

Belgium

   91    83    28    26    4.68%   4.75%

Hungary

   67    69    22    22    1.40%   1.40%

Portugal

   57    57    44    47    4.00%   4.25%
    
  
  
  
        

Total

   2,807    2,684    1,326    1,220         
    
  
  
  
        

 

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Asbestos and Environmental Loss Reserves in the United States

 

There are significant uncertainties in estimating A&E reserves for loss and loss adjustment expense. Reserves for asbestos-related illnesses and environmental clean-up losses cannot be estimated using traditional actuarial techniques due to the long latency period and sensitivity to legal, socio-economic and regulatory trends. Case reserves are established when sufficient information is available to indicate the involvement of a specific insurance policy. In addition, IBNR reserves are established to cover additional exposures on both known and not yet reported claims. To the extent possible, A&E loss reserve estimates are based not only on claims reported to date but also on a survey of policies that may be exposed to claims reported in the future (i.e., an exposure analysis).

 

In establishing liabilities for A&E claims, management considers facts currently known and the current state of the law and coverage litigation. However, given the expansion of coverage and liability by the courts and the legislatures in the past and the possibilities of similar interpretation in the future, there is significant uncertainty regarding the extent of remediation and insurer liability.

 

The industry-wide loss trends for some of these exposures, especially for asbestos-related losses, have deteriorated recently. Some of the reasons for this deterioration include the fact that insureds who either produced or installed products containing asbestos have seen more and larger claims brought against them, and some of these companies have declared bankruptcy which has caused plaintiff attorneys to seek larger amounts from solvent defendants and to also include new defendants. Some defendants are also seeking relief under different coverage provisions when the products liability portion of their coverage has been exhausted.

 

In response to these developments, Fireman’s Fund engaged an external consultant to review its gross asbestos liabilities at December 31, 2004. Based on the results of this external study, Fireman’s Fund estimated its asbestos reserves net of reinsurance, analyzed the company’s environmental reserves gross and net of reinsurance and selected the actuarial best estimate reserves for its A&E exposure. The analyses included a review of the ultimate, gross asbestos and environmental loss and allocated loss adjustment reserves for accident years 1987 and prior. The 1987 and prior year cut-off date for A&E is consistent with the way Fireman’s Fund segregates its data for reporting and reserving purposes; this definition coincides with changes in policy language and the introduction of pollution exclusions which occurred in the mid-1980s. The methodology involved exposure-based modeling of policies with the greatest asbestos exposures, supplemented by aggregate methods for the remaining insureds and environmental loss exposures.

 

The range of reasonable potential outcomes for A&E liabilities provided in these analyses is particularly large. Given this inherent uncertainty in estimating A&E liabilities, significant deviation from the currently carried A&E reserve position is possible.

 

The table below shows Fireman’s Fund case count activity for A&E in 2003 to 2005, including the activity for A&E of Jefferson Insurance Company of New York for 2004 and 2005:

 

     Year-to-Date Case
Counts December 31,


  Percent Change

 
     2005    2004    2003   2005     2004  

New

   1,173    2,314    1,782   (49.3 )%   29.9 %

Reopened

   207    213    326   (2.8 )%   (34.7 )%

Closed

   4,590    1,606    1,296   185.8 %   23.9 %

Pending

   3,388    6,624    5,726   (48.9 )%   15.7 %

 

On September 30, 2002, Fireman’s Fund and Allianz AG entered into a reinsurance contract whereby Fireman’s Fund ceded net carried A&E loss and allocated ALAE reserves to Allianz AG, with Allianz AG providing reinsurance cover up to a maximum of USD 2,158 million. Based on the aforementioned A&E study completed during the year ended December 31, 2005, Fireman’s Fund increased the cession to this treaty from USD 1,276 million at December 31, 2004 to USD 2,080 million at December 31, 2005, leaving further coverage of USD 78 million. As a result of already sufficient reserves, there was no net impact on Allianz Group level, absent a USD 65 million loss caused by the increase in provisions for uncollectible reinsurance recoverables and ULAE.

 

Total net reserves for A&E related liabilities for the U.S. based subsidiaries of the Allianz Group (i.e., Fireman’s Fund and AGR U.S.) at December 31, 2005 and 2004 were €1,390 million and €739 million, respectively, excluding intercompany reinsurance agreements.

 

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The following table summarizes the gross and net loss and loss adjustment expenses reserves for the U.S.- based subsidiaries for A&E claims before intercompany reinsurance agreements.

 

Year-end December 31,


   A&E Net
Reserves


   A&E Gross
Reserves


   As percentage of
U.S. Property-
Casualty Gross
Reserves


    As percentage of
the Allianz Group’s
Property-Casualty
Gross Reserves


 
     € mn    € mn             

2001

   979    1,649    10.1 %   2.7 %

2002

   1,250    1,704    11.8 %   2.9 %

2003

   906    1,263    11.9 %   2.2 %

2004

   739    1,097    12.4 %   2.0 %

2005

   1,390    1,887    17.1 %   3.1 %

 

The table below shows total A&E loss activity for the past five years for Fireman’s Fund and AGR U.S. These numbers are shown gross of reinsurance and on a U.S. statutory basis.

 

     Year Ended December 31,

Asbestos:


   2001

    2002

   2003

    2004

   2005

     $ mn     $ mn    $mn     $mn    $mn

Loss + LAE Reserves as of January 1

   679     596    1,147     1,097    1,033

Plus Incurred Loss and LAE

   23     688    101     110    1,090

Less Loss and LAE Payments

   106     137    151     173    270

Payments for Loss

   79     102    106     121    220

Payments for LAE

   27     35    45     52    50

Loss + LAE Reserves as of December 31

   596     1,147    1,097     1,033    1,853
     Year Ended December 31,

Environmental:


   2001

    2002

   2003

    2004

   2005

     $mn     $mn    $mn     $mn    $mn

Loss + LAE Reserves as of January 1

   975     863    630     482    462

Plus Incurred Loss and LAE

   (37 )   73    (89 )   67    86

Less Loss and LAE Payments

   75     306    59     87    88

Payments for Loss

   38     259    31     53    52

Payments for LAE

   37     47    28     34    36

Loss + LAE Reserves as of December 31

   863     630    482     462    460
     Year Ended December 31,

Total Asbestos and Environmental:


   2001

    2002

   2003

    2004

   2005

     $ mn     $ mn    $ mn     $ mn    $ mn

Loss + LAE Reserves as of January 1

   1,654     1,459    1,776     1,579    1,495

Plus Incurred Loss and LAE

   (14 )   761    12     177    1,176

Less Loss and LAE Payments

   181     443    210     260    358

Payments for Loss

   117     361    137     174    272

Payments for LAE

   64     82    73     86    86

Loss + LAE Reserves as of December 31

   1,459     1,776    1,579     1,495    2,313

 

Non-U.S. Asbestos and Environmental Exposures

 

Asbestos and environmental exposures also exist outside of the United States and have led to insurance claims in several other countries. The level of claims activity to date, and the potential for future claims varies significantly from country to country due to many factors, including differing social and legal systems, policy terms and conditions and mix of insured business. The Allianz Group is currently conducting a review of its non-U.S. asbestos exposures.

 

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Table of Contents

Selected Statistical Information Relating to Our Banking Operations

 

For the purposes of presenting the following information, our banking operations include Dresdner Bank AG and its subsidiaries (“Dresdner Bank”), including its asset management operations, which are insignificant in size relative to Dresdner Bank’s banking operations, and certain other banking subsidiaries of the Allianz Group. This presentation differs from the presentation in the remainder of “Operating and Financial Review and Prospects”, where the asset management operations of Dresdner Bank are included in our asset management segment and excluded from our banking segment. The following information has been derived from the financial records of our banking operations and has been prepared in accordance with IFRS; it does not reflect certain adjustments and consolidations to convert such information to the Allianz Group’s consolidated financial statements. Particularly, the assets and liabilities of Dresdner Bank do not reflect the purchase accounting adjustments applied for the Allianz Group’s consolidated financial statements with respect to Dresdner Bank’s assets and liabilities at July 23, 2001, the date of the acquisition of Dresdner Bank by the Allianz Group. Further, the following information does not reflect adjustments necessary to convert such information to U.S. GAAP.

 

As discussed in more detail in “Key Information—Selected Consolidated Financial Data” and Note 3 to our consolidated financial statements, our consolidated financial statements have been prepared in accordance with 2005 IFRS, which introduced a number of new and revised IFRS standards effective January 1, 2005 and which also apply to the financial records of our banking operations. Certain of these standards are required to be applied retrospectively, which has the effect of applying 2005 IFRS to prior periods as if those accounting principles had always been used. These standards include IAS 39 revised, Financial Instruments: Recognition and Measurement, which has an impact on the selected statistical information relating to our banking operations. Accordingly, the information at and for the years ended December 31, 2005, 2004, 2003 and 2002 is presented below in accordance with 2005 IFRS, and where applicable and as indicated, certain information for the years 2004, 2003 and 2002 has been revised to reflect the retrospective application of IAS 39 revised. The information at and for the year ended December 31, 2001 is presented in accordance with pre-2005 IFRS and accordingly does not reflect the retrospective application of 2005 IFRS, due to the unreasonable effort or expense required to prepare such information, in particular resulting from the implementation for such year of the new impairment criteria of IAS 39 revised. For more information on the impact of the retrospective application of 2005 IFRS at and for the years ended December 31, 2004 and 2003, see Note 3 to our consolidated financial statements.

 

The following information also reflects the closure of Dresdner Bank’s non-strategic IRU effective September 30, 2005, having completed its mandate to free-up risk capital through the reduction of risk-weighted assets. At September 30, 2005, the IRU’s remaining risk assets amounted to €1.4 billion, of which the majority was sold in 4Q 2005, resulting in a further decrease of these risk assets to approximately one-third at December 31, 2005.

 

Average Balance Sheet and Interest Rate Data

 

The following table sets forth the average balances of assets and liabilities and related interest earned from interest-earning assets and interest expensed on interest-bearing liabilities, as well as the resulting average interest yields and rates for the years ended December 31, 2005, 2004 and 2003. The average balance sheet and interest rate data is based on consolidated monthly average balances using month-end balances prepared in accordance with IFRS.

 

In accordance with IAS 39, the fair values of all derivative instruments are included within non-interest-earning assets or non-interest-bearing liabilities. Interest income and interest expense relating to qualifying hedge derivative instruments have been reported within the interest income and interest expense of the hedged item for each period.

 

The allocation between German and non-German components is based on the location of the office that recorded the transaction. Categories of loans and advances include loans placed on non-accrual status. For a description of our accounting policies on non-accrual loans see “—Risk Elements—Non-accrual Loans” and “Operating and Financial Review and Prospects—Critical Accounting Policies and Estimates.”

 

33


Table of Contents

Our banking operations do not have a significant balance of tax-exempt investments. Accordingly, interest income on such investments has been included as taxable interest income for purposes of calculating the change in taxable net interest income.

 

     Year Ended December 31,

 
     2005

    2004

    2003

 
     Average
Balance


    Interest
Income/
Expense


   Average
Yield/
Rate


    Average
Balance


    Interest
Income/
Expense


   Average
Yield/
Rate


    Average
Balance


    Interest
Income/
Expense


   Average
Yield/
Rate


 
     € mn     € mn    %     € mn     € mn    %     € mn     € mn    %  

Assets

                                                   

Financial assets carried at fair value through income

                                                   

In German offices

   88,194     4,215    4.8 %   110,316     3,972    3.6 %   84,197     1,724    2.0 %

In non-German offices

   53,059     1,941    3.7 %   37,643     1,131    3.0 %   29,191     809    2.8 %
    

 
        

 
        

 
      

Total

   141,253     6,156    4.4 %   147,959     5,103    3.4 %   113,388     2,533    2.2 %
    

 
        

 
        

 
      

Loans and advances to banks

                                                   

In German offices

   19,646     424    2.2 %   21,880     455    2.1 %   20,163     517    2.6 %

In non-German offices

   14,276     564    4.0 %   8,653     210    2.4 %   7,244     325    4.5 %
    

 
        

 
        

 
      

Total

   33,922     988    2.9 %   30,533     665    2.2 %   27,407     842    3.1 %
    

 
        

 
        

 
      

Loans and advances to customers

                                                   

In German offices

   77,873     4,313    5.5 %   83,950     4,058    4.8 %   90,720     4,452    4.9 %

In non-German offices

   34,371     1,600    4.7 %   28,029     1,210    4.3 %   39,246     2,137    5.4 %
    

 
        

 
        

 
      

Total

   112,244     5,913    5.3 %   111,979     5,268    4.7 %   129,966     6,589    5.1 %
    

 
        

 
        

 
      

Securities purchased under resale agreements

                                                   

In German offices

   83,614     2,690    3.2 %   110,439     2,896    2.6 %   91,306     2,602    2.8 %

In non-German offices

   59,513     2,324    3.9 %   64,030     1,399    2.2 %   27,492     851    3.1 %
    

 
        

 
        

 
      

Total

   143,127     5,014    3.5 %   174,469     4,295    2.5 %   118,798     3,453    2.9 %
    

 
        

 
        

 
      

Investment securities(1)

                                                   

In German offices

   7,392     237    3.2 %   5,727     206    3.6 %   5,909     254    4.3 %

In non-German offices

   5,651     237    4.2 %   7,663     241    3.1 %   7,683     263    3.4 %
    

 
        

 
        

 
      

Total

   13,043     474    3.6 %   13,390     447    3.3 %   13,592     517    3.8 %
    

 
        

 
        

 
      

Total interest-earning assets

   443,589     18,545    4.2 %   478,330     15,778    3.3 %   403,151     13,934    3.5 %
    

 
        

 
        

 
      

Non-interest-earning assets

                                                   

In German offices

   45,974     —      —       45,760     —      —       38,581     —      —    

In non-German offices

   43,714     —      —       38,008     —      —       30,868     —      —    
    

            

            

          

Total non-interest-earning assets

   89,688     —      —       83,768     —      —       69,449     —      —    
    

            

            

          

Total assets

   533,277     —      —       562,098     —      —       472,600     —      —    
    

            

            

          

Percent of assets attributable to non-German offices

   39.5 %   —      —       32.7 %   —      —       30.0 %   —      —    

 

34


Table of Contents
     Year Ended December 31,

 
     2005

    2004

    2003

 
     Average
Balance


    Interest
Income/
Expense


   Average
Yield/
Rate


    Average
Balance


    Interest
Income/
Expense


   Average
Yield/
Rate


    Average
Balance


    Interest
Income/
Expense


   Average
Yield/
Rate


 
     € mn     € mn    %     € mn     € mn    %     € mn     € mn    %  

Liabilities and shareholders’ equity

                                                   

Financial liabilities carried at fair value through income

                                                   

In German offices

   215     16    7.4 %   184     15    8.2 %   163     13    8.0 %

In non-German offices

   19     1    4.6 %   —       —      —       —       —      —    
    

 
        

 
        

 
      

Total

   234     17    7.2 %   184     15    8.2 %   163     13    8.0 %
    

 
        

 
        

 
      

Liabilities to banks

                                                   

In German offices

   67,698     1,869    2.8 %   86,796     1,989    2.3 %   86,173     2,000    2.3 %

In non-German offices

   25,374     1,414    5.6 %   21,784     1,066    4.9 %   13,784     754    5.5 %
    

 
        

 
        

 
      

Total

   93,072     3,283    3.5 %   108,580     3,055    2.8 %   99,957     2,754    2.8 %
    

 
        

 
        

 
      

Liabilities to customers

                                                   

In German offices

   60,254     1,720    2.9 %   57,877     1,576    2.7 %   57,322     1,726    3.0 %

In non-German offices

   39,056     1,139    2.9 %   32,792     1,043    3.2 %   37,211     910    2.4 %
    

 
        

 
        

 
      

Total

   99,310     2,859    2.9 %   90,669     2,619    2.9 %   94,533     2,636    2.8 %
    

 
        

 
        

 
      

Securities sold under repurchase agreements

                                                   

In German offices

   60,471     2,382    3.9 %   75,091     2,019    2.7 %   58,998     1,719    2.9 %

In non-German offices

   59,113     2,226    3.8 %   52,942     1,105    2.1 %   17,568     638    3.6 %
    

 
        

 
        

 
      

Total

   119,584     4,608    3.9 %   128,033     3,124    2.4 %   76,566     2,357    3.1 %
    

 
        

 
        

 
      

Subordinated liabilities

                                                   

In German offices

   3,244     163    5.0 %   3,433     164    4.8 %   3,757     174    4.6 %

In non-German offices

   3,062     181    5.9 %   3,707     220    5.9 %   3,836     267    7.0 %
    

 
        

 
        

 
      

Total

   6,306     344    5.5 %   7,140     384    5.4 %   7,593     441    5.8 %
    

 
        

 
        

 
      

Certificated liabilities(2)

                                                   

In German offices

   18,441     758    4.1 %   16,651     604    3.6 %   13,745     536    3.9 %

In non-German offices

   32,258     1,205    3.7 %   28,392     779    2.7 %   40,093     1,365    3.4 %
    

 
        

 
        

 
      

Total

   50,699     1,963    3.9 %   45,043     1,383    3.1 %   53,838     1,901    3.5 %
    

 
        

 
        

 
      

Profit participation certificates outstanding

                                                   

In German offices

   1,521     110    7.2 %   1,517     111    7.3 %   1,515     111    7.3 %
    

 
        

 
        

 
      

Total

   1,521     110    7.2 %   1,517     111    7.3 %   1,515     111    7.3 %
    

 
        

 
        

 
      

Total interest-bearing liabilities

   370,726     13,184    3.6 %   381,166     10,691    2.8 %   334,165     10,213    3.1 %
    

 
        

 
        

 
      

Non-interest-bearing liabilities

                                                   

In German offices

   94,036     —      —       116,286     —      —       89,561     —      —    

In non-German offices

   56,582     —      —       52,892     —      —       36,447     —      —    

Total non-interest-bearing liabilities

   150,618     —      —       169,178     —      —       126,008     —      —    
    

            

            

          

Shareholders’ equity

   11,934     —      —       11,754     —      —       12,427     —      —    
    

            

            

          

Total liabilities and shareholders’ equity

   533,277     —      —       562,098     —      —       472,600     —      —    
    

            

            

          

Percent of liabilities attributable to non-German offices

   41.3 %   —      —       35.0 %   —      —       32.4 %   —      —    

(1) In 2003, the average yields for investment securities available-for-sale have been calculated using amortized cost balances and do not include changes in fair value recorded within a component of shareholders’ equity. In 2005 and 2004, the average yields for investment securities available-for-sale have been calculated using the fair value balances. These balances are not materially different from the amortized cost balances. The average yields for investment securities held-to-maturity have been calculated using amortized cost balances.
(2) Interest-bearing deposits are presented within liabilities to banks and liabilities to customers; certificates of deposit are presented within certificated liabilities.

 

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Table of Contents

Net Interest Margin

 

The following table sets forth the average total interest-earning assets, net interest earned and the net interest margin of our banking operations.

 

     Year Ended December 31,

 
     2005

    2004

    2003

 
     € mn     € mn     € mn  

Average total interest-earning assets

   443,589     478,330     403,151  

Net interest earned(1)

   5,361     5,087     3,721  

Net interest margin in %(2)

   1.21 %   1.06 %   0.92 %

(1) Net interest earned is defined as total interest income less total interest expense.
(2) Net interest margin is defined as net interest earned divided by average total interest-earning assets.

 

The following table sets forth an allocation of changes in interest income, interest expense and net interest income between changes in the average volume and changes in the average interest rates for the two most recent years. Volume and interest rate variances have been calculated based on movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities. Changes due to a combination of volume and rate are allocated proportionally to the absolute change in volume and rate.

 

     Year Ended December 31,

 
     2005 over 2004

    2004 over 2003

 
     Increase/(Decrease)
due to Change in:


    Increase/(Decrease)
due to Change in:


 
     Total
Change


    Average
Interest Rate


    Average
Volume


    Total
Change


    Average
Interest Rate


    Average
Volume


 
     € mn     € mn     € mn     € mn     € mn     € mn  

Interest income

                                    

Financial assets carried at fair value through income

                                    

In German offices

   243     1,139     (896 )   2,248     1,595     653  

In non-German offices

   810     281     529     322     72     250  
    

 

 

 

 

 

Total

   1,053     1,420     (367 )   2,570     1,667     903  
    

 

 

 

 

 

Loans and advances to banks

                                    

In German offices

   (31 )   17     (48 )   (62 )   (103 )   41  

In non-German offices

   354     174     180     (115 )   (170 )   55  
    

 

 

 

 

 

Total

   323     191     132     (177 )   (273 )   96  
    

 

 

 

 

 

Loans and advances to customers

                                    

In German offices

   255     563     (308 )   (394 )   (66 )   (328 )

In non-German offices

   390     100     290     (927 )   (390 )   (537 )
    

 

 

 

 

 

Total

   645     663     (18 )   (1,321 )   (456 )   (865 )
    

 

 

 

 

 

Securities purchased under resale agreements

                                    

In German offices

   (206 )   580     (786 )   294     (220 )   514  

In non-German offices

   925     1,030     (105 )   548     (311 )   859  
    

 

 

 

 

 

Total

   719     1,610     (891 )   842     (531 )   1,373  
    

 

 

 

 

 

Investment securities

                                    

In German offices

   31     (24 )   55     (48 )   (40 )   (8 )

In non-German offices

   (5 )   68     (73 )   (22 )   (21 )   (1 )
    

 

 

 

 

 

Total

   26     44     (18 )   (70 )   (61 )   (9 )
    

 

 

 

 

 

Total interest income

   2,766     3,928     (1,162 )   1,844     346     1,498  
    

 

 

 

 

 

 

36


Table of Contents
     Year Ended December 31,

 
     2005 over 2004

    2004 over 2003

 
     Increase/(Decrease)
due to Change in:


    Increase/(Decrease)
due to Change in:


 
     Total
Change


    Average
Interest Rate


    Average
Volume


    Total
Change


    Average
Interest Rate


    Average
Volume


 
     € mn     € mn     € mn     € mn     € mn     € mn  

Interest expense

                                    

Financial liabilities carried at fair value through income

                                    

In German offices

   1     1     —       2     —       2  

In non-German offices

   1     1     —       —       —       —    
    

 

 

 

 

 

Total

   2     2     —       2     —       2  
    

 

 

 

 

 

Liabilities to banks

                                    

In German offices

   (120 )   364     (484 )   (11 )   (25 )   14  

In non-German offices

   348     159     189     312     (87 )   399  
    

 

 

 

 

 

Total

   228     523     (295 )   301     (112 )   413  
    

 

 

 

 

 

Liabilities to customers

                                    

In German offices

   144     78     66     (150 )   (167 )   17  

In non-German offices

   96     (92 )   188     133     250     (117 )
    

 

 

 

 

 

Total

   240     (14 )   254     (17 )   83     (100 )
    

 

 

 

 

 

Securities sold under repurchase agreements

                                    

In German offices

   363     810     (447 )   300     (141 )   441  

In non-German offices

   1,121     980     141     467     (367 )   834  
    

 

 

 

 

 

Total

   1,484     1,790     (306 )   767     (508 )   1,275  
    

 

 

 

 

 

Subordinated liabilities

                                    

In German offices

   (1 )   8     (9 )   (10 )   5     (15 )

In non-German offices

   (39 )   (1 )   (38 )   (47 )   (38 )   (9 )
    

 

 

 

 

 

Total

   (40 )   7     (47 )   (57 )   (33 )   (24 )
    

 

 

 

 

 

Certificated liabilities

                                    

In German offices

   154     85     69     68     (39 )   107  

In non-German offices

   426     309     117     (586 )   (234 )   (352 )
    

 

 

 

 

 

Total

   580     394     186     (518 )   (273 )   (245 )
    

 

 

 

 

 

Profit participation certificates outstanding

                                    

In German offices

   (1 )   (1 )   —       —       —       —    

Total

   (1 )   (1 )   —       —       —       —    
    

 

 

 

 

 

Total interest expense

   2,493     2,701     (208 )   478     (843 )   1,321  
    

 

 

 

 

 

Change in taxable net interest income

   273     1,227     (954 )   1,366     1,189     177  
    

 

 

 

 

 

 

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Table of Contents

Return on Equity and Assets

 

The following table sets forth the net income, average shareholders’ equity and selected financial information and ratios of our banking operations.

 

     Year Ended December 31,

 
     2005

    2004

    2003

 
     € mn     € mn     € mn  

Net income/(loss)

   1,768     343     (2,242 )

Average shareholders’ equity

   11,934     11,754     12,427  

Return on assets in %(1)

   0.33 %   0.06 %   (0.47 )%

Return on equity in %(2)

   14.81 %   2.92 %   (18.04 )%

Equity to assets ratio in %(3)

   2.24 %   2.09 %   2.63 %

(1) Return on assets is defined as net income/(loss) of our banking operations divided by average total assets of our banking operations.
(2) Return on equity is defined as net income/(loss) of our banking operations divided by average shareholders’ equity of our banking operations.
(3) Equity to assets ratio is defined as average shareholders’ equity of our banking operations divided by average total assets of our banking operations.

 

Financial Assets Carried At Fair Value Through Income and Investment Securities

 

The following table sets forth the book value of financial assets carried at fair value through income (including trading securities) and investment securities held by our banking operations by type of issuer. The allocation between German and non-German components is based on the domicile of the issuer.

 

     At December 31,

     2005

    2004(2)

   2003(2)

     € mn     € mn    € mn

Financial assets carried at fair value through income(1)

               

German:

               

Federal and state government and government agency debt securities

   11,497 (3)   33,693    19,764

Local government debt securities

   690     1,578    4,384

Corporate debt securities

   18,972     30,157    31,319

Mortgage-backed securities

   139     112    315

Equity securities

   2,656     2,853    1,636
    

 
  

German total

   33,954     68,393    57,418
    

 
  
     At December 31,

     2005

    2004(2)

   2003(2)

     € mn     € mn    € mn

Non-German:

               

U.S. Treasury and other U.S. government agency debt securities

   915     2,083    5,107

Other government and official institution debt securities

   25,534 (3)   51,636    28,424

Corporate debt securities

   39,425     26,557    20,623

Mortgage-backed securities

   13,601 (4)   7,059    543

Equity securities

   28,105 (5)   16,301    13,216
    

 
  

Non-German total

   107,580     103,636    67,913
    

 
  

Total financial assets carried at fair value through income

   141,534     172,029    125,331
    

 
  

Securities available-for-sale

               

German:

               

Federal and state government and government agency debt securities

   305     77    1,036

Local government debt securities

   1,777     2,083    1,591

Corporate debt securities

   5,195     5,865    3,424

Mortgage-backed and other debt securities

   —       —      14

Equity securities

   1,573     2,354    742
    

 
  

German total

   8,850     10,379    6,807
    

 
  

Non-German:

               

U.S. Treasury and other U.S. government agency debt securities

   5     —      246

Other government and official institution debt securities

   1,245     1,430    1,792

Corporate debt securities

   3,180     3,061    3,560

Mortgage-backed and other debt securities

   721     424    905

Equity securities

   1,649     1,552    3,546
    

 
  

Non-German total

   6,800     6,467    10,049
    

 
  

Total securities available-for-sale

   15,650     16,846    16,856
    

 
  

Securities held-to-maturity

               

Non-German:

               

Other government and official institution debt securities

   41     103    96
    

 
  

Non-German total

   41     103    96
    

 
  

Total securities held-to-maturity

   41     103    96
    

 
  

(1) Excludes derivative financial instruments held for trading.
(2) The years ended December 2004 and 2003 have been revised to reflect the required retrospective application of IAS 39 revised, which became effective January 1, 2005, as if IAS 39 revised had always been used.

 

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(3) The decrease in German federal and state government and government agency debt securities as well as non-German other government and official institution debt securities is primarily driven by the reduction of government and agency bonds and other fixed-income securities during 2005 due to declined earnings prospects in this sector.
(4) The increase in non-German mortgage-backed securities was driven largely by the increased volume of credit derivative trades during 2005.
(5) The increase in non-German equity securities reflects the positive developments within the stocks markets and indices during 2005.

 

At December 31, 2005, our banking operations held no ordinary shares with a book value in excess of ten percent of the shareholders’ equity of our banking operations.

 

Maturity Analysis of Debt Investment Securities

 

The following table sets forth an analysis of the contractual maturity and weighted average yields of our banking operations’ debt investment securities. Actual maturities may differ from contractual maturity dates because issuers may have the right to call or prepay obligations. The allocation between German and non-German components is based on the domicile of the issuer.

 

 

 

     At December 31, 2005

 
     Due In
One Year
Or Less


    Due After
One Year
Through
Five Years


    Due After
Five Years
Through
Ten Years


    Due After
Ten Years


    Total

 
     € mn     € mn     € mn     € mn     € mn  

Securities available-for-sale

                              

German:

                              

Federal and state government and government agency debt securities

   11     114     175     5     305  

Local government debt securities

   57     1,678     42     —       1,777  

Corporate debt securities

   348     3,447     1,400     —       5,195  
    

 

 

 

 

German total

   416     5,239     1,617     5     7,277  
    

 

 

 

 

Non-German:

                              

Government and official institution debt securities

   258     564     362     66     1,250  

Corporate debt securities

   326     2,042     764     48     3,180  

Mortgage-backed and other debt securities

   467     152     101     1     721  
    

 

 

 

 

Non-German total

   1,051     2,758     1,227     115     5,151  
    

 

 

 

 

Total securities available-for-sale

   1,467     7,997     2,844     120     12,428  
    

 

 

 

 

Weighted average yield in %

   3.4 %   3.4 %   3.3 %   3.0 %   3.3 %

Securities held-to-maturity(1)

                              

Non-German:

                              

Other government and official institution debt securities

   41     —       —       —       41  
    

 

 

 

 

Non-German total

   41     —       —       —       41  
    

 

 

 

 

Total securities held-to-maturity

   41     —       —       —       41  
    

 

 

 

 

Weighted average yield in %

   8.7 %   —       —       —       8.7 %

(1) We did not hold any German securities held-to-maturity at December 31, 2005.

 

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Table of Contents

Loan Portfolio

 

The following table sets forth an analysis of our loan portfolio, gross of allocated loan loss allowances and net of unearned income, according to the industry sector of borrowers, excluding reverse repurchase agreements and collateral paid for securities borrowing transactions, short-term investments and certificates of deposit, as well as other advances to banks and customers. The allocation between German and non-German components is based on the domicile of the borrower.

 

     At December 31,

     2005

   2004(1)

    2003(1)

   2002(1)

    2001

     € mn    € mn     € mn    € mn     € mn

German:

                          

Corporate:

                          

Manufacturing

   4,953    6,487     8,042    9,728     10,825

Construction

   653    811     1,062    1,226     1,813

Wholesale and retail trade

   4,646    4,125     4,275    6,041     7,165

Financial institutions (excluding banks) and insurance companies

   3,144    2,005     2,958    2,810     4,896

Banks

   1,767    1,152     276    1,499     517

Service providers

   10,377    11,918     12,952    13,797     22,943

Other

   2,142    1,901     2,280    2,911     3,974
    
  

 
  

 

Corporate total

   27,682    28,399     31,845    38,011     52,133
    
  

 
  

 

Public authorities

   286    531     548    572     718

Private individuals (including self-employed professionals)

   38,974    39,475     40,835    43,041 (2)   63,773
    
  

 
  

 

German total

   66,942    68,405     73,228    81,624     116,624
    
  

 
  

 

Non-German:

                          

Corporate:

                          

Manufacturing, construction, wholesale and retail trade and service providers(3)

   10,567    9,108     14,370    21,846     38,383

Financial institutions (excluding banks) and insurance companies

   10,579    8,886     6,627    6,312     10,285

Banks

   5,392    5,095     3,704    3,348     5,157

Other

   5,087    4,489     5,798    9,144     3,899
    
  

 
  

 

Corporate total

   31,625    27,578     30,499    40,650     57,724
    
  

 
  

 

Public authorities

   803    1,819     598    2,065     3,458

Private individuals (including self-employed professionals)

   1,863    1,888 (4)   11,496    11,046     10,601
    
  

 
  

 

Non-German total

   34,291    31,285     42,593    53,761     71,783
    
  

 
  

 

Total loans

   101,233    99,690     115,821    135,385     188,407
    
  

 
  

 

 

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Table of Contents

The following table sets forth our banking operations’ mortgage loans and finance leases that are included within the above analysis of loans.

 

     At December 31,

     2005

   2004(3)

   2003

   2002(2)

   2001

     € mn    € mn    € mn    € mn    € mn

Mortgage loans

   25,877    28,193    38,191    39,683    57,315

Finance leases

   1,500    1,248    933    1,104    2,414

(1) The years ended December 2004, 2003 and 2002 have been revised to reflect the required retrospective application of IAS 39 revised, which became effective January 1, 2005, as if IAS 39 revised had always been used.
(2) On August 1, 2002, we merged our mortgage banking subsidiary, Deutsche Hyp, which was a part of our former Other division, with the mortgage banking subsidiaries of Commerzbank and Deutsche Bank into a single entity, Eurohypo. The assets and liabilities of the former Deutsche Hyp were accordingly deconsolidated as of August 1, 2002. The result of this deconsolidation is primarily reflected in the change in the mortgage loans balance and the German private individuals loans balance from 2001 to 2002.
(3) The continued decrease in the Non-German Corporate manufacturing, construction, wholesale and retail trade and service providers loan category from 2001 to 2004 is primarily attributable to the reduction of our foreign non-strategic loan business. The change in this loan category’s balance from 2001 to 2002 was also impacted by the deconsolidation of Deutsche Hyp.
(4) The decrease in the mortgage loans balance and the non-German private individuals loans balance from 2003 to 2004 was primarily attributable to the sale of our banking subsidiary Entenial in January 2004.

 

Loan Concentrations

 

Although our loan portfolio is diversified across more than 153 countries, at December 31, 2005 approximately 66.1% of our total loans were to borrowers in Germany. At December 31, 2005, our largest credit exposures to borrowers in Germany were loans to private individuals (including self-employed professionals) at 58.2%; this category represented 38.5% of our total loans outstanding at December 31, 2005. Approximately 54.8% of these loans are residential mortgage loans, which represent approximately 21.1% of our total loans outstanding at December 31, 2005. Our residential mortgage loans include owner-occupied, single- and two-family homes and apartment dwellings and investment properties. Our residential mortgage loans are well diversified across all German states. Our remaining loans to private individuals in Germany primarily include other consumer installment loans and loans to self-employed professionals, which are also geographically diversified across Germany. We have no other concentrations of loans to private individuals (including self-employed professionals) in Germany in excess of ten percent of our total loans.

 

Our German corporate customers are broadly diversified within the service providers category, however no one sector is individually significant to our domestic loan portfolio and we have no concentrations of loans to borrowers in any services industry in excess of ten percent of our total loans.

 

At December 31, 2005, approximately 10.3% of our total loans were to German corporate customers in various service industries, including utilities, media, transportation and other.

 

At December 31, 2005, approximately 15.5% of our total loans were to non-financial corporate borrowers outside Germany. These loans are well diversified across various commercial industries, including:

 

     At
December 31,
2005


 
     Percent of
Total Loans


 

Manufacturing

   3.08 %

Construction

   0.23 %

Wholesale and retail trade

   1.39 %

Telecommunications

   1.15 %

Transportation

   1.72 %

Other service providers(1)

   2.88 %

Other(2)

   5.02 %

(1) Other services providers include media, utilities, natural resources and other services.
(2) There are no significant concentrations of loans in any industry included in other non-financial corporate borrowers outside Germany.

 

We have no concentrations of loans to non-financial corporate borrowers in any industry in excess of ten percent of our total loans.

 

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Table of Contents

Maturity Analysis of Loan Portfolio

 

The following table sets forth an analysis of the contractual maturity of our loans at December 31, 2005. The allocation between German and non-German components is based on the domicile of the borrower.

 

     At December 31, 2005

     Due In
One Year
Or Less


   Due After
One Year
Through
Five Years


   Due After
Five Years


   Total

     € mn    € mn    € mn    € mn

German:

                   

Corporate:

                   

Manufacturing

   3,119    1,187    647    4,953

Construction

   387    188    78    653

Wholesale and retail trade

   2,943    1,346    357    4,646

Financial institutions (excluding banks) and insurance companies

   904    1,583    657    3,144

Banks

   509    572    686    1,767

Service providers:

                   

Telecommunication

   579    19    1    599

Transportation

   555    371    316    1,242

Other service providers

   2,669    3,989    1,878    8,536

Total service providers

   3,803    4,379    2,195    10,377

Other

   702    708    732    2,142
    
  
  
  

Corporate total

   12,367    9,963    5,352    27,682
    
  
  
  

Public authorities

   176    67    43    286

Private individuals (including self-employed professionals):

                   

Residential mortgage loans

   2,128    3,786    15,453    21,367

Consumer installment loans

   2,279    —      —      2,279

Other

   2,021    4,512    8,795    15,328

Total private individuals (including self-employed professionals)

   6,428    8,298    24,248    38,974
    
  
  
  

German total

   18,971    18,328    29,643    66,942
    
  
  
  

Non-German:

                   

Corporate:

                   

Manufacturing industry

   1,277    1,110    727    3,114

Construction

   11    44    175    230

Wholesale and retail trade

   980    391    38    1,409

Service Providers:

                   

Telecommunication

   1,140    21    1    1,162

Transportation

   336    866    535    1,737

Other service providers

   755    1,568    592    2,915

Total service providers

   2,231    2,455    1,128    5,814

Total manufacturing industry, construction, wholesale and retail trade and service providers

   4,499    4,000    2,068    10,567

Financial institutions (excluding banks) and insurance companies

   4,582    4,433    1,564    10,579

Banks

   4,000    1,265    127    5,392

Other

   1,262    3,591    234    5,087
    
  
  
  

Corporate total

   14,343    13,289    3,993    31,625
    
  
  
  

Public authorities

   135    193    475    803

Private individuals (including self-employed professionals):

                   

Residential mortgage loans

   173    253    187    613

Consumer installment loans

   43    36    2    81

Other

   533    305    331    1,169

Total private individuals

   749    594    520    1,863
    
  
  
  

Non-German total

   15,227    14,076    4,988    34,291
    
  
  
  

Total loans

   34,198    32,404    34,631    101,233
    
  
  
  

 

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Table of Contents

The following table sets forth the total amount of loans due after one year with predetermined interest rates and floating or adjustable interest rates at December 31, 2005. Loans with predetermined interest rates are loans for which the interest rate is fixed for the entire term of the loan. All other loans are considered floating or adjustable interest rate loans. The allocation between German and non-German components is based on the domicile of the borrower.

 

     At December 31, 2005

     Loans with
Predetermined
Interest Rates


   Loans with
Floating or
Adjustable
Interest Rates


   Total

     € mn    € mn    € mn

German:

              

Private individuals (including self-employed professionals)

   27,348    5,198    32,546

Corporate and public customers

   7,139    8,286    15,425
    
  
  

German total

   34,487    13,484    47,971

Non-German:

              

Private individuals (including self-employed professionals)

   329    785    1,114

Corporate and public customers

   6,879    11,071    17,950
    
  
  

Non-German total

   7,208    11,856    19,064
    
  
  

Total

   41,695    25,340    67,035
    
  
  

 

Risk Elements

 

Non-performing Loans

 

The following table sets forth the outstanding balance of our non-performing loans. The allocation between German and non-German components is based on the domicile of the borrower.

 

     At December 31,

     2005

   2004

   2003

   2002

   2001

     € mn    € mn    € mn    € mn    € mn

Non-accrual loans(1):

                        

German

   1,855    4,774    6,459    7,355    8,751

Non-German

   247    831    2,236    3,097    2,404
    
  
  
  
  

Total non-accrual loans

   2,102    5,605    8,695    10,452    11,155
    
  
  
  
  

Loans past due 90 days and still accruing interest(1):

                        

German

   251    390    477    644    1,640

Non-German

   293    321    183    151    309
    
  
  
  
  

Total loans past due 90 days and still accruing interest

   544    711    660    795    1,949
    
  
  
  
  

Troubled debt restructurings(1):

                        

German

   31    17    26    65    215

Non-German

   1    54    200    313    336
    
  
  
  
  

Total troubled debt restructurings

   32    71    226    378    551
    
  
  
  
  

(1) The decline in the 2005 risk elements is predominantly driven by the disposal of non-strategic assets and the streamlining of the retail portfolio.

 

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Table of Contents

Non-accrual Loans

 

Non-accrual loans are loans on which interest income is no longer recognized on an accrual basis or loans for which a specific allowance is recorded for the full amount of accrued interest receivable. We place loans on non-accrual status when we determine, based on management’s judgment, that the payment of interest or principal is doubtful. Management’s judgment is applied based on its credit assessment of the borrower.

 

When a loan is placed on non-accrual status, any accrued and unpaid interest receivable is reversed and charged against interest income. We restore loans to accrual status only when interest and principal are made current in accordance with the contractual terms and, in management’s judgment, future payments are reasonably assured. When we have doubts about the ultimate collectibility of the principal of a loan placed on non-accrual status, all cash receipts are recorded as reductions in principal. Once the recorded principal amount of the loan is reduced to zero, future cash receipts are recognized as interest income.

 

Loans Past Due 90 Days and Still Accruing Interest

 

Loans past due 90 days and still accruing interest are loans that are contractually past due 90 days or more as to principal or interest on which we continue to recognize interest income on an accrual basis.

 

Troubled Debt Restructurings

 

Troubled debt restructurings are loans that we have restructured due to a deterioration in the borrower’s financial position and in relation to which, for economic or legal reasons related to the borrower’s deteriorated financial position, we have granted a concession to the borrower that we would not have otherwise granted.

 

Interest Income on Non-performing Loans

 

The following table sets forth the gross interest income that would have been recorded during the year ended December 31, 2005 on non-accrual loans and troubled debt restructurings had such loans been current in accordance with their original contractual terms and the interest income on such loans that was actually included in interest income during the year ended December 31, 2005.

 

    

Year Ended

December 31, 2005


     In German
Offices


   In non-
German
Offices


   Total

     € mn    € mn    € mn

Interest income that would have been recorded in accordance with the original contractual terms

   92    11    103

Interest income actually recorded

   17    10    27

 

Potential Problem Loans

 

Potential problem loans are loans that are not classified as non-accrual loans, loans past due 90 days and still accruing interest or troubled debt restructurings, but where known information about possible credit problems causes us to have doubts as to the ability of the borrower to comply with the present loan repayment terms and which may result in classifying the loans in one of the three categories of non-performing loans described above. The outstanding balance of our potential problem loans was €333 million at December 31, 2005, a decrease of €700 million, or 67.8% from €1,033 million at December 31, 2004. This decline was primarily attributable to the fact that during 2005, and as a result of enhanced credit policies and processes, loans were categorized earlier as non-performing loans than in 2004. Moreover, no potential problem loans were identified within the homogeneous portfolio during 2005. Further, the faster than planned completion of the wind-down of our non-strategic loan portfolio within our IRU division, which was closed effective September 30, 2005, contributed to this development.

 

Each of our potential problem loans has been subject to our normal credit monitoring and review procedures. Effective January 1, 2005, in accordance with our policy on loan loss provisioning, no specific loan loss allowance was recorded on potential problem loans. Hence, no potential problem loans were recorded for the homogeneous portfolio at December 31, 2005. For further information on the split between homogeneous and inhomogeneous

 

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Table of Contents

loan portfolio see “—Summary of Loan Loss Experience.”

 

Approximately 14.1% of our potential problem loans are to private individuals in Germany. The remaining loans are to corporate borrowers in manufacturing, construction, wholesale and retail trade, telecommunication, transportation and other services, including media, utilities, natural resources and other services and other industry sectors. Our potential problem loans to corporate borrowers are diversified across the following geographic regions based on the domicile of the borrower:

 

     At December 31, 2005

 
     Percent of Total
Potential Problem Loans


 

Germany

   55 %

North America

   12 %

Europe (excluding Germany)

   3 %

Latin America

   7 %

 

Foreign Outstandings

 

Cross-border outstandings consist of loans, net of allowances for loan losses, accrued interest receivable, acceptances, interest-bearing deposits with other banks, other interest-bearing investments and other monetary assets that either are recorded in an office that is not in the same country as the domicile of the borrower, guarantor, issuer or counterparty, or are denominated in a currency that is not the local currency of the borrower, guarantor, issuer or counterparty or are net local country claims. Net local country claims are domestic claims recorded in offices outside Germany that are denominated in local or foreign currency and that are not funded by liabilities in the same currency as the claim and recorded in the same office.

 

Our cross-border outstandings are allocated by country based on the country of domicile of the borrower, guarantor, issuer or counterparty of the ultimate credit risk. We set limits on and monitor actual cross-border outstandings on a country-by-country basis based on transfer, economic and political risks.

 

The following table sets forth our cross-border outstandings by geographic location for countries that exceeded 0.75% of the total assets of our banking operations. At December 31, 2005 there were no cross-border outstandings that exceeded 0.50% of the total assets of our banking operations in any country currently facing debt restructurings or liquidity problems that we expect would materially impact the borrowers’ ability to repay their obligations.

 

     At December 31, 2005

    

Government

and Official

Institutions


  

Banks and

Financial

Institutions


   Other(1)

  

Net local

Country

Claims


  

Total Cross-

border

Outstandings


  

Percent

of Total

Assets(2)


   

Cross-border

Commitments(3)


     € mn    € mn    € mn    € mn    € mn          € mn

Country

                                   

United States

   60    1,849    16,704    —      18,613    3.97 %   3,325

United Kingdom

   —      2,672    6,665    84    9,421    2.01 %   9,423

France

   3,443    3,082    3,611    14    10,150    2.17 %   2,765

Italy

   1,826    1,682    1,665    543    5,716    1.22 %   6,428

Netherlands

   1    1,452    2,255    —      3,708    0.79 %   913

Switzerland

   75    2,005    1,420    —      3,500    0.75 %   857

Cayman Islands

   9,656    87    1,114    —      10,857    2.32 %   2,370

Borrowers in all other countries

   158    4,151    5,086    40    9,435    2.01 %   1,759
    
  
  
  
  
  

 

Total cross-border outstandings

   15,219    16,980    38,520    681    71,400    15.24 %   27,840
    
  
  
  
  
  

 

 

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Table of Contents
     At December 31, 2004

    

Government

and Official

Institutions


  

Banks and

Financial

Institutions


   Other(1)

  

Net
local

Country

Claims


  

Total Cross-

border

Outstandings


  

Percent

of Total

Assets(2)


   

Cross-border

Commitments(3)


     € mn    € mn    € mn    € mn    € mn          € mn

Country

                                   

United States

   512    10,619    6,893    —      18,024    3.40 %   542

United Kingdom

   77    6,593    2,208    58    8,936    1.68 %   4,141

France

   5,361    4,252    2,369    —      11,982    2.26 %   4,051

Italy

   163    2,154    519    828    3,664    0.69 %   4,849

Netherlands

   4    3,193    1,623    —      4,820    0.91 %   1,049

Switzerland

   123    1,186    934    13    2,256    0.43 %   1,068

Cayman Islands

   —      2,262    1,146    —      3,408    0.64 %   5,974

Borrowers in all other countries

   5,239    9,436    2,768    100    17,543    3.31 %   1,786
    
  
  
  
  
  

 

Total cross-border outstandings

   11,479    39,695    18,460    999    70,633    13.32 %   23,460
    
  
  
  
  
  

 

 

     At December 31, 2003

    

Government

and Official

Institutions


  

Banks and

Financial

Institutions


   Other(1)

  

Net local

Country

Claims


  

Total Cross-

border

Outstandings


  

Percent

of Total

Assets(2)


   

Cross-border

Commitments(3)


     € mn    € mn    € mn    € mn    € mn          € mn

Country

                                   

United States

   1,776    6,332    4,266    —      12,374    2.48 %   1,850

United Kingdom

   633    4,276    2,051    98    7,058    1.42 %   3,635

France

   2,950    3,437    1,282    13    7,682    1.54 %   2,604

Italy

   1,445    941    155    748    3,289    0.66 %   2,663

Netherlands

   560    4,967    763    —      6,290    1.26 %   1,436

Switzerland

   83    3,388    754    174    4,399    0.88 %   722

Cayman Islands

   15    5,196    474    —      5,685    1.14 %   5,963

Borrowers in all other countries

   3,043    4,439    1,057    148    8,687    1.74 %   630
    
  
  
  
  
  

 

Total cross-border outstandings

   10,505    32,976    10,802    1,181    55,464    11.14 %   19,503
    
  
  
  
  
  

 

(1) Other includes insurance, commercial, industrial, service providers and other corporate counterparties.
(2) Percent of total assets is defined as total cross-border outstandings divided by total assets of our banking operations. The total assets of our banking operations were €468 billion, €530 billion and €498 billion at December 31, 2005, 2004 and 2003, respectively.
(3) Cross-border commitments have been presented separately as they are not included as cross-border outstandings unless utilized.

 

Total cross-border outstandings disclosed above included €292 million of gross loans outstanding to borrowers in Grand Cayman that are also disclosed within the category of non-performing loans at December 31, 2005. At December 31, 2005 and 2004, there were no material cross-border outstandings disclosed above that were also disclosed within the category of potential problem loans.

 

 

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Summary of Loan Loss Experience

 

The following discussion of loan loss allowances refers to the banking operations of the Dresdner Bank, which represents substantially all of our banking segment, as our other banking operations have historically not been significant.

 

We determine an allowance for loan losses in our loan portfolio that represent management’s estimate of probable losses at the balance sheet date. An allowance indicates that it is very likely that the obligor/counterparty/borrower will not be able to partly, or entirely, fulfill the contractually agreed-upon principal and interest terms.

 

The loan portfolio is divided into a homogenous and an inhomogenous portion. The homogeneous portion includes only loans in the domestic private banking business.

 

We calculate an allowance for each of the following risks that are allocable to identified loans or groups of loans in our portfolio:

 

    a specific loan loss allowance for impaired loans within the inhomogenous portfolio;

 

    a portfolio loan loss allowance for loans within our homogeneous portfolio;

 

    a general loan loss allowance for impairments that have been incurred but are not yet identified within the inhomogenous portfolio; and

 

    an allowance for transfer risk, or country risk allowance.

 

The loan loss allowance for the homogenous portfolio is established on a portfolio basis, while the inhomogenous portfolio is assessed both with respect to loan losses on a single transaction basis and allowances for incurred but not identified risks.

 

In order to avoid layering or double counting of specific, portfolio, general and country risk loan loss allowances, only those loans that have not been deemed impaired under International Accounting Standards Board’s International Accounting Standard (or “IAS”) 39, Financial Instruments: Recognition and Measurement and the Financial Accounting Standards Board’s Statement of Financial Accounting Standard (or “SFAS”) 114, Accounting by Creditors for Impairment of a Loan, or loans from countries for which no country risk allowance exists, are included as part of the portfolio used to establish the general loan loss allowance. We do not maintain any additional reserves.

 

Specific Loan Loss Allowance

 

We evaluate our loans based on portfolio segmentation, classified either as homogeneous or inhomogeneous. Loans included within DrKW and Corporate Banking divisions are classified as inhomogeneous, and are therefore evaluated individually. Loans to borrowers within the Personal Banking and Private and Business Banking divisions, which are greater than €1 million, are also classified as inhomogeneous. All remaining loans form the homogeneous portfolio and are reviewed together. Prior to 2003, we evaluated each of our loans individually. Loans for which a specific loan loss allowance had been previously established were evaluated on an individual basis if the existing specific loan loss allowance was €0.5 million or more. Loans for which a specific loan loss allowance of less than €0.5 million had been previously established were aggregated into homogeneous portfolios by collateral types (portfolio approach) for evaluation under IAS 39 and SFAS 114.

 

A specific loan loss allowance is established to provide for specifically identified counterparty risks within the inhomogeneous loan portfolio. Loans are identified as impaired if it is probable that borrowers are no longer able to make their contractually agreed-upon interest and principal payments. We calculate the specific loan loss allowance based on the guidance provided in IAS 39 and SFAS 114 according to which an impaired loan should be recorded at its estimated recoverable amount either directly, or through use of an allowance account by recording a charge to the income statement. The estimated recoverable amount is the present value of expected future cash flows discounted at the loan’s original effective interest rate, or if the loan is secured by collateral and foreclosure on the loan is probable, the fair value of the collateral, or if there is an observable market for the loan, the market value of the loan. If the amount of the impairment subsequently increases or decreases due to an event occurring after the initial impairment measurement, a change in the allowance is recognized in earnings by a charge or a credit to net loan loss provisions.

 

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Table of Contents

We use an internal credit rating system implemented in 2002, to assign ratings from 1 to 16 to each loan within our portfolio, on the basis of specific quantitative and qualitative customer criteria, including financial condition, historical earnings, management quality, and general industry data, among others. Loans that are classified in the rating categories 15 and 16 are loans that are deemed to be impaired under IAS 39 and SFAS 114. In addition, loans that carry ratings of 13 and 14 are reviewed for potential impairment. See “Quantitative and Qualitative Disclosures about Market Risk—Risk Controlling in our Banking Business” for further information.

 

Portfolio Loan Loss Allowance

 

Beginning in 2005, we established loan loss allowances for all loans allocated to the homogenous portfolio within our Personal Banking and Private & Business Banking divisions (e.g. for mortgage loans and installment loans) with gross risk below €1 million by using the portfolio approach. This approach is based on historically derived loss rates for the corresponding sub-portfolio and is dependent upon the respective products as well as geared to the individual overdraft status. The continuous consideration of potential losses helps to ensure an ongoing recalibration of the underlying model. The resulting risk allowance embraces incurred but unidentified losses for loans which are performing properly. Prior to 2005, we determined the impairment allowance on the homogeneous portfolios by applying a back-testing approach.

 

General Loan Loss Allowance

 

General loan loss allowances are established to provide for incurred but unidentified losses that are inherent in the inhomogeneous loan portfolio as of the relevant balance sheet date. General allowances for loan losses are established for loans that are impaired but not yet identified as impaired due to the time lag between the occurrence of an impairment event and the detection of that event by our credit risk monitoring systems and controls. Such a time lag may occur due to intervals between impairment tests, ratings reviews and/or a borrower’s financial reporting.

 

The amount of the general loan loss allowance is based on historical loan loss experience, loss ratios as well as management’s assessment of current events and economic conditions when determing the general loan loss allowance. This approach includes the consideration of the average period for the identification of impaired loans (loss emergence period).

 

Country Risk Allowance

 

Country risk allowances are established for transfer risk. Transfer risk is a measure of the likely ability of a borrower in a certain country to repay its foreign currency-denominated debt in light of the economic or political situation prevailing in that country. We establish a country risk allowance for loan exposures if serious doubts exist regarding a counterparty’s ability to comply with the repayment terms due to the economic or political situation prevailing in the country of the domicile of the counterparty. We believe that this risk represents an additional risk above and beyond the normal counterparty risk.

 

Country risk allowances are based on our country rating system that incorporates current and historical economic, political and other data to categorize countries by risk profile. Using this system, we define country risk ratings from 1 to 16. Country risk allowances are established only for loans to borrowers in countries that are classified in country risk rating categories 10 to 16 and, in certain circumstances, country risk rating categories 8 and 9. See “Quantitative and Qualitative Disclosures about Market Risk—Risk Controlling in our Banking Business” for further information.

 

Country risk allowances apply to cross-border loan transactions, acceptances and various forms of import and export financing exceeding one year, such as guarantees and commercial letters of credit. Country risk allowances are not calculated for traded products or off-balance sheet products. We deduct the amount of collateral and guarantees provided by parties domiciled in countries for which no country risk allowances are assessed, and loans made in local currency, from the portfolio prior to determining the country risk allowance. In order to avoid layering or double counting of both specific loan loss allowances and country risk allowances, the amount of the specific loan loss allowances are also deducted from the portfolio prior to determining the country risk allowance.

 

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Table of Contents

Self-Correcting Mechanisms

 

The principal self-correcting mechanism used to reduce the difference between estimated and actual observed losses is our practice of basing loss estimates on our historical loss experience. Where actual observed losses differ from estimated losses, information relating to the actual observed losses is incorporated into the historical statistical data on which we base our estimates and is accordingly reflected in our subsequent estimated losses. Similarly, the credit default models that we use in calculating the general loan loss allowance are updated to incorporate newly available statistical evidence on impairment into the default calculations.

 

In addition, Dresdner Bank reviews its loss estimates on a quarterly basis, and, where such estimates differ from actual observed losses, makes appropriate adjustment to the general loan loss allowance and/or the country risk allowance.

 

Movements in Loan Loss Allowance

 

Our total loan portfolio increased by €1,543 million, or 1.5%, to €101,233 million at December 31, 2005 from €99,690 million at December 31, 2004. As a result of the faster than planned completion of the wind-down of our non-strategic loan portfolio within our IRU division, which was closed effective September 30, 2005, the non-performing loans and potential problem loans were significantly reduced during 2005. Our non-performing loans decreased by €3,709 million, or 58.1%, and potential problem loans decreased by €700 million, or 67.8%, from December 31, 2004 to December 31, 2005.

 

Net releases from allowances of €49 million are predominantly due to the reductions in our non-strategic business within our IRU division and the significantly improved risk profile of Dresdner Bank’s strategic loan portfolio. Recoveries of €103 million, however, remain relatively consistent with recoveries in prior years.

 

As previously discussed, when we establish a specific loan loss allowance in relation to a particular loan in the inhomogeneous loan portfolio, that loan is removed from the portfolio of loans that is used as a basis for calculating the general loan loss allowance and the country risk allowance. The establishment of a specific loan loss allowance may therefore result indirectly in a decrease in the general loan loss allowance and the country risk allowance, but no direct reallocation of allowances occurs.

 

The establishment of the portfolio loan loss allowance for evaluation of the homogeneous portfolio caused a shift to the general loan loss allowance. As a result, our general loan loss allowance increased by €54 million, or 9.6 %, during 2005 to €619 million at December 31, 2005, compared to €565 million at December 31, 2004.

 

We believe the level of our total loan loss allowance is adequate in comparison to our historical net loan loss experience. The average credit rating of loans in our portfolio based on our internal rating system has constantly improved in recent years. Due to the accelerated reduction of highly provisioned, mainly non-strategic loans, our total loan loss allowance as a percentage of total loans has decreased to 1.6% at December 31, 2005, compared to 4.1% at December 31, 2004, and 4.9% at December 31, 2003.

 

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Table of Contents

The following table sets forth an analysis of the loan loss allowances established for our recognized loan volume as of the dates specified. It differentiates by industry sector and geographic category of the borrowers, and the percentage of our total loan portfolio accounted for by those industry and geographic categories. The allocation between German and non-German components is based on the domicile of the borrower.

 

     At December 31,

 
     2005

    2004

    2003

    2002

    2001

 
     Amount

    Percent of
total loans
in each
category to
total loans


    Amount

  Percent of
total loans
in each
category to
total loans


    Amount

  Percent of
total loans
in each
category to
total loans


    Amount

  Percent of
total loans
in each
category to
total loans


    Amount

  Percent of
total loans
in each
category to
total loans


 
     € mn           € mn         € mn         € mn         € mn      

German:

                                                    

Corporate:

                                                    

Manufacturing

   105     4.9 %   447   6.5 %   687   6.9 %   884   7.2 %   884   5.7 %

Construction

   63     0.6 %   230   0.8 %   256   0.9 %   301   0.9 %   353   1.0 %

Wholesale and retail trade

   63     4.6 %   271   4.1 %   382   3.7 %   426   4.5 %   448   3.8 %

Financial institutions (excluding banks) and insurance companies

   21     3.1 %   83   2.0 %   94   2.6 %   171   2.1 %   133   2.6 %

Banks

   1     1.7 %   2   1.2 %   1   0.2 %   7   1.1 %   5   0.3 %

Service providers

   187     10.3 %   537   12.0 %   767   11.2 %   827   10.2 %   982   12.2 %

Other

   41     2.1 %   34   1.9 %   39   2.0 %   108   2.2 %   59   2.1 %
    

       
       
       
       
     

Corporate total

   481     27.3 %   1,604   28.5 %   2,226   27.5 %   2,724   28.1 %   2,864   27.7 %

Public authorities

   —       0.3 %   —     0.5 %   —     0.5 %   —     0.4 %   —     0.4 %

Private individuals (including self-employed professionals)

   115     38.5 %   1,211   39.6 %   1,409   35.3 %   1,702   31.8 %   2,090   33.8 %
    

       
       
       
       
     

German total

   596     66.1 %   2,815   68.6 %   3,635   63.2 %   4,426   60.3 %   4,954   61.9 %
    

       
       
       
       
     

Non-German:

                                                    

Corporate:

                                                    

Manufacturing, construction, wholesale and retail trade and service providers

   51     10.4 %   206   9.1 %   492   12.4 %   659   16.1 %   1,201   20.4 %

Financial institutions (excluding banks) and insurance companies

   12     10.4 %   133   8.9 %   262   5.7 %   33   4.7 %   96   5.5 %

Banks

   59     5.3 %   14   5.1 %   175   3.2 %   244   2.5 %   118   2.7 %

Other

   8     5.0 %   77   4.5 %   157   5.0 %   321   6.8 %   247   2.1 %
    

       
       
       
       
     

Corporate total

   130     31.2 %   430   27.7 %   1,086   26.3 %   1,257   30.0 %   1,662   30.7 %

Public authorities

   —       0.8 %   —     1.8 %   8   0.5 %   14   1.5 %   15   1.8 %

Private individuals (including self-employed professionals)

   26     1.8 %   47   1.9 %   143   9.9 %   182   8.2 %   211   5.6 %
    

       
       
       
       
     

Non-German total

   156     33.9 %   477   31.4 %   1,237   36.8 %   1,453   39.7 %   1,888   38.1 %
    

       
       
       
       
     

Total specific loan loss allowances

   752     100.0 %   3,292   100.0 %   4,872   100.0 %   5,879   100.0 %   6,842   100.0 %

Country risk allowances

   225           252         259         340         443      

General loan loss allowances

   619 (1)         565         589         747         753      
    

       
       
       
       
     

Total loan loss allowances

   1,596           4,109         5,720         6,966         8,038      
    

       
       
       
       
     

(1) Includes a portfolio loan loss allowance.

 

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Table of Contents

The following table sets forth the movements in the loan loss allowance according to the industry sector and geographic category of the borrower. The allocation between German and non-German components is based on the domicile of the borrower.

 

     Year Ended December 31,

 
     2005

    2004

    2003

    2002

    2001

 
     € mn     € mn     € mn     € mn     € mn  

Total allowances for loan losses at beginning of the year

   4,109     5,720     6,966     8,038     7,123  

Gross charge-offs:

                              

German:

                              

Corporate:

                              

Manufacturing

   366     217     146     314     66  

Construction

   193     53     72     138     16  

Wholesale and retail trade

   233     169     113     206     54  

Financial institutions (excluding banks) and insurance companies

   87     31     28     74     17  

Banks

   —       —       7     11     —    

Service providers

   440     486     234     327     103  

Other

   21     21     53     117     16  
    

 

 

 

 

Corporate total

   1,340     977     653     1,187     272  

Private individuals (including self-employed professionals)

   1,156     404     590     348     211  
    

 

 

 

 

German total

   2,496     1,381     1,243     1,535     483  
    

 

 

 

 

Non-German:

                              

Corporate:

                              

Manufacturing, construction, wholesale and retail trade and service providers

   157     228     232     270     516  

Financial institutions (excluding banks) and insurance companies

   28     46     9     12     23  

Banks

   1     70     52     6     13  

Other

   22     107     391     28     2  
    

 

 

 

 

Corporate total

   208     451     684     316     554  

Public authorities

   —       4     1     —       —    

Private individuals (including self-employed professionals)

   22     14     43     38     49  
    

 

 

 

 

Non-German total

   230     469     728     354     603  
    

 

 

 

 

Total gross charge-offs

   2,726     1,850     1,971     1,889     1,086  
    

 

 

 

 

Recoveries:

                              

German:

                              

Corporate:

                              

Manufacturing

   —       3     1     —       1  

Wholesale and retail trade

   —       2     —       —       —    

Service providers

   27     4     4     —       —    

Other

   —       1     —       1     —    
    

 

 

 

 

Corporate total

   27     10     5     1     1  

Private individual (including self-employed professionals)

   61     34     24     28     25  
    

 

 

 

 

German total

   88     44     29     29     26  
    

 

 

 

 

Non-German:

                              

Corporate:

                              

Manufacturing, construction, wholesale and retail trade and service providers

   2     9     24     57     3  

Financial institutions (excluding banks) and insurance companies

   1     1     —       1     7  

Banks

   —       7     —       —       4  

Other

   8     44     20     32     2  
    

 

 

 

 

Corporate total

   11     61     44     90     16  

Public authorities

   —       5     —       —       —    

Private individuals (including self-employed professionals)

   4     5     —       56     6  
    

 

 

 

 

Non-German total

   15     71     44     146     22  
    

 

 

 

 

Total recoveries

   103     115     73     175     48  
    

 

 

 

 

Net charge-offs(1)

   2,623     1,735     1,898     1,714     1,038  
    

 

 

 

 

Additions to allowances charged to operations

   (49 )   272     979     1,902     1,901  

(Decreases)/Increases in allowances due to (dispositions)/acquisitions of Allianz Group companies and other increases/(decreases)

   122     (106 )(2)   (55 )   (1,085 )(3)   12  

Foreign exchange translation adjustments

   37     (42 )   (272 )   (175 )   40  
    

 

 

 

 

Total allowances for loan losses at end of the year(1)

   1,596     4,109     5,720     6,966     8,038  
    

 

 

 

 

Ratio of net charge-offs during the year to average loans outstanding during the year

   1.79 %   1.23 %   1.22 %   0.93 %   0.46 %

(1) The increase in net charge-offs and the decline of the total allowances for loan losses at the end of the year is primarily attributable to the reduction of the portfolio within our non-strategic business.
(2) In 2004, the impact of dispositions on our allowances was primarily attributable to the sale of our banking subsidiary Entenial in January 2004.
(3) On August 1, 2002, we merged our mortgage banking subsidiary, Deutsche Hyp, which was a part of our former Other division, with the mortgage banking subsidiaries of Commerzbank and Deutsche Bank into a single entity, Eurohypo. The assets and liabilities of the former Deutsche Hyp were accordingly deconsolidated as of August 1, 2002. Therefore, in 2002 the impact of dispositions on our allowances was primarily related to the deconsolidation of Deutsche Hyp.

 

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When we determine that a loan is uncollectible, the loan is charged off against any existing specific loss allowance or directly recognized as expense in the income statement. Subsequent recoveries, if any, are recognized in the income statement as a credit to the net loan loss provisions. Since 2000, we have charged-off loans when, based on management’s judgment, all economically sensible means of recovery have been exhausted. Our determination considers information such as the age of specific loss allowances and expected proceeds from liquidation of collateral and other repayment sources. Prior to 2000, we charged-off loans only when all legal means of recovery had been exhausted, for example only after completion of bankruptcy proceedings. The change in practice has affected both the timing and amount of charge-offs in the years 2001 to 2003, as well as the level of our non-accrual loans in 2002 and 2003. See “—Risk Elements—Non-performing Loans.”

 

Deposits

 

The following table sets forth the average balances and the average interest rates on deposit categories in excess of ten percent of average total deposits of our banking operations. The allocation between German and non-German components is based on the location of the office that recorded the transaction.

 

 

     Year Ended December 31,

 
     2005

    2004

    2003

 
     Average
Balance


   Average
Rate


    Average
Balance


   Average
Rate


    Average
Balance


   Average
Rate


 
     € mn          € mn          € mn       

German:

                                 

Non-interest-bearing demand deposits

   26,805          29,979          26,796       

Interest-bearing demand deposits

   36,274    2.7 %   21,004    4.1 %   34,578    3.7 %

Savings deposits

   4,768    2.5 %   4,732    2.7 %   4,720    2.7 %

Time deposits

   86,911    2.7 %   118,936    2.1 %   104,197    2.1 %
    
        
        
      

German total

   154,758          174,651          170,291       
    
        
        
      

Non-German:

                                 

Non-interest-bearing demand deposits

   7,310          8,334          5,355       

Interest-bearing demand deposits

   11,769    5.0 %   7,927    4.5 %   11,254    3.9 %

Savings deposits

   513    2.1 %   594    1.9 %   751    2.5 %

Time deposits

   52,113    3.7 %   45,903    3.6 %   38,102    3.0 %
    
        
        
      

Non-German total

   71,705          62,758          55,462       
    
        
        
      

Total deposits

   226,463          237,409          225,753       
    
        
        
      

 

The aggregate amount of deposits by foreign depositors in our German offices was €48,675 million, €42,272 million and €54,894 million at December 31, 2005, 2004 and 2003 respectively.

 

Time Deposits

 

The following table sets forth the balance of time certificates of deposit and other time deposits in the amount of €100,000 or more issued by our German offices by time remaining to maturity at December 31, 2005.

 

     At December 31, 2005

    

Time Deposits of

€100,000 or more


     € mn

Maturing in three months or less

   56,871

Maturing in over three months through six months

   1,994

Maturing in over six months through twelve months

   2,886

Maturing in over twelve months

   5,699
    

Total

   67,450
    

 

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Table of Contents

The amount of time deposits of €100,000 or more issued by our non-German offices was €38,423 million at December 31, 2005.

 

Short-term Borrowings

 

Short-term borrowings are borrowings with an original maturity of one year or less. Short-term borrowings are included within liabilities to customers, liabilities to banks and certificated liabilities.

 

Securities sold under agreements to repurchase and negotiable certificates of deposit are the only significant categories of short-term borrowings within our banking operations.

 

The following table sets forth certain information relating to the categories of our short-term borrowings.

 

 

     Year Ended December 31,

 
     2005

    2004

    2003

 
     € mn     € mn     € mn  

Securities sold under repurchase agreements(1):

                  

Balance at the end of the year

   89,389     121,474     92,629  

Monthly average balance outstanding during the year

   119,584     128,032     76,565  

Maximum balance outstanding at any period end during the year

   148,231     157,576     92,629  

Weighted average interest rate during the year

   3.9 %   2.4 %   3.1 %

Weighted average interest rate on balance at the end of the year

   2.4 %   1.9 %   2.1 %

Negotiable certificates of deposit:

                  

Balance at the end of the year

   25,353     23,037     16,196  

Monthly average balance outstanding during the year

   25,125     21,002     17,351  

Maximum balance outstanding at any period end during the year

   27,289     23,155     25,384  

Weighted average interest rate during the year

   1.9 %   1.9 %   2.4 %

Weighted average interest rate on balance at the end of the year

   3.0 %   2.5 %   2.1 %

(1) Excludes collateral received for securities lending transactions.

 

Regulation and Supervision

 

Our insurance, banking and asset management businesses are subject to detailed, comprehensive regulation and supervision in all countries in which we do business. In addition, certain EU regulations, which are directly applicable in the EU member states and EU directives, that need to be implemented through local legislation, have had and will continue to have a significant impact on the regulation of the insurance, banking and asset management industries in EU member states. The following discussion addresses significant aspects of the regulatory schemes to which our businesses are subject.

 

Allianz AG

 

Allianz AG operates as a reinsurer and holding company for our insurance, banking and asset management operating entities. As such, Allianz AG is supervised and regulated by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or “BaFin”). The BaFin monitors and enforces regulatory standards for banks, financial services institutions and insurance companies by supervising their activities in the financial markets. The BaFin is also responsible for the supervision of the Allianz Group as a financial conglomerate.

 

Effective January 2005, reinsurance companies in Germany such as Allianz AG are subject to specific legal requirements regarding assets covering their technical reserves. These assets are required to be appropriately diversified to prevent a reinsurer from relying excessively on any particular asset. The introduction of these requirements anticipates the implementation of the EU Reinsurance Directive (2005/68/EC) which was adopted in November 2005. The implementation of the directive’s provisions that have not yet been implemented in Germany effective January 2006 is expected to occur by the end of 2006. Although Allianz AG expects to meet the new requirements once fully implemented, there can be no assurances as to the impact on Allianz AG of any future amendments to or changes in the interpretation of the laws and regulations regarding assets covering technical reserves of reinsurance companies, which could require Allianz AG to change the composition of its asset portfolio covering its technical reserves or take other appropriate measures.

 

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Allianz AG is required to submit several annual and interim reports, including certain accounting documents, to the BaFin. The BaFin also reviews transactions between Allianz AG and its subsidiaries, including reinsurance relationships and cost sharing agreements.

 

Regulations for Financial Conglomerates

 

In December 2004, Germany adopted a law, implementing the EU Financial Conglomerates Directive (2002/87/EC). The law provides for additional supervision of financial conglomerates in the following five areas: (i) assessment of capital requirements of financial conglomerates on a group level, (ii) supervision of risk concentration, (iii) supervision of intra-group transactions, (iv) assessment of the good repute and professional competence of the management of a financial conglomerate’s holding company and (v) establishment of appropriate internal controls to ensure compliance with the aforementioned components of supervision. The Allianz Group is a financial conglomerate with in the scope of the directive and the related German law.

 

In the United States, the Gramm-Leach-Bliley Financial Modernization Act of 1999 (or “Gramm-Leach-Bliley Act”) substantially eliminated barriers separating the banking, insurance and securities industries in the United States. The law allows the formation of diversified financial services firms that can provide a broad array of financial products and services to their customers. In addition, the law permits insurers and other financial services companies to acquire banks. On June 30, 2004, Allianz AG acquired “financial holding company” status pursuant to the Gramm-Leach-Bliley Act.

 

Regulation by Sector

 

Financial services providers operating in the insurance, banking or asset management sectors are subject to supplementary supervision specific to their respective sectors. The regulatory framework is established by local law which is in part harmonized as a result of EU directives regulating specific areas.

 

Insurance

 

European Union

 

The EU has adopted a series of insurance directives on life insurance and direct insurance other than life insurance, which have resulted in significant deregulation of the EU insurance markets. Under the directives, the regulation of insurance companies, including insurance operations outside their respective home countries (whether direct or through branches), is the responsibility of the home country insurance regulatory authority. As a result of the home country control principle, the EU insurance directives generally permit an insurance company licensed in any jurisdiction of the EU to conduct insurance business, directly or through branches, in all other jurisdictions of the EU, without being subject to additional licensing requirements in these countries. In EU member states, insurance contracts will be subject to laws and regulations implementing the so-called anti-discrimination EU directives. In the insurance industry, differences in premiums and benefits of polices will not be permitted unless they are based on actuarial or statistical data. The impact of the directives on Allianz Group companies in EU member states depends on how the directives will be implemented by member states and how courts will interpret the provisions. Consequently, at this stage, we cannot assess the potential impact of the directives.

 

Germany

 

German insurance companies are subject to a comprehensive system of regulation under the German Insurance Supervision Act. The BaFin monitors and enforces compliance with German insurance laws, applicable accounting standards, technical administrative regulations, and investment and solvency provisions. Under the Insurance Supervision Act, German insurance companies are subject to detailed requirements with respect to the administration of their assets and liabilities. In general, the actuarial and claims reserves of each insurer must be adequate to allow the insurer to fulfill its contractual commitments to pay upon receipt of claims. To that end, insurers must maintain a certain solvency margin (own funds). This solvency margin is monitored by the BaFin, which has the authority to order the company to take certain action if it considers the solvency margin inadequate to assure the company’s sound financial position.

 

On January 15, 2003, the EU Insurance Mediation Directive (2002/92/EC) became effective. The directive introduces obligations regarding information of the customers and the documentation of sales of insurance policies. Once implemented in

 

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Germany, the regulations may lead to higher costs of administration and may increase the risk of litigation concerning selling practices. The local implementation of this directive in Germany will start soon.

 

Furthermore, insurance companies that form part of an insurance group, as defined by the German law implementing the EU Financial Conglomerates Directive, are subject to regulatory requirements, including the following three components: (i) the supervision of intra-group transactions, (ii) the monitoring of solvency on a consolidated basis and (iii) the establishment of appropriate internal controls for providing the BaFin with information as part of its monitoring of the first two components.

 

In addition, in the health and life sectors, German insurance companies are required to disclose to the BaFin the principles they use to set premium rates and establish actuarial provisions and are required to appoint a chief actuary responsible for reviewing and ensuring the appropriateness of actuarial calculation methods. In addition, restrictions apply to the investment of German life and health insurance companies’ assets. The BaFin closely monitors the calculation of actuarial reserves and the allocation of assets covering actuarial reserves. German law also requires that private health insurance companies offer certain kinds of health insurance, including private compulsory long-term care insurance, to policyholders with substitutive health insurance.

 

Other European Countries

 

In other European jurisdictions where our insurance operations are located, insurance companies are subject to laws and regulations relating to, among other things, statutory accounting principles, asset management, the adequacy of actuarial and claims reserves, solvency margins, minimum capital requirements, internal governance and periodic reporting requirements. The compliance with these laws and regulations, which are in part based on EU directives providing a certain level of harmonization, is enforced by the relevant regulatory and supervisory authority in each jurisdiction in which we operate, including, among others, the Autorité de Contrôle des Assurances et des Mutuelles in France, the Institute for the Supervision of Private and Collective Interest Insurance in Italy, the Swiss Federal Office of Private Insurance in Switzerland and the Financial Services Authority in the United Kingdom. These regulators have supervisory as well as disciplinary authority over our insurance operations in these jurisdictions.

 

United States

 

Our insurance subsidiaries in the United States are subject to comprehensive and detailed regulation of their activities under U.S. state and federal laws.

 

In addition, U.S. property-casualty and life insurance companies are subject to insurance regulation and supervision in the individual states in which they transact business. Supervisory agencies in each state have broad powers to grant or revoke licenses to transact business, regulate trade practices, license agents, approve insurance policy terms and certain premium rates, set standards of solvency and reserve requirements, determine the form and content of required financial reports, examine insurance companies and prescribe the type, concentration, and amount of investments permitted. Insurance companies are subject to a mandatory audit every three to five years by state regulatory authorities, depending on the state of domicile, and every year by independent auditors. In addition, state Attorneys General have broad authority to investigate business practices within their respective states and to initiate legal action as they deem appropriate.

 

Although the federal government generally does not directly regulate the insurance business, many federal laws affect the insurance business in a variety of ways, including the Federal Fair Credit Reporting Act relating to the privacy of information used in consumer reports, the “Do Not Call” laws and the USA PATRIOT Act of 2001 relating to, among other things, the establishment of anti-money laundering programs.

 

There are a number of proposals for regulation which may significantly affect the U.S. market, such as proposals relating to the establishment of an optional federal charter for insurance and reinsurance companies; employee benefits regulations; changes to pension and retirement savings laws; asbestos litigation; class action litigations; taxation; disclosure requirements; and the creation of private accounts within the Federal social security system. All of these matters are very much in a preliminary stage and the impact upon our operations in the United States remains unknown.

 

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Pursuant to industry-wide investigations, several of our U.S. subsidiaries have received requests for information from state insurance regulatory authorities and attorneys general relating to contingent commissions and other industry practices. These activities have led to joint actions and inquiries by these governmental agencies, in the course of which carriers and intermediaries have entered into settlements that may signal a shift in the industry towards more transparency with respect to intermediary compensation. Our U.S. subsidiaries are cooperating fully in these inquiries.

 

Other Countries

 

Our insurance operations in countries other than those discussed above are also subject to detailed regulation and supervision by authorities in the relevant jurisdictions, including but not limited to such matters as corporate governance, solvency, minimum capital, policy forms and rates, reserving, investment and financial practices, and marketing, distribution and sales activities.

 

Banking, Asset Management and other Investment Services

 

European Union

 

The supervision of banking, asset management and other investment services in the EU member states is the exclusive responsibility of national authorities within the individual member states. However, the rules governing the regulation and supervision of these financial services have been harmonized by a number of EU directives, which have been or will be implemented in the member states. These directives mostly focus on establishing harmonized minimum capital requirements and the freedom to provide services within the member states on the basis of harmonized minimum requirements for the organization and conduct of business. As a result of this harmonization, banking, asset management or investment service licenses granted in one EU member state are to be recognized in all other member states.

 

Under the EU Markets in Financial Instruments Directive (2004/39/EC), EU member states have to ensure that financial institutions that are members of a securities exchange in one member state are eligible for admission to trading on the exchanges of all other member states. Another field of harmonization is the offering and the trading of securities. The EU Prospectus Directive (2003/71/EC), which came into force on December 31, 2003, provides for harmonized rules with respect to the contents and filing of prospectuses for publicly traded securities. In addition, the EU Transparency Directive (2004/109/EC) harmonizes the rules for disclosure of financial and other information that publicly traded companies have to provide. The EU Market Abuse Directive (2003/6/EC) sets forth certain rules against market manipulation and insider dealing. There are also EU directives harmonizing rules governing investment fund management and investor protection.

 

Germany

 

Our banking and other financial services activities in Germany are extensively supervised and regulated by the BaFin and the German Central Bank (Deutsche Bundesbank or “Bundesbank”) in accordance with the German Banking Act (Kreditwesengesetz). The BaFin monitors compliance with, among other things, capital adequacy and liquidity requirements, leading limits, restrictions on certain activities imposed by the German Banking Act and coverage by adequate capital of market risk and counterparty risk associated with securities and foreign exchange transactions of banks. The BaFin has the authority to request information and documentation on business matters from the banks and requires banks to file periodic reports. If the BaFin discovers irregularities, it has a wide range of enforcement powers.

 

With respect to capital adequacy requirements under German banking regulation, each bank’s ratio of Liable Capital to risk-weighted assets and certain off-balance sheet items must be at least 8% at the end of each business day in order to cover credit risks. This ratio is known as the Solvency Ratio. Capital adequacy rules must also be met on a consolidated basis by entire banking groups.

 

In June 2004, the Basle Committee released the “Revised Framework” (“Basle II”) to replace the 1988 capital accord with a new capital accord. The

 

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two principal objectives of Basle II for measuring risk are (i) to align capital requirements more closely with the underlying risks; and (ii) to introduce a capital charge for operational risk (comprising, among other things, risks related to certain external factors, as well as to technical errors and errors of employees). Basle II is to be implemented by the credit institutions in the various countries which participate in the Basle Committee by the beginning of 2007 at the earliest. A bank must report its large credits to the Bundesbank and must notify the BaFin and the Bundesbank if it exceeds certain ceilings. Credits exceeding these ceilings may only be granted with the approval of the BaFin, and the amount exceeding these ceilings must be covered by capital of the bank.

 

In accordance with the German Deposit Guarantee Act (Einlagensicherungs- und Anlegerentschädigungsgesetz), the Bundesverband deutscher Banken, the association of the German private sector commercial banks, established a company known as the Compensation Institution (Ent-schädigungseinrichtung deutscher Banken GmbH) to carry out and ensure the deposit guarantee scheme of the German private sector commercial banks. The Deposit Guarantee Act provides certain guarantees for depositors and for claims resulting from securities transactions by customers. In addition, the banking industry has voluntarily set up various protection funds for the protection of depositors such as the Einlagensicherungsfonds, a deposit protection association with a fund which covers most liabilities to the majority of creditors up to a certain amount, as describes by the funds articles of association.

 

Other European Countries

 

In other European countries, our banking, asset management and other investment services operations are subject to laws and regulations relating to, among other things, listed financial instruments, capital adequacy requirements, shareholdings in other companies, rules of conduct and limitation of risk. Our operations are also subject to ongoing disclosure obligations and may be subject to regulatory audits.

 

United States

 

Allianz Investment Company, LLC., Allianz Global Investors of America L.P., Pacific Investment Management Company LLC, Oppenheimer Capital, Nicholas-Applegate, RCM Capital Management LLC and other financial services subsidiaries of Allianz AG in the United States are registered as investment advisers under the Investment Advisers Act of 1940. Many of the investments managed by these financial services subsidiaries, including a variety of mutual funds and other pooled investment vehicles, are registered with the SEC under the Investment Company Act of 1940. The investment advisory activities of these financial services subsidiaries are subject to various U.S. federal and state laws and regulations. These laws and regulations relate to, among other things, limitations on the ability of investment advisers to charge performance-based or non-refundable fees to clients, record-keeping and reporting requirements, disclosure requirements, limitations on principal transactions between an adviser or its affiliates and advisory clients, as well as general anti-fraud provisions.

 

Federal and state regulators have focused on the mutual fund and variable insurance product industries. As a result of publicity relating to widespread perceptions of industry abuses, there have been numerous proposals for legislative and regulatory reforms, including mutual fund governance, new disclosure requirements concerning mutual fund share classes, compensation arrangements, commission breakpoints, revenue sharing, advisory fees, market timing, late trading, portfolio pricing, annuity products, hedge funds, regulation and distribution of equity index products, and other issues. It is difficult to predict at this time whether changes resulting from new laws and regulations will affect the industries or our investment management businesses, and, if so, to what degree.

 

Some U.S. financial service subsidiaries of Allianz AG are also registered with the SEC as broker-dealers under the Securities Exchange Act of 1934 and are subject to extensive regulation. In addition, some of these subsidiaries are members of, and subject to regulation by, self-regulatory organizations such as the National Association of Securities Dealers and, in the case of Dresdner Kleinwort Wasserstein Securities LLC, also the New York Stock Exchange. The scope of broker-dealer regulation covers matters such as capital requirements, the use and safekeeping of customers’ funds and securities, advertising and other communications with the public, record-keeping and reporting requirements, supervisory and

 

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organizational procedures intended to assure compliance with securities laws and rules of the self- regulatory organizations and to prevent improper trading on material non-public information, employee-related matters, limitations on extensions of credit in securities transactions, and clearance and settlement procedures.

 

Dresdner Bank provides commercial banking services in the Unites States through its New York and Grand Cayman Branches. Dresdner Bank’s U.S. banking activities are accordingly subject to regulation, supervision and examination by the Federal Reserve Board under the U.S. Bank Holding Company Act of 1956, as amended (or “BHCA”), and the International Banking Act of 1978, as amended (or “IBA”). The New York branch of Dresdner Bank is licensed, supervised and examined by the New York State Banking Department and is also supervised and examined by the Federal Reserve Bank of New York.

 

The Gramm-Leach-Bliley Act substantially eliminated barriers separating the banking, insurance and securities industries in the United States. According to this law, a bank holding company that has effectively elected to become a financial holding company under the applicable regulation may conduct business activities either directly or through it subsidiaries that were previously prohibited for bank holding companies. Dresdner Bank became a financial holding company under the Gramm-Leach-Bliley Act in 2000. To qualify as a financial holding company, a bank is required to meet the criteria of being well-managed and well-capitalized. See “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Resources.” As a result of its ownership of Dresdner Bank, Allianz AG is also subject to the supervision of the Federal Reserve Board under the BHCA and the IBA and has elected to be treated as a financial holding company. Allianz AG’s status as a financial holding company became effective on June 30, 2004.

 

Other Countries

 

Our financial services businesses in countries other than those discussed above are also subject to detailed regulation and supervision by authorities in the relevant jurisdictions, including, but not limited to such matters as corporate governance, capital adequacy, investment advisory and securities trading activities, and mutual fund management and distribution activities.

 

ITEM 4A. Unresolved Staff Comments

 

None.

 

ITEM 5. Operating and Financial Review and Prospects

 

You should read the following discussion in conjunction with our consolidated financial statements including the notes thereto. We prepare our consolidated financial statements in accordance with IFRS, which differ in certain significant respects from U.S. GAAP. For a description of the significant differences between IFRS and U.S. GAAP and a reconciliation of net income and shareholders’ equity under IFRS to U.S. GAAP, you should read Note 47 to the consolidated financial statements. Unless otherwise indicated, the financial information we have included in this annual report is presented on a consolidated basis under IFRS. Unless otherwise indicated, we have obtained data regarding the relative size of various national insurance markets from annual reports prepared by SIGMA, an independent organization which publishes market research data on the insurance industry. In addition, unless otherwise indicated, insurance market share data are based on gross premiums written and statutory premiums for our Property-Casualty and Life/Health segments, respectively. Data on position and market share within particular countries are based on various third party and/or internal sources as indicated herein.

 

Critical Accounting Policies and Estimates

 

Principles of consolidation

 

The consolidated financial statements of the Allianz Group include those of Allianz AG, its subsidiaries and certain investment funds and special purpose entities (“SPEs”). Subsidiaries, investment funds and SPEs, hereafter “subsidiaries”, which are directly or indirectly controlled by the Allianz Group are consolidated. Subsidiaries are consolidated from the date control is obtained by the Allianz Group. Subsidiaries are consolidated until the date that the Allianz Group no longer maintains control. The Allianz Group has used interim financial statements for certain subsidiaries whose fiscal year is other than

 

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December 31, but not exceeding a lag of three months. The effects of intra-Allianz Group transactions have been eliminated.

 

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 allocate 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-aquisition carrying amounts of the identifiable assets and liabilities.

 

Acquisitions and disposals of minority interests are treated as transactions between equity holders. Therefore, any difference between the acquisition cost of the minority interest and the carrying amount of the minority interest is recognized as an increase or decrease in equity.

 

Intangible assets

 

Goodwill resulting from business combinations represents the difference between the acquisition cost of the business combination and the Allianz Group’s proportionate share of the net fair value of identifiable assets, liabilities and certain contingent liabilities. Goodwill resulting from business combinations is not subject to amortization and is recorded at cost less accumulated impairments.

 

The Allianz Group conducts an annual impairment test of goodwill on October 1, in addition to whenever there is an indication that goodwill is not recoverable. The impairment test includes comparing the recoverable amount to the carrying amount, including goodwill, for all cash generating units. A cash generating unit is not impaired if the recoverable amount is greater than the carrying amount. 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.

 

Present value of future profits (“PVFP”) is the present value of net cash flows anticipated in the future from insurance and investment contracts in force at the date of acquisition and is amortized over the life of the related contracts. PVFP was determined using discount rates ranging from 12% to 15%. Interest accrues on the PVFP balance based upon the policy liability rate or contract rate. Interest accrues on PVFP at rates between 3.5% and 8.5%.

 

Software includes software purchased from third parties or developed internally, which are amortized on a straight-line basis over their useful service lives or contractual terms, generally over 3 to 5 years. Costs for repairs and maintenance are expensed, while improvements, if they extend the useful life of the asset, are capitalized. For the Allianz Group’s Property-Casualty and Life/Health segments amortization of software is allocated amongst several line items according to cost allocation. Amortization of software related to the Allianz Group’s Banking and Asset Management segments is included in administrative expenses.

 

The brand names “Dresdner Bank” and “dit” (Deutscher Investment-Trust) have an indefinite life; therefore, are not subject to amortization and are recorded at cost less accumulated impairments. The fair values for the brand names, registered as trade names, were determined using a royalty savings approach.

 

Similar to goodwill, an intangible asset is subject to an annual impairment test, in addition to whenever there is an indication that it is not recoverable. The impairment test includes comparing the recoverable amount to the carrying amount. An intangible asset is not impaired if the recoverable amount is greater than the carrying amount. An intangible asset is impaired if the carrying amount is

 

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greater than the recoverable amount. The impairment of an intangible asset is equal to the difference between the carrying amount and recoverable amount. Impairments of intangible assets are not reversed.

 

Available-for-sale Investments

 

Securities available-for-sale are securities that are not classified as held-to-maturity, loans and advances to banks or customers, financial assets held for trading, or financial assets designated at fair value through income. Securities available-for-sale are recorded at fair value. Unrealized gains and losses, which are the difference between fair value and cost or amortized cost, are included as a separate component of shareholders’ equity, net of deferred taxes and the latent reserve for premium refunds to the extent that policyholders will participate in such gains and losses on the basis of statutory or contractual regulations when they are realized. Realized gains and losses on securities are generally determined by applying the average cost method at the subsidiary level.

 

A held-to-maturity or available-for-sale debt security is impaired if there is objective evidence that the cost may not be recovered. If all amounts due according to the contractual terms of the security are not considered collectible, typically due to deterioration in the creditworthiness of the issuer, the security is considered to be impaired. An impairment is not recorded as a result of declines in fair value resulting from general market interest or exchange rate movements unless the Allianz Group intends to dispose of the security.

 

If there is objective evidence that the cost may not be recovered, an available-for-sale equity security is considered to be impaired. Objective evidence that the cost may not be recovered, in addition to qualitative impairment criteria, includes a significant or prolonged decline in the fair value below cost. The Allianz Group established a policy that an available-for-sale equity security is considered impaired if the fair value is below the weighted-average cost by more than 20% or if the fair value is below the weighted-average cost for greater than nine months, to define the significant criteria and the prolonged criteria, respectively. This policy is applied individually by all subsidiaries.

 

If an available-for-sale equity security is impaired based upon the Allianz Group’s qualitative or quantitative impairment criteria, any further declines in the fair value at subsequent reporting dates are recognized as impairments. Therefore, at each reporting period, for an equity security that is determined to be impaired based upon the Allianz Group’s impairment criteria, an impairment is recognized for the difference between the fair value and the original cost basis, less any previously recognized impairments.

 

In a subsequent period, if the amount of the impairment previously recorded on a debt security decreases and the decrease can be objectively related to an event occurring after the impairment, such as an improvement in the debtor’s credit rating, the impairment is reversed through other income from investments. These reversals do not result in a carrying amount of a debt security that exceeds what would have been, had the impairment not been recorded, at the date of the impairment is reversed. Reversals of impairments of available-for-sale equity securities are not recorded.

 

Available-for-sale equity securities include investments in limited partnerships. The Allianz Group records its investments in limited partnerships at cost, where the ownership interest is less than 20%, as the limited partnerships do no have a quoted market price and fair value cannot be reliably measured. The Allianz Group accounts for its investment in limited partnerships with ownership interests of 20% or greater using the equity method.

 

Loans and advances to banks and customers

 

Loans and advances to banks and customers are financial assets with fixed and determinable payments, not quoted in an active market, that are not classified as securities available-for-sale or held-to-maturity, financial assets held for trading, or financial assets designated at fair value through income. Loans to banks and customers are recorded at amortized cost, or generally their outstanding unpaid principal balance, net of the loan loss allowance, deferred fees and costs on origination, and unamortized premiums or discounts. 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 lives of the related loans.

 

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Loans are placed on non-accrual status when the payment of principal or interest is doubtful based on the credit assessment of the borrower. Non-accrual loans consist of loans on which interest income is no longer recognized on an accrued basis, and loans for which a specific provision is recorded for the entire amount of accrued interest receivable. When a loan is placed on non-accrual status, any accrued interest receivable is reversed against interest and similar income. Loans can only be restored to accrual status when interest and principal payments are made current (in accordance with the contractual terms), and future payments in accordance with those terms are reasonably assured. When there is a doubt regarding the ultimate collectibility of the principal of a loan placed in non-accrual status, all cash receipts are applied as reductions of principal. Once the recorded principal amount of the loan is reduced to zero, future cash receipts are recognized as interest income.

 

Loan impairments and provisions

 

Impaired loans represent loans for which, based upon current information and events, it is probable that the Allianz Group will not be able to collect all interest and principal amounts due in accordance with the contractual terms of the loan agreements.

 

The loan loss allowance represents the estimate of probable losses that have occurred in the loan portfolio and other lending-related commitments. The loan loss allowance is reported as a reduction of loans and advances to banks and customers and the provisions for contingent liabilities, such as guarantees, loan commitments and other obligations are reported as other liabilities.

 

To determine the appropriate level of the loan loss allowance, all significant counterparty relationships are periodically reviewed. A specific allowance is established to provide for specifically identified counterparty risks. Specific allowances are established for impaired loans. The amount of the impairment is based on the present value of expected future cash flows or based on the fair value of the collateral if the loan is collateralized and foreclosure is probable. If the amount of the impairment subsequently increases or decreases due to an event occurring after the initial measurement of impairment, a change in the allowance is recognized in earnings by a charge or a credit to the loan loss provisions.

 

A country risk allowance is 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.

 

A particular allowance is established for all loans with an outstanding balance of €1 mn or less for incurred but unidentified losses by the Dresdner Bank Group. The particular allowance methodology categorizes loans into homogeneous portfolios and establishes the particular allowance based upon historical loss rates which are continuously updated.

 

A general allowance is established to provide for incurred but unidentified losses for loans with an outstanding balance greater than €1 mn for the Dresdner Bank Group and for all other loans held by subsidiaries of the Banking segment. General allowances are established for loans not specifically identified as impaired. The amount of the allowance is based on historical loss experience and the evaluation of the loan portfolio under current events and economic conditions.

 

Loans are charged-off when all economically sensible means of recovery have been exhausted. At the point of charge-off, the loan as well as any specific allowance associated with the loan is removed from the consolidated balance sheet or a charge may be recorded to directly charge-off the loan. A charge-off may be full or partial. Subsequent to a charge-off, recoveries, if any, are recognized as a credit to the loan loss provisions.

 

The loan loss provisions are the amount necessary to adjust the loan loss allowance to a level determined through the process described above.

 

Financial assets carried at fair value through income

 

Financial assets carried at fair value through income include financial assets held for trading, financial assets for unit linked contracts and financial assets designated at fair value through income.

 

Financial assets held for trading consists of debt and equity securities, promissory notes and precious

 

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metal holdings, which have been acquired principally for the purpose of generating a profit from short-term fluctuations in price and derivative financial instruments that do not meet the criteria for hedge accounting with positive fair values. Financial assets held for trading are reported at fair value. Changes in fair value are recognized directly in net income. Exchange-traded financial instruments are valued at the exchange prices prevailing on the last exchange trading day of the year. To determine the fair values of unlisted financial instruments, quotations of similar instruments or other valuation models (in particular present value models or option pricing models) are used. In the process, appropriate adjustments are made for credit and measurement risks.

 

Financial assets for unit linked contracts and financial assets designated at fair value through income are recorded at fair value with changes recorded together with the changes in the corresponding financial liabilities for unit linked contracts in net income.

 

Derivative financial instruments used for hedging purposes

 

For derivative financial instruments used for hedging purposes that meet the criteria for hedge accounting, 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 also 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 hedge transactions that meet the criteria for hedge accounting are recognized as follows:

 

Fair value hedges

 

The risk of changes of a specific risk in the fair value of assets or liabilities is hedged by a fair value hedge. Changes in the fair value of a derivative financial instrument together with the pro rata share of the change in fair value of the hedged item are recognized in net income.

 

Cash flow hedges

 

Cash flow hedges reduce the exposure to variability in cash flows that is attributable to a particular risk associated with a recognized asset or liability or attributable to future cash flows from a firm commitment or a forecasted transaction. Changes in the fair value of derivative financial instruments that represent an effective hedge are recorded in unrealized gains and losses (net) in shareholders’ equity, and recognized in net income when the offsetting gain or loss associated with the hedged item is recognized. The ineffective part 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 hedge a net investment in a foreign entity. Derivative financial instruments are used to hedge currency risk. The proportion of gains or losses arising from valuation of the derivative financial instrument, which is classified as an effective hedge, is recognized in unrealized gains and losses (net) in shareholders’ equity, while the ineffective part is recognized in net income.

 

For all fair value hedges, cash flow hedges, and hedges of a net investment in a foreign entity, the derivative financial instruments are included in other assets or other liabilities.

 

The Allianz Group discontinues hedge accounting prospectively when it is determined that the derivative financial instrument is no longer highly effective, 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. When a fair value hedge is discontinued, the Allianz Group continues to report the derivative financial instrument at its fair value, and no longer recognizes changes in fair value of the hedged item in net income. When hedge accounting for a cash flow hedge is discontinued, the Allianz Group continues to record the derivative financial instrument at its fair value and any net unrealized gains and losses accumulated in shareholders’ equity are recognized when the planned transaction occurs. When a hedge of a net

 

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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.

 

Derivative financial instruments are netted when there is a legally enforceable right to offset and when the Allianz Group intends to settle on a net basis.

 

Other assets

 

Deferred policy acquisition costs generally consist of commissions, underwriting expenses and policy issuance costs, which vary with and are directly related to the acquisition and renewal of insurance contracts. These acquisition costs are deferred, to the extent they are recoverable, and amortized over the life of the related contracts.

 

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.

 

Sales inducements on insurance contracts that meet the following criteria are deferred and amortized using the same methodology and assumptions used to amortize deferred policy acquisition costs:

 

  recognized as part of reserves for insurance and investment contracts,

 

  explicitly identified in the contract at inception,

 

  incremental to amounts the Allianz Group credits on similar contracts without sales inducements, and

 

  higher than the contract’s expected ongoing crediting rates for periods after the inducement.

 

Reserves for insurance and investment contracts

 

Reserves for insurance and investment contracts include unearned premiums, aggregate policy reserves, reserves for loss and loss adjustment expenses, the reserve for premium refunds, premium deficiency reserves and other insurance reserves.

 

Contracts issued by insurance subsidiaries of the Allianz Group are classified according to IFRS 4 as insurance or investment contracts. Contracts under which the Allianz Group accepts significant insurance risk from a policyholder are classified as insurance contracts. Contracts under which the Allianz Group does not accept significant insurance risk are classified as investment contracts. Certain insurance and investment contracts include discretionary participation features. All insurance contracts and investment contracts with discretionary participating features are accounted for under the provisions of US GAAP, including SFAS 60, SFAS 97 and SFAS 120.

 

For short-duration insurance contracts, such as property-casualty contracts, in accordance with SFAS 60, premiums written to be earned in future years, are recorded as unearned premiums. These premiums are earned in subsequent years in relation to the insurance coverage provided. Unearned premiums for reinsurance business assumed are generally based on the calculations of the cedent. Deferred policy acquisition costs for short-duration insurance contracts are amortized over the periods in which the related premiums are earned.

 

The aggregate policy reserves for long-duration insurance contracts, such as traditional life and health products, are computed in accordance with SFAS 60 using the net level premium method, which represents the present value of estimated future policy benefits to be paid less the present value of estimated future net premiums to be collected from policyholders. The method uses best estimate assumptions adjusted for a provision for adverse deviation for mortality, morbidity, expected investment yields, surrenders and expenses at the policy inception date, which remain locked-in thereafter. Deferred policy acquisition costs and PVFP for traditional life and health products are amortized over the premium paying period of the related policies in proportion to the earned premium using assumptions consistent with those used in computing the aggregate policy 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 are used in determining the policyholder dividends. Deferred policy acquisition costs and PVFP for traditional participating products are amortized over the expected life of the contracts in proportion to

 

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estimated gross margins (“EGMs”) based upon historical and anticipated future experience, which is determined on a best estimate basis and evaluated regularly. The present value of EGMs is computed using the expected investment yield. EGMs include premiums, investment income including realized gains and losses, insurance benefits, administration costs, changes in the aggregate reserves and policyholder dividends. The effect of changes in EGMs are recognized in net income in the period revised.

 

The aggregate policy reserves for universal life-type insurance contracts and unit linked insurance contracts in accordance with SFAS 97 is equal to the account balance, which represents premiums received and investment return credited to the policy less deductions for mortality costs and expense charges. Deferred policy acquisition costs and PVFP for universal life-type and investment contracts are amortized over the expected life of the contracts in proportion to estimated gross profits (“EGPs”) based upon historical and anticipated future experience, which is determined on a best estimate basis and evaluated regularly. The present value of EGPs is computed using the interest rate that accrues to the policyholders, or the credited rate. EGPs include margins from mortality, administration, investment income including realized gains and losses and surrender charges. The effect of changes in EGPs are recognized in net income in the period revised.

 

Current and historical client data, as well as industry data, are used to determine the assumptions. Assumptions for interest reflect expected earnings on assets, which back the future policyholder benefits. The information used by the Allianz Group’s qualified actuaries in setting such assumptions includes, but is not limited to, pricing assumptions, available experience studies, and profitability analyses.

 

The interest rate assumptions used in the calculation of aggregate policy reserves were as follows:

 

     Long-
duration
insurance
contracts
(SFAS 60)


    Traditional
participating
insurance
contracts
(SFAS 120)


 

Aggregate policy reserves

   2.5–7 %   3–4 %

Deferred acquisition costs

   5–7 %   5–6 %

 

In connection with the adoption of SOP 03-1 effective January 1, 2004, insurance reserves include liabilities for guaranteed minimum death and similar mortality and morbidity benefits related to non-traditional contracts, annuitization options, and sales inducements. These liabilities are calculated based on contractual obligations using actuarial assumptions. Contractually agreed sales inducements to contract holders include persistency bonuses and are accrued over the period in which the insurance contract must remain in force to qualify for the inducement.

 

The aggregate policy reserves for unit linked investment contracts is equal to the account balance, which represents premiums received and investment return credited to the policy less deductions for mortality costs and expense charges. The aggregate policy reserves for non unit linked investment contracts is equal to amortized cost, or account balance less deferred policy acquisition costs. Deferred policy acquisition costs and PVFP for unit linked and non unit linked investment contracts are amortized over the expected life of the contracts in proportion to revenues.

 

Reserves for loss and loss adjustment expenses are established for the payment of losses and loss adjustment expenses (“LAE”) on claims which have occurred but are not yet settled. Reserves for loss and loss adjustment expenses fall into two categories: case reserves for reported claims and reserves for incurred but not reported reserves (“IBNR”).

 

Case reserves for reported claims are based on estimates of future payments that will be made in respect of claims, including LAE relating to such claims. Such estimates are made on a case-by-case basis, based on the facts and circumstances available at the time the reserves are established. The estimates reflect the informed judgment of claims personnel based on general insurance reserving practices and knowledge of the nature and value of a specific type of claim. These case reserves are regularly re-evaluated in the ordinary course of the settlement process and adjustments are made as new information becomes available.

 

IBNR reserves are established to recognize the estimated cost of losses that have occurred but where the Allianz Group has not yet been notified. IBNR reserves, similar to case reserves for reported claims,

 

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are established to recognize the estimated costs, including expenses, necessary to bring claims to final settlement. Since nothing is known about the occurrence, the Allianz Group relies on its past experience, adjusted for current trends and any other relevant factors. IBNR reserves are estimates based on actuarial and statistical projections of the expected cost of the ultimate settlement and administration of claims. The analyses are based on facts and circumstances known at the time, predictions of future events, estimates of future inflation and other societal and economic factors. Trends on claim frequency, severity and time lag in reporting are examples of factors used in projecting the IBNR reserves. IBNR reserves are reviewed and revised periodically as additional information becomes available and actual claims are reported.

 

The process of estimating loss and LAE reserves is by nature uncertain due to the large number of variables affecting the ultimate amount of claims. Some of these variables are internal, such as changes in claims handling procedures, introduction of new IT systems or company acquisitions and divestitures. Others are external, such as inflation, judicial trends, and legislative changes. The Allianz Group attempts to reduce the uncertainty in reserve estimates through the use of multiple actuarial and reserving techniques and analysis of the assumptions underlying each technique.

 

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 are becoming generally known very slowly and are still evolving. 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 current reserves for loss and loss adjustment expenses for asbestos claims in the United States reflect loss developments since the most recent external independent actuarial report which was completed during the year ended December 31, 2005.

 

The 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 IFRS 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 in connection with the valuation of securities available-for-sale 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. Any dividends allocated or disbursed over and above the reserve are recorded in other expenses.

 

Methods and corresponding percentages for participation in profits by the policyholders are set out below for the most significant countries for latent reserves:

 

Country


  

Base


   Percentage

Germany

         

Life

   All sources of Profit    90%

Health

   All sources of Profit    80%

France

         

Life

   Investments    80%

Italy

         

Life

   Investments    85%

Switzerland

         

Group Life

   All sources of Profit    90%

Individual Life

   All sources of Profit    100%

 

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.

 

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Other insurance reserves include experience-rated and other premium refunds in favor of policyholders.

 

Financial liabilities carried at fair value through income

 

Financial liabilities carried at fair value through income include financial liabilities held for trading, financial liabilities for unit linked contracts, liabilities for puttable equity instruments and financial liabilities designated at fair value through income.

 

Financial liabilities held for trading primarily include derivative financial instruments that do not meet the criteria for hedge accounting with negative fair values and obligations to deliver assets arising from short sales of securities, which are carried out in order to benefit from short-term price fluctuations. The securities required to close out short sales are obtained through securities borrowing or reverse repurchase agreements. These liabilities are valued the same as financial assets held for trading.

 

Financial liabilities for unit linked contracts and financial liabilities designated at fair value through income are recorded at fair value with changes recorded together with the changes in the corresponding financial assets in net income.

 

Liabilities for puttable financial 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. As the redemption amount of these liabilities is their fair value, these liabilities are included in financial liabilities carried at fair value through income as liabilities for puttable equity instruments.

 

Changes to Accounting and Valuation Policies

 

See Note 3 to our consolidated financial statements.

 

Introduction

 

The following analysis is based on our consolidated financial statements and should be read in conjunction with those statements. We evaluate the results of our Property-Casualty insurance, Life/Health insurance, Banking and Asset Management segments using a financial performance measure we refer to herein as “operating profit”. We define our segment operating profit as earnings from ordinary activities before taxes, excluding, as applicable for each respective segment, all or some of the following items: net capital gains and impairments on investments, net trading income, intra-Allianz Group dividends and profit transfer, interest expense on external debt, restructuring charges, other non-operating income/(expenses), acquisition-related expenses and amortization of goodwill.

 

While these excluded items are significant components in understanding and assessing our consolidated financial performance, we believe that the presentation of operating results enhances the understanding and comparability of the performance of our operating segments by highlighting net income attributable to ongoing segment operations and the underlying profitability of our businesses. For example, we believe that trends in the underlying profitability of our segments can be more clearly identified without the fluctuating effects of the realized capital gains and losses or impairments on investment securities, as these are largely dependent on market cycles or issuer specific events over which we have little or no control, and can and do vary, sometimes materially, across periods. Further, the timing of sales that would result in such gains or losses is largely at our discretion. Operating profit is not a substitute for earnings from ordinary activities before taxes or net income as determined in accordance with International Financial Reporting Standards (or “IFRS”). Our definition of operating profit may differ from similar measures used by other companies, and may change over time. For further information on operating profit, as well as the particular reconciling items between operating profit and net income, see Note 5 to the consolidated financial statements.

 

In the following analysis, we analyze the Allianz Group’s consolidated results of operations for the year ended December 31, 2005 as compared to December 31, 2004 and for the year ended December 31, 2004 as compared to December 31, 2003, using operating profit and net income as the relevant performance measures, as permitted under IFRS.

 

We further believe that an understanding of our revenue performance is enhanced when the effects from foreign currency translation as well as

 

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acquisitions and disposals (or “changes in scope of consolidation”) are excluded. Accordingly, in addition to presenting “nominal growth”, “internal growth,” which excludes the effects from foreign currency translation and changes in scope of consolidation, is also provided. The following table sets forth the reconciliation of nominal total revenue growth to internal total revenue growth for each of our segments and the Allianz Group as a whole for the year ended December 31, 2005.

 

Composition of total revenue growth for the year ended December 31, 2005

 

Segment(1)


  

Nominal

growth


   

Changes in

scope of

consolidation


   

Foreign

currency

translation


   

Internal

growth


 
     %     %     %     %  

Property-Casualty

   0.6     (2.5 )   0.4     2.7  

Life/Health

   6.5         0.5     6.0  

Banking

   (3.3 )       (0.1 )   (3.2 )

thereof: Dresdner Bank

   (4.4 )       (0.1 )   (4.3 )

Asset Management

   18.4     1.9     0.2     16.3  

thereof: Allianz Global Investors

   17.3     (0.4 )   0.2     17.5  
    

 

 

 

Total Group

   4.2     (0.5 )   0.4     4.3  
    

 

 

 


(1) Before the elimination of transactions between Allianz Group companies in different segments.

 

Executive Summary

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

We exceeded our targets for 2005 and net income increased by 31% to €4.4 billion.

 

  All segments exceeded their 2005 targets:

 

    Property-Casualty achieved a new low combined ratio1) of 92.3%, 2.7 percentage points better than the 95% target.

 

    Operating profit in Life/Health was €1.6 billion, exceeding our goal by €100 million.

 

    Dresdner Bank increased its operating profit by 33.2% to €775 million.

 

    Asset Management operating profit grew by 32.4%, more than three times our target.

 

  Total revenues hit €100.9 billion.

 

  Net income rose significantly, driven by the increase in operating profit of 13.2% to 7.7 billion.

 

  Our shareholders’ equity, before minority interests, increased by 31.6% to €39.5 billion.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

In 2004, we increased our operating profit by 71.7%.

 

  In 2004, we successfully continued the execution of our “3+One” program. 2004 was a year of carefully managed growth. We were successful in increasing our total revenues by €3.1 billion, particularly in Life/Health. In Property-Casualty, we focused on profitability and were willing to forego business opportunities which did not offer a reasonable relation between risk and return. Banking operating revenues were stable. We were also successful in attaining growth in our operating revenues from our Asset Management operations.

 

  2004 was also a year of continued operational discipline to strengthen our earnings power, thereby achieving a significant improvement in our operating profit by €2.9 billion to €6.8 billion. The quality of earnings also improved.

 

  Our shareholders’ equity, before minority interests, increased by €2.0 billion to €30.0 billion, further strengthening our capital base.

 


(1) Represents ratio of net claims incurred and net acquisition costs and administrative expenses, excluding expenses for service agreements, to net premiums earned.

 

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Total Revenues

in € bn

 

LOGO

 

Operating Profit

in € mn

 

LOGO

 

Net Income

in € mn

 

LOGO

 

Shareholders’ Equity Before Minority Interests

in € mn

 

LOGO

 

 


(1) Compound annual growth rate (or “CAGR”) is the year-over-year growth rate over a multiple-year period.
(2) Net income contained goodwill amortization (net of tax).

 

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Allianz Group’s Consolidated Results of Operations

 

Total Revenues

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Led by our Life/Health and Asset Management operations, our total revenues increased by 4.2% to €100.9 billion. Internal growth was 4.3%.

 

Property-Casualty While we continued to put profitability first, we succeeded in growing gross premiums written by €281 million to €44.1 billion, and achieved internal growth of 2.7%. Particularly strong increases were experienced within the United States, Switzerland, Allianz Marine & Aviation and Australia.

 

Life/Health Statutory premiums increased by 6.5% to €48.1 billion, originating principally from investment-oriented and single-premium products. Strong growth rates were achieved in our core European life markets, particularly in Germany, France and Italy, with growth rates in Germany and France well above 10%. In the United States, statutory premiums remained strong. Internal growth was 6.0%.

 

Banking Operating revenues from our banking operations declined by 3.3% to €6.2 billion primarily due to the faster than planned close of Dresdner Bank’s IRU and negative accounting impacts from IAS 39. In contrast, operating revenues from Dresdner Bank’s strategic business(1), excluding the negative impacts from IAS 39, increased by 4.1% to €6.1 billion.

 

Asset Management We achieved record net inflows of third-party assets of €64 billion, particularly from our fixed income institutional funds business within the United States and Germany. Market-related appreciation of third-party assets amounted to €33 billion. Overall, third-party assets increased by 27.0% to €743 billion at December 31, 2005. These positive developments led to significant operating revenue growth of 18.4% to €2.7 billion. Internal growth was 16.3%.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

2004 was a year of carefully managed growth, increasing our total revenues by €3.1 billion, or 3.3%, to €96.9 billion. Excluding the effects from foreign currency translation as well as changes in scope of consolidation, growth was 6.0%.

 

Property-Casualty Gross premiums written remained fairly constant with growth of 0.8%, as we sought opportunities that offered a profitable correlation between premium rates and risks and were willing to forego premium growth in certain markets where this objective could not be achieved.

 

Life/Health and Asset Management Our two segments focusing on the promising pension and wealth accumulation market experienced increases in statutory premiums and operating revenues of 6.8% and 3.7%, respectively.

 

Banking Excluding the effects from foreign currency translation as well as changes in scope of consolidation, operating revenues slightly increased by 0.5%. Overall, operating revenues experienced only a 3.8% decline despite a reduced portfolio of interest-bearing assets. However, net fee and commission income increased by 5.8%.

 


(1) Dresdner Bank’s strategic business includes its Personal Banking, Private & Business Banking, Corporate Banking, DrKW and Corporate Other divisions, but does not include IRU.

 

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Operating Profit

 

Operating Profit – Segments

in € mn

 

LOGO

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

In 2005, our operating profit increased by 13.2% to €7.7 billion, thereby demonstrating our commitment to continued operational discipline. All segments contributed to this development.

 

Property-Casualty  We achieved a new low combined ratio of 92.3%, 2.7 percentage points better than our target. We continued to adhere to our disciplined underwriting and pricing practices worldwide, thereby successfully improving our combined ratio by 60 basis points compared to 2004. These positive developments were achieved despite the negative impacts of various natural catastrophes, including one of the worst hurricane seasons on record. The combined effects of losses from natural catastrophes produced estimated claims of €1.1 billion, net of reinsurance. Offsetting these losses were decreases in loss estimates for previous underwriting years that resulted in an increase in operating profit of 4.6% to €4.2 billion.

 

Life/Health  Operating profit strengthened by 13.0% and reached €1.6 billion, exceeding our 2005 target by approximately €100 million. Strong margins on new business and the increased business volume from the strong growth rates in recent years were the most important factors in this development. Our statutory expense ratio(1) declined by 1.0 percentage point to 8.1%, resulting from statutory premium growth, while net acquisition costs and administrative expenses decreased.

 

Banking  In 2005, Dresdner Bank was successful in increasing its operating profit by 33.2% to €775 million. This growth was principally due to a favorable development within Dresdner Bank’s net loan loss provisions, resulting in a net release of €113 million (2004: net charge of €337 million), driven predominantly by the reductions in our portfolios within our non-strategic IRU and the improved risk profile of Dresdner Bank’s strategic loan portfolio.

 

Asset Management  Operating profit grew by 32.4% to €1.1 billion, thereby significantly

 


(1) Represents ratio of net acquisition costs and administrative expenses, excluding expenses for service agreements, to net statutory premiums.

 

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surpassing our 2005 target. Commensurate with this development, we succeeded in consistently reducing our cost-income ratio(1) during the course of 2005 to 58.5%, a marked improvement of 4.4 percentage points. These achievements demonstrate our strong market position and attest to our superior performance as the overwhelming majority of the third-party assets we manage outperformed their respective benchmarks in 2005.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

2004 was also a year of continued operational discipline, which resulted in a significant improvement of operating profit by €2.9 billion to €6.8 billion.

 

Property-Casualty We managed to reduce our combined ratio by 4.1 percentage points to 92.9% as a result of our disciplined underwriting and pricing practices, as well as stringent expense control. This positive development increased operating profit to €4.0 billion in 2004.

 

Life/Health Notwithstanding the 6.8% increase of our statutory premiums to €45.2 billion, our administrative expenses were reduced by 2.8% to €1.3 billion. These developments helped in large part to increase our operating profit by 12.1% to €1.4 billion.

 

Banking Administrative expenses and net loan loss provisions were reduced significantly by 9.4% and 66.1%, respectively. As a consequence, our Banking segment reported operating profit of €586 million.

 

Asset Management We succeeded in reducing our cost-income ratio by a further 4.9 percentage points to 62.9%, primarily as a result of increased operating revenues and a reduction in operating expenses. These positive developments led to an operating profit of €856 million.

 

Net Income

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Net income increased significantly to €4.4 billion from €2.3 billion.

 

Our operating profit of €7.7 billion drove the continued strengthening of our earnings power with earnings from ordinary activities reaching €7.9 billion. Non-operating items, in aggregate, amounted to €137 million, benefiting from the discontinuance of goodwill amortization due to a change in accounting under IFRS (2004: charge of €1.2 billion).

 

The impact of net capital gains and impairments, including non-operating net trading income, remained relatively stable at €1.8 billion. Other non-operating items, in aggregate, improved by more than €300 million to a net charge of €1.7 billion, with restructuring charges declining by 71.2% to €100 million, due primarily to the absence of significant charges at Dresdner Bank.

 

Our tax expenses increased by 27.2% to 2.1 billion, representing an overall effective tax rate of 26.3% (2004: 31.9%). In 2005, our effective tax rate benefited from preferable tax treatment on dividend income and realized capital gains at various operating entities, as well as the discontinuation of non-tax deductible goodwill amortization. Minority interests in earnings increased by 18.7% to 1.4 billion, primarily due to increased earnings at our Italian and French Life/Health operating entities.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Net income amounted to €2.3 billion. Overall, quality of earnings strongly improved in 2004.

 

Notwithstanding the €2.9 billion and €1.2 billion increase in operating profit and earnings from ordinary activities before taxes, respectively, from our continued operational discipline, our consolidated net income declined by €425 million to €2.3 billion. This development was primarily driven by the addition of €801 million of net income in 2003 as a result of the retrospective application of new and revised IFRS effective January 1, 2005, in particular due to the adoption of IAS 39 revised. See “—Effects of Recently Adopted Accounting Pronouncements”

 


(1) Represents ratio of operating expenses to operating revenues.

 

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and Note 3 to our consolidated financial statements for further information on the impacts of retrospectively applied new and revised IFRS. This development was partially offset by a decrease in restructuring charges of 63.2% to €347 million, primarily driven by lower restructuring charges at Dresdner Bank, which fell by 65.5% to €290 million.

 

Our consolidated tax expense increased by €1.4 billion to €1.7 billion, largely as a consequence of the significantly reduced level of tax-exempt capital gains, representing an overall effective income tax rate of 31.9% (2003: 5.1%). Minority interests in earnings also increased to €1.2 billion.

 

The following table sets forth our basic and diluted earnings per share for the years ended December 2005, 2004 and 2003.

 

Earnings per Share

in €

 

LOGO

 


(1) Includes goodwill amortization. Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.
(2) See Note 44 to our consolidated financial statements for further details regarding the dilutive effect of certain outstanding securities.

 

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The following table sets forth the total revenues, operating profit and net income for each of our business segments for the years ended December 2005, 2004 and 2003, as well as consolidated net income of the Allianz Group.(1)

 

     Property-
Casualty


    Life/Health

    Banking

    Asset
Management


    Consolidation
adjustments


    Total
Group


 
     € mn     € mn     € mn     € mn     € mn     € mn  

Year ended December 31, 2005

                                    

Total revenues(2)

   44,061     48,129     6,235     2,733     (261 )   100,897  

Operating profit

   4,162     1,603     845     1,133     —       7,743  

Earnings from ordinary activities before taxes

   5,672     2,274     1,537     420     (2,023 )   7,880  
    

 

 

 

 

 

Taxes

   (1,126 )   (463 )   (396 )   (132 )   3     (2,114 )

Minority interests in earnings

   (997 )   (462 )   (102 )   (51 )   226     (1,386 )
    

 

 

 

 

 

                                      

Net income

   3,549     1,349     1,039     237     (1,794 )   4,380  
    

 

 

 

 

 

                                      

Year ended December 31, 2004

                                    

Total revenues(2)

   43,780     45,177     6,446     2,308     (836 )   96,875  

Operating profit

   3,979     1,418     586     856     —       6,839  

Earnings from ordinary activities before taxes

   6,137     1,704     (67 )   (275 )   (2,403 )   5,096  
    

 

 

 

 

 

Taxes

   (1,520 )   (469 )   294     52     (19 )   (1,662 )

Minority interests in earnings

   (1,151 )   (368 )   (101 )   (52 )   504     (1,168 )
    

 

 

 

 

 

Net income (loss)

   3,466     867     126     (275 )   (1,918 )   2,266  
    

 

 

 

 

 

Year ended December 31, 2003

                                    

Total revenues(2)

   43,420     42,319     6,704     2,226     (929 )   93,740  

Operating profit

   2,397     1,265     (396 )   716     —       3,982  

Earnings from ordinary activities before taxes

   6,418     1,244     (1,936 )   (385 )   (1,475 )   3,866  
    

 

 

 

 

 

Taxes

   (756 )   (639 )   1,025     80     41     (249 )

Minority interests in earnings

   (451 )   (386 )   (104 )   (92 )   107     (926 )
    

 

 

 

 

 

Net income (loss)

   5,211     219     (1,015 )   (397 )   (1,327 )   2,691  
    

 

 

 

 

 


(1) Effective January 1, 2005, under IFRS, various existing accounting standards changed and additional new accounting standards became effective, both of which impacted the Allianz Group’s consolidated financial statements prospectively and, to a certain extent, retrospectively, which required revisions of prior year periods as if those accounting principles had always been used. For further information concerning the impact of these accounting standards, see “Effects of Recently Adopted Accounting Pronouncements” and Note 3 to our consolidated financial statements.
(2) 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.

 

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Allianz Group’s Consolidated Assets, Liabilities and Shareholders’ Equity

 

In 2005, our shareholders’ equity increased by 25.0% to €47.1 billion at December 31, 2005, further strengthening our capital base. Our shareholders’s equity before minority interests grew by 31.6% to €39.5 billion. This increase resulted primarily from our strong net income for 2005, growth in unrealized gains on investments due to favorable equity market conditions and lower interest rates in Europe, as well as reduced negative foreign currency translation effects from the strengthening of the U.S. dollar against the Euro. Additionally, the reduction in treasury shares (net €352 million) and the issuance of warrants on Allianz AG shares, of which 9 million were exercised in 3Q 2005 raising capital of €828 million, increased our shareholders’ equity before minority interests. In connection with the purchase of the minority interest of Riunione Adriatica di Sicurta S.p.A. (or “RAS”), our shareholders’ equity before minority interests also increased by €1.1 billion through the issuance of shares out of authorized capital without pre-emptive rights, offset by €1.3 billion related to the acquisition cost for additional interest in RAS. See “Information on the Company – Allianz-RAS Merger/European Company (SE)” for further information on the contemplated merger of RAS with and into Allianz AG.

 

Shareholders’ Equity Before Minority Interests

in € mn

 

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(1) Revised as a result of the implementation of new and revised IFRS with retrospective application effective January 1, 2005. See “– Effects of Recently Adopted Accounting Pronouncements” and Note 3 to our consolidated financial statements.
(2) Consists of the following developments (in €mn): foreign currency translation 1,601: treasury shares 352; net income 4,380; shareholders’ dividend (674); changes in the group of consolidated companies (1,741) miscellaneous 370.

 

In 2005, total assets increased by €7.6 billion (0.8%), while total liabilities decreased by €1.8 billion (0.2%). Increases within our total assets were primarily experienced within cash and cash equivalents due to our strong operating cash flow, as well as investments, where balances rose by €16.0 billion (102.5%) and €34.6 billion (13.9%), respectively. These increases were offset in part by declines predominantly in loans and advances to banks of €30.2 billion (16.6%). Additionally, investments in associated enterprises and joint ventures declined by €3.7 billion (63.6%). Increases within our total liabilities, primarily our reserves for insurance and investment contracts, which rose by €32.8 billion (10.0%), were more than offset by the €39.4 billion (20.6%) decrease within liabilities to banks.

 

See “– Group Asset Allocation” and “– Liquidity and Capital Resources” for detailed information on our investments and investments in associated enterprises and joint ventures, as well as the development of our cash and cash equivalents, respectively. Decreases in loans and advances to banks and in liabilities to banks primarily reflect reduced volumes of repurchase and reverse repurchase operations at Dresdner Bank. The growth in reserves for insurance and investment contracts was driven predominantly by aggregate policy reserves at €19.7 billion (8.6%) and reserves for premium refunds at €7.3 billion (34.2%). Our aggregate policy reserves increased primarily due to strong sales of unit- and indexed-linked life insurance contracts (see “—Life/Health Insurance Operations” for further discussion). The growth within our reserves for premium refunds principally resulted from changes due to fluctuations in fair value associated with group’s own investments.

 

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The following table presents the Allianz Group’s consolidated balance sheets as of December 31, 2005, and 2004, and the respective changes.(1)

 

As of December 31,


   2005

   2004

   Change

 
     € mn    € mn    %  
ASSETS                 

Intangible assets

   15,385    15,147    1.6  

Investments in associated enterprises and joint ventures

   2,095    5,757    (63.6 )

Investments

   282,920    248,327    13.9  

Loans and advances to banks

   151,384    181,543    (16.6 )

Loans and advances to customers

   185,424    195,680    (5.2 )

Financial assets carried at fair value through income

   235,007    240,574    (2.3 )

Cash and cash equivalents

   31,647    15,628    102.5  

Amounts ceded to reinsurers from reserves for insurance and investment contracts

   22,120    22,310    (0.9 )

Deferred tax assets

   14,596    14,139    3.2  

Other assets

   57,303    51,213    11.9  
    
  
  

Total assets

   997,881    990,318    0.8  
    
  
  

As of December 31,


   2005

   2004

   Change

 
     € mn    € mn    %  
SHAREHOLDERS’ EQUITY AND LIABILITIES       

Shareholders’ equity before minority interests

   39,487    29,995    31.6  

Minority interests in shareholders’ equity

   7,615    7,696    (1.1 )
    
  
  

Shareholders’ equity

   47,102    37,691    25.0  
    
  
  

Participation certificates and subordinated liabilities

   14,684    13,230    11.0  

Reserves for insurance and investment contracts

   359,137    326,380    10.0  

Liabilities to banks

   151,957    191,347    (20.6 )

Liabilities to customers

   158,359    157,137    0.8  

Certificated liabilities

   59,203    57,752    2.5  

Financial liabilities carried at fair value through income

   144,640    145,137    (0.3 )

Other accrued liabilities

   14,302    13,984    2.3  

Other liabilities

   31,383    31,271    0.4  

Deferred tax liabilities

   14,621    14,350    1.9  

Deferred income

   2,493    2,039    22.3  
    
  
  

Total shareholders’ equity and liabilities

   997,881    990,318    0.8  
    
  
  


(1) Effective January 1, 2005, under IFRS, various existing accounting standards changed and additional new accounting standards became effective, both of which impacted the Allianz Group’s consolidated financial statements prospectively and, to a certain extent, retrospectively, which required revisions of prior year periods as if those accenting principles had always been used. For further information concerning the impact of these accounting standards, see “– Effects of Recently Adopted Accounting Pronouncements” and Note 3 to our consolidated financial statements.

 

 

Group Asset Allocation

 

Of the total group’s own investments, the majority are invested in fixed income securities and, to a lesser extent, equities. At December 31, 2005, group’s own investments amounted to €467.5 billion, an increase of 6.0% compared to December 31, 2004. This increase was mainly due to higher balances of fixed income and equity available-for-sale securities, resulting predominantly from favorable capital market conditions, lower interest rates in Europe, and strong growth in sales of our life operations. See “–  Life/Health Insurance Operations” for further discussion of our Life/Health segment’s results of operations. Growth in our group’s own investments was partially offset by decreased financial assets held for trading, net. Additionally, investments in associated enterprises and joint ventures, which are classified as equity investments within group’s own investments, decreased principally as a result of sales of our shareholdings in MAN AG and Gecina S.A. in 1Q 2005, Bilfinger Berger AG in 2Q 2005, as well as the sale of 7.35% of our 28.48% shareholding in Eurohypo AG to Commerzbank AG in 4Q 2005. During 4Q 2005, Eurohypo AG was reclassified as held-for-sale and presented within “Other assets”. The sale of the remaining 21.13% participation in Eurohypo AG to Commerzbank AG is scheduled for 1Q 2006, subject to the fulfilment of customary conditions.

 

The following table and graphs set forth our assets under management, excluding third-party assets.

 

Fair values as of December 31,


   2005

   2004

 
     € mn    € mn  

Group’s own investments(1)

   467,459    441,033 (2)

Financial assets for unit-linked contracts(3)

   54,661    41,409 (2)

(1) Real estate used by third parties and securities held-to-maturity are stated at amortized cost. Investments in associated enterprises and joint ventures are stated at either amortized cost or equity, depending upon, among others, our ownership percentage.
(2) As a result of a revised IFRS accounting standard, IAS 39 revised, certain unit-linked contracts previously classified as trading assets within group’s own investments were reclassified to financial assets for unit-linked contracts, which had no impact on net income.
(3) Represents assets owned by, and managed on the behalf of, policyholders of the Allianz Group, with all appreciation and depreciation in these assets accruing to the benefit of policyholders.

 

 

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Allocation of Group’s Own Investments

in € bn

 

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(1) Consists of available-for-sale fixed income securities (€209.8 bn and €186.7 bn at December 31, 2005 and December 31, 2004, respectively), loans and advances to banks and customers (€88.5 bn and €89.9 bn at December 31, 2005 and December 31, 2004, respectively), fixed income financial assets designated at fair value through income (€8.5 bn and €1.7 bn at December 31, 2005 and December 31, 2004, respectively), and securities held-to-maturity (€4.8 bn and €5.2 bn at December 31, 2005 and December 31, 2004, respectively). Securities held-to-maturity are stated at amortized cost. Loans and advances to banks and customers exclude loans from our banking and asset management operations (€248.3 bn and €295.8 bn at December 31, 2005 and December 31, 2004, respectively). See Notes 8, 9 and 10 to our consolidated financial statements for further details.
(2) Consists of available-for-sale equity securities (€57.1 bn and €44.2 bn at December 31, 2005 and December 31, 2004, respectively), investments in associated enterprises and joint ventures (€2.1 bn and €5.8 bn at December 31, 2005 and December 31, 2004, respectively), and equity financial assets designated at fair value through income (€3.4 bn and €1.7 bn at December 31, 2005 and December 31, 2004, respectively). Investments in associated enterprises and joint ventures are stated at either amortized cost or equity, depending upon, among other factors, our ownership percentage. See Notes 7, 8 and 10 to our consolidated financial statements for further details.
(3) Real estate used by third parties is stated at amortized cost. See Note 8 to our consolidated financial statements for further details.
(4) Consists primarily of funds held by others under reinsurance contracts assumed (€1.6 bn and €1.6 bn at December 31, 2005 and December 31, 2004, respectively). See Note 8 to our consolidated financial statements for further details.
(5) Consists of financial assets held for trading (€166.2 bn and €194.4 bn at December 31, 2005 and December 31, 2004, respectively), financial liabilities held for trading (€86.4 bn and €102.1 bn at December 31, 2005 and December 31, 2004, respectively), and financial assets designated at fair value through income from our banking and asset management operations (€2.3 bn and €1.3 bn at December 31, 2005 and December 31, 2004, respectively). See Notes 10 and 20 to our consolidated financial statements for further details.

 

Insurance Operations-Investments We limit our fixed income investment risk by establishing high thresholds on the creditworthiness of our debtors and by spreading our risk accordingly. The credit quality of our insurance operations’ fixed income securities portfolio has been, and continues to be, strong. At December 31, 2005, approximately 91% of the fixed income investments of the insurance companies of the Allianz Group had an investment grade rating. Approximately 87% were distributed over obligors that had been assigned at least an “A” rating by Standard & Poor’s. Additionally, of the not rated fixed income investments, which amounted to approximately 8% at December 31, 2005, the majority were invested in instruments of high credit quality, consisting of asset and mortgage-backed securities (e.g. Pfandbriefe), as well as loans to banks and customers. See “Quantitative and Qualitative Disclosures About Market Risk” for further information on risk management within our insurance business.

 

Group’s Own Investments – Insurance Operations

Fixed Income Investments by Rating Classes

in %

 

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(1) Investments for which no individual rating information is available.

 

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Group’s Own Investments – Property-Casualty Segment Asset Allocation

in € bn

 

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(1) Excludes trading portfolio of €0.1 bn and €0.3 bn at December 31, 2005 and December 31, 2004, respectively.
(2) Includes securities held-to-maturity that are stated at amortized cost.
(3) Includes investments in associated enterprises and joint ventures that are stated at either amortized cost or equity, depending upon, among other factors, our ownership percentage.
(4) Real estate used by third parties is stated at amortized cost.

 

Group’s Own Investments – Life/Health Segment Asset Allocation

in € bn

 

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(1) Excludes trading portfolio of €(2.5) bn and €0.1 bn at December 31, 2005 and December 31, 2004, respectively.
(2) Includes securities held-to-maturity that are stated at amortized cost.
(3) Includes investments in associated enterprises and joint ventures that are stated at either amortized cost or equity, depending upon, among other factors, our ownership percentage.
(4) Real estate used by third parties is stated at amortized cost.

 

      Banking Operations-Investments The majority of our group’s own investments within our Banking segment are invested in financial assets and financial liabilities held for trading. At December 31, 2005, financial assets held for trading, net, amounted to approximately 81% (2004: approximately 81%) of group’s own investments, net, within our Banking segment. See “Quantitative and Qualitative Disclosures About Market Risk” for a discussion of risk management in connection with our trading activities within our banking business.

 

Group’s Own Investments – Banking Segment

Trading Portfolio Asset Allocation

in € bn

 

At December 31, 2005

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At December 31, 2004

 

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Significant Allianz Group Equity Investments    For a list of significant associated enterprises and other selected holdings in listed companies, including our ownership percentage, please see Note 48 to our consolidated financial statements.

 

Off-Balance Sheet Arrangements In the ordinary course of business, the Allianz Group enters into arrangements that, under IFRS, are not recognized on the consolidated balance sheet and do not affect the consolidated income statement. Such arrangements remain off-balance sheet as long as the Allianz Group does not incur an obligation from them or become entitled to an asset itself. As soon as an obligation is incurred, it is recognized on the Allianz Group’s consolidated balance sheet, with the corresponding loss recorded in the consolidated income statement. However, in such cases, the amount recognized on the consolidated balance sheet may or may not, in many instances, represent the full loss potential inherent in such off-balance sheet arrangements. The importance of such arrangements to the Allianz Group as it concerns liquidity, capital resources or market and credit risk support, is not significant. Additionally, the Allianz Group does not rely on off-balance sheet arrangements as a significant source of revenue. Similarly, the Allianz Group has not incurred significant expenses from such arrangements and does not reasonably expect to do so in the future.

 

Distinct areas the Allianz Group is involved in off-balance sheet arrangements as of December 31, 2005, which are all conducted through the normal course of our business, include various irrevocable loan commitments, leasing commitments, purchase obligations and various other commitments. Additionally, we extend market value guarantees to customers, as well as execute indemnification contracts under existing service, lease or acquisition transactions. See Notes 42 and 47 to our consolidated financial statements for further information.

 

Furthermore, through Dresdner Bank, and in order to seek a Tier I capital release, we conducted a synthetic securitization to place credit risk from a designated loan portfolio on the open market. As of December 31, 2005, credit risks in the amount of €1.0 billion had been transferred to third-parties using a special purpose vehicle, which is not consolidated within our IFRS consolidated financial statements or our U.S. GAAP condensed financial statements in Note 47.

 

Effects of Recently Adopted Accounting Pronouncements

 

Our Annual Report on Form 20-F for the year ended December 31, 2004 was prepared in conformity with IFRS effective as of December 31, 2004 as adopted under EU regulations in accordance with clause 292a of the German Commercial Code (or “HGB”), which we refer to below as “pre-2005 IFRS.” Effective January 1, 2005, a number of new and revised IFRS were introduced, some of which required retrospective application to all years presented within our consolidated financial statements. As discussed above, this Annual Report on Form 20-F for the year ended December 31, 2005 is prepared in accordance with 2005 IFRS. Retrospective application has the effect of applying the new and revised IFRS to prior periods as if those accounting principles had always been used. We present below a brief overview of the major impacts from the retrospective application of 2005 IFRS. For more detailed information regarding the quantitative impacts of new and revised standards under 2005 IFRS at the Allianz Group consolidated level, as well as a description of each 2005 IFRS compared to pre-2005 IFRS please refer to Note 3 of our consolidated financial statements.

 

The following table sets forth the impacts of 2005 IFRS on the Allianz Group’s consolidated total revenues, operating profit and net income for the years ended December 31, 2004 and 2003.

 

Years ended December 31,


   2004

    2003

 
     € mn     € mn  

Total revenues under pre-2005 IFRS(1)

   96,892     93,779  
    

 

IAS 39 revised

   (17 )   (39 )
    

 

Total impact of 2005 IFRS

   (17 )   (39 )
    

 

Total revenues under 2005 IFRS

   96,875     93,740  
    

 

Operating profit under pre-2005 IFRS

   6,856     4,066  
    

 

IAS 39 revised

   (17 )   (84 )
    

 

Total impact of 2005 IFRS

   (17 )   (84 )
    

 

Operating profit under 2005 IFRS

   6,839     3,982  
    

 

Net income under pre-2005 IFRS

   2,199     1,890  
    

 

IAS 39 revised

   209     915  

IFRS 4

   (19 )   6  

IFRS 2

   (123 )   (120 )
    

 

Total impact of 2005 IFRS

   67     801  
    

 

Net income under 2005 IFRS

   2,266     2,691  
    

 


(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.

 

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The following table sets forth the impacts of 2005 IFRS on the Allianz Group’s consolidated assets, liabilities and shareholders’ equity as of December 31, 2004.

 

As of December 31,


   2004

 
     € mn  

Total assets under pre-2005 IFRS

   994,698  
    

IAS 39 revised

   (3,984 )

IFRS 2

   (396 )

IFRS 4

   —    
    

Total impact of 2005 IFRS

   (4,380 )
    

Total assets under 2005 IFRS

   990,318  
    

Total liabilities under pre-2005 IFRS

   963,870  
    

IAS 1 revised

   (7,696 )

IAS 39 revised

   (3,408 )

IFRS 2

   (147 )

IFRS 4

   8  
    

Total impact of 2005 IFRS

   (11,243 )
    

Total liabilities under 2005 IFRS

   952,627  
    

Shareholders’ equity under pre-2005 IFRS

   30,828  
    

IAS 1 revised

   7,696  

IAS 39 revised

   (576 )

IFRS 2

   (249 )

IFRS 4

   (8 )
    

Total impact of 2005 IFRS

   6,863  
    

Shareholders’ equity under 2005 IFRS

   37,691  
    

 

IAS 1 revised

 

The adoption of IAS 1 revised required the inclusion of minority interests in shareholders’ equity. Hence, shareholders’ equity increased, while total liabilities decreased by the same amount.

 

IAS 39 revised

 

IAS 39 revised required several changes to the Allianz Group’s accounting policies. One of the most significant of these changes relates to the recognition of impairments of available-for-sale equity securities. In particular, the changes in the Allianz Group’s impairment policy led to the following effects on our consolidated financial statements:

 

    Income Statements Accelerated impairments in 2002, caused by weak equity markets, led to a rise in net realized gains on available-for-sale equity securities in 2003 and 2004, resulting in increased net income in 2003 and 2004, with our Property-Casualty, Life/Health and Banking segments most heavily impacted. The increase in net realized gains in 2003 and 2004 was offset in part by a decrease in reversals of impairments on available-for-sale equity securities, since such reversals are no longer permitted under IAS 39 revised, and an increase in insurance and investment contract benefits due to policyholder participation in the increased net realized gains.

 

    Balance Sheets Unrealized gains (net of unrealized losses) were increased in 2003 and 2004, while revenue reserves were reduced by the same amount.

 

IFRS 2

 

As a result of the adoption of IFRS 2, the PIMCO LLC Class B Unit Purchase Plan (or “Class B Plan”) is considered a cash settled plan as the equity instruments issued are puttable at the holder’s option, resulting in changes in the fair value of the shares issued to be recognized as expense. The adoption of IFRS 2 led to additional charges in 2003 and 2004, shown as additional acquisition-related expenses and administrative expenses in our Asset Management segment.

 

Recently Issued Accounting Pronouncements

 

See Notes 3 and 47 to our consolidated financial statements for recently issued IFRS accounting pronouncements and recently issued U.S. GAAP accounting pronouncements, respectively, effective on or after January 1, 2006.

 

Events After the Balance Sheet Date

 

See Note 46 to our consolidated financial statements.

 

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Property-Casualty Insurance Operations

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Combined ratio further improved to 92.3%.

 

  Although we continued to put profitability first, we succeeded in increasing gross premiums written by 2.7%, excluding the effects of exchange rate movements and disposals and acquisitions.

 

  We achieved a record low combined ratio of 92.3%–2.7 percentage points better than our target—despite the effects of natural catastrophes.

 

  Our operating profit achieved a 4.6% growth, reaching €4.2 billion.

 

  Net income grew by 2.4% to €3.5 billion, founded on our robust operating profitability.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

We continued to focus on profitable growth and reduced our combined ratio to 92.9 %.

 

  We continued to focus on profitable growth through selectively increasing our business volume where risk-adequate premiums could be attained. Overall, our gross premiums written increased by 0.8% to €43.8 billion. Excluding the effects from foreign currency translation as well as changes in scope of consolidation, our property-casualty gross premiums written grew by 2.1%.

 

  We succeeded in reducing our combined ratio by a further 4.1 percentage points to 92.9%. Net current income from investments rose by €81 million to €3.9 billion. As a result, operating profit increased significantly by 66.0% to €4.0 billion.

 

  Non-operating results decreased by 46.3% compared to the prior year, which included significant net realized gains from the sale of investments.

 

  As a result of higher tax charges and increased minority interests due to our improved operating profitability, net income decreased from €5.2 billion to €3.5 billion.

Earnings Summary

 

Gross Premiums Written by Region(1)

in € bn

 

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(1) After elimination of transactions between Allianz Group companies in different geographic regions and different segments.
(2) Comprises the following major European markets by relative percentage share: France: 24.9%, Italy: 22.9%, Switzerland: 10.7%, UK: 11.7%, Spain: 7.3%; other European markets: 22.5%.
(3) Comprises the following major European markets by relative percentage share: France: 24.1%, Italy: 23.4%, Switzerland: 10.9%, UK: 11.9%, Spain: 7.6%; other European markets: 22.1%.

 

Gross Premiums Written – Growth Rates(1)

 

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(1) Before elimination of transactions between Allianz Group companies in different geographic regions and different segments.
(2) Comprise “Other Europe”.

 

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Gross premiums written

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Capitalizing on growth opportunities in markets that offered a profitable correlation between premium rates and risks and our willingness to forego premium growth in markets with increasing pricing pressures, we were successful in slightly growing gross premiums written from €43,780 million to €44,061 million, despite the disposal of our Taiwanese, Chilean and Canadian operations in the second half of 2004. Based on internal growth, gross premiums written increased by 2.7%.

 

Growth varied considerably across different markets. Positive developments were primarily experienced by our operations in the United States, our Swiss operations, Allianz Marine & Aviation within our specialty lines, and Allianz Australia with additional gross premiums written of €355 million (7.7%), €196 million (10.8%), €185 million (19.5%) and €145 million (11.0%), respectively. At Fireman’s Fund Insurance Company (or “Fireman’s Fund”) in the United States, increases across all lines of business were achieved, namely in our personal, commercial and specialty lines with a constant focus on disciplined underwriting and increased sales effectiveness in our chosen markets. In Switzerland, growth was driven primarily by Allianz Risk Transfer (or “ART”). At Allianz Marine & Aviation, the positive development was driven by our marine and aviation business in the United Kingdom, largely as a result of additional business generated from a fairly new branch office, as well as the strengthening of the British Pound against the Euro. The increase at Allianz Australia resulted from its broker and agency channels as well as its financial institutions and direct divisions due to intensified customer relationship management and positive exchange rate effects.

 

Further increases, albeit to a lesser degree, were also experienced in South America, Spain and Italy with gross premiums written increasing by 19.5% (€117 million), 6.2% (€110 million) and 1.9% (€98 million), respectively. The growth in South America, specifically from AGF Seguros in Brazil, stemmed from, among other factors, our motor business as a result of increased sales of new cars. The beneficial development in Spain at Allianz Seguros was driven by all lines of business, namely our motor, personal and industrial lines. In Italy, the increase in gross premiums written at RAS was mainly driven by the development of our non-motor business, and in particular by the significant growth of personal lines and business with small and medium enterprises. Furthermore, motor business at RAS increased marginally, in line with the market growth in Italy, partially compensated by the development of the direct channel, Genialloyd. Within our specialty lines, growth within credit insurance at Euler Hermes of €71 million (4.4%) resulted from significant growth at our French, Italian and United States operations, as our customers in these regions increased their sales, producing increased receivables. Similarly, within travel insurance and assistance services, Mondial Assistance Group saw an increase of €92 million (10.2%), primarily driven by increased sales through the Internet as well as stronger sales through airline partners.

 

These increases were offset by decreased gross premiums written primarily in Germany, the United Kingdom, France, as well as at Allianz Global Risks Re, where gross premiums written decreased by €373 million (2.9%), €166 million (6.3%), €178 million (3.4%) and €35 million (2.6%), respectively.

 

The decline in Germany resulted largely from the commutation of an intra-Allianz Group reinsurance agreement between Allianz AG and Allianz Lebensversicherungs-AG (or “Allianz Leben”) in 1Q 2005. Furthermore, at Sachgruppe Deutschland (or “SGD”), we remained committed to our policy of focusing on profitability and not volume. Additionally, SGD undertook a range of portfolio measures in our motor business resulting in higher “no claims bonuses”, which reduced gross premiums written on these contracts. As a consequence, gross premiums written at SGD declined by 1.3% to €10,035 million.

 

In the United Kingdom at Allianz Cornhill, this decline was primarily related to lower premiums in our motor and household lines, a development that was significantly driven by our cycle management efforts, through which we endeavor to balance volume and margin criteria. Our French subsidiary, AGF, as result of a more competitive environment, experienced decreases in gross premiums written especially through its brokerage business with large accounts. The decline in gross premiums written at Allianz Global Risks Re resulted from a more competitive environment in the global property market, leading primarily to a decrease of new business volume.

 

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Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Our gross premiums written increased by €360 million, or 0.8%, to €43,780 million from €43,420 million. Excluding the effects from foreign currency translation as well as changes in scope of consolidation, gross premiums written increased by 2.1%. This increase was specifically due to rate increases, particularly in Italy, Switzerland, the United Kingdom and Germany and to growth in new business, particularly in Central and Eastern Europe, Australia and Spain. The increase was offset in part by the effects of a more selective underwriting policy and portfolio review measures, particularly in France, and a decrease in gross premiums written at Allianz Marine & Aviation within our specialty lines and at our operations in The Netherlands. These achievements reflect our strategy of selective growth which we pursued. While we continue to strive for profitable growth, we are willing to forego sales growth.

 

Growth varied considerably across different markets in 2004. Positive developments were primarily experienced by our operations in Italy, Switzerland, the United Kingdom, Germany and Allianz Australia with additional gross premiums written of €154 million (3.0%), €74 million (4.2%), €94 million (3.7%), €151 million (1.2%) and €71 million (5.7%). In Italy, this increase was due to growth in almost all lines of business, particularly in our automobile, general liability, fire and personal property lines. Automobile premiums increased by €85 million, or 2.5%, reflecting an increase in the number of vehicles insured, while general liability premiums increased by €32 million, or 8.4%, reflecting primarily new business and rate increases resulting from a review of our portfolio.

 

In Switzerland, growth was driven by Allianz Risk Transfer, reflecting primarily the sale of a large alternative risk contract, offset in part by the negative effect of exchange rate movements. In the United Kingdom, gross premiums written grew due primarily to increased business in our commercial lines and specialty insurance, reflecting strong growth in our engineering business and pet insurance lines, offset in part by decreased gross premiums written in our personal lines business, attributable largely to the withdrawal from a major motor affinity relationship following a decision to rate for profit rather than volume.

 

In Germany, gross premiums written increased, reflecting growth in almost all lines of business, in particular personal accident insurance resulting mainly from increases in new business. This increase was offset in part by a decrease in automobile insurance, due primarily to substantial competition where clients were highly sensitive to rate changes, as well as to a more stringent underwriting practice and our continuous portfolio monitoring and re-underwriting measures.

 

Our operations in Asia-Pacific increased gross premiums written, driven by strong growth in our Australian operations, offset in part by decreased gross premiums written in Taiwan as a result of the sale of our property-casualty operations in Taiwan in the second half of 2004. Further increases were also experienced in Spain and Central and Eastern Europe with gross premiums written increasing by €82 million (4.9%) and €97 million (6.4%), respectively.

 

These increases were offset by decreased gross premiums written primarily in France, the Netherlands, as well as at Allianz Marine & Aviation, where gross premiums written decreased by €85 million (1.6%), €112 million (10.2%) and €124 million (11.6%).

 

In the NAFTA region, gross premiums written deceased slightly to €5,351 million (2003: €5,380 million), primarily as a result of a negative currency translation effect. Excluding the currency translation effect, gross premiums written in the NAFTA zone increased reflecting growth in the United States due primarily to increases in direct and assumed premiums in our crop insurance line at Fireman’s Fund, offset in part by a decline in Canada where we sold our private clients business as we did not have the critical business volume necessary in this competitive market.

 

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Operating Profit

in € mn

 

LOGO

 

Operating profit

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Driven by further improvement of our combined ratio(1) to a new low of 92.3%, our operating profit grew by 4.6% to €4,162 million, a growth rate stronger than that of our gross premiums written. The strongest improvements occurred at Fireman’s Fund in the United States (€154 million), Allianz Australia (€101 million), Credit Insurance through Euler Hermes (€73 million), SGD (€67 million), as well as RAS in Italy (€42 million).

 

In a year that saw a large number of global catastrophes and one of the worst hurricane seasons on record, the insurance and reinsurance markets as a whole incurred multi-billion Euros in damages. Our operating entities most affected by the natural catastrophes included Allianz Marine & Aviation, Allianz Global Risks Re, Allianz AG, Fireman’s Fund, SGD and Allianz Suisse. Total estimated claims from natural catastrophes, net of reinsurance, were €1.1 billion in 2005, increasing our accident year loss ratio(2) to 70.2% (2004: 69.0%). These natural catastrophe losses were mitigated by positive net development on prior years’ loss reserves largely in the United Kingdom, Italy, Slovakia, and in our specialty lines, comprising 2.6% of our total carried net loss reserves at January 1, 2005; our calendar year loss ratio(3) decreased to 67.1% (67.7%). However, our net loss reserve position remains sound. Moreover, our ratio of loss reserves expressed as a percentage of net premiums earned has increased from 119.2% to 130.7% over the prior year. In the United States, the planned external review of the A&E liability reserves at Fireman’s Fund had no net impact at the Allianz Group level as a result of already sufficient reserves, absent a USD 65 million loss caused by the increase in provisions for uncollectible reinsurance recoverables and unallocated loss adjustment expenses.

 

Our expense ratio(4) remained stable at 25.2% (2004: 25.2%), although our administrative expenses declined by €55 million. Net acquisition costs and administrative expenses rose slightly by 4.6% to €10,840 million, due to increased expenses for service agreements from the consolidation of a non-insurance entity acquired in the latter part of 3Q 2004, which are not included in the calculation of our expense ratio.

 

Current income from investments remained relatively unchanged at €3,901 million. Investment management and interest expenses decreased significantly to €488 million, which was due to a reclassification of interest expenses attributable to investments financed by borrowed funds, which is now classified in other operating income/expenses (net).

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Our operating profit improved significantly with an increase of 66.0% to €3,979 million from €2,397 million, mainly reflecting an improved underwriting result.

 

Our loss ratio, which decreased for the third consecutive year, declined by 3.8 percentage points to 67.7%, driven primarily by our disciplined underwriting and pricing practices. We believe this improvement was positive in light of losses arising from natural catastrophe claims in 2004. As a result of our risk management system, we recorded only € €216 million of net losses in connection with claims arising from the hurricanes which struck the South-Eastern United States in August and September 2004, which was low in comparison to our market share in the United States. Net losses in connection with the tsunamis which struck South Asia in late December 2004 amounted to €22 million.

 


(1) Represents ratio of net claims incurred and net acquisition costs and administrative expenses, excluding expenses for service agreements, to net premiums earned.
(2) Represents ratio of net claims incurred to net premiums earned based upon accidents which occurred during the year.
(3) Represents ratio of net claims incurred to net premiums earned during the year, irrespective of accident year or policy year.
(4) Represents ratio of net acquisition costs and administrative expenses, excluding expenses for service agreements, to net premiums earned.

 

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Our expense ratio also decreased from 25.5 % to 25.2 %. Overall, our combined ratio improved by 4.1 percentage points to 92.9% from 97.0%.

 

Net income

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Net income increased by 2.4% to €3,549 million, driven by our robust operating profitability, despite a decline in non-operating results of more than €600 million.

 

Net capital gains and impairments on investments were relatively unchanged, as our strong operating profitability allowed us to reduce the realization of net capital gains by €538 million, while net impairments were €519 million lower due to strong capital markets and the absence of a large real estate impairment recorded in 2004.

 

Net trading income declined to a loss of €426 million, driven by negative changes in fair values of €220 million from certain derivatives in connection with our “All-in-One” capital market transactions. However, economically, these negative fair value changes were offset by the increased market prices of shares of DAX companies we own, although the development of these available-for-sale securities is reflected in unrealized gains and losses within shareholders’ equity, and not net income. Additionally, the effects of embedded derivatives from an equity-linked loan, which was issued in connection with the Allianz-RAS merger, contributed €243 million to the significant decline in our net trading income.

 

Intra-group dividends and profit transfer was €432 million lower than in 2004, due primarily to our French operating entity, AGF Holding, receiving in 2004 a one-off dividend from our life/health operating entity, AGF Vie. The intra-group dividends and profit transfer were eliminated at the Allianz Group level.

 

Interest expense on external debt decreased slightly by 3.4% resulting primarily from the maturation of two bond issues during 1Q and 3Q 2005.

 

Conversely, restructuring charges of €67 million were incurred during 2005, of which €52 million are attributable to the AGF Group as a result of an early retirement program.

 

Other non-operating income/(expenses) (net) declined by €163 million due to the sale of real estate used for own use in the prior year by SGD. Net income was positively impacted by the elimination of goodwill amortization brought about by a change in accounting under IFRS (2004: €381 million).

 

Tax expenses decreased by 25.9% to €1,126 million, leading to an effective tax rate of 19.4% (2004: 24.3%), largely driven by the discontinuation of non-tax deductible goodwill amortization.

 

Minority interests in earnings decreased by 13.4% to €997 million, primarily as a result of reduced earnings at our French operating entities.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Net capital gains and impairments on investments decreased by €4,724 million to €1,325 million from €6,049 million, primarily as a result of significant realized gains in connection with the sale of certain shareholdings in 2003, including, most notably, interests in Beiersdorf AG and Munich Re.

 

Net trading income improved significantly to a loss of €49 million from a loss of €1,490 million, which reflected losses in the first half of 2003 relating to the use of certain derivative financial instruments to hedge our equity exposure.

 

Intra-group dividends and profit transfer and interest expense on external debt were €1,963 million and €863 million as compared to €676 million and €831 million, respectively. The increase in intra-group dividends and profit transfer reflected higher dividend payouts by our subsidiaries, particularly in France and the United States, attributable to significantly improved operating profitability in 2004. The intra-group dividends and profit transfer were eliminated at the Allianz Group level.

 

Due to improved operating profitability, tax expenses increased by €764 million to €1,520 million. Similarly, minority interests in earnings increased by €700 million to €1,151 million.

 

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Overall, net income declined by €1,745 million to €3,466 million.

 

The following table sets forth our Property-Casualty insurance segment’s income statement and key operating ratios for the years ended December 31, 2005, 2004 and 2003.

 

Years ended December 31,


   2005

    2004

    2003

 
     € mn     € mn     € mn  

Gross premiums written

   44,061     43,780     43,420  

Premiums earned (net)(1)

   38,017     38,193     37,277  

Current income from investments

   3,901     3,935     3,854  

Investment management and interest expenses

   (488 )   (834 )   (1,295 )

Insurance benefits (net)(2)

   (26,076 )   (26,650 )   (27,261 )

Net acquisition costs and administrative expenses(3)

   (10,840 )   (10,360 )   (9,814 )

Other operating income/ (expenses)(net)

   (352 )   (305 )   (364 )
    

 

 

Operating profit

   4,162     3,979     2,397  
    

 

 

Net capital gains and impairments on investments(4)

   1,306     1,325     6,049 (5)

Net trading income/(expenses)(6)

   (426 )   (49 )   (1,490 )

Intra-group dividends and profit transfer

   1,531     1,963     676  

Interest expense on external debt

   (834 )   (863 )   (831 )

Amortization of goodwill(7)

   —       (381 )   (383 )

Restructuring charges

   (67 )   —       —    

Other non-operating income/ (expenses)(net)

   —       163     —    
    

 

 

Earnings from ordinary activities before taxes

   5,672     6,137     6,418  
    

 

 

Taxes

   (1,126 )   (1,520 )   (756 )

Minority interests in earnings

   (997 )   (1,151 )   (451 )
    

 

 

Net income

   3,549     3,466     5,211  
    

 

 

Loss ratio(8) in%

   67.1     67.7     71.5  

Expense ratio(9) in%

   25.2     25.2     25.5  
    

 

 

Combined ratio(10) in%

   92.3     92.9     97.0  
    

 

 


(1) Net of earned premiums ceded to reinsurers of €5,411 mn (2004: €5,298 mn, 2003: €5,539 mn).
(2) Comprises net claims incurred of €25,519 mn (2004: €25,867 mn, 2003: €26,659 mn), net expenses from changes in other net underwriting provisions of €187 mn (2004: €458 mn, 2003: €269 mn) and net expenses for premium refunds of €370 mn (2004: €325 mn, 2003: €333 mn). Net expenses for premium refunds were adjusted for income of €111 mn (2004: income of €210 mn, 2003: expenses of €138 mn), related to policyholders’ participation of net capital gains and impairments on investments, as well as net trading income/(expenses), that were excluded from the determination of operating profit.
(3) Comprises net acquisition costs of €5,771 mn (2004: €5,781 mn, 2003: €5,509 mn), administrative expenses of €3,794 mn (2004: €3,849 mn, 2003: €4,002 mn) and expenses for service agreements of €1,275 mn (2004: €730 mn, 2003: €303 mn). Net acquisition costs and administrative expenses do not include expenses for the management of investments and, accordingly, do not reconcile to the acquisition costs and administrative expenses as presented in the consolidated financial statements.
(4) Comprises net realized gains on investments of €1,340 mn (2004: €1,878 mn, 2003: €7,517 mn) and net impairments on investments of €34 mn (2004: €553 mn, 2003: €1,468 mn). These amounts are net of policyholders’ participation.
(5) Includes significant net realized gains from sales of certain shareholdings.
(6) Net trading income/(expenses) are net of policyholders’ participation.
(7) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.
(8) Represents ratio of net claims incurred to net premiums earned.
(9) Represents ratio of net acquisition costs and administrative expenses, excluding expenses for service agreements, to net premiums earned.
(10) Represents ratio of net claims incurred and net acquisition costs and administrative expenses, excluding expenses for service agreements, to net premiums earned.

 

Property-Casualty Operations by Geographic Region

 

The following table sets forth our property-casualty gross premiums written, combined ratio, loss ratio, expense ratio, as well as earnings after taxes and before minority interests in earnings, which we refer to herein as “earnings after taxes and before minority interests”, by geographic region. Applicable only for 2004 and 2003, earnings after taxes and before minority interests excludes amortization of goodwill. Consistent with our general practice, gross premiums written, combined ratio, loss ratio, expense ratio as well as earnings after taxes and before minority interests by geographic region are presented before consolidation adjustments representing the elimination of transactions between Allianz Group companies in different geographic regions and different segments.

 

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     Gross premiums written
€ mn


    

Combined ratio
%


 

Years ended December 31,


   2005

     2004

     2003

     2005

    2004

    2003

 

Germany

   12,424      12,797      12,646      89.5     93.6     97.4  

France

   5,104      5,282      5,367      99.0     98.4     104.2  

Italy

   5,369      5,271      5,117      90.5     90.5     93.8  

United Kingdom

   2,466      2,632      2,538      94.0     93.4     96.1  

Switzerland

   2,012      1,816      1,742      96.4     92.6     96.3  

Spain

   1,873      1,763      1,681      90.8     90.9     95.5  
    

  

  

  

 

 

Other Europe, thereof

   5,125      5,154      5,262      87.4     91.9     96.5  

Netherlands(1)

   930      981      1,093      89.9     97.4     99.6  

Austria

   935      926      906      94.9     96.4     98.6  

Ireland

   742      792      856      77.1     77.2     85.6  

Belgium

   352      351      374      102.8     103.7     105.1  

Portugal

   304      315      305      91.5     94.0     100.6  

Luxembourg(2)

   3      108      142      125.9     79.1     135.6  

Greece

   71      73      75      80.8     116.4     106.3  
    

  

  

  

 

 

Western and Southern Europe

   3,337      3,546      3,751      89.6     84.4     98.1  
    

  

  

  

 

 

Hungary

   599      533      546      94.9     96.2     92.0  

Slovakia

   301      326      324      51.6     94.9     97.7  

Czech Republic

   248      234      227      84.1     82.1     88.1  

Poland

   246      196      158      91.4     95.3     100.1  

Romania

   220      169      131      90.2     88.9     76.3  

Bulgaria

   89      78      64      52.6     32.3     46.3  

Croatia

   60      48      40      93.8     91.0     99.5  

Russia

   25      24      21      23.4     42.5     20.1  
    

  

  

  

 

 

Central and Eastern Europe

   1,788      1,608      1,511      82.5     91.2     91.4  
    

  

  

  

 

 

NAFTA, thereof

   5,157      5,351      5,380      94.7     92.7     98.2  

United States

   4,982      4,627      4,597      94.5     96.0     99.2  

Canada

   —        464      568      —       87.0     100.0  

Mexico

   175      260      215      104.6     32.1     51.7  
    

  

  

  

 

 

Asia-Pacific, thereof

   1,749      1,672      1,654      92.1     96.5     95.5  

Australia

   1,469      1,324      1,253      91.9     97.1     95.6  

Other

   280      348      401      93.5     92.6     94.7  
    

  

  

  

 

 

South America

   716      599      614      96.8     98.0     103.9  
    

  

  

  

 

 

Other

   61      63      61      —   (3)   —   (3)   —   (3)
    

  

  

  

 

 

Specialty Lines

                                       

Credit Insurance

   1,701      1,630      1,564      66.5     69.0     82.0  

Allianz Global Risks Re

   1,310      1,345      1,346      99.9     97.7     98.8  

Allianz Marine & Aviation

   1,134      949      1,073      148.5     93.6     87.3  

Travel Insurance and Assistance Services

   992      900      818      91.5     91.6     91.9  
    

  

  

  

 

 

Subtotal

   47,193      47,224      46,863      92.3     92.9     97.0  
    

  

  

  

 

 

Consolidation adjustments(4)

   (3,132 )    (3,444 )    (3,443 )    —       —       —    
    

  

  

  

 

 

Subtotal

   44,061      43,780      43,420      92.3     92.9     97.0  
    

  

  

  

 

 

Amortization of goodwill(5)

   —        —        —        —       —       —    

Minority interests

   —        —        —        —       —       —    
    

  

  

  

 

 

Total

   44,061      43,780      43,420      92.3     92.9     97.0  
    

  

  

  

 

 


(1) Earnings after taxes and before goodwill amortization in the Netherlands includes the results of operations of the holding and financing entities that are domiciled in this country, which amounted to €323 mn in 2005 (2004: €272 mn; 2003: €489 mn).
(2) The decline in 2005 is due to the merger of International Reinsurance Company S.A. into Allianz AG.
(3) Presentation not meaningful.
(4) Represents adjustment of transactions between Allianz Group companies in different geographic regions. Additionally, we have excluded a number of significant non-operating intra-Allianz Group transactions from various country and specialty lines above and instead have reflected such transactions in the consolidation line, as well as the impacts of the September 30, 2002 reinsurance agreement between Fireman’s Fund in the United States and Allianz AG in Germany, providing cover for asbestos and environmental exposures, for the year ended December 31, 2005.
(5) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.

 

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Loss Ratio

%


   

Expense Ratio

%


   

Earnings after taxes
and before minority interests

€ mn


 

Years ended December 31,


   2005

    2004

    2003

    2005

    2004

    2003

    2005

     2004

     2003

 

Germany

   64.2     68.5     71.7     25.3     25.1     25.7     1,398      1,850      4,612  

France

   74.0     73.5     79.8     25.0     24.9     24.4     975      1,540      358  

Italy

   68.0     68.1     70.9     22.5     22.4     22.9     892      703      513  

United Kingdom

   64.1     63.6     67.1     29.9     29.8     29.0     283      228      198  

Switzerland

   74.9     72.9     71.0     21.5     19.7     25.3     153      156      97  

Spain

   71.4     72.2     75.9     19.4     18.7     19.6     170      180      101  
    

 

 

 

 

 

 

  

  

Other Europe, thereof

   61.7     67.1     72.6     25.7     24.8     23.9     1,138      921      632  

Netherlands(1)

   60.5     68.4     74.7     29.4     29.0     24.9     441      382      479  

Austria

   72.4     72.2     75.4     22.5     24.2     23.2     157      109      48  

Ireland

   54.9     55.9     64.9     22.2     21.3     20.7     175      185      105  

Belgium

   66.1     68.9     68.0     36.7     34.8     37.1     115      80      44  

Portugal

   66.9     70.2     76.3     24.6     23.8     24.3     28      16      8  

Luxembourg(2)

   1.3     76.6     133.7     124.6     2.5     1.9     24      43      (146 )

Greece

   49.7     87.9     69.0     31.1     28.5     37.3     4      (15 )    (2 )
    

 

 

 

 

 

 

  

  

Western and Southern Europe

   63.4     59.3     74.3     26.2     25.1     23.8     944      800      536  
    

 

 

 

 

 

 

  

  

Hungary

   69.9     71.2     67.1     25.0     25.0     24.9     59      46      53  

Slovakia

   25.1     72.6     76.8     26.5     22.3     20.9     64      10      5  

Czech Republic

   63.6     63.3     69.2     20.5     18.8     18.9     20      20      5  

Poland

   60.0     61.2     59.5     31.4     34.1     40.6     19      12      7  

Romania

   75.7     71.1     61.6     14.5     17.8     14.7     9      10      14  

Bulgaria

   27.0     12.4     31.2     25.6     19.9     15.1     19      19      10  

Croatia

   63.0     58.7     61.9     30.8     32.3     37.6     3      3      0  

Russia

   5.8     14.0     (0.2 )   17.6     28.5     20.3     1      1      2  
    

 

 

 

 

 

 

  

  

Central and Eastern Europe

   57.9     67.3     67.5     24.6     23.9     23.9     194      121      96  
    

 

 

 

 

 

 

  

  

NAFTA, thereof

   68.3     64.7     70.0     26.4     28.0     28.2     826      538      (57 )

United States

   68.0     67.0     70.2     26.5     29.0     29.0     813      486      (82 )

Canada

   —       62.6     76.7     —       24.4     23.3     —        41      14  

Mexico

   81.2     19.3     33.4     23.4     12.8     18.3     13      11      11  
    

 

 

 

 

 

 

  

  

Asia-Pacific, thereof

   68.0     72.8     71.7     24.1     23.7     23.8     173      139      109  

Australia

   69.1     75.1     73.9     22.8     22.0     21.7     167      98      91  

Other

   57.2     57.1     58.5     36.3     35.5     36.2     6      41      18  
    

 

 

 

 

 

 

  

  

South America

   64.5     64.7     71.3     32.3     33.3     32.6     57      50      13  
    

 

 

 

 

 

 

  

  

Other

   —   (3)   —   (3)   —   (3)   —   (3)   —   (3)   —   (3)   6      7      9  
    

 

 

 

 

 

 

  

  

Specialty Lines

                                                        

Credit Insurance

   41.2     40.8     49.3     25.3     28.2     32.7     290      214      125  

Allianz Global Risks Re

   71.3     68.9     70.9     28.6     28.8     27.9     38      52      73  

Allianz Marine & Aviation

   123.5     64.4     65.5     25.0     29.2     21.8     (186 )    88      68  

Travel Insurance and Assistance Services

   60.3     59.8     60.6     31.2     31.8     31.3     51      23      20  
    

 

 

 

 

 

 

  

  

Subtotal

   67.1     67.7     71.5     25.2     25.2     25.5     6,264      6,689      6,871  
    

 

 

 

 

 

 

  

  

Consolidation adjustments(4)

   —       —       —       —       —       —       (1,718 )    (1,691 )    (826 )
    

 

 

 

 

 

 

  

  

Subtotal

   67.1     67.7     71.5     25.2     25.2     25.5     4,546      4,998      6,045  
    

 

 

 

 

 

 

  

  

Amortization of goodwill(5)

   —       —       —       —       —       —       —        (381 )    (383 )

Minority interests

   —       —       —       —       —       —       (997 )    (1,151 )    (451 )
    

 

 

 

 

 

 

  

  

Total

   67.1     67.7     71.5     25.2     25.2     25.5     3,549      3,466      5,211  
    

 

 

 

 

 

 

  

  

 

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Our Largest Markets & Companies(1)

 

  We are one of the leading property-casualty insurers in the world covering all major global insurance markets. While we have our strongest positions in our home market of Europe, we strive for leading market positions in all markets or market segments in which we are active.

 

  Our successful strategy to capitalize on growth opportunities where risk-adequate premiums could be achieved has resulted in a significant improvement of operational profitability over the last three years.

 

Germany

 

Within our most important market, we market our “Allianz” brand through various operating entities combined under SGD. SGD is the market leader in Germany based on gross written premiums in 2005(2), accounting for €10.0 billion, or 21%, of our gross premiums written. SGD offers a wide variety of insurance products, of which our main lines of business include motor—liability and own damage—general liability, homeowner and accident. SGD distributes our products mainly through a network of full-time tied agents. However, distribution through Dresdner Bank branches and the Internet is increasing in relative importance. With Germany being a rather mature market with a high degree of competition, one of the key challenges is successfully managing the trade-off between achieving growth while maintaining profitability. Please refer to “Reorganization of German Insurance Operations” for a description of initiatives we have undertaken to further strengthen our position in the German market going forward.

 

France

 

In France, we are represented through our “AGF” brand. AGF comprised 11% of our gross premiums written in 2005, with a volume of €5.1 billion. AGF offers a broad range of products for both individuals and corporate customers including property, injury and liability insurance. AGF distributes primarily through a network of general agents, brokers and other direct sales channels. AGF is ranked third in France, based on gross premiums written in 2004(3). Operating in a market which has seen only limited growth in recent years, AGF has focused intensively on maintaining operating profitability while simultaneously implementing selective growth initiatives.

 

Italy

 

We operate in the Italian market through our “RAS” and “Lloyd Adriatico” brands. The Italian non-motor market, which has a lower penetration rate for insurance products in comparison to other European markets, provides us with great growth potential. With a combined €5.4 billion gross premiums written, RAS and Lloyd Adriatico contributed more than 11% to our gross premiums written. RAS operates in most major personal and commercial property and casualty lines in Italy, while Lloyd Adriatico underwrites mainly personal lines. RAS’s most important business line is motor, which contributes heavily to its results of operations. Other important business lines include fire, general liability and personal accident. Among other channels, distribution through direct telephone and the Internet exhibit signs of healthy growth and profitability. On a combined basis, RAS and Lloyd Adriatico continued to rank third in Italy based on gross written premiums in 2004(4). Although operating in a highly competitive market, our Italian operating entities have recorded strong operating profits and combined ratios below the average of our property-casualty segment.

 

United Kingdom

 

We serve the U.K. market primarily through our subsidiary Allianz Cornhill which generated gross premiums written of €2.5 billion, or 5%, of our gross written premiums. Allianz Cornhill offers a broad range of property-casualty products, including a number of specialty products, which we offer through our personal, commercial and specialty lines. Allianz Cornhill distributes our products through a range of distribution channels, including affinity groups. Operating in a highly competitive market,

 


(1) See “Information on the Company – International Presence” for the Allianz Group’s ownership percentages in these consolidated operating entities.
(2) Source: German Insurance Association, GDV.
(3) Source: French Insurers Association, FFSA.
(4) Source: Italian Insurers Association, ANIA.

 

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Allianz Cornhill has concentrated on active cycle management as a measure to maintain its operating profitability, even if, at times, it requires forgoing business volume. Allianz Cornhill ranks seventh in the United Kingdom based on gross premiums written in 2003(1).

 

Switzerland

 

In the Swiss market we are represented by Allianz Suisse and ART. Jointly, these two operating entities generated premiums of €2.0 billion in 2005. While Allianz Suisse operates in the general property-casualty market, ART offers conventional reinsurance as well as a variety of alternative risk transfer products. The most important line of business for Allianz Suisse is motor, comprising approximately 40% of its gross premiums written. Allianz Suisse ranks fourth in Switzerland based on gross premiums written in 2004(2). Though operating in a very competitive market, Allianz Suisse has recently been able to increase gross premiums written in motor primarily through a rise in the number of contracts sold and, to a lesser degree, higher pricing.

 

Spain

 

We serve the Spanish market through our operating entities Allianz Compania de Seguros and Fénix Directo, which are united under the name “Allianz Spain”, with gross premiums written of €1.9 billion. Allianz Spain offers a wide variety of traditional personal and commercial property-casualty insurance products, with an emphasis on automobile insurance, comprising approximately two thirds of our gross premiums written in Spain. In 2005, Allianz Spain continued to hold its second rank in the market, based on gross premiums written in 2004(3). The market conditions have been characterized, however, by intense price competition in motor insurance business, including decreasing average premiums.

 

Central and Eastern Europe

 

We have very strong positions in key property-casualty markets in Central and Eastern Europe, one of the fastest growing insurance markets in the world. Based on gross premiums written in 2004, we are one of the five leading insurers in the following markets: Hungary, Czech Republic, Slovakia, Poland, Bulgaria, Romania and Croatia(4). We also market property-casualty insurance in Russia. In the Central and Eastern European region, we recorded premiums of €1.8 billion, a growth rate of 11.2% over 2004. Motor insurance business and increasingly other personal lines products continue to be the main drivers for profitable growth.

 

United States

 

Our operations in the United States are organized under the umbrella of Allianz of America, Inc. (or “Allianz of America”), which contributed approximately 11%, or €5.0 billion, of our gross premiums written. Allianz of America comprises a group of operating entities underwriting a wide, but focused, variety of lines of business. Through Fireman’s Fund, we underwrite personal, commercial and specialty lines. Fireman’s Fund has increasingly implemented a focused business strategy, targeting a segment of the market that addresses the needs of high net worth customers. Through Allianz Global Risks US Insurance Company, we operate in the international industrial insurance market.

 

Asia-Pacific

 

In Asia-Pacific, the large majority of our operations are conducted through Allianz Australia, which contributed €1.5 billion, or 3%, of our gross premiums written. Allianz Australia serves the markets of Australia, New Zealand and Papua New Guinea and its insurance operations include a variety of products and services. Allianz Australia has strong positions in the workers compensation market and in rehabilitation and occupational health, safety and environment services, as well as operates in certain niche markets, including premium financing and pleasure craft insurance. Allianz Australia markets our products through brokers, the major distribution channel for commercial business in Australia, as well as non-tied agents, including automobile dealers, accountants, banks and directly to customers. Allianz Australia is driving further its successful market segmentation technique, which includes diversifying its portfolio outside of the traditionally cyclical areas. We also maintain operations in Malaysia, Indonesia, as well as other Asia-Pacific countries, including China, Thailand and India.

 

 


(1) Source: Financial Services Authority, FSA.
(2) Source: Statistics of the Swiss Federal Bureau of Private Insurers.

(3) Source: Research and Statistics Bureau of Spanish insurers and Pension Funds, ICEA.
(4) Source: Local supervisory authorities/insurance associations.

 

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Specialty lines

 

We offer a variety of specialty lines of business, namely credit/trade insurance, marine, aviation and industrial transport insurance, international industrial risks reinsurance, as well as travel insurance and assistance service. In contrast to our other insurance businesses, we offer these services on a worldwide basis. Through Euler Hermes, the largest credit insurer in the world based upon gross premiums written in 2004(1), we underwrite credit insurance in major markets around the world. In 2005, Euler Hermes contributed €1.7 billion to our gross premiums written. Allianz Global Risks Re acts as our industrial reinsurance clearing house, assuming industrial insurance from Allianz Group operating entities and centralizing the placement of outgoing reinsurance with third-party carriers in the reinsurance market. Allianz Global Risks Re achieved gross premiums written of €1.3 billion in 2005. Our marine, aviation and industrial transport business in Germany, France and the United Kingdom is bundled under our Allianz Marine & Aviation operating entity, which recorded gross premiums written of €1.1 billion in 2005. Through Mondial Assistance Group, we are among the world’s largest providers of travel insurance and assistance services based on gross premiums written in 2005 of €1.0 billion.

 


(1) Source: Own estimate based on published annual reports.

Life/Health Insurance Operations

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Strong profitable growth.

 

  Overall, 6.5% increase in statutory premiums, driven by our key European markets of Germany, France and Italy.

 

  Operating profit grew even stronger by 13.0%, reaching €1.6 billion, and exceeding our target of €1.5 billion, reflecting stronger product margins.

 

  Net income reached €1.3 billion, a 55.6% increase over 2004, as a result primarily of strong operating profitability, increased net capital gains and the elimination of goodwill amortization.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

We achieved strong growth in both our operating profit and net income.

 

  Statutory premiums increased by 6.8% to €45.2 billion, reflecting growth in new business, in particular in the United States and in Germany. Excluding the effects from foreign currency translation as well as changes in scope of consolidation, statutory premiums increased by 10.0%.

 

  Operating profit increased significantly by 12.1% to €1.4 billion, primarily reflecting an increase in business volume, pricing of new business and further efficiency gains.

 

  Non-operating results were up significantly by €307 million to €286 million, largely due to reduced amortization of goodwill, which was still applicable under IFRS, and higher intra-group dividends and profit transfers. In 2003, amortization of goodwill included an impairment charge on goodwill of €224 million attributable to our South Korean life subsidiary.

 

  Net income rose significantly by €648 million to €867 million in 2004.

 

Earnings Summary

 

Statutory Premiums by Regions(1)

in € bn

 

LOGO


(1) After elimination of transactions between Allianz Croup companies in different geographic regions and different segments.
(2) Comprises the following major European markets by relative percentage share: Italy: 51.2%, France: 25.3%, Switzerland: 6.8%, Spain: 3.5%; other European markets: 13.2%.
(3) Comprises the following major European markets by relative percentage share: Italy: 49.2%, France: 27.3%, Switzerland: 6.1%, Spain: 3.9%; other European markets: 13.5%.

 

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Statutory Premiums – Growth Rates(1)

 

LOGO

 


(1) Before elimination of transactions between Allianz Group companies in different geographic regions and different segments.
(2) Comprise “Other Europe”.

 

Statutory premiums

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Our statutory premiums rose by 6.5% to €48.1 billion, with particularly strong growth in our key European markets resulting from our solid market positions, our ability to reach our customers through a variety of distribution channels and increasing demand for retirement products. Based on internal growth, our statutory premiums increased by 6.0%. The strongest growth rates were achieved within Germany Life at 11.8% (€1,293 million), France at 12.0% (€567 million), Italy at 6.6% (€575 million) and the Asia-Pacific region at 29.7% (€758 million). In Switzerland, statutory premiums remained relatively unchanged at €1,058 million. Likewise, in the United States, statutory premiums remained strong at €11,115 million. Conversely, in Spain, statutory premiums at Allianz Seguros declined by 19.1% to €547 million primarily due to a large pension contract we acquired in 1Q 2004.

 

Through Allianz Leben, Germany Life’s 11.8% growth reflected the success it had achieved in the context of last year’s German “Retirement Revenue Act” (“Alterseinkünftegesetz”), resulting in a considerable increase in recurring premiums which began in 4Q 2004 and continued over the course of 2005. Additionally, and equally as important, growth from single premium products, namely our corporate pension solutions business and short-term renewals, were contributing factors to the underlying growth at Allianz Leben.

 

In France, at AGF Vie, the increase was driven by strong sales of unit-linked products through our well-performing partnership and broker as well as our agent channels. Additionally, the acquisition of AVIP and Martin Maurel Vie on December 31, 2004 from Dresdner Bank was a contributing factor to France’s growth in 2005.

 

Our Italian operating entities, RAS and Lloyd Adriatico, experienced considerable growth of 6.6% from the sale of unit-linked and index-linked products through all distribution channels, particularly through representative agencies and financial planners. In addition, statutory premiums from the RAS’s bancassurance channel grew, reflecting increased sales at CreditRas Vita. Within Italy, 69% of our total statutory premiums were comprised of investment oriented products in 2005 (2004: 65%).

 

Our Asian-Pacific markets excelled by 29.7% to €3,309 million, mainly in South Korea and Taiwan, thus highlighting the strategic importance of this region. The growth at Allianz Life Insurance Korea Co. Ltd., Seoul (or “Allianz Life Korea”) was the result of strong sales of variable life products, a product line which had been launched in 2004.

 

In the United States of America, at Allianz Life of North America (or “Allianz Life”) we experienced a 4.6% increase in statutory premiums related to core business lines, led by strong fixed annuity sales. The overall 1.1% decline in statutory premiums, however, was due to a novation (sale) of a non-core block of reinsurance business in 2005.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Despite a negative exchange rate effect, our statutory premiums increased by €2,858 million from €42,319 million to €45,177 million. Excluding the

 

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effects from foreign currency translation as well as changes in scope of consolidation, statutory premiums increased by 10.0%. However, growth varied noticeably across different markets.

 

The strongest growth rates were achieved with the United States at 31.1 % (€2,668 million), France at 6.3 % (€281 million) and Germany Life at 4.7 % (€492 million). In the United States, statutory premiums increased significantly, and excluding the negative effect of exchange rate movements of €1,071 million, statutory premiums in the United States grew by 43.6 %. This increase was primarily due to higher sales of both fixed and variable annuity products, driven in particular by an expanding distribution network, the launch of new and innovative products and a relatively stable capital markets environment.

 

In France, the increase in statutory premiums was due primarily to sales momentum brought about by new products in individual life insurance through our re-organized distribution networks.

 

At Germany Life, the increase was mainly attributable to strong new business growth in the second half of 2004, due primarily to the enactment of the German Retirement Income Revenue Act. As a result, Allianz Leben sold a record high of approximately 1.3 million insurance policies in 2004, representing an increase of 38.6 % as compared to the number of policies sold in 2003.

 

This growth in statutory premiums was offset primarily by declines in Italy of 5.0 % (€459 million), Switzerland of 11.9 % (€143 million) and South Korea of 14.9 % (€239 million). In Italy, the decrease in statutory premiums was primarily attributable to a reduction in sales of life insurance products through our bancassurance channel, reflecting mainly decreased sales at CreditRas Vita. This decrease was offset in part by growth in new business in our life insurance products through our representative agencies and financial planners.

 

In Switzerland, the decline in statutory premiums was attributable primarily to a reduction in group life insurance business resulting from the spin-off of our “Pensionskasse”, as well as a more stringent underwriting practice. Furthermore, there was a reduction in our individual life insurance business, which was in line with the general market trend, mainly attributable to the reductions in interest rates.

 

In the Asia-Pacific region, our South Korean operations saw statutory premiums decline, where in 2004 we continued our efforts to reorganize our insurance portfolio and focus on more profitable products with a longer maturity. This decline was offset in part by a growth in new business in Taiwan over the course of 2004.

 

Operating Profit

in € mn

 

 

LOGO

 

Operating Profit

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Our operating profit increased significantly by 13.0% to €1,603 million, surpassing our target of €1.5 billion for 2005. The strongest improvements occurred at our German and Italian operations, specifically Allianz Leben (€75 million), Allianz Private Krankenversicherung (€33 million) and RAS (€39 million). Improved margins on new business brought about by enhanced risk management providing a better basis for pricing and the increased business volume from the strong growth rates in recent years, were important factors in this development.

 

Current income from investments developed favorably with an increase of 4.3% to €11,826 million, despite lower interest rates in the Euro zone. Main contributors were Allianz Life (€334 million) and Allianz Leben (€84 million), driven predominantly by an increased investment base resulting primarily from significant inflows of funds from new business underwritten. Higher dividend

 

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yields on equity investments also had a beneficial impact. Investment management and interest expenses remained relatively unchanged at €478 million.

 

Insurance benefits (net) increased by 4.9% to €25,023 million. This increase was largely attributable to additional aggregate policy reserves mirroring the development in net premiums earned and an overall increase in expenses for premium refunds, attributable to policyholders, due to improved results of operations at Allianz Leben. This effect overcompensated for a slight reduction in the policyholder participation rate, which itself had a positive effect on operating profit.

 

Net acquisition costs and administrative expenses decreased by 2.9% to €3,921 million, despite a €95 million increase at Allianz Life resulting from increased wages and fees. Major drivers of this decline included reduced acquisition costs compared to the 2004 level which was impacted by the German Retirement Revenue Act in 4Q 2004 and the regular unlocking of assumptions within our deferred policy acquisition cost assets in 2005. As a result of the strong growth of our statutory premiums and the decline in net acquisition costs and administrative expenses, our statutory expense ratio(1) declined by 1.0 percentage point to 8.1%.

 

Net trading income, which is almost exclusively attributable to policyholders, decreased significantly to a loss of €326 million, primarily from changes in fair values from freestanding derivatives at Allianz Leben, as well as embedded and freestanding derivatives at Allianz Life in connection with equity-indexed annuities it sold.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Operating profit increased significantly by 12.1% to €1,418 million. This was due primarily to lower net other operating income/(expenses), reduced net insurance benefits and increased net current income from investments, offset in part by increased net acquisition costs and a decline in our net trading income. Important drivers for these beneficial developments were an increase in business volume, more favorable pricing of new business and further efficiency gains.

 

Administrative expenses decreased by €37 million to €1,270 million, primarily as a result of efficiency gains.

 

Net acquisition costs increased by €750 million, or 39.8%, to €2,635 million, primarily reflecting the strong growth in our statutory premiums. In addition, in 2003, net acquisition costs included a significant benefit from a change in calculation assumptions related to deferred policy acquisition costs. Accordingly, our statutory expense ratio1) increased to 9.1% in 2004 from 7.9% in 2003.

 

Net Income

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Driven by strong operating profitability and increased net capital gains net income grew significantly by 55.6% to €1,349 million.

 

Net capital gains and impairments on investments attributable to shareholders increased to €608 million. This was primarily the result of favorable capital markets conditions, which we sought to leverage to yield increased realizations, with our sale of Gecina S.A. (France) in 1Q 2005 as the most significant. At the same time, net impairments remained low at €63 million.

 

Net income was also positively affected by the elimination of the amortization of goodwill resulting from a change in accounting under IFRS (2004: €159 million). Restructuring charges of €19 million resulted from an early retirement program at AGF Vie in France.

 

Our tax expenses remained stable at €463 million. However, our effective tax rate declined considerably to 20.1% from 27.3%, largely due to tax-exempt income at various operating entities, including tax-exempt income from securities at Allianz Leben, a beneficial tax settlement at Allianz Life, the discontinuation of non-tax deductible goodwill amortization, as well as through the write-down of deferred tax assets at Allianz Life Korea in 2004.

 

Minority interests in earnings increased to €462 million, primarily due to improved earnings at our Italian and French Life entities.

 


(1) Represents ratio of net acquisition costs and administrative expenses, excluding expenses for service agreements, to net statutory premiums.

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Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Net capital gains and impairments on investments increased slightly by 2.9 % to €282 million in 2004.

 

Intra-group dividends and profit transfer increased by €60 million to €163 million in 2004. The intra-group dividends and profit transfer were eliminated at the Allianz Group level.

 

Amortization of goodwill, which was still applicable under IFRS for the year ended December 31, 2004, decreased by €239 million to €159 million in 2004 as compared to €398 million in 2003, which reflected an impairment on goodwill of €224 million attributable to South Korea.

 

Tax expenses decreased significantly to €469 million from €639 million in 2003, which reflected a charge of €409 million relating primarily to a change in tax law in Germany.

 

Minority interests in earnings remained relatively unchanged at €368 million.

 

Overall, net income increased significantly by €648 million to €867 million.

 

The following table sets forth our Life/Health insurance segment’s income statement and key operating ratio for the years ended December 2005, 2004 and 2003.

 

Years ended December 31,


  2005

    2004

    2003

 
    € mn     € mn     € mn  

Statutory premiums(1)

  48,129     45,177     42,319  

Gross premiums written

  20,950     20,716     20,689  

Premiums earned (net)(2)

  19,730     18,596     18,701  

Current income from investments

  11,826     11,335     11,260  

Investment management and interest expenses

  (478 )   (483 )   (516 )

Insurance benefits (net)(3)

  (25,023 )  
(23,845
)   (24,189 )

Net acquisition costs and administrative expenses(4)

  (3,921 )   (4,039 )   (3,416 )

Net trading income/(expenses)

  (326 )   117     218  

Other operating income/(expenses)(net)

  (205 )   (263 )   (793 )
   

 

 

Operating profit

  1,603     1,418     1,265  
   

 

 

Net capital gains and impairments on investments(5)

  608     282     274 (6)

Intra-group dividends and profit transfer

  82     163     103  

Amortization of goodwill(7)

  —       (159 )   (398 )

Restructuring charges

  (19 )   —       —    
   

 

 

Earnings from ordinary activities before taxes

    2,274     1,704     1,244  
     

 

 

Taxes

    (463 )   (469 )   (639 )

Minority interests in earnings

    (462 )   (368 )   (386 )
     

 

 

Net income

    1,349     867     219  
     

 

 

Statutory expense ratio(8) in %

    8.1     9.1     7.9  

(1) Under the Allianz Group’s accounting policies for life insurance contracts, for which we have adopted U.S. GAAP accounting standards, gross premiums written include only the cost- and risk-related components of premiums generated from unit-linked and other investment-oriented products, but do not include the full amount of statutory premiums written on these products. Statutory premiums are gross premiums written from sales of life insurance policies as well as gross receipts from sales of unit-linked and other investment-oriented products, in accordance with the statutory accounting practices applicable in the insurer’s home jurisdiction.
(2) Net of earned premiums ceded to reinsurers of €1,125 mn (2004: €2,048 mn; 2003: €1,953 mn).
(3) Net insurance benefits were adjusted for income of €2,541 mn (2004: €1,548 mn; 2003: €1,015 mn), related to policyholders’ participation of net capital gains and impairments on investments that were excluded from the determination of operating profit.
(4) Comprises net acquisition costs of €2,358 mn (2004: €2,635 mn; 2003: €1,885 mn), administrative expenses of €1,426 mn (2004: €1,270 mn; 2003: €1,307 mn) and expenses for service agreements of €137 mn (2004: €134 mn; 2003: €224 mn). Net acquisition costs and administrative expenses do not include expenses for the management of investments and, accordingly, do not reconcile to the acquisition costs and administrative expenses as presented in the consolidated financial statements.
(5) Comprises net realized gains on investments of €671 mn (2004: €331 mn; 2003: €602 mn) and net impairments on investments of €63 mn (2004: €49 mn; 2003: €328 mn). These amounts are net of policyholders’ participation.
(6) Includes realized gains of €743 mn from sales of Crédit Lyonnais shares in 2003.
(7) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.
(8) Represents ratio of net acquisition costs and administrative expenses, excluding expenses for service agreements, to net statutory premiums (2005: €46,895 mn; 2004: €43,031 mn; 2003: €40,276 mn).

 

Life/Health Operations by Geographic Region

 

The following table sets forth our life/health statutory premiums, gross premiums written, statutory expense ratio, as well as earnings after taxes and before minority interests in earnings, which we refer to herein as “earnings after taxes and before minority interests”, by geographic region. Applicable only for 2004 and 2003, earnings after taxes and

 

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before minority interests excludes amortization of goodwill. Consistent with our general practice, statutory premiums, gross premiums written, statutory expense ratio as well as earnings after taxes and before minority interests by geographic region are presented before consolidation adjustments representing the elimination of transactions between Allianz Group companies in different geographic regions and different segments.

 

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       Statutory premiums(1)          
Gross premiums written
 
       € mn

     € mn

 

Years ended December 31,


     2005

     2004

     2003

     2005

     2004

     2003

 

Germany Life

     12,231      10,938      10,446      10,825      10,182      9,924  

Germany Health(2)

     3,042      3,020      2,960      3,042      3,020      2,960  

France(3)

     5,286      4,719      4,438      1,583      1,629      1,572  

Italy

     9,313      8,738      9,197      1,167      1,142      1,239  

Switzerland

     1,058      1,054      1,197      475      516      557  

Spain

     547      676      611      361      588      540  
      

  

  

  

  

  

Other Europe, thereof

     2,026      2,140      2,133      1,324      1,453      1,355  

Netherlands

     356      371      396      140      156      137  

Austria

     343      335      316      298      311      305  

Belgium

     601      532      453      328      345      324  

Portugal

     83      85      90      63      61      59  

Luxembourg

     72      146      166      42      36      40  

Greece

     91      82      82      79      82      70  

United Kingdom

     —        198      297      —        149      143  
      

  

  

  

  

  

Western and Southern Europe

     1,546      1,749      1,800      950      1,140      1,078  
      

  

  

  

  

  

Hungary

     89      77      66      74      62      53  

Slovakia

     149      134      126      132      125      121  

Czech Republic

     64      53      45      52      44      43  

Poland

     99      75      66      54      38      30  

Romania

     18      11      3      8      3      3  

Bulgaria

     19      14      8      19      14      8  

Croatia

     41      25      19      34      25      19  

Cyprus

     1      2      —        1      2      —    
      

  

  

  

  

  

Central and Eastern Europe

     480      391      333      374      313      277  
      

  

  

  

  

  

United States

     11,115      11,234      8,566      746      889      1,078  
      

  

  

  

  

  

Asia-Pacific, thereof

     3,309      2,551      2,603      1,343      1,228      1,372  

South Korea

     1,752      1,370      1,609      993      980      1,135  

Taiwan

     1,347      988      827      216      126      122  

Malaysia

     106      111      72      80      66      51  

Indonesia

     69      59      74      39      34      43  

Other

     35      23      21      15      22      21  
      

  

  

  

  

  

South America

     141      64      129      42      33      58  
      

  

  

  

  

  

Other

     83      67      61      63      61      57  
      

  

  

  

  

  

Subtotal

     48,151      45,201      42,341      20,971      20,741      20,712  
      

  

  

  

  

  

Consolidation adjustments(5)

     (22 )    (24 )    (22 )    (21 )    (25 )    (23 )
      

  

  

  

  

  

Subtotal

     48,129      45,177      42,319      20,950      20,716      20,689  
      

  

  

  

  

  

Amortization of goodwill(6)

     —        —        —        —        —        —    

Minority interests

     —        —        —        —        —        —    
      

  

  

  

  

  

Total

     48,129      45,177      42,319      20,950      20,716      20,689  
      

  

  

  

  

  


(1) Under the Allianz Group’s accounting policies for life insurance contracts, for which we have adopted U.S. GAAP accounting standards, gross written premiums include only the cost- and risk-related components of premiums generated from unit-linked and other investment-oriented products, but do not include the full amount of statutory premiums written on these products. Statutory premiums are gross premiums written from sales of life insurance policies as well as gross receipts from sales of unit-linked and other investment-oriented products, in accordance with the statutory accounting practices applicable in the insurer’s home jurisdiction.
(2) Loss ratios were 69.7%, 68.9% and 68.7% for the years ended December 31, 2005, 2004 and 2003, respectively.
(3) On December 31, 2004, AVIP and Martin Maurel Vie were consolidated within the Life/Health insurance operations of France.
(4) Presentation not meaningful.
(5) Represents elimination of transactions between Allianz Group companies in different geographic regions.
(6) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.

 

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       Statutory expense ratio     Earnings after taxes and
before minority interests
 
       %

    € mn

 

Years ended December 31,


     2005

    2004

    2003

    2005

     2004

     2003

 

Germany Life

     7.0     10.4     6.8     329      223      84  

Germany Health(2)

     8.8     9.3     10.4     96      80      26  

France(3)

     15.4     17.3     16.5     384      265      336  

Italy

     5.1     4.4     3.5     400      298      230  

Switzerland

     8.5     9.8     8.6     44      30      21  

Spain

     7.2     5.8     6.3     48      45      33  
      

 

 

 

  

  

Other Europe, thereof

     17.1     19.2     19.6     160      174      95  

Netherlands

     16.4     19.7     23.3     52      26      17  

Austria

     11.3     15.0     12.5     11      15      8  

Belgium

     11.8     14.0     15.0     62      95      (18 )

Portugal

     18.8     17.6     20.5     9      9      8  

Luxembourg

     29.2     15.1     14.0     7      8      (8 )

Greece

     23.5     19.8     28.2     4      (2 )    1  

United Kingdom

     —       35.8     26.6     (10 )    3      67  
      

 

 

 

  

  

Western and Southern Europe

     14.6     17.7     18.6     135      154      75  
      

 

 

 

  

  

Hungary

     25.4     23.9     22.9     8      5      5  

Slovakia

     23.5     26.3     22.5     6      3      6  

Czech Republic

     21.2     24.2     23.4     4      3      2  

Poland

     34.0     29.0     25.6     3      2      1  

Romania

     25.7     11.2     135.0     —        —        —    

Bulgaria

     9.1     (1.3 )   28.9     2      3      1  

Croatia

     21.6     30.4     28.2     2      4      5  

Cyprus

     46.1     15.7     —       —        —        —    
      

 

 

 

  

  

Central and Eastern Europe

     25.1     25.2     24.6     25      20      20  
      

 

 

 

  

  

United States

     5.4     5.2     4.6     295      274      152  
      

 

 

 

  

  

Asia-Pacific, thereof

     10.5     13.2     10.8     55      7      34  

South Korea

     14.5     18.7     13.1     53      —        (34 )

Taiwan

     3.8     4.3     2.9     8      6      72  

Malaysia

     12.5     5.0     19.7     1      7      5  

Indonesia

     22.1     34.8     35.2     —        (2 )    (5 )

Other

     34.2     36.1     33.9     (7 )    (4 )    (4 )
      

 

 

 

  

  

South America

     17.4     23.2     24.3     1      2      4  
      

 

 

 

  

  

Other

     —   (4)   —   (4)   —   (4)   2      3      (2 )
      

 

 

 

  

  

Subtotal

     8.1     9.1     7.9     1,814      1,401      1,013  
      

 

 

 

  

  

Consolidation adjustments(5)

     —       —       —       (3 )    (7 )    (10 )
      

 

 

 

  

  

Subtotal

     8.1     9.1     7.9     1,811      1,394      1,003  
      

 

 

 

  

  

Amortization of goodwill(6)

     —       —       —       —        (159 )    (398 )

Minority interests

     —       —       —       (462 )    (368 )    (386 )
      

 

 

 

  

  

Total

     8.1     9.1     7.9     1,349      867      219  
      

 

 

 

  

  

 

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Our Largest Markets & Companies(1)

 

  Similar to our property-casualty operations, we are one of the leading life/health insurers in the world covering all major global insurance markets. We strive for leading market positions in the markets in which we are active.

 

  The globally increasing demand for wealth accumulation and pension services and products leads us to expect that the life/health market will enjoy dynamic growth in the coming years, and we believe our market positions will allow us to capitalize on this emerging trend.

 

Germany Life

 

In Germany, Allianz Leben is the market leader for life insurance based on statutory premiums in 2005(2). Besides Allianz Leben, we operate through a variety of smaller operating entities in the German market. Together, our German life operating entities contributed €12.2 billion, or 25%, of our statutory premiums. We are active both in the private and commercial markets and offer a comprehensive range of life insurance and life insurance-related products on both an individual and group basis. The main classes of coverage offered include endowment, annuity and term insurance, which are provided as riders to other policies and on a stand-alone basis. Our private lines have enjoyed favorable development, especially though retirement savings products, also driven by recent changes in legislation. In particular, the German “Retirement Revenue Act” (“Alterseinkünftegesetz”) led to a strong increase of recurring premiums in 2005. In our commercial lines, we are offering group life insurance and are providing companies with services and solutions in connection with pension schemes and defined contribution plans.

 

Germany Health

 

Through Allianz Private Krankenversicherungs-AG (or “Allianz Private Health”), we are the third-largest private health insurer in Germany based on statutory premiums in 2004(2) with more than 2 million customers. In 2005, Allianz Private Health contributed €3.0 billion, or 6%, of our statutory premiums. Allianz Private Health provides a wide range of health insurance products, including full private healthcare coverage for the self-employed, supplementary insurance for individuals insured under statutory health insurance plans, supplementary care insurance as well as foreign travel medical insurance.

 

France

 

In France, we operate through the companies of AGF. AGF is the eighth-largest life insurance provider in France based on statutory premiums in 2004(3) and experienced significant growth of 12% in 2005, also driven by the acquisition of AVIP and Martin Maurel Vie in 4Q 2004. AGF contributed €5.3 billion, or 11%, to our statutory premiums in 2005. AGF provides a broad line of life insurance and other financial products, including short-term investment and savings products. An important portion of AGF’s life statutory premiums is generated through the sale of unit-linked policies. Life statutory premiums growth was strong in January 2006 and we expect this positive trend to continue in 2006.

 

Italy

 

Through RAS and Lloyd Adriatico, we maintain a strong position in Italy, where the life market is increasingly focusing on investment-related products. RAS and Lloyd Adriatico contributed 15% and 4% of our statutory premiums in 2005, respectively. Together, these two operating entities generated a statutory premium volume of €9.3 billion in 2005. Products offered through these operating entities include individual life policies, primarily endowment policies, but also annuities and unit-linked products. Consistent with general trends in the Italian market, our business includes an increasing amount of unit-linked policies, where policyholders participate directly in the performance of policy-related investments. At December 31, 2005, two-thirds of our combined statutory premiums at RAS and Lloyd Adriatico comprise unit-linked products. Jointly, and on the basis of statutory premiums, RAS and Lloyd Adriatico ranked second in Italy(4) in 2004. A large percentage of our contracts is marketed through our bancassurance channel.

 


(1) See “Information on the Company – International Presence” for the Allianz Group’s ownership percentages in these consolidated operating entities.
(2) Source: German Insurance Association, GDV.
(3) Source: French Insurers Association, FFSA.
(4) Source: Italian Insurers Association, ANIA.

 

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Switzerland

 

We conduct our life/health operations in Switzerland primarily through the Allianz Suisse Lebensversicherungs-Gesellschaft and Phénix Vie. Together, these operating entities contributed €1.1 billion, or 2%, to our statutory premiums in 2005 and, in aggregate, represent the sixth largest life insurance provider in Switzerland based on statutory premiums in 2004(1). Through these operating entities, we market a wide range of individual and group life insurance products, including retirement, death and disability products. Despite a challenging political and regulatory environment, coupled with low interest rates, our Swiss operations have experienced a positive trend in their results of operation through cost and pricing discipline.

 

United States

 

In the United States, we are represented by Allianz Life, which contributed €11.1 billion, or 23%, to our total statutory premiums in 2005 and is the market leader in equity-indexed annuities, with approximately one-third of the market share based on statutory premiums in 2005(2). Allianz Life holds a 12% share of the overall fixed annuity market and also maintains a 3% market share of the large variable annuity market based on statutory premiums in 2005(2). Its smaller but growing lines of business include individual life, long-term care, and health excess of loss insurance. We believe Allianz Life is well positioned for the expected growth in demand for retirement income & longevity protection.

 

Asia-Pacific

 

In Asia-Pacific, the majority of our operations are conducted through Allianz Life Korea and Hana Life, our bancassurance joint venture with Hana Financial Group, Seoul. Overall, our South Korean operations contributed €1.8 billion, or 4%, of our statutory premiums in 2005. Allianz Life Korea is the fifth-largest life insurance company in South Korea based on statutory premiums in 2005(3). Allianz Life Korea is faced with the challenge of identifying growth opportunities within a mature marketplace. Our South Korean operations market a wide range of life insurance products, including unit-linked products, variable life, individual whole life insurance polices, annuities and endowments. Due to the very low interest rate environment in South Korea since 2000, Allianz Life Korea has increasingly shifted its focus to variable life products. As a result, we have achieved a strong increase in statutory premiums and, more importantly, new business in 2005 has been more profitable than in recent years. Additionally, due to strict expense management, improved commission schemes and cutbacks in agency costs, Allianz Life Korea posted strong results of operation in 2005.

 

We are also represented in Taiwan by Allianz President Life Insurance, Taipeh (or “Allianz President Life”), which contributed €1.3 billion, or 3%, of our statutory premiums in 2005. Allianz President Life markets term life, whole life and endowment products. In addition, Allianz President Life increasingly offers investment-linked products. We also maintain operations in Malaysia, Indonesia, as well as other Asia-Pacific countries, including China, Thailand and India.

 


(1) Source: Statistics of the Swiss Federal Bureau of Private Insurers.
(2) Source: LIMRA.
(3) Source: Korean Life Insurance Association.

 

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Banking Operations

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Dresdner Bank increased its operating profit by 33.2% to €775 million.

 

  Operating revenues decreased by 3.3% to €6.2 billion, primarily due to the close of our non-strategic IRU at Dresdner Bank and negative impacts from IAS 39. In contrast, operating revenues from Dresdner Bank’s strategic business(1), excluding the negative impacts from IAS 39, grew by 4.1% to €6.1 billion.

 

  In line with our expectations, operating profit increased by 44.2% to €845 million, of which Dresdner Bank contributed €775 million, an increase of 33.2%.

 

  Operating profit and high net capital gains resulted in net income of €1.0 billion.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

We stabilized operating revenues, significantly increased efficiency and markedly decreased risks.

 

  In 2004, we successfully drove forward the turnaround of our banking business.

 

  After an operating loss of €396 million in 2003, we successfully achieved an operating profit of €586 million in 2004, of which Dresdner Bank contributed €582 million. This positive development resulted from the impact of previous years’ cost reduction plans and the significant reduction of our net loan loss provisions through the further reduction in our non-strategic loan business within the IRU of Dresdner Bank.

 

  Additionally, and following a decline in restructuring charges, we successfully achieved a net income of €126 million in 2004 as compared to a loss of €1,015 million in 2003.

 

Earnings Summary

 

The results of operations of our Banking segment are almost exclusively represented by Dresdner Bank, accounting for 95.5% of our total Banking segment’s operating revenues for the year ended December 31, 2005 (2004: 96.6%, 2003: 93.2%). Accordingly, the discussion of our Banking segment’s results of operations relates solely to the operations of Dresdner Bank.

 

Operating Revenues

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Strategic Business(1) Operating revenues improved in our four operating divisions (Personal Banking, Private & Business Banking, Corporate Banking and DrKW). In aggregate, operating revenues from our strategic business increased by 4.1% to €6,098 million, excluding the aggregate negative accounting effects from IAS 39 of €214 million (2004: income of €7 million).

 

In our Personal Banking division, operating revenues increased by 2.0% to €1,883 million. Our Business Models 2 and 3, which comprise the sale of banking products through insurance agents, were successfully implemented with an improvement in revenues and growing client base. In 2005, we acquired approximately 360,000 new bank clients through this sales channel, which was well above our target of 300,000.

 

Additionally, our Personal Banking division benefited from the improved securities business, specifically from closed-end funds, as did our Private & Business Banking division, which experienced an increase in operating revenues of 3.0% to €1,179 million.

 

While operating revenues in our Corporate Banking division increased slightly by 1.3% to €1,027 million, at DrKW, operating revenues rose by 2.8% to €2,102 million. The increase at DrKW resulted primarily from favorable developments within our client business, with an improvement in our capital markets and mergers & acquisitions business more than offsetting the substantial decrease in net trading income, largely due to the difficult capital market conditions in April and May. In the second half of 2005, DrKW’s net trading income increased significantly, driven primarily by strong client and customer business.

 


(1) Dresdner Bank’s strategic business includes its Personal Banking, Private & Business Banking, Corporate Banking, DrKW and Corporate Other divisions, but does not include IRU.

 

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Operating Revenues by Type of Revenues Net interest income remained relatively stable at €2,228 million. Excluding the negative effects from the reduction of our non-strategic IRU portfolio and from IAS 39, net interest income increased by 11.0%, in particular driven by our structured finance business. At September 30, 2005, the IRU’s remaining risk assets amounted to €1.4 billion, of which the majority was sold in 4Q 2005, resulting in a further decrease of these risk assets to approximately one-third at December 31, 2005.

 

Net fee and commission income grew by 6.1% to €2,610 million, principally driven by the securities business in our Personal Banking and Private & Business Banking divisions. At DrKW, client business also contributed to our increased net fee and commission income.

 

Net trading income declined by 25.6% to €1,116 million, largely due to the difficult capital market conditions in April and May, as well as the negative impacts from IAS 39.

 

In summary, despite the revenue growth experienced by our strategic business, the faster than planned completion of the wind-down of our non-strategic IRU, which was closed effective September 30, 2005, as well as the negative impacts from IAS 39 of €214 million, resulted in a decrease in operating revenues by 4.4% to €5,954 million at Dresdner Bank.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Operating revenues remained fairly constant at €6,226 million, with only a 0.3% decrease.

 

This was driven primarily by a 2.5% decline in net interest income to €2,267 million, primarily resulting from the reduction of our interest-bearing assets within our IRU, reflecting predominantly the accelerated exit from our non-strategic loan business with disposals aggregating €8.8 billion in loan exposure.

 

Partially offsetting the decline in net interest income was an increase of 3.1% to €2,460 million in net fee and commission income, principally resulting from our Personal Banking and Private & Business Banking divisions. In our Personal Banking division, increased activities in our securities and insurance business helped to excel net fee and commission income. Primarily successful sales activities, product innovations in our securities business, as well as an increased efficiency in our distribution channels contributed to the rise in net fee and commission income within our Private & Business Banking division. Overall, the commission income generated from the sales of insurance products of approximately €136 million (2003: €84 million) also contributed significantly to the increase in net fee and commission income.

 

Net trading income declined by 2.2% to €1,499 million, predominantly resulting from lower net trading income at DrKW, mainly reflecting significantly reduced risk capital.

 

Operating revenues from our Private & Business Banking division rose by 4.1% to €1,145 million, primarily reflecting increased net fee and commission income, as previously discussed.

 

Conversely, operating revenues from our Personal Banking, Corporate Banking and DrKW divisions decreased by 0.5%, 2.6% and 4.5%, respectively. At Personal Banking and Corporate Banking, the decline resulted primarily from lower net interest income. The decline in our Personal Banking’s net interest income more than offset the division’s increased net fee and commission income, as previously discussed, and resulted primarily from the deposit business, which was negatively affected by lower market interest rates in 2004 as compared to 2003. Corporate Banking’s net interest income declined due to significantly decreased risk-weighted assets, partially offset by improved interest margins. At DrKW, the decrease in operating revenues resulted predominantly from lower net trading income due to significantly reduced risk capital.

 

Operating Profit

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Dresdner Bank’s operating profit significantly improved by 33.2% to €775 million. However, given lower operating revenues and an almost unchanged expense base, our cost-income ratio(1) increased from

 


(1) Represents the ratio of administrative expenses to operating revenues.

 

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85.2% to 88.9%, substantially burdened by the negative impact from the application of the IAS 39 hedge accounting rules on derivative financial instruments.

 

Operating Profit – Dresdner Bank

in € mn

 

LOGO

 

The increase in operating profit was driven by the positive developments within our net loan loss provisions, resulting in a net release of €113 million (2004: net charge of €337 million). While gross releases and recoveries decreased, the decline in gross new additions was even stronger. Gross releases and recoveries reached €850 million (2004: €1,061 million), stemming principally from exits from large debtors, mainly within our IRU. Gross new additions to allowances of €737 million were significantly lower compared to €1,398 million in 2004, predominantly due to the reductions in our non-strategic business within our IRU and the significantly improved risk profile of Dresdner Bank’s strategic loan portfolio. The net release in loan loss provisions, together with the reduction of our non-performing loan portfolio by approximately 58%, led to a coverage ratio(1) at December 31, 2005 of 56.8% (2004: 60.4%). Both personnel and non-personnel expenses remained stable at €3,246 million (2004: €3,247 million) and €2,046 million (2004: €2,060 million) despite focused investments in certain growth areas, such as infrastructure established for our Business Models 2 and 3.

 

Our Personal Banking division experienced a strong improvement in 2005. Operating revenues increased by 2.0% to €1,883 million and operating profit was more than three times higher compared to 2004, reaching €210 million. These positive developments reflect primarily strict cost control while loan loss provisions reached normalized levels. Our cost-income ratio strengthened by 5.0 percentage points to 84.2%.

 

Private & Business Banking and Corporate Banking also increased operating revenues and further improved their operating profitability, with cost-income ratios decreasing by 6.5 and 2.3 percentage points, respectively. These positive developments led to increases in operating profit by 35.4% to €440 million and by 14.8% to €551 million, respectively.

 

Conversely, DrKW’s cost-income ratio rose to a disappointing 91.7% from 89.4%, primarily reflecting decreased net trading income and increased expenses. Accordingly, operating profit declined by 6.4% to €204 million.

 

These developments underline the need for a better re-alignment between our corporate banking and investment banking activities, a decision recently undertaken at Dresdner Bank. See “Information on the Company—Banking Operations.”

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Dresdner Bank’s operating profit increased significantly to €582 million, compared to an operating loss of €509 million in the prior year. This positive development was brought about by reductions in our administrative expenses and net loan loss provisions across all segments.

 

Our administrative expenses were reduced by 7.5% to €5,307 million. This was largely due to our cost-cutting and restructuring measures, including further reduction in headcount, which resulted in savings in both personnel and non-personnel operating expenses. Personnel expenses decreased by €202 million, or 5.9%, to €3,247 million. As a result of lower expenses related to information technology and other equipment, non-personnel operating expenses also declined by 10.0% to €2,060 million. Our net loan loss provisions declined by 66.8% to €337 million, primarily as a result of further improved risk management processes, absence of large defaults and the reduction in our non-strategic loan business within the IRU, thereby reducing our risk-weighted assets. Overall, our coverage ratio increased to 60.4% at December 31, 2004 (2003: 55.9%).

 


(1) Represents total loan loss allowances as a percentage of total non-performing loans and potential problem loans.

 

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Personal Banking’s operating profit grew significantly to €61 million, compared to an operating loss of €85 million in 2003, due primarily to strict cost management and further reduction in headcount, mainly in the back office function. As a result, our cost-income ratio improved from 93.5% to 89.2%.

 

Private & Business Banking and Corporate Banking were also successful in improving their operating profitability, with cost-income ratios decreasing by 3.2 and 0.9 percentage points, respectively. These positive developments led to increases in operating profit by 18.6% to €325 million and 13.5% to €480 million, respectively.

 

Conversely, DrKW’s cost-income ratio rose to 89.4%, compared to 87.6% in the prior year, primarily reflecting decreased net trading income due to significantly reduced risk capital. Accordingly, operating profit decreased by 29.7% to €218 million.

 

Net Income

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Net income increased significantly to €1,003 million, including a tax-exempt gain of €343 million from the transfer of 5% of Dresdner Bank’s 7.3% shareholding in Munich Re to Allianz AG in 1Q 2005 as part of the Allianz Group’s “All-in-One” capital market transactions. In addition to the positive operating profit development, the growth in net income was attributable to our improved non-operating results.

 

Net capital gains and impairments on investments of Dresdner Bank rose by €547 million. This increase resulted principally from the aforementioned Munich Re transfer, the complete sale of our shareholding in Bilfinger Berger in 2Q 2005, as well as the sale of 7.35% of our 28.48% shareholding in Eurohypo AG to Commerzbank AG and of the majority of our real estate portfolio in 4Q 2005, largely of which was subsequently leased back. Further, net impairments on investments decreased heavily, primarily from improved capital market conditions. The sales of various assets in 2005 was in line with Dresdner Bank’s focus on its core business. The sale of the remaining 21.13% participation in Eurohypo AG to Commerzbank AG is subject to the fulfilment of customary conditions, in particular the approval by the German and various European antitrust authorities and the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or “BaFin”).

 

The absence of significant restructuring charges and the elimination of goodwill amortization (2004: charge of €244 million) also benefited our net income. Other non-operating income/expenses (net) in 2005 improved significantly to an expense of €9 million (2004: expense of €278 million), resulting from, among other factors, impairments on certain non-strategic assets in 2004. The increase in operating profit and non-operating results led to tax expenses of €382 million in 2005, compared to a tax credit of €288 million in the previous year, including a one-off tax benefit. Accordingly, our effective tax rate was 25.6% in 2005.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Net income of Dresdner Bank improved significantly to €164 million in 2004 from a loss of €1,042 million in 2003.

 

In addition to the positive developments in our operating profit, Dresdner Bank’s net income was strengthened by a significant reduction in restructuring charges, which declined to €290 million from €840 million, as well as an improvement in net other non-operating income/(expenses), which increased by €335 million to a loss of €278 million from a loss of €613 million.

 

During 2004, restructuring charges of €96 million resulted from our “New Dresdner” program, with a further €55 million stemming from other existing programs. Restructuring provisions of €139 million were also recorded for measures taken in optimizing our internal business processes in our Personal Banking and DrKW divisions, as well as the reorganization of our business in Latin America.

 

Additionally, the sale of non-strategic investments contributed to our net capital gains and impairments on investments, which increased to €166 million from €120 million.

 

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The following table sets forth the income statements and key operating ratio for both our Banking segment as a whole and Dresdner Bank on a stand-alone basis for the years ended December 2005, 2004 and 2003.

 

Years ended December 31,


   2005

    2004

    2003

 
     Banking
Segment


    Dresdner
Bank


    Banking
Segment


    Dresdner
Bank


    Banking
Segment


    Dresdner
Bank


 
     € mn     € mn     € mn     € mn     € mn     € mn  

Net interest income

   2,305     2,228     2,359     2,267     2,728     2,325  

Net fee and commission income

   2,767     2,610     2,593     2,460     2,452     2,387  

Net trading income

   1,163     1,116     1,494     1,499     1,524     1,533  
    

 

 

 

 

 

Operating revenues(1)

   6,235     5,954     6,446     6,226     6,704     6,245  
    

 

 

 

 

 

Administrative expenses

   (5,500 )   (5,292 )   (5,516 )   (5,307 )   (6,086 )   (5,739 )

Net loan loss provisions

   110     113     (344 )   (337 )   (1,014 )   (1,015 )
    

 

 

 

 

 

Operating profit

   845     775     586     582     (396 )   (509 )
    

 

 

 

 

 

Net capital gains and impairments on investments

   7102 )   713     172 (2)   166     166 (2)   120  

Restructuring charges

   (13 )   (12 )   (292 )   (290 )   (892 )   (840 )

Other non-operating income/(expenses)(net)

   (5 )   (9 )   (289 )   (278 )   (551 )   (613 )

Amortization of goodwill(3)

   —       —       (244 )   (244 )   (263 )   (270 )
    

 

 

 

 

 

Earnings from ordinary activities before taxes

   1,537     1,467     (67 )   (64 )   (1,936 )   (2,112 )
    

 

 

 

 

 

Taxes

   (396 )   (382 )   294     288     1,025     1,075  

Minority interests in earnings

   (102 )   (82 )   (101 )   (60 )   (104 )   (5 )
    

 

 

 

 

 

Net income

   1,039     1,003     126     164     (1,015 )   (1,042 )
    

 

 

 

 

 

Cost-income ratio4) in %

   88.2     88.9     85.6     85.2     90.8     91.9  

(1) Operating revenues is a measure used by management to calculate and monitor the activities and operating performance of its banking operations. This measure is used by other banks, but other banks may calculate operating revenues on a different basis and accordingly may not be comparable to operating revenues as used herein.
(2) Comprises primarily net realized gains on investments of €930 million (2004: €604 million, 2003: €709 million) and impairments on investments of €225 million (2004: €467 million, 2003: €591 million). Impairments on investments includes €37 million (2004: €32 million, 2003: €23 million) of scheduled depreciation of real estate used by third parties.
(3) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.
(4) Represents ratio of administrative expenses to operating revenues.

 

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Banking Operations by Division

 

The following table sets forth our banking operating revenues, cost-income ratio, as well as earnings after taxes and before minority interests in earnings, which we refer to herein as “earnings after taxes and before minority interests”, by division. Applicable only for 2004 and 2003, earnings after taxes and before minority interests by division excludes amortization of goodwill. Consistent with our general practice, operating revenues, cost-income ratio and earnings after taxes and before minority interests by division are presented before consolidation adjustments, representing the elimination of transactions between Allianz Group companies in different segments.

 

Years ended December 31,


   2005

    2004

    2003

 
     Operating
revenues(1)


    Cost-
income
ratio


    Earnings
after
taxes and
before
minority
interests


    Operating
revenues(1)


    Cost-
income
ratio


    Earnings
after
taxes and
before
minority
interests


    Operating
revenues(1)


    Cost-
income
ratio


    Earnings
after
taxes and
before
minority
interests


 
     € mn     %     € mn     € mn     %     € mn     € mn     %     € mn  

Personal Banking

   1,883     84.2     136     1,846     89.2     (6 )   1,856     93.5     (130 )

Private & Business Banking

   1,179     58.5     293     1,145     65.0     188     1,100     68.2     146  

Corporate Banking

   1,027     44.9     335     1,014     47.2     282     1,041     48.1     197  

DrKW

   2,102     91.7     132     2,045     89.4     152     2,141     87.6     209  

IRU

   70     232.6     91     362     79.1     5     598     77.6     (896 )

Corporate Other(2)

   (307 )   —   (3)   98     (186 )   —   (3)   (153 )   (491 )   —   (3)   (293 )
    

 

 

 

 

 

 

 

 

Dresdner Bank

   5,954     88.9     1,085     6,226     85.2     468     6,245     91.9     (767 )
    

 

 

 

 

 

 

 

 

Other Banks(4)

   281     73.9     56     220     94.9     3     459     75.7     119  
    

 

 

 

 

 

 

 

 

Subtotal

   6,235     —       1,141     6,446     —       471     6,704     —       (648 )
    

 

 

 

 

 

 

 

 

Amortization of goodwill(5)

   —       —       —       —       —       (244 )   —       —       (263 )

Minority interests in earnings

   —       —       (102 )   —       —       (101 )   —       —       (104 )
    

 

 

 

 

 

 

 

 

Total

   6,235     88.2     1,039     6,446     85.6     126     6,704     90.8     (1,015 )
    

 

 

 

 

 

 

 

 


(1) Consists of net interest income, net fee and commission income, and net trading income. Operating revenues is a measure used by management to calculate and monitor the activities and operating performance of its banking operations. This measure is used by other banks, but other banks may calculate operating revenues on a different basis and accordingly may not be comparable to operating revenues as used herein.
(2) The Corporate Other division contains income and expense items that are not assigned to Dresdner Bank’s operating divisions. These items include, in particular, impacts from the application of IAS 39, as well as expenses for central functions and projects affecting Dresdner Bank as a whole which are not allocated to the operating divisions. Further, provisioning requirements for country and general risks, as well as realized gains and losses from Dresdner Bank’s non-strategic investment portfolio. In 2005, the impact from the application of IAS 39 on Corporate Other’s operating revenues amounted to a charge of €214 million (2004: income of €7 million).
(3) Presentation not meaningful.
(4) Consists of non-Dresdner Bank banking operations within our Banking segment.
(5) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.

 

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Banking Operations by Geographic Region

 

The following table sets forth our banking operating revenues and earnings after taxes and before minority interests in earnings, which we refer to herein as “earnings after taxes and before minority interests”, by geographic region. Applicable only for 2004 and 2003, earnings after taxes and before minority interests by geographic region excludes amortization of goodwill. Consistent with our general practice, operating revenues and earnings after taxes and before minority interests by geographic region are presented before consolidation adjustments, representing the elimination of transactions between Allianz Group companies in different geographic regions and different segments.

 

    

Operating revenues(1)

€ mn


       

Earnings after taxes and before
minority interests(2)

€ mn


 

Years ended December 31,


   2005

    2004

   2003

        2005

    2004

    2003

 

Germany

   4,084     4,238    3,377         1,553     724     (32 )

Rest of Europe

   1,662     1,698    2,394         (28 )   (138 )   39  

NAFTA

   347     359    385         184     143     (351 )

Rest of world

   184     151    548         67     89     198  
    

 
  
       

 

 

Subtotal

   6,277     6,446    6,704         1,776     818     (146 )
    

 
  
       

 

 

Consolidation adjustments(3)

   (42 )   —      —           (635 )   (347 )   (502 )
    

 
  
       

 

 

Total

   6,235     6,446    6,704         1,141     471     (648 )
    

 
  
       

 

 


(1) Consists of net interest income, net fee and commission income, and net trading income. Operating revenues is a measure used by management to calculate and monitor the activities and operating performance of its banking operations. This measure is used by other banks, but other banks may calculate operating revenues on a different basis and accordingly may not be comparable to operating revenues as used herein.
(2) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.
(3) Represents elimination of transactions between Allianz Group subsidiaries in different geographic regions.

 

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Asset Management Operations

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Record net inflows to third-party assets under management of €64 billion.

 

  Inclusive of record net inflows of €64 billion, our third-party assets under management rose by 27.0% to €743 billion.

 

  Commensurate with the marked 4.4 percentage point improvement of our cost-income ratio, which reached 58.5%, our operating profit grew by 32.4% to €1.1 billion.

 

  Net income experienced strong growth of €512 million, reaching €237 million.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

We continued to significantly increase our operating profit.

 

  In 2004, we achieved net inflows of €31 billion to third-party assets under management.

 

  In spite of the negative effects of exchange rate movements of €31 billion, our third-party assets, most of which are managed in U.S. dollars, increased by €20 billion, or 3.5%, to €585 billion.

 

  Operating profit improved by €140 million to €856 million. After deducting acquisition-related expenses, amortization of goodwill, taxes and minority interests, our Asset Management segment reported a net loss of €275 million in 2004 from a net loss of €397 million in 2003.

 

Third-Party Assets Under Management of the Allianz Group

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

The growth in third-party assets under management includes record net inflows of €64 billion (2004: €31 billion). Net inflows were particularly strong in our fixed income institutional business within the United States at PIMCO and within Germany at AGI Germany. Of the total increase in our third-party assets, market-related appreciation amounted to €33 billion, primarily attributable to favorable equity capital markets and, to a lesser extent, bond capital markets. These achievements continue to strengthen our position as one of the world’s largest asset managers, based on total assets under management. A major success factor has been our competitive performance, as the overwhelming majority of the third-party assets we manage outperformed their respective benchmarks in 2005. Further, positive effects of €66 billion from exchange rate movements were incurred, resulting primarily from the strengthening of the U.S. dollar compared to the Euro.

 

Overall, third-party assets accounted for approximately 59% and 55% of total assets under management of the Allianz Group at December 31, 2005 and 2004, respectively. We operate our third-party asset management business primarily through AGI. At December 31, 2005, AGI managed approximately 95.2% (December 31, 2004: 94.0%) of our third-party assets. The remaining assets are managed by Dresdner Bank (approximately 2.3% and 3.2% at December 31, 2005 and 2004, respectively) and other Allianz Group companies (approximately 2.5% and 2.8% at December 31, 2005 and 2004, respectively).

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

The value of our third-party assets increased by €20 billion, including net inflows of €31 billion and market-related increases of €32 billion. With net inflows of €37.0 billion, our fixed income fund business achieved significant growth. These increases of our third-party assets more than compensated the negative effects from exchange rate movements of €31 billion, resulting primarily from the weakness of the U.S. dollar as compared to the Euro. Our third-party assets were also negatively affected by the withdrawal from our joint venture with Meiji Life in Japan, which resulted in a €12 billion decline in our third-party assets.

 

The following graphs present the third-party assets managed by the Allianz Group by geographic region, investment category and investor class at December 31 for the years indicated.

 

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Third-party assets under management— Fair values by geographic region(1)

in € bn

 

LOGO


(1) Based on the domicile of respective investment companies.
(2) Consists of third-party assets managed by Dresdner Bank (approximately €17 billion, €19 billion and € 20 billion at December 31, 2005, 2004 and 2003, respectively) and by other Allianz Group companies (approximately €19 billion, €16 billion and € 22 billion at December 31, 2005, 2004 and 2003, respectively).

 

Third-party assets under management— Fair values by investment category

in € bn

 

LOGO


(1) Includes primarily investments in real estate.

 

Third-party assets under management— Fair values by investor class

in € bn

 

LOGO

 

United States

 

Third-party assets under management—Composition of fair value development for the years ended December 31, 2005, 2004 and 2003

in € bn

 

LOGO

 

 

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Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Our major achievements in 2005 included:

 

  PIMCO, our entity specializing in fixed income investments, significantly increased third-party assets by 36.8% to €468 billion, with record high net inflows of €60 billion, market-related appreciation of €12 billion and a positive foreign currency effect of €54 billion.

 

  Our PIMCO Total Return Fund continued to be the largest actively-managed fixed income fund in the world, with assets under management of USD 90.6 billion at December 31, 2005.

 

  In February 2005, we launched the then largest closed-end equity fund, raising USD 2.5 billion. This fund’s investment strategy combines the expertise of our equity managers NFJ Investment Group, Nicholas Applegate and PEA Capital.

 

  Allianz Global Distributors continued to remain in the top 5 market positions in the U.S. retail market based on net inflows. Our mutual funds product family captured first place in Lipper/ Barron’s Fund Family survey for 2005.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Our major achievements in 2004 included:

 

  In the institutional business, PIMCO, our entity specializing in fixed income investments, again achieved significant improvements in third-party assets. Despite a negative currency effect of €26 billion, PIMCO increased third-party assets by €27 billion to €342 billion, with net inflows of €33 billion and market-related increases of €20 billion.

 

  Due to its strong product performance, our PIMCO Total Return Fund increased its assets under management to USD 79 billion at December 31, 2004, and thus continued to be the largest actively-managed fixed income fund in the world.

 

Germany

 

Third-party assets under management—Composition of fair value development for the years ended December 31, 2005, 2004 and 2003

in € bn

 

LOGO

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Our major achievements in 2005 included:

 

  Record high net inflows, primarily in our fixed income institutional business at AGI Germany.

 

  AGI ranked first and fourth among German asset management companies based on net inflows for 2005 and assets under management at December 31, 2005, respectively(1).

 

  Net inflows from mutual funds through both third-party distributors, as well as the Allianz Group’s tied agents network and Dresdner Bank’s branch offices, increased significantly to €13.8 billion (2004: €2.3 billion), largely resulting from fixed income products. These numbers include net inflows from mutual funds at PIMCO Europe Ltd.

 

  The dit-Euro Bond Total Return Funds were once again Germany’s best selling fixed income funds, based on net inflows of more than €4.3 billion.

 

  AGI further increased its market share in the institutional special funds (or “Spezialfonds”) business to 14.7% based on assets under management(1).

 


(1) Source: Bundesverband Investment und Asset Management (or “BVI”), an association representing the German investment fund industry.

 

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Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Our major achievements in 2004 included:

 

  AGI ranked second among German asset management companies based on net inflows(1). With a market share of 15.0%, AGI ranked fourth among German asset management companies based on assets under management at December 31, 2004(1).

 

  In 2004, AGI achieved net inflows from mutual funds of €2.3 billion. In addition to the continued positive development of the sale of mutual funds through third-party distributors, we also managed to increase the share of net inflows through the Allianz Group’s tied-agents network.

 

  With net inflows of more than €1.9 billion, the dit-Euro Bond Total Return Funds were once again Germany’s best selling fixed income funds.

 

  In the Spezialfonds business, assets managed increased from €68 billion in 2003 to €75 billion in 2004. With a market share of 14.1%, we again achieved a top position among German asset management companies(1).

 

Earnings Summary

 

Our Asset Management segment’s results of operations are almost exclusively represented by AGI, which accounted for 98.7% and 98.3% of our total Asset Management segment’s operating revenues and net income, respectively, for the year ended December 31, 2005. Accordingly, the discussion of our Asset Management segment’s results of operations relates solely to the operations of AGI.

 

Operating Revenues

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Our operating revenues increased by 17.3% to €2,698 million. Internal growth was comparable at 17.5%. As previously noted, these positive developments reflect favorable business developments worldwide, namely resulting in significant increases of management and loading fees as well as performance fees. Management and loading fees, net of commission, and performance fees rose by 16.5% to €2,423 million and 117.0% to €122 million, respectively. Overall, fees, net of commission, improved by 19.2% to €2,597 million, whereas other income remained relatively stable.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Operating revenues increased by €75 million, or 3.4%, to €2,301 million. Excluding the negative effects from exchange rate movements, operating revenues increased by €226 million, representing a growth rate of 10.1%. This growth reflected positive business developments worldwide, resulting primarily from higher average assets under management driven by significant net inflows and favorable capital markets in 2004. We recorded the strongest growth rate in our Asia-Pacific business, which was also due to a much lower base (assets under management) as compared to our businesses in the United States and Europe.

 

Operating Profit

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Operating profit increased significantly by 32.1% to €1,124 million, primarily resulting from the aforementioned growth in our operating revenues. Operating profit development was particularly strong in the United States and Germany. Due in large part to strict cost management, the increase of our operating expenses was proportionally smaller compared to that of our operating revenues. As a result, our cost-income ratio(2) improved considerably to 58.3% (2004: 63.0%). The 8.6% rise in operating expenses to €1,574 million was due largely to increased performance-related compensation in the United States and Germany as a result of our strong business developments.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Operating profit increased significantly by €135 million, or 18.9%, to €851 million. Excluding the effects of exchange rate movements, operating profit would have improved by €182 million, or 24.8%, primarily due to growth in our operating revenues. While operating revenues increased,

 


(1) Source: BVI.
(2) Represents ratio of operating expenses to operating revenues.

 

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operating expenses decreased by €60 million, or 4.0%, to €1,450 million. Excluding the effects of exchange rate movements, operating expenses increased by 2.9% to €1,549 million. On a constant currency basis, personnel expenses remained stable at €908 million (2003: €907 million), while non-personnel expenses increased by €42 million, or 7.0%, to €641 million.

 

In all regions, the increase in operating expenses was below the growth we experienced in our operating revenues. This development was due primarily to strict cost management in all entities and restructuring measures initiated in 2002 and 2003, especially concerning our equity investment managers and our operations in Germany. These restructuring measures, which include consolidating our product offerings, streamlining and automation of our backoffice operations, and reduction of our headcount, led to a decrease in our cost base and improved operational efficiency.

 

As a result of the above-mentioned developments, our cost-income ratio improved from 67.8% to 63.0%.

 

Operating Profit – Allianz Global Investors

in € mn

 

 

LOGO

 

Net Income

 

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Net income reached €233 million, a €512 million improvement from prior year’s net loss of €279 million. Acquisition-related expenses declined by 5.1% to €713 million. Thereof, €676 million was due to the deferred purchases of interests in PIMCO related to the Class B Plan, which increased by 34.9%. The rise was commensurate with the strong profit development at PIMCO in 2005 and the increased number of vested units according to the vesting schedule of the purchase plan. The Class B Plan was agreed upon at the time this company was acquired. Of the total acquisition-related expenses, a further €12 million was incurred due to retention payments for the management and employees of PIMCO and Nicholas Applegate, and €25 million resulted from amortization charges relating to capitalized loyalty bonuses for PIMCO management. These expenses, in aggregate, decreased by €213 million as they largely expired in 2005. Our net income also benefited from the elimination of goodwill amortization under IFRS, effective January 1, 2005 (2004: charge of €380 million). Tax expenses amounted to €130 million, resulting in an effective tax rate of 31.2%, compared to a tax credit of €53 million in 2004. Taxes increased due predominantly to improved operating profitability, inclusive of higher taxable income in the United States, partially offset by a one-off deferred tax credit of €37 million related to tax deductible goodwill amortization.

 

During 2005, a subsidiary of Allianz AG purchased a total of approximately USD 250 million of the remaining minority interest in Allianz Global Investors of America L.P. (or “AGI L.P.”), with payment therefore made in April 2005. Following this transaction, the remaining ownership interest that is held by AGI L.P.’s former parent company, Pacific Life, was reduced to approximately 2% at December 31, 2005 (December 31, 2004: 6%). Further, and also during 2005, a subsidiary of Allianz AG called 5,427 Class B equity units from former and current members of the management of PIMCO under the Class B Plan. The total amount paid related to the call of the Class B equity units was €71 million. Under the plan, participants acquired Class B equity units annually through 2004 for a total of 150,000 units. Please see Note 43 to our consolidated financial statements for further information.

 

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Net income was a lower-than-expected loss of €279 million, representing a significant improvement from the loss of €397 million in 2003. Acquisition-related expenses and amortization of goodwill, in aggregate, amounted to €1,131 million as compared

 

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to €1,101 million. Thereof, amortization of goodwill and amortization related to capitalized loyalty bonuses for PIMCO management was €380 million and €125 million, respectively, in 2004. These loyalty bonuses expire in 2005. Of the total acquisition-related expenses, €125 million was related to retention payments for the management and employees of PIMCO and Nicholas Applegate and €501 million was due to the deferred purchases of interests in PIMCO. These retention payments and deferred purchases of interests in PIMCO were agreed upon at the time these investment companies were acquired.

 

During 2004, a subsidiary of Allianz AG purchased a total of approximately USD 500 million of the remaining ownership interest that is held by the former parent company of AGI L.P., with payment therefore made in April and November 2004. Following these transactions, the remaining ownership interest that is held by the former parent company of AGI L.P. was reduced to approximately 6% at December 31, 2004.

 

The following table sets forth the income statements and key operating ratio for both our Asset Management segment as a whole and AGI on a stand-alone basis for the years ended December 2005, 2004 and 2003.

 

Years ended December 31,


  2005

    2004

    2003

 
    Asset
Management
Segment


    Allianz
Global
Investors


    Asset
Management
Segment


    Allianz
Global
Investors


    Asset
Management
Segment


    Allianz
Global
Investors


 
    € mn     € mn     € mn     € mn     € mn     € mn  

Operating revenues

  2,733     2,698     2,308     2,301     2,226     2,226  

Operating expenses

  (1,600 )   (1,574 )   (1,452 )   (1,450 )   (1,510 )   (1,510 )
   

 

 

 

 

 

Operating profit

  1,133     1,124     856     851     716     716  
   

 

 

 

 

 

Acquisition-related expenses thereof:

  (713 )   (713 )   (751 )   (751 )   (732 )   (732 )

Deferred purchases of interests in PIMCO(1)

  (676 )   (676 )   (501 )   (501 )   (448 )   (448 )

Retention payments for the management and employees of PIMCO and Nicholas Applegate

  (12 )   (12 )   (125 )   (125 )   (147 )   (147 )

Amortization charges relating to capitalized bonuses for PIMCO management

  (25 )   (25 )   (125 )   (125 )   (137 )   (137 )

Amortization of goodwill(2)

  —       —       (380 )   (380 )   (369 )   (369 )
   

 

 

 

 

 

Earnings from ordinary activities before taxes

  420     411     (275 )   (280 )   (385 )   (385 )
   

 

 

 

 

 

Taxes

  (132 )   (130 )   52     53     80     80  

Minority interests in earnings

  (51 )   (48 )   (52 )   (52 )   (92 )   (92 )
   

 

 

 

 

 

Net income (loss)

  237     233     (275 )   (279 )   (397 )   (397 )
   

 

 

 

 

 

Cost-income ratio(3) in %

  58.5     58.3     62.9     63.0     67.8     67.8  

(1) Effective January 1, 2005, and applied retrospectively, under IFRS, the Class B Plan is considered a cash settled plan, resulting in changes in the fair value of the equity units issued to be recognized as expense.
(2) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.
(3) Represents ratio of operating expenses to operating revenues.

 

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Liquidity and Capital Resources

 

Organization, Capital Allocation and Liquidity Planning

 

Allianz AG operates as both a holding company for the Allianz Group’s insurance, banking and other subsidiaries and as a reinsurance company, primarily for other Allianz Group companies. As such, Allianz AG not only has to cover the funding needs of its own reinsurance operations but also acts as the central coordinating function for the liquidity and capital allocation of Allianz Group companies.

 

Our operating entities require capital to run their businesses. The amount of necessary capital depends on, among other factors, local capital and regulatory requirements, rating agency capital requirements and our own internal risk capital standards. As our operating entities grow, local requirements change or other factors intervene, the need for additional capital can arise. To the extent that these requirements cannot be financed by results from operations from the respective operating entities, in excess of dividends, Allianz AG can and does allocate additional capital. Decisions as to which operating entities should receive additional capital, including the amount thereof, or whether capital should rather be withdrawn, are taken by the Board of Management of Allianz AG during our annual management dialogues.

 

In order to finance capital provisioning to our operating entities, Allianz AG uses the intra-Allianz Group dividend funding it receives from operating entities. Furthermore, Allianz AG will also from time to time raise funds on the capital markets through the issue of debt or other financial instruments in order to finance any capital or liquidity requirement in excess of the Allianz Group-internal financing capacity.

 

Liquidity planning is an important process at both the operating entity and Allianz AG levels, and is integrated into the financial planning process of the Allianz Group. The financial planning process is based on strategic decisions and includes, for example, solvency planning, dividend targets and merger & acquisition expenditures. Liquidity risks can result from operational risks, planning risks, system risks, adverse developments in solvency levels of operating entities, contingent liabilities as well as requirements caused by natural catastrophes, financial markets, political crises or any other significant adverse developments. Strategic liquidity risks and resources are monitored on a regular basis. Liquidity risks are managed continuously through a variety of instruments to ensure short- and long-term financial flexibility for the Allianz Group. 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.

 

Capital Requirements

 

Our capital requirements are primarily dependent on our growth and the type of business that we underwrite, as well as the industry and geographic locations in which we operate. In addition, the allocation of our investments plays an important role. During our annual management planning dialogues with our operating entities, capital requirements are forecasted through business plans regarding the levels and timing of capital expenditures and investments. Regulators impose minimum capital rules on the level of both our operating entities and the Allianz Group as a whole.

 

At December 31, 2005, our eligible capital for the solvency margin, required for insurance groups under German law, was €43.6 billion (2004: €29.1 billion), surpassing the minimum legally stipulated level by €29.4 billion. This margin resulted in a cover ratio(1) of 307% (2004: 217%). In 2005, this solvency margin requirement applied only to our insurance segments and did not contain any capital requirements for our banking business.

 

On January 1, 2005, the Financial Conglomerates Directive, a supplementary EU directive, became effective in Germany. Under this 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 the related German law. The law requires that the financial conglomerate calculates the capital needed to meet the respective solvency requirements on a consolidated basis. The calculation methodology for the financial conglomerates solvency margin is still subject to uncertainties.

 


(1) Represents the ratio of eligible capital to required capital.

 

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At December 31, 2005, 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, was €40.0 billion including off-balance sheet reserves(1), surpassing the minimum legally stipulated level by €16.3 billion. This margin resulted in a cover ratio of 169% in 2005. In 2005, all Allianz Group companies also have met their local solvency requirements.

 

Dresdner Bank is subject to the risk-adjusted capital guidelines (or “Basle Accord”) promulgated by the Basle Committee on Banking Supervision (or “BIS-rules”) and therefore calculates and reports under such guidelines to the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or “BaFin”) and the Deutsche Bundesbank, the German central bank. These guidelines are used to evaluate capital adequacy based primarily on the perceived credit risk associated with balance sheet assets, as well as certain off-balance sheet exposures such as unfunded loan commitments, letters of credit, and derivative and foreign exchange contracts. In addition, for Allianz AG to maintain its status as a “financial holding company” under the U.S. Gramm-Leach-Bliley Financial Modernization Act of 1999, Dresdner Bank must be considered “well capitalized” under guidelines issued by the Board of Governors of the Federal Reserve System. To be considered “well capitalized” for these purposes, Dresdner Bank must have a Tier I Capital Ratio of a least 6% and a combined Tier I and Tier II Capital Ratio of at least 10%, and not be subject to a directive, order or written agreement to meet and maintain specific capital levels. As shown in the table below, Dresdner Bank maintained a “well capitalized” position during both 2005 and 2004.

 


(1) Representative of the difference between fair value and amortized cost of real estate used by third parties and investments in associated enterprises and joint ventures, net of deferred taxes, policyholders’ participation and minority interests.

 

The following table sets forth Dresdner Bank’s BIS capital ratios:

 

As of December 31,


   2005(1)

   2004

     € mn    € mn

Tier I capital (core capital)

   11,126    6,867
    
  

Tier I & Tier II capital (supplementary capital)

   18,211    13,734

Tier III capital

   —      226
    
  

Total capital

   18,211    13,960
    
  

Risk-weighted assets-banking book

   108,659    100,814

Risk-weighted assets-trading book

   2,875    3,963
    
  

Total risk-weighted assets

   111,534    104,777
    
  

Tier I capital ratio (core capital) in %

   9.98    6.55

Tier I & Tier II capital ratio in %

   16.33    13.11
    
  

Total capital ratio in %

   16.33    13.32
    
  

(1) Effective June 2005, Dresdner Bank changed the accounting basis for calculation and disclosure of BIS-figures from HGB to IFRS.

 

The distinction between “core capital” and “supplementary capital” in the table above reflects the ability of the capital components to cover losses. Core capital, with the highest ability to cover losses, corresponds to Tier I capital, while supplementary capital corresponds to Tier II capital as such terms are defined in applicable U.S. capital adequacy rules.

 

In addition to regulatory capital requirements, Allianz AG also uses an internal risk capital model to determine how much capital is required to absorb any unexpected volatility in results of operations. For further information regarding our internal risk capital model, see “Quantitative and Qualitative Disclosures About Market Risk—Risk Management Tools.”

 

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In addition to regulatory requirements and our internal risk capital model, rating agencies use distinct methodologies to determine if our capital base is adequate. During the course of 2005, the rating agencies “Standard & Poor’s” and “A.M. Best” have recognized the considerable strengthening of our capital base and updated the outlooks for our ratings during 2005 accordingly. At December 31, 2005, we had the following ratings with the major rating agencies:

 

Allianz AG Ratings as of December 31, 2005

 

    Standard
& Poor’s


    Moody’s

  A.M. Best

Insurer financial strength
Outlook

  AA-
Stable
 
 
  Aa3
Stable
  A+
Stable

Counterparty credit Outlook

  AA-
Stable
 
 
  not
rated
  aa-
Stable
(issuer credit rating)

Senior unsecured debt

  AA-     Aa3   aa-

Outlook

        Stable   Stable

Subordinated debt Outlook

  A/A- (1)   A2
Stable
  a+/a(1)
Stable

Commercial paper (short term)

  A-1+     P-l   not rated

Outlook

        Stable    

(1) Ratings vary on the basis of maturity period and terms.

 

Liquidity

 

Our liquidity results from the operating activities generated by our property-casualty, life/health, banking and asset management operations, as well as the financing activities from Allianz AG, the holding company for the Allianz Group.

 

Insurance Operations

 

The principal sources of liquidity for our operating activities within our insurance operations include primary and reinsurance premiums collected (primarily from our operating entities), collected reinsurance receivables, as well as investment income and proceeds generated from the sale of investments. Our major uses of funds within our insurance operations include paying property-casualty claims and related claims expenses, providing life policy benefits, paying surrenders and cancellations, as well as other operating costs.

 

We generate substantial cash flow from our insurance operations as a result of most premiums being received in advance of the time when claim payments or policy benefits are required, thereby allowing us to invest these funds in the interim to generate future investment income and realized gains. However, the liquidity of our insurance operations is impacted by, among other factors, the duration of our investments, development of equity markets, the interest rate environment and our ability to realize the carrying value of our investment portfolio to meet insurance claims and policyholder benefits as they become due.

 

Additionally, the liquidity of our property-casualty insurance operations is affected by the frequency and severity of losses under its policies, as well as by the persistency of its products. Future catastrophic events, the timing and effect of which are inherently unpredictable, may also create increased liquidity requirements for our property-casualty operations. The liquidity needs of our life operations are generally affected by trends in actual mortality experience relative to the assumptions with respect thereto included in the pricing of our life insurance policies, by the extent to which minimum returns or crediting rates are provided in connection with our life insurance products, as well as by the level of surrenders and withdrawals.

 

Banking and Asset Management Operations

 

For our banking operations, our primary sources of liquidity include customer deposits and interest and similar income from our lending transactions, while our major uses of funds are for the issuance of new loans and advances to banks and customers, and the payment of interest on deposits and other operating costs. The liquidity of our banking operations is largely subject to the ability of individual customers, and various other enterprises to which we extend credit, to make payments to us based on their outstanding commitments and could, therefore, be negatively affected by unforeseeable losses due to problem loans.

 

Within our asset management operations, our primary sources of liquidity include fees generated from asset management activities, while the principal use of these funds is for the payment of operating costs.

 

Financing

 

From time to time, the Allianz Group, through Allianz AG, will raise funds on the capital markets

 

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through the issue of debt or other financial instruments in order to fund any liquidity need which cannot fully be covered by our operating or investment cash flows. See “Debt and Capital Funding” below for further information. We also have access to commercial paper, medium-term notes and other credit facilities as additional sources of liquidity. At December 31, 2005, we had access to unused credit lines as a source of further liquidity.

 

While Allianz AG receives internal funding from Allianz Group operating entities through the payment of dividends, it also paid dividends of €674 million and €551 million to our shareholders in 2005 and 2004 with respect to the fiscal years 2004 and 2003, respectively. The Board of Management and the Supervisory Board propose to pay a dividend of €2.00 per eligible share in 2006 for fiscal year 2005, which will approximate €811 million of dividend payments in 2006.

 

Certain of the operating entities within the Allianz Group are subject to legal restrictions on the amount of dividends they can pay to their shareholders. In addition to the restrictions in respect of minimum capital and solvency requirements that are imposed by insurance and other regulators in the countries in which these companies operate, other limitations exist in certain countries. For example, the operations of our insurance company subsidiaries located in the United States are subject to limitations on the payment of dividends to their parent company under applicable state insurance laws. Dividends paid in excess of these limitations generally require prior approval of the insurance commissioner of the state of domicile.

 

Debt and Capital Funding

 

Allianz AG coordinates and executes external debt financing, securities issues and other capital raising transactions for the Allianz Group. At December 31, 2005, the majority of Allianz AG’s external debt financing was in the form of debentures and money market securities. Our total certificated liabilities outstanding at December 31, 2005 and 2004 were €59,203 million and €57,752 million, respectively. Of the certificated liabilities outstanding at December 31, 2005, €33,097 million are due within one year. See Note 19 to our consolidated financial statements for further information. Our total participation certificates and subordinated liabilities outstanding at December 31, 2005 and 2004 were €14,684 million and €13,230 million, respectively. Of the participation certificates and subordinated liabilities at December 31, 2005, €1,077 million are due within one year. See Note 15 to our consolidated financial statements for further information. Additionally, see Note 39 to our consolidated financial statements for information regarding how we use certain derivatives to hedge our exposure to interest rate and foreign currency risk related to certificated and subordinated liabilities.

 

Allianz AG owns several finance companies. Among those, primarily Allianz Finance B.V. and Allianz Finance II B.V., both incorporated in The Netherlands, are used from time to time for external debt financing and other corporate financing purposes. In addition, in December 2003, Allianz AG established a Medium Term Note (or “MTN”) program which is used from time to time for purposes of external and internal debt issuance. The volume of debt issued by Allianz Finance B.V. and Allianz Finance II B.V. for the years ended December 31, 2005 and 2004 was €2.7 billion and zero, respectively. At December 31, 2005, Allianz AG had money market securities outstanding with a carrying value of €1,131 million.

 

In January 2005, we successfully completed our “All-in-One” capital market transactions. The All-in-One capital market transactions (1) reduced the Allianz Group’s equity gearing, (2) included the issuance of a subordinated bond, and (3) helped Dresdner Bank to further reduce its non-strategic asset portfolio.

 

    Reduction of equity gearing In order to further reduce our exposure to equities, Allianz AG, through Allianz Finance II B.V., issued a three-year index linked exchangeable bond of €1.3 billion. The redemption value of this security, BITES (or “Basket Index Tracking Equity-linked Securities”), is linked to the performance of the DAX Index and was issued at a DAX-reference level of 4,205.115. During the three-year term of this instrument, Allianz AG may choose to redeem the bond with shares of BMW AG, Munich Re or Siemens AG. Investors will receive an annual out-performance premium of 0.75% on the prevailing future DAX level and a repayment premium of 1.75%, based on the DAX level at redemption.

 

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    Subordinated bond Allianz AG refinanced part of its 2005 €2.7 billion maturing bonds through the issuance of a subordinated bond in the amount of €1.4 billion. The subordinated bond bears a coupon of 4.375% for the first twelve years and was issued at a price of 98.923%, yielding 4.493%. While this is a perpetual bond, it is callable by Allianz AG for the first time in 2017. Attached to the bond are 11.2 million warrants on Allianz AG shares with a maturity of three years. The bond ex-warrants were placed with institutional investors. In 3Q 2005, warrants representing 9 million Allianz AG shares were exercised. The premiums received thereof were accounted for within shareholders’ equity.

 

    Reduction of non-strategic assets by Dresdner Bank Dresdner Bank accomplished a further step in its strategy of reducing its non-strategic equity holdings. Dresdner Bank sold 17,155,008 Allianz AG shares at €88.75 per share to an investment bank, which placed these shares in the form of a Mandatory Exchangeable. This structure enabled the Allianz Group to benefit from a portion of Allianz AG’s future share price appreciation.

 

In connection with financing the merger of RAS with and into Allianz AG, approximately €2.2 billion, in aggregate, was secured in 3Q 2005 from equity-based financing and the issuance of an equity-linked loan. In this context, approximately €1.1 billion was placed out of authorized capital without pre-emptive rights and a €1.1 billion equity-linked loan was issued with a variable redemption amount linked to the share price of Allianz AG, which can be settled, at our option, in cash or Allianz AG shares.

 

On March 23, 2005, we repaid the Siemens exchangeable bond issued in 2000. The issue amount of the exchangeable bond of €1.7 billion was repaid in cash as the share price of Siemens AG was below the exercise price. Additionally, on August 26, 2005, we repaid the CHF 1.5 billion senior bond issued in 1999 and 2000. Our use of commercial paper as a short-term financing instrument was reduced by 21.4% to €1.1 billion in 2005 from €1.4 billion in 2004. Interest expense on commercial paper declined marginally to €31.3 million (2004: €31.6 million) due to increasing interest rates in 2005.

 

In March 2006, Allianz Finance II B.V. issued €800 million of subordinated perpetual bonds, guaranteed by Allianz AG, with a coupon rate of 5.375%. Allianz Finance II B.V. has the right to call the bonds after five years.

 

Outstanding Allianz AG issued debt(1) — Overview as of December 31, 2005

 

     Volume

   Carrying
value


   Interest
expense
in 2005


     € mn    € mn    € mn

Senior bonds(2)

   4,732    4,696    250.3

Subordinated bonds

   6,324    6,220    355.7

Exchangeable bonds

   2,337    2,326    103.1
    
  
  

Bonds total

   13,393    13,242    709.1
    
  
  

(1) Bonds and exchangeable bonds issued or guaranteed by Allianz AG in the capital market, presented at nominal and carrying values. Excludes €85.1 million of participation certificates with interest expense of €6.3 million in 2005.
(2) Excludes €85 million related to a private placement due in 2006.

 

Certificated liabilities and subordinated bonds(1) by maturity—Overview as of December 31, 2005

in € mn

 

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(1) Bonds and exchangeable bonds issued or guaranteed by Allianz AG in the capital market, presented at carrying values. Excludes €85.1 million of participation certificates.
(2) Excludes €85 million related to a private placement.

 

The following table describes the Allianz AG issued debt outstanding at December 31, 2005 at nominal values. For further information, see Notes 15, 19 and 32 to our consolidated financial statements.

 

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Allianz AG Issued Debt(1)

1. Senior bonds(2)

        Interest
expense
in 2005

5.75% bond issued by Allianz Finance

B. V., Amsterdam

  

Volume

   €1.1 bn     

Year of issue

   1997/2000     

Maturity date

   7/30/2007     

SIN

   194 000     

ISIN

   DE 000 194 000 5     

Interest expense

        €63.6mn
5.0% bond issued by Allianz Finance B.V., Amsterdam     

Volume

   €1.6bn     

Year of issue

   1998     

Maturity date

   3/25/2008     

SIN

   230 600     

ISIN

   DE 000 230 600 8     

Interest expense

        €83.7mn

4.625% bond issued by Allianz Finance II B. V.,

Amsterdam

Volume

   €1.1 bn     

Year of issue

   2002     

Maturity date

   11/29/2007     

SIN

   250 035     

ISIN

   XS 015 878 835 5     

Interest expense

        €52.2mn

5.625% bond issued by Allianz Finance II B. V.,

Amsterdam

Volume

   €0.9bn     

Year of issue

   2002     

Maturity date

   11/29/2012     

SIN

   250 036     

ISIN

   XS 015 879 238 1     

Interest expense

        €50.8mn

Total interest expense for senior bonds

   €250.3mn

2. Subordinated bonds

    

6.125% bond issued by Allianz Finance II B. V.,

Amsterdam

Volume

   €2 bn     

Year of issue

   2002     

Maturity date

   5/31/2022     

SIN

   858 420     

ISIN

   XS 014 888 756 4     

Interest expense

        €122.8mn

7.25% bond issued by Allianz Finance II B. V.,

Amsterdam

Volume

   USD 0.5 bn     

Year of issue

   2002     

Maturity date

   Perpetual Bond     

SIN

   369 290     

ISIN

   XS 015 915 072 0     

Interest expense

        €29.9mn

6.5% bond issued by Allianz Finance II B. V.,

Amsterdam

Volume

   €1 bn     

Year of issue

   2002     

Maturity date

   1/13/2025     

SIN

   377 799     

ISIN

   XS 015 952 750 5     

Interest expense

        €65.0mn

 

5.5% bond issued by Allianz AG

 

 

 

Interest
expense
in 2005

Volume

   €1.5bn    

Year of issue

   2004    

Maturity date

   Perpetual Bond      

SIN

   A0A HG3      

ISIN

   XS 018 716 232 5      

Interest expense

         €83.3mn

4.375% bond issued by Allianz Finance II B. V.,

Amsterdam

Volume

   €1.4 bn      

Year of issue

   2005      

Maturity date

   Perpetual Bond      

SIN

   A0DX0V      

ISIN

   XS 021 163 783 9      

Interest expense

         €54.7mn

Total interest expense for subordinated bonds

 

  €355.7mn

3. Exchangeable bonds

 

   

1.25% exchangeable bond issued by Allianz Finance II

B. V., Amsterdam

Exchangeable for

   RWE AG shares      

Volume

   €1.1 bn      

Year of issue

   2001      

Maturity date

   12/20/2006      

Current exchange price

   €50.16      

SIN

   825 371      

ISIN

   XS 013 976 180 2      

Interest expense(3)

         €45.9mn

Received option premium at issue

   €178.1 mn      
0.75% Basket Index Tracking Equity Linked Securities (BITES) issued by Allianz Finance II B. V., Amsterdam        

Underlying

   DAX ®    

Volume

   €1.3bn      

Year of issue

   2005      

Maturity date

   2/18/2008      

SIN

   A0DX0F      

ISIN

   XS 021 157 635 9      

Interest expense(3)

         €57.2mn

Total interest expense for exchangeable bonds

 

  €103.1mn
4. Participation certificates
Allianz AG participation certificate
Volume    €85.1 mn      
SIN    840 405      
ISIN    DE 000 840 405 4      
Interest expense          €6.3mn
Total interest expense for participation certificates     €6.3mn
5. Issues that matured in 2005
3.0% issued by Allianz Finance B. V., Amsterdam
Volume    CHF 1.5 bn      
ISIN    CH 000 830 806 3      
Matured on    8/26/2005      
Interest expense          €21.1mn
2.0% exchangeable bond issued by Allianz Finance B. V., Amsterdam       
Volume    €1.7 bn      
ISIN    DE 000 452 540 7      
Maturity date    3/23/2005      
Interest expense(3)          €18.8mn
Total interest expense 2005 for matured issues     €39.9mn
Total interest expense     €755.3mn

 

(1) Bonds and exchangeable bonds issued or guaranteed by Allianz AG in the capital market.
(2) Excludes €85 million related to a private placement due in 2006.
(3) Includes coupon payment and option premium at amortized cost.

 

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Allianz Group Consolidated Cash Flows

 

Change in cash and cash equivalents for the years ended December 31

in € mn

 

 

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(1) Includes effect of exchange rate changes on cash and cash equivalents of €72 million, €(24) million and €(120) million in 2005, 2004 and 2003 respectively.

 

Net cash flow provided by operating activities increased by €28,975 million to €32,171 million (2004: €3,196 million) in 2005. Of which, the decrease in financial assets and liabilities held for trading contributed €11,885 million (2004: reduction of €30,209 million), mainly resulting from a decline in the trading business and the reduction in trading liabilities. In addition, assets from reverse repurchase agreements and collateral paid for securities borrowing transactions contributed €43,656 million (2004: reduction of €10,136 million), largely as a result of reduced business volume. Conversely, the reduction of liabilities from repurchase agreements and collateral received from securities lending transactions reduced operating cash flow by €18,692 million (2004: increase of €35,255 million). This development was primarily caused by declining business volume, which lead to a reduction in the respective liabilities.

 

Net cash flow used in investing activities amounted to €22,452 million (2004: €15,378 million), primarily due to an increase in investments held at fair value by €28,983 million (2004: €12,661 million), resulting from a significant inflow of funds from business underwritten.

 

Net cash flow provided by financing activities increased by €3,922 million to €6,228 million (2004: €2,306 million). Cash inflow from capital increases amounted to €2,183 million (2004: €86 million). Further, the issuance of subordinated debt and the sale of treasury shares contributed to the increased cash flow provided by financing activities.

 

In total, cash and cash equivalents increased by €16,019 million (2004: decrease of €9,900 million).

 

Cash and cash equivalents as of December 31, 2005

in € mn (Total: €31,647 mn)

LOGO

 

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, followed by U.S. Dollars, Swiss Francs and British Pounds. At December 31, 2005, 2004 and 2003, the Allianz Group held €31,647 million, €15,628 million and €25,528 million, respectively, of cash and cash equivalents. See Note 11 to our consolidated financial statements for additional information on the Allianz Group’s cash and cash equivalents.

 

Investment Portfolio Impairments, Depreciation and Unrealized Losses

 

For information concerning the valuation of available-for-sale securities and held-to-maturity securities, see “—Critical Accounting Policies and Estimates—Fair Values of Financial Assets and Liabilities.”

 

Impairment Charges and Depreciation

 

For the year ended December 31, 2005, other expenses for investments totaled €1,679 million, of which €921 million related to realized losses, €505 million related to impairments on securities and real estate used by third parties and €253 million related to depreciation recorded on real estate used by third parties. Of the total amount of realized losses in 2005, €898 million related to available-for-sale

 

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securities and €23 million to real estate used by third parties, while there were no realized losses on held-to-maturity securities. Of the €505 million related to impairments, €263 million was attributable to impairments recorded on available-for-sale securities, €2 million to impairments recorded on held-to-maturity securities and €240 million to impairments on real estate used by third-parties. Of the available-for-sale impairments we recorded in 2005, €245 million related to equity securities, €10 million to debt securities and €8 million to other available-for-sale securities.

 

For the year ended December 31, 2004, other expenses for investments totaled €2,672 million, of which €943 million related to realized losses and €1,471 million related to impairments on securities and real estate used by third parties and €258 million related to depreciation recorded on real estate used by third parties. Of the total amount of realized losses in 2004, €890 million related to securities available-for-sale, €1 million to securities held-to-maturity and €52 million to real estate used by third parties. Of the amount related to impairments, €814 million was attributable to impairments recorded on securities available-for-sale, €4 million to impairments on securities held-to-maturity and €653 million to impairments on real estate used by third parties. Of the available-for-sale impairments we recorded in 2004, €764 million related to equity securities, €29 million to debt securities and €21 million to other available-for-sale securities.

 

Unrealized Losses

 

As of December 31, 2005, unrealized losses from available-for-sale securities totaled €999 million, of which €188 million were attributable to equity securities, €267 million to corporate bonds, €542 million to government bonds and €2 million to other securities.

 

As of December 31, 2004, unrealized losses from available-for-sale securities totaled €728 million, of which €393 million were attributable to equity securities, €95 million to corporate bonds, €236 million to government bonds and €4 million to other securities.

 

The following tables set forth further details regarding the duration and amount below amortized cost of the Allianz Group’s unrealized loss positions for equity securities and debt securities as of December 31, 2005 and 2004, respectively. The length of time criterion reflects the period of time over which a security had continually been in the actual percentage decline category it was in on December 31, 2005 and December 31, 2004, respectively. We believe the following tables provide meaningful disclosure, as they capture the actual percentage decline category and related time period applicable at December 31, 2005 and December 31, 2004, respectively.

 

As described in more detail in Note 3 to our consolidated financial statements, effective January 1, 2005, the Allianz Group adopted IAS 39 revised, which required a change to our impairment criteria for available-for-sale equity securities. An equity security is considered to be impaired if there is objective evidence that the cost of the equity security may not be recovered. IAS 39 revised requires that a significant or prolonged decline in the fair value of an equity security below cost is considered to be objective evidence of impairment. In addition to the existing qualitative criteria, the Allianz Group established new quantitative impairment criteria for equity securities to define significant or prolonged decline. To satisfy the “significant” criterion, the Allianz Group has established a policy that an equity security is considered impaired if the fair value is below the weighted-average cost by more than 20%. To satisfy the “prolonged” criterion, the Allianz Group established a policy that an equity security is considered impaired if the fair value is below the weighted-average cost for greater than nine months. Each of these policies is applied independently at the subsidiary level. Accordingly, the use of a nine month period is reflected in the table below relating to equity securities as of December 31, 2005, while the table relating to equity securities as of December 31, 2004 is presented in accordance with the 0-6 month period as implemented by the Allianz Group in prior years. However, the unrealized losses within the equity securities aging table as of December 31, 2004 have been revised to reflect the Allianz Group’s impairment policy effective January 1, 2005.

 

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Equity Securities Aging Table: Duration and Amount of Unrealized Losses as of December 31, 2005

 

     0-6 months

    6-9 months

    >9 months

    Total

 
     € mn     € mn     € mn     € mn  

Less than 20%

                        

Market Value

   3,499     24     86     3,609  

Amortized Cost

   3,650     26     89     3,765  

Unrealized Loss

   (151 )   (2 )   (3 )   (156 )
    

 

 

 

20% to 50%

                        

Market Value

   49     —       2     51  

Amortized Cost

   71     —       3     74  

Unrealized Loss

   (22 )   —       (1 )   (23 )
    

 

 

 

Greater than 50%

                        

Market Value

   7     —       —       7  

Amortized Cost

   15     —       1     16  

Unrealized Loss

   (8 )   —       (1 )   (9 )
    

 

 

 

Total

                        

Market Value

   3,555     24     88     3,667  

Amortized Cost

   3,736     26     93     3,855  

Unrealized Loss

   (181 )   (2 )   (5 )   (188 )

 

Equity Securities Aging Table: Duration and Amount of Unrealized Losses as of December 31, 2004

 

     0-6 months

    6-12 months

    >12 months

    Total

 
     € mn     € mn     € mn     € mn  

Less than 20%

                        

Market Value

   1,140     38     278     1,456  

Amortized Cost

   1,347     42     304     1,693  

Unrealized Loss

   (207 )   (4 )   (26 )   (237 )
    

 

 

 

20% to 50%

                        

Market Value

   103     24     203     330  

Amortized Cost

   142     33     296     471  

Unrealized Loss

   (39 )   (9 )   (93 )   (141 )
    

 

 

 

Greater than 50%

                        

Market Value

   4     —       14     18  

Amortized Cost

   10     —       23     33  

Unrealized Loss

   (6 )   —       (9 )   (15 )
    

 

 

 

Total

                        

Market Value

   1,247     62     495     1,804  

Amortized Cost

   1,499     75     623     2,197  

Unrealized Loss

   (252 )   (13 )   (128 )   (393 )

 

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Debt Securities Aging Table: Duration and Amount of Unrealized Losses as of December 31, 2005

 

     0-6 months

    6-12 months

    >12 months

    Total

 
     € mn     € mn     € mn     € mn  

Less than 20%

                        

Market Value

   40,838     4,566     4,404     49,808  

Amortized Cost

   41,425     4,659     4,530     50,614  

Unrealized Loss

   (587 )   (93 )   (126 )   (806 )
    

 

 

 

20% to 50%

                        

Market Value

   8     6     1     15  

Amortized Cost

   10     8     2     20  

Unrealized Loss

   (2 )   (2 )   (1 )   (5 )
    

 

 

 

Greater than 50%

                        

Market Value

   —       —       —       —    

Amortized Cost

   —       —       —       —    

Unrealized Loss

   —       —       —       —    
    

 

 

 

Total

                        

Market Value

   40,846     4,572     4,405     49,823  

Amortized Cost

   41,435     4,667     4,532     50,634  

Unrealized Loss

   (589 )   (95 )   (127 )   (811 )

 

Debt Securities Aging Tables: Duration and Amount of Unrealized Losses as of December 31, 2004

 

     0-6 months

    6-12 months

    >12 months

    Total

 
     € mn     € mn     € mn     € mn  

Less than 20%

                        

Market Value

   15,878     2,632     2,042     20,552  

Amortized Cost

   16,106     2,655     2,099     20,860  

Unrealized Loss

   (228 )   (23 )   (57 )   (308 )
    

 

 

 

20% to 50%

                        

Market Value

   13     7     25     45  

Amortized Cost

   18     15     35     68  

Unrealized Loss

   (5 )   (8 )   (10 )   (23 )
    

 

 

 

Greater than 50%

                        

Market Value

   —       —       1     1  

Amortized Cost

   1     —       4     5  

Unrealized Loss

   (1 )   —       (3 )   (4 )
    

 

 

 

Total

                        

Market Value

   15,891     2,639     2,068     20,598  

Amortized Cost

   16,125     2,670     2,138     20,933  

Unrealized Loss

   (234 )   (31 )   (70 )   (335 )

 

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Reversals of Impairment

 

Pursuant to IAS 39 revised, we no longer record reversals of impairment in our consolidated income statement for available-for-sale equity securities.

 

For fixed income securities, if, in a subsequent period, the amount of the impairment previously recorded on a security decreases and the decrease can be objectively related to an event occurring after the impairment, such as an improvement in the debtor’s credit rating, the impairment is reversed through other income for investments in the Allianz Group’s consolidated income statement. Such reversals do not result in a carrying amount of a security that exceeds what would have been, had the impairment not been recorded, at the date of the impairment is reversed. For the years ended December 31, 2005, 2004 and 2003, we recorded reversals of impairments of €20 million (available-for-sale securities: €17 million; held-to-maturity securities: €3 million), €73 million (available-for-sale securities: €73 million; held-to-maturity securities: €0 million) and €68 million (available-for-sale securities: €65 million; held-to-maturity securities: €3 million), respectively.

 

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Tabular Disclosure of Contractual Obligations

 

     Payments Due By Period at December 31, 2005(1)

     Total

   Less than 1 Year

   1-3 Years

   3-5 Years

   More than 5 Years

     € mn    € mn    € mn    € mn    € mn

Long-term debt obligations(2)

   73,887    34,174    18,009    5,629    16,075

Operating lease obligations(3)

   2,883    463    620    543    1,257

Purchase obligations(4)

   2,783    533    701    486    1,063

Liabilities to banks and customers(5)

   284,968    284,968    —      —      —  

Aggregate policy reserves(6)

   35,462    1,642    3,248    3,027    27,545

Reserves for loss and loss adjustment expenses(7)

   60,246    19,418    15,817    7,941    17,070

Other long-term liabilities(8)

   6,876    576    1,212    1,338    3,750
    
  
  
  
  

Total contractual obligations

   467,105    341,774    39,607    18,964    66,760
    
  
  
  
  

(1) The table sets forth the Allianz Group’s contractual obligations as of December 31, 2005. Contractual obligations do not include contingent liabilities or commitments and only transactions with parties outside the Allianz Group are considered.
(2) For further information, see Notes 15 and 19 to our consolidated financial statements.
(3) The amount of €2,883 million is gross of €66 million related to subleases, which represent cash inflow to the Allianz Group.
(4) Purchase obligations only include transactions related to goods and services; purchase obligations for financial instruments are excluded.
(5) This amount reflects the current portion of liabilities to banks and customers and includes €14,534 million and €57,624 million of payables on demand, respectively. For further information, see Notes 17 and 18 to our consolidated financial statements.
(6) Amounts included in the table represent aggregate policy reserves from our life/health insurance operations where the Allianz Group believes the amount and timing of the payment is essentially fixed and determinable. These amounts include, but are not limited to, immediate annuities, guaranteed investment contracts, structured settlements and annuity certain contracts where the Allianz Group is currently making payments and will continue to do so until the occurrence of a specific event, such as death.

 

   Amounts excluded from the table represent aggregate policy reserves from our life/health insurance operations that generally comprise policies or contracts where (i) the Allianz Group is not currently making payments and will not make payments in the future until the occurrence of an insurable event, such as death or disability or (ii) the occurrence of a payment triggering event, such as a surrender of a policy or contract, is outside the control of the Allianz Group. The determination of these liabilities and the timing of payment are not reasonably fixed and determinable since the insurable event or payment triggering event has not yet occurred. Such excluded amounts include, but are not limited to, traditional life, health and disability insurance products, unit-linked and other investment-oriented insurance products, as well as deferred annuities.

 

   Amounts included in the table reflect estimated cash payments to be made to policyholders. Such cash outflows reflect adjustments for the estimated timing of mortality, retirement, and other appropriate factors, but are undiscounted with respect to interest. As a result, the sum of the cash outflows shown for all years in the table of €35,462 million exceeds the corresponding liability of €22,498 million included in our consolidated financial statements at December 31, 2005, which reflect the discounting for interest, as well as adjustments for the timing of other factors as previously noted. For further information on aggregate policy reserves, see Note 16 to our consolidated financial statements.

 

(7) Comprise reserves for loss and loss adjustment expenses from our property-casualty insurance operations. The amounts presented in the above table are gross of reinsurance ceded. The corresponding amounts, net of reinsurance ceded, are €15,128 million, €12,741 million, €6,831 million and €14,978 million for the periods less than 1 year, 1-3 years, 3-5 years and more than 5 years, respectively. For further information on reserves for loss and loss adjustment expenses, see “Information on the Company—Property-Casualty Insurance Reserves” and Note 16 to our consolidated financial statements.
(8) Comprise estimated future benefit payments. For further information, see Note 21 to our consolidated financial statements.

 

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Expected Developments(1)

 

Economic Outlook

 

  Economic growth to improve our business prospects.

 

For 2006, we expect the global economy to maintain a rate of growth consistent with the previous year, but with decreasing differences between the industrialized countries. The current trade deficit in the United States and the effect it will have on future exchange rates against the U.S. dollar remain uncertain. While the more restrictive monetary policy of the various central banks around the world are working to thwart off the risk of inflation, it is also restricting economic growth. Overall this is a positive business environment for financial service providers.

 

Our economists forecast world economic growth in 2006 at 3.2 % (2005: 3.2 %). This should allow world trade to maintain its current dynamic and increase by approximately 8 %. We consider the emerging markets, with growth of 5.5 %, to have particular potential. Industrialized countries should see expansion of approximately 2.6 %, consistent with the previous year.

 

Growth in Asia of 6.7 % will continue to drive the global economy. We assume that the expansion in South Korea in 2006 will accelerate further. In contrast, economic growth in India will decline slightly to 7.0 % (2005: 7.5 %), and in China to 8.5 % (2005: 9.9 %); this will reduce the risk of the economies in these countries from expanding at an over-accelerated pace. In Japan, the largest economy in Asia, we predict continued stable growth of 2.5 % (2005: 2.6 %).

 

While economic growth in the United States is predicted to slow to 3.2 % (2005: 3.7 %), primarily as a result of the restrictive interest rate policy of the Federal Reserve Bank, it should increase slightly in Europe. We believe that most of the EU countries will slightly exceed the growth of the previous year, except in Spain, where we expect the pace of growth to slow. We expect the German economy to perform positively in 2006. We expect increased investment and increases in consumer spending as a response to the changes in tax policy by the German federal government, largely as a result of the increase in value added tax in 2007. We estimate economic growth in Germany will reach approximately 2 %, doubling that of the previous year. With minor deviations, EU countries and the Euro zone should also see a comparable level of growth.

 

On the financial markets, we expect higher interest rates on short maturities as a result of a restrictive monetary policy by the various central banks across the globe. There is great uncertainty as to the strength of the U.S. dollar, as well as, among others, the effects of the substantial trade deficit of the U.S. economy, which may also slow growth. Initial signs seem to indicate that the profitability of U.S. companies will weaken in the second half of 2006, which would negatively affect the performance of the U.S. stock markets.

 

Industry Outlook

 

  Favorable business environment for financial service providers.

 

These macroeconomic conditions improve the business outlook for financial service providers.

 

Following a year plagued with a large number of natural catastrophes, including one of the worst hurricane seasons on record, we expect the property-casualty insurance sector to experience an improved year in 2006, further major natural catastrophes notwithstanding. However, as competition for market share is everincreasing, there exists an inherent risk that insurance companies will adopt a less than disciplined approach in underwriting new business in order to gain market share. The rapid growth in the economy, income levels and the value of property in Asia make the market in this region increasingly interesting for the property-casualty insurance business.

 

We expect the life insurance business to continue to benefit from the continued necessity of individuals and companies making provisions for retirement. This need will be predominantly covered by life insurance and related retirement products. Demand for products of this type should continue to rise, as in many countries reforms of state retirement systems have not yet been completed, consequently additional cuts in anticipated retirement income promised by these government-sponsored plans are expected. Equally significant are the effects of the aging society on the state healthcare systems, but there appears to be little sign of political will for effective reforms in this area. With this in mind, it appears evident that sooner or later it will be unavoidable that citizens themselves will have to

 


(1) For a discussion of risks and uncertainties related to these expectations, see “Cautionary Statement Regarding Forward-Looking Statements.”

 

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bear a portion of their healthcare costs, thereby creating attractive business opportunities for private health insurance providers.

 

The need for people to make provisions for their retirement and the virtually worldwide increase in the standard of living are also leading to a rise in the asset management business. The total assets that must be managed for personal or corporate retirement schemes is steadily increasing. The U.S. and European markets present particular opportunities, where “baby boomers” are nearing retirement age. While this transition will occur in the United States in five to ten years, Europeans still have fifteen to twenty years to make their own provisions for retirement. Another growth area is Asia, whose middle class is increasingly gaining importance with its economic upturn.

 

Banking, even in Germany, should present encouraging figures because of the solid growth outlook, as this is a more cyclical industry than, for example, insurance. We expect that a higher corporate propensity to invest will noticeably increase demand for credit.

 

Reporting Changes for the Allianz Group Effective January 1, 2006

 

Through the implementation of the following reporting changes effective January 1, 2006, and applied retrospectively, we will further improve transparency.

 

  Operating profit methodology We will fully align operating profit methodology across all segments, with the exception of the consolidation of intra-Allianz Group dividends. Life/Health segment’s operating profit will be different from our other operations’ operating profit with respect to the consolidation of intra-Allianz Group dividends. Intra-Allianz Group dividends received by our Life/Health segment will be further consolidated on the segment level, due to policyholder participation in these dividends. By refining our operating profit methodology, we will further improve its reflection of our business mechanics. Our definition of operating profit in our various segments may differ from similar measures used by other companies, and may change further over time.

 

  Consolidation of intra-Allianz Group dividends Effects within the consolidation column will be significantly reduced as intra-Allianz Group dividends will be eliminated at the recipient. As previously stated, this does not apply to our Life/Health segment.

 

  Introduction of re-defined combined ratio Other income and other expenses will be minimized as they will be, to a significant extent, reflected within our re-defined combined ratio. Accordingly, our Property-Casualty segment’s re-defined combined ratio for 2005 will be approximately two percentage points higher compared to that calculated based on the methodology used herein.

 

  Introduction of a Corporate segment Clear distinction between results of operations of our Property-Casualty segment and corporate activities through the introduction of a Corporate segment.

 

  New structure of Allianz Group income statement All key performance indicators, including a re-defined combined ratio encompassing additional costs, will be able to be directly derived from the income statement.

 

ITEM 6. Directors, Senior Management and Employees

 

Corporate Governance

 

General

 

Allianz AG is a German stock corporation (Aktiengesellschaft, or “AG”) . The corporate bodies of Allianz AG are the Board of Management (Vorstand), the Supervisory Board (Aufsichtsrat) and the General Meeting (Hauptversammlung). The Board of Management and the Supervisory Board are separate and no individual may serve simultaneously as a member of both boards. This dual board system is required for a German stock corporation by German law.

 

The Board of Management is responsible for managing the day-to-day business of Allianz AG in accordance with the German Stock Corporation Act (Aktiengesetz, or “AktG) and the articles of association (Satzung) of Allianz AG. The Board of Management is bound by applicable German law, the articles of association of Allianz AG as well as its internal rules of procedure (Geschäftsordnung). The Board of Management represents Allianz AG in its dealings with third parties. The Supervisory Board

 

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oversees the management. It is also responsible for appointing and removing the members of the Board of Management and representing Allianz AG in its transactions with members of the Board of Management. The Supervisory Board is not permitted to make management decisions, but the Supervisory Board or the articles of association must determine that certain types of transactions require the Supervisory Board’s prior consent.

 

In carrying out their duties, the members of the Board of Management and the Supervisory Board must exercise the standard of care of a diligent and prudent business person. In complying with this standard of care, the members of both boards must take into account a broad range of considerations in their decisions, including the interests of Allianz AG, its shareholders, employees and creditors. Additionally, the Board of Management is required to respect the rights of shareholders to equal treatment and equal information.

 

Members of either board who violate their duties may be personally liable for damages to Allianz AG. The company may only waive these damages or settle these claims if at least three years have passed from the date of their origination, and if the general meeting approves the waiver or settlement with a simple majority. No approval of a waiver or settlement by the general meeting will be effective if opposing shareholders who hold, in the aggregate, one-tenth or more of the share capital of Allianz AG have their opposition formally noted in the minutes recorded by a German notary. As a general rule under German law, a shareholder has no direct recourse against the members of the Board of Management or the Supervisory Board in the event that they are believed to have breached a duty to Allianz AG.

 

The Supervisory Board has comprehensive monitoring functions. To ensure that these functions are carried out properly, the Board of Management must regularly report to the Supervisory Board with regard to current business operations and future business planning (including financial, investment and personnel planning). The Supervisory Board is also entitled to request at any time special reports regarding the affairs of Allianz AG, the legal or business relations of Allianz AG to its subsidiaries and the affairs of any of its subsidiaries to the extent these may have a significant impact on Allianz AG.

 

The Board of Management is required to ensure that adequate risk management and internal monitoring systems exist within Allianz AG to detect risks relating to the Allianz Group’s business activities at the earliest possible stage.

 

German Corporate Governance Rules

 

Principal sources of enacted corporate governance standards for German stock corporations are the German Stock Corporation Act and the German Co-determination Act (Mitbestimmungsgesetz). In addition, the German Corporate Governance Code (the “Code”), published by the German Ministry of Justice (Bundesministerium der Justiz) for the first time in 2002 and now effective in its version as of June 2, 2005, presents essential statutory regulations for the corporate governance of German listed companies. The aim of the Code is to make the German corporate governance rules related to German listed stock corporations transparent for national and international investors. As a German listed stock corporation, Allianz AG is subject to the Code.

 

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The Code comprises a set of best-practice guidelines. In addition to restating various corporate governance-related provisions of German law, the Code contains “recommendations”, which reflect widely recognized standards of corporate governance. Listed companies can deviate from the recommendations, but are then required to disclose this annually. Furthermore, the Code contains “suggestions”, which incorporate additional standards for the sound and responsible management and supervision of a company. Companies can deviate from the Code’s suggestions without disclosure. Topics covered by the Code include:

 

    The composition and responsibilities of the Board of Management, the compensation of Board of Management members, and rules for avoiding and resolving conflicts of interest;

 

    The composition and responsibilities of the Supervisory Board and committees of the Supervisory Board, the compensation of Supervisory Board members, and rules for avoiding and resolving conflicts of interest;

 

    The relationship between the Board of Management and the Supervisory Board;

 

    Transparency and disclosure in periodic reports; and

 

    Reporting on, and auditing of, the company’s annual financial statements.

 

Although the Code does not have the force of law, it has a legal basis through the declaration of compliance required by Section 161 of the German Stock Corporation Act, which entered into force in 2002 and requires that the Board of Management and the Supervisory Board of a listed company declare annually either:

 

(i) that the company has complied, and does comply, with the recommendations set forth in the Code, or, alternatively,

 

(ii) which recommendations the company has not complied, or does not comply, with (so-called “comply or explain” principle).

 

On December 15, 2005, the Board of Management and the Supervisory Board of Allianz AG issued the current declaration of compliance stating in its English convenience translation the following:

 

“1. Allianz AG will comply with all recommendations made by the Government Commission on the German Corporate Governance Code (Code version as of June 2, 2005).

 

2. Since the last Declaration of Compliance as of December 15, 2004, which referred to the German Corporate Governance Code in its May 21, 2003 version, Allianz AG has complied with the recommendations made by the Government Commission on the German Corporate Governance Code then in force.”

 

This declaration is made available on a permanent basis to the shareholders on the company’s website under www.allianz.com/corporate-governance. (Reference to this “uniform resource locator” or “URL” is made as an inactive textual reference for informational purposes only. The information found at this website is not incorporated by reference into this document.)

 

Furthermore, you will find a summary of significant ways in which our corporate governance differs from those required of domestic companies under the NYSE corporate governance standards on our website under www.allianz.com/corporate-governance. (Reference to this URL is made as an inactive textual reference for informational purposes only. The information found at this website is not incorporated by reference into this document.)

 

Board of Management

 

The Board of Management of Allianz AG consists of eleven members. Under the articles of association of Allianz AG, the Supervisory Board determines the size of the Board of Management, although it must have at least two members. The articles of association furthermore provide that Allianz AG may be legally represented by two members of the Board of Management or by one member of the Board of Management together with one holder of a general commercial power of attorney (Prokura), which entitles its holder to carry out legal acts and transactions on behalf of Allianz AG. In addition, pursuant to a filing with the commercial register in Munich, Allianz AG may also be represented by two holders of a general commercial power of attorney Prokura. The Supervisory Board represents Allianz AG in connection with transactions between a member of the Board of

 

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Management and Allianz AG. To the extent that a Supervisory Board committee is entitled to decide on a specific matter in lieu of the Supervisory Board, the right of representing Allianz AG vis-à-vis the Board of Management in that matter can be transferred to the relevant Supervisory Board committee.

 

The Supervisory Board appoints the members of the Board of Management. The initial term of the members of the Board of Management is generally between three and five years. Each member may be reappointed or have his term extended by the Supervisory Board for one or more terms of up to five years each. According to Allianz AG’s practice, the initial appointment or the reappointment of members of the Board of Management attaining the age of 60 is generally limited to terms of one year with the option of further extension if neither the member of the Board of Management nor the Supervisory Board objects. Members of the Board of Management must under Allianz AG’s practice resign from office at the end of the fiscal year in which they attain the age of 65. The Supervisory Board may remove a member of the Board of Management prior to the expiration of his term for good cause, for example in the case of a serious breach of duty or a bona fide vote of no confidence by the general meeting. A member of the Board of Management may not deal with, or vote on, matters relating to proposals, arrangements or contractual agreements between himself and Allianz AG and may be liable to Allianz AG if he has a material interest in any contractual agreement between Allianz AG and a third party which was not disclosed to, and approved by, the Supervisory Board. The Board of Management has adopted its own internal rules of procedure.

 

The Board of Management regularly reports to the Supervisory Board on the business of Allianz AG. According to the internal rules of procedure of the Supervisory Board, the Board of Management requires the consent of the Supervisory Board for certain transactions, primarily, share capital measures and acquisitions or divestitures of companies or shareholdings in companies of a significant volume.

 

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The current members of the Board of Management, their age as of December 31, 2005, their areas of responsibility, the year in which each member was first appointed, the year in which the term of each member expires, and the principal board memberships outside the Allianz Group, respectively, are as follows:

 

Name


  Age

 

Area of Responsibility


  Year First
Appointed


  Year Current
Term Expires(1)


 

Principal Outside Board Memberships


Michael Diekmann

  51   Chairman of the Board of Management   1998   2011   Member of the Supervisory Boards of BASF AG, Linde AG (deputy chairman) and Lufthansa AG

Dr. Paul Achleitner

  49   Group Finance   2000   2009   Member of the Supervisory Boards of Bayer AG, MAN AG and RWE AG

Clement Booth

  51   Insurance Anglo Broker Markets, Global Lines   2006   2010   None

Jan R. Carendi

  60   Insurance NAFTA   2003   2007   None

Enrico Tomaso Cucchiani

  55   Insurance Europe I   2006   2010   Member of the board of directors of ACEGAS-APS S.p.A. and Banca Antonveneta S.p.A.

Dr. Joachim Faber

  55   Asset Management   2000   2009   Member of the Supervisory Boards of Bayerische Börse AG and Infineon Technologies AG

Dr. Helmut Perlet

  58   Group Controlling, Financial Risk Management, Accounting, Taxes, Compliance   1997   2007   None

Dr. Gerhard Rupprecht

  57   Insurance Germany   1991   2008   Member of the Supervisory Boards of Fresenius AG, Heidelberger Druckmaschinen AG, Quelle AG and ThyssenKrupp Automotive AG

Jean-Philippe Thierry

  57   Insurance Europe II   2006   2008   Member of the board of directors of Société Financière et Foncière de participation

Dr. Herbert Walter

  52   Allianz Dresdner Banking   2003   2007   Member of the Supervisory Boards of Deutsche Börse AG and TSV München von 1860 GmbH & Co.KG aA

Dr. Werner Zedelius

  48   Insurance Growth Markets   2002   2009   Member of the board of directors of Rosno

(1) Upon effectiveness of the contemplated merger of Riunione Adriatica di Sicurtà S.p.A. (RAS) with and into Allianz AG and the change of the legal form of Allianz AG into a European Company (Societas Europaea, SE), as described further in “Information on the Company—Allianz-RAS Merger/European Company (SE)”, the current term of the members of the Board of Management will expire. The members of the Board of Management of Allianz SE will be appointed by the Supervisory Board with a majority of its members participating in the resolution. Notwithstanding this competence of the Supervisory Board of the future Allianz SE according to German corporate law, it is expected that the current members of the Board of Management of Allianz AG will be appointed as members of the Board of Management of the future Allianz SE.

 

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The following is a summary of the business experience of the current members of the Board of Management, including their experience within the Allianz Group:

 

Michael Diekmann: Joined the Allianz Group in 1988. From 1996 to 1998 he was chief executive officer of Allianz Insurance Management Asia-Pacific Pte. Ltd., Singapore. He became a deputy member of the Board of Management of Allianz AG in October 1998 and a full member in March 2000. He was appointed as chairman of the Board of Management on April 29, 2003.

 

Dr. Paul Achleitner: Joined the Board of Management of Allianz AG in January 2000. He was previously chairman of Goldman, Sachs & Co. oHG, Frankfurt, Germany and a partner of Goldman Sachs Group from 1994 to 1999.

 

Clement Booth: Joined the Board of Management of Allianz AG on January 1, 2006. From 1999 to 2003, he was a member of the Board of Management of Munich Re and from 2003 to 2005 he was chairman and CEO of Aon Re International, London.

 

Jan R. Carendi: Became a member of the Board of Management of Allianz AG in May 2003. He previously held a variety of positions at Skandia Insurance Company Ltd. and other companies of the Skandia Group, including chief executive officer of Skandia Insurance Company Ltd. and Skandia New Markets Inc. and chief executive officer of American Skandia Inc.

 

Enrico Tomaso Cucchiani: Joined the Board of Management of Allianz AG on January 1, 2006. From 1996, he has held several leading management positions within Lloyd Adriatico S.p.A., Trieste. He became CEO in 1998 and since 2001, he is chairman of the board of directors of Lloyd Adriatico.

 

Dr. Joachim Faber: Joined the Allianz Group in 1997 after holding various positions at Citibank AG, Frankfurt, Germany (1984-1992), including chairman of the Board of Management, and Citibank International PLC, London (1992-1997), including head of capital markets. He was a member of the Board of Management of Allianz Versicherung from 1997 to 1999 and became a member of the Board of Management of Allianz AG in January 2000.

 

Dr. Helmut Perlet: Joined the Allianz Group in 1973. He has been head of the foreign tax department since 1981, head of corporate finance since 1990 and head of accounting and controlling since 1992. He became a deputy member in July 1997 and a full member of the Board of Management of Allianz AG in January 2000.

 

Dr. Gerhard Rupprecht: Joined the Allianz Group in 1979. In January 1989, he became a deputy member, and in January 1991 a full member, and in October 1991 was appointed chairman, of the Board of Management of Allianz Leben. He became a member of the Board of Management of Allianz AG in October 1991.

 

Jean-Philippe Thierry: Joined the Board of Management of Allianz AG on January 1, 2006. Previously, he was Chairman and CEO of Athena Insurance (1985-1997) and CEO of Generali France (1998-2001). Since June 2001, he is Chairman and Chief Executive Officer of Assurances Générales de France.

 

Dr. Herbert Walter: Held various positions at Deutsche Bank AG since 1983, including chairman of the business segment Private & Business Clients and speaker of the Board of Management of Deutsche Bank 24. Since 2002, he was a member of the Group Executive Committee of Deutsche Bank group as well as Global Head of Private & Business Clients. He became a member of the Board of Management of Allianz AG on March 19, 2003, and became the Chairman of the Board of Management of Dresdner Bank AG effective March 25, 2003.

 

Dr. Werner Zedelius: Joined the Allianz Group in 1987. After various positions in branch offices and in the headquarters of Allianz AG, he was General Manager Finance and member of the board of directors of Cornhill Insurance PLC in London from 1996 until 1999. Dr. Zedelius became a member of the Board of Management of Allianz AG on January 1, 2002.

 

The members of the Board of Management may be contacted at the business address of Allianz AG.

 

Supervisory Board

 

In accordance with the articles of association of Allianz AG and the German Co-determination Act (Mitbestimmungsgesetz), the Supervisory Board of Allianz AG consists of 20 members, ten of whom are

 

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elected by the shareholders (shareholder representatives) and ten of whom are elected by the employees of the German companies of the Allianz Group (employee representatives). Three of the employee representatives are representatives of the trade unions represented in the Allianz Group in Germany. The general meeting may remove any Supervisory Board member it has elected by a simple majority of the votes cast. The employee representatives may be removed with a majority of three-quarters of the votes cast by those employees who elected them. In addition, any member of the Supervisory Board may resign by written notice to the Board of Management.

 

The Supervisory Board has a quorum when all members of the Supervisory Board were invited or requested to participate in a decision and either (i) ten or more members, including the chairman of the Supervisory Board, or (ii) if the chairman of the Supervisory Board does not participate in the voting, fifteen or more members participate in the voting. Except where a different majority is required by law or the articles of association of Allianz AG, the Supervisory Board acts by simple majority of the votes cast. In the case of any deadlock, the chairman has the deciding vote. The Supervisory Board meets at least twice each half-year. Its main functions are:

 

    to monitor the management of Allianz AG;

 

    to appoint the members of the Board of Management; and

 

    to approve matters in areas where such approval is required by German law or which the Supervisory Board has made generally or in the individual case subject to its approval. See “—Board of Management.”

 

In addition, Supervisory Boards of German insurance companies are tasked with the appointment of the external auditor.

 

The Supervisory Board has established a Standing Committee, an Audit Committee, a Personnel Committee and a Mediation Committee.

 

Standing Committee. The Standing Committee, which comprises the chairman of the Supervisory Board, his deputy and three additional members elected by the Supervisory Board, may approve or disapprove certain transactions of Allianz AG to the extent that such transactions do not fall under the competency of any other committee or are required to be decided by plenary meeting of the Supervisory Board. The Standing Committee examines the corporate governance of Allianz AG, drafts the declaration of compliance and examines the efficiency of the work of the Supervisory Board. In addition, it determines the guest status of non-members who wish to attend Supervisory Board meetings as well as changes in form to the articles of association. The Standing Committee held three meetings in 2005. The members of the Standing Committee are Dr. Henning Schulte-Noelle as chairman, Norbert Blix, Dr. Gerhard Cromme, Peter Haimerl and Dr. Manfred Schneider.

 

Audit Committee. The Audit Committee comprises five members elected by the Supervisory Board. The Audit Committee prepares the decisions of the Supervisory Board about the Allianz Group’s annual financial statements, the consolidated financial statements and the appointment of the auditors and ascertains the independence of the auditors. Furthermore, the Audit Committee assigns the mandate to the auditors, sets priorities for the audit and determines the compensation of the auditors. In addition, it examines the quarterly reports. After the end of the fiscal year, the Audit Committee examines the Allianz Group’s annual financial statements and the consolidated financial statements, examines the risk monitoring system and discusses the auditor’s report with the auditors. The Audit Committee held five meetings in 2005. The members of the Audit Committee are Dr. Manfred Schneider as chairman, Dr. Gerhard Cromme, Claudia Eggert-Lehmann, Prof. Dr. Rudolf Hickel and Dr. Henning Schulte-Noelle.

 

Personnel Committee. The Personnel Committee consists of the chairman of the Supervisory Board and two other members elected by the Supervisory Board. It prepares the appointment of members of the Board of Management. In addition, it tends to on-going personnel matters of the members of the Board of Management including their membership on boards of other companies, the payments they receive and the structure of Group Equity Incentives. See “—Stock-based Compensation Plans—Group Equity Incentive (GEI) Plans.” The Personnel Committee held four meetings in 2005. The members of the Personnel Committee are Dr. Henning Schulte-Noelle as chairman, Norbert Blix and Dr. Gerhard Cromme.

 

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Mediation Committee. The Mediation Committee consists of the chairman of the Supervisory Board and his representative elected according to the rules of the German Co-determination Act of 1976, one member elected by the employees and one member elected by the shareholders. Under Sec. 27(3) of the German Co-determination Act, the Mediation Committee is charged with the solution of conflicts in the appointment of members of the Board of Management. If the Supervisory Board in a vote on the appointment or recall of a member of the Board of Management fails to obtain the required majority, the Mediation Committee has to convene in order to present a proposal to the Supervisory Board. There arose no need for the Mediation Committee to meet in 2005. The members of the Mediation Committee are Dr. Henning Schulte-Noelle as chairman, Wulf Bernotat, Norbert Blix and Hinrich Feddersen.

 

Each member of the Supervisory Board is generally elected for a fixed term, which expires at the end of the general meeting at which the shareholders discharge the members of the Supervisory Board in respect of the fourth fiscal year after the beginning of the term. The fiscal year in which the members of the Supervisory Board are first elected is not considered. The current term of office of all current members of the Supervisory Board of Allianz AG will expire at the end of the annual general meeting of Allianz AG in 2008. Nevertheless, the term of office of the current members of the Supervisory Board will expire upon the effectiveness of the planned merger of Riunione Adriatica di Sicurta S.p.A. (RAS) with and into Allianz AG and the change of the legal form of Allianz AG into an SE. For further information on the planned merger, see “Information on the Company—Allianz-RAS Merger/European Company (SE)” and “—RAS Merger and the Future Allianz SE—Anticipated Changes in the Corporate Constitution.”

 

The current members of the Supervisory Board of Allianz AG, their age as of December 31, 2005, their principal occupations, the year in which each member first served on the Supervisory Board and their principal memberships in boards outside the Allianz Group, respectively, are as follows:

 

Name


  Age

  

Principal Occupation


  Year First
Appointed


 

Principal Outside Board
Memberships


Dr. Henning Schulte-Noelle,

Chairman(1)

  63    Former chairman of the Board of Management of Allianz AG   2003   Member of the Supervisory Boards of E.ON AG, Siemens AG and ThyssenKrupp AG

Norbert Blix, Deputy

Chairman(2)

  56    Employee, Allianz Versicherungs-AG   1997   None

Dr. Wulf H. Bernotat(1)

  57    Chairman of the Board of Management of E.ON AG   2003   Member of the Board of Managements of E.ON AG (chairman), Metro AG and RAG AG

Dr. Diethart Breipohl(1)

  66    Former member of the Board of Management of Allianz AG   2000   Member of the Supervisory Boards of Continental AG, KarstadtQuelle AG, KM Europa Metal AG (chairman) and member of the board of directors of Atos Origin S.A. and Credit Lyonnais

Dr. Gerhard Cromme(1)

  52    Chairman of the Supervisory Board of ThyssenKrupp AG   2001   Member of the Supervisory Boards of ThyssenKrupp AG (chairman), Axel Springer AG, Siemens AG, Hochtief AG, Deutsche Lufthansa AG, E.ON AG, Volkswagen AG, Suez S.A., BNP Paribas and Compagnie de Saint-Gobain S.A.

Claudia Eggert-Lehmann(2)

  38    Employee, Dresdner Bank AG   2003   None

Hinrich Feddersen(2)

  61    Member of the federal steering committee of ver.di (Vereinte Dienstleistungsgewerkschaft)   2001   None

 

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Name


  Age

  

Principal Occupation


  Year First
Appointed


 

Principal Outside Board
Memberships


Franz Fehrenbach(1)

  56    Chairman of the Board of Management of Robert Bosch GmbH   2005   Member of the Board of Management of Robert Bosch GmbH (Chairman) and member of the Supervisory Board of Robert Bosch Corporation

Peter Haimerl(2)

  56    Employee, Dresdner Bank AG; Chairman of the works council of Dresdner Bank   2001   None

Prof. Dr. Rudolf Hickel(2)

  63    Professor of Finance, University of Bremen   1999   Member of the Supervisory Boards of Salzgitter AG Stahl und Technologie, Howaldtswerke Deutsche Werft AG and Gewoba AG Wohnen und Bauen in Bremen

Dr. Franz B. Humer(1)

  59    Chairman of the board of directors and Chief Executive Officer of F. Hoffmann-La Roche AG   2005   Member of the Supervisory Board of F. Hoffmann-La Roche AG (Chairman) and member of the board of directors of DIAGEO plc

Prof. Dr. Renate Köcher(1)

  53    Chairperson Institut für Demoskopie, Allensbach   2003   Member of the Supervisory Boards of MAN AG, Infineon Technologies AG and BASF AG

Igor Landau(1)

  61    Member of the board of directors of Sanofi-Aventis S.A.   2005   Member of the Supervisory Boards of adidas-Salomon AG and member of the boards od directors of HSBC France, Essilior S.A. and Sanofi-Aventis S.A.

Dr. Max Link(2)

  51    Employee, Allianz Versicherungs-AG   2004   None

Iris Mischlau-Meyrahn(2)

  47    Employee, Allianz Lebensversicherungs-AG   2005   None

Karl Neumeier(2)

  58    Employee, Allianz Versicherungs-AG   2003   None

Sultan Salam(2)

  64    Employee, Dresdner Bank AG   2003   None

Dr. Manfred Schneider(1)

  67    Chairman of the Supervisory Board of Bayer AG   1998   Member of the Supervisory Boards of Bayer AG (chairman), DaimlerChrysler AG, Linde AG (chairman), METRO AG, RWE AG and TUI AG

Margit Schoffer(2)

  49    Employee, Dresdner Bank AG   2003   None

Prof. Dr. Dennis Snower(1)

  55    President of the Kiel Institute for World Economics   2004   None

(1) Shareholder representative.
(2) Employee representative.

 

The members of the Supervisory Board may be contacted at the business address of Allianz AG.

 

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RAS Merger and the Future Allianz SE—Anticipated Changes in the Corporate Constitution

 

In the course of the contemplated merger of Riunione Adriatica di Sicurtà S.p.A. (RAS) with and into Allianz AG, and the change of the legal form of Allianz AG into a European Company (Societas Europaea, or SE), as described further in “Information on the Company—Allianz-RAS Merger/European Company (SE)”, some changes in the corporate constitution will occur.

 

According to the Articles of Association (Statutes) of the future Allianz SE, which were approved together with the merger plan by the extraordinary General Meeting of Allianz AG on February 8, 2006, Allianz SE will retain its two-tier board system of a Board of Management and a Supervisory Board. Upon the effectiveness of the merger, the mandates of the current members of the Board of Management and the Supervisory Board of Allianz AG will expire.

 

The Statutes of the future Allianz SE provide for reducing the size of the Supervisory Board from 20 members to 12, with six members representing the employees to maintain parity. The shareholder representatives on the first Allianz SE Supervisory Board are determined in the Statutes. In the future, the employee representatives on the Supervisory Board will no longer exclusively be representatives of the German employees, but also representatives of the employees of other European countries. They will be named according to the rules effective in their respective countries and will later be elected by the first General Meeting of Allianz SE. For the period prior to the first General Meeting, the employee representatives will be court-appointed.

 

The German Co-Determination Act will not apply to the future Allianz SE. A special negotiating body will negotiate the scope of employee involvement on the Supervisory Board with the management bodies of Allianz AG and RAS. If no agreement is reached by the established deadline, a statutorily-imposed solution provided for in the German Act on Employee Involvement in a European Company (Gesetz über die Beteiligung der Arbeitnehmer in einer Europäischen Gesellschaft) will apply. This statutorily-imposed solution can also be agreed upon in full or in part by the negotiating parties as a result of the negotiations.

 

Compensation of Directors and Officers

 

Remuneration of the Board of Management

 

The remuneration of the Board of Management of Allianz AG supports sustainable value-oriented management. In the last several years, it has been enhanced in order to arrive at a balanced structure, whose level is appropriate and competitive, and achieves the intended management purpose.

 

The remuneration of the Board of Management is determined by the Personnel Committee of the Supervisory Board. The remuneration structure is regularly discussed and examined in the plenary meetings of the Supervisory Board. See Note 45 to our consolidated financial statements for more information.

 

The individual remuneration components for the Board of Management include:

 

Fixed remuneration

 

The amount of the fixed remuneration is, on the one hand, determined by the delegated function or responsibility. On the other hand, it is influenced by external market conditions.

 

Variable remuneration

 

This component consists of an annual and a mid-term three-year bonus, each of which is performance- and success-related and limited to a maximum amount.

 

Group Equity Incentive

 

This consists of stock appreciation rights (SAR) and restricted stock units (RSU). More detailed information on the stock-based remuneration components can be found at Note 43 to our consolidated financial statements or on the Internet at www.allianz.com/cg.

 

The valuation of the stock-based remuneration is merely a mathematically calculated reference value. If and when the stock-based remuneration actually leads to payment depends on the future development of the share price, the strike price and the date of exercise. Exercise of SARs is possible, at the earliest, two years after their granting, and of RSUs after five

 

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years. The exercise, the number of rights issued and the development of the value of stock-based remuneration are shown in the income statement.

 

Variable remuneration and stock-based remuneration together form a three-tier incentive system.

 

Yearly bonus
(short-term)


  

3-year-bonus
(medium-term)


  

Stock-based remuneration
(long-term)


Target categories

   Target categories    Target category

    Group objectives

       Meeting defined strategic objectives        Sustainable increase in share price

    Group/department objectives

    Individual objectives

       Sustained achievement of annual EVA®
    objectives
    

EVA® is a registered trademark of Stern Stewart & Co.

 

Miscellaneous

 

Income-equivalent ancillary benefits vary with the function and position of the recipient and are subject to personal income tax. They essentially include insurance coverage generally granted in the industry and the use of a company car. In 2005, income-equivalent ancillary benefits amounted to €0.2 million (2004: €0.3 million).

 

The members of the Board of Management either receive no remuneration from mandates at Allianz Group companies or the remuneration paid to them from such mandates is turned over to the company in full. Of the remuneration received from positions in companies outside the Allianz Group, 50 % is turned over to the company and, in the year under review, this amounted to €0.5 million (2004: €0.5 million). This remuneration is shown in the annual reports of the companies concerned. For a list of supervisory mandates in companies outside the Allianz Group, see “ —Board of Management”.

 

The individual members of the Board of Management each received the following remuneration:

 

    Fixed
remuneration


  Annual bonus(1)

    Cash
remuneration(2)


    Reserves
3-year-bonus(3)


    Group Equity-
Incentive


Board of Management


  2005

  Change
from
previous
year


  2005

  Change
from
previous
year


    2005

  Change
from
previous
year


    2005

  Change
from
previous
year


    2005 SARs/
RSUs granted


    € thou   %   € thou   %     € thou   %     € thou   %      

Michael Diekmann (Chairman)

  900     1,494   (10 )   2,394   (6 )   540       45,343

Dr. Paul Achleitner

  700     1,065   (14 )   1,765   (9 )   360       34,497

Detlev Bremkamp

  600     886   (19 )   1,486   (12 )   300   (17 )   29,987

Jan R. Carendi

  600     867   (24 )   1,467   (16 )   300   (17 )   30,896

Dr. Joachim Faber

  600     916   (17 )   1,516   (11 )   330   (8 )   30,172

Dr. Reiner Hagemann(4)

  700     1,079   (28 )   1,779   (19 )   270   (25 )   38,859

Dr. Helmut Perlet

  600     920   (15 )   1,520   (10 )   360       29,874

Dr. Gerhard Rupprecht(5)

  600     910   (13 )   1,510   (8 )   360       29,235

Dr. Herbert Walter6)

  700     1,051   (34 )   1,751   (24 )   310   (14 )   54,998

Dr. Werner Zedelius

  600   25   975   17     1,575   20     270   (25 )   25,471

(1) Paid in 2006 for fiscal year 2005.
(2) Total from fixed remuneration and annual bonus.
(3) Pro rated share of provisions for reporting.
(4) Total remuneration from Allianz Group Board mandates. Allianz AG has a 62.5% share in this remuneration.
(5) Total remuneration from Allianz Group Board mandates. Allianz AG has a 50% share in this remuneration.
(6) Total remuneration from Allianz Group Board mandates. Allianz AG has a 25% share in this remuneration.

 

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The individual members of the Board of Management each received the following stock-related remuneration:

 

       Number of rights granted

     Mathematical value of GEI
at the date of grant


           SAR(1)    

         RSU(2)    

         SAR(1)    

         RSU(2)    

         Total    

                     € thou      € thou      € thou

Michael Diekmann (Chairman)

     30,048      15,295      802      1,304      2,106

Dr. Paul Achleitner

     22,860      11,637      610      992      1,603

Detlev Bremkamp

     19,872      10,115      530      863      1,393

Jan R. Carendi

     20,474      10,422      546      889      1,435

Dr. Joachim Faber

     19,994      10,178      534      868      1,402

Dr. Reiner Hagemann(3)

     25,751      13,108      687      1,118      1,805

Dr. Helmut Perlet

     19,797      10,077      528      859      1,388

Dr. Gerhard Rupprecht(4)

     19,373      9,862      517      841      1,358

Dr. Herbert Walter(5)

     27,077      27,921      723      2,381      3,104

Dr. Werner Zedelius

     16,879      8,592      451      733      1,183

(1) Following a vesting period, the SARs may be exercised at any time between May 18, 2007 and May 17, 2012 at the latest, provided that the Allianz Share price stands at a minimum of €111.44 and has outperformed Dow Jones EURO STOXX Price Index (600) at least once for a period of five consecutive days during the contractual term. For more detailed information about SARs, see Note 43 to our consolidated financial statements.
(2) RSUs are exercised the day following expiration of a five-year period; i.e. on May 18, 2010, at the Allianz AG share price applicable on that date. For more detailed information about the RSUs see Note 43 to our consolidated financial statements.
(3) Total remuneration from Allianz Group Board mandates. Allianz AG has a 62.5% share in this remuneration.
(4) Total remuneration from Allianz Group Board mandates. Allianz AG has a 50% share in this remuneration.
(5) Total remuneration from Allianz Group Board mandates. Allianz AG has a 25% share in this remuneration.

 

Pensions and similar benefits

 

The pension agreements for members of the Board of Management stipulate retirement benefits of a fixed amount that is not linked to the development of the fixed or variable remuneration components. The agreements are examined and revised at irregular intervals. In 2005, we changed to a contribution-oriented system. This involves savings contributions and a fixed interest rate of 2.75 % per year, which is also the actuarial interest rate for life insurance companies in Germany. In the case of an insured event, the accumulated capital is converted to equal annuity payments that are then paid out for the rest of the member’s life. If the net return on investment exceeds the actuarial interest rate, a corresponding profit share will be credited in the following year.

 

When a member of the Board of Management retires from the Board at the end of his mandate, old age pension is paid no earlier than upon completion of the 60th year of age, except for cases of professional disability or general disability for medical reasons, or payments to a beneficiary in the case of death. If the mandate is terminated for other reasons before the retirement age has been reached, a non-expiring pension claim is maintained. This does not mean, however, claim to pension payments must begin immediately.

 

The Allianz Group paid €1.4 million (2004: €2.3 million) to increase pension reserves and reserves for similar benefits for active members of the Board of Management in the past financial year. On December 31, 2005, the corresponding provisions amounted to €26.1 million (2004: €25.8 million).

 

Remuneration of the Supervisory Board

 

The remuneration of the Supervisory Board is based on the size of the company, the functions and responsibilities of the members of the Supervisory Board and the financial situation of the company. On May 4, 2005, they were rearranged by resolution of the Annual General Meeting. The relevant provisions are contained in clause 9 of the Articles of Association.

 

The relationship between the fixed and variable remuneration components is now more balanced. In addition, merit-based remuneration is no longer determined by the dividend, but by corporate earnings per share.

 

Three components make up the Supervisory Board’s remuneration: a fixed sum of €50,000 and two merit-based components. One has a short-term orientation and depends on corporate earnings per share in the previous fiscal year. The other is

 

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long-term and focuses on the cumulative trend in this indicator over the past three years.

 

The maximum sum for each of the two variable remuneration components is limited to €24,000. This means that the maximum total compensation for a Supervisory Board member is €98,000. This maximum limit would take effect when the previous year’s earnings per share have risen by more than 16 %, or when this indicator has improved by a total of 40 % over the past three years. If there has been no improvement in corporate profits per share during the applicable review period (i.e., the previous fiscal year or the past three years), no merit-based remuneration will be awarded.

 

For the reporting year, both merit-based remuneration components reached €24,000, because corporate earnings per share rose by more than 16 % in 2005, and by more than 40 % between 2002 and 2005.

 

The chairman and the deputy chairman of the Supervisory Board as well as the chairmen and members of its committees receive additional remuneration as follows: The chairman of the Supervisory Board receives double, and his deputy one and a half times the remuneration of an ordinary member of the Supervisory Board. Members of the Personnel Committee and Standing Committee receive an additional 25 %, and their respective chairmen 50 %. Members of the Audit Committee are entitled to a fixed sum of €30,000 per year, and the committee’s chairman receives €45,000.

 

The additional remuneration of the committee members is capped by an upper limit. This limit takes effect when the remuneration of the chairman of the Supervisory Board has reached triple and that of the other members of the Supervisory Board double the basic remuneration.

 

The members of the Supervisory Board receive a €500 attendance fee for each Supervisory Board or committee meeting that they personally attend. This sum remains unchanged if several meetings occur on one day or when various meetings are held on consecutive days. The total expenditure for attendance fees in the reporting year amounted to €38,500.

 

The individual members of the Supervisory Board each received the following remuneration:

 

     Fixed
remuneration


   Variable remuneration

   Committee
remuneration


   Total
remuneration


      short-term

   long-term

     
                

Dr. Henning Schulte-Noelle (Chairman)

   100,000    48,000    48,000    98,000    294,000

Norbert Blix (Deputy Chairman)

   75,000    36,000    36,000    49,000    196,000

Dr. Wulf H. Bernotat

   50,000    24,000    24,000    —      98,000

Dr. Diethart Breipohl

   50,000    24,000    24,000    —      98,000

Dr. Gerhard Cromme

   50,000    24,000    24,000    79,000    177,000

Claudia Eggert-Lehmann

   50,000    24,000    24,000    20,000    118,000

Hinrich Feddersen

   50,000    24,000    24,000    —      98,000

Franz Fehrenbach (since May 4, 2005)

   33,333    16,000    16,000    —      65,333

Peter Haimerl

   50,000    24,000    24,000    24,500    122,500

Prof. Dr. Rudolf Hickel

   50,000    24,000    24,000    30,000    128,000

Dr. B. Humer (since May 4, 2005)

   33,333    16,000    16,000    —      65,333

Prof. Dr. Renate Kocher

   50,000    24,000    24,000    —      98,000

Igor Landau (since January 1, 2005)

   50,000    24,000    24,000    —      98,000

Frank Ley (until May 4, 2005)

   20,833    10,000    10,000    12,500    53,333

Dr. Max Link

   50,000    24,000    24,000    —      98,000

Iris Mischlau-Meyrahn (since May 4, 2005)

   33,333    16,000    16,000    —      65,333

Karl Neumeier

   50,000    24,000    24,000    —      98,000

Sultan Salam

   50,000    24,000    24,000    —      98,000

Dr. Albrecht Schafer (until May 4, 2005)

   20,833    10,000    10,000    —      40,833

Dr. Manfred Schneider

   50,000    24,000    24,000    69,500    167,500

Margit Schoffer

   50,000    24,000    24,000    —      98,000

Dr. Hermann Scholl (until May 4, 2005)

   20,833    10,000    10,000    —      40,833

Prof. Dr. Dennis J. Snower

   50,000    24,000    24,000    —      98,000
    
  
  
  
  

Total

   1,087,500    522,000    522,000    382,500    2,514,000
    
  
  
  
  

 

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Board Practices

 

Allianz AG has entered into service contracts with management board members providing for a limited benefit upon termination of service prior to the stated expiration date of a management board member’s contract. In such circumstances, the management board member would receive monthly fixed payments for a further six months as well as pro rata bonus payments if the conditions for the bonus payments are fulfilled. If regular pension benefits were to become due during this time period, they would be credited against these payments. Allianz AG has not entered into such contracts with supervisory board members.

 

Share Ownership

 

As of March 15, 2006, the members of the management board and the supervisory board held less than 1% of our ordinary shares issued and outstanding. As of such date, based on our share register, the members of the management board and the supervisory board held in the aggregate approximately 2.726 ordinary shares of Allianz AG.

 

Employees

 

As of December 31, 2005, the Allianz Group employed a total of 177,625 people worldwide, of whom 72,195, or 40,6%, were employed in Germany. A large number of our German employees are covered by collective bargaining agreements or similar arrangements. In the past three years, there have been no work stoppages or strikes at our various sites that have arisen from collective bargaining disputes or for other reasons which had a material adverse effect on the Allianz Group’s results of operations. We believe that our employee relations are good.

 

The following table shows the number of employees of the Allianz Group by region for the years ended December 31, 2005, 2004 and 2003.

 

     At December 31,

     2005

   2004

   2003

Germany

   72,195    75,667    82,245

United Kingdom

   27,661    23,817    9,801

France

   17,246    17,129    19,639

United States

   10,840    10,313    11,058

Italy

   7,706    7,715    7,467

Australia

   3,673    3,283    3,187

Austria

   3,024    3,006    3,246

Hungary

   2,839    2,941    3,056

Switzerland

   2,823    2,930    3,117

Spain

   2,762    2,664    2,735

Slovakia

   2,645    2,858    3,039

Brazil

   2,345    2,259    2,304

Romania

   1,749    1,598    1,332

South Korea

   1,711    1,785    1,735

Other

   18,406    18,536    19,789
    
  
  

Total

   177,625    176,501    173,750
    
  
  

 

Stock-based Compensation Plans

 

Group Equity Incentive (GEI) plans

 

Group Equity Incentives support the orientation of senior management, and in particular the management board, toward the long-term increase of the value of the company. In 1999, we introduced Stock Appreciation Rights (SAR) through which part of the total remuneration is directly tied to the development of the Allianz share price. In 2003, Restricted Stock Units (RSU) with a 5-year vesting period were issued for the first time. Allianz senior management worldwide is entitled to participate in these Group Equity Incentives.

 

Awards were granted by the respective companies in accordance with uniform group-wide conditions. The grant price for SAR and RSU applicable for the award is calculated on the basis of the average daily closing price of the Allianz share in Xetra trading on the 10 trading days following the Annual General Meeting of Allianz AG. The grant price for the GEI plan 2005 is 92.87.

 

The number of SAR and RSU offered is set individually for each participant and is determined on the basis of the grant price, the economic

 

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development of the value of Allianz AG and the respective responsible company and individual elements such as fixed remuneration and performance. The volume of rights granted and thus the potential gain for the participant depends essentially on the economic performance.

 

For additional information on our Group Equity Incentive Plans see Note 43 to our consolidated financial statements.

 

Employee Stock Purchase Plans

 

Allianz AG offers its shares to qualified employees in Germany and abroad at favorable conditions within pre-defined timeframes. To be eligible, employees must have been employed for a minimum period of six continuous months prior to the share offering and no notice of termination of employment must have been served. Employees are also subject to certain restrictions on the amount that may be invested to purchase the shares. Allianz AG and each participating Allianz Group subsidiary establishes a restricted period of at least one and maximum five years during which employees may not transfer the shares after purchasing them. After this period, the shares are not subject to vesting or other restrictions. The eligible employees of the Allianz Group acquired a total of 1,144,196 ordinary shares under such arrangements in 2005.

 

For additional information on our Employee Stock Purchase Plans, see Note 43 to our consolidated financial statements.

 

ITEM 7. Major Shareholders and Related Party Transactions

 

Major Shareholders

 

The outstanding capital stock of Allianz AG consists of ordinary shares without par value that are issued in registered form. Under our articles of association, each outstanding ordinary share represents one vote. Major shareholders do not have different voting rights. Based on our share register, as of March 15, 2006, we had approximately 484,600 registered shareholders, of which approximately 870 were U.S. holders. Based on our share register, approximately 12.1% of our ordinary shares issued were held by such U.S. holders. Although our shareholders are generally required when registering to indicate their respective names, addresses and, in the case of legal entities, whether they hold on behalf of a third party, many of our ordinary shares may be held of record by brokers, trustees or other nominal holders who are not required to provide such information with regard to beneficial holders. As a result, the number of holders of record or registered U.S. holders may not be representative of the actual number of beneficial U.S. holders. For information regarding the share ownership of the members of our Board of Management and our Supervisory Board, see “Directors, Senior Management and Employees—Share Ownership.”

 

Under the German Securities Trading Act, holders of voting securities of a listed German company must notify the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or BaFin) and the company of the level of their holding whenever it reaches, exceeds or falls below specified thresholds. These thresholds are 5%, 10%, 25%, 50% and 75% of a company’s shares. The provisions of the German Securities Trading Act provide several criteria for attribution of shares.

 

As of March 15, 2006, we do not have any major shareholder holding 5% or more of our share capital. Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (Munich Re) informed us pursuant to the rules of the German Securities Trading Act that it has reduced its ownership in Allianz AG to below 5% effective July 14, 2005 and held 4.9% of the voting rights as of that date.

 

As of March 15, 2006, 406,040,000 ordinary shares were issued, of which 404,310,879 were outstanding and 1,729,121 were held by the Allianz Group in treasury (including 1,305,086 shares held by Dresdner Bank in trading positions). The number of treasury shares held by the Allianz Group has decreased significantly as a result of the reduction of non-strategic assets by Dresdner Bank in the course of the “All-in-One” capital market transactions which were completed on January 28, 2005. For further information regarding such transactions, see “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Debt and Capital Funding.”

 

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Significant changes in the percentage ownership held of record by any of our major shareholders in the last three years were as follows:

 

    the share ownership of Munich Re as reported to the SEC decreased from 12.8% as of December 31, 2003 to approximately 4.9% of our outstanding ordinary shares on July 12, 2005; and

 

    the share ownership of Deutsche Bank as reported to the SEC decreased from approximately 5.5% as of December 31, 2002 to 3.4% as of June 30, 2003.

 

Related Party Transactions

 

For a description of related party transactions, see Note 41 to the consolidated financial statements.

 

ITEM 8. Financial Information

 

Consolidated Statements and Other Financial Information

 

See pages F-1 and following for the consolidated financial statements required by this item.

 

Legal Proceedings

 

For a description of legal proceedings, see Note 42 to the consolidated financial statements.

 

Dividend Policy

 

Allianz AG normally declares dividends at the annual general meeting and pays these dividends once a year. Under applicable German law, dividends may be declared and paid only from balance sheet profits as shown in the German statutory annual financial statements of Allianz AG. For each fiscal year, the Board of Management approves the annual financial statements and submits them to the Supervisory Board with its proposal as to the appropriation of the annual profit. This proposal will set forth what amounts of the annual profit should be paid out as dividends, transferred to capital reserves, or carried forward to the next fiscal year. Upon approval by the Supervisory Board, the Board of Management and the Supervisory Board submit their combined proposal to the shareholders at the annual general meeting. The general meeting ultimately determines the appropriation of the annual profits, including the amount of the annual dividends. Shareholders generally participate in distributions of any dividends in proportion to the number of their ordinary shares. Any dividends declared by Allianz AG will be paid in Euro.

 

For information regarding annual dividends paid from 2001 through 2005, see “Key Information—Dividends.”

 

Significant Changes

 

For a description of significant developments since the date of the annual financial statements included in this annual report, see Note 46 to the consolidated financial statements.

 

ITEM 9. The Offer and Listing

 

Trading Markets

 

The principal trading market for the ordinary shares is the Frankfurt Stock Exchange. The ordinary shares also trade on the following other German stock exchanges: Berlin-Bremen, Düsseldorf, Hamburg, Hanover, Munich and Stuttgart, as well as the stock exchanges in London, Paris and Zürich. The ADSs of Allianz AG, each representing one-tenth of an ordinary share, trade on the New York Stock Exchange under the symbol “AZ.” See also “Major Shareholders and Related Party Transactions—Major Shareholders.”

 

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Market Price Information

 

The table below sets forth, for the periods indicated, the high and low closing sales prices on the Frankfurt Stock Exchange for the ordinary shares of Allianz AG as reported by XETRA. The table also shows, for the periods indicated, the highs and lows of the DAX. See the discussion under “Key Information—Exchange Rate Information” for information with respect to rates of exchange between the U.S. dollar and the Euro applicable during the periods set forth below.

 

     Price per
ordinary share(1)


   DAX

     High

   Low

   High

   Low

                 

Annual highs and lows

                   

2001

   358.3    185.8    6,795.1    3,787.2

2002

   259.5    69.4    5,462.6    2,597.9

2003

   101.5    41.1    3,965.2    2,203.0

2004

   111.2    73.9    4,261.8    3,647.0

2005

   129.7    89.7    5,458.6    4,178.1

2006 (through March 31, 2006)

   139.5    124.1    5,984.2    5,334.3

Quarterly highs and lows

                   

2004

                   

First quarter

   111.2    86.2    4,151.8    3,726.1

Second quarter

   94.4    80.7    4,134.1    3,754.4

Third quarter

   89.3    73.9    4,035.0    3,647.0

Fourth quarter

   97.9    78.5    4,261.8    3,854.4

2005

                   

First quarter

   101.0    89.7    4,428.1    4,201.8

Second quarter

   98.4    90.1    4,627.5    4,178.1

Third quarter

   112.3    95.2    5,048.7    4,530.2

Fourth quarter

   129.7    110.6    5,458.6    4,806.1

2006

                   

First quarter

   139.5    124.1    5,984.2    5,334.3

Monthly highs and lows

                   

2005

                   

October

   117.8    110.6    5,138.0    4,806.1

November

   123.9    118.6    5,199.5    4,922.6

December

   129.7    125.0    5,458.6    5,266.6

2006

                   

January

   135.6    124.1    5,674.2    5,334.3

February

   137.4    128.3    5,915.2    5,649.6

March

   139.5    128.6    5,984.2    5,673.4

(1) Adjusted to reflect the capital increase in April 2003.

 

On March 31, 2006, the closing sale price per Allianz AG ordinary share on XETRA was €137.8, which was equivalent to $167.28 per ordinary share, translated at the closing buying rate for Euros on such date.

 

Based on turnover statistics supplied by Bloomberg, the average daily volume of the ordinary shares of Allianz AG traded on the Frankfurt Stock Exchange (XETRA) between January 2, 2006 and March 31, 2006 was 3,220,870.

 

Trading on the New York Stock Exchange

 

Official trading of Allianz AG ADSs on the New York Stock Exchange commenced on November 3, 2000. Allianz AG ADSs trade under the symbol “AZ.”

 

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The following table sets forth, for the periods indicated, the high and low closing sales prices per Allianz AG ADS as reported on the New York Stock Exchange Composite Tape:

 

    

Price per

ADS


       High  

     Low  

     $    $

Annual highs and lows

         

2001

   37.6    18.7

2002

   25.2    7.5

2003

   12.7    5.0

2004

   14.0    9.0

2005

   15.4    11.4

2006 (through March 31, 2006)

   17.0    15.1

Quarterly highs and lows

2004

         

First quarter

   14.0    10.6

Second quarter

   11.4    9.6

Third quarter

   10.9    9.0

Fourth quarter

   13.3    10.0

2005

         

First quarter

   13.4    11.7

Second quarter

   12.6    11.5

Third quarter

   13.8    11.4

Fourth quarter

   15.4    13.3

2006

         

First quarter

   17.0    15.1

Monthly highs and lows

2005

         

October

   14.1    13.3

November

   14.6    14.0

December

   15.4    14.8

2006

         

January

   16.5    15.1

February

   16.3    15.5

March

   17.0    15.4

 

On March 31, 2006, the closing sales price per Allianz AG ADS on the New York Stock Exchange as reported on the New York Stock Exchange Composite Tape was $16.7.

 

ITEM 10. Additional Information

 

Articles of Association

 

Information relating to Allianz AG’s articles of association is incorporated in this annual report by reference to Allianz AG’s Registration Statement on Form 20-F (File No. 1-15154) as filed with the SEC on October 31, 2000. Allianz AG’s current articles of association are filed as an exhibit to this annual report.

 

Organization

 

Allianz AG is a stock corporation organized in the Federal Republic of Germany under the German Stock Corporation Act. It is registered in the Commercial Register in Munich, Germany under the entry number HRB 7158.

 

The share capital of Allianz AG consists of ordinary shares without par value. As of March 15, 2006, the capital stock of Allianz AG amounts to €1,039,462,400. It is sub-divided into 406,040,000 no-par shares, of which 404,310,879 shares were outstanding. See also “Major Shareholders and Related Party Transactions—Major Shareholders.”

 

Objects and Purposes

 

Pursuant to article 1, paragraph 2 of our articles of association the purpose of the Company is the direction of an international group of companies that are active in the areas of insurance, banking, asset management and other financial, consulting and similar services. The Company holds interests in insurance companies, banks, industrial companies, investment companies and other enterprises. As a reinsurer, the Company primarily assumes insurance business from its Group companies and other companies in which Allianz AG holds direct or indirect ownership interests.

 

Copies of the articles of association are publicly available from the Commercial Register in Munich. German- and English-language versions are available at our headquarters and on our website.

 

Conditions Governing Changes in Capital

 

Allianz AG has several categories of authorized capital, which are set forth in its articles of association. At the Annual General Meeting on May 5, 2004, the shareholders approved the following authorized capital for issuance of new registered shares by the Board of Management, upon the approval of the Supervisory Board:

 

 

Up to €450,000,000 in the aggregate on one or more occasions on or before May 4, 2009 by issuing new registered no-par shares against contributions in cash and/or in kind (Authorized Capital 2004/1), of which an amount of €424,100,864 remain as of March 15, 2006. If the

 

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capital stock is increased against contributions in cash, the shareholders are to be granted preemptive rights. However, the Board of Management is authorized, upon the approval of the Supervisory Board, to exclude shareholders’ preemptive rights:

 

(i) for fractional amounts;

 

(ii) if necessary to grant preemptive rights on new shares to holders of bonds issued by Allianz AG or its Group companies that carry conversation or option rights or conversation obligations to such an extent as such holders would be entitled after having exercised their conversation or option rights after any conversation obligations have been fulfilled; and

 

(iii) if the issue price is not substantially lower than the market price, subject to certain additional limitations in accordance with the German Stock Corporation Act.

 

Furthermore, the Board of Management is authorized, upon the approval of the Supervisory Board, to exclude shareholders’ preemptive rights in the case of a capital increase against contributions in kind. The Board of Management is also authorized, upon the approval of the Supervisory Board, to determine the additional rights of the shares and the conditions of their issuance.

 

  Up to €10,000,000 in the aggregate on one or more occasions on or before May 4, 2009 by issuing new registered no-par shares against contributions in cash (Authorized Capital 2004/II), of which amount €4,356,736 remain as of March 15, 2006. The Board of Management is authorized, upon the approval of the Supervisory Board:

 

(i) to exclude shareholders’ preemptive rights in order to issue the new shares to the employees of Allianz AG and Allianz Group companies;

 

(ii) to exclude preemptive rights with respect to fractional amounts; and

 

(iii) to determine the additional rights of these shares and the conditions of their issuance.

 

The shareholders have conditionally increased the share capital by an aggregate amount of €250,000,000.00 through issuance of up to 97,656,250 new registered no-par shares (Conditional Capital 2004). The conditional capital increase shall be carried out only to the extent that conversation or option rights are exercised by holders of bonds that Allianz AG or its Group companies have issued against payment in cash pursuant to the authorization approved by the Annual General Meeting on May 5, 2004, or to the extent that mandatory conversion obligations are fulfilled, and insofar as no other methods of servicing these rights are used. Of this conditional capital, an amount of up to €226,960,000 through issuance of up to 88,656,250 new registered no-par shares remains as of March 15, 2006.

 

With respect to purchases of our own ordinary shares, see Note 14 to our consolidated financial statements.

 

Capital Increase

 

In April 2003, by way of a rights offering, we raised approximately €4.4 billion, based on a subscription price of €38.00 per share, resulting in net proceeds of approximately €4.3 billion after deduction of the commission payable to the underwriters. We increased our issued share capital by €300,000,000 to €982,408,000 by issuing 117,187,500 new no-par value shares with full dividend entitlement for the 2003 fiscal year. For further information regarding capital increases see also Note 14 to our consolidated financial statements.

 

Material Contracts

 

For information on material contracts to which Allianz AG or any of its subsidiaries was a party in the preceding two years, see Note 41 to our consolidated financial statements and “Information on the Company—Allianz-RAS Merger/European Company (SE).”

 

Exchange Controls

 

Germany does not generally restrict capital movements between Germany and other countries, institutions or persons.

 

For statistical purposes, subject to certain exceptions, each company or person domiciled in Germany is required to report to the German Bundesbank each payment received from or made to a company or person not domiciled in Germany in excess of €12,500 (or an equivalent amount in a foreign currency). Moreover, all claims and liabilities of a company or person domiciled in Germany

 

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against or towards a company or person not domiciled in Germany in excess of €5 million (or an equivalent amount in a foreign currency) are required to be reported monthly to the German Bundesbank.

 

Other than as described above, there is no limitation on the right of non-resident or foreign owners to receive dividends or other payments relating to the ordinary shares or the ADSs permitted or granted by German law. Various national, state and other laws relating to the acquisition of “control” of Allianz AG’s insurance and banking subsidiaries may impose limitations on the ability to acquire ordinary shares or ADSs beyond specified thresholds. In addition, some national laws may authorize investigation of certain money transfers.

 

German Taxation

 

The following discussion is a summary of the material German tax consequences for beneficial owners of shares or ADSs who are (i) not German residents for German income tax purposes (i.e., persons whose residence, habitual abode, statutory seat or place of effective management and control is not located in Germany) and (ii) whose shares do not form part of the business property of a permanent establishment or fixed base in Germany. Throughout this section we refer to these owners as “Non-German Holders.”

 

This summary is based on German tax laws and typical tax treaties to which Germany is a party as they are in effect on the date hereof and is subject to changes in German tax laws or such treaties.

 

The following discussion does not purport to be a comprehensive discussion of all German tax consequences which may be relevant for Non-German Holders. You should consult your tax advisor regarding the German federal, state and local tax consequences of the purchase, ownership and disposition of shares or ADSs and the procedures to follow for the refund of German taxes withheld from dividends.

 

Taxation of the Company in Germany

 

German corporations with a fiscal year that equals the calendar year, including Allianz AG, have been subject to a corporate income tax rate of 25% in 2005. The solidarity surcharge of 5.5% on the net assessed corporate income tax has been retained in 2005, so that the corporate income tax and the solidarity surcharge, in the aggregate, amount to approximately 26.38%.

 

In addition, German corporations are subject to profit-related trade tax on income, the exact amount of which depends on the municipality in which the corporation maintains its business establishment(s). Trade tax on income is a deductible item in computing the corporation’s tax base for corporate income tax purposes.

 

From 2004 onwards, tax losses carried forward can be used to offset against taxable profits of a period for an amount not exceeding €1 million. Taxable profits exceeding €1 million may only be set off by 60% against tax losses brought forward from prior periods. Unutilized tax losses can be carried forward without any time limitation.

 

Taxation of Dividends

 

Germany has a classic corporate tax system, which applied for the first time to dividend distributions paid by Allianz AG in 2002 for the financial year 2001. The former corporate income tax credit system has been abolished. Certain transition rules apply in connection with the change from the corporate income tax credit system to the classic corporate tax system.

 

Under the current system, a tax credit is no longer attached to the dividends. To avoid multiple levels of taxation in a corporate chain, the law provides for an exemption comparable to a full dividend received deduction for inter-corporate dividends at the level of a German corporate shareholder. However, from 2004 onwards, 5% of the gross dividend is considered non tax deductible expense on each level of a corporate chain for corporate tax as well as for trade tax purposes. Dividends received from non-qualifying participations, which are participations of less than 10%, are subject to trade tax on income in full amount. German resident individuals are required to recognize 50% of the dividends received as taxable income.

 

Imposition of Withholding Tax

 

Dividend distributions on or after January 1, 2002 by a German corporation with a calendar year that equals fiscal year are subject to a 20% withholding

 

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tax. In addition, a solidarity surcharge at a rate of 5.5% on the withholding tax is levied, resulting in an aggregate rate of withholding tax of 21.1% of the declared dividend. The withholding tax is generally withheld irrespective of whether and to what extent the dividend distribution is exempt at the level of the holder.

 

If you are a Non-German Holder, the withholding tax rate may be reduced in accordance with an applicable income tax treaty. Under most income tax treaties to which Germany is a party, including the U.S.-German income tax treaty, the rate of dividend withholding tax for individual holders and corporate holders of a non-qualifying participation is reduced to 15%. In that case, the Non-German Holder eligible for the reduced treaty rate may apply for a refund of 6.1% of the declared dividend for dividend distributions paid on or after January 1, 2002 by Allianz AG. The application for refund must be filed with the German Federal Tax Office (Bundeszentralamt für Steuern, Dienstsitz Bonn, An der Kuppe 1, D-53225 Bonn, Germany). The relevant forms can be obtained from the German Federal Tax Office or from German embassies and consulates.

 

Refund Procedure for U.S. Shareholders

 

For shares and ADSs kept in custody with The Depository Trust Company in New York or one of its participating banks, the German tax authorities have introduced a collective procedure for the refund of German dividend withholding tax and the solidarity surcharge thereon on a trial basis. Under this procedure, The Depository Trust Company may submit claims for refunds payable to eligible U.S. holders (as defined below) under the income tax convention between Germany and the United States, as currently in effect (the “Treaty”) collectively to the German tax authorities on behalf of these eligible U.S. holders. The German Federal Tax Office will pay the refund amounts on a preliminary basis to The Depository Trust Company, which will redistribute these amounts to the eligible U.S. holders according to the regulations governing the procedure. The German Federal Tax Office may review whether the refund was made in accordance with the law within four years after making the payment to The Depository Trust Company. Details of this collective procedure are available from The Depository Trust Company.

 

You are an “eligible U.S. holder” if you are a U.S. holder (as defined below under “—United States Taxation”) that:

 

    is a resident of the United States for purposes of the Treaty;

 

    does not maintain a permanent establishment or fixed base in Germany to which the ordinary shares or ADSs are attributable and through which you carry on or have carried on business (or, in the case of an individual, perform or have performed independent personal services); and

 

    is otherwise eligible for benefits under the Treaty with respect to income and gain from the ordinary shares or ADSs.

 

Individual claims for refunds may be made on a special German form which must be filed with the German Federal Tax Office at the address noted above. Copies of such form may be obtained from the German Federal Tax Office at the same address or from the Embassy of the Federal Republic of Germany, 4645 Reservoir Road, N.W., Washington, D.C. 20007-1998. Claims must be filed within a four-year period from the end of the calendar year in which the dividend was received. Holders who are entitled to a refund in excess of €150 for the calendar year generally must file their refund claims on an individual basis. However, the custodian bank may be in a position to make refund claims on behalf of such holders.

 

As part of the individual refund claim, an eligible U.S. holder must submit to the German tax authorities the original bank voucher (or a certified copy thereof) issued by the paying agent documenting the tax withheld, and an official certification on IRS Form 6166 of its last United States federal income tax return. IRS Form 6166 may be obtained by filing a request with the Internal Revenue Service Center in Philadelphia, Pennsylvania, Foreign Certification Request, P.O. Box 16347, Philadelphia, PA 19114-0447. Requests for certification must include the eligible U.S. holder’s name, Social Security or Employer Identification Number, tax return form number, and tax period for which the certification is requested. Requests for certifications can include a request to the Internal Revenue Service to send the certification directly to the German tax authorities. If no such request is made, the Internal Revenue Service will

 

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send a certification on IRS Form 6166 to the eligible U.S. holder, who then must submit this document with his refund claim.

 

Taxation of Capital Gains

 

Under German domestic tax law, capital gains derived on or after January 1, 2002 by a Non-German Holder from the sale or other disposition of shares or ADSs are subject to tax in Germany only if such Non-German Holder has held, directly or indirectly, shares or ADSs representing 1% or more of the registered share capital of the company at any time during the five-year period immediately preceding the disposition. In computing the relevant size of a Non-German Holder’s shareholding, shareholdings already existing prior to the effective date of the German Tax Reduction Act (approved by the German legislature in July 2000) are also taken into account. Corporate Non-German Holders are exempt from German tax on capital gains derived on or after January 1, 2002 from the sale or other disposition of shares or ADSs in a German corporation with a fiscal year that equals the calendar year. However, from 2004 onwards, 5% of the net capital gain are considered as non tax deductible expense for purposes of corporate income tax as well as trade tax on income. Half of the capital gains realized by the individual Non-German Holders are subject to German individual income tax plus a 5.5% solidarity surcharge.

 

U.S. holders that qualify for benefits under the Treaty are exempt in Germany under the Treaty on capital gains derived from the sale or disposition of shares or ADSs.

 

Inheritance and Gift Tax

 

Under German law, German gift or inheritance tax will be imposed on transfers of shares or ADSs by a Non-German Holder at death or by way of gift, if

 

(i) the decedent or donor, or the heir, donee or other transferee has his residence in Germany at the time of the transfer or with respect to German citizens who are not resident in Germany, if the decedent or donor, or the heir, donee or other transferee has not been continuously outside of Germany for a period of more than five years; or

 

(ii) the shares or ADSs subject to such transfer form part of a portfolio which represents 10% or more of the registered share capital of the company and has been held, directly or indirectly, by the decedent or donor, respectively, himself or together with related parties.

 

The right of the German government to impose inheritance or gift tax on a Non-German Holder may be further limited by an applicable estate tax treaty (such as the U.S.-German Inheritances and Gifts Tax Treaty of December 3, 1980).

 

Other Taxes

 

No German transfer, stamp or similar taxes apply to the purchase, sale or other disposition of shares or ADSs by a Non-German Holder. Currently, net worth tax is not levied in Germany.

 

United States Taxation

 

This section describes the principal United States federal income tax consequences of owning ordinary shares or ADSs. It applies to you only if you hold your ordinary shares or ADSs as capital assets for tax purposes. This section does not address all material tax consequences of owning ordinary shares or ADSs. It does not address special classes of holders, some of whom may be subject to other rules, including:

 

    dealers in securities or currencies;

 

    tax-exempt entities;

 

    life insurance companies;

 

    broker-dealers;

 

    traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;

 

    investors liable for alternative minimum tax;

 

    investors that actually or constructively own 10% or more of the voting stock of Allianz AG;

 

    investors that hold ordinary shares or ADSs as part of a straddle or a hedging or conversion transaction; or

 

    investors whose functional currency is not the U.S. dollar.

 

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This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, and published rulings and court decisions, all as currently in effect, as well as on the Treaty. These laws are subject to change, possibly on a retroactive basis.

 

In addition, this section is based in part upon the representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms. In general, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the shares represented by those ADSs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be subject to United States federal income tax.

 

You are a “U.S. holder” if you are a beneficial owner of ordinary shares or ADSs and you are, for United States federal income tax purposes:

 

    a citizen or resident of the United States;

 

    a domestic corporation;

 

    an estate whose income is subject to United States federal income tax regardless of its source; or

 

    a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.

 

You should consult your own tax advisor regarding the United States federal, state, local, foreign and other tax consequences of owning and disposing of ordinary shares or ADSs in your particular circumstances. In particular, you should confirm whether you qualify for the benefits of the Treaty and the consequences of failing to do so.

 

Taxation of Dividends

 

If you are a U.S. holder, the gross amount of any dividend we pay out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal income taxation. If you are a noncorporate U.S. holder, dividends paid to you in taxable years beginning before January 1, 2009 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15% provided that you hold the ordinary shares or ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends we pay with respect to the ordinary shares or ADSs generally will be qualified dividend income if you meet the holding period requirement. You must include any German tax withheld from the dividend payment in this gross amount even though you do not in fact receive it. The dividend is taxable to you when you, in the case of ordinary shares, or the depositary, in the case of ADSs, receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the gross dividend amount, determined at the spot Euro/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The currency gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a return of capital to the extent of your basis in the ordinary shares or ADSs and thereafter as capital gain.

 

Subject to certain limitations, the German tax withheld in accordance with German law or the Treaty and paid over to Germany will be creditable against your United States federal income tax liability. To the extent a refund of the tax withheld is available to you under German law or under the Treaty, the amount of tax withheld that is refundable will not be eligible for credit against your United States federal income tax liability. See “German Taxation—Refund Procedure for U.S. Shareholders,” above, for the procedures for obtaining a tax refund. Special rules apply in determining the foreign tax

 

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credit limitation with respect to dividends that are subject to the maximum 15% tax rate.

 

Dividends constitute income from sources outside the United States, but dividends paid in taxable years beginning before January 1, 2007 generally will be “passive” or “financial services” income, and dividends paid in taxable years beginning after December 31, 2006 will, depending on your circumstances, be “passive” or “general” income which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit allowable to you.

 

Taxation of Capital Gains

 

If you are a U.S. holder and sell or otherwise dispose of your ordinary shares or ADSs, you will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your ordinary shares or ADSs. Capital gain of a non-corporate U.S. holder that is recognized before January 1, 2009 is generally taxed at a maximum rate of 15% where the holder has a holding period greater than one year. Gain or loss generally will be treated as arising from sources within the United States for foreign tax credit limitation purposes.

 

Documents on Display

 

Allianz AG is subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, Allianz AG files reports and other information with the Securities and Exchange Commission. These materials, including this annual report and the exhibits thereto, may be inspected and copied at the Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Copies of the materials may be obtained from the Commission’s Public Reference Room at prescribed rates. The public may obtain information on the operation of the Commission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330. The Commission also maintains a web site at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the Commission. Allianz AG’s annual reports and some of the other information submitted by Allianz AG to the Commission may be accessed through this web site. In addition, material filed by Allianz AG can be inspected at the offices of the New York Stock Exchange at 20 Broad Street, New York, New York 10005.

 

ITEM 11. Quantitative and Qualitative Disclosures About Market Risk

 

The risk management is targeted at protecting our capital base and supporting our value based management.

 

  As providers of financial services, we consider risk management one of our core competencies. Risk management is therefore an integrated part of our business controlling process.

 

  Risks arise due to insufficient information concerning possible adverse developments affecting our business targets or plans.

 

  We identify and measure, aggregate and manage risks. The result of this process determines, among other things, how much capital is allocated to the Allianz Group’s various segments.

 

Risk Governance Structure

 

In our business, successful risk management means controlling risks in order to protect the financial strength of the Allianz Group and increase its value on a sustainable basis. Therefore, the Board of Management of Allianz AG formulates the business objectives and allocates the capital resources of the Allianz Group according to return on investment and risk criteria.

 

The Group Risk Committee monitors the capitalization and risk profile of the Allianz Group to ensure a reasonable ratio between these two criteria. Its role is to ensure comprehensive risk awareness within the Allianz Group and to further improve risk control. It also provides timely information to the Board of Management of Allianz AG about risk relevant developments, sets risk limits, and is responsible for recommending and coordinating risk-containment measures. In 2005, we established a Group Insurance Risk Committee to support the Group Risk Committee in matters concerning property-casualty insurance. This committee is responsible for updating our underwriting guidelines and monitoring the development of our property-casualty insurance portfolio.

 

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Group Risk Control, which reports to the Chief Financial Officer, develops methods and processes for risk assessment and control on an Allianz Group-wide basis. An important instrument to assess the Allianz Group’s risk profile is our internal risk capital model. In 2005, we also introduced a system for systematic qualitative risk evaluation. On this basis, it forms an overview of local and global risks, derives the risk situation of the Allianz Group, and regularly informs management about the current situation. In addition, Group Risk Control ensures that the risk governance principles of the Allianz Group are fully adhered to and further develops these principles. Group Risk Control is also responsible for the centralized monitoring of accumulation risk over all business lines, in particular with respect to natural disasters, market and credit risks. This structure ensures that we control our local and global risks equally and are not exposed to the danger of overall risk increasing unnoticed.

 

Within our risk governance policy, local units assume independent responsibility for their own risk control, as ultimately, it is they who have to respond quickly to risk changes in a market-oriented manner. At the same time, this independent responsibility enables operating units to meet the applicable legal requirements at their respective locations. In 2005, local risk monitoring was further accelerated. Our large operating entities have established local risk committees and risk control units managed by the Chief Risk Officer of the respective business unit and monitor local risks.

 

Investment risk management is implemented jointly with local units as part of a structured investment process. The Allianz Group Finance Committee, which is comprised of the members of the Board of Management of Allianz AG, delegates broad decision-making authority to the regional Finance Committees, which monitor the activities in their respective regions or countries. These regional Finance Committees compile local investment guidelines for their particular locations. Operational responsibility for investment portfolios lies within the local units.

 

Insurance, banking and asset management are all heavily influenced by legal factors; legislative changes in particular have a primary influence on our activities. Legal risks also include major litigation and disputes, regulatory proceedings, and contractual clauses that are unclear or construed differently by the courts. Limitation of such legal risks is a major task of our Legal Department, carried out with support from other departments. The objective is to ensure laws are observed, to react appropriately to all impending legislative changes or new court rulings, attend to legal disputes and litigation, and provide legally appropriate solutions for transactions and business processes.

 

The Trend Assessment Committee is responsible for the early recognition of new risks. Their role is to study and evaluate changes that may have a significant impact on the Allianz Group’s risk situation. In 2005, we established a panel of experts consisting of representatives from our insurance, banking and asset management segments, which is examining the possible effects of climate change on our business. Its task is to develop risk management strategies and identify potential opportunities resulting from climate change. We also belong to the Emerging Risk Initiative of the CRO Forum’s task force, which examines methods to identify, analyze and manage potential risks. The task force is comprised of representatives from ten international insurance and reinsurance companies.

 

Independent risk oversight

 

The principle of independent risk oversight is well-established within the Allianz Group. There is a clear distinction between risk assumption (i.e. the responsibility for the business including associated risk management) and independent risk monitoring. The latter also analyzes alternative courses of action and proposes recommendations to the Risk Committee and the board of directors or Board of Management of the local operating entity or Allianz AG, respectively.

 

Risk policies

 

The Group Risk Policy establishes the minimum requirements that are binding for all operating units. Specific minimum risk standards for our insurance, banking and asset management segments translate these requirements into action. In 2005, we supplemented our risk guidelines with standards for addressing natural disaster risks. Such standards are implemented by the operating entities worldwide and are monitored on a regular basis by Group Risk Control through a structured process.

 

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Risk Management Tools

 

Risk capital

 

We manage our business activities through our respective local entities. The most important parameters used in our risk-oriented controlling process are Economic Value Added (or “EVA”®) and risk capital. Risk capital is used to hedge against unexpected economic losses. In 2005, we used our internal risk capital model as input for the value-oriented management framework of our insurance companies and Dresdner Bank. For asset management, we used a model based on a concept developed by the Standard & Poor’s rating agency.

 

Our internal risk capital model evaluates quantifiable risks within a set timeframe and calculates a potential loss. This model allows us to systematically evaluate internal data using methods based on the theory of probability. This process takes into account the special characteristics of our operating entities as well as the specific nature of their risks. The model is based on the value-at-risk approach. Value-at-risk estimates the maximum loss which cannot be exceeded with a certain probability at a specified confidence level within a set holding period. The capital we allocate to our operating entities in accordance with our internal risk capital model meets the requirements for the one-year target shortfall of an “A” rating from Standard & Poor’s. Diversification effects from balancing portfolio risks result in a capitalization of the Allianz Group equivalent to an “AA” rating from Standard & Poor’s. Risk balancing effects result from the fact that not all potential losses are realized at the same time. With the internal risk capital model, we are able to evaluate risks more precisely and optimize allocation of capital within the Allianz Group.

 

Our risk capital model quantifies the following risk categories:

 

    Market risks—Possible losses caused by changes in interest rates, exchange rates, share prices and other relevant market prices (such as raw materials);

 

    Credit risks—Possible losses caused by the inability to pay or a downgrade in the credit rating of debtors or counterparties;

 

    Actuarial risks—Unexpected financial losses from the sale of insurance protection; and

 

    Business risks—Cost and lapse risks, as well as operational risks, i.e. risks associated with external events or arising from insufficient or failing internal processes, procedures and systems.

 

The risk capital after Group diversification effects and before minority interests amounted to €37.5 billion at December 31, 2005.

 

Risk capital (after Group diversification) by risk category

 

As of December 31,


   2005

   2004

     € bn    € bn

Market risks

   18.5    15.2

Credit risks

   5.7    5.9

Actuarial risks

   7.4    8.0

Business risks

   5.9    5.2
    
  

Total

   37.5    34.3
    
  

 

Risk capital (after Group diversification) by segment

 

As of December 31,


   2005

   2004

     € bn    € bn

Property-Casualty

   19.0    17.7

Life/Heath

   5.4    4.5

Banking

   6.1    6.8

Asset Management

   2.5    2.0

Holding

   4.5    3.3
    
  

Total

   37.5    34.3
    
  

 

Risk capital before and after Group diversification

in € bn

 

LOGO

 

The risk profile of the Allianz Group is managed actively. Under the “3+One program”, we reduced risk capital from €43.5 billion at December 31, 2002 to €37.5 billion at December 31, 2005, thereby

 

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significantly strengthening the Allianz Group’s capitalization.

 

Risk capital development as of December 31, (after Group diversification)

in € bn

 

LOGO

 

There are certain risks that cannot be quantified in our risk capital model. For these risks, we pursue a systematic approach with regard to identification, analysis, assessment and monitoring. The assessment is based on qualitative criteria or using scenario analyses. For example, these risks include:

 

    Liquidity risks.  These are risks that the business is unable to meet its current or future payment obligations in full or on a timely basis. These risks also include risks that, in the event of a liquidity crisis, refinancing funds could only be obtained at higher market rates (refinancing risk) or assets could only be sold at lower market prices (market liquidity risk).

 

    Reputational risks.  Unexpected losses due to a loss of reputation of our subsidiaries or the Allianz Group. Reputational risks may derive from Allianz Group actions, transactions or products. They may be caused by or result from losses in other risk categories.

 

Limit System

 

We monitor and manage credit risks with a limit system that is applicable for the entire Allianz Group. The limit system aggregates major risks of Allianz Group-wide significance from credit insurance, lending and our capital investments and serves as the basis for controlling the risk on an Allianz Group-wide basis in detecting credit risks at an early stage. In 2005, this system assisted in identifying critical developments at an early stage and making adjustments accordingly. The number of counterparties monitored by the limit system was significantly increased in 2005, and we also reinforced the automation of our internal reporting on credit risk and improved our procedures (for example, in relation to reducing risks in a crisis situation).

 

Stress tests

 

In addition to risk capital analyses, we also carry out stress tests, which act as early-warning indicators to secure external capital requirements. This affects capital requirements from the viewpoint of our supervisory authorities and rating agencies.

 

A 10% price decline in our available-for-sale equity securities at December 31, 2005 would have resulted in a €2.4 billion decline in shareholders’ equity before minority interests. If the interest rate had increased by 100 basis points, shareholders’ equity before minority interests would have decreased by €3.6 billion, if we take into account the available-for-sale fixed income securities at December 31, 2005. A 10% devaluation of the U.S. dollar against the Euro at December 31, 2005 would have decreased shareholders’ equity before minority interests by €1.1 billion. These model calculations do not take into account derivatives.

 

Risk Controlling – Insurance Business

 

Market risks

 

We monitor market risks by means of sensitivity analyses and stress testing. As protection against exchange rate fluctuations, we back our insurance commitments, to a very large extent, with funds of the same currency.

 

In certain insurance lines, there is a direct link between investments and obligations to our customers. For example, life insurance is subject to the guaranteed interest risk in that we must credit interest to our customers pursuant to the underlying contracts. The close relationship between insurance obligations and investment of the capital related to these obligations is monitored by using specific models for asset-liability management which involves integrated management of investment and insurance liabilities. We are continuously developing our asset-liability management. In 2005, we revised our internal model for life insurance with the objective of creating an integrated system to assess our portfolio, calculate risk capital and conduct

 

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sensitivity analyses. Once completed, this model will provide significant support to the management of our life insurance business.

 

In individual cases, we use derivative financial instruments to hedge against price risks, credit risks and risks associated with interest rate changes. We include derivative risks within our investment and monitoring guidelines, which, in our insurance segments, are based on the stricter regulations imposed by supervisory authorities for banks.

 

We limit liquidity risk by continually reconciling the cash flow from our investment portfolio with our commitment to pay liabilities. We employ actuarial methods for estimating our liabilities arising from insurance contracts. The quality of our investments also guarantees that we can also meet high liquidity requirements, for example, in the event of a natural disaster.

 

Credit risks

 

We 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 that offer excellent security. To control this credit risk, we compile Allianz Group-wide data on receivables from insurance losses. At December 31, 2005, approximately 78% of the Allianz Group’s reinsurance recoverables were distributed over reinsurers with an investment grade rating. Additionally, more than 77% were distributed over reinsurers who have been assigned at least an “A” rating by Standard & Poor’s. We may also require letters of credit, deposits, or other financial measures to further minimize our exposure to credit risk. See Note 12 to our consolidated financial statements for further information.

 

Ceded reserves by rating classes as of December 31, 2005(1)

in € bn

 

LOGO

(1) Net of amounts due to reinsurers.

 

We limit our fixed income investment credit risk by setting high requirements on the creditworthiness of our debtors and by spreading the risk. Through our central credit risk management, we consolidate our exposure according to debtors and across all investment categories and business segments, and monitor the exposure of the Allianz Group on a monthly basis. At December 31, 2005, approximately 91% of the fixed income investments of the insurance companies of the Allianz Group had an investment grade rating. More than 87% were distributed over obligors that had been assigned at least an “A” rating by Standard & Poor’s.

 

Fixed income investments by rating classes as of December 31, 2005

in € bn

 

LOGO

 

Actuarial risks

 

Premium risks are controlled primarily with the assistance of actuarial models used to calculate premiums and monitor claim patterns. In addition, we issue guidelines for underwriting insurance contracts and assuming insurance risks. Natural disasters such as earthquakes, storms and floods represent a special challenge for risk management. In order to manage such risks and better estimate the potential effects of natural disasters, we use special modelling techniques in which we combine data about our portfolio (e.g., the geographic distribution of insurance amounts), with simulated natural disaster scenarios in order to estimate the magnitude of potential damage. Where such models do not exist (e.g., flood risk in Germany), we utilize a scenario-based methodology.

 

2005 was characterized by a large number of violent hurricanes in the Gulf of Mexico. The three

 

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largest hurricanes, Katrina, Rita and Wilma, caused record losses to the insurance industry, in particular Hurricane Katrina with its disastrous impact on New Orleans. The total loss for the Allianz Group was lower than the total risk capital budget of our operating entities for natural disasters, yet the disasters in 2005 and its results must be examined closely so that our simulation systems used to estimate the possible effects of natural disasters can be continually improved.

 

In 2005, for the first time, we aggregated risk peaks from natural disasters in our portfolio and reinsured such risks. By doing so, we implemented the conclusions suggested by our internal risk capital model. We also continued to develop a limit system arising from natural disaster and terrorism risks, which we plan to further improve in 2006.

 

Reserve risks We control reserve risks by constantly monitoring the development of the provisions for insurance claims that have been submitted but not yet settled in all companies, and amend the provisions as necessary. For calculating insurance provisions in life insurance, the biometric assumptions, such as life expectancy, disability and illness, play a major role. If available, we use assumptions approved by supervisory authorities and actuarial associations.

 

Actuarial risks in property-casualty insurance have led to fluctuations of the loss ratio in our Property-Casualty segment over time, as shown below.

 

Loss ratios years ended December 31,

in %

LOGO

 

Business risks

 

Our operational risks are limited by a wide range of technical and organizational measures. We attempt to reduce any such risks by installing a comprehensive system of internal controls and security systems within each operational entity. In 2005, we introduced a self-assessment system to establish a uniform procedure to detect potential errors and identify internal control weaknesses. Each operating entity evaluates its key processes and existing controls at least once annually. Another instrument to identify weaknesses is through the systemic collection and recording of realized operational losses. An analysis of the causes of such losses assists the operating entity in adopting appropriate measures in order to avoid or limit such losses in the future. The measures to prevent and limit such operational risks are varied, including developing emergency plans, designing appropriate insurance policies, revising processes and adopting additional controls and responsibility assignments.

 

We understand the lapse risk in our life insurance business to mean the unexpected economic losses due to early cancellation of contracts by our customers. We assess this risk by calculating technical reserves using probability data based on historic rates of cancellation in our respective local markets.

 

Risk capital

 

At December 31, 2005, the risk capital of our insurance companies, based on local solvency requirements and before Allianz Group diversification and minority interests, was €23.1 billion for property-casualty insurance (2004: €21.9 billion) and €9.5 billion for life/health insurance (2004: €8.7 billion).

 

Risk Controlling – Banking Business

 

Market Risks

 

The market risks in our banking business are broken down into risks arising in our trading portfolio, banking book and equity holdings (i.e., shareholder risks).

 

 

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In 1998, the German Federal Financial Supervisory Authority (or “BaFin”) approved Dresdner Bank’s value-at-risk model for purposes of reporting market risks within the trading portfolio in accordance with Principle I of the German Banking Act. The BaFin also approved the improvements made to this model in 2001, 2002 and 2004. This value-at-risk model, which is used to evaluate capital adequacy for regulatory purposes, must take into account market fluctuations which can occur at a confidence level of 99% and a 10-day holding period. The value-at-risk model is supplemented by stress tests which estimate the potential loss under extreme market conditions.

 

For the purpose of setting internal limits and risk management, we calculate a value-at-risk with a confidence level of 95% and a one-day holding period. Unlike the value-at-risk calculation required by the supervisory authority, which is based on historical market data, we thus assign greater weight to the most recent market fluctuations. By doing so, we ensure that the current market trends are reflected in the value-at-risk calculation on a timely basis.

 

Value-at-risk is only one of the instruments used to characterize and control the risk profile of Dresdner Bank. In addition, Dresdner Bank also uses operational risk indicators and limits, which are specifically adapted to the risk situation of the trading units. Trading is controlled by setting value-at-risk and operational market risk limits. Current limit utilization is determined and monitored by Group Risk Controlling on a daily basis. Limit breaches are immediately indicated to management so that corrective action can be taken.

 

Market risks within Dresdner Bank’s trading portfolio had a value-at-risk, with a 99% confidence level and a 10-day holding period, of €66 million at December 31, 2005, compared to €50 million at December 31, 2004.

 

Value-at-risk statistics (Dresdner Bank)

 

(99% confidence level, 10-day holding period)

 

    

As of

December 31,


    Years ended December 31,

 
       Average

    Maximum

    Minimum

 
     2005

    2004

    2005

    2004

    2005

    2004

    2005

    2004

 
     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn  

Aggregate risk

   66     50     49     95     105     155     26     46  

Interest-rate risk

   71     57     52     99     121     159     25     49  

Equity risk

   12     15     19     20     36     36     10     12  

Currency risk

   9     9     7     11     21     37     1     2  

Commodity risk

   1     —       3     —       10     —       0     —    

Diversification effect

   (27 )   (31 )   (32 )   (35 )   —   (1)   —   (1)   —   (1)   —   (1)

(1) No diversification effect can be taken into account since the maximum and minimum values were measured on different dates.

 

Market risks within Dresdner Bank’s banking book These risks mainly comprise the risk of interest changes and is analyzed on the basis of sensitivity and value-at-risk indicators. As in the case for Dresdner Bank’s trading portfolio, Dresdner Bank manages this risk by setting value-at-risk limits. At December 31, 2005, the value-at-risk, with a 99% confidence level and 10-day holding period, for interest rate risks at Dresdner Bank amounted to €10.0 million, compared to €8.6 million at December 31, 2004.

 

Currency risks in the banking book of Dresdner Bank are limited by applying the principle that all loans and deposits in foreign currencies are refinanced or reinvested in the same currency with matching maturities.

 

Market risks within Dresdner Bank’s equity investments These risks comprise unanticipated economic losses which can arise from providing equity capital to third parties. Following the reduction of substantially all of the equity investments held by the Institutional Restructuring Unit (or “IRU”), our risk exposure was significantly reduced compared to 2004. The IRU was closed on September 30, 2005.

 

 

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Liquidity risks

 

Liquidity control and liquidity risk management are the responsibility of Treasury and Risk Controlling within Dresdner Bank, which establish principles for liquidity management within the framework of the Allianz Group’s liquidity policy. This liquidity policy meets both regulatory requirements and Allianz Group standards. The liquidity risk limits set include a reporting process for limit breaches and provisions for emergency planning. Liquidity risk measurement is based on Dresdner Bank’s liquidity management system. This system models the maturities of all cash flows and compiles a scenario-based liquidity balance sheet, taking into account available prime-rated securities. Limits on liquidity gaps are established to manage short-term liquidity risk.

 

Credit risks

 

Credit risks include credit and counterparty risks in the lending business, issuer risks from our securities business, counterparty risks from trading activities and country risks.

 

The central element of approval, monitoring and control process is the rating of our customers. In this process, the various creditworthiness characteristics of our customers are presented in the form of rating classes. To categorize the default probability of a borrower, a system with 16 different rating classes is used. The first six classes correspond to “investment grade”, classes VII to XIV signify “non-investment grade”. Rating classes XV and XVI are default classes according to the Basle II definition. The rating procedures utilized are assessed and improved on an ongoing basis. In 2005, Dresdner Bank further optimized this procedure in light of the Basle II requirements and aims at utilizing the Advanced Internal Ratings-Based (or “IRB”) Approach for the calculation of future regulatory capital requirements.

 

At December 31, 2005, approximately 87% of overall limits in the trading and banking portfolios of Dresdner Bank were included in rating classes I to VI, compared to 86% at December 31, 2004. Furthermore, approximately 13% were included in rating classes VII to XVI (2004: 14%). Dresdner Bank’s trading business represented 70% of the overall limits and approximately 86% (2004: 91%) of Dresdner Bank’s trading business involved primarily transactions with counterparties from rating classes I to VI, i.e., with state and local agencies and financial services providers at December 31, 2005.

 

Overall portfolio view by rating class as of December 31, 2005 (Dresdner Bank)

in %

 

LOGO

 

Credit and counterparty risks from loans and advances Of the total credit and counterparty risks from loans and advances of Dresdner Bank’s lending activities at December 31, 2005, 33% was accounted for by the Personal Banking division, 13% by the Private & Business Banking division, 35% by the Corporate Banking division, and 19% by the Dresdner Kleinwort Wasserstein division.

 

In 2005, credit risk management worked towards systematically reducing our non-strategic loan portfolio, lowering concentration risks and focusing the loan portfolio on certain regions and industries. At December 31, 2005, approximately 64% of the loan portfolio of Dresdner Bank were included in ratings classes I through VI (investment grade). In our loan business, the probability of average default was below the probability of default of the loan portfolio. The overall quality of our loan portfolio has improved significantly in recent years, as shown in the graph below.

 

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Development of Dresdner Bank’s loan portfolio by

ratings classes

 

Index 12/2003 = 100%

 

LOGO

 

Dresdner Bank’s IRU, which was responsible for reducing our non-strategic loan portfolio, completed its task faster than planned and was closed on September 30, 2005. The IRU’s remaining risk assets were re-transferred primarily to Dresdner Bank’s Corporate Other division on October 1, 2005. Streamlining the loan portfolio has resulted in a significant improvement in portfolio quality. Our total non-performing loans and potential problem loans, which are two measurements utilized to assess the quality of the loan portfolio, decreased from €7.4 billion at December 31, 2004 to €3.0 billion at December 31, 2005.

 

Country risks These risks comprise exchange rate and transfer risks relating to cross-border transactions. We manage country risks using internal country ratings. These ratings are based upon macroeconomic data and key qualitative indicators. The latter takes into account the economic, social and political environment. The country rating system comprises 16 ratings classes. The country rating system divides countries into those without any discernible risk and those with increased or high risk potential. The country risk management at Dresdner Bank is intended to limit transfer and local risks on the basis of a comprehensive country limit system.

 

Counterparty risk from trading activities Counterparty risks from the derivative trading business arise mainly from over-the-counter (or “OTC”) transactions. The resulting risk exposure cannot be directly traced to the nominal values of the transactions. In assessing current counterparty risk, positive replacement values from Dresdner Bank’s position is the determining factor. These correspond to the additional expense or lower yield that would result from restoring an equivalent position in the event of a trading partner defaulting. The banking sector, other financial services provider sectors, insurance companies and governments accounted for a large proportion (96.7%) of the positive replacement values at December 31, 2005.

 

In order to reduce the counterparty risk from trading activities, we entered into inter-product framework netting agreements with our business partners. Netting makes it possible to balance all outstanding receivables and payables with a counterparty if the counterparty defaults. In addition to these framework agreements, exposure from counterparty risk (positive replacement values after netting) is secured using so-called collateral management.

 

Counterparties – Positive replacement values by market segment (Dresdner Bank)

 

     As of December 31,

     2005

   2004

     € mn    € mn

Credit institutions

   49,701    46,014

Other financial services providers

   33,968    19,752

Insurance companies

   274    115

Small business

   717    669

Telecommunications, media, technology

   236    3,159

Transportation

   294    492

Raw materials

   30    19

Real estate

   60    126

Government

   926    59

Other

   1,601    2,925
    
  

Total—before netting

   87,807    73,330
    
  

Total—after netting and security

   16,260    13,926
    
  

 

Issuer risks Issuer risks arise from Dresdner Bank’s own holdings in securities such as fixed income and equity securities, as well as from synthetic positions assumed through purchasing credit derivatives. Such risks reflect the maximum possible loss in the event of an unexpected loss of a particular issuer. Issuer risks are managed comprehensively, in particular risks arising from credit-sensitive issuers. In 2005, the share of issuer risks of the total loss risk for Dresdner Bank’s trading

 

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activities decreased 7 percentage points to 57% at December 31,2005.

 

Business risks

 

Dresdner Bank has a process for the systematic identification, measuring and controlling of operational risks. The essential risk factors are evaluated in the framework of a structured self-assessment. A loss database is employed to record and analyze losses that actually occur. An internal risk model was developed for calculating the risk capital requirement using the criteria of the Advanced Measurement Approach (or “AMA”), which shall also be used in the future to determine capital adequacy pursuant to Basle II.

 

Cost risks

 

Cost risks comprise unanticipated fluctuations in earnings that arise due to a decline in income without a corresponding decrease in expenses. Cost-cutting measures implemented in the past have significantly reduced risks associated with fixed costs.

 

Risk capital

 

At December 31, 2005, the risk capital of Dresdner Bank before Allianz Group diversification was €7.0 billion, compared to €7.9 billion at December 31, 2004.

 

Risk Controlling – Asset Management

 

Risk control in asset management is an integral part of the processes of our operating entities and investment platform. The Allianz Global Investor Corporate Center is responsible for ensuring that Allianz Group-wide standards for asset management are applied at the local level. The individual asset management companies continually monitor the portfolio risks of the customer assets they manage by using analytical tools specifically adapted to the risk profile of the product concerned. At the same time, the performance of the various product lines is periodically monitored and analyzed at the Allianz Group level. At December 31, 2005, risk capital in our asset management segment, calculated according to the Standard & Poor’s model and before minority interests, was €2.5 billion compared to €2.0 billion at December 31, 2004.

 

Risk Monitoring by Third Parties

 

Supervisory authorities and rating agencies are additional risk monitoring bodies. Supervisory authorities stipulate the minimum precautions and capital requirements that must be accounted for in individual countries and on an international level. Rating agencies determine the relationship between the required risk capital of a company and the available safeguards. In their evaluation of capital resources, the rating agencies include equity shown in the balance sheet, minority interests and other items representing additional securities in times of crisis. At December 31, 2005, this total was at a level that corresponds to our current ratings. At December 31, 2005, the financial strength of the Allianz Group was rated by Standard & Poor’s as “AA-” (outlook stable), by A. M. Best as “A+” (outlook stable), and by Moody’s as “Aa3” (outlook stable).

 

Outlook

 

We will continue to strengthen our risk management system in 2006. For example, we will introduce standards for underwriting large insurance risks and for developing and marketing new products. We will complete the analytical model for our life insurance business and introduce the limit system for natural disaster risks.

 

In addition, we will continue to make progress in our project to evaluate derivatives on the basis of an Allianz Group-wide uniform IT system. We will also strengthen and clarify our guidelines for handling derivatives.

 

We are monitoring the Solvency II Project to prepare for the anticipated changes to the European insurance solvency requirements. In particular, we are continuously improving the methodology of our internal risk model to meet future requirements on internal models (Solvency II).

 

In order for the risk management at Dresdner Bank to continue to meet the highest standards, we are continually refining and optimizing our internal bank risk assessment procedures, including data entry and associated processes (Basle II). Dresdner Bank is implementing, on schedule, the supervisory requirements of the Capital Accord of Basle II and the related German implementing regulation, the

 

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Solvency Regulation (Solvency Order/SolvV). Dresdner Bank is targeting to implement advanced approaches by applying the Advanced IRB Approach for credit risks and the AMA for operational risks. Dresdner Bank already uses a comparable process for its internal risk management.

 

Finally, Dresdner Bank will introduce in 2006 a new validation process for its rating process, which will meet growing internal and external demands.

 

Market Risk Measurement

 

Sensitivity Analysis

 

The Allianz Group uses a risk modeling technique known as “sensitivity analysis” to show the implications of changes in market conditions on the financial instruments it holds in its trading and non-trading portfolios. This enables the Allianz Group to make comparisons across its business segments. Sensitivity analysis measures the potential loss due to changes in fair values resulting from hypothetical changes in equity prices, interest rates and foreign currency rates at a given point in time. Sensitivity analysis generates values representing the risk inherent in each position under given market conditions. Due to the standardization of the sensitivity analysis in this risk assessment, diversification effects are not considered.

 

Assumptions

 

In calculating equity price sensitivity, the Allianz Group assumes a 20% decrease in stock prices. This scenario has been chosen in conformity with German risk reporting standards. Estimates of interest rate risk sensitivity assume a 100 basis point parallel increase in interest rates. If interest rates rise, the fair values of interest-sensitive instruments such as bonds, loans and mortgages may fall; the magnitude of this decrease depends on the maturity, coupon and other characteristics of a particular instrument. The sensitivity analysis tables below show the aggregate effect on the fair value of all of the Allianz Group’s interest-sensitive assets and liabilities, assuming a 100 basis point parallel shift that occurs simultaneously and instantaneously across all countries, markets and maturities. This scenario has also been chosen in conformity with German risk reporting standards.

 

Foreign exchange risk is calculated in a manner similar to equity price sensitivity, by assuming a 10% decrease in all non-euro currency exchange rates against the euro. Consequently, the aggregate fair value sensitivity shown in the sensitivity analysis tables below illustrates the effect on fair values if, simultaneously and uniformly, all non-Euro currencies lose 10% of their value relative to the Euro.

 

The Allianz Group believes that the scenarios used in sensitivity analysis represent reasonable assumptions based on past observations of market conditions. Although market fluctuations exceeding 20% or 100 basis points are possible, the Allianz Group believes that estimates based on these assumptions offer a fair view on the risk inherent in its positions. Although these assumptions are intentionally simplified (e.g., they assume static portfolios and do not take into account that market prices under normal conditions change simultaneously or by a different magnitude), the Allianz Group believes they provide a useful framework for its risk management analysis and support the Allianz Group’s strategic decisions.

 

Limitations

 

While the Allianz Group believes that sensitivity analysis provides its managers with a valid estimation of market risk exposures, it recognizes that there are certain limitations to the use of this method.

 

Price changes in a diversified portfolio have offsetting effects, since various assets revalue in directions or in magnitudes different to overall marketplace changes. This is known as the “diversification effect” of holding a portfolio consisting of different assets. Because sensitivity analysis uses a generalized methodology, the Allianz Group’s risk estimates do not take this diversification effect into account. Actual changes in the fair value of the Allianz Group’s assets could be different to those shown in the table below.

 

Additionally, routine daily business activity entails a certain amount of change in the portfolios’ composition as bonds mature or as portfolio managers buy or sell investments. As a result, the actual sensitivity of the Allianz Group’s portfolio will vary at any particular moment in time, and the risk of loss from equity, interest rate, foreign

 

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exchange or other risks cannot be eliminated, although it can be quantified and monitored.

 

Finally, the Allianz Group’s sensitivity analyses are estimates based on a fixed point in the past. Nearly all of the Allianz Group’s assets and liabilities are subject to market risk from fluctuating equity, interest and foreign exchange markets. These fluctuations cannot be foreseen and can occur suddenly. The quantitative risk measurements provided by the model and reflected in the table below are a snapshot, describing the potential losses to investments under a particular set of assumptions and parameters. Although these measurements reflect reasonable possibility, they may differ considerably from actual losses that may be experienced in the future.

 

Allianz Group Market Risk Exposure Estimates

 

Trading Portfolios

 

Although the trading portfolios of the Allianz Group in terms of activity and absolute volumes relate primarily to the banking segment, this does not hold true for the resulting market risk. While in the Banking segment the whole portfolio comprising assets and liabilities are classified as trading, the resulting market risks in the insurance segment relate mainly to the hedging of insurance liabilities not classified as trading. In its worldwide trading activities, the Allianz Group uses financial derivatives both as non-standardized financial instruments for the individual management of market risks and as a component of structured financial transactions. The Allianz Group uses derivatives to manage its proprietary trading portfolio. The Allianz Group’s derivative trading activities focus on interest bearing financial instruments, predominately interest rate swaps. The Allianz Group also uses currency and credit derivatives as well as equity/index derivatives.

 

Insurance Operations. The Allianz Group’s insurance business does not generally engage in trading activities. With the adoption of IAS 39, however, derivative instruments that do not meet IAS hedge accounting standards are treated as trading derivatives. As a result of this accounting rule, the trading portfolio tables below show significant impact from trading not only for the Allianz Group’s banking business but also for its insurance business. Derivatives used in the Allianz Group’s insurance operations, however, are principally used for portfolio hedging and not for trading purposes. For instance, the significant change of the interest rate sensitivity for the life/health segment is due to the fact that we designated fixed income bonds to trading for Allianz Life so as to more appropriately match the changes in the fair values of these assets with the corresponding changes in fair value of the liabilities. The increase of equity price risk sensitivity in the property-casualty segment as compared with the prior year is mainly driven by a short DAX forward maturing in 2008. This position forms part of the convertible bond “BITES”, which has been issued by Allianz AG in January 2005 in order to further reduce its overall long equity exposure.

 

Banking Operations. The Banking segment is active in trading equities, interest rate instruments and foreign exchange and commodities. The Banking segment uses derivatives in its trading portfolios primarily to meet customer demands as well as to hedge market and credit risk. Derivatives are also used to take advantage of market opportunities. In terms of volume, the primary derivative products the Allianz Group uses are interest rate swaps, futures and options as well as foreign exchange forwards and equity related options. In comparison to the prior year, credit derivatives were used more extensively (+85%) in 2005, while still at a comparably low absolute level (i.e., notional of credit derivatives amount to 15% of the outstanding notional of interest rate derivatives). The primary exposures in foreign currencies are U.S. Dollars and British Pounds.

 

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The following table shows the sensitivity analysis of the market risk in the material trading portfolio of the Allianz Group. Certain financial instruments are included in more than one risk category because they may be affected by changes in more than one parameter. For example, equities denominated in non-Euro currencies are affected by fluctuation in both stock prices and exchange rates.

 

Sensitivity Analysis by Business Segment and Risk Category: Trading Portfolios

 

     At December 31, 2005

 
     Property-
Casualty


    Life/Health

    Asset
Management


    Banking

    Total

 
     € mn     € mn     € mn     € mn     € mn  

Equity price risk(1)

   291     15     (21 )   (216 )   69  

Interest rate risk

   19     (22 )   4     33     34  

Foreign exchange risk(2)

   (38 )   (191 )   (21 )   (13 )   (263 )

 

     At December 31, 2004

 
     Property-
Casualty


    Life/Health

    Asset
Management


    Banking

    Total

 
     € mn     € mn     € mn     € mn     € mn  

Equity price risk(1)

   —       (57 )   (25 )   (105 )   (187 )

Interest rate risk

   56     288     2     6     353  

Foreign exchange risk(2)

   (83 )   (124 )   (9 )   (38 )   (254 )

(1) Amounts do not take into account investments in associated enterprises and joint ventures.
(2) Amounts take into account financial instruments not denominated in Euros.

 

Non-Trading Portfolios

 

The Allianz Group’s remaining portfolios contain all non-trading activities of the banking segment as well as the financial investments of the insurance segment. The Allianz Group holds and uses many different financial instruments in managing its businesses. Grouped according to risk category, the following are the most significant assets according to their fair values:

 

    equity price risk: common shares and preferred shares;

 

    interest rate risk: bonds, loans and mortgages; and

 

    foreign exchange rate risk: non-Euro denominated equities and interest rate risk sensitive assets.

 

Insurance Segment. The insurance segment’s non-trading portfolio is exposed to foreign exchange risk because some of its assets are denominated in currencies other than the Euro. If non-Euro foreign exchange rates decline against the Euro, the fair values of the corresponding assets would also decline. The insurance segment’s primary exposures for foreign exchange risk are for the U.S. Dollar, Swiss Franc and Korean Won. Local laws generally require that the insurance policy obligations of the Allianz Group’s subsidiaries and the investments covering them must be in the same currency. As a result, currency fluctuations in connection with foreign subsidiaries have only a minor impact on the insurance segment’s risk management strategies.

 

Most of the Allianz Group’s insurance-related equity investments are intended to be held for the long term. The equity holdings are primarily in the Euro zone equity markets of Germany, France and Italy, with significant additional exposures in the Swiss and U.K. markets.

 

The insurance segment is exposed to interest rate risk due to its investments in fixed income instruments, in particular bonds, loans and mortgages. The primary exposures for interest rate sensitivity securities are for bonds, loans and mortgages held by the Allianz Group’s German, French, U.S. and Italian subsidiaries.

 

Banking Segment. The Allianz Group’s banking operations are subject to currency risk on all non-Euro loans and deposits. For non-trading activities, it is the Allianz Group’s policy that all

 

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loans and deposits in foreign currencies be funded and reinvested in the same currency and with matching maturities. Any residual risk in non-trading portfolios results primarily from operating profits of affiliated companies abroad during 2005.

 

The non-trading portfolio of the Banking segment with respect to interest rate risk includes all loans and deposits, issued securities, interest rate-related investment securities as well as corresponding hedges of Dresdner Bank as well as the other banks belonging to the Allianz Group. Market risk associated with these positions is primarily interest rate risk resulting from long-term fixed rate loans, which are funded in part by short-term deposits. On Dresdner Bank’s non-trading books, interest rate derivatives are used to hedge risk associated with fixed rate loans. For this purpose, Dresdner Bank primarily uses interest rate swaps. Futures and options are also used for asset and liability management in the non-trading activities, albeit to a significantly lesser degree. The Allianz Group also used swaptions to hedge risk arising from a borrower’s prepayment options under some loan agreements. A small volume of equity derivatives is held due to investments in shares from affiliated and non-affiliated companies.

 

Equity holdings in the banking segment are primarily in the German market. The following table shows a sensitivity analysis of the market risk in the Allianz Group’s material non-trading portfolios. Certain financial instruments are included in more than one risk category because they may be affected by changes in more than one parameter.

 

Sensitivity Analysis by Business Segment and Risk Category: Non-Trading Portfolios

 

     At December 31, 2005

 
     Property-
Casualty


    Life/Health

    Asset
Management


    Banking

    Total

 
     € mn     € mn     € mn     € mn     € mn  

Equity price risk(1)

   (4,952 )   (7,185 )   71     (864 )   (12,930 )

Interest rate risk

   (1,355 )   (13,003 )   (7 )   (37 )   (14,402 )

Foreign exchange risk(2)

   (2,805 )   (4,725 )   (14 )   (53 )   (7,597 )

 

     At December 31, 2004

 
     Property-
Casualty


    Life/Health

    Asset
Management


    Banking

    Total

 
     € mn     € mn     € mn     € mn     € mn  

Equity price risk(1)

   (3,653 )   (5,568 )   (8 )   (781 )   (10,011 )

Interest rate risk

   (1,136 )   (10,353 )   —       (44 )   (11,532 )

Foreign exchange risk(2)

   (1,693 )   (3,714 )   (28 )   85     (5,350 )

(1) Amounts do not take into account investments in associated enterprises and joint ventures.
(2) Amounts take into account financial instruments in foreign currency.

 

The significant increase of equity risk is related to the overall appreciation of equity markets in 2005, while the increase in foreign exchange risk and interest risk is mainly driven by the business growth in the United States as well as the strong appreciation of the U.S. Dollar against the Euro in 2005.

 

ITEM 12. Description of Securities Other than Equity Securities

 

Not applicable.

 

ITEM 13. Defaults, Dividend Arrearages and Delinquencies

 

None.

 

ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

 

None.

 

 

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ITEM 15: CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

For its fiscal year 2005, the Allianz Group performed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures in accordance with Section 302 of the Sarbanes-Oxley Act (or “SOA”). In doing so, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objectives. The Allianz Group’s management is required to apply judgment in evaluating the risks facing the Allianz Group in achieving its objectives, in determining the risks that are considered acceptable to bear, in assessing the likelihood of the risks concerned materializing, in identifying its ability to reduce the incidence and impact on the business of risks that do materialize and in ensuring the costs of operating particular controls are proportionate to the benefit.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of the Allianz Group’s disclosure controls and procedures, as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended, in light of the judgments noted above as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that these disclosure controls and procedures provided reasonable assurance as to effectiveness as of December 31, 2005.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting that occurred during fiscal year 2005, which have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

ITEM 16A. Audit Committee Financial Expert

 

Our Supervisory Board has determined that Dr. Manfred Schneider, chairman of the audit committee, meets the criteria of an audit committee financial expert, as that term is defined in Item 16A(b) of Form 20-F. Dr. Schneider is an “independent” member of the Supervisory Board in accordance with NYSE listing standards applicable to Allianz AG.

 

ITEM 16B. Code of Ethics

 

In response to Section 406 of the Sarbanes-Oxley Act of 2002, we have adopted a specific Code of Ethics in addition to our general Code of Conduct that applies to all members of our Board of Management, including persons performing the functions of a principal executive officer, principal financial officer, principal accounting officer and controller and senior employees performing similar functions. A copy of this code of ethics is available on our Internet website www.allianz.com/corporate-governance. (Reference to this “uniform resource locator” or “URL” is made as an inactive textual reference for informational purposes only. The information found at this website is not incorporated by reference into this document). There have been no amendments or waivers to this code of ethics since its adoption. Information regarding any future amendments or waivers will be published on the aforementioned website.

 

ITEM 16C. Principal Accountant Fees and Services

 

KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (or “KPMG DTG”) serves as the external auditing firm for the Allianz Group.

 

The table set forth below contains the aggregate fees billed for each of the last two fiscal years by KPMG DTG or KPMG DTG and the worldwide member firms of KPMG International (or “KPMG”) in each of 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 AG and its subsidiaries or services that 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 compliance,

 

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tax advice and tax planning; 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).

 

Fees of KPMG worldwide

 

     Years ended
December 31,


 
     2005

    2004

 
     € mn     € mn  

Audit fees

Audit-related fees

Tax fees

All other fees

   60.1
11.0
4.0
12.1
 
 
 
 
  38.6
16.1
3.2
12.1
 
 
 
 
    

 

Total

   87.2 (1)   70.0 (1)
    

 


(1) Fees attributable to KPMG DTG for audit fees were €26.3 million (2004: €16.4 million), audit-related fees € 3.6 million (2004: €6.9 million), tax fees € 1.0 million (2004: € 0.4 million) and all other fees € 3.7 million (2004: € 6.2 million) for the year ended December 31, 2005.

 

Audit Fees KPMG billed the Allianz Group an aggregate of €60.1 million in 2005 and €38.6 million in 2004 in connection with professional services rendered for the audit of our annual consolidated financial statements and services normally provided by KPMG in connection with statutory and regulatory filings or engagements. These services consisted mainly of periodic review engagements and the annual audit.

 

Audit-Related Fees KPMG billed the Allianz Group an aggregate of €11.0 million in 2005 and €16.1 million in 2004 for assurance and related services. These services consisted primarily of advisory and consulting services related to accounting and financial reporting standards, financial due diligence services, and review procedures associated with SOX 404 implementation.

 

Tax Fees KPMG billed the Allianz Group an aggregate of €4.0 million in 2005 and €3.2 million in 2004 for professional services, primarily for tax advice and tax compliance.

 

All Other Fees KPMG billed the Allianz Group an aggregate of €12.1 million in 2005 and €12.1 million in 2004 for other services, which consisted primarily of general consulting services and other services such as assistance in documenting internal control policies and procedures under the guidance of Allianz Group management.

 

All services provided by KPMG to Allianz Group companies, other than audit services, must be pre-approved separately by the Audit Committee of the Allianz AG Supervisory Board. The Audit Committee pre-approval process is based on the use of a “Positive List” of activities decided by the Audit Committee and, in addition, a “Guiding Principles and User Test” is applied. All internal control-related services are specifically pre-approved by the Audit Committee. Group Compliance and KPMG report to the Audit Committee periodically with respect to services performed. In 2005, the percentage of the total amount of revenue we paid to our principal accountants represented by non-audit services subject to paragraph (c)(7)(1)(G) of Rule 2-01 of Regulation S-X was less than 5%.

 

ITEM 16D. Exemptions from the Listing Standards for Audit Committees

 

Our Audit Committee consists of three shareholder representatives and two employee representatives, one of whom is employed by the Allianz Group. With respect to the employee representative employed by the Allianz Group, Allianz AG relies on the exemption afforded by Rule 10A-3(b)(1)(iv)(C) under the Securities Exchange Act of 1934. We believe that such reliance does not materially adversely affect the ability of the Audit Committee to act independently or to satisfy the other requirements of Rule 10A-3.

 

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ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

The table below sets forth the information with respect to purchases made by or on behalf of Allianz AG or any “affiliated purchaser”, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, of Allianz AG shares for the year ended December 31, 2005.

 

Period


        Total
Number of
Shares
Purchased(1)


    Average
Price Paid
per Share


    Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs


   Maximum
Number of Shares
that May Yet Be
Purchased Under the
Plans or Programs


January

   1/1/05-1/31/05    —       —       N/A    N/A

February

   2/1/05-2/28/05    —       —             

March

   3/1/05-3/31/05    —       —             

April

   4/1/05-4/30/05    —       —             

May

   5/1/05-5/31/05                      

June

   6/1/05-6/30/05    —       —             

July

   7/1/05-7/31/05    —       —             

August

   8/1/05-8/31/05    —       —             

September

   9/1/05-9/30/05    —       —             

October

   10/1/05-10/31/05    18,221 (2)   118.26 (2)         

November

   11/1/05-11/30/05    1,148,150 (3)   103.50 (3)         

December

   12/1/05-12/31/05    199 (4)   125.55 (4)         

Total

   1,166,570     103.73           

(1) This table excludes market-making and related hedging purchases by Dresdner Bank and certain other Allianz Group entities. The table also excludes Allianz AG shares purchased by investment funds managed by Allianz Group entities for clients in accordance with investment strategies that are established by fund managers acting independently of Allianz AG.
(2) Allianz Cornhill Share Schemes Trustees Limited purchased these shares for distribution to employees in accordance with the share incentive place (or “SIP”) of Allianz Cornhill Insurance plc (or “ACI”). ACI implements the Allianz Group’s Employee Stock Purchase Plan through its SIP. For further information, see Note 43 to our consolidated financial statements.
(3) Allianz AG purchased these newly issued shares in connection with the Allianz Group’s Employee Stock Purchase Plan.
(4) Allianz AG purchased these shares to adjust a temporary deficit in its Employee Stock Purchase Plan account.

 

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PART III

 

ITEM 17. Financial Statements

 

Not applicable.

 

ITEM 18. Financial Statements

 

See pages F-1 forward for the consolidated financial statements required by this item.

 

ITEM 19. Exhibits

 

The following exhibits are filed as part of this annual report:

 

Exhibit
Number


  

Document


1.1    Articles of Association, dated January 2006
4.1    Cancellation Agreement with respect to the Principles of Cooperation between Allianz AG and Munich Re, dated October 2003 (Incorporated by reference to Exhibit 4.8 to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2003)
4.2    Form of Services Agreement of Members of the Board of Management of Allianz AG
4.3    English translation of the Merger Plan between Allianz AG and Riunione Adriatica di Sicurtà S.p.A., dated December 16, 2005 (Incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form F-4 filed with the SEC on December 22, 2005 (File No. 333-128715))
7.1    Statement regarding ratio of earnings to fixed charges
8.1    List of subsidiaries
12.1    Certification of the Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002
12.2    Certification of the Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002
13.1    Certification of the Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002
13.2    Certification of the Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002
14.1    Consent of KPMG Deutsche Treuhand-Gesellschaft AG Wirtschaftsprüfungsgesellschaft

 

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INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

Consolidated Financial Statements

    
     Consolidated Balance Sheets    F-1
     Consolidated Income Statements    F-2
    

Consolidated Statements of Changes in Shareholders’ Equity

   F-3
    

Consolidated Cash Flow Statements

   F-4

Notes to the Allianz Group’s Consolidated Financial Statements

   F-5

1

  

Issuance of the Declaration of Compliance with the German Corporate Governance Code according to clause 161 AktG, nature of operations and basis of presentation

   F-5

2

   Summary of significant accounting policies    F-5

3

   Recently adopted and issued accounting pronouncements    F-19

4

   Consolidation    F-27

5

   Segment reporting    F-29

Supplementary Information on the Allianz Group’s Assets

   F-44

6

  

Intangible assets

   F-44

7

  

Investments in associated enterprises and joint ventures

   F-46

8

  

Investments

   F-46

9

  

Loans and advances to banks and customers

   F-51

10

  

Financial assets carried at fair value through income

   F-54

11

  

Cash and cash equivalents

   F-54

12

  

Amounts ceded to reinsurers from reserves for insurance and investment contracts

   F-54

13

  

Other assets

   F-55

Supplementary Information on the Allianz Group’s Shareholders’ Equity and Liabilities

   F-57

14

  

Shareholders’ equity

   F-57

15

  

Participation certificates and subordinated liabilities

   F-62

16

  

Reserves for insurance and investment contracts

   F-63

17

  

Liabilities to banks

   F-67

18

  

Liabilities to customers

   F-67

19

  

Certificated liabilities

   F-68

20

  

Financial liabilities carried at fair value through income

   F-69

21

  

Other accrued liabilities

   F-69

22

  

Other liabilities

   F-76

23

  

Deferred income

   F-76

Supplementary Information on the Allianz Group’s Consolidated
Income Statement

   F-77

24

  

Premiums earned (net)

   F-77

25

  

Interest and similar income

   F-78

26

  

Income from investments in associated enterprises and joint ventures (net)

   F-79

27

  

Other income from investments

   F-79

28

  

Income from financial assets and liabilities carried at fair value through income (net)

   F-79

29

  

Fee and commission income, and income from service activities

   F-80

30

  

Other income

   F-81

31

  

Insurance and investment contract benefits (net)

   F-82

32

  

Interest and similar expenses

   F-83

33

  

Other expenses from investments

   F-84

34

  

Loan loss provisions

   F-84

35

  

Acquisition costs and administrative expenses

   F-85

36

  

Other expenses

   F-86

37

  

Taxes

   F-86


Table of Contents

Other Information

   F-88

38

  

Supplementary information on the Banking segment

   F-88

39

  

Derivative financial instruments

   F-90

40

  

Fair value

   F-94

41

  

Related party transactions

   F-95

42

  

Contingent liabilities, commitments, guarantees, and assets pledged and collateral

   F-96

43

  

Share based compensation plans

   F-101

44

  

Earnings per share

   F-107

45

  

Other information

   F-108

46

  

Subsequent events

   F-108

47

  

Summary of significant differences between the accounting principles used in the preparation of the consolidated financial statements and accounting principles generally accepted in the United States of America

   F-110

48

  

Selected subsidiaries and other holdings

   F-129
    

Schedules

    
    

Schedule I Summary of Investments

   S-1
    

Schedule II Parent Only Condensed Balance Sheet (IFRS BASIS)

   S-2
    

Schedule III Supplementary Insurance Information

   S-5
    

Schedule IV Supplementary Reinsurance Information

   S-7


Table of Contents

Report of Independent Registered Public Accounting Firm

 

To the Board of Management and Supervisory Board of Allianz Aktiengesellschaft:

 

We have audited the accompanying consolidated balance sheets of Allianz Aktiengesellschaft and subsidiaries (collectively, “the Allianz Group”) as of December 31, 2005 and 2004, and the related consolidated income statements, consolidated statements of changes in shareholders’ equity and consolidated cash flow statements for each of the years in the three-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements we have also audited the accompanying financial statement schedules. These consolidated financial statements and financial statement schedules are the responsibility of Allianz Group’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Allianz Group as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with International Financial Reporting Standards. Also in our opinion, the related financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

 

As described in Note 3 to the financial statements, in connection with adoption of the new and revised International Financial Reporting Standards which became effective January 1, 2005, the Allianz Group has revised the 2004 financial statements to reflect retrospective application of select accounting principles.

 

International Financial Reporting Standards vary in certain significant respects from accounting principles generally accepted in the United States. Information relating to the nature and effect of such differences is presented in Note 47 to the consolidated financial statements.

 

KPMG Deutsche Treuhand-Gesellschaft

Aktiengesellschaft

Wirtschaftsprüfungsgesellschaft

Munich, Germany

 

April 6, 2006


Table of Contents

Consolidated Balance Sheets

as of December 31, 2005 and 2004

 

          2005

   2004

     Note    € mn    € mn

ASSETS

              

Intangible assets

   6    15,385    15,147

Investments in associated enterprises and joint ventures

   7    2,095    5,757

Investments(1)

   8    282,920    248,327

Loans and advances to banks

   9    151,384    181,543

Loans and advances to customers

   9    185,424    195,680

Financial assets carried at fair value through income(2)

   10    235,007    240,574

Cash and cash equivalents

   11    31,647    15,628

Amounts ceded to reinsurers from reserves for insurance and investment contracts

   12    22,120    22,310

Deferred tax assets

   37    14,596    14,139

Other assets

   13    57,303    51,213
         
  

Total assets

        997,881    990,318
         
  
          2005

   2004

     Note    € mn    € mn

SHAREHOLDERS’ EQUITY AND LIABILITIES

              

Shareholders’ equity before minority interests

        39,487    29,995

Minority interests in shareholders’ equity

        7,615    7,696

Shareholders’ equity

   14    47,102    37,691

Participation certificates and subordinated liabilities

   15    14,684    13,230

Reserves for insurance and investment contracts

   16    359,137    326,380

Liabilities to banks

   17    151,957    191,347

Liabilities to customers

   18    158,359    157,137

Certificated liabilities

   19    59,203    57,752

Financial liabilities carried at fair value through income

   20    144,640    145,137

Other accrued liabilities

   21    14,302    13,984

Other liabilities

   22    31,383    31,271

Deferred tax liabilities

   37    14,621    14,350

Deferred income

   23    2,493    2,039
         
  

Total shareholders’ equity and liabilities

        997,881    990,318
         
  

(1) of which €5,079 mn and €540 mn are pledged to creditors and can be sold or repledged
(2) of which €77,954 mn and €99,082 mn are pledged to creditors and can be sold or repledged

 

F-1


Table of Contents

Consolidated Income Statements

for the Years ended December 31, 2005, 2004 and 2003

 

          2005

    2004

    2003

 
     Note    € mn     € mn     € mn  

Premiums earned (net)

   24    57,747     56,789     55,978  

Interest and similar income

   25    22,341     20,956     22,510  

Income from investments in associated enterprises and joint ventures (net)

   26    1,257     777     3,014  

Other income from investments

   27    4,710     5,179     10,490  

Income from financial assets and liabilities carried at fair value through income (net)

   28    1,159     1,658     519  

Fee and commission income, and income from service activities

   29    8,310     6,823     6,060  

Other income

   30    2,182     2,533     3,803  
         

 

 

Total income

        97,706     94,715     102,374  
         

 

 

Insurance and investment contract benefits (net)

   31    (53,797 )   (52,255 )   (52,240 )

Interest and similar expenses

   32    (6,370 )   (5,703 )   (6,871 )

Other expenses from investments

   33    (1,679 )   (2,672 )   (7,452 )

Loan loss provisions

   34    109     (354 )   (1,027 )

Acquisition costs and administrative expenses

   35    (24,447 )   (23,380 )   (22,917 )

Amortization of goodwill

   6    —       (1,164 )   (1,413 )

Other expenses

   36    (3,642 )   (4,091 )   (6,588 )
         

 

 

Total expenses

        (89,826 )   (89,619 )   (98,508 )
         

 

 

Earnings from ordinary activities before taxes

        7,880     5,096     3,866  

Taxes

   37    (2,114 )   (1,662 )   (249 )

Minority interests in earnings

   14    (1,386 )   (1,168 )   (926 )
         

 

 

Net income

        4,380     2,266     2,691  
         

 

 

         

   

   

 

Basic earnings per share

   44    11.24     6.19     7.96  

Diluted earnings per share

   44    11.14     6.16     7.93  

 

F-2


Table of Contents

Consolidated Statements of Changes in Shareholders’ Equity

for the Years ended December 31, 2005, 2004 and 2003

 

    Paid-in
capital


  Revenue
reserves


    Foreign currency
translation
adjustments


    Unrealized
gains and
losses (net)


    Shareholders’
equity before
minority
interests


    Minority
interests in
shareholders’
equity


    Shareholders’
equity


 
    € mn   € mn     € mn     € mn     € mn     € mn     € mn  

Balance as of 12/31/2002, as previously reported

  14,785   5,914     (342 )   1,317     21,674     8,314     29,988  

Effect of implementation of new accounting standards (Note 3)

  —     (3,306 )   27     2,651     (628 )   (349 )   (977 )
   
 

 

 

 

 

 

Balance as of 12/31/2002

  14,785   2,608     (315 )   3,968     21,046     7,965     29,011  

Foreign currency translation adjustments

  —     —       (1,578 )   (125 )   (1,703 )   (25 )   (1,728 )

Changes in the consolidated subsidiaries of the Allianz Group

  —     (1,117 )   —       876     (241 )   —       (241 )

Capital paid in

  4,562   —       —       —       4,562     —       4,562  

Treasury shares

  —     1,413     —       —       1,413     —       1,413  

Unrealized gains and losses (net)

  —     —       —       1,727     1,727     623     2,350  

Net income

  —     2,691     —       —       2,691     926     3,617  

Dividends paid

  —     (374 )   —       —       (374 )   (302 )   (676 )

Miscellaneous

  —     (1,128 )   —       —       (1,128 )   (1,921 )   (3,049 )
   
 

 

 

 

 

 

Balance as of 12/31/2003

  19,347   4,093     (1,893 )   6,446     27,993     7,266     35,259  

Foreign currency translation adjustments

  —     —       (805 )   (12 )   (817 )   (2 )   (819 )

Changes in the consolidated subsidiaries of the Allianz Group

  —     (73 )   64     (27 )   (36 )   —       (36 )

Capital paid in

  86   —       —       —       86     —       86  

Treasury shares

  —     (59 )   —       —       (59 )   —       (59 )

Unrealized gains and losses (net)

  —     —       —       1,156     1,156     315     1,471  

Net income

  —     2,266     —       —       2,266     1,168     3,434  

Dividends paid

  —     (551 )   —       —       (551 )   (518 )   (1,069 )

Miscellaneous

  —     217     —       (260 )   (43 )   (533 )   (576 )
   
 

 

 

 

 

 

Balance as of 12/31/2004

  19,433   5,893     (2,634 )   7,303     29,995     7,696     37,691  

Foreign currency translation adjustments

  —     —       1,601     50     1,651     33     1,684  

Changes in the consolidated subsidiaries of the Allianz Group

  —     (1,742 )   1     277     (1,464 )   (1,328 )   (2,792 )

Capital paid in

  2,183   —       —       —       2,183     —       2,183  

Treasury shares

  —     352     —       —       352     —       352  

Unrealized gains and losses (net)

  —     —       —       2,694     2,694     416     3,110  

Net income

  —     4,380     —       —       4,380     1,386     5,766  

Dividends paid

  —     (674 )   —       —       (674 )   (729 )   (1,403 )

Miscellaneous

  —     370     —       —       370     141     511  
   
 

 

 

 

 

 

Balance as of 12/31/2005

  21,616   8,579     (1,032 )   10,324     39,487     7,615     47,102  
   
 

 

 

 

 

 

 

F-3


Table of Contents

Consolidated Cash Flow Statements

for the Years ended December 31, 2005, 2004 and 2003

 

     2005

    2004

    2003

 
     € mn     € mn     € mn  

Operating activities

                  

Net income

   4,380     2,266     2,691  

Change in unearned premiums

   671     234     596  

Change in aggregate policy reserves (without unit linked contracts)(*)

   17,475     13,570     12,042  

Change in reserve for loss and loss adjustment expenses

   3,288     2,476     1,016  

Change in other insurance reserves (without unit linked liabilities)

   3,146     1,806     (446 )

Change in deferred acquisition costs

   (2,093 )   (1,174 )   (2,460 )

Change in funds held by others under reinsurance business assumed

   31     412     32  

Change in funds held under reinsurance business ceded

   (1,690 )   175     234  

Change in accounts receivable/payable on reinsurance business

   (386 )   194     219  

Change in financial assets and liabilities held for trading

   11,885     (30,209 )   8,156  

Change in loans and advances to banks and customers

   (2,451 )   (726 )   14,768  

Change in liabilities to banks and customers

   (18,418 )   (16,926 )   19,842  

Change in assets from reverse repurchase agreements and collateral paid for securities borrowing transactions

   43,656     (10,136 )   (65,122 )

Change in liabilities from repurchase agreements and collateral received from securities lending transactions

   (18,692 )   35,255     28,824  

Change in certificated liabilities

   1,569     5,786     (14,393 )

Change in other receivables and liabilities

   (3,772 )   5,291     (4,554 )

Change in deferred tax assets/liabilities (without change in deferred tax assets/liabilities from unrealized investment gains and losses)

   (99 )   446     (648 )

Adjustment for investment income/expenses not involving movements of cash

   (5,402 )   (4,400 )   (5,125 )

Amortization of goodwill

   —       1,164     1,413  

Other

   (927 )   (2,308 )   1,574  
    

 

 

Net cash flow provided by (used in) operating activities

   32,171     3,196     (1,341 )
    

 

 

Investing activities

                  

Change in investments held at fair value

   (28,983 )   (12,661 )   (5,520 )

Change in investments held-to-maturity

   373     (493 )   1,754  

Change in real estate

   989     (772 )   157  

Change in investments in associated enterprises and joint ventures

   5,576     1,379     7,668  

Change in cash and cash equivalents from the acquisition of subsidiaries

   (2,932 )   (1,302 )   —    

Other

   2,525     (1,529 )   532  
    

 

 

Net cash flow provided by (used in) investing activities

   (22,452 )   (15,378 )   4,591  
    

 

 

Financing activities

                  

Change in participation certificates and subordinated liabilities

   1,449     999     (1,943 )

Cash inflow from capital increases

   2,183     86     4,562  

Dividends

   (1,403 )   (1,069 )   (676 )

Other from shareholders’ capital and minority interests (without change in revenue reserve from unrealized investment gains and losses)

   3,999     2,290     (553 )
    

 

 

Net cash flow provided by financing activities

   6,228     2,306     1,390  
    

 

 

Effect of exchange rate changes on cash and cash equivalents

   72     (24 )   (120 )
    

 

 

Change in cash and cash equivalents

   16,019     (9,900 )   4,520  

Cash and cash equivalents at beginning of period

   15,628     25,528     21,008  
    

 

 

Cash and cash equivalents at end of period

   31,647     15,628     25,528  
    

 

 

Supplementary information:

                  

Income taxes (paid) received

   (1,369 )   (1,785 )   596  
    

 

 


(*) Reclassification of non unit linked reserves for SFAS 97 contracts from financing activities into operating activities.

 

F-4


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements

 

1    Issuance of the Declaration of Compliance with the German Corporate Governance Code according to clause 161 AktG, nature of operations and basis of presentation

 

Issuance of the Declaration of Compliance with the German Corporate Governance Code according to clause 161 AktG

 

On December 15, 2005, the Board of Management and the Supervisory Board of Allianz AG issued the Declaration of Compliance according to clause 161 AktG and made it available on a permanent basis to the shareholders on the company’s website. The text of the Declaration of Compliance is also reproduced in the section Corporate Governance of Item 6 beginning on page 126 of this Annual Report.

 

The Declaration of Compliance of the two publicly traded group companies Allianz Lebensversicherungs-Aktiengesellschaft and Oldenburgische Landesbank AG were issued in December 2005, respectively, and were made permanently available to the shareholders.

 

Nature of operations

 

Allianz Aktiengesellschaft (“Allianz AG”) 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 AG, Munich. Allianz AG is a public stock corporation (“Aktiengesellschaft”) incorporated in Germany. It is recorded in the Commercial Register of the municipal court Munich under its registered address at Königinstraße 28, 80802 München.

 

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 regulations in accordance with section 315a of the German Commercial Code (“HGB”). Since 2002, the designation IFRS applies to the overall framework of all standards approved by the International Accounting Standards Board (“IASB”). Already approved standards continue to be cited as International Accounting Standards (“IAS”). For years through 2004, IFRS did not provide specific guidance concerning the reporting of insurance and reinsurance contracts. Therefore, as envisioned in the IFRS Framework, the provisions embodied under accounting principles generally accepted in the United States of America (“US GAAP”) have been applied. See Note 3 regarding changes to IFRS effective January 1, 2005. The consolidated financial statements are presented in Euros (€).

 

2    Summary of significant accounting policies

 

Principles of consolidation

 

The consolidated financial statements of the Allianz Group include those of Allianz AG, its subsidiaries and certain investment funds and special purpose entities (“SPEs”). Subsidiaries, investment funds and SPEs, hereafter “subsidiaries”, which are directly or indirectly controlled by the Allianz Group are consolidated. Subsidiaries are consolidated from the date control is obtained by the Allianz Group. Subsidiaries are consolidated until the date that the Allianz Group no longer maintains control. The Allianz Group has used interim financial statements for certain subsidiaries whose fiscal year is other than December 31, but not exceeding a lag of three months. The effects of intra-Allianz Group transactions have been eliminated.

 

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 allocate 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.

 

F-5


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

For business combinations with an agreement date before March 31, 2004, minority interests are recorded at the minority’s proportion of the pre-aquisition carrying amounts of the identifiable assets and liabilities.

 

Acquisitions and disposals of minority interests are treated as transactions between equity holders. Therefore, any difference between the acquisition cost of the minority interest and the carrying amount of the minority interest is recognized as an increase or decrease in equity.

 

Foreign currency translation

 

Foreign currency is translated by the functional currency method. The functional currencies for the Allianz Group’s subsidiaries are usually the local currency of the relevant company, e.g., the prevailing currency in the environment where the subsidiary conducts its ordinary activities. In accordance with the functional currency method, assets and liabilities are translated at the closing rate on the balance sheet date and income and expenses are translated at the quarterly average rate in all financial statements of subsidiaries not reporting in Euro. Any foreign currency translation differences, including those arising from the equity method, are recorded directly in shareholders’ equity, as foreign currency translation adjustments.

 

Currency gains and losses arising from foreign currency transactions, transactions in a currency other than the functional currency of the entity, are reported in other income and other expenses, respectively.

 

Use of estimates and assumptions

 

The preparation of consolidated financial statements requires that the Allianz Group makes estimates and assumptions that affect items reported in the consolidated balance sheets and consolidated income statements, in addition to contingent liabilities. The actual values may differ from those reported. The most important of such items are the reserve for loss and loss adjustment expenses, the aggregate policy reserves, the loan loss allowance, fair value and impairments of investments, goodwill, brand names, deferred policy acquisition costs, deferred taxes and reserves for pensions and similar obligations.

 

Supplementary information on the Allianz Group’s assets

 

Intangible assets

 

Goodwill resulting from business combinations represents the difference between the acquisition cost of the business combination and the Allianz Group’s proportionate share of the net fair value of identifiable assets, liabilities and certain contingent liabilities. Goodwill resulting from business combinations is not subject to amortization and is recorded at cost less accumulated impairments.

 

The Allianz Group conducts an annual impairment test of goodwill on October 1, in addition to whenever there is an indication that goodwill is not recoverable. The impairment test includes comparing the recoverable amount to the carrying amount, including goodwill, for all cash generating units. A cash generating unit is not impaired if the recoverable amount is greater than the carrying amount. 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.

 

Intangible assets acquired in business combinations are recorded at fair value on the acquisition date if the intangible asset is separable or arises from contractual or other legal rights. Intangible assets with an indefinite useful life are not subject to amortization and are recorded at cost less accumulated impairments. Intangible assets with a definite useful life are amortized over their useful lives and are recorded at cost less accumulated amortization and impairments.

 

Present value of future profits (“PVFP”) is the present value of net cash flows anticipated in the future from insurance and investment contracts in force at the date of acquisition and is amortized over the life of the related contracts. PVFP was determined using discount rates ranging from 12% to 15%. Interest accrues on the PVFP balance based upon the policy liability rate or contract rate. Interest accrues on PVFP at rates between 3.5% and 8.5%.

 

F-6


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Software includes software purchased from third parties or developed internally, which are amortized on a straight-line basis over their useful service lives or contractual terms, generally over 3 to 5 years. Costs for repairs and maintenance are expensed, while improvements, if they extend the useful life of the asset, are capitalized. For the Allianz Group’s Property-Casualty and Life/Health segments amortization of software is allocated amongst several line items according to cost allocation. Amortization of software related to the Allianz Group’s Banking and Asset Management segments is included in administrative expenses.

 

The brand names “Dresdner Bank” and “dit” (Deutscher Investment-Trust) have an indefinite life; therefore, are not subject to amortization and are recorded at cost less accumulated impairments. The fair values for the brand names, registered as trade names, were determined using a royalty savings approach.

 

Similar to goodwill, an intangible asset is subject to an annual impairment test, in addition to whenever there is an indication that it is not recoverable. The impairment test includes comparing the recoverable amount to the carrying amount. An intangible asset is not impaired if the recoverable amount is greater than the carrying amount. 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. Impairments of intangible assets are not reversed.

 

Investments in associated enterprises and joint ventures

 

Associated enterprises are enterprises over which the Allianz Group can exercise a significant influence and which are not joint ventures. A significant influence is presumed to exist where the Allianz Group directly or indirectly has at least 20% but no more than 50% of the voting rights. Joint ventures are enterprises over which the Allianz Group and one or more other parties have joint control.

 

Investments in associated enterprises and joint ventures are generally accounted for using the equity method, such that the carrying amount of the investment represents the Allianz Group’s proportionate share of the entity’s net assets. 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 as a separate component of total income.

 

Investments

 

Investments include securities held-to-maturity, securities available-for-sale, real estate used by third parties and funds held by others under reinsurance contracts assumed.

 

Securities held-to-maturity are comprised of debt securities, which the Allianz Group has the positive intent and ability to hold to maturity. These securities are recorded at amortized cost and any premium or discount is amortized using the effective interest method over the life of the security. Amortization of premium or discount is included in interest income and similar income.

 

Securities available-for-sale are securities that are not classified as held-to-maturity, loans and advances to banks or customers, financial assets held for trading, or financial assets designated at fair value through income. Securities available-for-sale are recorded at fair value. Unrealized gains and losses, which are the difference between fair value and cost or amortized cost, are included as a separate component of shareholders’ equity, net of deferred taxes and the latent reserve for premium refunds to the extent that policyholders will participate in such gains and losses on the basis of statutory or contractual regulations when they are realized. Realized gains and losses on securities are generally determined by applying the average cost method at the subsidiary level.

 

A held-to-maturity or available-for-sale debt security is impaired if there is objective evidence that the cost may not be recovered. If all amounts due according to the contractual terms of the security are not considered collectible, typically due to deterioration in the creditworthiness of the issuer, the

 

F-7


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

security is considered to be impaired. An impairment is not recorded as a result of declines in fair value resulting from general market interest or exchange rate movements unless the Allianz Group intends to dispose of the security.

 

If there is objective evidence that the cost may not be recovered, an available-for-sale equity security is considered to be impaired. Objective evidence that the cost may not be recovered, in addition to qualitative impairment criteria, includes a significant or prolonged decline in the fair value below cost. The Allianz Group established a policy that an available-for-sale equity security is considered impaired if the fair value is below the weighted-average cost by more than 20% or if the fair value is below the weighted-average cost for greater than nine months, to define the significant criteria and the prolonged criteria, respectively. This policy is applied individually by all subsidiaries.

 

If an available-for-sale equity security is impaired based upon the Allianz Group’s qualitative or quantitative impairment criteria, any further declines in the fair value at subsequent reporting dates are recognized as impairments. Therefore, at each reporting period, for an equity security that is determined to be impaired based upon the Allianz Group’s impairment criteria, an impairment is recognized for the difference between the fair value and the original cost basis, less any previously recognized impairments.

 

In a subsequent period, if the amount of the impairment previously recorded on a debt security decreases and the decrease can be objectively related to an event occurring after the impairment, such as an improvement in the debtor’s credit rating, the impairment is reversed through other income from investments. These reversals do not result in a carrying amount of a debt security that exceeds what would have been, had the impairment not been recorded, at the date of the impairment is reversed. Reversals of impairments of available-for-sale equity securities are not recorded.

 

Available-for-sale equity securities include investments in limited partnerships. The Allianz Group records its investments in limited partnerships at cost, where the ownership interest is less than 20%, as the limited partnerships do no have a quoted market price and fair value cannot be reliably measured. The Allianz Group accounts for its investment in limited partnerships with ownership interests of 20% or greater using the equity method.

 

Real estate used by third-parties (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 used by third parties 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 used by third parties 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.

 

Funds held by others under reinsurance contracts assumed relate to cash deposits to which the Allianz Group is entitled, but which the ceding insurer retains as collateral for future obligations of the Allianz Group. The cash deposits are recorded at face value, less any impairments for balances that are deemed to not be fully recoverable.

 

Loans and advances to banks and customers

 

Loans and advances to banks and customers are financial assets with fixed and determinable payments, not quoted in an active market, that are not classified as securities available-for-sale or held-to-maturity, financial assets held for trading, or financial assets designated at fair value through income. Loans to banks and customers are recorded at amortized cost, or generally their outstanding unpaid principal balance, net of the loan loss allowance, deferred fees and costs on origination, and unamortized premiums or discounts. 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 lives of the related loans.

 

Loans are placed on non-accrual status when the payment of principal or interest is doubtful based on the credit assessment of the borrower. Non-accrual loans consist of loans on which interest income is no longer recognized on an accrued basis, and loans for which a specific provision is recorded for the entire

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

amount of accrued interest receivable. When a loan is placed on non-accrual status, any accrued interest receivable is reversed against interest and similar income. Loans can only be restored to accrual status when interest and principal payments are made current (in accordance with the contractual terms), and future payments in accordance with those terms are reasonably assured. When there is a doubt regarding the ultimate collectibility of the principal of a loan placed in non-accrual status, all cash receipts are applied as reductions of principal. Once the recorded principal amount of the loan is reduced to zero, future cash receipts are recognized as interest income.

 

Loans and advances to banks and customers include reverse repurchase (“reverse repo”) transactions and securities borrowing transactions. Reverse repos involve the purchase of securities by the Allianz Group from a counterparty, subject to a simultaneous obligation to sell these securities at a certain later date, at an agreed upon price. If control of the securities remains with the counterparty over the entire lifetime of the agreement of the transaction, the securities concerned are not recognized as assets. The amounts of cash disbursed are recorded under loans and advances to banks and customers, as appropriate. Interest income on reverse repo agreements is accrued over the duration of the agreements and is reported in interest and similar income.

 

Securities borrowing transactions generally require the Allianz Group to deposit cash with the security’s lender. Fees paid are reported as interest expense.

 

Loans and advances to customers include the Allianz Group’s gross investment in leases, less unearned finance income, related to lease financing transactions for which the Allianz Group is the lessor. The gross investment in leases is the aggregate of the minimum lease payments and any unguaranteed residual value accruing to the Allianz Group. Lease financing transactions include direct financing leases and leveraged leases. The unearned finance income is amortized over the period of the lease in order to produce a constant periodic rate of return on the net investment outstanding in respect of finance leases.

 

Loan impairments and provisions

 

Impaired loans represent loans for which, based upon current information and events, it is probable that the Allianz Group will not be able to collect all interest and principal amounts due in accordance with the contractual terms of the loan agreements.

 

The loan loss allowance represents the estimate of probable losses that have occurred in the loan portfolio and other lending-related commitments. The loan loss allowance is reported as a reduction of loans and advances to banks and customers and the provisions for contingent liabilities, such as guarantees, loan commitments and other obligations are reported as other liabilities.

 

To determine the appropriate level of the loan loss allowance, all significant counterparty relationships are periodically reviewed. A specific allowance is established to provide for specifically identified counterparty risks. Specific allowances are established for impaired loans. The amount of the impairment is based on the present value of expected future cash flows or based on the fair value of the collateral if the loan is collateralized and foreclosure is probable. If the amount of the impairment subsequently increases or decreases due to an event occurring after the initial measurement of impairment, a change in the allowance is recognized in earnings by a charge or a credit to the loan loss provisions.

 

A country risk allowance is 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.

 

A particular allowance is established for all loans with an outstanding balance of €1 mn or less for incurred but unidentified losses by the Dresdner Bank Group. The particular allowance methodology categorizes loans into homogeneous portfolios and establishes the particular allowance based upon historical loss rates which are continuously updated.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

A general allowance is established to provide for incurred but unidentified losses for loans with an outstanding balance greater than €1 mn for the Dresdner Bank Group and for all other loans held by subsidiaries of the Banking segment. General allowances are established for loans not specifically identified as impaired. The amount of the allowance is based on historical loss experience and the evaluation of the loan portfolio under current events and economic conditions.

 

Loans are charged-off when all economically sensible means of recovery have been exhausted. At the point of charge-off, the loan as well as any specific allowance associated with the loan is removed from the consolidated balance sheet or a charge may be recorded to directly charge-off the loan. A charge-off may be full or partial. Subsequent to a charge-off, recoveries, if any, are recognized as a credit to the loan loss provisions.

 

The loan loss provisions are the amount necessary to adjust the loan loss allowance to a level determined through the process described above.

 

Financial assets carried at fair value through income

 

Financial assets carried at fair value through income include financial assets held for trading, financial assets for unit linked contracts and financial assets designated at fair value through income.

 

Financial assets held for trading consists 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 that do not meet the criteria for hedge accounting with positive fair values. Financial assets held for trading are reported at fair value. Changes in fair value are recognized directly in net income. Exchange-traded financial instruments are valued at the exchange prices prevailing on the last exchange trading day of the year. To determine the fair values of unlisted financial instruments, quotations of similar instruments or other valuation models (in particular present value models or option pricing models) are used. In the process, appropriate adjustments are made for credit and measurement risks.

 

Financial assets for unit linked contracts and financial assets designated at fair value through income are recorded at fair value with changes recorded together with the changes in the corresponding financial liabilities for unit linked contracts in net income.

 

Derivative financial instruments

 

The Allianz Group’s Property-Casualty and Life/Health segments use derivative financial instruments such as swaps, options and futures to hedge against changes in prices or interest rates in their investment portfolios.

 

In the Allianz Group’s Banking segment, derivative financial instruments are used both for trading purposes and to hedge against movements in interest rates, currency and other price risks of investments, loans, deposit liabilities and other interest sensitive assets and liabilities.

 

Derivative financial instruments that do not meet the criteria for hedge accounting are reported at fair value as financial assets held for trading or financial liabilities held for trading. Gains or losses from these derivative financial instruments arising from valuation at fair value are included in income from financial assets and liabilities held for trading. This treatment is also applicable for bifurcated embedded derivatives of a hybrid financial instrument.

 

For derivative financial instruments used for hedging purposes that meet the criteria for hedge accounting, 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 also 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 hedge transactions that meet the criteria for hedge accounting are recognized as follows:

 

Fair value hedges

 

The risk of changes of a specific risk in the fair value of assets or liabilities is hedged by a fair value

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

hedge. Changes in the fair value of a derivative financial instrument together with the pro rata share of the change in fair value of the hedged item are recognized in net income.

 

Cash flow hedges

 

Cash flow hedges reduce the exposure to variability in cash flows that is attributable to a particular risk associated with a recognized asset or liability or attributable to future cash flows from a firm commitment or a forecasted transaction. Changes in the fair value of derivative financial instruments that represent an effective hedge are recorded in unrealized gains and losses (net) in shareholders’ equity, and recognized in net income when the offsetting gain or loss associated with the hedged item is recognized. The ineffective part 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 hedge a net investment in a foreign entity. Derivative financial instruments are used to hedge currency risk. The proportion of gains or losses arising from valuation of the derivative financial instrument, which is classified as an effective hedge, is recognized in unrealized gains and losses (net) in shareholders’ equity, while the ineffective part is recognized in net income.

 

For all fair value hedges, cash flow hedges, and hedges of a net investment in a foreign entity, the derivative financial instruments are included in other assets or other liabilities.

 

The Allianz Group discontinues hedge accounting prospectively when it is determined that the derivative financial instrument is no longer highly effective, 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. When a fair value hedge is discontinued, the Allianz Group continues to report the derivative financial instrument at its fair value, and no longer recognizes changes in fair value of the hedged item in net income. When hedge accounting for a cash flow hedge is discontinued, the Allianz Group continues to record the derivative financial instrument at its fair value and any net unrealized gains and losses accumulated in shareholders’ equity are recognized when the planned transaction occurs. When 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.

 

Derivative financial instruments are netted when there is a legally enforceable right to offset and when the Allianz Group intends to settle on a net basis.

 

Cash and cash equivalents

 

Cash and cash equivalents include balances with banks payable on demand, balances with central banks, checks and cash on hand, treasury bills to the extent they are not included in financial assets held for trading, and bills of exchange which are eligible for refinancing at central banks, subject to a maximum term of six months from the date of acquisition.

 

Reinsurance

 

Premiums ceded for reinsurance and reinsurance recoveries on benefits and claims incurred are deducted from premiums earned and insurance and investment contract benefits. Assets and liabilities related to reinsurance are reported on a gross basis. Amounts ceded to reinsurers from reserves for insurance and investment contracts are estimated in a manner consistent with the claim liability associated with the reinsured risks. Accordingly, revenues and expenses related to reinsurance agreements are recognized consistent with the underlying risk of the business reinsured.

 

Income taxes

 

Income tax expense consists of the taxes actually charged to the individual Allianz Group subsidiaries and changes in deferred tax assets and liabilities.

 

The calculation of deferred tax is based on temporary differences between the Allianz Group’s

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

carrying amounts of assets or liabilities in its consolidated balance sheet and their tax bases. The tax rates used for the calculation of deferred taxes are the local rates applicable in the countries concerned; changes to tax rates already adopted prior to or as of the consolidated balance sheet date are taken into account. Deferred tax assets are recognized if sufficient future taxable income is available for realization.

 

Other assets

 

Other assets, amongst others, consist of real estate owned by the Allianz Group and used for its own activities, equipment, accounts receivable, deferred policy acquisition costs, deferred sales inducements, prepaid expenses and miscellaneous assets.

 

Real estate owned by the Allianz Group used for its own activities (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, while improvements if they extend the useful life or increase the value of the asset are capitalized. An impairment is recognized when the recoverable amount of these assets is less than their carrying amount.

 

Real estate used by the Allianz Group is to be accounted for as corporate assets within a cash-generating unit (CGU). An impairment loss is recognized if the recoverable amount of the CGU is less than the carrying amount of the CGU.

 

Equipment is carried at cost less accumulated depreciation and impairments. Depreciation is generally computed using the straight-line method over the estimated useful lives of the assets. The estimated useful life of equipment ranges from 2 to 10 years, except for purchased information technology equipment, which is 2 to 8 years.

 

Receivables are recorded at face value less any payments received, net of appropriate valuation allowances.

 

Deferred policy acquisition costs generally consist of commissions, underwriting expenses and policy issuance costs, which vary with and are directly related to the acquisition and renewal of insurance contracts. These acquisition costs are deferred, to the extent they are recoverable, and amortized over the life of the related contracts.

 

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.

 

Sales inducements on insurance contracts that meet the following criteria are deferred and amortized using the same methodology and assumptions used to amortize deferred policy acquisition costs:

 

    recognized as part of reserves for insurance and investment contracts,

 

    explicitly identified in the contract at inception,

 

    incremental to amounts the Allianz Group credits on similar contracts without sales inducements, and

 

    higher than the contract’s expected ongoing crediting rates for periods after the inducement.

 

Asset securitizations

 

The Allianz Group transfers financial assets to certain SPEs in revolving securitizations of commercial mortgage or other loan portfolios. The Allianz Group consolidates these SPEs as the Allianz Group continues to control the financial assets transferred and retains the servicing of such loans.

 

Leases

 

Payments made under operating leases to the lessor are charged to administrative expenses using the straight-line method over the period of the lease. When an operating lease is terminated before the lease period has expired, any penalty is recognized in full as an expense at the time when such termination takes place.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Supplementary information on the Allianz Group’s shareholders’ equity and liabilities

 

Shareholders’ equity

 

Paid-in capital includes issued capital and capital reserves. Issued capital represents the mathematical per share value received from the issuance of shares. Capital reserves represent the premium, or additional paid in capital, received from the issuance of shares.

 

Revenue reserves include the retained earnings of the Allianz Group and treasury shares. Treasury shares are deducted from shareholders’ equity at cost. Upon disposal any difference between proceeds and costs is recorded in revenue reserves, net of any applicable taxes.

 

Any 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.

 

Unrealized gains and losses include unrealized gains and losses from securities available-for-sale and derivative financial instruments used for hedge purposes that meet the criteria for hedge accounting, including cash flow hedges and hedges of a net investment in a foreign entity.

 

Minority interests in shareholders’ equity represent the proportion of shareholders’ equity that is attributable to minority shareholders.

 

Comprehensive income is defined as the change in shareholders’ equity of the Allianz Group excluding transactions with shareholders such as the issuance of common or preferred shares, payment of dividends and purchase of treasury shares. Comprehensive income has two major components: net income and other comprehensive income. Other comprehensive income includes such items as unrealized gains and losses on foreign currency translation, securities available-for-sale, and gains and losses on derivatives involved in cash flow hedges and hedges of a net investment in a foreign entity, net of applicable deferred income taxes. It also includes, where applicable, adjustments to insurance policyholder liabilities, PVFP and deferred policy acquisition costs.

 

Certificated liabilities, participation certificates and subordinated liabilities

 

Certificated liabilities, participation certificates and subordinated liabilities are initially recorded at cost, which is the fair value of the consideration received, net of transaction costs incurred. Subsequent measurement is at amortized cost, using the effective interest method to amortize the premium or discount to the redemption value over the life of the liability.

 

Reserves for insurance and investment contracts

 

Reserves for insurance and investment contracts include unearned premiums, aggregate policy reserves, reserves for loss and loss adjustment expenses, the reserve for premium refunds, premium deficiency reserves and other insurance reserves.

 

Contracts issued by insurance subsidiaries of the Allianz Group are classified according to IFRS 4 as insurance or investment contracts. Contracts under which the Allianz Group accepts significant insurance risk from a policyholder are classified as insurance contracts. Contracts under which the Allianz Group does not accept significant insurance risk are classified as investment contracts. Certain insurance and investment contracts include discretionary participation features. All insurance contracts and investment contracts with discretionary participating features are accounted for under the provisions of US GAAP, including SFAS 60, SFAS 97 and SFAS 120.

 

For short-duration insurance contracts, such as property-casualty contracts, in accordance with SFAS 60, premiums written to be earned in future years, are recorded as unearned premiums. These premiums are earned in subsequent years in relation to the insurance coverage provided. Unearned premiums for reinsurance business assumed are generally based on the calculations of the cedent. Deferred policy acquisition costs for short-duration insurance contracts are amortized over the periods in which the related premiums are earned.

 

The aggregate policy reserves for long-duration insurance contracts, such as traditional life and health products, are computed in accordance with SFAS 60 using the net level premium method, which

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

represents the present value of estimated future policy benefits to be paid less the present value of estimated future net premiums to be collected from policyholders. The method uses best estimate assumptions adjusted for a provision for adverse deviation for mortality, morbidity, expected investment yields, surrenders and expenses at the policy inception date, which remain locked-in thereafter. Deferred policy acquisition costs and PVFP for traditional life and health products are amortized over the premium paying period of the related policies in proportion to the earned premium using assumptions consistent with those used in computing the aggregate policy 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. Deferred policy acquisition costs and PVFP for traditional participating products are amortized over the expected life of the contracts in proportion to estimated gross margins (“EGMs”) based upon historical and anticipated future experience, which is determined on a best estimate basis and evaluated regularly. The present value of EGMs is computed using the expected investment yield. EGMs include premiums, investment income including realized gains and losses, insurance benefits, administration costs, changes in the aggregate reserves and policyholder dividends. The effect of changes in EGMs are recognized in net income in the period revised.

 

The aggregate policy reserves for universal life-type insurance contracts and unit linked insurance contracts in accordance with SFAS 97 is equal to the account balance, which represents premiums received and investment return credited to the policy less deductions for mortality costs and expense charges. Deferred policy acquisition costs and PVFP for universal life-type and investment contracts are amortized over the expected life of the contracts in proportion to estimated gross profits (“EGPs”) based upon historical and anticipated future experience, which is determined on a best estimate basis and evaluated regularly. The present value of EGPs is computed using the interest rate that accrues to the policyholders, or the credited rate. EGPs include margins from mortality, administration, investment income including realized gains and losses and surrender charges. The effect of changes in EGPs are recognized in net income in the period revised.

 

Current and historical client data, as well as industry data, are used to determine the assumptions. Assumptions for interest reflect expected earnings on assets, which back the future policyholder benefits. The information used by the Allianz Group’s qualified actuaries in setting such assumptions includes, but is not limited to, pricing assumptions, available experience studies, and profitability analyses.

 

The interest rate assumptions used in the calculation of aggregate policy reserves were as follows:

 

   

Long-

duration
insurance
contracts
(SFAS 60)


    Traditional
participating
insurance
contracts
(SFAS 120)


 

Aggregate policy reserves

  2.5 – 7 %   3 – 4 %

Deferred acquisition costs

  5 – 7 %   5 – 6 %

 

In connection with the adoption of SOP 03-1 effective January 1, 2004, insurance reserves include liabilities for guaranteed minimum death and similar mortality and morbidity benefits related to non-traditional contracts, annuitization options, and sales inducements. These liabilities are calculated based on contractual obligations using actuarial assumptions. Contractually agreed sales inducements to contract holders include persistency bonuses and are accrued over the period in which the insurance contract must remain in force to qualify for the inducement.

 

The aggregate policy reserves for unit linked investment contracts is equal to the account balance, which represents premiums received and investment return credited to the policy less deductions for mortality costs and expense charges. The aggregate policy reserves for non unit linked investment contracts is equal to amortized cost, or account balance less deferred policy acquisition costs. Deferred policy acquisition costs and PVFP for unit linked and non unit linked investment contracts are amortized over the expected life of the contracts in proportion to revenues.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Reserves for loss and loss adjustment expenses are established for the payment of losses and loss adjustment expenses (“LAE”) on claims which have occurred but are not yet settled. Reserves for loss and loss adjustment expenses fall into two categories: case reserves for reported claims and reserves for incurred but not reported reserves (“IBNR”).

 

Case reserves for reported claims are based on estimates of future payments that will be made in respect of claims, including LAE relating to such claims. Such estimates are made on a case-by-case basis, based on the facts and circumstances available at the time the reserves are established. The estimates reflect the informed judgment of claims personnel based on general insurance reserving practices and knowledge of the nature and value of a specific type of claim. These case reserves are regularly re-evaluated in the ordinary course of the settlement process and adjustments are made as new information becomes available.

 

IBNR reserves are established to recognize the estimated cost of losses that have occurred but where the Allianz Group has not yet been notified. IBNR reserves, similar to case reserves for reported claims, are established to recognize the estimated costs, including expenses, necessary to bring claims to final settlement. Since nothing is known about the occurrence, the Allianz Group relies on its past experience, adjusted for current trends and any other relevant factors. IBNR reserves are estimates based on actuarial and statistical projections of the expected cost of the ultimate settlement and administration of claims. The analyses are based on facts and circumstances known at the time, predictions of future events, estimates of future inflation and other societal and economic factors. Trends on claim frequency, severity and time lag in reporting are examples of factors used in projecting the IBNR reserves. IBNR reserves are reviewed and revised periodically as additional information becomes available and actual claims are reported.

 

The process of estimating loss and LAE reserves is by nature uncertain due to the large number of variables affecting the ultimate amount of claims. Some of these variables are internal, such as changes in claims handling procedures, introduction of new IT systems or company acquisitions and divestitures. Others are external, such as inflation, judicial trends, and legislative changes. The Allianz Group attempts to reduce the uncertainty in reserve estimates through the use of multiple actuarial and reserving techniques and analysis of the assumptions underlying each technique.

 

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 are becoming generally known very slowly and are still evolving. 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 current reserves for loss and loss adjustment expenses for asbestos claims in the United States reflect loss developments since the most recent external independent actuarial report which was completed during the year ended December 31, 2005.

 

The 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 IFRS 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 in connection with the valuation of securities available-for-sale 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. Any dividends allocated or disbursed over and above the reserve are recorded in other expenses.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Methods and corresponding percentages for participation in profits by the policyholders are set out below for the most significant countries for latent reserves:

 

Country


 

Base


   Percentage

 

Germany

          

Life

  all sources of Profit    90 %

Health

  all sources of Profit    80 %

France

          

Life

  investments    80 %

Italy

          

Life

  investments    85 %

Switzerland

          

Group Life

  all sources of Profit    90 %

Individual Life

  all sources of Profit    100 %

 

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 insurance reserves include experience-rated and other premium refunds in favor of policyholders.

 

Liabilities to banks and customers

 

Liabilities to banks and customers include repurchase (“repo”) transactions and securities lending transactions. Repo transactions involve the sale of securities by the Allianz Group to a counter-party, 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 recognized as assets and are recorded in accordance with the accounting principles for financial assets held for trading or investments. The proceeds of the sale are reported under liabilities to banks or liabilities to customers. Interest expenses from repo transactions are accrued over the durations 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 liabilities to customers. Fees received are recognized as interest income.

 

Financial liabilities carried at fair value through income

 

Financial liabilities carried at fair value through income include financial liabilities held for trading, financial liabilities for unit linked contracts, liabilities for puttable equity instruments and financial liabilities designated at fair value through income.

 

Financial liabilities held for trading primarily include derivative financial instruments that do not meet the criteria for hedge accounting with negative fair values and obligations to deliver assets arising from short sales of securities, which are carried out in order to benefit from short-term price fluctuations. The securities required to close out short sales are obtained through securities borrowing or reverse repurchase agreements. These liabilities are valued the same as financial assets held for trading.

 

Financial liabilities for unit linked contracts and financial liabilities designated at fair value through income are recorded at fair value with changes recorded together with the changes in the corresponding financial assets in net income.

 

Liabilities for puttable financial 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. As the redemption amount of these liabilities

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

is their fair value, these liabilities are included in financial liabilities carried at fair value through income as liabilities for puttable equity instruments.

 

Other accrued liabilities

 

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 21. The census date for the primary pension plans is October or November, with any significant changes through December 31, taken into account.

 

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 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.

 

Accrued taxes are calculated in accordance with relevant local tax regulations.

 

Miscellaneous accrued liabilities primarily include provisions for restructuring, anticipated losses arising from non-insurance business, litigation, employees (e.g., early retirement, phased retirement, employee awards for long service, vacation and cash settled share compensation plans) and agents (e.g., unpaid commissions).

 

Provisions for restructuring are recognized when the Allianz Group has a detailed formal plan for the restructuring and has started to implement the plan or has communicated its main features. The detailed formal plan includes the business concerned, approximate number of employees who will be compensated for terminating their services, the expenses to be incurred and the time period over which the plan will be implemented. The detailed plan must be communicated such that those affected have an expectation that the plan will be implemented.

 

Other liabilities

 

Other liabilities include funds held under reinsurance business ceded, accounts payable on direct insurance business, accounts payable on reinsurance business, and miscellaneous liabilities. These liabilities are reported at redemption value.

 

Supplementary information on the Allianz Group’s income statement

 

Premiums

 

Property-casualty insurance premiums are recognized as revenues over the period of the contract in proportion to the amount of insurance protection provided. Unearned premiums are calculated separately for each individual policy to cover the unexpired portion of written premiums.

 

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. Unearned premiums are calculated separately for each individual policy to cover the unexpired portion of written premiums.

 

Life insurance premiums from traditional life insurance policies are recognized as earned when due. Premiums from short-duration life insurance policies are recognized as revenues over the period of the contract in proportion to the amount of insurance protection provided. Unearned premiums are calculated separately for each individual policy to cover the unexpired portion of written premiums. Benefits are recognized when incurred.

 

Revenues for universal life-type and investment contracts, such as universal life and variable annuity contracts, represent charges assessed against the policyholders’ account balances for the cost of insurance, surrenders and policy administration and are included within premiums earned (net). Benefits charged to expense include benefit claims incurred during the period in excess of policy account balances and interest credited to policy account balances.

 

F-17


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Interest and similar income/expense

 

Interest income and interest expense are recognized on an accrual basis. Interest income from lending business is recognized using the effective interest method. This line item also includes dividends from available-for-sale equity securities and interest recognized on finance leases. Dividends are recognized in income when declared. Interest on finance leases is recognized in income over the term of the respective lease so a constant period yield based on the net investment is attained.

 

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 principally comprises 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.

 

Income from investments in associated enterprises and joint ventures (net)

 

Income from investments in associated enterprises and joint ventures includes dividends from equity securities and the share of net income from enterprises accounted for using the equity method. Dividends are recognized in income when received. Further, realized gains and losses from the disposal of subsidiaries are included in income from investments in associated enterprises and joint ventures. Income from investments in associated enterprises and joint ventures is presented net of related expenses.

 

Fee and commission income and expenses

 

In addition to traditional commission income received on security transactions, fee and commission income in the securities business also includes commissions received in relation to private placements, syndicated loans and financial advisory services. Other fees reflect commissions received for trust and custody services, for the brokerage of insurance policies, credit cards, home loans, savings contracts and real estate. Fee and commission income is recognized in Allianz Group’s Banking segment when the corresponding service is provided.

 

Assets and liabilities held in trust by the Allianz Group in its own name, but for the account of third parties, are not reported in its consolidated balance sheet. Commissions received from such business are shown in fee and commission income.

 

Investment advisory fees are recognized as the services are performed. Such fees are primarily based on percentages of the market value of the assets under management. Investment advisory fees receivable for private accounts consist primarily of accounts billed on a quarterly basis. Private accounts may also generate a fee based on investment performance, which are recognized at the end of the respective contract period if the prescribed performance hurdles have been achieved.

 

Distribution and servicing fees are recognized as the services are performed. Such fees are primarily based on percentages of the market value of assets under management.

 

Administration fees are recognized as the services are performed. Such fees are primarily based on percentages of the market value of assets under management.

 

Other supplementary information

 

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. Further, 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. If the shares issued are redeemable, either mandatorily or at the counter-party’s option, the share based compensation

 

F-18


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

plan is required to be classified as a cash settled plan by the Allianz Group. In this respect, IFRS 2 has incorporated the “puttable instrument” concept of IAS 32 revised, which requires such instruments to be classified as liabilities rather than equity instruments.

 

Reclassifications

 

For reasons of comparability with the current reporting year, some prior-year amounts were adjusted in the consolidated balance sheet and the consolidated income statements through reclassifications that do not affect net income or shareholders’ equity.

 

3    Recently adopted and issued accounting pronouncements

 

Recently adopted accounting pronouncements with retrospective application (effective January 1, 2005)

 

IAS 1 revised

 

Effective January 1, 2005, the Allianz Group adopted IAS 1 revised, Presentation of Financial Statements (“IAS 1 revised”). The adoption of IAS 1 required that the Allianz Group reclassify minority interests in shareholders’ equity as equity. Therefore, minority interests in shareholders’ equity were reclassified from liabilities into shareholders’ equity in the consolidated balance sheet and consolidated statement of changes in shareholders’ equity.

 

IAS 1 revised required retrospective application of this change to the Allianz Group’s accounting policy; therefore, the Allianz Group’s consolidated financial statements for the years ended December 31, 2004 and 2003 were adjusted to include the effect of this change.

 

IAS 32 revised and IAS 39 revised

 

Effective January 1, 2005, the Allianz Group adopted IAS 32 revised, Financial Instruments: Disclosure and Presentation (“IAS 32 revised”) and IAS 39 revised, Financial Instruments: Recognition and Measurement (“IAS 39 revised”).

 

Impairments

 

The adoption of IAS 39 revised required several changes to the Allianz Group’s accounting policies for the recognition of impairments of available-for-sale equity securities. In accordance with IAS 39 revised, if there is objective evidence that the cost may not be recovered, an available-for sale equity security is considered to be impaired. Objective evidence that the cost may not be recovered, in addition to qualitative impairment criteria, includes a significant or prolonged decline in the fair value below cost. Previously under IFRS, objective evidence that the cost may not be recovered included a significant and prolonged decline in the fair value below cost. As a result, the Allianz Group established new quantitative impairment criteria to define a significant or prolonged decline. The Allianz Group established a policy that an available-for-sale equity security is considered impaired if the fair value is below the weighted-average cost by more than 20% or if the fair value is below the weighted-average cost for greater than nine months, to define the significant criteria and the prolonged criteria, respectively. This policy is applied individually by all subsidiaries.

 

In addition, IAS 39 revised does not allow an adjusted cost basis to be established upon impairment of an available-for-sale equity security. Therefore, if an available-for-sale equity security is impaired based upon the Allianz Group’s qualitative or quantitative impairment criteria, any further declines in fair values at subsequent reporting dates are recognized as impairments. Previously, IFRS allowed an adjusted cost basis to be established upon the recognition of an impairment of an available-for-sale equity. Therefore, at each reporting period, if the fair value was less than the adjusted cost basis, the available-for-sale equity security was analyzed for impairment based upon the Allianz Group’s qualitative or quantitative impairment criteria.

 

Finally, IAS 39 revised does not allow reversals of an impairment of available-for-sale equity securities. Previously, IFRS required that if an impairment of an available-for-sale equity security decreases, the impairment was reversed.

 

IAS 39 required retrospective application of these changes to the Allianz Group’s accounting policies; therefore, the Allianz Group’s consolidated financial statements for the years ended December 31, 2004 and 2003 were adjusted to include the effects of these changes.

 

F-19


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Loans and receivables

 

The adoption of IAS 39 revised allowed a change to the Allianz Group’s accounting policy for non-quoted financial assets to qualify for accounting as “loans and receivables”. For non-quoted financial assets to qualify for accounting as “loans and receivables”, IAS 39 revised does not require that the financial asset is originated by the Allianz Group. Previously, IFRS required that a financial asset is originated by the Allianz Group to qualify for similar accounting. Non-quoted financial assets which qualify for this accounting, and are classified by the Allianz Group, as “loans and receivables”, are measured at amortized cost using the effective interest method. In addition, IAS 39 revised does not include prohibitions for disposing of “loans and receivables”, dissimilar to financial assets classified as held-to-maturity debt securities.

 

As a result of the adoption of IAS 39 revised, the Allianz Group reclassified certain available-for-sale debt securities to loans and advances to banks and loans and advances to customers. IAS 39 revised required retrospective application of this change to the Allianz Group’s accounting policies; therefore, the Allianz Group’s consolidated financial statements for the years ended December 31, 2004 and 2003 were adjusted to include the effect of this change.

 

Financial assets and liabilities designated at fair value through income

 

IAS 39 revised created a new category, “designated at fair value through income”, for financial assets and liabilities. Financial assets and liabilities designated at fair value through income are measured at fair value with changes recognized in net income. In June 2005, the IASB issued an amendment to IAS 39 revised, which adjusted the qualifications for classification as “designated at fair value through income” as a result of concerns of the EU. The EU endorsed this amendment in November 2005. The Allianz Group has adopted the amendment to IAS 39 revised related to financial assets and liabilities designated at fair value through income.

 

As a result of the adoption of IAS 39 revised, the Allianz Group reclassified certain available-for-sale securities to financial assets designated at fair value through income as a result of the change as described in the following paragraph regarding adoption of IAS 32 revised. In addition, the Allianz Group reclassified the financial assets and liabilities related to its unit linked insurance and investment contracts to financial assets designated at fair value through income and financial liabilities designated at fair value through income, respectively.

 

As a result of the adoption IAS 32 revised, a financial instrument qualifies as a financial liability of the Allianz Group, if it gives the holder the right to put the instrument back to the Allianz Group for cash or another financial asset (a “puttable instrument”). The classification as a financial liability is independent of considerations such as when the right is exercisable, how the amount payable or receivable upon exercise of the right is determined, and whether the puttable instrument has a fixed maturity. As a result of the adoption of IAS 32 revised, the Allianz Group was required to reclassify the minority interests in shareholders’ equity of certain consolidated investment funds to liabilities. These liabilities are required to be recorded at redemption amounts with changes recognized in net income. As the redemption amount of these liabilities is their fair value, these liabilities are included in financial liabilities carried at fair value through income as liabilities for puttable equity instruments.

 

IAS 39 revised and IAS 32 revised required retrospective application of these changes to the Allianz Group’s accounting policies; therefore, the Allianz Group’s consolidated financial statements for the years ended December 31, 2004 and 2003 were adjusted to include the effects of these changes.

 

IFRS 4

 

Effective January 1, 2005, the Allianz Group adopted IFRS 4, Insurance Contracts (“IFRS 4”). IFRS 4 represents the completion of phase I and is a transitional standard until the IASB has more fully addressed the recognition and measurement of insurance contracts. IFRS 4 requires that all contracts issued by insurance companies be classified as either insurance contracts or investment contracts. Contracts with significant insurance risk are considered insurance contracts. IFRS 4 permits a company to continue with its previously adopted

 

F-20


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

accounting policies with regard to recognition and measurement of insurance contracts. Only in the case of presentation of more reliable figures should a change in accounting policy be carried out. As a result, the Allianz Group principally continues to apply the provisions of US GAAP for the recognition and measurement of insurance contracts. Contracts issued by insurance companies without significant insurance risk are considered investment contracts. Investment contracts are accounted for in accordance with IAS 39 revised. As a result of the adoption of IFRS 4, certain contracts were reclassified as investment contracts.

 

In addition, IFRS 4 contains specific guidance for contracts with discretionary participation features. As a result of this guidance, the Allianz Group recorded additional liabilities for its individual life insurance business in Switzerland.

 

IFRS 4 required retrospective application of these changes to the Allianz Group’s accounting policies; therefore, the Allianz Group’s consolidated financial statements for the years ended December 31, 2004 and 2003 were adjusted to include the effects of these changes.

 

IFRS 2

 

Effective January 1, 2005, the Allianz Group adopted IFRS 2, Share Based Payments (“IFRS 2”). In accordance with IFRS 2, 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. 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. If the shares issued are redeemable, either mandatorily or at the counter-party’s option, the share based compensation plan is required to be classified as a cash settled plan by the Allianz Group. In this respect, IFRS 2 has incorporated the “puttable instrument” concept of IAS 32 revised, which requires such instruments to be classified as liabilities rather than equity instruments. As a result of the adoption of IFRS 2, the PIMCO LLC Class B Unit Purchase Plan (“Class B Plan”) is considered a cash settled plan as the equity instruments issued are puttable at the holder’s option. Before IFRS 2 was introduced by the IASB, no IFRS covered the accounting for share-based compensation plans. Therefore the Allianz Group applied previously appropriate US GAAP standards, which required, that the Class B Plan be classified as an equity settled plan.

 

Further, IFRS 2 requires that 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. Previously, the Allianz Group’s accounting policy required that forfeitures of equity instruments be recognized when incurred.

 

IFRS 2 revised required retrospective application of these changes to the Allianz Group’s accounting policies; therefore, the Allianz Group’s consolidated financial statements for the years ended December 31, 2004 and 2003 were adjusted to include the effects of these changes.

 

F-21


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Impact on the Allianz Group’s consolidated financial statements

 

The impact of these recently adopted accounting principles on the Allianz Group’s consolidated financial statements is presented on the following pages.

 

Impact of recently adopted accounting standards on the consolidated

balance sheet as of December 31, 2004:

 

        IAS 32 revised and IAS 39 revised

                 
    Balance as of
12/31/2004
as previously
reported


  Impairments

    Loans and
receivables


    Financial
assets and
liabilities
designated
at fair
value


    IFRS 4

    IFRS 2

   

Balance

as of
12/31/2004


    € mn   € mn     € mn     € mn     € mn     € mn     € mn

ASSETS

                                     

Intangible assets

  15,147   —       —       —       —       —       15,147

Investments in associated enterprises and joint ventures

  5,832   —       (75 )   —       —       —       5,757

Investments

  319,552   —       (66,504 )   (4,721 )   —       —       248,327

Separate account assets

  15,851   —       —       (15,851 )   —       —       —  

Loans and advances to banks

  126,618   —       54,925     —       —       —       181,543

Loans and advances to customers

  188,168   —       7,512     —       —       —       195,680

Financial assets carried at fair value through income

  220,001   —       —       20,573     —       —       240,574

Cash and cash equivalents

  15,628   —       —       —       —       —       15,628

Amounts ceded to reinsurers from insurance reserves

  22,310   —       —       —       —       —       22,310

Deferred tax assets

  13,809   151     (4 )   29     —       154     14,139

Other assets

  51,782   (19 )   —       —       —       (550 )   51,213
   
 

 

 

 

 

 

Total assets

  994,698   132     (4,146 )   30     —       (396 )   990,318
   
 

 

 

 

 

 

SHAREHOLDERS’ EQUITY AND LIABILITIES

                                     

Shareholders’ equity before minority interests

  30,828   —       (543 )   (33 )   (8 )   (249 )   29,995

Minority interests in shareholders’ equity

  9,531   —       (30 )   (1,389 )   (6 )   (410 )   7,696

Shareholders’ equity

  40,359   —       (573 )   (1,422 )   (14 )   (659 )   37,691

Participation certificates and subordinated liabilities

  13,230   —       —       —       —       —       13,230

Reserves for insurance and investment contracts

  355,195   —       (3,290 )   (25,560 )   35     —       326,380

Separate account liabilities

  15,848   —       —       (15,848 )   —       —       —  

Liabilities to banks

  191,354   —       —       (7 )   —       —       191,347

Liabilities to customers

  157,274   —       —       (137 )   —       —       157,137

Certificated liabilities

  57,771   —       —       (19 )   —       —       57,752

Financial liabilities carried at fair value through income

  102,141   —       —       42,996     —       —       145,137

Other accrued liabilities

  13,168   —       —       —       —       816     13,984

Other liabilities

  31,833   (10 )   —       1     —       (553 )   31,271

Deferred tax liabilities

  14,486   142     (283 )   26     (21 )   —       14,350

Deferred income

  2,039   —       —       —       —       —       2,039
   
 

 

 

 

 

 

Total shareholders’ equity and liabilities

  994,698   132     (4,146 )   30     —       (396 )   990,318
   
 

 

 

 

 

 

 

F-22


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Impact of recently adopted accounting standards and reclassifications on the

consolidated income statement for the year ended December 31, 2004:

 

          IAS 32 revised and IAS 39 revised

                         
    Balance as of
12/31/2004
as previously
reported


    Impairments

    Loans and
receivables


    Financial
assets and
liabilities
designated
at fair
value


    IFRS 4

    IFRS 2

    Reclassifications

   

Balance

as of
12/31/2004


 
    € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn  

Premiums earned (net)

  56,789     —       —       —       —       —       —       56,789  

Interest and similar income

  21,053     —       —       (97 )   —       —       —       20,956  

Income from investments in associated enterprises and joint ventures (net)

  777     —       —       —       —       —       —       777  

Other income from investments

  4,816     519     6     (162 )   —       —       —       5,179  

Income from financial assets and liabilities carried at fair value through income (net)

  2,813     —       —       (1,155 )   —       —       —       1,658  

Fee and commission income, and income from service activities

  6,823     —       —       —       —       —       —       6,823  

Other income

  2,556     —       (5 )   —       —       (18 )   —       2,533  
   

 

 

 

 

 

 

 

Total income

  95,627     519     1     (1,414 )   —       (18 )   —       94,715  
   

 

 

 

 

 

 

 

Insurance and investment contract benefits (net)

  (53,326 )   (105 )   —       1,213     (37 )   —       —       (52,255 )

Interest and similar expenses

  (5,437 )   —       —       44     —       —       (310 )   (5,703 )

Other expenses from investments

  (2,745 )   (77 )   51     99     —       —       —       (2,672 )

Loan loss provisions

  (354 )   —       —       —       —       —       —       (354 )

Acquisition costs and administrative expenses (net)

  (22,240 )   —       —       —       —       (311 )   (829 )   (23,380 )

Amortization of goodwill

  (1,164 )   —       —       —       —       —       —       (1,164 )

Other expenses

  (5,178 )   —       (52 )   —       —       —       1,139     (4,091 )
   

 

 

 

 

 

 

 

Total expenses

  (90,444 )   (182 )   (1 )   1,356     (37 )   (311 )   —       (89,619 )
   

 

 

 

 

 

 

 

Earnings from ordinary activities before taxes

  5,183     337     —       (58 )   (37 )   (329 )   —       5,096  
   

 

 

 

 

 

 

 

Taxes

  (1,727 )   (55 )   —       22     11     87     —       (1,662 )

Minority interests in earnings

  (1,257 )   (67 )   —       30     7     119     —       (1,168 )
   

 

 

 

 

 

 

 

Net income

  2,199     215     —       (6 )   (19 )   (123 )   —       2,266  
   

 

 

 

 

 

 

 

 

F-23


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Impact of recently adopted accounting standards and reclassifications on the

consolidated income statement for the year ended December 31, 2003:

 

          IAS 32 revised and IAS 39 revised

                         
    Balance as of
12/31/2003
as previously
reported


    Impairments

    Loans and
receivables


    Financial
assets and
liabilities
designated
at fair
value


    IFRS 4

    IFRS 2

    Reclassifications

   

Balance

as of
12/31/2003


 
    € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn  

Premiums earned (net)

  55,978     —       —       —       —       —       —       55,978  

Interest and similar income

  22,592     —       —       (82 )   —       —       —       22,510  

Income from investments in associated enterprises and joint ventures (net)

  3,030     (16 )   —       —       —       —       —       3,014  

Other income from investments

  10,002     790     (53 )   (249 )   —       —       —       10,490  

Income from financial assets and liabilities carried at fair value through income (net)

  243     —       —       276     —       —       —       519  

Fee and commission income, and income from service activities

  6,060     —       —       —       —       —       —       6,060  

Other income

  3,750     —       53     —       —       —       —       3,803  
   

 

 

 

 

 

 

 

Total income

  101,655     774     —       (55 )   —       —       —       102,374  
   

 

 

 

 

 

 

 

Insurance and investment contract benefits (net)

  (50,432 )   (1,677 )   —       (141 )   10     —       —       (52,240 )

Interest and similar expenses

  (6,561 )   —       —       —       —       —       (310 )   (6,871 )

Other expenses from investments

  (9,848 )   2,012     26     358     —       —       —       (7,452 )

Loan loss provisions

  (1,027 )   —       —       —       —       —       —       (1,027 )

Acquisition costs and administrative expenses (net)

  (22,117 )   —       —       —       —       (276 )   (524 )   (22,917 )

Amortization of goodwill

  (1,413 )   —       —       —       —       —       —       (1,413 )

Other expenses

  (7,396 )   —       (26 )   —       —       —       834     (6,588 )
   

 

 

 

 

 

 

 

Total expenses

  (98,794 )   335     —       217     10     (276 )   —       (98,508 )
   

 

 

 

 

 

 

 

Earnings from ordinary activities before taxes

  2,861     1,109     —       162     10     (276 )   —       3,866  
   

 

 

 

 

 

 

 

Taxes

  (146 )   (109 )   —       (58 )   (1 )   65     —       (249 )

Minority interests in earnings

  (825 )   (98 )   —       (91 )   (3 )   91     —       (926 )
   

 

 

 

 

 

 

 

Net income

  1,890     902     —       13     6     (120 )   —       2,691  
   

 

 

 

 

 

 

 

 

F-24


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Impact of recently adopted accounting standards on shareholders’ equity

as of December 31, 2002:

 

     Balance as of
12/31/2002, as
previously reported


    Impairments

    Loans and
receivables


    IFRS 4

    IFRS 2

   

Balance

as of
12/31/2002


 
     € mn     € mn     € mn     € mn     € mn     € mn  

Paid-in capital

   14,785     —       —       —       —       14,785  

Revenue reserves

   5,914     (3,270 )   —       16     (52 )   2,608  

Foreign currency translation adjustments

   (342 )   —       —       —       27     (315 )

Unrealized gains and losses (net)

   1,317     3,270     (609 )   (10 )   —       3,968  
    

 

 

 

 

 

Shareholders’ equity before minority interests

   21,674     —       (609 )   6     (25 )   21,046  

Minority interests in share-holders’ equity

   8,314     —       (26 )   2     (325 )   7,965  
    

 

 

 

 

 

Total

   29,988     —       (635 )   8     (350 )   29,011  
    

 

 

 

 

 

 

Recently adopted accounting pronouncements with prospective application (effective January 1, 2005)

 

IFRS 3

 

Effective January 1, 2005, the Allianz Group adopted IFRS 3, Business Combinations (“IFRS 3”). In accordance with IFRS 3, the Allianz Group is no longer required to amortize of goodwill and intangible assets with an indefinite life. Instead, the Allianz Group is required to perform impairment tests on an annual basis in addition to whenever there is an indication that the carrying amount is not recoverable. As a result of the adoption on IFRS 3 on January 1, 2005, the Allianz Group ceased amortization of goodwill and brand names.

 

Further, the Allianz Group revised its accounting policy for accounting for the acquisition of a minority interest in shareholders’ equity for subsidiaries, companies under control, of the Allianz Group. IFRS 3 does not specifically address these transactions, as the scope of IFRS 3 is limited to accounting for acquisitions in which the Allianz Group obtains control over a company. Therefore, as a result of the adoption of IAS 1 as noted above, the Allianz Group has adopted an accounting policy to treat these acquisitions as transactions between equity holders. Therefore, the acquisition of a minority interest in shareholders’ equity does not result in an allocation of the acquisition cost to the respective fair value of the assets and liabilities acquired. Rather, the excess of the acquisition cost over the Allianz Group’s carrying amount of the minority interest in shareholders’ equity is recognized as a reduction of equity. Similarly, the excess of the Allianz Group’s carrying amount of the minority interest in shareholders’ equity over acquisition cost is recognized as an increase of equity. The Allianz Group has applied this accounting policy to any acquisition of a minority interest in shareholders’ equity on or after January 1, 2005.

 

IFRS 5

 

Effective January 1, 2005, the Allianz Group adopted IFRS 5, Non-current Assets Held for Sale and Discontinued Operations (“IFRS 5”). In accordance with IFRS 5, a non-current asset or a disposal group is classified as held for sale if its carrying amount will be recovered principally through sale rather than through continuing use. On the date a non-current asset or disposal group meet the criteria as held for sale, it is measured at the lower of its carrying amount and fair value less costs to sell. If the carrying amount is greater than the fair value less costs to sell, a loss is recognized. If the fair value less costs to sell is greater than carrying amount, the gain is recognized upon derecognition of the non-current asset or disposal group.

 

In addition, IFRS 5 requires that income from discontinued operations be presented separately from income from continuing operations. A discontinued operation is a component of an entity that either has or will be disposed of or is classified as held for sale

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

and: represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale.

 

A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.

 

If a component of an entity qualifies as a discontinued operation, the Allianz Group will present a single amount on its consolidated statements of income for the net income of the discontinued operation, including any gain or loss from the disposal of a non-current asset or a disposal group, for all periods presented.

 

Recently adopted accounting pronouncement (effective before January 1, 2005)

 

SOP 03-1

 

Effective January 1, 2004, the Allianz Group adopted American Institute of Certified Public Accountants (“AICPA”) Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for certain Nontraditional Long-Duration Contracts and for Separate Accounts (“SOP 03-1”). The most significant accounting implications of SOP 03-1 for the Allianz Group are as follows:

 

    capitalizing sales inducements that meet specified criteria and amortizing such amounts over the life of the contracts using the same methodology as used for amortizing deferred policy acquisition costs, and immediately expensing those sales inducements not meeting such criteria,

 

    recognizing a liability for guaranteed minimum death and similar mortality and morbidity benefits only for contracts determined to incorporate mortality and morbidity risk that is other than nominal and when the risk charges made for a period are not proportionate to the risk borne for the period,

 

    for contracts containing an annuitization benefit option contract feature, an additional liability is established, if a provision for such a contract feature is not required under other applicable accounting standards and if the present value of expected annuitization payments at the expected annuitization date exceeds the expected account balance at the expected annuitization date, and

 

    recognizing contract holder liabilities for persistency bonuses and other sales inducements.

 

The effect of initially adopting SOP 03-1 was reported in the consolidated statements of changes in shareholders’ equity in the amount of €10 mn, net of taxes.

 

Recently issued accounting pronouncements (effective on or after January 1, 2006)

 

In December 2004, the IASB issued an amendment to IAS 19, Employee Benefits, relating to the recognition of actuarial gains and losses and disclosure requirements for detailed benefits plans. The amendment allows the Allianz Group the election to adopt an accounting policy to recognize actuarial gains and losses in the period which they occur outside of net income. As a result, the Allianz Group would no longer be required to amortize actuarial gains and losses in excess of the corridor over the expected average remaining working lives of the employees participating in the plans in net income. However, if the Allianz Group elects to adopt this accounting policy, it must present the recognized actuarial gains and losses, along with any other items required to be recognized directly in equity, in a statement of recognized income and expenses. This option may be used for reporting periods ending on or after December 16, 2004. The Allianz Group did not elect to utilize this option for the reporting periods ending during the year ended December 31, 2005; however, it is considering the option for reporting period ending during the year ended December 31, 2006. In addition, this amendment incorporates additional disclosure requirements with regards to defined benefit plans that are effective for the year ended December 31, 2006.

 

In April 2005, the IASB issued an amendment to IAS 39 related to the cash flow hedge accounting of intragroup transactions. The amendment is

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

effective for the Allianz Group’s reporting periods ending on or after January 1, 2006. The adoption is not expected to have a material impact on the Allianz Group’s financial results or financial position.

 

In August 2005, the IASB issued amendments to IAS 39 and IFRS 4 relating to the recognition and measurement of financial guarantee contracts. The amendments require that financial guarantee contracts be initially measured at fair value. After initial recognition, the financial guarantee contracts are measured at the higher of the amount determined in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and the amount initially recognized less cumulative amortization recognized in accordance with IAS 18, Revenues. The amendment is effective for the Allianz Group’s reporting periods ending on or after January 1, 2006; however, the Allianz Group will be required to retrospectively apply the provisions of the amendments to reporting periods prior to January 1, 2006. As the Allianz Group previously applied US GAAP to its credit insurance contracts, the amendments will not impact the insurance segments. Therefore, the new rule mainly impacts the banking segment. These adoptions are not expected to have a material impact on the Allianz Group’s financial results or financial position.

 

In August 2005, the IASB issued an amendment to IAS 1, Presentation in the 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. This standard requires additional disclosures relating to the Allianz Group’s financial instruments and insurance contracts. The amendment to IAS 1 and IFRS 7 are effective for the year ended December 31, 2007. The adoptions are expected to have no impact on the Allianz Group’s financial results or financial position.

 

4    Consolidation

 

Scope of the consolidation

 

As of December 31, 2005, in addition to Allianz AG, 169 (2004: 156; 2003: 193) German and 840 (2004: 907; 2003: 972) foreign subsidiaries have been consolidated. As of December 31, 2005, 67 (2004: 68; 2003: 61) German and 26 (2004: 29; 2003: 39) foreign investment funds and 35 (2004: 24) SPEs were also consolidated.

 

As of December 31, 2005, of the entities that have been consolidated, 9 (2004: 9; 2003: 10) subsidiaries have been consolidated where the Allianz Group owns less than majority of the voting power of the subsidiary, including CreditRas Vita S.p.A. (“CreditRas”) and Antoniana Veneta Popolare Vita S.p.A. (“Antoniana”). The Allianz Group controls these entities on the basis of shareholder agreements between the Allianz Group subsidiary owning 50% of each such entity and the other shareholder. Pursuant to these shareholder agreements, the Allianz Group has the power to govern the financial and operating policies of these subsidiaries and the right to appoint the general manager, in the case of CreditRas, and the CEO, in the case of Antoniana, who have been given unilateral authority over all aspects of the financial and operating policies of these entities, including the hiring and termination of staff and the purchase and sale of assets. In addition, all management functions of these subsidiaries are performed by the employees of the Allianz Group and all operations are undertaken in Allianz Group’s facilities. The Allianz Group also develops all insurance products written through these subsidiaries. Although the Allianz Group and the other shareholder each have the right to appoint half of the directors of each subsidiary, the rights of the other shareholders are limited to matters specifically reserved to the board of directors and shareholders under Italian law, such as decisions concerning capital increases, amendments to articles and similar matters. In addition, in the case of Antoniana, the Allianz Group has the right to appoint the Chairman, who has double board voting rights, thereby giving the Allianz Group a majority of board votes. The shareholder agreements for CreditRas and Antoniana are subject to automatic renewal and are not terminable prior to their stated terms.

 

As of December 31, 2005, there were 10 (2004: 11; 2003: 13) joint ventures that were accounted for using the equity method; each of these entities is managed by the Allianz Group together with a third party not consolidated in the Allianz Group’s consolidated financial statements. As of December 31, 2005, there were 150 (2004: 181; 2003: 170) associated enterprises accounted for using the equity method.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

All subsidiaries, joint ventures, and associated enterprises are individually listed in the disclosure of equity investments filed with the Commercial Register in Munich. All private companies are also listed and identified separately in this disclosure of equity investments, for which the consolidated financial statements and the Allianz Group management report are exempt in accordance with the application of clause 264b of the German Commercial Code (“HGB”). Selected subsidiaries and associated enterprises are listed in the selected subsidiaries and other holdings section.

 

Acquisitions

 

     Effects on the Consolidated Financial Statements in the Year of Acquisition(1)

For the years ended 12/31/


   Date of First-time
Consolidation


   Turnovers

    Net Income

   Goodwill(2)

   Amortization
of Goodwill


          € mn     € mn    € mn    € mn

2004

                         

Four Seasons Health Care Ltd., Wilmslow

   8/31/2004    163 (3)   2    141    —  

(1) Consolidated in the business segments.
(2) At the date of first-time consolidation.
(3) Income from service agreements (not included in total revenues of the Allianz Group).

 

2004 Acquisitions

 

Four Seasons Health Care Ltd., Wilmslow On August 16, 2004, the Allianz Group acquired 100.0% of Four Seasons Health Care Ltd., Wilmslow at a purchase price of €1,167 mn. Four Seasons Health Care Ltd., Wilmslow operates care homes and specialist centres in England, Scotland and Northern Ireland.

 

Disposals

 

The principal subsidiaries deconsolidated in the course of the year are presented in the following table:

 

    Effects on the Consolidated Financial Statements in the Year of Disposal(1)

 

For the years ended 12/31/


  Date of
Deconsolidation


  Gross Premiums

  Net Income

    Disposed Goodwill
charged to Income(2)


 
        € mn   € mn     € mn  

2005

                   

Cadence Capital Management Inc., Delaware

  8/31/2005   17   5     39  

DresdnerGrund-Fonds, Frankfurt am Main

  12/22/2005   —     85     —    

2004

                   

Allianz of Canada, Inc., Toronto

  9/12/2004   458   105     31  

Allianz President General Insurance Co. Ltd., Taipeh

  9/27/2004   69   10     4  

ENTENIAL, Guyancourt

  4/2/2004   —     —       (5 )

2003

                   

AFORE Allianz Dresdner S. A. de C. V., Mexico City

  11/11/2003   —     10     117  

AGF AZ Chile Vida, Santiago de Chile

  4/29/2003   —     —       —    

AGF Belgium Bank S. A., Brussels

  12/15/2003   —     (5 )   —    

Allianz Parkway Integrated Care Pte Ltd., Singapore

  9/30/2003   7   —       —    

Merchant Investors Assurance Company Ltd., Bristol

  3/10/2003   3   —       —    

Pioneer Allianz Life Assurance Corporation, Metro Manila

  1/14/2003   —     —       —    

(1) Consolidated in the business segments.
(2) At the date of deconsolidation.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

2005 Disposals

 

DresdnerGrund-Fonds, Frankfurt am Main On December 22, 2005, the Allianz Group sold its shares in DresdnerGrund-Fonds, Frankfurt am Main, which is described further in Note 42. The proceeds from the sale of these shares amounted to €2,029 mn.

 

Acquisitions and disposals of minority interests

 

2005

 

Riunione Adriatica di Sicurtà S.p.A., Milan On November 30, 2005, the Allianz Group increased its interest in Riunione Adriatica di Sicurtà S.p.A., Milan, by 20.7% to 76.3%. The acquisition cost for the additional interest was €2,701 mn. This transaction was accounted for as a transaction between equity holders; therefore, the Allianz Group recorded a decrease in shareholders’ equity before minority interests of €1,339 mn and a decrease of minority interest in shareholders’ equity of €1,362 mn.

 

Allianz Global Investors of America L.P., Delaware On May 9, 2005, the Allianz Group increased its interest in Allianz Global Investors of America L.P., Delaware, by 3.4% to 97.0%. The acquisition cost for the additional interest was €209 mn. This transaction was accounted for as a transaction between equity holders; therefore, the Allianz Group recorded a decrease in shareholders’ equity before minority interests of €209 mn.

 

Bayerische Versicherungsbank AG, Munich (was merged in January 2006 retroactively effective October 1, 2005 into Allianz Versicherungs-Aktiengesellschaft, Munich) On November 15, 2005, the Allianz Group increased its interest in Bayerische Versicherungsbank AG, Munich, by 10.0% to 100.0%. The acquisition cost for the additional interest was €22 mn. This transaction was accounted for as a transaction between equity holders; therefore, the Allianz Group recorded an increase in shareholders’ equity before minority interests of €82 mn and a decrease of minority interest in shareholders’ equity of €104 mn.

 

Assurances Générales de France, Paris During the year ended December 31, 2005, Assurances Générales de France, Paris issued shares to plan participants as a result of exercises of share options. These issuances resulted in a decrease in the Allianz Group’s ownership interest in Assurances Générales de France, Paris from 62% at December 31, 2004 to 61% at December 31, 2005. These transactions were accounted for as transactions between equity holders; therefore, the Allianz Group recorded an increase in shareholders’ equity before minority interests of €19 mn and an increase in minority interests in shareholders’ equity of €127 mn.

 

2004

 

Allianz Global Investors of America L.P., Delaware In January, April and November 2004, the Allianz Group increased its interest in Allianz Global Investors of America L.P., Delaware, by a total of 9.7 % to 93.6 %, resulting in additional goodwill of €583 mn. The acquisition cost for the additional interest was €598 mn.

 

2003

 

Riunione Adriatica di Sicurtà S.p.A., Milan On February 17, 2003, the Allianz Group increased its interest in Riunione Adriatica di Sicurtà S.p.A., Milan, by 4.4% to 55.5%, resulting in additional goodwill of €146 mn. The acquisition cost for the additional interest was €810 mn.

 

Münchener und Magdeburger Agrarversicherung AG, München On December 2, 2003, the Allianz Group increased its interest in Münchener und Magdeburger Agrarversicherung AG, Munich, by 6.1% to 58.5%. The acquisition cost for the additional interest was €0.2 mn.

 

Allianz Global Investors of America L.P., Delaware In April 2003, July 2003 and October 2003, the Allianz Group increased its interest in PIMCO Advisors L.P., Delaware, by a total of 14.4% to 83.9%, resulting in additional goodwill of €624 mn. The acquisition cost for the additional interest was €640 mn.

 

5    Segment Reporting

 

As a result of the Allianz Group’s worldwide organization, the business activities of the Allianz Group are first segregated by product and type of

 

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Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

service: insurance activities, banking activities and asset management activities. Due to differences in the nature of products, risks and capital allocation, insurance activities are further divided between property-casualty and life/health categories. Thus, the Allianz Group’s segments are structured as Property- Casualty, Life/Health, Banking and Asset Management. Based on various legal, regulatory and other operational issues associated with operating entities in jurisdictions worldwide, the segments of the Allianz Group are also further analyzed by geographical areas or regions in matrixes that comprise a number of profit and service-center segments (see following pages). This geographic analysis is performed to provide further understanding of trends and results underlying the segment data.

 

Property-Casualty

 

The Allianz Group is the largest German property-casualty insurance company based on gross premiums written during the year ended December 31, 2005. Principal product lines offered primarily within Germany include automobile liability and other automobile insurance, fire and property insurance, personal accident insurance, liability insurance and legal expense insurance. The Allianz Group is also among the largest property-casualty insurance companies in other countries, including France, Italy, the United Kingdom, Switzerland and Spain. The Allianz Group conducts its property-casualty insurance operations in these countries through five main groups of operating entities in France, primarily offering automobile, property, injury and liability for both individual and corporate customers; Italy, operating in all personal and commercial property-casualty lines in particular personal automobile insurance; the United Kingdom, offering products generally similar to those offered by the Allianz Group’s German property-casualty operations as well as a number of specialty products, including extended warranty and pet insurance; Switzerland, offering property-casualty insurance, travel and assistance insurance, conventional reinsurance as well as a variety of alternative risk transfer products for corporate customers worldwide; and Spain, offering a wide variety of traditional personal and commercial property-casualty insurance products, with an emphasis on automobile insurance.

 

Life/Health

 

The Allianz Group is the largest provider of life insurance and the third-largest provider of health insurance in Germany as measured by gross premiums written during the year ended December 31, 2005. Germany is the Allianz Group’s most important market for life/health insurance. The Allianz Group’s German life insurance companies offer a comprehensive and unified range of life insurance and life insurance-related products on both an individual and group basis. The main classes of coverage offered include endowment life insurance, annuity policies, term life insurance, unit linked annuities, and other life insurance-related forms of cover, which are provided as riders to other policies and on a stand-alone basis. The Allianz Group’s German health insurance companies provide a wide range of health insurance products, including full private healthcare coverage for the self-employed, salaried employees and civil servants, supplementary insurance for people insured under statutory health insurance plans, daily sickness allowance for the self-employed and salaried employees, hospital daily allowance, supplementary care insurance and foreign travel medical expenses insurance. The Allianz Group also maintains significant life/health operations in the United States, offering a wide variety of life insurance, fixed and variable annuity contracts, including equity-indexed annuities to individuals, and long-term care insurance to individual and corporate customers. Italy and France are also markets where the Allianz Group maintains a significant presence offering products such as unit linked and investment-oriented products, health insurance and individual and group life insurance.

 

Banking

 

The Allianz Group’s banking operations primarily comprise the operations of the Dresdner Bank AG and subsidiaries, hereafter “Dresdner Bank Group”, whose principal banking products and services include traditional commercial banking activities such as deposit taking, lending (including residential mortgage lending) and cash management, as well as corporate finance advisory services, mergers and acquisitions advisory services, capital and money market services, securities underwriting and securities trading and derivatives business on its own account and for its customers. The Allianz Group operates

 

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Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

through the domestic and international branch network of the Dresdner Bank Group and through various subsidiaries both in Germany and abroad, some of which also have branch networks.

 

Asset Management

 

The Allianz Group’s Asset Management segment operates as a global provider of institutional and retail asset management products and services to third-party investors and provides investment management services to the Allianz Group’s insurance operations. The Allianz Group managed approximately €743 bn of third-party assets, Allianz Group’s own investments and separate account assets on a worldwide basis as of December 31, 2005, with key management centers in Munich, Frankfurt, London, Paris, Singapore, Hong Kong, Milan, Westport (Connecticut) and San Francisco, San Diego and Newport Beach (California). As measured by total assets under management at December 31, 2005, the Allianz Group is one of the five largest asset managers in the world. The United States is the Allianz Group’s largest geographic region for third-party assets under management comprising approximately 73% (2004: 70% and 2003: 69%).

 

F-31


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Business Segment Information—Consolidated Balance Sheets

as of December 31, 2005 and 2004

 

     Property-Casualty

   Life/Health

     2005

   2004

   2005

   2004

     € mn    € mn    € mn    € mn

ASSETS

                   

Intangible assets

   2,117    2,185    3,975    4,075

Investments in associated enterprises and joint ventures

   47,766    48,359    3,845    5,532

Investments

   88,408    81,245    178,821    154,920

Loans and advances to banks

   11,181    7,424    56,285    56,699

Loans and advances to customers

   2,031    6,224    27,788    28,808

Financial assets carried at fair value through income

   2,977    1,137    66,029    46,668

Cash and cash equivalents

   3,961    1,665    5,872    968

Amounts ceded to reinsurers from reserves for insurance and investment contracts

   13,030    12,337    10,944    16,382

Deferred tax assets

   7,470    6,816    3,969    3,451

Other assets

   22,417    20,045    24,633    20,362
    
  
  
  

Total segment assets

   201,358    187,437    382,161    337,865
    
  
  
  
     Property-Casualty

   Life/Health

     2005

   2004

   2005

   2004

     € mn    € mn    € mn    € mn

SHAREHOLDERS’ EQUITY AND LIABILITIES

                   

Participation certificates and subordinated liabilities

   7,338    5,497    141    141

Reserves for insurance and investment contracts

   85,051    83,095    276,105    249,854

Liabilities to banks

   5,411    1,358    5,405    1,241

Liabilities to customers

   5,017    5,336    75    165

Certificated liabilities

   9,215    11,405    4    68

Financial liabilities carried at fair value through income

   1,680    530    61,031    44,776

Other accrued liabilities

   6,270    5,960    938    1,016

Other liabilities

   14,310    12,352    16,976    21,280

Deferred tax liabilities

   8,034    7,894    5,199    4,539

Deferred income

   94    161    121    139
    
  
  
  

Total segment liabilities

   142,420    133,588    365,995    323,219
    
  
  
  

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

    Banking

   Asset Management

   Consolidation Adjustments

    Group

        2005    

   2004

   2005

   2004

       2005    

        2004    

    2005

   2004

    € mn    € mn    € mn    € mn    € mn     € mn     € mn    € mn
                                          
    2,545    2,526    6,748    6,362    —       (1 )   15,385    15,147
    677    3,037    2    3    (50,195 )   (51,174 )   2,095    5,757
    16,646    17,736    831    529    (1,786 )   (6,103 )   282,920    248,327
    85,730    119,025    431    144    (2,243 )   (1,749 )   151,384    181,543
    163,482    168,346    46    29    (7,923 )   (7,727 )   185,424    195,680
    165,928    192,746    227    131    (154 )   (108 )   235,007    240,574
    21,848    13,097    476    431    (510 )   (533 )   31,647    15,628
    —      —      —      —      (1,854 )   (6,409 )   22,120    22,310
    2,925    3,679    232    187    —       6     14,596    14,139
    12,011    15,341    3,535    2,942    (5,293 )   (7,477 )   57,303    51,213
   
  
  
  
  

 

 
  
    471,792    535,533    12,528    10,758    (69,958 )   (81,275 )   997,881    990,318
   
  
  
  
  

 

 
  
    Banking

   Asset Management

   Consolidation Adjustments

    Group

    2005

   2004

       2005    

       2004    

   2005

    2004

    2005

   2004

    € mn    € mn    € mn    € mn    € mn     € mn     € mn    € mn
    7,428    7,815    —      —      (223 )   (223 )   14,684    13,230
                                          
    2    4    —      —      (2,021 )   (6,573 )   359,137    326,380
    141,914    189,187    205    7    (978 )   (446 )   151,957    191,347
    159,672    158,127    461    294    (6,866 )   (6,785 )   158,359    157,137
    50,719    47,041    4    4    (739 )   (766 )   59,203    57,752
    82,080    99,934    —      —      (151 )   (103 )   144,640    145,137
    5,163    5,783    1,931    1,225    —       —       14,302    13,984
    5,137    8,859    1,120    709    (6,160 )   (11,929 )   31,383    31,271
    1,314    1,860    74    57    —       —       14,621    14,350
    2,257    1,737    21    2    —       —       2,493    2,039
   
  
  
  
  

 

 
  
    455,686    520,347    3,816    2,298    (17,138 )   (26,825 )   950,779    952,627
   
  
  
  
  

 

        
    Shareholders’ equity     47,102    37,691
                                   
  
    Total equity and liabilities     997,881    990,318
                                   
  

 

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Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Business Segment Information—Consolidated Income Statements

for the Years ended December 31, 2005, 2004 and 2003

 

     Property-Casualty

    Life/Health

 
     2005

    2004

    2003

    2005

    2004

    2003

 
     € mn     € mn     € mn     € mn     € mn     € mn  

Premiums earned (net)

   38,017     38,193     37,277     19,730     18,596     18,701  

Interest and similar income

   4,021     4,051     4,187     11,731     11,196     11,065  

Income from associated enterprises and joint ventures (net)

   1,582     2,438     3,619     809     438     712  

Other income from investments

   1,745     2,145     5,026     2,683     2,423     4,605  

Income from financial assets and liabilities carried at fair value through income (net)

   (289 )   (41 )   (1,481 )   256     198     447  

Fee and commission income, and income from service activities

   1,711     1,038     522     198     224     234  

Other income

   992     1,064     1,770     916     1,226     1,484  
    

 

 

 

 

 

Total income

   47,779     48,888     50,920     36,323     34,301     37,248  
    

 

 

 

 

 

Insurance and investment contract benefits (net)

   (26,208 )   (26,871 )   (27,180 )   (27,563 )   (25,390 )   (25,206 )

Interest and similar expenses

   (1,476 )   (1,562 )   (1,667 )   (471 )   (749 )   (732 )

Other expenses from investments

   (539 )   (1,127 )   (2,340 )   (858 )   (867 )   (4,087 )

Loan loss provisions

   (1 )   (7 )   (10 )   —       (3 )   (3 )

Acquisition costs and administrative expenses

   (11,325 )   (10,734 )   (10,276 )   (4,432 )   (4,533 )   (3,938 )

Amortization of goodwill

   —       (381 )   (383 )   —       (159 )   (398 )

Other expenses

   (2,558 )   (2,069 )   (2,646 )   (725 )   (896 )   (1,640 )
    

 

 

 

 

 

Total expenses

   (42,107 )   (42,751 )   (44,502 )   (34,049 )   (32,597 )   (36,004 )
    

 

 

 

 

 

Earnings from ordinary activities before taxes

   5,672     6,137     6,418     2,274     1,704     1,244  
    

 

 

 

 

 

Taxes

   (1,126 )   (1,520 )   (756 )   (463 )   (469 )   (639 )

Minority interests in earnings

   (997 )   (1,151 )   (451 )   (462 )   (368 )   (386 )
    

 

 

 

 

 

Net income (loss)

   3,549     3,466     5,211     1,349     867     219  
    

 

 

 

 

 

 

F-34


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

 

     Banking

    Asset Management

    Consolidation Adjustments

    Group

 
     2005

   2004

    2003

    2005

    2004

    2003

      2005  

      2004  

      2003  

    2005

    2004

    2003

 
     € mn    € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn  
     —      —       —       —       —       —       —       —       —       57,747     56,789     55,978  
     7,064    6,471     8,047     90     62     78     (565 )   (824 )   (867 )   22,341     20,956     22,510  
     532    84     3     —       —       10     (1,666 )   (2,183 )   (1,330 )   1,257     777     3,014  
     619    635     809     8     21     16     (345 )   (45 )   34     4,710     5,179     10,490  
     1,164    1,493     1,524     19     11     30     9     (3 )   (1 )   1,159     1,658     519  
     3,278    3,085     2,956     3,757     3,110     2,892     (634 )   (634 )   (544 )   8,310     6,823     6,060  
     317    293     521     24     48     33     (67 )   (98 )   (5 )   2,182     2,533     3,803  
    
  

 

 

 

 

 

 

 

 

 

 

     12,974    12,061     13,860     3,898     3,252     3,059     (3,268 )   (3,787 )   (2,713 )   97,706     94,715     102,374  
    
  

 

 

 

 

 

 

 

 

 

 

     —      —       —       —       —       —       (26 )   6     146     (53,797 )   (52,255 )   (52,240 )
     (4,942)    (4,179 )   (5,284 )   (33 )   (13 )   (29 )   552     800     841     (6,370 )   (5,703 )   (6,871 )
     (259)    (480 )   (678 )   (2 )   (3 )   (13 )   (21 )   (195 )   (334 )   (1,679 )   (2,672 )   (7,452 )
     110    (344 )   (1,014 )   —       —       —       —       —       —       109     (354 )   (1,027 )
     (6,012)    (6,008 )   (6,592 )   (3,335 )   (2,730 )   (2,632 )   657     625     521     (24,447 )   (23,380 )   (22,917 )
     —      (244 )   (263 )   —       (380 )   (369 )   —       —       —       —       (1,164 )   (1,413 )
     (334)    (873 )   (1,965 )   (108 )   (401 )   (401 )   83     148     64     (3,642 )   (4,091 )   (6,588 )
    
  

 

 

 

 

 

 

 

 

 

 

     (11,437)    (12,128 )   (15,796 )   (3,478 )   (3,527 )   (3,444 )   1,245     1,384     1,238     (89,826 )   (89,619 )   (98,508 )
    
  

 

 

 

 

 

 

 

 

 

 

     1,537    (67 )   (1,936 )   420     (275 )   (385 )   (2,023 )   (2,403 )   (1,475 )   7,880     5,096     3,866  
    
  

 

 

 

 

 

 

 

 

 

 

     (396)    294     1,025     (132 )   52     80     3     (19 )   41     (2,114 )   (1,662 )   (249 )
     (102)    (101 )   (104 )   (51 )   (52 )   (92 )   226     504     107     (1,386 )   (1,168 )   (926 )
    
  

 

 

 

 

 

 

 

 

 

 

     1,039    126     (1,015 )   237     (275 )   (397 )   (1,794 )   (1,918 )   (1,327 )   4,380     2,266     2,691  
    
  

 

 

 

 

 

 

 

 

 

 

 

F-35


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Business Segment Information—Insurance

as of and for the Years ended December 31, 2005, 2004 and 2003

 

PROPERTY-CASUALTY


   Premiums earned (net)

       
Loss ratio(1)


         2005    

       2004    

       2003    

       2005    

       2004    

       2003    

     € mn    € mn    € mn    %    %    %

1. Europe

                             

Germany

   10,474    10,712    10,478    64.2    68.5    71.7

Italy

   4,964    4,840    4,645    68.0    68.1    70.9

France

   4,375    4,484    4,453    74.0    73.5    79.8

Great Britain

   1,913    2,012    1,827    64.1    63.6    67.1

Switzerland

   1,708    1,659    1,599    74.9    72.9    71.0

Spain

   1,551    1,454    1,337    71.4    72.2    75.9

2. America

                             

NAFTA Region

   3,590    3,932    4,037    68.3    64.7    70.0

South America

   510    378    408    64.5    64.7    71.3

3. Asia-Pacific

   1,280    1,243    1,171    68.0    72.8    71.7

4. Specialty Lines

                             

Allianz Global Risks Rückversicherungs-AG

   959    1,072    1,038    71.3    68.9    70.9

Credit Insurance

   995    901    845    41.2    40.8    49.3

Travel Insurance and Assistance Services

   934    863    784    60.3    59.8    60.6

Allianz Marine & Aviation

   541    475    417    123.5    64.4    65.5

5. Other

   4,223    4,168    4,238    61.4    76.9    73.2

6. Consolidation adjustments(2)

   —      —      —                 
    
  
  
  
  
  

Total

   38,017    38,193    37,277    67.1    67.7    71.5
    
  
  
  
  
  

LIFE/HEALTH


       
Premiums earned (net)


              
     2005

   2004

   2003

              
     € mn    € mn    € mn               

1. Europe

                             

Germany Life

   10,205    8,936    8,788               

Germany Health

   3,042    3,019    2,959               

France

   1,484    1,545    1,509               

Italy

   1,104    1,088    1,169               

Switzerland

   470    504    542               

Spain

   350    576    530               

2. USA

   522    428    598               

3. Asia-Pacific

   1,223    1,131    1,303               

4. Other

   1,330    1,369    1,303               

5. Consolidation adjustments(2)

   —      —      —                 
    
  
  
              

Total

   19,730    18,596    18,701               
    
  
  
              

(1) The loss ratio represents net claims incurred as a percentage of net premiums earned.
(2) Represents elimination of intercompany transactions between Allianz Group subsidiaries in different geographic regions. In the life/health insurance segment, consolidation adjustments also include the elimination of intercompany transactions between Germany Life and Germany Health. Additionally, the Allianz Group has excluded a number of significant non-operating intra-Allianz Group transactions from various country and specialty lines above and instead has netted them in the consolidation line, including the impacts from the September 30, 2002 reinsurance agreement between Fireman’s Fund in the United States and Allianz AG in Germany providing cover for asbestos and environmental exposures.

 

F-36


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

    Expense ratio(3)

   Net income (loss)

    Group’s own
investments(5)


 
        2005    

       2004    

       2003    

       2005    

        2004    

        2003    

        2005    

        2004    

 
    %    %    %    € mn     € mn     € mn     € mn     € mn  
                                              
    25.3    25.1    25.7    1,378     1,744     4,519     110,505     101,844  
    22.5    22.4    22.9    671     494     347     11,841     12,772  
    25.0    24.9    24.4    593     843     109     24,896     23,219  
    29.9    29.8    29.0    269     208     179     4,369     4,411  
    21.5    19.7    25.3    122     96     53     4,706     4,433  
    19.4    18.7    19.6    106     108     59     2,504     2,165  
    26.4    28.0    28.2    825     489     (85 )   17,407     16,729  
    32.3    33.3    32.6    31     23     3     667     499  
    24.1    23.7    23.8    172     88     64     3,539     2,902  
    28.6    28.8    27.9    38     52     73     2,843     2,325  
    25.3    28.2    32.7    126     99     62     2,912     2,634  
    31.2    31.8    31.3    30     6     3     656     574  
    25.0    29.2    21.8    (186 )   88     68     1,409     1,216  
    25.9    25.0    24.0    39     357     463     28,149     27,820  
                   (665 )   (1,229 )   (706 )   (65,863 )   (60,306 )
   
  
  
  

 

 

 

 

    25.2    25.2    25.5    3,549     3,466     5,211     150,540     143,237  
   
  
  
  

 

 

 

 

    Statutory expense ratio(4)

   Net income (loss)

    Group’s own
investments(5)


 
        2005    

       2004    

       2003    

       2005    

        2004    

        2003    

        2005    

        2004    

 
    %    %    %    € mn     € mn     € mn     € mn     € mn  
    7.0    10.4    6.8    297     159     17     122,148     115,960  
    8.8    9.3    10.4    96     53     (1 )   15,301     14,297  
    15.4    17.3    16.5    237     127     124     51,485     48,145  
    5.1    4.4    3.5    214     151     112     22,611     21,763  
    8.5    9.8    8.6    32     13     6     7,923     7,860  
    7.2    5.8    6.3    24     22     16     5,383     5,067  
    5.4    5.2    4.6    295     256     132     27,789     19,515  
    10.5    13.2    10.8    55     (16 )   (261 )   7,247     5,332  
    17.5    19.5    20.0    102     109     83     13,118     11,711  
                   (3 )   (7 )   (9 )   (675 )   (632 )
   
  
  
  

 

 

 

 

    8.1    9.1    7.9    1,349     867     219     272,330     249,018  
   
  
  
  

 

 

 

 


(3) The expense ratio represents net acquisition costs and administrative expenses as a percentage of net premiums earned.
(4) The statutory expense ratio represents net acquisition costs and administrative expenses as a percentage of net premiums earned (statutory).
(5) Group’s own investments, which reflect the definition of investments as used by management for controlling purposes, are presented before consolidation adjustments representing the elimination of intra-Allianz Group investment holdings held by Allianz Group subsidiaries in different geographic regions.

 

F-37


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Business Segment Information—Banking

for the Years ended December 31, 2005, 2004 and 2003

 

BANKING SEGMENT—DIVISIONS

 

    2005

    2004

    2003

 

For the years ended
12/31/


  Operating
revenues(1)


    Cost-income
ratio


    Earnings
after taxes
and before
minority
interests


    Operating
revenues(1)


    Cost-income
ratio


    Earnings
after taxes
and before
minority
interests


    Operating
revenues(1)


    Cost-income
ratio


    Earnings
after taxes
and before
minority
interests


 
    € mn     %     € mn     € mn     %     € mn     € mn     %     € mn  

Personal Banking

  1,883     84.2     136     1,846     89.2     (6 )   1,856     93.5     (130 )

Private & Business Banking

  1,179     58.5     293     1,145     65.0     188     1,100     68.2     146  

Corporate Banking

  1,027     44.9     335     1,014     47.2     282     1,041     48.1     197  

DrKW

  2,102     91.7     132     2,045     89.4     152     2,141     87.6     209  

IRU

  70     232.6     91     362     79.1     5     598     77.6     (896 )

Corporate Other(2)

  (307 )   —   (3)   98     (186 )   —   (3)   (153 )   (491 )   —   (3)   (293 )
   

 

 

 

 

 

 

 

 

Dresdner Bank

  5,954     88.9     1,085     6,226     85.2     468     6,245     91.9     (767 )

Other Banks(4)

  281     73.9     56     220     94.9     3     459     75.7     119  
   

 

 

 

 

 

 

 

 

Subtotal

  6,235     —       1,141     6,446     —       471     6,704     —       (648 )

Amortization of goodwill(5)

  —       —       —       —       —       (244 )   —       —       (263 )

Minority interests in earnings

  —       —       (102 )   —       —       (101 )   —       —       (104 )
   

 

 

 

 

 

 

 

 

Total

  6,235     88.2     1,039     6,446     85.6     126     6,704     90.8     (1,015 )
   

 

 

 

 

 

 

 

 


(1) Consists of net interest income, net fee and commission income, and net trading income. Operating revenues is a measure used by management to calculate and monitor the activities and operating performance of its banking operations. This measure is used by other banks, but other banks may calculate operating income on a different basis and accordingly may not be comparable to operating revenues as used herein.
(2) The Corporate Other division contains income and expense items that are not assigned to Dresdner Bank’s operating divisions. These items include, in particular, expenses for central functions and projects affecting Dresdner Bank as a whole which are not allocated to the operating divisions, as well as provisioning requirements for country and general risks, and realized gains and losses from Dresdner Bank’s non-strategic investment portfolio.
(3) Presentation not meaningful.
(4) Consists of non-Dresdner Bank banking operations within our Banking segment.
(5) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.

 

BANKING SEGMENT—GEOGRAPHICAL

 

     Operating revenues(1)

   Earnings after taxes and before goodwill
amortization and minority interests in earnings(2)


 

For the years ended 12/31/


   2005

    2004

   2003

           2005        

            2004        

            2003        

 
     € mn     € mn    € mn    € mn     € mn     € mn  

Germany

   4,084     4,238    3,377    1,553     724     (32 )

Rest of Europe

   1,662     1,698    2,394    (28 )   (138 )   39  

NAFTA

   347     359    385    184     143     (351 )

Rest of world

   184     151    548    67     89     198  
    

 
  
  

 

 

Subtotal

   6,277     6,446    6,704    1,776     818     (146 )

Consolidation adjustments(3)

   (42 )   —      —      (635 )   (347 )   (502 )
    

 
  
  

 

 

Total

   6,235     6,446    6,704    1,141     471     (648 )
    

 
  
  

 

 


(1) Consists of net interest income, net fee and commission income, and net trading income. Operating revenues is a measure used by management to calculate and monitor the activities and operating performance of its banking operations. This measure is used by other banks, but other banks may calculate operating income on a different basis and accordingly may not be comparable to operating revenues as used herein.
(2) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.
(3) Represents elimination of transactions between Allianz Group subsidiaries in different geographic regions.

 

F-38


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Business Segment Information—Operating Profit for the years ended December 31, 2005, 2004 and 2003

 

The Allianz Group evaluates the results of its Property-Casualty, Life/Health, Banking and Asset Management segments using a financial performance measure referred to herein as “operating profit”. The Allianz Group defines segment operating profit as earnings from ordinary activities before taxes, excluding, as applicable for each respective segment, all or some of the following items: net capital gains and impairments on investments, net trading income, intra-Allianz Group dividends and profit transfer, interest expense on external debt, restructuring charges, other non-operating income/(expenses), acquisition-related expenses and amortization of goodwill.

 

While these excluded items are significant components in understanding and assessing the Allianz Group’s consolidated financial performance, the Allianz Group believes that the presentation of operating results enhances the understanding and comparability of the performance of its operating segments by highlighting net income attributable to ongoing segment operations and the underlying profitability of its businesses. For example, the Allianz Group believes that trends in the underlying profitability of its segments can be more clearly identified without the fluctuating effects of the realized capital gains and losses or impairments on investment securities, as these are largely dependent on market cycles or issuer specific events over which the Allianz Group has little or no control, and can and do vary, sometimes materially, across periods. Further, the timing of sales that would result in such gains or losses is largely at the Allianz Group’s discretion. Operating profit is not a substitute for earnings from ordinary activities before taxes or net income as determined in accordance with IFRS. The Allianz Group’s definition of operating profit may differ from similar measures used by other companies, and may change over time.

 

The following table sets forth the total revenues, operating profit and net income for each of our business segments for the years ended December 31, 2005, 2004 and 2003, as well as consolidated net income of the Allianz Group.

 

    Property-
Casualty


    Life/
Health


    Banking

    Asset
Management


    Consolidation
adjustments


    Group

 
    € mn     € mn     € mn     € mn     € mn     € mn  

For the year ended 12/31/2005

                                   

Total revenues(*)

  44,061     48,129     6,235     2,733     (261 )   100,897  

Operating profit

  4,162     1,603     845     1,133     —       7,743  

Earnings from ordinary activities before taxes

  5,672     2,274     1,537     420     (2,023 )   7,880  

Taxes

  (1,126 )   (463 )   (396 )   (132 )   3     (2,114 )

Minority interests in earnings

  (997 )   (462 )   (102 )   (51 )   226     (1,386 )
   

 

 

 

 

 

Net income/(loss)

  3,549     1,349     1,039     237     (1,794 )   4,380  
   

 

 

 

 

 

For the year ended 12/31/2004

                                   

Total revenues(*)

  43,780     45,177     6,446     2,308     (836 )   96,875  

Operating profit

  3,979     1,418     586     856     —       6,839  

Earnings from ordinary activities before taxes

  6,137     1,704     (67 )   (275 )   (2,403 )   5,096  

Taxes

  (1,520 )   (469 )   294     52     (19 )   (1,662 )

Minority interests in earnings

  (1,151 )   (368 )   (101 )   (52 )   504     (1,168 )
   

 

 

 

 

 

Net income/(loss)

  3,466     867     126     (275 )   (1,918 )   2,266  
   

 

 

 

 

 

For the year ended 12/31/2003

                                   

Total revenues(*)

  43,420     42,319     6,704     2,226     (929 )   93,740  

Operating profit/(loss)

  2,397     1,265     (396 )   716     —       3,982  

Earnings from ordinary activities before taxes

  6,418     1,244     (1,936 )   (385 )   (1,475 )   3,866  

Taxes

  (756 )   (639 )   1,025     80     41     (249 )

Minority interests in earnings

  (451 )   (386 )   (104 )   (92 )   107     (926 )
   

 

 

 

 

 

Net income(loss)

  5,211     219     (1,015 )   (397 )   (1,327 )   2,691  
   

 

 

 

 

 


(*) Total revenues comprise Property-Casualty segment’s gross premiums written, Life/Health segment’s statutory premiums, Banking segment’s operating revenues, as well as Asset Management segment’s operating revenues.

 

F-39


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Property-Casualty Insurance Segment

 

For the years ended 12/31/


  2005

    2004

    2003

 
    € mn     € mn     € mn  

Gross premiums written

  44,061     43,780     43,420  

Premiums earned (net)(1)

  38,017     38,193     37,277  

Current income from investments

  3,901     3,935     3,854  

Investment management and interest expenses

  (488 )   (834 )   (1,295 )

Insurance benefits (net)(2)

  (26,076 )   (26,650 )   (27,261 )

Net acquisition costs and administrative expenses(3)

  (10,840 )   (10,360 )   (9,814 )

Other operating income/(expenses) (net)

  (352 )   (305 )   (364 )
   

 

 

Operating profit

  4,162     3,979     2,397  
   

 

 

Net capital gains and impairments on investments(4)

  1,306     1,325     6,049 (5)

Net trading income/(expense)(6)

  (426 )   (49 )   (1,490 )

Intra-group dividends and profit transfer

  1,531     1,963     676  

Interest expense on external debt

  (834 )   (863 )   (831 )

Amortization of goodwill(7)

  —       (381 )   (383 )

Restructuring charges

  (67 )   —       —    

Other non-operating income/(expenses) (net)

  —       163     —    
   

 

 

Earnings from ordinary activities before taxes

  5,672     6,137     6,418  

Taxes

  (1,126 )   (1,520 )   (756 )

Minority interests in earnings

  (997 )   (1,151 )   (451 )
   

 

 

Net income

  3,549     3,466     5,211  
   

 

 

Loss ratio(8) in %

  67.1     67.7     71.5  

Expense ratio(9) in %

  25.2     25.2     25.5  
   

 

 

Combined ratio in %

  92.3     92.9     97.0  
   

 

 


(1) Net of earned premiums ceded to reinsurers of €5,411 mn (2004: €5,298 mn; 2003: €5,539 mn).
(2) Comprises net claims incurred of €25,519 mn (2004: €25,867 mn; 2003: €26,659 mn), net expenses from changes in other net underwriting provisions of €187 mn (2004: €458 mn; 2003: €269 mn) and net expenses for premium refunds of €370 mn (2004: €325 mn; 2003: €333 mn). Net expenses for premium refunds were adjusted for income of €111 mn (2004: €210 mn; 2003: expense of €138 mn) related to policyholders’ participation of net capital gains and impairments on investments as well as net trading income/(expense) that were excluded from the determination of operating profit.
(3) Comprises net acquisition costs of €5,771 mn (2004: €5,781 mn; 2003: €5,509 mn), administrative expenses of €3,794 mn (2004: €3,849 mn; 2003: €4,002 mn) and expenses for service agreements of €1,275 mn (2004: €730 mn; 2003: €303 mn). Net acquisition costs and administrative expenses do not include expenses for the management of investments and, accordingly, do not reconcile to acquisition costs and administrative expenses.
(4) Comprises net realized gains on investments of €1,340 mn (2004: €1,878 mn; 2003: €7,517 mn) and net impairments on investments of €34 mn (2004: €553 mn; 2003: €1,468 mn). These amounts are net of policyholders’ participation.
(5) Includes significant net realized gains from sales of certain shareholdings.
(6) Net trading income/(expense) are net of policyholders’ participation.
(7) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.
(8) Represents ratio of net claims incurred to net premiums earned.
(9) Represents ratio of net acquisition costs and administrative expenses, excluding expenses for service agreements, to net premiums earned.

 

F-40


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Life/Health Insurance Segment

 

For the years ended 12/31/


  2005

    2004

    2003

 
    € mn     € mn     € mn  

Statutory premiums(1)

  48,129     45,177     42,319  

Gross premiums written

  20,950     20,716     20,689  
   

 

 

Premiums earned (net)(2)

  19,730     18,596     18,701  

Current income from investments

  11,826     11,335     11,260  

Investment management and interest expenses

  (478 )   (483 )   (516 )

Insurance benefits (net)(3)

  (25,023 )   (23,845 )   (24,189 )

Net acquisition costs and administrative expenses(4)

  (3,921 )   (4,039 )   (3,416 )

Net trading income

  (326 )   117     218  

Other operating income/(expenses) (net)

  (205 )   (263 )   (793 )
   

 

 

Operating profit

  1,603     1,418     1,265  
   

 

 

Net capital gains and impairments on investments(5)

  608     282     274 (6)

Intra-group dividends and profit transfer

  82     163     103  

Amortization of goodwill(7)

  —       (159 )   (398 )

Restructuring charges

  (19 )   —       —    
   

 

 

Earnings from ordinary activities before taxes

  2,274     1,704     1,244  

Taxes

  (463 )   (469 )   (639 )

Minority interests in earnings

  (462 )   (368 )   (386 )
   

 

 

Net income

  1,349     867     219  
   

 

 

Statutory expense ratio(8) in %

  8.1     9.1     7.9  
   

 

 


(1) Under the Allianz Group’s accounting policies for life insurance contracts, for which the Allianz Group has adopted US GAAP accounting standards, gross written premiums include only the cost- and risk-related components of premiums generated from unit linked and other investment-oriented products, but do not include the full amount of statutory premiums written on these products. Statutory premiums are gross premiums written from sales of life insurance policies as well as gross receipts from sales of unit linked and other investment-oriented products, in accordance with the statutory accounting practices applicable in the insurer’s home jurisdiction.
(2) Net of earned premiums ceded to reinsurers of €1,125 mn (2004: €2,048 mn; 2003: €1,953 mn).
(3) Net insurance benefits were adjusted for income of €2,541 mn (2004: €1,548 mn; 2003: €1,015 mn), related to policyholders’ participation of net capital gains and impairments on investments that were excluded from the determination of operating profit.
(4) Comprises net acquisition costs of €2,358 mn (2004: €2,635 mn; 2003: €1,885 mn), administrative expenses of €1,426 mn (2004: €1,270 mn; 2003: €1,307 mn) and expenses for service agreements of €137 mn (2004: €134 mn; 2003: €224 mn). Net acquisition costs and administrative expenses do not include expenses for the management of investments and, accordingly, do not reconcile to acquisition costs and administrative expenses.
(5) Comprises net realized gains on investments of €671 mn (2004: €331 mn; 2003: €602 mn), and net impairments on investments of €63 mn (2004: €49 mn; 2003: €328 mn). These amounts are net of policyholders’ participation.
(6) Includes realized gains of €743 mn from sales of Credit Lyonnais shares in 2003.
(7) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.
(8) Represents ratio of net acquisition costs and administrative expenses, excluding expenses for service agreements, to net statutory premiums of €46,895 mn (2004: €43,031 mn; 2003: €40,276 mn).

 

F-41


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Banking Segment

 

     2005

    2004

    2003

 

For the years ended 12/31/


   Banking
Segment


    Dresdner
Bank


    Banking
Segment


    Dresdner
Bank


    Banking
Segment


    Dresdner
Bank


 
     € mn     € mn     € mn     € mn     € mn     € mn  

Net interest income

   2,305     2,228     2,359     2,267     2,728     2,325  

Net fee and commission income

   2,767     2,610     2,593     2,460     2,452     2,387  

Net trading income

   1,163     1,116     1,494     1,499     1,524     1,533  
    

 

 

 

 

 

Operating revenues(1)

   6,235     5,954     6,446     6,226     6,704     6,245  

Administrative expenses

   (5,500 )   (5,292 )   (5,516 )   (5,307 )   (6,086 )   (5,739 )

Net loan loss provisions

   110     113     (344 )   (337 )   (1,014 )   (1,015 )
    

 

 

 

 

 

Operating profit/(loss)

   845     775     586     582     (396 )   (509 )

Net capital gains and impairments on investments

   710 (2)   713     172 (2)   166     166 (2)   120  

Restructuring charges

   (13 )   (12 )   (292 )   (290 )   (892 )   (840 )

Other non-operating income/(expenses) (net)

   (5 )   (9 )   (289 )   (278 )   (551 )   (613 )

Amortization of goodwill(3)

   —       —       (244 )   (244 )   (263 )   (270 )
    

 

 

 

 

 

Earnings from ordinary activities before taxes

   1,537     1,467     (67 )   (64 )   (1,936 )   (2,112 )

Taxes

   (396 )   (382 )   294     288     1,025     1,075  

Minority interests in earnings

   (102 )   (82 )   (101 )   (60 )   (104 )   (5 )
    

 

 

 

 

 

Net income/(loss)

   1,039     1,003     126     164     (1,015 )   (1,042 )
    

 

 

 

 

 

Cost-income ratio(4) in %

   88.2     88.9     85.6     85.2     90.8     91.9  
    

 

 

 

 

 


(1) Operating revenues is a measure used by management to calculate and monitor the activities and operating performance of its banking operations. This measure is used by other banks, but other banks may calculate operating revenues on a different basis and accordingly may not be comparable to operating revenues as used herein.
(2) Comprises primarily net realized gains on investments of €930 mn (2004: €604 mn; 2003: €709 mn) and impairments on investments of €225 mn (2004: €467 mn; 2003: €591 mn). Impairments on investments includes €37 mn (2004: €32 mn; 2003: €23 mn) of scheduled depreciation of real estate used by third parties.
(3) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.
(4) Represents ratio of administrative expenses to operating revenues.

 

F-42


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Asset Management Segment

 

     2005

    2004

    2003

 

For the years ended 12/31/


   Asset
Management
Segment


    Allianz
Global
Investors


    Asset
Management
Segment


    Allianz
Global
Investors


    Asset
Management
Segment


    Allianz
Global
Investors


 
     € mn     € mn     € mn     € mn     € mn     € mn  

Operating revenues

   2,733     2,698     2,308     2,301     2,226     2,226  

Operating expenses

   (1,600 )   (1,574 )   (1,452 )   (1,450 )   (1,510 )   (1,510 )
    

 

 

 

 

 

Operating profit

   1,133     1,124     856     851     716     716  

Acquisition-related expenses

   (713 )   (713 )   (751 )   (751 )   (732 )   (732 )

thereof:

                                    

Deferred purchases of interests in PIMCO(1)

   (676 )   (676 )   (501 )   (501 )   (448 )   (448 )

Retention payments for management and employees of PIMCO and Nicholas Applegate

   (12 )   (12 )   (125 )   (125 )   (147 )   (147 )

Amortization charges relating to capitalized bonuses for PIMCO management

   (25 )   (25 )   (125 )   (125 )   (137 )   (137 )

Amortization of goodwill(2)

   —       —       (380 )   (380 )   (369 )   (369 )
    

 

 

 

 

 

Earnings from ordinary activities before taxes

   420     411     (275 )   (280 )   (385 )   (385 )

Taxes

   (132 )   (130 )   52     53     80     80  

Minority interests in earnings

   (51 )   (48 )   (52 )   (52 )   (92 )   (92 )
    

 

 

 

 

 

Net income/(loss)

   237     233     (275 )   (279 )   (397 )   (397 )
    

 

 

 

 

 

Cost-income ratio(3) in %

   58.5     58.3     62.9     63.0     67.8     67.8  
    

 

 

 

 

 


(1) Effective January 1, 2005, and applied retrospectively, under IFRS, the PIMCO LLC Class B Unit Purchase Plan (“Class B Plan”) is considered a cash settled plan, resulting in changes in the fair value of the shares issued to be recognized as expense.
(2) Effective January 1, 2005, under IFRS, and on a prospective basis, goodwill is no longer amortized.
(3) Represents ratio of operating expenses to operating revenues.

 

F-43


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Supplementary Information on the Allianz Group’s Assets

 

6    Intangible assets

 

As of 12/31/


   2005

   2004

     € mn    € mn

Goodwill

   12,023    11,677

PVFP

   1,336    1,522

Software

   1,091    972

Brand names

   740    740

Loyalty bonuses(*)

   —      33

Other

   195    203
    
  

Total

   15,385    15,147
    
  

(*) Net of accumulated amortization of €713 mn as of December 31, 2005 (2004: €680 mn).

 

Amortization expense of intangible assets is estimated to be €428 mn in 2006, €419 mn in 2007, €406 mn in 2008, €390 mn in 2009 and €377 mn in 2010.

 

Goodwill

 

    2005

    2004

    2003

 
    € mn     € mn     € mn  

Cost as of 1/1/

  11,901     12,594     13,786  

Accumulated impairments as of 1/1/

  (224 )   (224 )   —    
   

 

 

Carrying amount as of 1/1/

  11,677     12,370     13,786  

Additions

  70     803     782  

Disposals

  (45 )   (62 )   (225 )

Impairment

  —       —       (224 )

Foreign currency translation adjustments

  479     (270 )   (560 )

Reclassifications to disposal groups held for sale

  (158 )   —       —    

Amortization

  —       (1,164 )   (1,189 )
   

 

 

Carrying amount as of 12/31/

  12,023     11,677     12,370  

Accumulated impairments as of 12/31/

  224     224     224  
   

 

 

Cost as of 12/31/

  12,247     11,901     12,594  
   

 

 

 

Additions include goodwill from

 

    Increasing the interest in GamePlan Financial Marketing, LLC, Woodstock by 60.0% to 100.0%,

 

    the acquisition of 100.0% interest in BetterCare Group Limited, Kingston upon Thames,

 

    the acquisition of 100.0% interest in Questar Capital Corporation, Ann Arbor.

 

Disposals include goodwill from

 

    Reducing the interest in Cadence Capital Management Inc., Delaware, by 100.0% to 0.0%.

 

The impairment charge of €224 mn during the year ended December 31, 2003 concerns Allianz Life Insurance Company Ltd., Seoul. In the course of the annual goodwill impairment review the amount of the impairment was determined on the basis of an evaluation of future cash flows from the existing contract portfolio and new business. This amount reflects the effects of persistently lower interest rates in the capital markets and the overall unsatisfactory earnings performance of the company.

 

The reclassifications affect the goodwill of Four Seasons Health Care Ltd., Wilmslow and BetterCare Group Limited, Kingston upon Thames as these subsidiaries were reclassified to disposal groups held for sale.

 

PVFP

 

    2005

    2004

    2003

 
    € mn     € mn     € mn  

Cost as of 1/1/

  2,737     2,699     2,619  

Accumulated amortization as of 1/1/

  (1,215 )   (1,041 )   (851 )
   

 

 

Carrying amount of 1/1/

  1,522     1,658     1,768  

Additions

  —       47     —    

Changes in the consolidated subsidiaries of the Allianz Group

  —       (4 )   (5 )

Change in assumptions

  —       —       118  

Foreign currency translation adjustments

  7     (5 )   (33 )

Amortization(*)

  (193 )   (174 )   (190 )
   

 

 

Carrying amount as of 12/31/

  1,336     1,522     1,658  

Accumulated amortization as of 12/31/

  1,408     1,215     1,041  
   

 

 

Cost as of 12/31/

  2,744     2,737     2,699  
   

 

 


(*) During the year ended December 31, 2005, includes interest accrued on unamortized PVFP €47 mn (2004: €94 mn; 2003: €102 mn).

 

F-44


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

As of December 31, 2005, the percentage of PVFP that is expected to be amortized in 2006 is 12.78% (12.11% in 2007, 11.16% in 2008, 9.94% in 2009 and 9.02% in 2010).

 

Software

 

    2005

    2004

    2003

 
    € mn     € mn     € mn  

Cost as of 1/1/

  3,532     3,083     2,692  

Accumulated amortization as of 1/1/

  (2,560 )   (2,019 )   (1,411 )
   

 

 

Carrying amount as of 1/1/

  972     1,064     1,281  

Additions

  577     757     713  

Changes in the consolidated subsidiaries of the Allianz Group

  (2 )   (70 )   (69 )

Disposals

  (290 )   (232 )   (233 )

Foreign currency translation adjustments

  14     (6 )   (20 )

Amortization

  (180 )   (541 )   (608 )
   

 

 

Carrying amount as of 12/31/(*)

  1,091     972     1,064  

Accumulated amortization as of 12/31/

  2,740     2,560     2,019  
   

 

 

Cost as of 12/31/

  3,831     3,532     3,083  
   

 

 


(*) As of December 31, 2005, includes €772 mn (2004: €608 mn; 2003: €598 mn) for software developed in-house and €319 mn (2004: €364 mn; 2003: €466 mn) for software purchased from third parties.

 

Impairment Tests for Goodwill and Intangible Assets with Indefinite Lives

 

The Allianz Group has allocated goodwill for impairment testing purposes to seven cash generating units in the Property-Casualty segment, five cash generating units in the Life/Health segment, three cash generating units in the Banking segment and one cash generating unit in the Asset Management segment. These cash generating units represent the lowest level at which the goodwill is monitored for internal management purposes. In addition, the Allianz Group’s brand names have been allocated to two cash generating units in the Banking segment and one cash generating unit in the Asset Management segment.

 

The groups of cash generating units of the Property-Casualty segment are: Europe I, including Germany, Switzerland and Austria; Europe II, including France, Italy and Spain; NAFTA, including the United States and Mexico; South America; Asia Pacific; Eastern Europe and Specialty Lines. The groups of cash generating units of the Life/Health segment are: Europe I Life, including Germany Life, Switzerland and Austria; Europe I Health, comprising Germany Health; Europe II, including France, Italy and Spain; NAFTA, including the United States; and Asia Pacific. The cash generating units of the Banking segment are Personal Banking and Private & Business Banking; Corporate Banking and DrKW; and Other Banking. The Asset Management segment is considered a cash generating unit.

 

The recoverable amounts of all cash generating units are determined on the basis of value in use calculations.

 

The Allianz Group applies generally acknowledged valuation principles to determine the value in use. In this regard, the Allianz Group utilizes the capitalized earnings method to derive the value in use for all cash generating units in the Property-Casualty and Banking segments and for the Asset Management and Europe I Health cash generating units. Generally, the basis for the determination of the capitalized earnings value is the business plan (“detailed planning period”) as well as the estimate of the sustainable returns which can be assumed to be realistic on a long term basis (“terminal value”) of the companies included in the cash generating units. The capitalized earnings value is calculated by discounting the future earnings using an appropriate discount rate.

 

The business plans applied in the value in use are the results of the structured management dialogues between the Board of Management of the Allianz Group and the companies in connection with a reporting process integrated into these dialogues. Generally, the business plans comprise a planning horizon of three years.

 

The terminal values are largely based on the expected profits of the final year of the detailed planning period. Where necessary, the planned profits are adjusted so that long term sustainable earnings are reflected. The financing of the assumed growth in the terminal values is accounted for by appropriate profit retention.

 

F-45


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

The discount rate is based on the capital asset pricing model. The assumptions, including the risk free interest rate, market risk premium, segment beta and leverage ratio, used to calculate the discount rates are consistent with the parameters used in the Allianz Group’s planning and controlling process, specifically those utilized in the calculation of Economic Value Added.

 

For all cash generating units in the Life/Health segment, with the exception of Europe I Health, the Embedded Value, specifically Appraisal Value, approach is utilized to determine the value in use. Embedded value is an industry-specific valuation method and is in compliance with the general principles of the discounted earnings methods. The Embedded Value approach utilized is based on the Allianz Group’s Embedded Value guidelines.

 

The carrying amounts of goodwill and brand names allocated to Allianz Group’s cash generating units as of December 31, 2005 are as follows:

 

As of 12/31/


   2005

Cash Generating Units


   Goodwill

   Brand
names


     € mn    € mn

Property-Casualty

         

Europe I

   293    —  

Europe II

   701    —  

NAFTA

   120    —  

South America

   21    —  

Asia Pacific

   214    —  

Eastern Europe

   71    —  

Specialty Lines

   20    —  
    
  

Subtotal

   1,440    —  

Life/Health

         

Europe I—Life

   723    —  

Europe I—Health

   325    —  

Europe II

   580    —  

NAFTA

   406    —  

Asia Pacific

   320    —  
    
  

Subtotal

   2,354    —  

Banking

         

Personal Banking and Private & Business Banking

   1,390    377

Corporate Banking and DrKW

   183    279

Other Banking

   52    —  
    
  

Subtotal

   1,625    656

Asset Management

   6,604    84
    
  

Total

   12,023    740
    
  

 

7    Investments in associated enterprises and joint ventures

 

As of 12/31/


   2005

   2004

     € mn    € mn

Investments in associated enterprises

   1,984    5,675

Investments in joint ventures

   111    82
    
  

Total

   2,095    5,757
    
  

 

As of December 31, 2005, loans to associated enterprises and joint ventures and debt securities available-for-sale issued by associated enterprises and joint ventures held by the Allianz Group amounted to €12,618 mn (2004: €19,011 mn).

 

8    Investments

 

As of 12/31/


   2005

   2004

     € mn    € mn

Securities held-to-maturity

   4,826    5,179

Securities available-for-sale

   266,953    230,919

Real estate used by third parties

   9,569    10,628

Funds held by others under reinsurance contracts assumed

   1,572    1,601
    
  

Total

   282,920    248,327
    
  

 

F-46


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Securities held-to-maturity

 

     As of 12/31/2005

     Amortized
Cost


   Unrealized
Gains


   Unrealized
Losses


    Fair Value

     € mn    € mn    € mn     € mn
                      

Government and government agency bonds

                    

Germany

   140    8    —       148

Italy

   427    42    —       469

Austria

   364    2    —       366

All other countries

   1,240    70    —       1,310
    
  
  

 

Subtotal

   2,171    122    —       2,293

Corporate bonds

   2,619    154    —       2,773

Other

   36    —      —       36
    
  
  

 

Total

   4,826    276    —       5,102
    
  
  

 
     As of 12/31/2004

     Amortized
Cost


   Unrealized
Gains


   Unrealized
Losses


    Fair Value

     € mn    € mn    € mn     € mn
                      

Government and government agency bonds

                    

Germany

   157    3    —       160

Italy

   407    10    —       417

Austria

   367    9    —       376

All other countries

   1,255    27    (1 )   1,281
    
  
  

 

Subtotal

   2,186    49    (1 )   2,234

Corporate bonds

   2,951    143    —       3,094

Other

   42    17    —       59
    
  
  

 

Total

   5,179    209    (1 )   5,387
    
  
  

 

 

F-47


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Securities available-for-sale

 

As of 12/31/


  2005

  2004

    Amortized
Cost


  Unrealized
Gains


  Unrealized
Losses


    Fair
Value


  Amortized
Cost


  Unrealized
Gains


  Unrealized
Losses


    Fair
Value


    € mn   € mn   € mn     € mn   € mn   € mn   € mn     € mn

Debt Securities

                                   

Government and agency mortgage-backed securities (residential and commercial)

  9,894   10   (253 )   9,651   9,376   38   (58 )   9,356

Corporate mortgage-backed securities (residential and commercial)

  3,265   37   (31 )   3,271   909   42   (1 )   950

Other asset-backed securities

  3,381   56   (22 )   3,415   2,926   84   (4 )   3,006

Government and government agency bonds

                                   

Germany

  15,801   825   (32 )   16,594   13,887   559   —       14,446

Italy

  23,479   1,339   (39 )   24,779   23,403   1,160   (7 )   24,556

France

  16,250   1,656   (13 )   17,893   14,031   1,218   (2 )   15,247

United States

  9,527   202   (85 )   9,644   4,430   127   (110 )   4,447

Spain

  8,484   823   (3 )   9,304   7,371   646   (1 )   8,016

Belgium

  4,438   302   (4 )   4,736   4,362   249   (19 )   4,592

Austria

  3,730   220   (3 )   3,947   3,509   190   (3 )   3,696

All other countries

  27,656   1,082   (110 )   28,628   25,616   1,176   (36 )   26,756
   
 
 

 
 
 
 

 

Subtotal

  109,365   6,449   (289 )   115,525   96,609   5,325   (178 )   101,756

Corporate bonds

  73,136   3,331   (214 )   76,253   65,417   3,510   (90 )   68,837

Other

  1,556   154   (2 )   1,708   2,727   90   (4 )   2,813
   
 
 

 
 
 
 

 

Subtotal

  200,597   10,037   (811 )   209,823   177,964   9,089   (335 )   186,718

Equity Securities

  38,157   19,161   (188 )   57,130   32,106   12,488   (393 )   44,201
   
 
 

 
 
 
 

 

Total

  238,754   29,198   (999 )   266,953   210,070   21,577   (728 )   230,919
   
 
 

 
 
 
 

 

 

The following table presents proceeds from sales, gross realized gains, and gross realized losses from securities available-for-sale:

 

For the years ended 12/31/


   2005

   2004

   2003

     € mn    € mn    € mn

Proceeds from Sales

              

Debt securities

   107,929    101,239    99,568

Equity securities

   24,800    17,462    34,930
    
  
  

Total

   132,729    118,701    134,498
    
  
  

Gross Realized Gains

              

Debt securities

   968    1,109    1,763

Equity securities

   3,348    3,579    8,151
    
  
  

Total

   4,316    4,688    9,914
    
  
  

Gross Realized Losses

              

Debt securities

   331    373    508

Equity securities

   567    517    2,390
    
  
  

Total

   898    890    2,898
    
  
  

 

F-48


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

The following table sets forth gross unrealized losses on securities held-to-maturity and securities available-for-sale and the related fair value, segregated by investment category and length of time such investments have been in a continuous unrealized loss position as of December 31, 2005. For a general discussion of the Allianz Group’s impairment policy see Note 2.

 

     Less than 12 months

    Greater than 12 months

    Total

 
     Fair
Value


   Unrealized
Losses


    Fair
Value


   Unrealized
Losses


    Fair
Value


   Unrealized
Losses


 
         € mn            € mn             € mn            € mn             € mn            € mn      

Debt Securities

                                 

Government and agency mortgage-backed securities (residential and commercial)

   6,465    (185 )   2,443    (68 )   8,908    (253 )

Corporate mortgage-backed securities (residential and commercial)

   1,474    (31 )   —      —       1,474    (31 )

Other asset-backed securities

   1,190    (19 )   113    (3 )   1,303    (22 )

Government and government agency bonds

   23,006    (260 )   1,154    (29 )   24,160    (289 )

Corporate bonds

   13,073    (187 )   695    (27 )   13,768    (214 )

Other

   210    (2 )   —      —       210    (2 )
    
  

 
  

 
  

Subtotal

   45,418    (684 )   4,405    (127 )   49,823    (811 )

Equity Securities

   3,667    (188 )   —      —       3,667    (188 )
    
  

 
  

 
  

Total

   49,085    (872 )   4,405    (127 )   53,490    (999 )
    
  

 
  

 
  

 

Government and agency mortgage-backed securities (residential and commercial) Total unrealized losses amounted to €253 mn at December 31, 2005. The unrealized loss positions concern mostly issues of United States government agencies, which are primarily held by Allianz Group’s North American entities. These pay-through/pass-through securities are serviced by cash flows from pools of underlying loans to mostly private debtors. The unrealized losses of these mortgage-backed securities were partly caused by interest rate increases between purchase date of the individual securities and the balance sheet date. Also in various instances, price decreases were caused by increased prepayment risk for individual loan pools that were originated in a significantly higher interest rate environment. Because the decline in fair value is attributable to changes in interest rates and, to a lesser extent, instances of insignificant deterioration of credit quality and as an immediate disposal is not intended, the Allianz Group does not consider these investments to be impaired at December 31, 2005.

 

Government and government agency bonds Total unrealized losses amounted to €289 mn at December 31, 2005. 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 compared to 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 and as an immediate disposal is not intended, the Allianz Group does not consider these investments to be impaired at December 31, 2005.

 

Corporate bonds Total unrealized losses amounted to €214 mn at December 31, 2005. The Allianz Group holds a large variety of bonds issued by corporations mostly domiciled in OECD countries. For the vast majority of the Allianz Group’s corporate bonds, issuers and/or issues are of “investment grade”. Therefore, the unrealized losses on Allianz Group’s investment in corporate debt securities were primarily caused by interest rate increases between the purchase date of the individual

 

F-49


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

securities compared to balance sheet date. As the decline in fair value is primarily attributable to changes in interest rates and as an immediate disposal is not intended, the Allianz Group does not consider these investments to be impaired at December 31, 2005.

 

Equity securities As of December 31, 2005, unrealized losses from equity securities amounted to €188 mn. These unrealized losses concern equity securities that did not meet the criteria of Allianz Group’s impairment policy for equity securities as described in Note 2. Substantially all of the unrealized losses have been in a continuous loss position for less than 6 months. In addition, only 2 securities have an aggregated unrealized loss greater than €10 mn.

 

Contractual maturities

 

The amortized cost and estimated fair value of debt securities held-to-maturity and debt securities available-for-sale as of December 31, 2005, by contractual maturity, are as follows:

 

     Amortized
Cost


   Fair
Value


     € mn    € mn

Held-to-maturity

         

Contractual term to maturity

         

Due in 1 year or less

   350    362

Due after 1 year and in less than 5 years

   1,502    1,566

Due after 5 years and in less than 10 years

   2,059    2,161

Due after 10 years

   915    1,013
    
  

Total

   4,826    5,102
    
  

Available-for-sale

         

Contractual term to maturity

         

Due in 1 year or less

   13,847    13,916

Due after 1 year and in less than 5 years

   67,599    69,171

Due after 5 years and in less than 10 years

   60,504    63,207

Due after 10 years

   58,647    63,529
    
  

Total

   200,597    209,823
    
  

 

Actual maturities may deviate from the contractually defined maturities, because certain security issuers have the right to call or repay certain obligations ahead of schedule, with or without redemption or early repayment penalties. Investments that are not due at a single maturity date are, in general, not allocated over various maturity buckets, but are shown within their final contractual maturity dates.

 

Equity investments carried at cost

 

As of December 31, 2005, fair values could not be reliably measured for equity investments with carrying amounts totaling €935 mn (2004: €167 mn). These investments are primarily investments in privately held corporations and partnerships. During the year ended December 31, 2005, such investments with carrying amounts of €2 mn (2004: €20 mn) were sold leading to gains of €2 mn (2004: €2 mn) and losses of €0 mn (2004: €6 mn).

 

F-50


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Real estate used by third-parties

 

         2005    

        2004    

        2003    

 
     € mn     € mn     € mn  

Cost as of 1/1/

   14,710     13,672     13,621  

Accumulated depreciation as of 1/1/

   (4,082 )   (3,171 )   (2,874 )
    

 

 

Carrying amount as of 1/1/

   10,628     10,501     10,747  

Additions

   608     1,669     712  

Changes in the consolidated subsidiaries of the Allianz Group

   240     83     (228 )

Disposals

   (740 )   (709 )   (594 )

Reclassifications

   (745 )   —       345  

Foreign currency translation adjustments

   71     (5 )   (184 )

Depreciation and impairments(*)

   (493 )   (911 )   (297 )
    

 

 

Carrying amount as of 12/31/

   9,569     10,628     10,501  

Accumulated depreciation as of 12/31/

   4,575     4,082     3,171  
    

 

 

Cost as of 12/31/

   14,144     14,710     13,672  
    

 

 


(*) For the year ended December 31, 2005, includes impairments of €240 mn (2004: €653 mn; 2003: €30 mn).

 

As of December 31, 2005, the fair value of real estate used by third parties was €12,901 mn (2004: €14,181 mn). As of December 31, 2005, real estate used by third parties pledged as security, and other restrictions on title, were €55 mn (2004: €61 mn).

 

9    Loans and advances to banks and customers

 

Loans and advances to banks

 

     2005

    2004

 

As of 12/31/


   Germany

    Other
countries


    Total

    Germany

    Other
countries


    Total

 
     € mn     € mn     € mn     € mn     € mn     € mn  

Loans

   61,149     4,339     65,488     54,332     5,211     59,543  

Reverse repurchase agreements and collateral paid for securities borrowing transactions

   24,055     45,323     69,378     18,520     84,886     103,406  

Short-term investments and certificates of deposit

   1,590     3,702     5,292     1,578     6,151     7,729  

Other

   1,787     9,640     11,427     4,344     6,752     11,096  
    

 

 

 

 

 

Subtotal

   88,581     63,004     151,585     78,774     103,000     181,774  

Loan loss allowance

   (11 )   (190 )   (201 )   (2 )   (229 )   (231 )
    

 

 

 

 

 

Total

   88,570     62,814     151,384     78,772     102,771     181,543  
    

 

 

 

 

 

Due within one year

               93,762                 132,200  

Due after more than one year

               57,823                 49,574  
                

             

Total

               151,585                 181,774  
                

             

 

F-51


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Loans and advances to customers

 

     2005

    2004

 

As of 12/31/


   Germany

    Other
countries


    Total

    Germany

    Other
countries


    Total

 
     € mn     € mn     € mn     € mn     € mn     € mn  

Corporate customers

   30,933     92,082     123,015     38,148     95,816     133,964  

Public authorities

   2,739     1,800     4,539     4,014     2,898     6,912  

Private customers

   57,218     2,098     59,316     52,203     6,505     58,708  
    

 

 

 

 

 

Subtotal

   90,890     95,980     186,870     94,365     105,219     199,584  

Loan loss allowance

   (1,143 )   (303 )   (1,446 )   (3,365 )   (539 )   (3,904 )
    

 

 

 

 

 

Total

   89,747     95,677     185,424     91,000     104,680     195,680  
    

 

 

 

 

 

Due within one year

               103,425                 98,922  

Due after more than one year

               83,445                 100,662  
                

             

Total

               186,870                 199,584  
                

             

 

Loans and advances to customers by type of loan, are comprised of the following:

 

As of 12/31/


   2005

   2004

     € mn    € mn

Loans

   114,933    119,832

Reverse repurchase agreements and collateral paid for securities borrowing transactions

   60,981    70,459

Other

   10,956    9,293
    
  

Total

   186,870    199,584
    
  

 

The table shown below provides a breakdown of loans and advances to customers, by economic sector:

 

As of 12/31/


   2005

   2004

     € mn    € mn

Germany

         

Manufacturing industry

   5,425    6,459

Construction

   721    812

Wholesale and retail trade

   5,023    3,979

Financial institutions (excluding banks) and insurance companies

   5,988    8,849

Service providers

   10,425    12,060

Other

   3,351    5,989
    
  

Corporate customers

   30,933    38,148

Public authorities

   2,739    4,014

Private customers

   57,218    52,203
    
  

Subtotal

   90,890    94,365
    
  

Other countries

         

Industry, wholesale and retail trade and service providers

   10,732    11,419

Financial institutions (excluding banks) and insurance companies

   75,957    78,001

Other

   5,393    6,396
    
  

Corporate customers

   92,082    95,816

Public authorities

   1,800    2,898

Private customers

   2,098    6,505
    
  

Subtotal

   95,980    105,219
    
  

Total

   186,870    199,584
    
  

 

F-52


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

As of December 31, 2005, unearned income related to discounts deducted from loan balances was €85 mn (2004: €103 mn).

 

As of December 31, 2005, loans and advances to customers include amounts receivable under finance leases at their net investment value totaling €1,500 mn (2004: €1,247 mn). As of December 31, 2005, the corresponding gross investment value of these leases amounts to €2,177 mn (2004: €1,517 mn), and the associated unrealized finance income is €677 mn (2004: €270 mn). As of December 31, 2005 and 2004, the residual values of the entire leasing portfolio were fully insured. During the year ended December 31, 2005, lease payments received were recognized as income in the amount of €122 mn (2004: €42 mn; 2003: €80 mn). As of December 31, 2005 and 2004, an allowance for uncollectible lease payments was not recorded. As of December 31, 2005, the total amounts receivable under leasing arrangements include €155 mn (2004: €371 mn) due within one year, €593 mn (2004: €388 mn) due within one to five years, and €752 mn (2004: €758 mn) due after more than five years, as of December 31, 2005.

 

Loan loss allowance

 

As of December 31, 2005, the overall volume of risk provisions includes loan loss allowances deducted from loans and advances to banks and customers in the amount of €1,647 mn (2004: €4,135 mn; 2003: €5,725 mn) and provisions for contingent liabilities, such as guarantees, loan commitments and other obligations included in other accrued liabilities in the amount of €117 mn (2003: €371 mn; 2003: €549 mn).

Changes in the loan loss allowance

 

     Specific allowances

    Country risk
allowances


   

General

allowances(*)


    Total

 
     2005

    2004

    2003

    2005

    2004

    2003

    2005

    2004

    2003

    2005

    2004

    2003

 
     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn  

As of 1/1/

   3,685     5,304     6,415     261     270     367     560     700     818     4,506     6,274     7,600  

Changes in the consolidated subsidiaries of the Allianz Group

   (3 )   (251 )   (60 )   —       —       —       —       (62 )   (3 )   (3 )   (313 )   (63 )

Additions charged to the income statement

   604     1,313     2,154     83     117     42     87     9     4     774     1,439     2,200  

Charge-offs

   (2,829 )   (1,900 )   (2,034 )   —       —       (7 )   —       —       —       (2,829 )   (1,900 )   (2,041 )

Amounts released

   (641 )   (756 )   (858 )   (90 )   (119 )   (95 )   (51 )   (98 )   (150 )   (782 )   (973 )   (1,103 )

Other additions/reductions

   40     6     (67 )   (48 )   1     4     63     13     34     55     20     (29 )

Foreign currency translation adjustments

   24     (31 )   (246 )   19     (8 )   (41 )   —       (2 )   (3 )   43     (41 )   (290 )
    

 

 

 

 

 

 

 

 

 

 

 

As of 12/31/

   880     3,685     5,304     225     261     270     659     560     700     1,764     4,506     6,274  
    

 

 

 

 

 

 

 

 

 

 

 


(*) Includes particular allowances.

 

 

The following tables present information relating to the Allianz Group’s impaired and non-accrual loans:

 

As of 12/31/


   2005

   2004

     € mn    € mn

Impaired loans

   2,888    6,732

Impaired loans with specific allowances

   1,754    6,048

Impaired loans with particular allowances

   562    —  

Non-accrual loans

   2,102    5,605

For the years ended 12/31/


  2005

  2004

  2003

    € mn   € mn   € mn

Average balance of impaired loans

  4,581   8,479   11,780

Interest income recognized on impaired loans

  36   104   117

Interest income not recognized from non-accrual loans

  102   244   367

Interest collected and recorded on non-accrual loans

  4   49   49

 

F-53


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

As of December 31, 2005, the Allianz Group had €39 mn (2004: €48 mn) of commitments to lend additional funds to borrowers whose loans are non-performing or whose terms have been previously restructured.

 

10    Financial assets carried at fair value through income

 

As of 12/31/


   2005

   2004

     € mn    € mn

Financial assets held for trading

   166,184    194,439

Financial assets for unit linked contracts

   54,661    41,409

Financial assets designated at fair value through income

   14,162    4,726
    
  

Total

   235,007    240,574
    
  

 

Financial assets held for trading

 

As of 12/31/


   2005

   2004

     € mn    € mn

Equity securities

   30,788    20,033

Debt securities

   109,384    153,858

Derivative financial instruments

   26,012    20,548
    
  

Total

   166,184    194,439
    
  

 

Equity and debt securities held in financial assets held for trading are primarily marketable and listed securities. As of December 31, 2005, the debt securities include €38,375 mn (2004: €87,509 mn) from public-sector issuers and €71,009 mn (2004: €66,349 mn) from other issuers.

 

As of December 31, 2005, the portion of trading gains and losses from financial assets held for trading amounted to €1,161 mn (2004: €2,285 mn) and to €2,706 mn (2004: €2,555 mn), respectively.

 

Financial assets designated at fair value through income

 

As of 12/31/


   2005

   2004

     € mn    € mn

Equity securities

   3,476    1,751

Debt securities

   10,686    2,975
    
  

Total

   14,162    4,726
    
  

 

11    Cash and cash equivalents

 

As of 12/31/


   2005

   2004

     € mn    € mn

Balances with banks payable on demand and checks

   26,640    12,621

Balances with central banks

   3,807    1,384

Cash on hand

   1,045    963

Treasury bills, discounted treasury notes and similar treasury securities

   23    465

Bills of exchange

   132    195
    
  

Total

   31,647    15,628
    
  

 

As of December 31, 2005, compulsory deposits on accounts with national central banks under restrictions due to required reserves from the European Central Bank totaled €3,232 mn (2004: €264 mn).

 

12    Amounts ceded to reinsurers from reserves for insurance and investment contracts

 

As of 12/31/


   2005

   2004

     € mn    € mn

Unearned premiums

   1,448    1,238

Aggregate policy reserves

   9,770    10,276

Reserves for loss and loss adjustment expenses

   10,874    10,684

Other insurance reserves

   28    112
    
  

Total

   22,120    22,310
    
  

 

Changes in aggregrate policy reserves ceded to reinsurers are as follows:

 

     2005

 
     € mn  

Carrying amount as of 1/1/

   10,276  

Foreign currency translation adjustments

   443  

Change recorded in insurance and investment contract benefits (net)

   134  

Other changes(*)

   (1,083 )
    

Carrying amount as of 12/31/

   9,770  
    


(*) Primarily relates to novation of quota share reinsurance agreement.

 

The Allianz Group reinsures a portion of the risks it underwrites in an effort to control its exposure to losses and events and protect capital resources. For international corporate risks exposures exceeding the

 

F-54


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

relevant retention levels of the Allianz Group’s subsidiaries are reinsured internally by Allianz Global Risks Rückversicherungs-AG (“AGR”) where the portfolio is pooled and with risks exceeding retention limits ceded by external reinsurance. The Allianz Group maintains a centralized program for natural catastrophe events which pools exposures from a number of subsidiaries by internal reinsurance agreements with Allianz AG. Allianz AG limits exposures in this portfolio through external reinsurance. For other risks, the subsidiaries of the Allianz Group maintain individual reinsurance programs. Allianz AG participates as a reinsurer on an arms’ length basis in these programs.

 

Reinsurance involves credit risk and is subject to aggregate loss limits. Reinsurance does not legally discharge the Allianz Group from primary liability under the reinsured policies. Although the reinsurer is liable to the Allianz Group to the extent of the reinsurance ceded, the Allianz Group remains primarily liable as the direct insurer on all risks it underwrites, including the portion that is reinsured. The Allianz Group monitors the financial condition of its reinsurers on an ongoing basis and reviews its reinsurance arrangements periodically in order to evaluate the reinsurer’s ability to fulfill its obligations to the Allianz Group under existing and planned reinsurance contracts. The Allianz Group’s evaluation criteria, which includes the claims-paying and debt ratings, capital and surplus levels, and marketplace reputation of its reinsurers, are such that the Allianz Group believes any risks of collectibility to which it is exposed are not significant, and historically the Allianz Group subsidiaries have not experienced difficulty in collecting from their reinsurers. Additionally, and as appropriate, the Allianz Group may also require letters of credit, deposits, or other financial measures to further minimize its exposure to credit risk. In certain cases, however, the Allianz Group does establish an allowance for doubtful amounts related to reinsurance as appropriate, although this amount was not significant as of December 31, 2005 and 2004.

 

Concentrations the Allianz Group has with individual reinsurers include Munich Re, Swiss Reinsurance Company, GE Global Insurance Holding Corporation and SCOR. As of December 31, 2005, amounts ceded to reinsurers for insurance and investment contracts includes €7,613 mn (2004: € 8,590 mn) related to Munich Re.

 

13    Other assets

 

As of 12/31/


   2005

   2004

     € mn    € mn

Real estate used for its own activities

   4,391    6,042

Equipment(1)

   1,385    1,470

Accounts receivable on direct insurance business(2)

   7,691    7,579

Accounts receivable on reinsurance business

   2,469    2,137

Other receivables(3)

   14,338    11,617

Other assets(4)

   8,271    4,022

Deferred sales inducements

   515    303

Deferred policy acquisition costs

   15,586    13,474

Prepaid expenses

   2,657    4,569
    
  

Total

   57,303    51,213
    
  

(1) As of December 31, 2005, cost of €7,472 mn (2004: €7,186 mn), net of accumulated depreciation of €6,087 mn (2004: €5,716 mn).
(2) As of December 31, 2005, includes accounts receivable from policyholders of €4,105 mn (2004: €4,041 mn), accounts receivable from agents and other distributors of €3,852 mn (2004: €3,671 mn) and allowances for doubtful accounts of €266 mn (2004: €133 mn).
(3) As of December 31, 2005, includes tax refunds of €2,123 mn (2004: €2,227 mn) and interest and rental receivable of €5,474 mn (2004: €5,286 mn) as of December 31, 2005. Included in tax refunds are income tax refunds of €1,523 mn (2004: €1,671 mn).
(4) As of December 31, 2005, includes derivative financial instruments used for hedging purposes that meet the criteria for hedge accounting of €839 mn (2004: €969 mn), and assets and disposal groups held for sale of €3,292 mn.

 

The accounts receivable on direct insurance business and accounts receivable on reinsurance business are due within one year. Other receivables due within one year amounted to €13,980 mn (2004: €10,518 mn), and those due after more than one year totaled €358 mn (2004: €1,099 mn).

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Real estate owned by the Allianz Group used for its own activities

 

     2005

    2004

    2003

 
     € mn     € mn     € mn  

Cost as of 1/1/

   7,799     6,543     6,854  

Accumulated depreciation as of 1/1/

   (1,757 )   (1,523 )   (1,422 )
    

 

 

Carrying amount as of 1/1/

   6,042     5,020     5,432  

Additions

   540     1,373     877  

Changes in the consolidated subsidiaries of the Allianz

                  

Group

   (2,493 )   691     (1 )

Disposals

   (318 )   (789 )   (765 )

Reclassification

   745     —       (345 )

Foreign currency translation adjustments

   84     (19 )   (77 )

Depreciation

   (209 )   (234 )   (101 )
    

 

 

Carrying amount as of 12/31/

   4,391     6,042     5,020  

Accumulated depreciation as of 12/31/

   1,966     1,757     1,523  
    

 

 

Cost as of 12/31/

   6,357     7,799     6,543  
    

 

 

 

As of December 31, 2005, the fair value of real estate owned by the Allianz Group used for its own activities was €6,227 mn (2004: €7,232 mn). As of December 31, 2005, assets pledged as security and other restrictions on title were €25 mn (2004: €34 mn).

 

Deferred sales inducements

 

Changes in the deferred sales inducements were:

 

     2005

    2004

 
     € mn     € mn  

Carrying amount as of 1/1/

   303     —    

Transfer from insurance reserves

   —       89  

Cumulative effect adjustment due to implementation of SOP 03-1

   —       23  

Additions

   209     222  

Foreign currency translation adjustment

   52     —    

Amortization

   (49 )   (31 )
    

 

Carrying amount as of 12/31/

   515     303  
    

 

 

Deferred policy acquisition costs

 

     2005

    2004

    2003

 
     € mn     € mn     € mn  

Property-Casualty

                  

Carrying amount as of 1/1/

   3,432     3,380     3,158  

Additions

   2,625     1,732     450  

Changes in the consolidated subsidiaries of the Allianz Group

   —       (60 )   2  

Foreign currency translation adjustments

   78     (51 )   (86 )

Amortization

   (2,545 )   (1,569 )   (120 )

Impairments

   —       —       (24 )
    

 

 

Carrying amount as of 12/31/

   3,590     3,432     3,380  
    

 

 

Life/Health

                  

Carrying amount as of 1/1/

   10,042     9,117     7,370  

Additions

   2,765 (*)   2,888     2,525  

Changes in the consolidated subsidiaries of the Allianz Group

   (21 )   (158 )   153  

Foreign currency translation adjustments

   539     (712 )   (521 )

Amortization

   (1,352 )   (1,093 )   (410 )

Carrying amount as of 12/31/

   11,973     10,042     9,117  
    

 

 

Asset Management

   23     —       —    
    

 

 

Total

   15,586     13,474     12,497  
    

 

 


(*) Includes €61 mn related to novation of quota share reinsurance agreement.

 

Assets and disposal groups held for sale

 

As a result of the agreements described in Note 41, the Allianz Group reclassified the carrying amount of its ownership interest in Eurohypo AG to assets held for sale. On the agreement date, as the fair value less costs to sell of the Eurohypo AG ownership interest was greater than the Allianz Group’s carrying amount, a gain or loss was not recognized. Therefore, on December 15, 2005, the

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

date of derecognition of the first tranche, the Allianz Group recognized a gain on disposal which is included in income from associated enterprises and joint ventures (net). The assets held for sale related to Eurohypo AG are included in the Banking segment.

 

During the year ended December 31, 2005, the Allianz Group reclassified the assets, including goodwill, and liabilities related to its ownership of Four Seasons Health Care Ltd., Wilmslow and BetterCare Group Limited, Kingston upon Thames to disposal groups held for sale as the classification criteria in IFRS 5 were met. On the date of reclassification, as the fair value less cost to sell was in excess of the carrying amount a gain or loss was not recognized. The disposal of Four Seasons Health Care Ltd., Wilmslow and BetterCare Group Limited, Kingston upon Thames is expected to occur during the first half of 2006. The assets and liabilities of the disposal group held for sale related to Four Seasons Health Care Ltd., Wilmslow and BetterCare Group Limited, Kingston upon Thames are included in the Property-Casualty segment.

 

Supplementary Information on the Allianz

Group’s Shareholders’ Equity and Liabilities

 

14    Shareholders’ equity

 

As of 12/31/


   2005

    2004

 
     € mn     € mn  

Issued capital

   1,039     988  

Capital reserve

   20,577     18,445  

Revenue reserves

   9,930     10,498  

Treasury shares

   (1,351 )   (4,605 )

Foreign currency translation adjustments

   (1,032 )   (2,634 )

Unrealized gains and losses (net)

   10,324     7,303  
    

 

Shareholders’ equity before minority interests

   39,487     29,995  

Minority interests in shareholders’ equity

   7,615     7,696  
    

 

Total

   47,102     37,691  
    

 

 

Issued capital

 

Issued capital at December 31, 2005 amounted to €1,039,462,400 divided into 406,040,000 registered shares. The shares have no par value but a mathematical per share value of €2.56 each as a proportion of the issued capital.

 

As of December 31, 2005, the Allianz AG had €424,100,864 (165,664,400 shares) of authorized unissued capital (Authorized Capital 2004/I) which can be issued at any time up to May 4, 2009. The Board of Management, with approval of the Supervisory Board, is authorized to exclude the pre-emptive rights of shareholders if the shares are issued against a contribution in kind and, in certain cases, if they are issued against a cash contribution.

 

As of December 31, 2005, the Allianz AG had €4,356,736 (1,701,850 shares) of authorized unissued capital (Authorized Capital 2004/II) which can be issued at any time up to May 4, 2009. The Board of Management, with approval of the Supervisory Board, is authorized to exclude the preemptive rights of shareholders if the shares are issued to employees of the Allianz Group.

 

Further, as of December 31, 2005, Allianz AG had €226,960,000 (88,656,250 shares) of unissued conditional authorized capital which will be carried out only to the extent that conversion or option rights are exercised by holders of bonds issued by Allianz AG or any of its subsidiaries or that mandatory conversion obligations are fulfilled.

 

Changes to the number of issued shares outstanding

 

     2005

   2004

 

As of 1/1/

   366,859,799    366,472,698  

Exercise of warrants

   9,000,000    —    

Capital increase for cash

   10,116,850    —    

Capital increase for employee shares

   1,148,150    1,056,250  

Change in treasury shares held for non-trading purposes

   17,165,510    (2,861 )

Change in treasury shares held for trading purposes

   1,008,088    (666,288 )
    
  

As of 31/12/

   405,298,397    366,859,799  
    
  

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

On February 18, 2005, the Allianz Group issued a subordinated bond with 11.2 mn detachable warrants, which allow the holder to purchase a share of Allianz AG. The warrants are exercisable at any time during their three year term and have an exercise price of €92 per share. The warrants were recorded in capital reserve at the premium received of €174 mn on their issuance date. During the year ended December 31, 2005, as a result of the exercise of 9 mn warrants the Allianz Group received consideration of €828 mn, which increased issued capital by €23 mn and capital reserve by €805 mn.

 

In September 2005, the Allianz Group issued 10,116,850 shares for proceeds of €1,062 mn, which increased issued capital by €26 mn and capital reserve of €1,036 mn.

 

In November 2005, 1,148,150 (2004: 1,056,250) shares were issued at a price of €103.50 (2004: €81.61) per share, enabling employees of Allianz Group subsidiaries in Germany and abroad to purchase 1,144,196 (2004: 1,051,191) shares at prices ranging from €72.45 (2004: €57.13) to €87.98 (2004: €69.37) per share. The remaining 3,954 (2004: 5,059) shares were sold on the Frankfurt stock exchange at an average price of €129.23 (2004: €95.74) per share. As a result, issued capital increased by €2 mn and capital reserve increased by €117 mn.

 

All shares issued in during the years ended December 31, 2005, and 2004 are qualifying shares from the beginning of the year of issue.

 

Dividends

 

For the year ended December 31, 2005, the Board of Management will propose to shareholders at the Annual General Meeting the distribution of a dividend of €2.00 per qualifying share. During the years ended December 31, 2004 and 2003, Allianz AG paid a dividend of €1.75 and €1.50, respectively, per qualifying share.

 

Treasury shares

 

The Annual General Meeting on May 4, 2005 (2004: May 5), authorized Allianz AG to acquire its own shares for other purposes pursuant to clause 71 (1) no. 8 of the German Stock Corporation Law (“Aktiengesetz”). During the years ended December 31, 2005 and 2004, the authorization was not used to acquire shares of Allianz AG.

 

In 2005, the Dresdner Bank Group placed 17,155,008 shares of Allianz AG in the market.

 

In order to enable Dresdner Bank Group to trade in shares of Allianz AG, the Annual General Meeting on May 4, 2005 authorized the Allianz Group’s domestic or foreign credit institutions in which Allianz AG has a majority holding to acquire treasury shares for trading purposes pursuant to clause 71 (1) no. 7 of the Aktiengesetz. During the year ended December 31, 2005, in accordance with this authorization, the credit institutions of the Allianz Group purchased 83,202,188 (2004: 29,685,678) of Allianz AG’s shares or acquired them by way of securities borrowing at an average price of €104.66 per share (2004: €88.84), which included previously held Allianz AG shares. During the year ended December 31, 2005, 87,652,805 shares (2004: 29,092,223) were disposed of or ceded from borrowed holdings at an average price of €105.06 per share (2004: €88.82). During the year ended December 31, 2005, the losses arising from treasury share transactions and in consideration of the holding, were €31 mn (2004: losses of €53 mn), which were transferred to revenue reserves.

 

The resulting short position in own shares is hedged by the use of derivatives and is reflected in the revenue reserves. Due to written put options the Allianz Group is obliged to buy own shares amounting to €1,261 mn, in case the put options are exercised.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Composition of the treasury shares

 

     Acquisition
costs


   Number of
shares


   Issued
capital


     € mn         %

As of 12/31/2005

              

Allianz AG

   50    424,035    0.10

Dresdner Bank Group

   40    317,568    0.08

Dresdner Bank Group (obligation for written put options on Allianz AG shares)

   1,261    —      —  
    
  
  

Total

   1,351    741,603    0.18
    
  
  

As of 12/31/2004

              

Allianz AG

   50    424,035    0.11

Dresdner Bank Group

   4,554    18,480,664    4.79

Other

   1    10,502    —  
    
  
  

Total

   4,605    18,915,201    4.90
    
  
  

 

Capital Requirements

 

The Allianz Group’s capital requirements are primarily dependent on our growth and the type of business that it underwrites, as well as the industry and geographic locations in which it operates. In addition, the allocation of the Allianz Group’s investments plays an important role. During the Allianz Group’s annual management planning dialogues with its operating entities, capital requirements are forecasted through business plans regarding the levels and timing of capital expenditures and investments. Regulators impose minimum capital rules on the level of both the Allianz Group’s operating entities and the Allianz Group as a whole.

 

At December 31, 2005, the Allianz Group’s eligible capital for the solvency margin, required for insurance groups under German law, was €43.6 billion (2004: €29.1 billion), surpassing the minimum legally stipulated level by €29.4 billion. This margin resulted in a cover ratio(1) of 307% (2004: 217%). In 2005, this solvency margin requirement applied only to the Allianz Group’s insurance segments and did not contain any capital requirements for the banking business.

 

On January 1, 2005, the Financial Conglomerates Directive, a supplementary EU directive, became effective in Germany. Under this 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 the related German law. The law requires that the financial conglomerate calculate the capital needed to meet the respective solvency requirements on a consolidated basis. The calculation methodology for the financial conglomerates solvency margin is still subject to uncertainties.

 

At December 31, 2005, based on the current status of discussion, the Allianz Group’s eligible capital for the solvency margin, required for the insurance segments and the banking and asset management business, was €40.0 billion (including off-balance sheet reserves(2)), surpassing the minimum legally stipulated level by €16.3 billion. This margin resulted in a cover ratio(1) of 169% in 2005.

 

Dresdner Bank is subject to the risk-adjusted capital guidelines (or “Basle Accord”) promulgated by the Basle Committee on Banking Supervision (or “BIS-rules”) and therefore calculates and reports under such guidelines to the German Federal Financial Supervisory Authority (the Bundesanstalt für Finanzdienstleistungsaufsicht, or “BaFin”) and the Deutsche Bundesbank, the German central bank. These guidelines are used to evaluate capital adequacy based primarily on the perceived credit risk associated with balance sheet assets, as well as certain off-balance sheet exposures such as unfunded loan commitments, letters of credit, and derivative and foreign exchange contracts. In addition, for Allianz AG to maintain its status as a “financial holding company” under the U.S. Gramm-Leach-Bliley Financial Modernization Act of 1999,

 


(1) Represents the ratio of the eligible capital to the required capital.
(2) Representative of the difference between fair value and book value of real estate used by third parties and investments in associated enterprises and joint ventures, net of deferred taxes, policy-holder participation and minority interest.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Dresdner Bank must be considered “well capitalized” under guidelines issued by the Board of Governors of the Federal Reserve System. To be considered “well capitalized” for these purposes, Dresdner Bank must have a Tier I Capital Ratio of a least 6% and a combined Tier I and Tier II Capital Ratio of at least 10%, and not be subject to a directive, order or written agreement to meet and maintain specific capital levels. As shown in the table below, Dresdner Bank maintained a “well capitalized” position during both 2005 and 2004.

 

The following table sets forth Dresdner Bank’s BIS capital ratios:

 

As of 12/31/


   2005(1)

   2004

     € mn    € mn

Tier I capital (core capital)

   11,126    6,867

Tier I & Tier II capital

   18,211    13,734

Tier III capital (supplementary capital)

   —      226
    
  

Total capital

   18,211    13,960
    
  

Risk-weighted assets—banking book

   108,659    100,814

Risk-weighted assets—trading book

   2,875    3,963
    
  

Total risk-weighted assets

   111,534    104,777
    
  

Tier I capital ratio (core capital) in %

   9.98    6.55

Tier I & Tier II capital ratio in %

   16.33    13.11
    
  

Total capital ratio in %

   16.33    13.32
    
  

(1) Effective June 2005, Dresdner Bank changed the accounting basis for calculation and disclosure of BIS-figures from German GAAP to IFRS.

 

The distinction between “core capital” and “supplementary capital” in the table above reflects the ability of the capital components to cover losses. Core capital, with the highest ability to cover losses, corresponds to Tier I capital, while supplementary capital corresponds to Tier II capital as such terms are defined in applicable U.S. capital adequacy rules.

 

In addition to regulatory capital requirements, Allianz AG also uses an internal risk capital model to determine how much capital is required to absorb any unexpected volatility in results of operations.

 

Certain of the Allianz Group’s insurance subsidiaries prepare individual financial statements based on local laws and regulations. These laws establish restrictions on the minimum level of capital and surplus an insurance entity must maintain and the amount of dividends that may be paid to shareholders. The minimum capital requirements and dividend restrictions vary by jurisdiction. The minimum capital requirements are based on various criteria including, but not limited to, volume of premiums written or claims paid, amount of insurance reserves, asset risk, mortality risk, credit risk, underwriting risk and off-balance sheet risk.

 

As of December 31, 2005, the Allianz Group’s insurance subsidiaries were in compliance with all applicable solvency and capital adequacy requirements.

 

Certain insurance subsidiaries are subjected to regulatory restrictions on the amount of dividends, which can be remitted to Allianz AG without prior approval by the appropriate regulatory body. Such restrictions provide that a company may only pay dividends up to an amount in excess of certain regulatory capital levels or based on the levels of undistributed earned surplus or current year income or a percentage thereof. By way of example only, the operations of our insurance subsidiaries located in the United States are subject to limitations on the payment of dividends to their parent company under applicable state insurance laws. Dividends paid in excess of these limitations generally require prior approval of the insurance commissioner of the state of domicile. The Allianz Group believes that these restrictions will not affect the ability of the Allianz AG to pay dividends to its shareholders in the future. In addition, Allianz AG is not subject to legal restrictions on the amount of dividends it can pay to its shareholders.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Comprehensive income

 

The components of comprehensive income were as follows:

 

For the years ended 12/31/


   2005

    2004

    2003

 
     € mn     € mn     € mn  

Unrealized gains and losses from investments

                  

Unrealized gains and losses arising during the year, net of deferred tax impact of €521 mn (2004: €1,451 mn; 2003: €781 mn)

   5,934     2,893     5,031  

Less: Reclassification adjustment for realized gains and losses included in net income, net of deferred tax impact of €256 mn (2004: €1,021 mn; 2003: €396 mn)

   (2,916 )   (2,036 )   (2,549 )
    

 

 

Subtotal

   3,018     857     2,482  

Foreign currency translation adjustments

   1,602     (741 )   (1,578 )

Unrealized gains and losses on derivatives related to hedging cash flows and net investments in foreign entities, net of deferred tax impact of €1 mn (2004: €0 mn; 2003: €2 mn)

   3     —       (4 )
    

 

 

Other comprehensive income

   4,623     116     900  

Net income

   4,380     2,266     2,691  
    

 

 

Comprehensive income

   9,003     2,382     3,591  
    

 

 

 

Unrealized investment gains and losses are shown net of policyholder liabilities and minority interests. As of December 31, 2005, unrealized gains, net of unrealized losses, which have been allocated to policyholder liabilities, were €14,299 mn (2004: €10,210 mn; 2003: €6,433 mn). Net amounts which have been allocated to minority interests are presented below.

 

As of December 31, 2005, ending balances in accumulated other comprehensive income for derivatives related to hedging net investments in foreign entities were €182 mn (2004: €182 mn; 2003: €182 mn).

 

Minority interests in shareholders’ equity

 

As of 12/31/


       2005    

       2004    

     € mn    € mn

Unrealized gains and losses

   1,321    1,206

Share of earnings

   1,386    1,168

Other equity components

   4,908    5,322
    
  

Total

   7,615    7,696
    
  

 

The primary subsidiaries of the Allianz Group included in minority interests are the AGF Group, Paris and the RAS Group, Milan.

 

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Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

15    Participation certificates and subordinated liabilities

 

     Contractual Maturity Date

          
     2006

    2007

    2008

    2009

    2010

    Thereafter

    As of
12/31/2005


   As of
12/31/2004


     € mn(1)     € mn(1)     € mn(1)     € mn(1)     € mn(1)     € mn(1)     € mn(1)    € mn(1)

Allianz AG(2)

                                             

Subordinated bonds

                                             

Fixed rate

   —       —       —       —       —       1,984     1,984     

Contractual interest rate

   —       —       —       —       —       5.87 %         

Floating rate

   —       —       —       —       —       4,236     4,236     

Current interest rate

   —       —       —       —       —       5.65 %         
    

 

 

 

 

 

 
  

Subtotal

   —       —       —       —       —       6,220     6,220    4,775

Participation certificates

                                             

Floating rate(3)

   85     —       —       —       —       —       85    85
    

 

 

 

 

 

 
  

Total Allianz AG(2)

   85     —       —       —       —       6,220     6,305    4,860
    

 

 

 

 

 

 
  

Banking subsidiaries

                                             

Subordinated bonds

                                             

Fixed rate

   458     715     401     105     160     1,239     3,078     

Contractual interest rate

   3.76 %   6.30 %   5.94 %   4.17 %   6.98 %   6.25 %         

Floating rate

   12     92     54     303     32     702     1,195     

Current interest rate

   6.38 %   3.35 %   2.76 %   3.08 %   2.82 %   4.44 %         
    

 

 

 

 

 

 
  

Subtotal

   470     807     455     408     192     1,941     4,273    4,779

Hybrid equity

                                             

Fixed rate

   —       —       —       —       —       1,614     1,614    1,500

Contractual interest rate

   —       —       —       —       —       7.00 %         

Participation certificates(4)

                                             

Fixed rate

   504     940     51     —       4     —       1,499     

Contractual interest rate

   8.01 %   6.91 %   6.13 %   —       6.39 %   —             

Floating rate

   18     —       —       —       —       —       18     

Current interest rate

   3.41 %   —       —       —       —       —             
    

 

 

 

 

 

 
  

Subtotal

   522     940     51     —       4     —       1,517    1,526
    

 

 

 

 

 

 
  

Total banking subsidiaries

   992     1,747     506     408     196     3,555     7,404    7,805
    

 

 

 

 

 

 
  

All other subsidiaries

                                             

Subordinated liabilities

                                             

Fixed rate

   —       —       62     —       —       643     705     

Contractual interest rate

   —       —       6.84 %   —       —       5.35 %         

Floating rate

   —       —       —       —       —       225     225     

Current interest rate

   —       —       —       —       —       3.23 %         
    

 

 

 

 

 

 
  

Subtotal

   —       —       62     —       —       868     930    520

Hybrid equity

                                             

Fixed rate

   —       —       —       —       —       45     45    45

Contractual interest rate

   —       —       —       —       —       3.58 %         
    

 

 

 

 

 

 
  

Total all other subsidiaries

   —       —       62     —       —       913     975    565
    

 

 

 

 

 

 
  

Total

   1,077     1,747     568     408     196     10,688     14,684    13,230
    

 

 

 

 

 

 
  

(1) Except for interest rates. Interest rates represent the weighted-average.
(2) Includes subordinated bonds issued by Allianz Finance B.V. and Allianz Finance II B.V. and guaranteed by Allianz AG.
(3) The terms of the profit participation certificates provide for an annual cash distribution of 240% of the dividend paid by Allianz AG per one Allianz AG share. Holders of profit participation certificates do not have voting rights, or any rights to convert the certificates into Allianz AG shares, or rights to liquidation proceeds. Profit participation certificates are unsecured and rank pari passu with the claims of other unsecured creditors. Profit participation certificates can be redeemed by holders upon twelve months prior notice every fifth year. Allianz AG has the right to call the profit participation certificates for redemption, upon six months’ prior notice every fifth year. The next call date is December 31, 2006. Upon redemption by Allianz AG, the cash redemption price per certificate would be equal to 122.9% of the then current price of one Allianz AG share during the last three months preceding the recall of the participation certificate. In lieu of redemption for cash, Allianz AG may offer 10 Allianz AG ordinary shares per 8 profit participation certificates.
(4) Participation certificates issued by the Dresdner Bank Group which entitle holders to annual interest payments, which take priority over its shareholders’ dividend entitlements. They are subordinated to obligations for all other creditors of the issuer, except those similarly subordinated, and share in losses of the respective issuers in accordance with the conditions attached to the participation certificates. The profit participation certificates will be redeemed subject to the provisions regarding loss sharing.

 

F-62


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

On February 18, 2005, the Allianz Group issued a subordinated bond with a principal amount of €1,400 mn. The subordinated bond is perpetual; however, the Allianz Group has the right to call the bond after 12 years. The subordinated bond has a coupon rate of 4.375%.

 

On January 27, 2005, the AGF Group issued a subordinated bond with a principal amount of €400 mn. The subordinated bond is perpetual and has a coupon rate of 4.625%.

 

16    Reserves for insurance and investment contracts

 

As of 12/31/


   2005

   2004

     € mn    € mn

Unearned premiums

   13,303    12,050

Aggregate policy reserves

   249,530    229,873

Reserves for loss and loss adjustment expenses

   67,005    62,331

Reserves for premium refunds

   28,510    21,237

Premium deficiency reserves

   153    138

Other insurance reserves

   636    751
    
  

Total

   359,137    326,380
    
  

 

Unearned premiums

 

As of 12/31/


   2005

   2004

     € mn    € mn

Property-Casualty

   12,970    11,822

Life/Health

   333    228
    
  

Total

   13,303    12,050
    
  

 

Aggregate policy reserves

 

As of 12/31/


   2005

   2004

     € mn    € mn

Traditional participating insurance contracts
(SFAS 120)

   120,967    117,439

Long-duration insurance contracts (SFAS 60)

   39,679    38,442

Universal-Life type insurance contracts (SFAS 97)

   88,415    73,610

Non unit linked investment contracts

   469    382
    
  

Total

   249,530    229,873
    
  

 

Changes in aggregate policy reserves and financial liabilities for unit linked contracts were as follows:

 

    2005

 
    SFAS 120

    SFAS 60

  SFAS 97

 
    € mn     € mn   € mn  

As of 1/1/

  117,439     38,442   115,129  

Foreign currency translation adjustments

  (28 )   280   7,378  

Changes in the consolidated subsidiaries of the Allianz Group

  77     —     (99 )

Deposits from SFAS 97 contracts

  —       —     27,179  

Change recorded in premiums (net)

  —       —     (2,414 )

Change recorded in insurance and investment contract benefits (net)

  2,698     558   2,125  

Change recorded in income from financial assets and liabilities carried at fair value through income

  —       —     3,551  

Other changes

  781     399   (9,304 )
   

 
 

As of 12/31/

  120,967     39,679   143,545  
   

 
 

Comprised of

               

Universal life type insurance contracts

            88,415  

Non unit linked investment contracts

            469  

Unit linked insurance contracts

            30,320  

Unit linked investment contracts

            24,341  
             

Total

            143,545  
             

 

As of December 31, 2005, participating life business represented approximately 67% (2004: 70%) of the Allianz Group’s gross insurance in-force. During the year ended December 31, 2005, participating policies represented approximately 66%

 

F-63


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

(2004: 64%) of the gross premiums written and 63% (2004: 61%) of the life premiums earned. As of December 31, 2005, conventional participating reserves were approximately 53% (2004: 55%) of the Allianz Group’s consolidated aggregate policy reserves.

 

Reserves for loss and loss adjustment expenses

 

As of 12/31/


   2005

   2004

     € mn    € mn

Property-Casualty

   60,246    55,536

Life/Health

   6,759    6,795
    
  

Total

   67,005    62,331
    
  

 

Changes in the reserves for loss and loss adjustment expenses for the property-casualty segment

 

    2005

    2004

    2003

 
    Gross

    Ceded

    Net

    Gross

    Ceded

    Net

    Gross

    Ceded

    Net

 
    € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn  

Reserves for loss and loss adjustment expenses as of 1/1/

  55,536     (10,029 )   45,507     56,644     (12,049 )   44,595     60,054     (14,588 )   45,466  

Loss and loss adjustment expenses incurred

                                                     

Current year

  30,038     (3,620 )   26,418     28,650     (3,007 )   25,643     28,990     (3,278 )   25,712  

Prior year

  (1,589 )   423     (1,166 )   (1,281 )   835     (446 )   (371 )   650     279  
   

 

 

 

 

 

 

 

 

Subtotal

  28,449     (3,197 )   25,252     27,369     (2,172 )   25,197     28,619     (2,628 )   25,991  
   

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses paid

                                                     

Current year

  (12,667 )   905     (11,762 )   (12,260 )   886     (11,374 )   (12,697 )   837     (11,860 )

Prior year

  (13,359 )   2,572     (10,787 )   (14,393 )   2,575     (11,818 )   (16,351 )   3,196     (13,155 )
   

 

 

 

 

 

 

 

 

Subtotal

  (26,026 )   3,477     (22,549 )   (26,653 )   3,461     (23,192 )   (29,048 )   4,033     (25,015 )

Foreign currency translation adjustments and other

  2,286     (819 )   1,467     (1,020 )   551     (469 )   (2,966 )   1,144     (1,822 )

Change in the consolidated subsidiaries of the Allianz Group

  1     —       1     (804 )   180     (624 )   (15 )   (10 )   (25 )
   

 

 

 

 

 

 

 

 

Reserves for loss and loss adjustment expenses as of 12/31/

  60,246     (10,568 )   49,678     55,536     (10,029 )   45,507     56,644     (12,049 )   45,595  
   

 

 

 

 

 

 

 

 

 

Prior year’s loss and loss adjustment expenses incurred reflects the changes in estimation charged or credited to the consolidated income statement in each year with respect to the reserves for loss and loss adjustment expenses established as of the beginning of that year. During the year ended December 31, 2005, the Allianz Group recorded additional income of €1,166 mn (2004: income of €446 mn and 2003: losses of €279 mn) with respect of losses occurring in prior years. During the year ended December 31, 2005, these amounts as percentages of the net balance of the beginning of the year were 2.6% (2004: 1.0% and 2003:—0.6%).

 

F-64


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Loss and loss adjustment expenses development for the property-casualty segment

 

The following table illustrates the development of the Allianz Group’s reserves for loss and loss adjustment expenses, over the past five years. The table presents calendar year data, not accident year data. In addition, the table includes subsidiaries from the date acquired and excludes all subsidiaries disposed on a retrospective basis.

 

For the years ended 12/31/


   2000

    2001

    2002

    2003

    2004

    2005

     € mn     € mn     € mn     € mn     € mn     € mn

Loss and loss adjustment expenses

                                  

Net

   41,294     45,158     44,801     43,988     45,504     49,678

Ceded

   12,386     15,875     14,403     11,901     10,025     10,568

Gross

   53,680     61,033     59,204     55,889     55,529     60,246

Paid (cumulative) as of

                                  

One year later

   16,001     15,624     16,120     14,218     13,357      

Two years later

   22,889     24,069     23,739     20,987            

Three years later

   27,755     29,394     28,687                  

Four years later

   31,220     33,016                        

Five years later

   33,826                              

Liability re-estimated as of

                                  

One year later

   54,577     57,738     55,836     54,050     56,311      

Two years later

   53,069     55,703     55,650     55,227            

Three years later

   51,495     55,820     57,119                  

Four years later

   52,016     57,130                        

Five years later

   53,234                              

Cumulative surplus (deficiency)

                                  

Gross

   446     3,903     2,085     662     (782 )    

Gross excluding the impact of foreign exchange and other

   (1,996 )   (1,415 )   781     1,767     1,589      

Net

   2,242     4,118     450     162     (181 )    
    

 

 

 

 

   

Percent

   5.4 %   9.1 %   1.0 %   0.4 %   (0.4 )%    
    

 

 

 

 

   

 

Discounted loss and loss adjustment expenses

 

As of December 31, 2005 and 2004, the Allianz Group Property-Casualty reserves for loss and loss adjustment expenses reflected discounts of €1,326 mn and €1,220 mn, respectively.

 

The discount reflected in the reserves is related to annuities for certain long-tailed liabilities, primarily in workers’ compensation, personal accident, general liability, motor liability, individual and group health disability and employers’ liability. All of the reserves that have been discounted have payment amounts that are fixed and timing that is reasonably determinable.

 

F-65


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

The following table shows, by country, the carrying amounts of reserves for loss and loss adjustment expenses that have been discounted, and the interest rates used for discounting:

 

     Discounted reserves for
loss and loss adjustment expenses


   Amount of the discount

   Interest rate used for
discounting


As of 12/31/


             2005          

             2004          

         2005      

         2004      

         2005      

         2004      

     € mn    € mn    € mn    € m    %    %

France

   1,404    1,402    357    330    3.25    3.25

Germany

   445    407    298    278    2.75 — 4.00    2.75 — 4.00

Switzerland

   414    392    237    236    3.25    3.25

United States

   213    190    230    216    6.00    6.00

United Kingdom

   116    84    110    65    4.00 — 4.25    4.25

Belgium

   91    83    28    26    4.68    4.75

Hungary

   67    69    22    22    1.40    1.40

Portugal

   57    57    44    47    4.00    4.25
    
  
  
  
         

Total

   2,807    2,684    1,326    1,220          
    
  
  
  
         

Asbestos and Environmental (A&E) Reserves

 

In the United States, the planned external review of the asbestos & environmental (or “A&E”) liability reserves at Fireman’s Fund had no net impact at the Allianz Group level as a result of already sufficient reserves, absent a USD 65 mn loss caused by the increase in provisions for uncollectible reinsurance recoverables and unallocated loss adjustment expenses.

 

Reserves for premium refunds

 

         2005    

        2004    

       2003    

 
     € mn     € mn    € mn  

Amounts already allocated under local statutory or contractual regulations

                 

As of 1/1/

   8,794     7,326    7,131  

Foreign currency translation adjustments

   14     6    (35 )

Changes in the consolidated subsidiaries of the Allianz Group

   —       27    (7 )

Change

   2,107     1,435    237  
    

 
  

As of 12/31/

   10,915     8,794    7,326  
    

 
  

Latent reserves for premiums Refunds

                 

As of 1/1/

   12,443     8,001    6,554  

Foreign currency translation Adjustments

   (4 )   6    (25 )

Changes due to fluctuations in market value

   4,094     3,771    1,924  

Changes in the consolidated subsidiaries of the Allianz Group

   6     71    1,028  

Changes due to valuation differences charged (credited) to income

   1,056     594    (1,480 )
    

 
  

As of 12/31/

   17,595     12,443    8,001  
    

 
  

Total

   28,510     21,237    15,327  
    

 
  

 

F-66


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

17    Liabilities to banks

 

As of 12/31/


   2005

   2004

     € mn    € mn

Payable on demand

   14,534    14,003

Repurchase agreements and collateral received from securities lending transactions

   62,219    78,675

Term deposits and certificates of deposit

   73,189    96,736

Other

   2,015    1,933
    
  

Total

   151,957    191,347
    
  

Due within one year

   141,682    180,716

Due after more than one year

   10,275    10,631
    
  

Total

   151,957    191,347
    
  

 

As of December 31, 2005, liabilities to domestic banks amounted to €61,919 mn (2004: €80,326 mn) and liabilities to foreign banks amounted to €90,038 mn (2004: €111,021 mn).

 

18    Liabilities to customers

 

As of 12/31/


   2005

   2004

     € mn    € mn

Savings deposits

   2,302    2,410

Home loan savings deposits

   3,306    3,214

Payable on demand

   57,624    50,946

Repurchase agreements and collateral received from securities lending transactions

   47,064    49,276

Term deposits and certificates of deposit

   45,968    49,124

Other

   2,095    2,167
    
  

Total

   158,359    157,137
    
  

Due within one year

   143,286    148,320

Due after more than one year

   15,073    8,817
    
  

Total

   158,359    157,137
    
  

 

Liabilities to customers, by type of customer, are comprised of the following:

 

     Germany

   Other
countries


   Total

     € mn    € mn    € mn

12/31/2005

              

Corporate customers

   44,973    71,356    116,329

Public authorities

   1,026    6,105    7,131

Private customers

   27,762    7,137    34,899
    
  
  

Total

   73,761    84,598    158,359
    
  
  

12/31/2004

              

Corporate customers

   40,954    75,100    116,054

Public authorities

   1,529    6,471    8,000

Private customers

   27,807    5,276    33,083
    
  
  

Total

   70,290    86,847    157,137
    
  
  

 

As of December 31, 2005, liabilities to customers include €30,049 mn (2004: €24,989 mn) of noninterest bearing deposits.

 

F-67


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

19    Certificated liabilities

 

     Contractual Maturity Date

          
     2006

    2007

    2008

    2009

    2010

    Thereafter

    As of
12/31/2005


   As of
12/31/2004


     € mn(1)     € mn(1)     € mn(1)     € mn(1)     € mn(1)     € mn(1)     € mn(1)    € mn(1)

Allianz AG(2)

                                             

Senior bonds

                                             

Fixed rate

   85     2,184     1,620     —       —       892     4,781    5,741

Contractual interest rate

   2.93 %   2.60 %   5.00 %   —       —       5.70 %         

Exchangeable bonds

                                             

Fixed rate

   1,064     —       1,262     —       —       —       2,326    2,742

Contractual interest rate

   1.25 %   —       0.75 %   —       —       —             

Money market securities

                                             

Fixed rate

   1,131     —       —       —       —       —       1,131    1,428

Contractual interest rate

   2.29 %   —       —       —       —       —             
    

 

 

 

 

 

 
  

Total Allianz AG(2)

   2,280     2,184     2,882     —       —       892     8,238    9,911
    

 

 

 

 

 

 
  

Banking subsidiaries

                                             

Senior bonds

                                             

Fixed rate

   3,038     4,584     3,149     2,240     402     1,847     15,260     

Contractual interest rate

   5.20 %   5.32 %   4.94 %   5.38 %   4.32 %   5.17 %         

Floating rate

   3,092     1,219     1,676     1,510     873     2,632     11,002     

Current interest rate

   3.47 %   3.14 %   3.16 %   3.19 %   2.74 %   3.17 %         
    

 

 

 

 

 

 
  

Subtotal

   6,130     5,803     4,825     3,750     1,275     4,479     26,262    25,140

Money market securities

                                             

Fixed rate

   17,306     —       —       —       —       —       17,306     

Contractual interest rate

   3.99 %   —       —       —       —       —             

Floating rate

   6,981     —       —       —       —       —       6,981     

Current interest rate

   2.26 %   —       —       —       —       —             
    

 

 

 

 

 

 
  

Subtotal

   24,287     —       —       —       —       —       24,287    21,693
    

 

 

 

 

 

 
  

Total banking subsidiaries

   30,417     5,803     4,825     3,750     1,275     4,479     50,549    46,833
    

 

 

 

 

 

 
  

All other subsidiaries

                                             

Certificated liabilities

                                             

Fixed rate

   —       —       —       —       —       16     16    458

Contractual interest rate

   —       —       —       —       —       6.00 %         

Money market securities

                                             

Fixed rate

   400     —       —       —       —       —       400    550

Contractual interest rate

   2.12 %   —       —       —       —       —             
    

 

 

 

 

 

 
  

Total all other subsidiaries

   400     —       —       —       —       16     416    1,008
    

 

 

 

 

 

 
  

Total

   33,097     7,987     7,707     3,750     1,275     5,387     59,203    57,752
    

 

 

 

 

 

 
  

(1) Except for the interest rates. The interest rates represent the weighted-average.
(2) Includes senior bonds, exchangeable bonds and money market securities issued by issued by Allianz Finance B.V. and Allianz Finance II B.V. guaranteed by Allianz AG and money market securities issued by Allianz Finance Corporation, a wholly-owned subsidiary of Allianz AG, which are fully and unconditionally guaranteed by Allianz AG.

 

F-68


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

On February 18, 2005, the Allianz Group issued a senior exchangeable bond, Basket Index Tracking Equity Linked Securities (“BITES”), with a principal amount of €1,262 mn. The redemption value of the BITES is linked to the performance of the DAX Index. The BITES were issued at a DAX reference level of 4,205.115. The Allianz Group may redeem the BITES with shares of BMW AG, Munich Re and/or Siemens AG or cash. The BITES have a term of 3 years, however, the Allianz Group has the right to redeem the BITES anytime during their term. The holders of the BITES have the right to exchange the BITES during their term at the redemption value. An outperformance premium is paid annually equal to 0.75% of the average DAX Index during the reference period prior to the payment date. Upon redemption of the BITES by the Allianz Group or at maturity, the holders of the BITES receive a redemption premium of 1.75% of the redemption value. As of December 31, 2005, the Allianz Group has recorded an embedded derivative related to this transaction in financial liabilities carried at fair value through income of €409 mn.

 

On March 23, 2005, the Allianz Group repaid in cash a senior exchangeable bond with a face amount of €1,700 mn.

 

On August 26, 2005, The Allianz Group repaid a senior bond with a face amount of CHF 1,500 mn.

 

20    Financial liabilities carried at fair value through income

 

As of 12/31/


   2005

   2004

     € mn    € mn

Financial liabilities held for trading

   86,392    102,141

Financial liabilities for unit linked contracts

   54,661    41,409

Financial liabilities for puttable equity instruments

   3,137    1,386

Financial liabilities designated at fair value through income

   450    201
    
  

Total

   144,640    145,137
    
  

 

Financial liabilities held for trading

 

As of 12/31/


   2005

   2004

     € mn    € mn

Obligations to deliver securities

   49,029    72,804

Derivative financial instruments

   28,543    23,018

Other trading liabilities

   8,820    6,319
    
  

Total

   86,392    102,141
    
  

 

Financial liabilities for unit linked contracts

 

As of 12/31/


   2005

   2004

     € mn    € mn

Unit linked insurance contracts

   30,320    21,444

Unit linked investment contracts

   24,341    19,965
    
  

Total

   54,661    41,409
    
  

 

21    Other accrued liabilities

 

As of 12/31/


   2005

   2004

     € mn    € mn

Reserves for pensions and similar obligations

   5,594    5,630

Accrued taxes

   1,802    1,408

Miscellaneous accrued liabilities(*)

   6,906    6,946
    
  

Total

   14,302    13,984
    
  

(*) As of December 31, 2005, includes restructuring provisions of €186 mn (2004: €739 mn), provisions for lending related commitments of €117 mn (2004: €371 mn), provisions for employee expenses of €4,440 mn (2004: €3,451 mn), loss reserves from the non-insurance business of €235 mn (2004: €243 mn), provisions for litigation of €184 mn (2004: €155 mn), and commission reserves for agents of €216 mn (2004: €333 mn).

 

Defined benefit and defined contribution plans

 

Retirement benefits in the Allianz Group are either in the form of defined benefit or defined contribution plans. Employees, including agents in Germany, are granted such retirement benefits by the various legal entities of the Allianz Group. In Germany, these are primarily defined benefit in nature.

 

F-69


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

For defined benefit plans, the participant is granted a defined benefit by the employer or via an external entity. In contrast to defined contribution arrangements, the future cost to the employer of a defined benefit plan is not known with certainty in advance.

 

Defined benefit plans

 

The following table represents the changes in the net amount recognized for defined benefit plans:

 

     2005

    2004

 
     € mn     € mn  

Carrying amount as of 1/1/

   5,630     5,572  

Changes in the consolidated subsidiaries of the Allianz Group

   15     (27 )

Foreign currency translation adjustments

   21     (6 )

Expense

   641     672  

Payments

   (713 )   (581 )
    

 

Carrying amount as of 12/31/

   5,594     5,630  
    

 

 

The following table sets forth the changes in the projected benefit obligations, the changes in fair value of plan assets and the net amount recognized for the various Allianz Group defined benefit plans:

 

For the years ended 12/31/


   2005

    2004

 
     € mn     € mn  

Change in projected benefit obligations

            

Projected benefit obligations as of 1/1/

   14,279     13,310  

Service cost

   353     313  

Interest cost

   693     676  

Plan participants’ contributions

   66     55  

Amendments

   (44 )   7  

Actuarial losses

   2,268     646  

Foreign currency translation adjustments

   125     (52 )

Benefits paid

   (655 )   (595 )

Changes in the consolidated subsidiaries of the Allianz Group

   74     (81 )
    

 

Projected benefit obligations as of 12/31/(1)

   17,159     14,279  
    

 

Change in fair value of plan assets

            

Fair value of plan assets as of 1/1/

   7,149     6,724  

Actual return on plan assets

   883     431  

Employer contributions

   374     236  

Plan participants’ contributions

   66     55  

Foreign currency translation adjustments

   81     (36 )

Benefits paid(2)

   (293 )   (264 )

Changes in the consolidated subsidiaries of the Allianz Group

   27     3  
    

 

Fair value of plan assets as of 12/31/

   8,287     7,149  
    

 

Funded status as of 12/31/

   8,872     7,130  

Unrecognized net actuarial losses

   (3,283 )   (1,504 )

Unrecognized prior service costs

   5     4  
    

 

Net amount recognized as of 12/31/

   5,594     5,630  
    

 


(1) As of December 31, 2005, includes direct commitments of the consolidated subsidiaries of the Allianz Group of €8,164 mn (2004: €6,649 mn) and commitments through plan assets of €8,995 mn (2004: €7,630 mn).
(2) In addition, the Allianz Group paid €362 mn (2004: €331 mn) directly to plan participants.

 

F-70


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Amounts recognized in the Allianz Group’s consolidated balance sheets for defined benefit plans are as follows:

 

As of 12/31/


   2005

    2004

 
     € mn     € mn  

Prepaid benefit cost

   (262 )   (220 )

Accrued benefit cost

   5,856     5,850  
    

 

Net amount recognized

   5,594     5,630  
    

 

 

As of December 31, 2005, postretirement health benefits included in the projected benefit obligation and net amount recognized amounted to € 165 mn (2004: €97 mn) and €151 mn (2004: €107 mn), respectively.

 

As of December 31, 2005, the accumulated benefit obligation for all defined benefit plans was €16,188 mn (2004: €13,395 mn).

 

Defined benefit plans with an accumulated benefit obligation in excess of plan assets are summarized as follows:

 

As of 12/31/


   2005

   2004

     € mn    € mn

Projected benefit obligation

   16,069    12,254

Accumulated benefit obligation

   15,242    11,446

Fair value of plan assets

   7,215    5,188

 

The net periodic benefit cost related to defined benefit plans consists of the following components:

 

For the years ended 12/31/


   2005

    2004

    2003

 
     € mn     € mn     € mn  

Service cost

   353     313     314  

Interest cost

   693     676     606  

Expected return on plan assets

   (411 )   (366 )   (312 )

Amortization of prior service costs recognized

   (45 )   5     26  

Amortization of net loss recognized

   57     8     6  

(Income)/expenses of plan curtailments or settlements

   (6 )   36     (19 )
    

 

 

Net periodic benefit cost

   641     672     621  
    

 

 

 

During the year ended December 31, 2005, net periodic benefit cost includes net periodic benefit cost related to postretirement health benefits of €8 mn (2004: €7 mn).

 

Most of the amounts expensed are charged in the Allianz Group’s consolidated income statement as acquisition and administrative expenses, and loss and loss adjustment expenses (claims settlement expenses).

 

The actual return on plan assets amounted to €883 mn, €431 mn and € 379 mn during the years ended December 31, 2005, 2004 and 2003.

 

Assumptions

 

The assumptions for the actuarial computation of the projected benefit obligation, accumulated benefit obligation and the net periodic benefit cost depend on the circumstances in the particular country where the plan has been established.

 

The calculations are based on current actuarially calculated mortality estimates. Projected turnover depending on age and length of service have also been used, as well as internal Allianz Group retirement projections.

 

The weighted-average assumptions, for the Allianz Group’s defined benefit plans, used to determine projected and accumulated benefit obligation:

 

As of 12/31/


       2005    

       2004    

     %    %

Discount rate

   4.1    4.9

Rate of compensation increase

   2.7    2.7

Rate of pension increase

   1.4    1.6

 

The discount rate assumptions reflect the market yields at the balance sheet date of high-quality fixed income investments corresponding to the currency and duration of the liabilities.

 

The weighted-average assumptions used to determine net periodic benefit cost:

 

For the years ended
12/31/


       2005    

       2004    

       2003    

     %    %    %

Discount rate

   4.9    5.5    5.7

Expected long-term return on plan assets

   5.8    6.4    6.6

Rate of compensation increase

   2.7    2.8    2.9

Rate of pension increase

   1.6    1.9    1.8

 

F-71


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

For the year ended December 31, 2005, the weighted expected long-term return on plan assets was derived from the following target allocation and expected long-term rate of return for each asset category:

 

Asset category


   Target
allocation


   Weighted
expected long-term
rate of return


     %    %

Equity securities

   30.5    8.2

Debt securities

   65.0    4.8

Real estate

   3.8    4.4

Other

   0.7    0.5
    
  

Total

   100.0    5.8
    
  

 

The determination of the expected long-term rate of return for the individual asset categories is based on capital market surveys.

 

Plan assets

 

The defined benefit plans’ weighted-average asset allocations by asset category are as follows:

 

For the years ended

12/31/


   2005

   2004

     %    %

Equity securities

   28.4    26.2

Debt securities

   66.0    69.7

Real estate

   3.6    2.6

Other

   2.0    1.5
    
  

Total

   100.0    100.0
    
  

 

The bulk of the plan assets are held by the Allianz Versorgungskasse VVaG, Munich. This entity insures effectively all employees of the German insurance operations and is not additionally consolidated.

 

Plan assets do not include equity securities issued by the Allianz Group or real estate used by the Allianz Group.

 

The Allianz Group plans to gradually increase its actual equity securities allocation for plan assets of defined benefit plans.

 

Contributions

 

During the year ending December 31, 2006, the Allianz Group expects to contribute €264 mn to its defined benefit plans and pay € 367 mn directly to plan participants of its defined benefit plans, in addition to the contributions noted in Note 46.

 

Estimated future benefit payments

 

The following estimated future benefit payments are based on the same assumptions used to measure the Allianz Group’s projected and accumulated benefit obligations as of December 31, 2005, and reflect expected future service, as appropriate.

 

     € mn

2006

   576

2007

   591

2008

   621

2009

   646

2010

   692

Years 2011–2015

   3,750

 

Defined contribution plans

 

Defined contribution plans are funded through independent pension funds or similar organizations. Contributions fixed in advance (e.g., based on salary) are paid to these institutions and the beneficiary’s right to benefits exists against the pension fund. The employer has no obligation beyond payment of the contributions. The main pension fund is the Versicherungsverein des Bankgewerbes a.G., Berlin, which covers most of the banking employees in Germany.

 

During the year ended December 31, 2005, the Allianz Group recognized expense for defined contribution plans of €126 mn (2004: €110 mn; 2003: €105 mn).

 

Provisions for restructuring

 

As of December 31, 2005, the Allianz Group has provisions for restructuring for a number of restructuring programs in various segments. With the exception of those provisions for restructuring related to Dresdner Bank Group, none of the individual restructuring programs is significant. These provisions for restructuring primarily include personnel costs, which result from severance payments for employee terminations, and contract termination costs, including those relating to the termination of lease contracts, that will arise in connection with the implementation of the respective initiatives. Restructuring charges are included in other expenses.

 

F-72


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Changes in the provisions for restructuring were:

 

     2005

    2004

    2003

 
     Dresdner
Bank
Group


    Other

    Total

    Dresdner
Bank
Group


    Other

    Total

    Dresdner
Bank
Group


    Other

    Total

 
     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn  

As of 1/1/

   670     69     739     815     30     845     365     39     404  

New provisions(*)

   22     86     108     132     57     189     389     9     398  

Additions to existing provisions

   29     3     32     143     1     144     324     6     330  

Release of provisions recognized in previous years

   (48 )   (2 )   (50 )   (62 )   (11 )   (73 )   (47 )   (7 )   (54 )

Release of provisions via payments

   (288 )   (68 )   (356 )   (274 )   (8 )   (282 )   (196 )   (16 )   (212 )

Release of provisions via transfers

   (294 )   —       (294 )   —       —       —       —       —       —    

Changes in the consolidated subsidiaries of the Allianz Group

   —       —       —       (55 )   —       (55 )   (7 )   —       (7 )

Foreign currency translation adjustments

   12     —       12     (6 )   —       (6 )   (13 )   (1 )   (14 )

Other

   (13 )   8     (5 )   (23 )   —       (23 )   —       —       —    
    

 

 

 

 

 

 

 

 

As of 12/31/

   90     96     186     670     69     739     815     30     845  
    

 

 

 

 

 

 

 

 


(*) In addition, during the year ended December 31, 2005, the Allianz Group directly reflected restructuring charges of €10 mn in other expenses (2004: €87 mn; 2003: €268 mn).

 

Dresdner Bank Group’s provisions for restructuring

 

Dresdner Bank Group supplemented its existing restructuring programs introduced since 2000 with some further measures. For these combined initiatives, Dresdner Bank Group has announced plans to eliminate an aggregate of approximately 17,050 positions. As of December 31, 2005, an aggregate of approximately 15,490 positions had been eliminated and approximately 760 additional employees had contractually agreed to leave Dresdner Bank Group under these initiatives.

 

During the year ended December 31, 2005, Dresdner Bank Group recorded restructuring charges for all restructuring programs of €12 mn. This amount includes new provisions, additions to existing provisions, release of provisions recognized in previous years, and restructuring charges directly reflected in other expenses. A summary of the restructuring charges related to Dresdner Bank Group for the year ended December 31, 2005, by restructuring program is as follows:

 

     2005

 
     2005
Measures


   2004
Measures


    New
Dresdner


    Other
Programs


    Total

 
     € mn    € mn     € mn     € mn     € mn  

New provisions

   22    —       —       —       22  

Additions to existing provisions

   —      6     18     5     29  

Release of provisions recognized in previous years

   —      (16 )   (26 )   (6 )   (48 )

Restructuring charges directly reflected in the consolidate income statement

   1    1     4     3     9  

Total restructuring charges during the year ended 12/31/

   23    (9 )   (4 )   2     12  
    
  

 

 

 

Total restructuring charges incurred to date

   23    130     578 (*)   816     1,547  
    
  

 

 

 

Total restructuring charges expected to be incurred

   —      —       3     —       3  
    
  

 

 

 


(*) Includes €106 mn primarily related to outsourcing domestic retail securities processing (and custody) and payment processing activities, as well as impairment charges related to information technology systems necessitated by the revised business model.

 

F-73


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

A summary of the existing provisions for restructuring related to the Dresdner Bank Group is as follows:

 

2005 Measures

 

During the year ended December 31, 2005, Dresdner Bank Group recorded restructuring charges of €23 mn for further restructuring initiatives announced in addition to and separately from the “2004 Measures” and from the “New Dresdner” program. Through these 2005 Measures, Dresdner Bank Group plans to eliminate 250 positions mainly within the Corporate Functions Units. Approximately 25 employees had been terminated and approximately 15 additional employees had contractually agreed to leave Dresdner Bank Group pursuant to the 2005 Measures as of December 31, 2005.

 

2004 Measures

 

During the year ended December 31, 2004, further restructuring initiatives were announced by Dresdner Bank Group in addition to the ‘New Dresdner’ program. Through these 2004 Measures, Dresdner Bank Group plans to eliminate 1,100 positions mainly within the Personal Banking and Dresdner Kleinwort Wasserstein divisions, as well as within Dresdner Bank Lateinamerika, which is part of the IRU division. Approximately 540 employees (2004: 40 employees) had been terminated and approximately 310 additional employees had contractually agreed to leave Dresdner Bank Group pursuant to the 2004 Measures as of December 31, 2005.

 

New Dresdner

 

In August 2003, Dresdner Bank Group announced the “New Dresdner” program as part of its cost-cutting initiatives to eliminate approximately 4,700 positions in the banking operations by December 31, 2005. This initiative focuses on the back-office areas and the support functions, which will primarily affect Dresdner Bank Group’s head office. Approximately 3,830 employees (2004: 2,740 employees) had been terminated and approximately 340 additional employees had contractually agreed to leave Dresdner Bank Group pursuant to the New Dresdner program as of December 31, 2005.

 

In February 2003, as part of our efforts to focus on the Allianz and Dresdner Bank brands, we announced a plan to integrate the activities of Dresdner Bank Group’s direct banking subsidiary Advance Bank into the Allianz Group during the year ended December 31, 2003. This initiative involved the elimination by mid 2004 of approximately 400 positions, which were also included within the 4,700 positions of the New Dresdner program. All 400 positions had been eliminated as of December 31, 2005.

 

Other Programs

 

In addition to the above mentioned programs, there were four further cost-cutting and restructuring programs that were implemented by Dresdner Bank Group from 2000 through 2002. These programs included the Turnaround 2003 program, two restructuring activities announced during the year 2001, and the first restructuring plans established by Dresdner Bank Group in May 2000. Although the last program was announced by Dresdner Bank Group prior to its acquisition by Allianz AG it had been included in the consolidated financial statements of the Allianz Group. These programs involved an aggregated reduction of approximately 11,000 positions and the last remaining measures were completed by December 31, 2005.

 

F-74


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

A summary of the changes in the provisions for restructuring of the Dresdner Bank Group during the year ended December 31, 2005 is:

 

    Provisions
as of
1/1/2005


  Provisions recorded during 2005

    Release of
provisions
via cash
payments


    Release of
provisions
via
transfers


    Foreign
currency
translation
adjustments


  Other

    Provisions
as of
12/31/2005


      New
provisions


  Additions
to existing
provisions


  Release of
provisions
recognized
in previous
years


           
    € mn   € mn   € mn   € mn     € mn     € mn     € mn   € mn     € mn

2005 Measures

                                           

Personnel costs

  —     22   —     —       —       (3 )   —     —       19
   
 
 
 

 

 

 
 

 

Subtotal

  —     22   —     —       —       (3 )   —     —       19
   
 
 
 

 

 

 
 

 

2004 Measures

                                           

Personnel costs

  123   —     6   (15 )   (42 )   (58 )   1   —       15

Contract termination costs

  4   —     —     (1 )   —       —       —     —       3

Other

  5   —     —     —       (2 )   (2 )   —     —       1
   
 
 
 

 

 

 
 

 

Subtotal

  132   —     6   (16 )   (44 )   (60 )   1   —       19
   
 
 
 

 

 

 
 

 

New Dresdner

                                           

Personnel costs

  295   —     16   (22 )   (117 )   (112 )   1   (9 )   52

Contract termination costs

  17   —     2   (3 )   (5 )   (11 )   —     —       —  

Other

  1   —     —     (1 )   —       —       —     —       —  
   
 
 
 

 

 

 
 

 

Subtotal

  313   —     18   (26 )   (122 )   (123 )   1   (9 )   52
   
 
 
 

 

 

 
 

 

Other Programs

                                           

Personnel costs

  120   —     —     (3 )   (56 )   (57 )   —     (4 )   —  

Contract termination costs

  28   —     2   (1 )   (6 )   (24 )   1   —       —  

Other

  77   —     3   (2 )   (60 )   (27 )   9   —       —  
   
 
 
 

 

 

 
 

 

Subtotal

  225   —     5   (6 )   (122 )   (108 )   10   (4 )   —  
   
 
 
 

 

 

 
 

 

Total

  670   22   29   (48 )   (288 )   (294 )   12   (13 )   90
   
 
 
 

 

 

 
 

 

 

The development of the restructuring provisions reflects the implementation status of the restructuring initiatives. Based on the specific IFRS guidance, restructuring provisions are recognized prior to when they qualify to be recognized under the guidance for other types of provisions. In order to reflect the timely implementation of the various restructuring initiatives, restructuring provisions, as far as they are already ‘locked in’, have been transferred to the provision type, which would have been used not having a restructuring initiative in place. This applies for each single contract. For personnel costs, at the time an employee has contractually agreed to leave Dresdner Bank Group by signing either an early retirement, a partial retirement (Altersteilzeit, which is a specific type of an early retirement program in Germany), or a termination agreement the respective part of the restructuring provision has been transferred to provisions for employee expenses. In addition, provisions for vacant office spaces that result from restructuring initiatives have been transferred to ‘other’ provisions after the offices have been completely vacated. In this context, Dresdner Bank Group recorded releases of provisions via transfers to other provision categories of €294 mn.

 

F-75


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

22    Other liabilities

 

As of 12/31/


   2005

   2004

     € mn    € mn

Funds held under reinsurance business ceded

   7,105    8,706

Accounts payable on direct insurance business

   7,843    8,199

Accounts payable on reinsurance business

   1,648    1,694

Other liabilities(*)

   14,787    12,672
    
  

Total

   31,383    31,271
    
  

(*) As of December 31, 2005, includes tax accruals of €1,352 mn (2004: €1,163 mn), interest and rental liabilities of €513 mn (2004: €471 mn), social security liabilities of €176 mn (2004: €241 mn), derivative financial instruments used for hedging purposes that meet the criteria for hedge accounting of €909 mn (2004: €1,254 mn) and unprocessed sales of €420 mn (2004: €473 mn), and liabilities for disposal groups held for sale of €1,389 mn.

 

Accounts payable on direct insurance business and accounts payable on reinsurance are due within one year. Of the remaining other liabilities, €12,126 mn (2004: €10,389 mn) are due within one year, and €2,661 mn (2004: €2,283 mn) are due after more than one year.

 

23    Deferred income

 

As of December 31, 2005, includes miscellaneous deferred income of €2,493 mn (2004: €2,039 mn), which is primarily comprised of accrued interest of €2,254 mn (2004: €1,737 mn).

 

F-76


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Supplementary Information on the Allianz Group’s Consolidated Income Statement

 

24    Premiums earned (net)

 

     Property-Casualty

    Life/Health

    Total

 

For the years ended 12/31/


   Segment

    Consolidation
adjustments


    Group(*)

    Segment
adjustments


    Consolidation

    Group(*)

    Group(*)

 
     € mn     € mn     € mn     € mn     € mn     € mn     € mn  

2005

                                          

Premiums written

                                          

Direct

   40,548     —       40,548     20,707     —       20,707     61,255  

Assumed

   3,514     (244 )   3,270     243     (1 )   242     3,512  
    

 

 

 

 

 

 

Subtotal

   44,062     (244 )   43,818     20,950     (1 )   20,949     64,767  

Ceded

   (5,548 )   1     (5,547 )   (1,128 )   244     (884 )   (6,431 )
    

 

 

 

 

 

 

Net

   38,514     (243 )   38,271     19,822     243     20,065     58,336  
    

 

 

 

 

 

 

Premiums earned

                                          

Direct

   40,168     —       40,168     20,612     —       20,612     60,780  

Assumed

   3,260     (241 )   3,019     243     (2 )   241     3,260  
    

 

 

 

 

 

 

Subtotal

   43,428     (241 )   43,187     20,855     (2 )   20,853     64,040  

Ceded

   (5,411 )   2     (5,409 )   (1,125 )   241     (884 )   (6,293 )
    

 

 

 

 

 

 

Net

   38,017     (239 )   37,778     19,730     239     19,969     57,747  
    

 

 

 

 

 

 

2004

                                          

Premiums written

                                          

Direct

   40,460     —       40,460     20,246     —       20,246     60,706  

Assumed

   3,320     (794 )   2,526     470     (11 )   459     2,985  
    

 

 

 

 

 

 

Subtotal

   43,780     (794 )   42,986     20,716     (11 )   20,705     63,691  

Ceded

   (5,331 )   11     (5,320 )   (2,045 )   794     (1,251 )   (6,571 )
    

 

 

 

 

 

 

Net

   38,449     (783 )   37,666     18,671     783     19,454     57,120  
    

 

 

 

 

 

 

Premiums earned

                                          

Direct

   40,156     —       40,156     20,174     —       20,174     60,330  

Assumed

   3,335     (799 )   2,536     470     (13 )   457     2,993  
    

 

 

 

 

 

 

Subtotal

   43,491     (799 )   42,692     20,644     (13 )   20,631     63,323  

Ceded

   (5,298 )   13     (5,285 )   (2,048 )   799     (1,249 )   (6,534 )
    

 

 

 

 

 

 

Net

   38,193     (786 )   37,407     18,596     786     19,382     56,789  
    

 

 

 

 

 

 


(*) After eliminating intra-Allianz Group transactions between segments.

 

F-77


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

     Property-Casualty

    Life/Health

    Total

 

For the year ended 12/31/


   Segment

    Consolidation
adjustments


    Group(*)

    Segment
adjustments


    Consolidation

    Group(*)

    Group(*)

 
     € mn     € mn     € mn     € mn     € mn     € mn     € mn  

2003

                                          

Premiums written

                                          

Direct

   40,675     —       40,675     20,002     —       20,002     60,677  

Assumed

   2,745     (711 )   2,034     687     (11 )   676     2,710  
    

 

 

 

 

 

 

Subtotal

   43,420     (711 )   42,709     20,689     (11 )   20,678     63,387  

Ceded

   (5,415 )   11     (5,404 )   (1,951 )   711     (1,240 )   (6,644 )
    

 

 

 

 

 

 

Net

   38,005     (700 )   37,305     18,738     700     19,438     56,743  
    

 

 

 

 

 

 

Premiums earned

                                          

Direct

   40,111     —       40,111     19,967     1     19,968     60,079  

Assumed

   2,705     (712 )   1,993     687     (11 )   676     2,669  
    

 

 

 

 

 

 

Subtotal

   42,816     (712 )   42,104     20,654     (10 )   20,644     62,748  

Ceded

   (5,539 )   11     (5,528 )   (1,953 )   711     (1,242 )   (6,770 )
    

 

 

 

 

 

 

Net

   37,277     (701 )   36,576     18,701     701     19,402     55,978  
    

 

 

 

 

 

 


(*) After eliminating intra-Allianz Group transactions between segments.

 

25    Interest and similar income

 

For the years ended 12/31/


   2005

   2004

   2003

     € mn    € mn    € mn

Securities held-to-maturity

   253    269    329

Securities available-for-sale(*)

   9,986    9,010    9,288

Real estate used by third parties

   1,018    974    986

Lending, money market transactions and loans

   10,753    9,954    11,064

Leasing agreements

   122    42    80

Other interest-bearing instruments

   209    707    763
    
  
  

Total

   22,341    20,956    22,510
    
  
  

(*) During the year ended December 31, 2005, includes dividend income of €1,447 mn (2004: €1,310 mn; 2003: €1,336 mn).

 

Net interest margin from the Banking segment is comprised of the following:

 

For the years ended
12/31/


  2005

    2004

    20 03

 
    Segment

    Consolidation
adjustments


    Group(*)

    Segment

    Consolidation
adjustments


    Group(*)

    Segment

    Consolidation
adjustments


    Group(*)

 
    € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn  

Interest and similar income

  7,064     (36 )   7,028     6,471     (30 )   6,441     8,047     (46 )   8,001  

Interest expense

  (4,942 )   81     (4,861 )   (4,179 )   60     (4,119 )   (5,284 )   59     (5,225 )
   

 

 

 

 

 

 

 

 

Net interest margin

  2,122     45     2,167     2,292     30     2,322     2,763     13     2,776  

Loan loss provisions

  110     —       110     (344 )   —       (344 )   (1,014 )   —       (1,014 )
   

 

 

 

 

 

 

 

 

Net interest margin after loan loss provisions

  2,232     45     2,277     1,948     30     1,978     1,749     13     1,762  
   

 

 

 

 

 

 

 

 


(*) After eliminating intra-Allianz Group transactions between segments.

 

F-78


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

26    Income from investments in associated enterprises and joint ventures (net)

 

For the years ended 12/31/


   2005

    2004

    2003

 
     € mn     € mn     € mn  

Income

                  

Current income

   253     251     (28 )

Reversal of impairments

   —       9     5  

Realized gains from investments in associated enterprises and joint ventures(1)

   1,098     856     4,013  
    

 

 

Subtotal

   1,351     1,116     3,990  
    

 

 

Expenses

                  

Impairments

   (50 )   (59 )   (237 )

Realized losses from investments in associated enterprises and joint ventures(2)

   (32 )   (271 )   (727 )

Miscellaneous expenses

   (12 )   (9 )   (12 )
    

 

 

Subtotal

   (94 )   (339 )   (976 )
    

 

 

Total

   1,257     777     3,014  
    

 

 


(1) During the year ended December 31, 2005, includes realized gains from the disposal of subsidiaries of €274 mn (2004: €171 mn; 2003: €780 mn).
(2) During the year ended December 31, 2005, includes realized losses from the disposal of subsidiaries of €14 mn (2004: €220 mn; 2003: €515 mn).

 

27    Other income from investments

 

For the years ended 12/31/


   2005

   2004

   2003

     € mn    € mn    € mn

Realized gains from investments

              

Securities available-for-sale

   4,316    4,688    9,914

Real estate used by third parties

   373    361    494

Other investments

   —      —      12
    
  
  

Subtotal

   4,689    5,049    10,420
    
  
  

Reversals of impairments from investments

              

Securities held-to-maturity

   3    —      3

Securities available-for-sale

   17    73    65

Real estate used by third parties

   1    57    2
    
  
  

Subtotal

   21    130    70
    
  
  

Total

   4,710    5,179    10,490
    
  
  

 

28    Income from financial assets and liabilities carried at fair value through income (net)

 

For the years ended 12/31/


   2005

    2004

   2003

 
     € mn     € mn    € mn  

Income from financial assets and liabilities held for trading

                 

Banking segment(*)

   1,171     1,502    1,485  

Property-Casualty and Life/Health segments(*)

   (742 )   63    (1,273 )

Asset Management segment(*)

   2     15    30  

Subtotal

   431     1,580    242  

Income from financial assets and liabilities designated at fair value through income

   728     78    277  
    

 
  

Total

   1,159     1,658    519  
    

 
  


(*) After eliminating intra-Allianz Group transactions between segments.

 

Income from financial assets and liabilities held for trading of the Banking segment(1) is comprised of the following:

 

For the years ended 12/31/


   2005

   2004

   2003

     € mn    € mn    € mn

Trading in interest products

   473    771    664

Trading in equity products

   274    219    146

Foreign exchange/precious metals trading

   222    149    358

Other trading activities(2)

   202    363    317
    
  
  

Total

   1,171    1,502    1,485
    
  
  

(1) After eliminating intra-Allianz Group transactions between segments.
(2) During the year ending December 31, 2005, other trading activities of the Banking segment includes expenses from the application of IAS 39 of €132 mn (2004: €331; 2003: €161 mn).

 

Income from financial assets and liabilities held for trading during the year ended December 31, 2005, includes expenses of €706 mn (2004: €286 mn; 2003: €1,359 mn) from derivative financial instruments used by the Property-Casualty and Life/Health segments for which hedge accounting is not applied. This includes expenses from derivative financial instruments embedded in exchangeable bonds of

 

F-79


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

€605 mn (2004: €11 mn; 2003: €249 mn), income from derivative financial instruments which economically hedge the exchangeable bonds, however which do not qualify for hedge accounting, of €265 mn (2004: €17 mn; 2003: €251 mn) and expenses from other derivative financial instruments of €366 mn (2004: €292 mn; 2003: €1,361 mn).

 

During the year ended December 31, 2003, equity exposure was substantially reduced through the use of derivatives and direct sales. Futures and put options on indexes were used for hedging purposes that did not meet the criteria for hedge accounting. The change in the fair value of the derivatives of this macro hedge are recognized as income from financial assets and liabilities held for trading in the Allianz Group’s consolidated income statement, while the corresponding changes in the fair value of the underlying equities were directly recognized in the Allianz Group’s consolidated shareholders’ equity. The changes in the fair value of the respective underlying equities were recognized in the Allianz Group’s consolidated income statement only at the time of their realization in the capital market. The use of derivatives for macro hedges that did not meet the criteria for hedge accounting resulted in a loss of €1,351 mn for year ending December 31, 2003.

 

29    Fee and commission income, and income from service activities

 

For the years ended 12/31/


   2005

   2004

   2003

     € mn    € mn    € mn

Banking segment(1)

   2,965    2,804    2,705

Asset Management segment(1)

   3,650    3,015    2,815

Other segments(1), (2)

   1,695    1,004    540
    
  
  

Total

   8,310    6,823    6,060
    
  
  

(1) After eliminating intra-Allianz Group transactions between segments.
(2) During the year ended December 31, 2005, includes fee revenue from Four Seasons Health Care Ltd., Wilmslow and BetterCare Group Limited, Kingston upon Thames of €572 mn (2004: €163 mn).

 

Net fee and commission income from the Banking segment

 

    2005

    2004

    2003

 

For the years ended
12/31/


  Segment

    Consolidation
adjustments


    Group(*)

    Segment

    Consolidation
adjustments


    Group(*)

    Segment

    Consolidation
adjustments


    Group(*)

 
    € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn  

Fee and commission income

  3,278     (313 )   2,965     3,085     (281 )   2,804     2,956     (251 )   2,705  

Fee and commission expenses

  (512 )   24     (488 )   (492 )   27     (465 )   (506 )   43     (463 )
   

 

 

 

 

 

 

 

 

Net fee and commission income

  2,766     (289 )   2,477     2,593     (254 )   2,339     2,450     (208 )   2,242  
   

 

 

 

 

 

 

 

 


(*) After eliminating intra-Allianz Group transactions between segments.

 

Net fee and commission income from the Allianz Group’s Banking segment(*), by type of business, is comprised of the following:

 

For the years ended 12/31/


       2005    

       2004    

       2003    

     € mn    € mn    € mn

Securities business

   1,074    951    1,027

Payment transactions

   357    375    372

Mergers and acquisitions advisory

   219    155    110

Underwriting business (new issues)

   101    95    104

Foreign commercial business

   62    63    64

Other

   664    700    565
    
  
  

Net fee and commission income

   2,477    2,339    2,242
    
  
  

(*) After eliminating intra-Allianz Group transactions between segments.

 

F-80


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Net fee and commission income from the Asset Management segment(*)

 

For the years ended 12/31/


   2005

    2004

    2003

 
     € mn     € mn     € mn  

Fee and commission income

   3,650     3,015     2,815  

Fee and commission expenses

   (755 )   (614 )   (520 )
    

 

 

Net fee and commission income

   2,895     2,401     2,295  
    

 

 


(*) After eliminating intra-Allianz Group transactions between segments.

 

Net fee and commission income from the Allianz Group’s Asset Management segment(*), by type of business, is comprised of the following:

 

For the years ended 12/31/


   2005

   2004

   2003

     € mn    € mn    € mn

Management fees

   1,505    1,256    1,128

Advisory fees

   1,344    1,139    1,073

Other

   46    6    94
    
  
  

Net fee and commission income

   2,895    2,401    2,295
    
  
  

(*) After eliminating intra-Allianz Group transactions between segments.

 

30    Other income

 

For the years ended 12/31/


   2005

   2004

   2003

     € mn    € mn    € mn

Foreign currency transaction gains

   417    481    1,010

Fees

   443    540    729

Release of miscellaneous accrued liabilities

   350    202    433

Income from reinsurance business

   140    214    254

Gains from the disposal of real estate used for own activities and equipment

   46    199    29

Income from other assets

   28    199    73

Other

   758    698    1,275
    
  
  

Total

   2,182    2,533    3,803
    
  
  

 

F-81


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

31    Insurance and investment contract benefits (net)

 

PROPERTY-CASUALTY

 

    2005

    2004

    2003

 

For the years ended
12/31/


  Segment

    Consolidation
adjustments


    Group(*)

    Segment

    Consolidation
adjustments


    Group(*)

    Segment

    Consolidation
adjustments


    Group(*)

 
    € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn  

GROSS

                                               

Claims

                                                     

Claims paid

  (26,294 )       268     (26,026 )   (27,321 )       668     (26,653 )   (29,718 )       670     (29,048 )

Change in loss reserves

  (2,420 )   (3 )   (2,423 )   (722 )   6     (716 )   423     6     429  
   

 

 

 

 

 

 

 

 

Subtotal

  (28,714 )   265     (28,449 )   (28,043 )   674     (27,369 )   (29,295 )   676     (28,619 )

Change in other reserves

                                                     

Aggregate policy reserves

  (190 )   (45 )   (235 )   (436 )   169     (267 )   (292 )   53     (239 )

Other

  (13 )   (1 )   (14 )   (52 )   3     (49 )   (76 )   1     (75 )
   

 

 

 

 

 

 

 

 

Subtotal

  (203 )   (46 )   (249 )   (488 )   172     (316 )   (368 )   54     (314 )

Expenses for premium refunds

  (520 )   1     (519 )   (576 )   1     (575 )   (198 )   1     (197 )
   

 

 

 

 

 

 

 

 

Total

  (29,437 )   220     (29,217 )   (29,107 )   847     (28,260 )   (29,861 )   731     (29,130 )
   

 

 

 

 

 

 

 

 

CEDED REINSURANCE

                                                     

Claims

                                                     

Claims paid

  3,482     (5 )   3,477     3,467     (6 )   3,461     4,038     (5 )   4,033  

Change in loss reserves

  (287 )   7     (280 )   (1,291 )   2     (1,289 )   (1,402 )   (3 )   (1,405 )
   

 

 

 

 

 

 

 

 

Subtotal

  3,195     2     3,197     2,176     (4 )   2,172     2,636     (8 )   2,628  

Change in other reserves

                                                     

Aggregate policy reserves

  1     —       1     17     —       17     38     —       38  

Other

  (6 )   —       (6 )   1     —       1     4     —       4  
   

 

 

 

 

 

 

 

 

Subtotal

  (5 )   —       (5 )   18     —       18     42     —       42  

Expenses for premium refunds

  39     —       39     42     —       42     3     —       3  
   

 

 

 

 

 

 

 

 

Total

  3,229     2     3,231     2,236     (4 )   2,232     2,681     (8 )   2,673  
   

 

 

 

 

 

 

 

 

NET

                                                     

Claims

                                                     

Claims paid

  (22,812 )   263     (22,549 )   (23,854 )   662     (23,192 )   (25,680 )   665     (25,015 )

Change in loss reserves

  (2,707 )   4     (2,703 )   (2,013 )   8     (2,005 )   (979 )   3     (976 )
   

 

 

 

 

 

 

 

 

Subtotal

  (25,519 )   267     (25,252 )   (25,867 )   670     (25,197 )   (26,659 )   668     (25,991 )

Change in other reserves

                                               

Aggregate policy reserves

  (189 )   (45 )   (234 )   (419 )   169     (250 )   (254 )   53     (201 )

Other

  (19 )   (1 )   (20 )   (51 )   3     (48 )   (72 )   1     (71 )
   

 

 

 

 

 

 

 

 

Subtotal

  (208 )   (46 )   (254 )   (470 )   172     (298 )   (326 )   54     (272 )

Expenses for premium refunds

  (481 )   1     (480 )   (534 )   1     (533 )   (195 )   1     (194 )
   

 

 

 

 

 

 

 

 

Total

  (26,208 )   222     (25,986 )   (26,871 )   843     (26,028 )   (27,180 )   723     (26,457 )
   

 

 

 

 

 

 

 

 


(*) After eliminating intra-Allianz Group transactions between segments.

 

F-82


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

LIFE/HEALTH

 

For the years ended
12/31/


  2005

    2004

    2003

 
    Segment

    Consolidation
adjustments


    Group(*)

    Segment

    Consolidation
adjustments


    Group(*)

    Segment

    Consolidation
adjustments


    Group(*)

 
    € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn  

GROSS

                                               

Benefits paid

  (18,134 )   5     (18,129 )   (18,424 )   6     (18,418 )   (18,358 )   5     (18,353 )

Change in reserves

                                               

Aggregate policy reserves

  (5,146 )   —       (5,146 )   (4,224 )   —       (4,224 )   (5,219 )   —       (5,219 )

Other

  (84 )   (7 )   (91 )   (144 )   (2 )   (146 )   (379 )   3     (376 )
   

 

 

 

 

 

 

 

 

Subtotal

  (23,364 )   (2 )   (23,366 )   (22,792 )   4     (22,788 )   (23,956 )   8     (23,948 )

Expenses for premium refunds

  (5,410 )   (26 )   (5,436 )   (4,524 )   6     (4,518 )   (3,170 )   146     (3,024 )
   

 

 

 

 

 

 

 

 

Total

  (28,774 )   (28 )   (28,802 )   (27,316 )   10     (27,306 )   (27,126 )   154     (26,972 )
   

 

 

 

 

 

 

 

 

CEDED REINSURANCE

                                                     

Benefits paid

  1,086     (268 )   818     1,701     (668 )   1,033     1,938     (670 )   1,268  

Change in reserves

                                               

Aggregate policy reserves

  88     45     133     219     (169 )   50     (86 )   (54 )   (140 )

Other

  19     4     23     (8 )   (9 )   (17 )   51     (6 )   45  
   

 

 

 

 

 

 

 

 

Subtotal

  1,193     (219 )   974     1,912     (846 )   1,066     1,903     (730 )   1,173  

Expenses for premium refunds

  18     (1 )   17     14     (1 )   13     17     (1 )   16  
   

 

 

 

 

 

 

 

 

Total

  1,211     (220 )   991     1,926     (847 )   1,079     1,920     (731 )   1,189  
   

 

 

 

 

 

 

 

 

NET

                                                     

Benefits paid

  (17,048 )   (263 )   (17,311 )   (16,723 )   (662 )   (17,385 )   (16,420 )   (665 )   (17,085 )

Change in reserves

                                               

Aggregate policy reserves

  (5,058 )   45     (5,013 )   (4,005 )   (169 )   (4,174 )   (5,305 )   (54 )   (5,359 )

Other

  (65 )   (3 )   (68 )   (152 )   (11 )   (163 )   (328 )   (3 )   (331 )
   

 

 

 

 

 

 

 

 

Subtotal

  (22,171 )   (221 )   (22,392 )   (20,880 )   (842 )   (21,722 )   (22,053 )   (722 )   (22,775 )

Expenses for premium refunds

  (5,392 )   (27 )   (5,419 )   (4,510 )   5     (4,505 )   (3,153 )   145     (3,008 )
   

 

 

 

 

 

 

 

 

Total

  (27,563 )   (248 )   (27,811 )   (25,390 )   (837 )   (26,227 )   (25,206 )   (577 )   (25,783 )
   

 

 

 

 

 

 

 

 


(*) After eliminating intra-Allianz Group transactions between segments.

 

32    Interest and similar expenses

 

For the years ended

12/31/


   2005

    2004

    2003

 
     € mn     € mn     € mn  

Deposits

   (2,719 )   (2,085 )   (2,859 )

Certificated liabilities

   (1,570 )   (1,385 )   (1,764 )
    

 

 

Subtotal

   (4,289 )   (3,470 )   (4,623 )

Other interest expenses

   (2,081 )   (2,233 )   (2,248 )
    

 

 

Total

   (6,370 )   (5,703 )   (6,871 )
    

 

 

 

F-83


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

33    Other expenses from investments

 

For the years ended 12/31/


   2005

    2004

    2003

 
     € mn     € mn     € mn  

Realized losses from investments

                  

Securities held-to-maturity

   —       (1 )   (3 )

Securities available-for-sale

   (898 )   (890 )   (2,898 )

Real estate used by third parties

   (23 )   (52 )   (102 )

Other investment securities

   —       —       (2 )
    

 

 

Subtotal

   (921 )   (943 )   (3,005 )
    

 

 

Impairments from investments

                  

Securities held-to-maturity

   (2 )   (4 )   (10 )

Securities available-for-sale

   (263 )   (814 )   (4,136 )

Real estate used by third parties

   (240 )   (653 )   (30 )

Other investment securities

   —       —       (4 )
    

 

 

Subtotal

   (505 )   (1,471 )   (4,180 )
    

 

 

Depreciation on real estate used by third parties

   (253 )   (258 )   (267 )
    

 

 

Total

   (1,679 )   (2,672 )   (7,452 )
    

 

 

 

34    Loan loss provisions

 

For the years ended 12/31/


   2005

    2004

    2003

 
     € mn     € mn     € mn  

Additions to allowances including direct impairments

   (774 )   (1,439 )   (2,200 )

Amounts released

   782     973     1,103  

Recoveries on loans previously impaired

   101     112     70  
    

 

 

Total

   109     (354 )   (1,027 )
    

 

 

 

F-84


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

35    Acquisition costs and administrative expenses

 

    2005

    2004

    2003

 

For the years ended

12/31/


  Segment

    Consolidation
adjustments


    Group(1)

    Segment

    Consolidation
adjustments


    Group(1)

    Segment

    Consolidation
adjustments


    Group(1)

 
    € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn     € mn  

PROPERTY–CASUALTY

                                                     

Acquisition costs

                                                     

Payments

  (6,805 )   —       (6,805 )   (6,813 )   —       (6,813 )   (6,676 )   —       (6,676 )

Commissions and profit received on reinsurance business ceded

  881     (1 )   880     864     (3 )   861     920     (2 )   918  

Change in deferred acquisition costs

  153     —       153     168     31     199     247     (42 )   205  
   

 

 

 

 

 

 

 

 

Total acquisition costs

  (5,771 )   (1 )   (5,772 )   (5,781 )   28     (5,753 )   (5,509 )   (44 )   (5,553 )

Administrative expenses

  (3,794 )   37     (3,757 )   (3,849 )   42     (3,807 )   (4,002 )   95     (3,907 )
   

 

 

 

 

 

 

 

 

Underwriting costs (net)

  (9,565 )   36     (9,529 )   (9,630 )   70     (9,560 )   (9,511 )   51     (9,460 )

Expenses for management of investments

  (485 )   27     (458 )   (374 )   27     (347 )   (461 )   28     (433 )

Expenses from service agreements(2)

  (1,275 )   16     (1,259 )   (730 )   6     (724 )   (304 )   6     (298 )
   

 

 

 

 

 

 

 

 

Subtotal

  (11,325 )   79     (11,246 )   (10,734 )   103     (10,631 )   (10,276 )   85     (10,191 )
   

 

 

 

 

 

 

 

 

LIFE/HEALTH

                                               

Acquisition costs

                                               

Payments

  (3,821 )   —       (3,821 )   (4,413 )   —       (4,413 )   (3,900 )   —       (3,900 )

Commissions and profit received on reinsurance business ceded

  146     (37 )   109     241     (73 )   168     247     (52 )   195  

Change in deferred acquisition costs

  1,317     —       1,317     1,537     —       1,537     1,768     —       1,768  
   

 

 

 

 

 

 

 

 

Total acquisition costs

  (2,358 )   (37 )   (2,395 )   (2,635 )   (73 )   (2,708 )   (1,885 )   (52 )   (1,937 )

Administrative expenses

  (1,426 )   1     (1,425 )   (1,270 )   3     (1,267 )   (1,307 )   2     (1,305 )
   

 

 

 

 

 

 

 

 

Underwriting costs (net)

  (3,784 )   (36 )   (3,820 )   (3,905 )   (70 )   (3,975 )   (3,192 )   (50 )   (3,242 )

Expenses for management of investments

  (511 )   151     (360 )   (494 )   125     (369 )   (521 )   107     (414 )

Expenses from service agreements

  (137 )   31     (106 )   (134 )   63     (71 )   (225 )   49     (176 )
   

 

 

 

 

 

 

 

 

Subtotal

  (4,432 )   146     (4,286 )   (4,533 )   118     (4,415 )   (3,938 )   106     (3,832 )
   

 

 

 

 

 

 

 

 


(1) After eliminating intra–Allianz Group transactions between segments.
(2) During the year ended December 31, 2005, includes expenses from Four Seasons Health Care Ltd., Wilmslow and BetterCare Group Limited, Kingston upon Thames of €476 mn (2004: €141 mn).

 

    2005

    2004

    2003

 

For the years ended

12/31/


  Segment

    Consolidation
adjustments


  Group(*)

    Segment

    Consolidation
adjustments


  Group(*)

    Segment

    Consolidation
adjustments


  Group(*)

 
    € mn     € mn   € mn     € mn     € mn   € mn     € mn     € mn   € mn  

BANKING

                                               

Personnel expenses

  (3,323 )   —     (3,323 )   (3,325 )   —     (3,325 )   (3,637 )   1   (3,636 )

Operating expenses

  (2,177 )   39   (2,138 )   (2,191 )   57   (2,134 )   (2,449 )   33   (2,416 )

Fee and commission expenses

  (512 )   24   (488 )   (492 )   27   (465 )   (506 )   43   (463 )
   

 
 

 

 
 

 

 
 

Subtotal

  (6,012 )   63   (5,949 )   (6,008 )   84   (5,924 )   (6,592 )   77   (6,515 )
   

 
 

 

 
 

 

 
 

ASSET MANAGEMENT

                                               

Personnel expenses

  (1,679 )   —     (1,679 )   (1,459 )   —     (1,459 )   (1,495 )   —     (1,495 )

Operating expenses

  (546 )   14   (532 )   (353 )   16   (337 )   (381 )   17   (364 )

Fee and commission expenses

  (1,110 )   355   (755 )   (918 )   304   (614 )   (756 )   236   (520 )

Subtotal

  (3,335 )   369   (2,966 )   (2,730 )   320   (2,410 )   (2,632 )   253   (2,379 )
   

 
 

 

 
 

 

 
 

Total

  (25,104 )   657   (24,447 )   (24,005 )   625   (23,380 )   (23,438 )   521   (22,917 )
   

 
 

 

 
 

 

 
 


(*) After eliminating intra-Allianz Group transactions between segments.

 

F-85


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Acquisition costs and administrative expenses in the insurance segments include the personnel and operating expenses allocated to the functional areas acquisition of insurance policies, administration of insurance policies and management of investments. Other personnel and operating expenses are reported under insurance and investment contract benefits (claims settlement expenses) and other expenses.

 

All personnel and operating expenses in banking business are reported under acquisition costs and administrative expenses.

 

36    Other expenses

 

For the years ended 12/31/


  2005

    2004

    2003

 
    € mn     € mn     € mn  

Overhead expenses

  (837 )   (1,027 )   (1,129 )

Restructuring charges

  (100 )   (347 )   (942 )

Foreign currency transaction losses

  (618 )   (336 )   (676 )

Expense of transferring or increasing miscellaneous or accrued liabilities

  (580 )   (390 )   (671 )

Bad debts

  (116 )   (123 )   —    

Expenses for service activities

  —       —       (53 )

Fees

  (192 )   (219 )   (388 )

Expenses resulting from reinsurance business

  (28 )   (33 )   (38 )

Amortization and impairments of intangible assets

  (112 )   (141 )   (261 )

Direct charge to policy reserve

  (91 )   (95 )   (171 )

Amortization of capitalized loyalty bonuses to senior management of PIMCO Group

  (25 )   (125 )   (137 )

Fire protection tax

  (115 )   (113 )   (118 )

Interest on accumulated policy-holder dividends

  (95 )   (103 )   (108 )

Expenses for assistance to victims under joint and several liability and road casualties

  (100 )   (101 )   (97 )

Other

  (633 )   (938 )   (1,799 )
   

 

 

Total

  (3,642 )   (4,091 )   (6,588 )
   

 

 

 

37    Taxes

 

For the years ended 12/31/


   2005

    2004

    2003

 
     € mn     € mn     € mn  

Current taxes

                  

Germany

   (1,020 )   (373 )   (660 )

Other countries

   (1,025 )   (930 )   (850 )
    

 

 

Subtotal

   (2,045 )   (1,303 )   (1,510 )
    

 

 

Deferred taxes

                  

Germany

   408     (32 )   1,260  

Other countries

   (425 )   (274 )   56  
    

 

 

Subtotal

   (17 )   (306 )   1,316  
    

 

 

Total income taxes

   (2,062 )   (1,609 )   (194 )

Other taxes

   (52 )   (53 )   (55 )
    

 

 

Total

   (2,114 )   (1,662 )   (249 )
    

 

 

 

During the year ended December 31, current income tax expense included a charge of €44 mn (2004: €17 mn; 2003: €531 mn) related to prior periods. The dividend distribution proposed for the year ended December 31, 2005 is expected to reduce corporate taxes for the year ended December 31, 2006 by €33 mn. Due to the “moratorium” introduced by the “bill on the reduction of tax privileges”, the dividend distribution proposed for the years ended December 31, 2004 and 2003 did not lead to a reduction of corporate taxes.

 

Of the deferred tax charge for the year ended December 31, 2005, income of €468 mn (2004: €2 mn; 2003: €141 mn) are attributable to the recognition of deferred taxes on temporary differences and expense of €492 mn (2004: €342 mn; 2003: income €1,137 mn) are attributable to tax losses carried forward. The change of applicable tax rates due to changes in tax law produced deferred tax income of €7 mn (2004: €34 mn; 2003: €28 mn). Deferred tax charge included in shareholders’ equity during the year ended December 31, 2005 amounted to €101 mn (2004: €578 mn; 2003: €169 mn).

 

The recognized income tax charge for the year ended December 31, 2005 is €278 mn lower than the expected income tax charge (2004: higher than expected by €131 mn; 2003: lower than expected by €975 mn). The following table shows the reconciliation of the expected income tax charge of the Allianz Group with the effectively recognized tax

 

F-86


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

charge. The Allianz Group’s reconciliation is a summary of the individual company-related reconciliations, which are based on the respective country-specific tax rates after consolidation effects with impact on group result are taken into account. The tax rate for domestic Allianz Group subsidiaries applied in the reconciliation includes corporate tax and the solidarity surcharge and amounts to 26.38% (2004: 26.38%; 2003: 27.96%).

 

The effective tax rate is determined on the basis of the effective income tax charge, on earnings from ordinary activities (before income tax and before minority interests), net of other taxes.

 

For the years ended 12/31/


  2005

    2004

    2003

 
    € mn     € mn     € mn  

Earnings from ordinary activities before income taxes

                 

Germany

  1,780     1,157     1,433  

Other countries

  6,048     3,886     2,378  
   

 

 

Total

  7,828     5,043     3,811  
   

 

 

Expected income tax rate in %

  29.9     29.3     30.7  
   

 

 

Expected income tax charge

  2,340     1,478     1,170  

Municipal trade tax and similar taxes

  280     227     (226 )

Net tax exempt income

  (503 )   (426 )   (1,746 )

Amortization of goodwill

  —       296     437  

Effects of tax losses

  (73 )   (68 )   (222 )

Effects of German tax law changes

  —       —       758  

Other tax settlements

  18     102     23  
   

 

 

Effective income tax charge

  2,062     1,609     194  
   

 

 

Effective tax rate in %

  26.3     31.9     5.1  
   

 

 

 

During the year ended December 31, 2005, a deferred tax charge of €4 mn (2004: €129 mn; 2003: €0 mn) was recognized due to a devaluation of deferred tax assets on tax losses carried forward. Due to the use of tax losses carried forward for which no deferred tax asset was recognized, the current income tax charge diminished by €64 mn (2004: €193 mn; 2003: €33 mn). The recognition of deferred tax assets on losses carried forward from earlier periods, for which no deferred taxes had yet been recognized or which had been devalued resulted in a deferred tax income of €39 mn (2004: €87 mn; 2003: €443 mn). The non-recognition of deferred taxes on tax losses for the current fiscal year increased tax charges by €26 mn (2004: €83 mn; 2003: €254 mn). The above mentioned effects are shown in the reconciliation statement as “effects of tax losses”.

 

The effect of changes in German tax law of €758 mn recorded in 2003 was the result of a law passed in December 2003 abolishing the tax-exempt status of dividends and gains from the sale of interests in corporations for life and health insurance companies. In addition, the taxation regarding investment funds had been changed.

 

The tax rates used in the calculation of the Allianz Group deferred taxes are the applicable national rates, which in 2005 ranged from 12.5% to 46.1%. Changes to tax rates already adopted on December 31, 2005, are taken into account.

 

Tax deferrals are recognized if a future reversal of the difference is expected. Deferred taxes on losses carried forward are recognized as an asset to the extent sufficient future taxable profits are available for realization.

 

F-87


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Deferred tax assets and liabilities

 

As of 12/31/


  2005

    2004

 
    € mn     € mn  

Deferred tax assets

           

Intangible assets

  370     308  

Investments

  1,555     1,673  

Trading assets

  332     186  

Deferred acquisition costs

  187     254  

Tax losses carried forward

  5,850     6,172  

Other assets

  1,308     1,637  

Insurance reserves

  3,929     3,128  

Pensions and similar reserves

  351     291  

Other liabilities

  1,546     1,325  
   

 

Total deferred tax assets

  15,428     14,974  
   

 

Valuation allowance for deferred tax assets on tax losses carried forward

  (832 )   (835 )
   

 

Net deferred tax assets

  14,596     14,139  
   

 

Deferred tax liabilities

           

Intangible assets

  805     630  

Investments

  4,930     4,389  

Trading assets

  900     990  

Deferred acquisition costs

  3,207     2,622  

Other assets

  440     933  

Insurance reserves

  2,402     2,539  

Pensions and similar reserves

  146     72  

Other liabilities

  1,791     2,175  
   

 

Total deferred tax liabilities

  14,621     14,350  
   

 

Net deferred tax (liabilities)/assets

  (25 )   (211 )
   

 

 

Tax losses carried forward

 

Tax losses carried forward at December 31, 2005 of €15,740 mn (2004: €16,566 mn) result in recognition of deferred tax assets to the extent there is sufficient certainty that the unused tax losses will be utilized. €10,886 mn (2004: €11,097 mn) of the tax losses carried forward can be utilized without time limitation. The Allianz Group believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize its deferred tax assets.

 

Tax losses carried forward are scheduled according to their expiry periods as follows:

 

For the years ending 12/31/


   € mn

2006

   248

2007

   203

2008

   140

2009

   287

2010

   87

2011

   73

2012

   39

2013

   —  

2014

   —  

2015

   —  

>10 years

   3,777

Unrestricted

   10,886
    

Total

   15,740
    

 

Allianz Life of North America Company (ALONA) has been under audit by the Internal Revenue Service (IRS) for the years ended December 31, 1991 through 1997. During the fourth quarter of 2004, ALONA and the IRS agreed on a proposed settlement of all open issues for those years. The agreement has been approved by the Joint Committee on Taxation and resulted in a tax refund.

 

Other Information

 

38    Supplementary information on the Banking segment(*)

 

Volume of foreign currency exposure from the Banking segment

 

The amounts reported constitute aggregate Euro equivalents of a wide variety of currencies outside the European Monetary Union (“EMU”). Any differences between assets and liabilities are a result of differing valuation principles. Loans and advances to banks, loans and advances to customers, liabilities to banks and liabilities to customers are reported at amortized cost, while all derivative transactions are accounted for at fair value.


(*) After eliminating intra-Allianz Group transactions between segments.

 

As of 12/31/


   USD

   GBP

   Other

   Total
2005


   Total
2004


     € mn    € mn    € mn    € mn    € mn

Balance sheet items

                        

Assets

   141,727    43,957    34,861    220,545    181,904

Liabilities

   127,035    45,494    32,664    205,193    186,528

 

F-88


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Structure of residual terms for the Banking segment

 

The following presents loans and advances and liabilities in the Allianz Group’s Banking segment according to their final maturity or call dates.

 

     Maturity at 12/31/2005

     Total

  

Up to

3 months


   > 3 months
to 1 year


   > 1 year to
5 years


   More than
5 years


     € mn    € mn    € mn    € mn    € mn

Assets

                        

Loans and advances to banks

   85,930    73,931    8,050    2,957    992

Loans and advances to customers(1)

   163,676    85,818    14,402    29,650    33,806
    
  
  
  
  

Total

   249,606    159,749    22,452    32,607    34,798
    
  
  
  
  

Liabilities

                        

Participation certificates and subordinated liabilities

   7,404    32    947    2,964    3,461

Term liabilities to banks(2)

   126,534    105,387    12,367    4,426    4,354

Liabilities to customers(2)

                        

Savings deposits and home-loan savings deposits

   5,357    1,702    3,523    109    23

Other term liabilities to customers

   94,764    84,948    2,383    2,576    4,857

Certificated liabilities

   50,549    18,507    11,963    15,517    4,562
    
  
  
  
  

Total

   284,608    210,576    31,183    25,592    17,257
    
  
  
  
  

(1) Loans and advances to customers with a residual term of up to 3 months include €5,295 mn of undated claims. These claims include credit lines available until further notice, overdraft facilities, called or overdue loans, unauthorized overdrafts, call money and internal account balances.
(2) Excluding balances payable on demand.

 

Trustee business in the Banking segment

 

The following presents trustee business within the Allianz Group’s Banking segment not recorded in the balance sheet as of December 31:

 

As of 12/31/


   2005

   2004

     € mn    € mn

Loans and advances to banks

   2,997    3,920

Loans and advances to customers

   1,405    1,889

Investments

   855    950
    
  

Total assets(*)

   5,257    6,759
    
  

Liabilities to banks

   1,035    1,044

Liabilities to customers

   4,222    5,715
    
  

Total liabilities

   5,257    6,759
    
  

(*) Including €3,420 mn (2004: €5,016 mn) of trustee loans.

 

Other banking information

 

As of December 31, 2005, the Allianz Group had deposits that have been reclassified as loan balances of €6,131 mn (2004: €8,555 mn) and deposits with related parties of €2,297 mn (2004: €2,441 mn). The Allianz Group received no deposits on terms other than those available in the normal course of banking operations. An amount of €132 mn (2004: €196 mn) eligible for refinancing with the central bank is held in cash funds.

 

The aggregate amount of certificates of deposit and other time deposits in the amount of €100,000 or more issued by the Allianz Group’s German offices at December 31, 2005 was €67,239 mn, including banks and customers (2004: €77,498 mn).

 

The aggregate amount of certificates of deposit and other time deposits in the amount of €100,000 or more issued by the Allianz Group’s non-German offices at December 31, 2005 was €24,528 mn, including banks and customers (2004: €26,505 mn).

 

F-89


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

39    Derivative financial instruments

 

Use, treatment and reporting of derivative financial instruments

 

Derivatives derive their fair values from one or more underlying assets or specified reference values.

 

Examples of derivatives include contracts for future delivery in the form of futures or forwards, options on shares or indices, interest rate options such as caps and floors, and swaps relating to both interest rates and non-interest rate markets. The latter include agreements to exchange previously defined assets or payment series.

 

Derivatives used by individual subsidiaries in the Allianz Group comply with the relevant supervisory regulations and the Allianz Group’s own internal guidelines. The Allianz Group’s investment and monitoring rules exceed regulations imposed by supervisory authorities. In addition to local management supervision, comprehensive financial and risk management systems are in force across the Allianz Group. Risk management is an integral part of the Allianz Group’s controlling process that includes identifying, measuring, aggregating and managing risks. Risk management objectives are implemented at both the Allianz Group level and by the local operational units. The use of derivatives is one key strategy used by the Allianz Group to manage its market and investment risks.

 

Insurance subsidiaries in the Allianz Group use derivatives to manage the risk exposures in their investment portfolios based on general thresholds and targets. The most important purpose of these instruments is hedging against adverse market movements for selected securities or for parts of a portfolio. Specifically, the Allianz Group selectively uses derivative financial instruments such as swaps, options and forwards to hedge against changes in prices or interest rates in their investment portfolio.

 

Within the Allianz Group’s banking business, derivatives are used both for trading purposes and to hedge against movements in interest rates, currency rates and other price risks of the Allianz Group’s investments, loans, deposit liabilities and other interest-sensitive assets and liabilities.

 

Market and counterparty risks arising from the use of derivative financial instruments are subject to control procedures. Credit risks related to counterparties are assessed by calculating gross replacement values. Market risks are monitored by means of up-to-date value-at-risk calculations and stress tests and limited by specific stop-loss limits.

 

The counterparty settlement risk is virtually excluded in the case of exchange-traded products, as these are standardized products. By contrast, over-the-counter (“OTC”) products, which are individually traded contracts, carry a theoretical credit risk amounting to the replacement value. The Allianz Group therefore closely monitors the credit rating of counterparties for OTC derivatives. In the derivatives portfolios of the Allianz Group’s banking operations 96% of the positive replacement values, which are essential for assessing counterparty risk, involve counter-parties with “investment grade” ratings. To reduce the counterparty risk from trading activities, so-called cross-product netting master agreements with the business partners are established. In the case of a defaulting counterparty, netting makes it possible to offset claims and liabilities not yet due.

 

The following tables show the distribution of derivative positions on the Allianz Group’s consolidated balance sheet date between its insurance segments and Banking and Asset Management segments.

 

F-90


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Property-Casualty and Life/Health Segments

 

    Maturity by notional
amount


  2005

    2004

 

As of 12/31/


 

Up to

1 year


  1–5
years


  Over 5
years


  Notional
principal
amounts


  Positive
fair
values


  Negative
fair
values


    Notional
principal
amounts


  Positive
fair
values


  Negative
fair
values


 
    € mn   € mn   € mn   € mn   € mn   € mn     € mn   € mn   € mn  

Interest rate contracts, consisting of

                                       

OTC

                                       

Forwards

  4,826   1,850   100   6,776   110   (10 )   —     —     —    

Swaps

  66   7,670   1,907   9,643   212   (95 )   5,467   143   (113 )

Swaptions

  —     56   700   756   12   (5 )   506   18   (2 )

Caps

  —     7,265   7,142   14,407   —     (102 )   14,008   1   (87 )

Futures

  —     —     —     —     —     —       50   —     —    

Options

  —     —     —     —     —     —       247   4   —    

Exchange traded

                                       

Futures

  1,357   4   —     1,361   2   (2 )   16   1   —    

Options

  1,084   —     —     1,084   2   —       20   —     —    
   
 
 
 
 
 

 
 
 

Subtotal

  7,333   16,845   9,849   34,027   338   (214 )   20,314   167   (202 )
   
 
 
 
 
 

 
 
 

Equity index contracts, consisting of

                                       

OTC

                                       

Forwards

  4,262   55   —     4,317   200   (599 )   649   30   (18 )

Swaps

  298   —     10   308   3   —       912   —     (1 )

Options

  19,681   3,134   23,887   46,702   1,190   (3,341 )   28,070   525   (2,092 )

Exchange traded

                                       

Futures

  4,923   —     —     4,923   4   (28 )   475   5   (2 )

Options

  1,942   —     —     1,942   2   (248 )   4,469   5   (33 )

Forwards

  —     1,262   —     1,262   —     (409 )   —     —     —    

Warrants

  1   1   —     2   1   —       20   48   —    
   
 
 
 
 
 

 
 
 

Subtotal

  31,107   4,452   23,897   59,456   1,400   (4,625 )   34,595   613   (2,146 )
   
 
 
 
 
 

 
 
 

Foreign exchange contracts, consisting of

                                       

OTC

                                       

Forwards

  1,048   —     —     1,048   9   (8 )   1,565   22   (15 )

Swaps

  32   328   52   412   35   (2 )   1,110   175   —    

Options

  —     —     —     —     —     —       22   1   —    
   
 
 
 
 
 

 
 
 

Subtotal

  1,080   328   52   1,460   44   (10 )   2,697   198   (15 )
   
 
 
 
 
 

 
 
 

Credit contracts, consisting of

                                       

OTC

                                       

Options

  —     —     —     —     —     —       5   —     —    

Swaps

  40   712   244   996   4   (3 )   365   5   (1 )
   
 
 
 
 
 

 
 
 

Subtotal

  40   712   244   996   4   (3 )   370   5   (1 )
   
 
 
 
 
 

 
 
 

Total

  39,560   22,337   34,042   95,939   1,786   (4,852 )   57,976   983   (2,364 )
   
 
 
 
 
 

 
 
 

 

As of December 31, 2005, included in equity index option contracts are equity indexed annuities with negative fair values of €2,841 mn (2004: €2,039 mn) and guaranteed minimum income benefits/guaranteed minimum death benefits with a negative fair value of €6 mn (2004: positive fair value of €37 mn).

 

The major exposures in equity contracts are in the form of options used for hedging the Allianz Group’s insurance portfolio against market fluctuations. In managing interest rate risk, long-term interest income is primarily controlled by the use of interest rate caps. In addition, exchange rate fluctuations are hedged by synthetically transforming financial assets and liabilities in foreign currencies into Euro-denominated financial instruments through foreign exchange deals and currency swaps.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Banking and Asset Management Segments

 

    Maturity by notional amount

  2005

    2004

 

As of 12/31/


 

Up to

1 year


 

1–5

years


 

Over

5 years


  Notional
principal
amounts


  Positive
fair
values


  Negative
fair
values


    Notional
principal
amounts


  Positive
fair
values


  Negative
fair
values


 
    € mn   € mn   € mn   € mn   € mn   € mn     € mn   € mn   € mn  

Interest rate contracts, consisting of

                                       

OTC

                                       

Forwards

  103,503   14,262   —     117,765   40   (33 )   105,788   25   (31 )

Swaps

  1,064,497   1,075,914   1,095,548   3,235,959   58,931   (56,849 )   2,507,529   47,217   (45,823 )

Swaptions

  25,821   34,080   35,452   95,353   1,094   (2,768 )   83,238   720   (1,708 )

Caps

  8,478   38,206   11,682   58,366   141   (112 )   50,457   84   (73 )

Floors

  7,311   17,476   6,134   30,921   404   (264 )   53,141   469   (313 )

Options

  335   648   598   1,581   57   (62 )   998   21   (10 )

Other

  8,817   205   996   10,018   64   (82 )   13,726   2   (89 )

Exchange traded

                                       

Futures

  165,853   19,435   —     185,288   105   (125 )   120,578   64   (25 )

Options

  42,985   —     —     42,985   692   (262 )   28,846   2   (9 )
   
 
 
 
 
 

 
 
 

Subtotal

  1,427,600   1,200,226   1,150,410   3,778,236   61,528   (60,557 )   2,964,301   48,604   (48,081 )
   
 
 
 
 
 

 
 
 

Equity index contracts, consisting of

                                       

OTC

                                       

Swaps

  13,995   4,139   2,371   20,505   642   (723 )   10,981   543   (686 )

Options

  102,012   112,561   5,713   220,286   9,061   (9,429 )   273,872   3,647   (4,220 )

Forwards

  70   —     —     70   —     (34 )   55   —     (1 )

Warrants

  —     —     —     —     —     —       20   1   —    

Other

  18   1,041   18   1,077   4   (11 )   66   5   (8 )

Exchange traded

                                       

Futures

  10,659   —     —     10,659   1   (38 )   8,970   8   (33 )

Options

  40,333   35,172   5,610   81,115   3,185   (3,063 )   62,733   1,734   (1,749 )
   
 
 
 
 
 

 
 
 

Subtotal

  167,087   152,913   13,712   333,712   12,893   (13,298 )   356,697   5,938   (6,697 )
   
 
 
 
 
 

 
 
 

Foreign exchange contracts, consisting of

                                       

OTC

                                       

Forwards

  392,823   11,966   5,777   410,566   4,805   (4,976 )   405,858   7,312   (8,047 )

Swaps

  14,646   49,490   18,852   82,988   2,888   (2,634 )   74,158   5,020   (4,501 )

Options

  124,954   18,441   4,788   148,183   1,340   (1,637 )   165,118   3,837   (4,345 )

Other

  590   —     —     590   1   —       —     —     —    

Exchange traded

                                       

Futures

  2,264   123   —     2,387   4   (5 )   1,624   17   (10 )

Options

  297   —     —     297   10   (2 )   —     —     —    
   
 
 
 
 
 

 
 
 

Subtotal

  535,574   80,020   29,417   645,011   9,048   (9,254 )   646,758   16,186   (16,903 )
   
 
 
 
 
 

 
 
 

Credit contracts, consisting of

                                       

OTC

                                       

Credit default swaps

  34,905   373,993   74,450   483,348   3,108   (2,711 )   260,063   1,690   (1,523 )

Total return swaps

  6,479   3,523   3,651   13,653   769   (1,249 )   7,686   747   (1,318 )
   
 
 
 
 
 

 
 
 

Subtotal

  41,384   377,516   78,101   497,001   3,877   (3,960 )   267,749   2,437   (2,841 )
   
 
 
 
 
 

 
 
 

Other contracts, consisting of

                                       

OTC

                                       

Precious metals

  6,151   2,695   2   8,848   503   (338 )   5,594   234   (196 )

Other

  926   1,260   20   2,206   48   (34 )   3,884   26   (24 )

Exchange traded

                                       

Futures

  1,317   —     —     1,317   8   —       639   —     —    

Options

  16   —     —     16   1   —       75   1   —    
   
 
 
 
 
 

 
 
 

Subtotal

  8,410   3,955   22   12,387   560   (372 )   10,192   261   (220 )
   
 
 
 
 
 

 
 
 

Total

  2,180,055   1,814,630   1,271,662   5,266,347   87,906   (87,441 )   4,245,697   73,426   (74,742 )
   
 
 
 
 
 

 
 
 

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

The primary derivative financial instruments used include interest rate derivatives, in particular interest rate swaps which are primarily entered into during the course of trading activities by our banking subsidiaries.

 

The Allianz Group principally uses fair value hedging. Important hedging instruments used by the Banking segment are interest rate swaps and forwards and currency swaps and forwards. Hedging instruments may be implemented for individual transactions (micro hedge) or for a portfolio of similar assets or liabilities (portfolio hedge).

 

The interest rate swaps used by the Banking segment in fair value hedges of the interest rate risk of certificated and subordinated liabilities had a total net fair value as of December 31, 2005 of €507 mn (2004: €707 mn). Thereof, interest rate swaps with a positive fair value of €537 mn (2004: €744 mn) are recorded in the Allianz Group’s consolidated balance sheet in other assets, and interest rate swaps with a negative fair value of €30 mn (2004: €37 mn) are recorded in other liabilities. During the year ended December 31, 2005, the fair value of the interest rate swaps increased by €43 mn (2004: decrease €5 mn), whereas the certificated and subordinated liabilities hedged decreased in fair value by €24 mn (2004: increase €13 mn), resulting in a net ineffectiveness of the hedge of €19 mn (2004: €8 mn) that is recognized in the Allianz Group’s consolidated income statement as interest and similar income. For detailed information about certificated and subordinated liabilities, see Note 15 and Note 19, respectively.

 

The derivative financial instruments used for all fair value hedges of the Allianz Group had a total negative fair value as of December 31, 2005 of €102 mn (2004: €282 mn). Ineffectiveness in fair value hedge transactions led to a net realized gain of €2 mn (2004: loss of €10 mn) and was classified consistently with the respective hedged item; €1 mn (2004: €1 mn) was excluded from the assessment of hedge effectiveness.

 

During the year ended December 31, 2005, cash flow hedges were used to hedge variable cash flows exposed to interest rate fluctuations. As of December, 31, 2005 the interest rate swaps utilized had a negative fair value of €68 mn (2004: €4 mn) other reserves in shareholders’ equity increased by €3 mn (2004: €0.3 mn). Ineffectiveness of the cash flow hedges led to net realized losses of €5 mn (2004: €0.5 mn) in 2004.

 

As of December 31, 2002, foreign exchange hedging transactions in the form of foreign currency forwards with a total fair value of €107 mn were outstanding with respect to hedges of currency risks related to a net investment in a foreign entity. This hedging strategy was terminated in the second quarter of 2003. Total unrealized gains of €182 mn related to this hedging strategy remain in other reserves.

 

Derivative Financial Instruments Indexed to Allianz Group’s shares

 

The Allianz Group enters into various types of contracts indexed to Allianz Group shares with third-parties, mainly as a hedge of Allianz Group’s future obligations under its share based compensation plans. Further, the Allianz Group issued an equity linked loan indexed to Allianz AG’s share, for which an embedded derivative has been bifurcated. In addition, in connection with various banking products offered by the Dresdner Bank Group, the Dresdner Bank Group has entered into various types of option contracts indexed to Allianz AG shares and AGF shares.

 

These contracts that are cash settled are accounted for as financial assets and liabilities held for trading. The contracts that are equity settled are accounted for as equity transactions, with the exception of written put options. The Allianz Group records a liability for the present value of its obligation to purchase the share with an offset to shareholders’ equity.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

The following table summarizes these option positions:

 

   

Total
shares


  Maturity

  Settlement

  Fair Value

   

Weighted
average
strike
price


As of 12/31/2005


    Up to
1 year


  1–5
years


 

More

than
5 years


 

of which
cash

settled


 

of which
share

settled


  of which
cash
settled


    of which
share
settled


   
                            € mn     € mn    

Derivatives on Allianz AG shares

                                       

Allianz AG activities

                                       

Long call options/warrants

  22,518,424   217,704   21,300,720   1,000,000   22,518,424   —     487     —       102

Forward purchase contracts

  4,574,891   4,574,891   —     —     4,574,891   —     154     —       95

Equity linked loan

  10,700,000   10,700,000   —     —     10,700,000   —     (243 )   —       105

Banking activities

                                       

Long call options

  24,357,414   12,601,414   11,756,000   —     6,148,170   18,209,244   188     447     112

Long put options

  18,495,959   10,426,854   8,069,105   —     4,240,775   14,255,184   38     115     114

Short call options/warrants

  23,326,959   11,970,876   11,356,083   —     5,506,227   17,820,732   (127 )   (335 )   122

Short put options

  18,307,643   10,765,911   7,541,732   —     4,627,880   13,679,763   (18 )   (63 )   97

Derivatives on AGF shares

                                       

Banking activities

                                       

Long call options

  540,000   40,000   500,000   —     540,000   —     4     —       89

Long put options

  3,000   3,000   —     —     3,000   —     —       —       83

Short call options

  599,154   75,000   524,154   —     524,154   75,000   (16 )   (3 )   6

 

40    Fair value

 

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.

 

The Allianz Group uses the following methods and assumptions to determine fair values:

 

Cash and cash equivalents The carrying amount corresponds to the fair value due to its short-term nature.

 

Investments (including financial assets and liabilities held for trading and financial assets and liabilities designated at fair value through income) The fair value of debt securities is based on market prices, provided these are available. If debt securities are not actively traded, their fair value is determined on the basis of valuations by independent data suppliers. The fair value of equity securities is based on their stock-market prices. The carrying amount and the fair value for debt securities and equity securities do not include the fair value of derivative contracts used to hedge the related debt and equity securities.

 

The fair value of derivative financial instruments is derived from the value of the underlying assets and other market parameters. Exchange-traded derivative financial instruments are valued using the fair-value method and based on publicly quoted market prices. Valuation models established in financial markets (such as present value models or option pricing models) are used to value OTC-traded derivatives. In addition to interest rate curves and volatilities, these models also take into account market and counterparty risks. Fair value represents the capital required to settle in full all the future rights and obligations arising from the financial contract.

 

Loans and advances to banks and customers The fair value of loans is calculated using the discounted cash flow method. This method uses the effective yield of similar debt instruments. Where there is doubt regarding the repayment of the loan, the anticipated cash flows are discounted using a reasonable discount rate and include a charge for an element of uncertainty in cash flows.

 

Financial assets and liabilities for unit linked contracts The fair values of financial assets for unit

 

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linked contracts were determined using the market value of the underlying investments. Fair values of financial liabilities for unit linked contracts are equal to the fair value of the financial assets for unit linked contracts.

 

Investment contracts with policyholders Fair values for investment and annuity contracts were determined using the cash surrender values of the policyholders’ and contract holders’ accounts.

 

Participation certificates, subordinated liabilities, and certificated liabilities The fair value of bonds and loans payable is estimated using discounted cash flow analyses, using interest rates currently offered for similar loans and other borrowings.

 

The following table presents the carrying amount and estimated fair value of the Allianz Group’s financial instruments:

 

     2005

   2004

As of 12/31/


   Carrying
Amount


   Fair
Value


   Carrying
Amount


   Fair
Value


     € mn    € mn    € mn    € mn

Financial assets

                   

Securities held-to-maturity

   4,826    5,102    5,179    5,387

Securities available-for-sale

   266,953    266,953    230,919    230,919

Cash and cash equivalents

   31,647    31,647    15,628    15,628

Loans and advances to banks and customers

   336,808    338,407    377,223    383,244

Financial assets held for trading

   166,184    166,184    194,439    194,439

Financial assets for unit linked contracts

   54,661    54,661    41,409    41,409

Financial assets designated at fair value through income

   14,162    14,162    4,726    4,726

Derivative financial instruments included in other assets

   839    839    969    969

Financial liabilities

                   

Investment contracts with policyholders

   88,884    91,092    59,625    57,327

Liabilities to banks and customers

   310,316    310,591    348,484    348,411

Certificated liabilities, participation certificates and subordinated liabilities

   73,887    76,454    70,982    72,885

Financial liabilities held for trading

   86,392    86,392    102,141    102,141

Financial liabilities for unit linked contracts

   54,661    54,661    41,409    41,409

Financial liabilities for puttable equity instruments

   3,137    3,137    1,386    1,386

Financial liabilities designated at fair value through income

   450    450    201    201

Derivative financial instruments included in other liabilities

   909    909    1,254    1,254

 

41    Related party transactions

 

Allianz Group companies maintain various types of ordinary course business relations (particularly in the area of insurance, banking and asset management) with related enterprises. In particular, the business relations with associated companies, which are active in the insurance business, take on various forms and may also include special service, computing, reinsurance, cost-sharing and asset management agreements, whose terms are deemed appropriate by management. Similar relationships may exist with pension funds, foundations, joint ventures and companies, which provide services to Allianz Group companies.

 

Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (“Munich Re”)

 

As a result of material changes in the relationship between Allianz Group and Munich Re in 2003 and 2004, in particular the significant reduction of the mutual shareholdings to below 10%, the cancellation of the “Principles of Cooperation” agreement and the termination of mutual board interlocks, we do not longer consider Munich Re as a related party since fiscal 2004.

 

As Munich Re is one of the biggest reinsurers in the world, the reinsurance relationship between companies of the Allianz Group and Munich Re will

 

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continue. All reinsurance and retrocession agreements are a result of the ordinary course business within which Allianz Group companies purchase reinsurance coverage from, among other reinsurers, Munich Re. These reinsurance contracts cover world-wide business within all areas (life and health, as well as property and casualty) and are subject to arms-length conditions. A major part of the reinsurance premiums relates to a quota share agreement for 10.5% of the gross self-retention of the insurance business of the subsidiaries of the Allianz German Property-Casualty Group via Allianz AG.

 

In 2003, Allianz Group ceded written premiums of €2,250 mn to Munich Re Group and assumed written premiums of €650 mn from companies of the Munich Re Group.

 

Of the Allianz Group’s total third-party reinsurance premiums ceded, approximately 33.9% were ceded to the Munich Re Group for the year ending December 31, 2003. This amount represents approximately 3.7% of the Allianz Group’s gross premiums written for the year ending December 31, 2003.

 

Eurohypo

 

Following the acquisition of Dresdner Bank AG by the Allianz Group, Dresdner Bank’s mortgage bank Deutsche Hyp, Rheinische Hypothekenbank AG, the mortgage banking subsidiary of Commerzbank, and Eurohypo, the mortgage banking subsidiary of Deutsche Bank, were merged into a single entity, Eurohypo, on August 1, 2002. As of December 31, 2004, the Allianz Group held an ownership interest of 28.48% in Eurohypo and accounted for it using the equity method. In November 2005, agreements for a two-step transfer of the 28.48% participation of Allianz Group in Eurohypo AG to Commerzbank AG were signed. In the first step, on December 15, 2005 Commerzbank AG acquired 7.35% of the 28.48% participation of Allianz Group in Eurohypo AG. Commerzbank AG’s acquisition of the residual 21.13% participation will be consummated after the fulfilment of the conditions precedent customary for such kind of transactions, in particular, after obtaining approvals from the relevant antitrust authorities and the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht—BaFin).

 

One member of the Supervisory Board of Eurohypo is a member of the Management Board of Dresdner Bank AG. As of December 31, 2005, the Allianz Group had loans to and held debt securities available-for-sale issued by Eurohypo of €11,149 mn in the aggregate. All of such loans were made in the ordinary course of business and are subject to arm’s length conditions. As of December 31, 2005, the Allianz Group’s carrying value in Eurohypo was €1,410 mn.

 

Loans to Members of the Board of Management and the Supervisory Board

 

In the normal course of business, and subject to applicable legal restrictions, members of the Board of Management and the Supervisory Board may be granted loans by Dresdner Bank AG and other Allianz Group companies. Other than such normal course loans, no loans to board members were outstanding in 2005.

 

42    Contingent liabilities, commitments, guarantees, and assets pledged and collateral

 

Litigation

 

Allianz Group companies are involved in legal, regulatory and arbitration proceedings in Germany and a number of foreign jurisdictions, including the United States, involving claims by and against them, which arise in the ordinary course of their businesses, including in connection with their activities as insurance, banking and asset management subsidiaries, employers, investors and taxpayers. It is not feasible to predict or determine the ultimate outcome of the pending or threatened proceedings. Management does not believe that the outcome of these proceedings, including those discussed below, will have a material adverse effect on the financial position or results of operations of Allianz Group, after consideration of any applicable reserves.

 

Dresdner Bank AG was one of the named defendants in a consolidated class action complaint, in re Deutsche Telekom Securities Litigation, filed in the United States District Court for the Southern District of New York in May 2001 by purported purchasers of Deutsche Telekom American Depositary Shares (ADSs) in the June 2000 offering. On June 9, 2005, the competent court delivered an order and final judgment approving the stipulation and agreement by and among Deutsche Telekom and

 

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the members of the class to settle all claims against a payment of USD 120 mn. The settlement also provides for a complete release of all claims against the underwriters, including Dresdner Bank.

 

In July 2002, the German Federal Cartel Office (Bundeskartellamt) commenced an investigation against several property-casualty insurance companies in Germany, in connection with alleged coordinated behavior to achieve premium increases in parts of the commercial and industrial insurance business and imposed administrative fines against these German insurance companies, among them Allianz Versicherungs-AG, which received a notice imposing a fine on March 22, 2005. Allianz Versicherungs-AG has appealed this decision.

 

On November 5, 2001, a lawsuit, Silverstein v. Swiss Re International Business Insurance Company Ltd., was filed in the United States District Court for the Southern District of New York against certain insurers and reinsurers, including a subsidiary of Allianz AG which is now named Allianz Global Risks US Insurance Company. The complaint sought a determination that the terrorist attack of September 11, 2001 on the World Trade Center constituted two separate occurrences under the alleged terms of various coverages. In connection with the terrorist attack of September 11, 2001 we recorded net claims expense of approximately €1.5 bn in 2001 for the Allianz Group on the basis of one occurrence. On December 6, 2004, a New York jury rendered a verdict that the World Trade Center attack constituted two occurrences under the alleged terms of various coverages. At December 31, 2005, this decision had no adverse impact on the Allianz Group’s operating results. Allianz Global Risk U.S. Insurance Co. has appealed this decision. The final implications of this decision for the Allianz Group will not be determined until the completion of further proceedings.

 

The insolvency administrator of KirchMedia GmbH & Co. KGaA (KirchMedia) made a formal demand on Dresdner Bank AG to compensate the insolvency assets (Insolvenzmasse) of KirchMedia for the loss of a 25% shareholding in the Spanish television group Telecinco. In June 2005, the insolvency administrator filed an action for a part of the claim. The shareholding had been pledged by subsidiaries of KirchMedia to Dresdner Bank AG as collateral for a loan of €500 mn from Dresdner Bank to KirchMedia’s holding company, TaurusHolding GmbH & Co. KG (or TaurusHolding). Following TaurusHolding’s default on the loan in April 2002 and insolvency in June 2002, Dresdner Bank AG acquired through a subsidiary the Telecinco shareholding in a forced auction sale. The insolvency administrator contends that the pledge was created under circumstances that cause it to be invalid or void. We believe that there is no valid basis for the insolvency administrator’s demand. At the end of June 2004, the 25% shareholding in Telecinco was placed within Telecinco’s initial public offering.

 

The insolvency administrator and the major limited partner of Heye KG have filed a complaint claiming damages of approximately €200 mn from Dresdner Bank, alleging a failure to execute transfer orders despite a purported line of credit. We believe that such claim is without merit.

 

In January 2006, a putative class action lawsuit was filed against Dresdner Bank AG and some of its subsidiaries by six employees of Dresdner Kleinwort Wasserstein in the United States District Court for the Southern District of New York. The plaintiffs are claiming an amount of USD 1.4 bn alleging gender-based discrimination. We believe that the claims are without merit.

 

On May 24, 2002, pursuant to a statutory squeeze-out procedure, the general meeting of Dresdner Bank AG resolved to transfer shares from its minority shareholders to Allianz AG as principal shareholder in return for payment of a cash settlement amounting to €51.50 per share. The amount of the cash settlement was established by Allianz AG on the basis of an expert opinion, and its adequacy was confirmed by a court-appointed auditor. Some of the former minority shareholders applied for a court review of the appropriate amount of the cash settlement in a mediation procedure (Spruchverfahren), which is pending with the district court (Landgericht) of Frankfurt. We believe that a claim to increase the cash settlement does not exist. In the event that the court were to determine a higher amount as an appropriate cash settlement, this would affect all approximately 16 mn shares which were transferred to Allianz AG.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Allianz Global Investors of America L.P. and some of its subsidiaries have been named as defendants in multiple civil US lawsuits commenced as putative class actions and other proceedings related to matters involving market timing and revenue sharing in the mutual fund industry. The outcome of these proceedings can not be predicted at this stage.

 

Three members of the Fireman’s Fund group of companies in the United States, all subsidiaries of Allianz AG, are amongst the roughly 135 defendants named in a class action filed on August 1, 2005 in the United States District Court District of New Jersey, captioned In re Insurance Brokerage Antitrust Litigation, in connection with allegations relating to contingent commissions in the insurance industry. Fireman’s Fund has filed a motion to dismiss, and the proceedings are in the preliminary discovery stage. It is not possible to predict potential outcomes or assess any eventual exposure at this point.

 

In 2005, Allianz Life Insurance Company of North America was named as a defendant in various putative class action lawsuits in Minnesota and California in connection with the marketing and sale of cash bonus annuity products. The lawsuit in Minnesota has been certified as a class action. The complaints allege that the defendant engaged in, among other practices, deceptive trade practices and misleading advertising in connection with the sale of such products, including, with the respect to the Minnesota lawsuit, the violation of the Minnesota Consumer Fraud and Deceptive and Unlawful Trade Practices Act. At this stage of the proceedings, we cannot predict the potential outcome of these lawsuits.

 

On February 8, 2006, the extraordinary shareholders’ meeting of Allianz AG passed a resolution approving the merger of Riunione Adriatica di Sicurtà S.p.A. (RAS) with and into Allianz AG. The merger will become effective upon its registration in the commercial register at the registered office of Allianz AG, which is planned for September 2006. Upon registration of the merger, Allianz AG will adopt the legal form of a European Company (Societas Europaea, or SE). In March 2006, certain shareholders of Allianz AG filed contestation suits against the above-mentioned resolution of the shareholders’ meeting. The entry of the merger in the commercial register may only take place once the competent court rejects the lawsuits, or if such lawsuits are withdrawn or if the competent court rules finally and conclusively that the lawsuits do not prevent the entry of the merger in the commercial register (so-called “Freigabeverfahren”). We will initiate such release ruling (Freigabeverfahren) before the competent court.

 

Other contingencies

 

Liquiditäts-Konsortialbank GmbH (“LIKO”) is a bank founded in 1974 in order to provide funding for German banks which experience liquidity problems. 30% of LIKO shares are held by Deutsche Bundesbank, while the remaining shares are being held by other German banks and banking associations. The shareholders have provided capital of €200 mn to fund LIKO; Dresdner Bank AG’s participation is €12.1 mn. Dresdner Bank AG is contingently liable to pay future assessments to LIKO up to €60.5 mn. In addition, under clause 5(4) of the Articles of Association of LIKO, Dresdner Bank AG is committed to a secondary liability, which arises if other shareholders do not fulfill their commitments to pay their respective future assessments. In all cases of secondary liability, the financial status of the other shareholders involved is sound.

 

Dresdner Bank AG is a member of the German banks’ Joint Fund for Securing Customer Deposits (Joint Fund), which covers liabilities to each respective creditor up to specified amounts. As a member of the Joint Fund, which is itself a shareholder in LIKO, Dresdner Bank AG is liable with the other members of the Joint Fund for additional capital contributions, with the maximum being the amount of Dresdner Bank AG’s annual contribution. During the year ended December 31, 2005, the Joint Fund levied a contribution of €21 mn (2004: €28 mn). Under section 5 (10) of the Statutes of the Joint Fund for Securing Customer Deposits, the Allianz Group has undertaken to indemnify the Federal Association of German Banks (Bundesverband deutscher Banken e.V.) for any losses it may incur by reason of measures taken on behalf of any bank in which the Allianz Group owns a majority interest.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Commitments

 

Loan commitments

 

The Allianz Group engages in various lending and underwriting related commitments to meet the financing needs of its customers. The following table represents the amounts at risk should customers draw fully on all facilities and then default, excluding the effect of any collateral. Since the majority of these commitments may expire without being drawn upon, the amounts shown may not be representative of actual liquidity requirements for such commitments.

 

As of 12/31/


   2005

   2004

     € mn    € mn

Underwriting commitments

   —      126

Irrevocable loan commitments

         

Advances

   26,954    31,001

Stand-by facilities

   9,496    8,238

Guarantee credits

   1,733    1,229

Discount credits

   46    65

Mortgage loans/public-sector loans

   667    282
    
  

Total

   38,896    40,941
    
  

 

Leasing commitments

 

During the year ended December 31, 2005, the Allianz Group completed the sale of a subsidiary that owned 301 properties, primarily branch offices of the Dresdner Bank Group, to an unrelated party. In addition, the Allianz Group has entered into agreements to lease the properties for an average term of nine years with options to renew for two additional five year terms. The lease agreements are accounted for as operating leases. Therefore, the Allianz Group has recognized gains related to the sale of the properties.

 

In addition, the Allianz Group occupies space in many other locations under various long-term operating leases and has entered into various operating leases covering the long-term use of data processing equipment and other office equipment. Rental expense for the year ending December 31, 2005, was €315 mn (2004: €280 mn; 2003: €296 mn).

 

As of December 31, 2005, the future minimum lease payments under non-cancelable operating leases operating lease were as follows:

 

     Dresdner Bank
Group properties


   Other

    Total

 
     € mn    € mn     € mn  

2006

       87    376     463  

2007

   85    236     321  

2008

   85    214     299  

2009

   80    200     280  

2010

   75    188     263  

Thereafter

   426    831     1,257  
    
  

 

Subtotal

   838    2,045     2,883  

Subleases

   —      (66 )   (66 )
    
  

 

Total

   838    1,979     2,817  
    
  

 

 

Purchase obligations

 

The Allianz Group has commitments to invest in private equity funds totaling €1,476 mn (2004: €1,378 mn) as of December 31, 2005. As of December 31, 2005, commitments outstanding to purchase real estate used by third-parties and owned by the Allianz Group used for its own activities amounted to €145 mn (2004: €99 mn). As of December 31, 2005, commitments outstanding to purchase items of equipment amounted to €66 mn (2004: €100 mn). In addition, as of December 31, 2005, the Allianz Group has other commitments of €244 mn (2004: €1,068 mn) referring to maintenance, real estate development, sponsoring and purchase obligations.

 

Other commitments

 

Other principal commitments of the Allianz Group include the following:

 

For Allianz of America Inc., Wilmington, Allianz Group posted a surety declaration for obligations in connection with the acquisition of Allianz Global Investors of America L.P., Delaware (“AGI L.P.”). The Allianz Group had originally acquired a 69.5% interest in AGI L.P., whereby minority interestholders had the option of putting their shares to Allianz of America, Inc. On December 31, 2005, the remaining interest of Pacific Life (the minority interest holder) in AGI L.P. was 2.24%, resulting in a commitment to Pacific Life amounting to USD 0.4 bn on December 31, 2005.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

In December 2002, Protektor Lebensversicherungs-AG (“Protektor”) was founded. Protektor is a life insurance company whose role is to protect policyholders of all German life insurers. Protektor intervenes in cases where other attempts to prevent insolvency of a German life insurer have failed. In such cases, Protektor takes over the contract portfolios of the respective company, managing and consolidating them with the goal of subsequently selling these portfolios. All life insurance companies in Germany are obliged to be shareholders of Protektor and thus have to finance a specific amount of the capital needed by Protector in cases of intervention. During the year ended December 31, 2003, Protektor intervened in one case in which Allianz Lebensversicherungs-AG was required to contribute €24 mn. No intervention was necessary during the years ended December 31, 2004 and December 31, 2005. At December 31, 2005, Allianz Lebensversicherungs-AG’s outstanding commitment to Protektor was €495 mn, what is equal to 10% of the total amount of the commitment of all German life insurance companies to Protektor.

 

Pursuant to a reform of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz, VAG), which became effective in December 2004, a mandatory insurance guarantee scheme (Sicherungsfonds) was implemented and exists independent of Protektor. Each member of the scheme is obliged to make a certain annual contribution to the scheme. The exact amount of costs for each member will be calculated according to the provisions of a Federal Regulation which has not been enacted yet. The annual contribution of all members together equals 0.02% of the sum of their technical provisions (net). The scheme is administered by a public bank, unless its functions and competences will be conferred on a legal entity under Private Law as a private trustee. It is likely that Protektor will become this trustee. The final impact of this new legislation on Protektor is currently unclear and subject to ongoing discussions.

 

Guarantees

 

Maximum potential amount of payments by maturity and collateral

 

    Letters of
credit and
other financial
guarantees


  Market-
value-
guarantees


  Indemnification
contracts


    € mn   € mn   € mn

Up to 1 year

  10,680   —     167

1-2 years

  1,989   76   13

3-5 years

  1,702   154   1

Over 5 years

  1,477   1,569   228
   
 
 

Total

  15,848   1,799   409
   
 
 

Collateral

  7,154   —     7
   
 
 

 

Letters of credit and other financial guarantees

 

The majority of the Allianz Group’s letters of credit and other financial guarantees are issued to customers through the normal course of the Allianz Group’s Banking segment in return for fee and commission income, which is generally determined based on rates subject to the nominal amount of the guarantees and inherent credit risks. Once a guarantee has been drawn upon, any amount paid by the Allianz Group to third-parties is treated as a loan to the customer, and is, therefore, principally subject to collateral pledged by the customer as specified in the agreement.

 

Market value guarantees

 

Market value guarantees represent assurances given to customers of certain mutual funds and fund management agreements, under which initial investment values and/or minimum market performance of such investments are guaranteed at levels as defined under the relevant agreements. The obligation to perform under a market value guarantee is triggered when the market value of such investments does not meet the guaranteed targets at pre-defined dates.

 

The Allianz Group’s Asset Management, in the ordinary course of business, issues market value guarantees in connection with investment trust accounts and mutual funds it manages. The levels of market value guarantees, as well as the maturity dates, differ based on the separate governing agreements of the respective investment trust accounts and mutual funds. As of December 31, 2005, the maximum potential amount of future payments of the market value guarantees was €1,113 mn, which represents the total value guaranteed under the respective agreements

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

including the obligation that would have been due had the investments matured on that date. The fair value of the investment trust accounts and mutual funds related to these guarantees as of December 31, 2005, was €2,285 mn.

 

The Allianz Group’s banking operations in France, in the ordinary course of business, issue market value and performance-at-maturity guarantees in connection with mutual funds offered by the Allianz Group’s asset management operations in France. The levels of market value and performance-at-maturity guarantees, as well as the maturity dates, differ based on the underlying agreements. In most cases, the same mutual fund offers both a market value guarantee and a performance-at-maturity guarantee. Additionally, the performance-at-maturity guarantees are generally linked to the performance of an equity index or group of equity indexes. As of December 31, 2005, the maximum potential amount of future payments of the market value and performance-at-maturity guarantees was €686 mn, which represents the total value guaranteed under the respective agreements. The fair value of the mutual funds related to the market guarantees as of December 31, 2005, was approximately €777 mn. Such funds generally have a duration of five to eight years.

 

Indemnification contracts

 

Indemnification contracts are executed by the Allianz Group with various counterparties under existing service, lease or acquisition transactions. Such contracts may also be used to indemnify counterparties under various contingencies, such as changes in laws and regulations or litigation claims.

 

In connection with the sale of various of the Allianz Group’s former private equity investments, subsidiaries of the Allianz Group provided indemnities to the respective buyers in the event certain contractual warranties arise. The terms of the indemnity contracts cover ordinary contractual warranties, environmental costs and any potential tax liabilities the entity incurred while owned by the Allianz Group.

 

Credit derivatives

 

Credit derivatives consist of written credit default swaps, which require payment by the Allianz Group in the event of default of debt obligations, as well as written total return swaps, under which the Allianz Group guarantees the performance of the underlying assets. The notional principal amounts and fair values of the Allianz Group’s credit derivative positions as of December 31, 2005 are provided in Note 39.

 

Assets pledged and collateral

 

The carrying amount of the assets pledged as collateral where the secured party does not have the right by contract or custom to sell or repledge the assets are as follows:

 

As of 12/31/


   2005

   2004

     € mn    € mn

Investments

   3,820    —  

Loans and advances to banks

   —      6,599

Loans and advances to customers

   1,161    6,380

Financial assets carried at fair value through income

   16,189    42,500
    
  

Total

   21,170    55,479
    
  

 

As of December 31, 2005, the Allianz Group has received collateral with a fair value of €213,333 mn (2004: €221,429 mn), respectively, which the Allianz Group has the right to sell or repledge. As of December 31, 2005, €137,559 mn (2004: €182,652 mn), respectively, related to collateral that the Allianz Group has received and sold or repledged.

 

43    Share based compensation plans

 

Group Equity Incentives Plans

 

The Group Equity Incentives Plans (“GEI”) of the Allianz Group support the orientation of senior management, in particular the Board of Management, toward the long-term increase of the value of the Allianz Group. The GEI include grants of stock appreciation rights and restricted stock units.

 

Stock appreciation rights

 

The stock appreciation rights granted to a plan participant obligate the Allianz Group to pay in cash the excess of the market price of an Allianz AG share over the reference price on the exercise date for each stock appreciation right granted. The excess is capped at 150% of the reference price. The reference

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

price represents the market price of an Allianz AG share on the grant date. The stock appreciation rights vest after two years and expire after seven years. Upon vesting, the stock appreciation rights may be exercised by the plan participant if the following market conditions are attained:

 

    during their contractual term, the market price of Allianz AG share has outperformed the Dow Jones Europe STOXX Price Index at least once for a period of five consecutive trading days; and

 

    the Allianz AG market price is in excess of the reference price by at least 20% on the exercise date.

 

In addition, upon a change in control of the Allianz Group or the sale of the subsidiary that employs the plan participant, the stock appreciation rights vest immediately.

 

Upon the expiration date, any unexercised stock appreciation rights that have not been exercised will be exercised automatically if the above market conditions have been attained. The stock appreciation rights are forfeited if the plan participant ceases to be employed by the Allianz Group or if the market conditions are not attained by the expiration date.

 

A summary of the number and the weighted-average grant date fair value of the nonvested stock appreciation rights are as follows:

 

    Number

    Weighted
average
grant date
fair value


         

Nonvested as of 12/31/2002

  1,075,961     111.60

Granted

  1,503,247     27.35

Vested

  (406,631 )   112.62

Forfeited

  (65,507 )   109.01
   

 

Nonvested as of 12/31/2003

  2,107,070     51.38

Granted

  1,788,458     30.71

Vested

  (588,963 )   110.53

Forfeited

  (133,554 )   40.56
   

 

Nonvested as of 12/31/2004

  3,173,011     29.21

Granted

  2,176,463     26.69

Vested

  (1,398,426 )   27.35

Forfeited

  (165,998 )   29.70
   

 

Nonvested as of 12/31/2005

  3,785,050     28.42
   

 

 

As of December 31, 2005, there were 1,130,779 stock appreciation rights, with a reference price of €65.91, that were granted during the year ended December 31, 2003, exercisable as the vesting and market conditions were met.

 

As of December 31, 2005, 1,419,884 stock appreciation rights, with a weighted average reference price of €281.25, that were granted before 2003, were not exercisable as the market conditions were not met.

 

The stock appreciation rights are accounted for as cash settled plans by the Allianz Group. Therefore, the Allianz Group accrues the fair value of the stock appreciation rights as compensation expense over the vesting period. Upon vesting, any changes in the fair value of the unexercised stock appreciation rights are recognized as compensation expense. During the year ended December 31, 2005, the Allianz Group recognized compensation expense related to the unexercised stock appreciation rights of €99 mn (2004: €23 mn; 2003: €18 mn). During the year ended December 31, 2005, the Allianz Group recognized a deferred tax benefit related to the unexercised stock appreciation rights of €24 mn (2004: €6 mn; 2003: €5 mn). During the year ended December 31, 2005, the total amount paid related to stock appreciation rights exercised was €11 mn (2004: €0 mn; 2003: €0 mn).

 

As of December 31, 2005, the Allianz Group recorded a liability, in other accrued liabilities, for the unexercised stock appreciation rights of €160 mn (2004: €41 mn). Based upon the fair value of the stock appreciation rights as of December 31, 2005, the total compensation expense not yet recognized related to the nonvested stock appreciation rights, due to vesting requirements was €87 mn. The total compensation expense not yet recognized related to the nonvested stock appreciation rights is expected to be recognized over a weighted-average period of 1 year.

 

Restricted stock units

 

The restricted stock units granted to a plan participant obligate the Allianz Group to pay in cash the average market price of an Allianz AG share in the ten trading days preceding the vesting date or issue one Allianz AG share, or other equivalent

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

equity instrument, for each restricted stock unit granted. The restricted stock units vest after five years. The Allianz Group will exercise the restricted stock units on the first stock exchange day after their vesting date. On the exercise date, the Allianz Group can choose the settlement method for each restricted stock unit.

 

In addition, upon a change in control of the Allianz Group or the sale of the subsidiary that employs the plan participant, the restricted stock units vest immediately.

 

A summary of the number and the weighted-average grant date fair value of the nonvested restricted stock units are as follows:

 

    Number

    Weighted
average
grant date
fair value


         

Nonvested as of 12/31/2003

  —       —  

Granted

  540,057     65.91

Forfeited

  (747 )   65.91

Nonvested as of 12/31/2003

  539,310     65.91

Granted

  749,030     77.02

Vested

  (4,123 )   73.54

Forfeited

  (39,805 )   69.74

Nonvested as of 12/31/2004

  1,244,412     72.45

Granted

  1,023,600     85.28

Forfeited

  (75,859 )   75.02
   

 

Nonvested as of 12/31/2005

  2,192,153     78.35
   

 

 

The restricted stock units are accounted for as cash settled plans as the Allianz Group intends to settle in cash. Therefore, the Allianz Group accrues the fair value of the restricted stock units as compensation expense over the vesting period. During the year ended December 31, 2005, the Allianz Group recognized compensation expense related to the nonvested restricted stock units of €49 mn (2004: €18 mn; 2003: €6 mn). During the year ended December 31, 2005, the Allianz Group recognized a deferred tax benefit related to the nonvested restricted stock units of €14 mn (2004: €5 mn; 2003: €2 mn). During the year ended December 31, 2005, the total amount paid related to restricted stock units exercised was €0 mn (2004: €0.4 mn; 2003: €0 mn).

 

As of December 31, 2005, the Allianz Group recorded a liability, in other accrued liabilities, of €72 mn (2004: €24 mn) for the nonvested restricted stock units. Based upon the fair value of the restricted stock units as of December 31, 2005, the total compensation expense not yet recognized related to the nonvested restricted stock units, due to vesting requirements, was €193 mn. The total compensation expense not yet recognized related to the nonvested restricted stock units is expected to be recognized over a weighted-average period of 4 years.

 

Share based compensation plans of subsidiaries of the Allianz Group

 

PIMCO LLC Class B Unit Purchase Plan

 

When acquiring AGI L.P. during the year ended December 31, 2000, Allianz AG caused Pacific Investment Management Company LLC (“PIMCO LLC”) to enter into a Class B Purchase Plan (the “Class B Plan”) for the benefit of members of the management of PIMCO LLC. The plan participants of the Class B Plan have rights to a 15% priority claim on the adjusted operating profits of PIMCO LLC.

 

The Class B equity units issued under the Class B Plan vest over three to five years and are subject to repurchase by AGI L.P. upon death, disability or termination of the participant prior to vesting. As of January 1, 2005, AGI L.P. has the right to repurchase, and the participants have the right to cause AGI L.P. to repurchase, a portion of the vested Class B equity units each year. On the repurchase date, the repurchase price will be based upon the determined value of the Class B equity units being repurchased. As the Class B equity units are puttable by the plan participants, the Class B Plan is accounted for as a cash settled plan.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

A summary of the number and the weighted-average grant date fair value of the outstanding Class B equity units are as follows:

 

    Number

    Weighted
average
grant date
fair value


         

Outstanding as of 12/31/2002

  84,625     5,892

Granted

  35,375     6,755

Forfeited

  —       —  

Outstanding as of 12/31/2003

  120,000     5,461

Granted

  30,000     8,480

Forfeited

  (4,695 )   5,169

Outstanding as of 12/31/2004

  145,305     6,004

Granted

  4,695     9,733

Called

  (5,427 )   3,998

Forfeited

  (480 )   7,823
   

 

Outstanding as of 12/31/2005

  144,093     5,900
   

 

 

The Class B equity units are accounted for as cash settled plans. 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, 2005, the Allianz Group recognized compensation expense related to the Class B equity units of €536 mn (2004: €399 mn; 2003: €357 mn). In addition, the Allianz Group recognized expense related to the priority claim on the adjusted operating profits of PIMCO LLC of €141 mn (2004: €101 mn; 2003: €91 mn). During the year ended December 31, 2005, the Allianz Group recognized a deferred tax benefit related to the Class B equity units of €219 mn (2004: €163 mn; 2003: €146 mn). During the year ended December 31, 2005, the Allianz Group called 5,427 Class B equity units. The total amount paid related to the call of the Class B equity units was €71 mn.

 

The total recognized compensation expense for Class B equity units that are outstanding is recorded as a liability in other accrued liabilities. As of December 31, 2005, the Allianz Group recorded a liability for the Class B equity units of €1,473 mn (2004: €816 mn). As of December 31, 2005, the total compensation expense not yet recognized related to the nonvested Class B equity units was €1,191 mn (2004: €1,331 mn). The total compensation expense not yet recognized related to the Class B equity units is expected to be recognized over the remaining vesting period of up to 5 years.

 

Dresdner Kleinwort Wasserstein

 

The Allianz Group awarded eligible employees of Dresdner Kleinwort Wasserstein (“DrKW”) a promise to deliver Allianz AG shares on the vesting dates (hereafter “nonvested shares”). In jurisdictions in which regulatory restrictions do not allow for delivery of shares where the awards are settled in cash. The awards vest in three installments in each of the three years following the initial award. Each year, immediately prior to vesting, the number of unvested shares is adjusted higher or lower according to the performance adjustment.

 

A summary of the number and the weighted-average grant date fair value of the nonvested share units are as follows:

 

     Number

    Weighted
average
grant date
fair value


          

Nonvested as of 12/31/2003

   —       —  

Granted

   1,161,614     105.62

Forfeited

   (82,261 )   105.62
    

 

Nonvested as of 12/31/2004

   1,079,353     105.62

Granted

   1,440,399     92.81

Vested

   (333,517 )   105.58

Forfeited

   (177,588 )   101.43
    

 

Nonvested as of 12/31/2005

   2,008,647     96.81
    

 

 

The shares settled by delivery of Allianz AG shares are accounted for as equity settled plans by the Allianz Group. Therefore, the Allianz Group measures the total compensation expense to be recognized for the equity settled shares based upon their fair value as of the grant date. The total compensation expense is recognized over the three year vesting period. The shares settled in cash are accounted for as cash settled plans by the Allianz Group. Therefore, the Allianz Group accrues the fair value of the cash settled shares as compensation expense over the vesting period. During the year

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

ended December 31, 2005, the Allianz Group recognized compensation expense related to the nonvested shares of €102 mn (2004: €64 mn). During the year ended December 31, 2005, the Allianz Group did not recognize a deferred tax benefit related to the nonvested shares as the expenses are not tax deductible. During the year ended December 31, 2005, the total amount paid related to cash settled shares vested was €2 mn. During the year ended December 31, 2005, the total fair value of equity settled shares that vested was €33 mn.

 

As of December 31, 2005, the Allianz Group recorded a liability for the nonvested cash settled shares of €6 mn (2004: €4 mn). As of December 31, 2005, the total compensation expense not yet recognized related to the nonvested shares was €74 mn (2004: €49 mn). The total compensation expense not yet recognized related to the nonvested shares is expected to be recognized over a weighted-average period of 1 year.

 

AGF Group Share Option Plan

 

The AGF Group has awarded share options on AGF shares to eligible AGF Group executives and managers of subsidiaries, as well as to certain employees, whose performance justified grants. The primary objective of the share option plan is to encourage the retention of key personnel of AGF Group and to link their compensation to the performance of AGF Group. These share options are independent of the remuneration plans of the Allianz Group. Share options granted have an exercise price of at least 85% of the market price on the day of grant. The maximum term for the share option granted is eight years.

 

The following table provides the weighted-average grant date fair value of options and the assumptions used in calculating their fair value by application of the Black-Scholes option pricing model for options granted.

 

For the years ended 12/31/


      2005

  2004

  2003

Weighted-average fair value

    5.05   14.38   12.04

Weighted-average assumptions

               

Risk free interest rate

  %   2.7   3.5   4.0

Expected volatility

  %   15.0   30.0   30.0

Dividend yield

  %   4.0   3.5   2.5

 

A summary of the number, weighted-average exercise price, weighted-average remaining contractual term and aggregate intrinsic value of the options outstanding and exercisable are as follows:

 

     Number(*)

    Weighted
average
exercise
price


   Weighted
average
remaining
contractual
term


   Aggregate
intrinsic
value


                   € mn

Outstanding as of 12/31/2002

   4,930,328     43.80          

Granted

   1,131,788     42.12          

Exercised

   (81,028 )   23.34          

Forfeited

   (8,687 )   23.39          
    

 
         

Outstanding as of 12/31/2003

   5,972,401     43.79          

Granted

   1,130,656     50.86          

Exercised

   (584,128 )   36.94          

Forfeited

   (11,952 )   23.05          
    

 
         

Outstanding as of 12/31/2004

   6,506,977     45.67          

Granted

   1,398,000     78.24          

Exercised

   (2,131,928 )   46.47          

Forfeited

   (352,959 )   42.29          
    

 
         

Outstanding as of 12/31/2005

   5,420,090     53.97        6    161
    

 
  
  

Exercisable as of 12/31/2005

   4,023,590     45.55        5    153
    

 
  
  

(*) Number and weighted-average exercise price were adjusted as in 2005 AGF Group increased its capital.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

During the year ended December 31, 2005, the total intrinsic value of share options exercised was €50 mn (2004: €9 mn; 2003: €2 mn). During the year ended December 31, 2005, the AGF Group recorded compensation expense related to the share options of €14 mn (2004: €16 mn; 2003: €15 mn). During the year ended December 31, 2005, the Allianz Group did not recognize a deferred tax benefit related to the share options as the share compensation expense is not tax deductible in France. As of December 31, 2005, the total compensation expense not yet recognized related to the share options was €5 mn (2004: €12 mn). The total compensation expense not yet recognized related to the share options is expected to be recognized over a weighted-average period of 1 year.

 

RAS Group share option plan

 

The RAS Group has awarded eligible members of senior management with share purchase options on RAS ordinary shares. The share options have a vesting period of 18 months to 2 years and a term of 6.5 to 7 years. The share options may be exercised at any time after the vesting period and before expiration, provided that:

 

    on the date of exercise, the RAS share price is at least 20% higher than the average share price in January of the grant year (for share options granted during the year ended December 31, 2001, the hurdle is 10%), and

 

    the performance of the RAS share in the year of grant exceeds the Milan Insurance Index in the same year.

 

The following table provides the weighted-average grant date fair value and the assumptions used in calculating their fair value by application of the Black-Scholes option pricing model for options granted:

 

For the years ended 12/31/


        2005

   2004

   2003

Weighted-average fair value

      1.91    1.51    4.68

Weighted-average assumptions

                   

Risk free interest rate

   %    3.4    3.3    3.1

Expected volatility

   %    18.0    17.0    13.5

Dividend yield

   %    7.1    6.8    6.3

 

A summary of the number, weighted-average exercise price, weighted-average remaining contractual term and aggregate intrinsic value of the options outstanding and exercisable are as follows:

 

     Number

    Weighted
average
exercise
price


   Weighted
average
remaining
contractual
term


   Aggregate
intrinsic
value


                   € mn

Outstanding as of 1/1/2005

   2,261,000     13.55          

Granted

   1,200,000     17.09          

Exercised

   (2,041,000 )   13.47          

Forfeited

   (467,000 )   15.78          

Outstanding as of 12/31/2005

   953,000     17.09    6    3
    

 
  
  

Exercisable as of 12/31/2005

   —       —      —      —  
    

 
  
  

 

During the year ended December 31, 2005, the total intrinsic value of share option exercised was €10 mn. During the year ended December 31, 2005, the RAS Group recorded compensation expense of €1 mn (2004: €3 mn; 2003: €3 mn) related to share options. During the year ended December 31, 2005, the Allianz Group did not recognize a deferred tax benefit related to the share options as the expenses are not tax deductible in Italy. As of December 31, 2005, the total compensation expense not yet recognized related to the share options was €1 mn (2004: €1 mn). The total compensation expense not yet recognized related to the share options is expected to be recognized over a weighted-average period of 2 years.

 

Share purchase plans

 

The Allianz Group offers Allianz AG shares to qualified employees at favorable conditions. The

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

shares have a minimum holding period of one year to five years. During the year ended December 31, 2005, the number of shares sold to employees under these plans was 1,144,196 (2004: 1,051,191; 2003: 944,625). During the year ended December 31, 2005, the Allianz Group recognized compensation expense, the difference between the market price and the offer price of the shares purchased by employees, of €24 mn (2004: €18 mn; 2003: €16 mn).

 

In addition, during the years ended December 31, 2004 and 2003, the AGF Group offered AGF shares to qualified employees in France at favorable conditions. The shares have a minimum holding period of five years. During the years ended December 31, 2004 and 2003, the number of shares sold to employees under this plan was 787,675 and 1,214,304. During the years ended December 31, 2004 and 2003, the compensation expense recorded was €8 mn and €11 mn.

 

Other share option and shareholding plans

 

The Allianz Group has other local share-based compensation plans, including share option and employee share purchase plans, none of which, individually or in the aggregate, are material to the consolidated financial statements. During the year ending December 31, 2005, the total expense, in the aggregate, recorded for these plans was €4 mn (2004: €3 mn; 2003: €5 mn).

 

44    Earnings per share

 

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflects the effect of potentially dilutive securities. As of December 31, 2005, 1,175,554 (2004: 1,175,554) participation certificates issued by Allianz AG were outstanding which can potentially be converted to 1,469,443 (2004: 1,469,443) Allianz shares (on a weighted basis: 1,469,443 (2004: 1,469,443) Allianz AG shares) and therefore have a dilutive effect.

 

The Allianz Group’s share compensation plans with potentially dilutive securities of 493,229 (2004: 729,596) are included in the calculation of diluted earnings per share for the year ended December 31, 2005.

 

Furthermore 807,859 common shares from trading in derivatives on own shares have been included in the calculation of diluted earnings per share for the year ended December 31, 2005.

 

Reconciliation of basic and diluted earnings per share

 

For the years ended 12/31/


        2005

   2004

   2003

Numerator for basic earnings per share (net income)

    mn    4,380    2,266    2,691

Effect of dilutive securities

   mn    —      3    3
           
  
  

Numerator for diluted earnings per share (net income after assumed conversion)

   mn    4,380    2,269    2,694
           
  
  

Denominator for basic earnings per share (weighted-average shares)—not including treasury shares held by the Allianz Group

          389,756,350    365,930,584    338,201,031

Potential dilutive securities

          3,513,710    2,199,039    1,585,044
           
  
  

Denominator for diluted earnings per share (adjusted weighted-average after assumed conversion)

          393,270,060    368,129,623    339,786,075
           
  
  

Basic earnings per share

        11.24    6.19    7.96

Diluted earnings per share

        11.14    6.16    7.93
           
  
  

 

During the year ended December 31, 2005, the weighted average number of shares does not include 2,389,193 (2004: 18,915,201; 2003: 18,766,949) treasury shares held by the Allianz Group. The potential settlement of the equity-linked loan has not been included in the calculation of diluted earnings per share as it is anti-dilutive.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

The impact of the recently adopted principles described in Note 3, on basic and diluted earnings per share is as follows:

 

    2004

    2003

 
    Basic

    Diluted

    Basic

    Diluted

 
                 

Earnings per share, as previously reported

  6.01     5.98     5.59     5.57  

IAS 32 and IAS 39 revised Impairments

  0.59     0.59     2.67     2.65  

Financial assets and liabilities designated at fair value

  (0.05 )   (0.05 )   0.04     0.04  

IFRS 4

  (0.34 )   (0.34 )   (0.36 )   (0.35 )

IFRS 2

  (0.02 )   (0.02 )   0.02     0.02  
   

 

 

 

Earnings per share

  6.19     6.16     7.96     7.93  
   

 

 

 

 

45    Other information

 

Employee information

 

As of December 31, 2005, the Allianz Group employed a total of 177,625 people (2004: 176,501*); 2003: 173,750). Of those people, 72,195 (2004: 75,667; 2003: 82,245) were employed in Germany and 105,430 (2004: 100,834*); 2003: 91,505) abroad. During the year ended December 31, 2005, the number of employees undergoing training decreased by 883 to 4,023. The average total number of employees for the year ended December 31, 2005 was 177,063 people.


(*) Increase of 14,321 reflects changes in scope of consolidation in 2004

 

Personnel expenses

 

For the years ended 12/31/


  2005

  2004

  2003

    € mn   € mn   € mn

Salaries and wages

  9,582   9,277   9,108

Social security contributions and employee assistance

  1,628   1,466   1,548

Expenses for pensions and other post-retirement benefits

  684   625   634
   
 
 

Total

  11,894   11,368   11,290
   
 
 

 

Principal accountant fees and services

 

For a summary of fees billed by the Allianz Group’s principal auditors, see page 163. The information provided there is considered part of these consolidated financial statements.

 

Compensation for the Board of Management

 

As of December 31, 2005, the Board of Management had 10 (2004: 10) members.

 

Total compensation of the Board of Management for the year ended December 31, 2005 amounts to €20.0*) mn (2004: €25.6 mn). For 2005 an expense was recorded for the group equity incentives granted to the Board of Management for 2005 amounting to €19.7 mn (2004: €5.4 mn). Compensation to former members of the Board of Management and their beneficiaries totaled €4.3 mn (2004: €4.2 mn).

 

Pension obligations to former members of the Board of Management and their beneficiaries are accrued in the amount of €38.9 mn (2004: €36.5 mn).

 

Total compensation to the Supervisory Board amounts to €2.6 mn (2004: €2.2 mn).

 

Board of Management and Supervisory Board compensation by individual is included in Item 6—Directors, Senior Management and Employees—of this Annual Report. The information provided there is considered part of these consolidated financial statements.


(*) Includes €0.3 mn from previous years effect

 

46    Subsequent events

 

Industrial and Commercial Bank of China Ltd. (ICBC)

 

On January 27, 2006, Allianz Group signed a contract for the acquisition of about 2.5% interest in Industrial and Commercial Bank of China Ltd. (ICBC) for approximately €825 mn. The acquisition will be executed by Dresdner Bank Luxemburg S.A.

 

Contributions to defined benefit plans

 

During January 2006, the Allianz Group contributed €1,876 mn to the defined benefit plans of the Dresdner Bank Group.

 

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Allianz-RAS Merger / European Company (SE)

 

On February 3, 2006, the extraordinary shareholders’ meetings of holders of RAS ordinary shares and holders of RAS saving shares agreed to the merger plan regarding the merger of RAS S.p.A. into Allianz AG. On February 8, 2006 the extraordinary shareholders’ meeting of Allianz AG agreed also to the merger plan. Against the resolution of the shareholders’ meeting of Allianz AG regarding the agreements to the merger plan and the capital increase to implement the merger, contestation suits have been filed. We are confident that we can achieve the entry of this merger in a release ruling (so called “Freigabeverfahren”). In the course of the merger, Allianz AG will be converted into a European Company (Societas Europaea or “SE”). For further details please see “Item 4—Information on the Company—Allianz-RAS Merger/European Company (SE).”

 

Sale of 33 Lafayette

 

On February 28, 2006, the Allianz Group sold 33 Lafayette, the holding company for a real estate property in France, for proceeds of €240 mn.

 

Restructuring of the German Business

 

In February 2006, in connection with the reorganization of the insurance business in Germany, the Allianz Group announced to its employees that in the course of tightening the organisational structure a reduction of 700 positions in the area of the sales support and distribution divisions has been identified. The reorganization of the insurance business in Germany is described in more detail on page 19 of this Annual Report.

 

Disposal of Eurohypo AG

 

On March 31, 2006, in connection with agreement described in Note 41, the Allianz Group completed sale of its remaining 21.13% ownership interest in Eurohypo AG for proceeds of €1,456 mn.

 

Subordinated Perpetual Bond

 

In March 2006, Allianz Finance II B.V., a wholly owned subsidiary of the Allianz Group, issued €800 mn of subordinated perpetual bonds, guaranteed by Allianz AG, with a coupon rate of 5.375%. Allianz Finance II B.V. has the right to call the bonds after 5 years.

 

Sale of Eve Holding N.V.

 

In March 2006, the Allianz Group entered into an agreement to sell Eve Holding N.V. (including the investment of Eve Holding N.V. in Hansen Transmissions International N.V.) to Suzlon Energy Ltd. of approximately €170 mn. The sale is expected to close in May 2006.

 

Exchangeable Bonds

 

During January through April 5, 2006, the holders of 55,226 exchangeable bonds issued by Allianz Finance B.V. II, with a nominal value of €552 mn, exchanged the bonds for 11,009,866 shares of RWE AG in accordance with the terms of the exchangeable bonds. In addition, the holders of 2,759 exchangeable bonds, with a nominal value of €28 mn, redeemed the bonds for a cash settlement of €39 mn.

 

Disposal of Banca Antoniana Populare S.p.A.

 

On April 5, 2006, the Allianz Group sold 7,579,337 shares in Banca Antoniana Popolare S.p.A. to ABN Amro Bank N.V. for approximately €200 mn.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

47 Summary of significant differences between the accounting principles used in the preparation of the consolidated financial statements and accounting principles generally accepted in the United States of America

 

The consolidated financial statements of the Allianz Group are presented in accordance with IFRS. IFRS differs in certain respects from US GAAP. The following table represents the reconciliation of the Allianz Group’s net income and shareholders’ equity between IFRS and US GAAP:

 

     Net Income

    Shareholders’ Equity(1)

 
     For the years ended December 31,

    As of December 31,

 
         2005    

        2004    

        2003    

        2005    

        2004    

 
     € mn     € mn     € mn     € mn     € mn  

Amounts determined in accordance with IFRS, as previously reported

   4,380     2,199     1,890     39,487     30,828  

Effect of implementation of new accounting standards (see Note 3)

   —       67     801     —       (833 )
    

 

 

 

 

Amounts determined in accordance with IFRS, as adjusted

   4,380     2,266     2,691     39,487     29,995  

Adjustments in respect to:

                              

(a) Goodwill and intangible assets

   (265 )   815     906     4,924     3,519  

(b) Employee benefit plans

   (63 )   (22 )   (22 )   (2,402 )   (509 )

(c) Investments

   (918 )   (496 )   (1,982 )   503     852  

(d) Real estate

   (191 )   (198 )   (2 )   (299 )   (226 )

(e) Equity method investees/subsidiaries

   50     —       85     —       —    

(f) Restructuring charges

   (20 )   41     (18 )   13     33  

(g) Deferred compensation

   (4 )   (16 )   (42 )   24     28  

(h) Guarantees

   (9 )   (22 )   —       (31 )   (22 )

(i) Financial assets and liabilities designated at fair value through income

   (66 )   58     (162 )   (18 )   38  

(j) Derivatives on own shares

   77     —       —       1,272     —    

(k) Insurance liabilities

   8     37     (10 )   301     35  

(l) Share based compensation

   435     210     185     842     403  
    

 

 

 

 

Total US GAAP adjustments

   (966 )   407     (1,062 )   5,129     4,151  

(m) Income taxes

   255     168     357     (164 )   (730 )

(n) Minority interests in earnings

   24     40     259     (69 )   (36 )
    

 

 

 

 

Effect of US GAAP adjustments

   (687 )   615     (446 )   4,896     3,385  
    

 

 

 

 

Amount determined in accordance with US GAAP

   3,693     2,881     2,245     44,383     33,380  
    

 

 

 

 

Net income per share in accordance with US GAAP:

                              

Basic

   9.33     7.87     6.71              
    

 

 

           

Diluted

   9.26     7.83     6.70              
    

 

 

           

(1) Shareholders’ equity before minority interests. See reconciliation of minority interests in shareholders’ equity following.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Valuation and recognition differences

 

The following describes the valuation and recognition differences presented in the reconciliation of the Allianz Group’s net income and shareholders’ equity between IFRS and US GAAP.

 

(a) Goodwill and intangible assets

 

A summary of the reconciliation adjustments relating to goodwill and intangible assets:

 

     Net Income

    Shareholders’
Equity(1)


     For the years ended December 31,

    As of December 31,

         2005    

        2004    

        2003    

        2005    

       2004    

     € mn     € mn     € mn     € mn    € mn

Goodwill

   —       1,137     1,123     3,661    2,143

Brand names

   —       (58 )   47     43    43

Core deposits

   (59 )   (59 )   (59 )   288    347

PVFP

   (1 )   —       —       135    —  

Customer relationships

   —       —       —       16    —  

Customer base intangibles

   (205 )   (205 )   (205 )   781    986
    

 

 

 
  

Total

   (265 )   815     906     4,924    3,519
    

 

 

 
  

(1) Shareholders’ equity before minority interests. See reconciliation of minority interests in shareholders’ equity following.

Goodwill

 

In accordance with US GAAP, goodwill is not subject to amortization; however, it is tested for impairment annually at a reporting unit level, or more frequently based upon facts and circumstances. For years through December 31, 2004, goodwill was amortized over its estimated useful life in accordance with IFRS. As of January 1, 2005, goodwill is not subject to amortization in accordance with IFRS. Therefore, the reconciliation adjustment to net income for the years ended December 31, 2004 and 2003, represents the reversal of goodwill amortization recorded in accordance with IFRS and the effects of a different cost basis for disposals. The reconciliation adjustment to shareholders’ equity represents the effects of the reversal of accumulated amortization related to goodwill, in addition to the following effects. The reconciliation adjustment to shareholders’ equity included the effect of a lower cost basis for goodwill in accordance with US GAAP as a result of the allocation of a portion of the purchase price of Dresdner Bank AG to core deposits and customer base intangibles. Further, the Allianz Group’s impairment of goodwill for Allianz Life Insurance Company Ltd., Seoul during 2003, as discussed in Note 6, resulted in a higher impairment of €66 mn in accordance with US GAAP due to the difference in the carrying amount of goodwill as a result of amortization recorded in accordance with IFRS. Finally, as further described under “Acquisitions and Disposals of Minority Interests”, the reconciliation adjustment to shareholders’ equity as of December 31, 2005, includes goodwill of €1,344 mn recorded in accordance with US GAAP related to transactions with equity holders.

 

Brand names

 

In accordance with US GAAP, intangible assets with an indefinite life are not subject to amortization; however, they are tested for impairment annually, or more frequently based upon facts and circumstances. In connection with the Allianz Group’s acquisition of Dresdner Bank AG, a portion of the purchase price was allocated to the brand names “Dresdner Bank” and “dit”, which in accordance with US GAAP are considered to have an indefinite life. For years through December 31, 2004, these brand names were amortized over a period of 20 years in accordance with IFRS. As of January 1, 2005, in accordance with IFRS, brand names were considered to have an indefinite life and therefore are no longer subject to amortization. Further, in connection with the Allianz

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Group’s annual impairment test in accordance with US GAAP during the year ended December 31, 2004, the Allianz Group recorded an impairment charge of €100 mn for brand names. Therefore, the reconciliation adjustment to net income for the years ended December 31, 2004 includes the reversal of amortization expense and the recognition of the brand names impairment charge. The reconciliation adjustment to net income for the year ended December 31, 2003 includes the reversal of amortization expense. The reconciliation adjustment to shareholders’ equity represents the effects of reversal of accumulated amortization and the recognition of the impairment charge.

 

Core deposits

 

In connection with the Allianz Group’s acquisition of Dresdner Bank AG, a portion of the purchase price was allocated to core deposits in accordance with US GAAP. In accordance with IFRS, a similar intangible asset was not recorded, resulting in a higher amount of the purchase price being allocated to goodwill. Core deposits are amortized over their expected useful lives, which range from 7.3 to 11.5 years. The weighted average original useful lives for the core deposits are 9.5 years. Amortization of core deposits is estimated to be €59 mn for each of the years 2006 through 2009 and €52 mn in 2010. Therefore, the reconciliation adjustments to net income and shareholders’ equity represent recognition of amortization expense and accumulated amortization, respectively, of core deposits.

 

PVFP

 

As further described under “Acquisitions and Disposals of Minority Interests”, the reconciliation adjustment to net income for the year ended December 31, 2005, includes the impact of amortization of PVFP, net of reduction of amortization of deferred acquisition costs, as a result of purchase accounting adjustments recorded in accordance with US GAAP related to transactions with equity holders. The reconciliation adjustment to shareholders’ equity as of December 31, 2005, represents the recognition of PVFP, net of elimination of deferred acquisition costs, net of accumulated amortization expense recognized as a result of previously mentioned purchase accounting adjustments. Amortization expense of PVFP, net of elimination of amortization of deferred acquisition costs and recognition of unearned revenue liabilities, is expected to be €12 mn in 2006, €11 mn in 2007, €10 mn in 2008, €9 mn in 2009 and €8 mn in 2010 as a result of this difference.

 

Customer relationships

 

As further described under “Acquisitions and Disposals of Minority Interests”, the reconciliation adjustment to net income for the year ended December 31, 2005, includes the impact of amortization of customer relationships for property-casualty insurance contracts as a result of purchase accounting adjustments recorded in accordance with US GAAP related to transactions with equity holders. The reconciliation adjustment to shareholders’ equity as of December 31, 2005, represents the recognition of the customer relationships, net of accumulated amortization expense recognized as a result of previously mentioned purchase accounting adjustments. Amortization expense of the customer relationships, is expected to be approximate €1 mn to €2 mn in each of the years ended December 31, 2006 through 2010 as a result of this difference.

 

Customer base intangibles

 

In connection with the Allianz Group’s acquisition of Dresdner Bank AG, a portion of the purchase price was allocated to customer base intangibles in accordance with US GAAP. In accordance with IFRS, a similar intangible asset was not recorded, resulting in a higher amount of the purchase price being allocated to goodwill. Customer base intangibles are amortized over their expected useful lives, which range from 7.5 to 16.6 years. The weighted average original useful lives for the customer base intangibles are 8.9 years. Amortization of customer base intangibles is estimated to be €205 mn for each of the years 2006 through 2008 and €166 mn in 2009. Therefore, the reconciliation adjustment to net income and shareholders’ equity represents the recognition of amortization expense and accumulated amortization, respectively, of customer base intangibles.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

The Allianz Group’s goodwill has been allocated to its reporting segments. The changes in goodwill by reporting segment, in accordance with US GAAP, for the years ended December 31, 2005, 2004 and 2003 are as follows:

 

     Property-
Casualty


    Life/
Health


    Banking

    Asset
Management


    Total

 
     € mn     € mn     € mn     € mn     € mn  

Carrying amount as of January 1, 2003

   2,628     3,011     1,631     6,456     13,726  

Additions

   104     54     —       624     782  

Disposals

   (75 )   (8 )   (17 )   (125 )   (225 )

Impairments

   —       (290 )   —       —       (290 )

Effects from exchange rate fluctuations

   (18 )   (39 )   (112 )   (391 )   (560 )
    

 

 

 

 

Carrying amount as of December 31, 2003

   2,639     2,728     1,502     6,564     13,433  

Additions

   142     22     52     587     803  

Disposals

   (72 )   (17 )   —       —       (89 )

Effects from exchange rate fluctuations

   (1 )   (5 )   —       (321 )   (327 )
    

 

 

 

 

Carrying amount as of December 31, 2004

   2,708     2,728     1,554     6,830     13,820  

Additions

   967     167     —       388     1,522  

Disposals

   (15 )   (9 )   (8 )   (41 )   (73 )

Reclassification to assets held for sale

   (158 )   —       —       —       (158 )

Effects from exchange rate fluctuations

   1     12     —       560     573  
    

 

 

 

 

Carrying amount as of December 31, 2005

   3,503     2,898     1,546     7,737     15,684  
    

 

 

 

 

 

(b) Employee benefit plans

 

A summary of the reconciliation adjustments relating to employee benefit plans is as follows:

 

     Net Income

    Shareholders’
Equity(1)


 
     For the years ended December 31,

    As of December 31,

 
         2005    

        2004    

        2003    

        2005    

        2004    

 
     € mn     € mn     € mn     € mn     € mn  

Transition obligation

   (15 )   (16 )   (16 )   —       15  

Prior service cost

   (48 )   (6 )   (6 )   57     105  

Additional minimum pension liability (net of intangible assets of €59 mn and €126 mn)

   —       —       —       (2,459 )   (629 )
    

 

 

 

 

Total

   (63 )   (22 )   (22 )   (2,402 )   (509 )
    

 

 

 

 


(1) Shareholders’ equity before minority interests. See reconciliation of minority interests in shareholders’ equity following.

Transition obligation

 

In accordance with IFRS, the Allianz Group did not record a transition adjustment upon the adoption of IAS 19, Employee Benefits, as the accrual at the time of adoption was equal to the difference between the projected benefit obligation and the plan assets at the time of adoption.

 

In accordance with US GAAP, a transition obligation was calculated as the difference between the projected benefit obligation less the plan assets and the benefit accrual under domestic rules. The transition obligation must be amortized on a straight-line basis over the average remaining service period of plan participants or over 15 years if the average remaining service period is less than 15 years. For US GAAP purposes, the Allianz Group amortized the unrecognized transition obligation over 19 years, ending during the year ended December 31, 2005. The Allianz Group adopted SFAS No. 87,

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Employers’ Accounting for Pensions (“SFAS 87”), effective January 1, 1998. The Allianz Group was unable to adopt SFAS 87 as of its effective date, January 1, 1987, due to the unavailability of actuarial data. The 19 year amortization period was applied retroactively to January 1, 1987 to effectively extinguish the transition obligation at the same date as if SFAS 87 were adopted on the effective date.

 

Therefore, the reconciliation adjustment to net income and shareholders’ equity represents recognition of amortization expense and unrecognized transition obligation, respectively.

 

Prior service cost

 

In accordance with IFRS, the vested portion of past service cost, which is the increase in the present value of the obligation due to changes in the benefit entitlement that is allocated to prior periods’ service, is recognized immediately in full. The unvested portion of past service cost is amortized on a straight-line basis from the point in time when the past service cost arises until the obligation is anticipated to become vested. In accordance with US GAAP, both the vested and unvested portions are amortized on a straight-line basis over the average future service lives of the active participants. Therefore, the reconciliation adjustment to net income and shareholders’ equity represents recognition of amortization expense and unrecognized prior service cost, respectively.

 

Additional minimum pension liability

 

In accordance with US GAAP, if the accumulated benefit obligation exceeds the fair value of plan assets, an additional minimum pension liability (including unfunded accrued pension cost) that is at least equal to the unfunded accumulated benefit obligation is recorded. Recognition of an additional minimum liability is required if an unfunded accumulated benefit obligation exists and (a) an asset has been recognized as prepaid pension cost, (b) the liability already recognized as unfunded accrued pension cost is less than the unfunded accumulated benefit obligation, or (c) no accrued or prepaid pension cost has been recognized. Also, in accordance with US GAAP, an equal amount is capitalized as an intangible asset up to the amount of any unrecognized net transition obligation plus the unrecognized prior service costs, with the remainder charged to shareholders’ equity as a component of other comprehensive income. In accordance with IFRS, there are no such requirements for the recognition of an additional minimum pension liability. Therefore, the reconciliation adjustment to shareholders’ equity represents recognition of an additional minimum pension liability net of the related intangible asset.

(c) Investments

 

A summary of the reconciliation adjustments relating to investments is as follows:

 

     Net Income

    Shareholders’
Equity(1)


     For the years ended December 31,

    As of December 31,

         2005    

        2004    

        2003    

        2005    

        2004    

     € mn     € mn     € mn     € mn     € mn

Impairments of equity securities

   (737 )   (351 )   (1,657 )   —       —  

Reversal of impairments on debt securities

   4     (4 )   (168 )   —       —  

Reversal of realized gains from the disposal of available-for-sale debt and equity securities acquired in transactions between equity holders

   (9 )   —       —       —       —  

Realized gains from equity securities

   —       (141 )   (157 )   —       —  

Foreign currency exchange differences from debt securities

   (176 )   —       —       —       —  

Valuation of equity securities

   —       —       —       (354 )   —  

Loans and receivables

   —       —       —       857     852
    

 

 

 

 

Total

   (918 )   (496 )   (1,982 )   503     852
    

 

 

 

 

(1) Shareholders’ equity before minority interests. See reconciliation of minority interests in shareholders’ equity following.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Impairments of equity securities

 

As described in Note 3, the adoption of IAS 39 revised required a change to the Allianz Group’s impairment criteria for available-for-sale equity securities. In addition, IAS 39 revised required that the Allianz Group no longer establish an adjusted cost basis upon the recognition of an impairment of an equity security. IAS 39 revised required retrospective application of these changes. As of January 1, 2005, the Allianz Group adopted these changes to its accounting policies for US GAAP. However, under US GAAP, retrospective application of these policies was not allowed; therefore, the Allianz Group was required to apply these changes only prospectively under US GAAP.

 

Therefore, the reconciliation adjustment to net income for the year end December 31, 2005, represents the differences in impairments and realized gains and losses from equity securities, net of policyholder participation, recognized from the application of these accounting policies with different transition rules. The reconciliation adjustments to net income for the years ended December 31, 2004 and 2003, represent the elimination of impairments of equity securities that result from the retrospective application of these changes to the Allianz Group’s accounting policies under IFRS.

 

Reversals of impairments of debt securities

 

In accordance with IFRS, if the amount of the impairment previously recorded on a debt security decreases and the decrease can be objectively related to an event occurring after the impairment, such as an improvement in the debtor’s credit rating, the impairment is reversed through net income. Such reversals cannot result in a carrying amount of a security in excess of the carrying amount prior to the impairment. In accordance with US GAAP, reversals of impairments recorded on debt securities are not permitted. Therefore, the reconciliation adjustment to net income represents the elimination of the reversal of impairments on debt securities, net of policyholder participation.

 

Reversal of realized gains from the disposal of available-for-sale debt and equity securities acquired in transactions between equity holders

 

As further described under “Acquisitions and Disposals of Minority Interests”, the reconciliation adjustment to net income for the year ended December 31, 2005, includes the reversal of net realized gains, net of policyholder participation, related to disposals of debt and equity securities recorded under IFRS as a result of purchase accounting adjustments recorded in accordance with US GAAP related to transactions with equity holders. As of December 31, 2005, the amount of the cost basis, net of policyholder participation and minority interests, of the related securities was €274 mn higher under US GAAP than under IFRS.

 

Realized gains from equity securities

 

On the date the Allianz Group no longer exercises significant influence over an investee accounted for under the equity method, the investment is transferred to securities available-for-sale and it is recorded at fair value with its previous carrying amount becoming its cost basis. The carrying amount prior to transfer, as determined in accordance with IFRS and US GAAP may be different. Subsequent to the transfer, these differences in cost basis are realized upon disposal of the equity securities. As a result of the sale of certain equity securities, which previously were accounted for as associated companies, a difference in the cost basis resulted in a lower amount of realized gains in accordance with US GAAP than in accordance with IFRS.

 

Foreign currency exchange differences from debt securities

 

In accordance with IFRS, foreign currency exchange differences from debt securities are recognized in net income. In accordance with US GAAP, foreign currency exchange differences from debt securities are recognized directly in equity as foreign currency translation adjustments. Therefore, the reconciliation adjustment to net income for the year ended December 31, 2005, represents the elimination of the foreign currency exchange differences from debt securities, net of policyholder participation, under US GAAP. During the year ended December 31, 2005, the Allianz Group significantly increased its average balance of debt securities denominated in a foreign currency. This increase, together with the strengthening of the Euro, resulted in the significant amount of foreign

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

currency exchange gains recognized in net income under IFRS. During the years ended December 31, 2004 and 2003, foreign currency exchange differences were not material to the Allianz Group’s net income.

 

Valuation of equity instruments

 

In accordance with IFRS, investments in equity instruments that do not have a quoted market price in an active market with fair values that can be reliably measured are recorded at fair value. In accordance with US GAAP, investments in equity instruments that do not have a quoted market price in an active market are recorded at cost. The Allianz Group has an investment in equity instruments that do not have a quoted market price in an active market; however, which the Allianz Group can reliably measure. Therefore, for IFRS reporting purposes the Allianz Group records its investment in equity instruments at fair value with changes in fair value recorded through shareholders’ equity. Under US GAAP the Allianz Group records its investment in these equity instruments at cost. Therefore, the reconciliation adjustment to shareholders’ equity eliminates the unrealized gains recorded under IFRS for these equity instruments.

 

Loans and receivables

 

As described in Note 3, as a result of the adoption of IAS 39 revised, the Allianz Group reclassified certain available-for-sale debt securities to loans and advances to banks and loans and advances to customers. IAS 39 revised required retrospective application of this change to the Allianz Group’s accounting policies. In accordance with US GAAP, these securities continue to be classified as available-for-sale debt securities. Therefore, the reconciliation adjustment to shareholders’ equity represents the unrealized gains and losses related to the available-for-sale debt securities, net of policyholder participation, under US GAAP.

(d) Real estate

 

A summary of the reconciliation adjustments relating to real estate is as follows:

 

     Net Income

    Shareholders’
Equity(1)


 
     For the years ended December 31,

    As of December 31,

 
         2005    

        2004    

        2003    

        2005    

        2004    

 
     € mn     € mn     € mn     € mn     € mn  

Purchase accounting differences resulting from transactions between equity holders

   (1 )   —       —       117     —    

Impairments of real estate

   21     (41 )   (2 )   (20 )   (41 )

Realized gains from real estate

   (211 )   (157 )   —       (396 )   (185 )
    

 

 

 

 

Total

   (191 )   (198 )   (2 )   (299 )   (226 )
    

 

 

 

 


(1) Shareholders’ equity before minority interests. See reconciliation of minority interests in shareholders’ equity following.

Purchase accounting differences resulting from transactions between equity holders

 

As further described under “Acquisitions and Disposals of Minority Interests”, the reconciliation adjustment to net income for the year ended December 31, 2005 and shareholders’ equity as of December 31, 2005, includes depreciation expense and a higher cost basis of real estate as a result of purchase accounting adjustments recorded in accordance with US GAAP related to transactions with equity holders.

 

Impairments of real estate

 

In accordance with IFRS, if the amount of a previously recognized impairment decreases, the impairment is reversed through net income. However, such reversals do not result in a carrying amount that exceeds what would have been the carrying amount had the impairment not been recorded. In accordance with US GAAP, reversals of impairments recorded on real estate are not permitted. Further, under IFRS to determine if real

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

estate is impaired discounted cash flows are utilized, whereas, under US GAAP undiscounted cash flows are utilized. As a result, certain impairments were recorded under IFRS that were not recorded under US GAAP during the year ended December 31, 2005. Therefore, the reconciliation adjustments to net income and shareholders’ equity represent the elimination of reversals of impairments of real estate less the related accumulated depreciation and differences in impairments recorded during the year ended December 31, 2005.

 

Realized gains from real estate

 

The Allianz Group entered into certain sales leaseback transactions that resulted in the Allianz Group recognizing realized gains from the sale of the real estate and treating the leases as operating leases in accordance with IFRS. In accordance with US GAAP, the Allianz Group is required to defer and amortize over the related lease term these realized gains. Therefore, the reconciliation adjustment to net income and shareholder’s equity represents the reversals of realized gains, net of accumulated amortization.

 

(e) Equity method investees/subsidiaries

 

As further described under “Acquisitions and Disposals of Minority Interests”, the reconciliation adjustment to net income for the year ended December 31, 2005, includes €50 mn of realized gains as a result of the sale of shares by a subsidiary under US GAAP. These realized gains were recorded directly in shareholders’ equity under IFRS.

 

In addition, during the first quarter of the year ended December 31, 2003, the Allianz Group reduced its shareholdings in Munich Re from 22.4% to slightly less than 20%. As a result, as of March 31, 2003, Munich Re was no longer accounted for as an associated company. Additionally, on October 23, 2003, the Allianz Group sold a significant part of its 43.6% ownership in Beiersdorf AG to Tchibo Holding AG, Hamburg, HGV Hamburger Gesellschaft für Vermögens und Beteiligungsverwaltung, Hamburg und Troma Alters-und Hinterbliebenenstiftung, Hamburg. The disposal was effective in December 2003 and resulted in Allianz Group’s ownership in Beiersdorf AG being less than 20%. As a result, Beiersdorf AG was no longer accounted for as an associated company at December 31, 2003. The carrying amounts of these two investments were transferred to securities available for sale upon the discontinuation of equity method accounting.

 

In accordance with IFRS, associated companies are accounted for under the equity method, in which the Allianz Group records its share of the net income or loss of the associate as reported on an IFRS basis. For US GAAP, adjustments have been made to calculate net income and equity of significant associates on the basis of US GAAP. The reconciliation adjustment to net income for the year ended December 31, 2003, results from this difference.

 

(f) Restructuring charges

 

Under IFRS, restructuring provisions include certain partial or early retirement provisions that are recognized in their entirety upon the employee accepting the partial or early retirement offer. Under US GAAP, these partial or early retirement provisions are recognized over the service period. Therefore, the reconciliation adjustment to net income and shareholder’s equity represents the recognition of compensation expense.

 

(g) Deferred compensation

 

In accordance with terms of employment contracts, the Allianz Group has deferred the payment of certain amounts of incentive compensation awards to employees. Employees vest in the deferred amounts over three years. In accordance with IFRS, these deferred amounts are recognized as expense in the year of the award, which is when the Allianz Group is constructively obligated to pay the award. In accordance with US GAAP, the deferred amounts are recognized as expense over the period in which the employee provides services to the Allianz Group, which is considered to be the three-year vesting period. Therefore, the reconciliation adjustment to net income and shareholder’s equity represents the recognition of compensation expense.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

(h) Guarantees

 

Under IFRS, guarantees related to indemnifications are not recorded unless it is probable a loss will occur. In accordance with US GAAP, guarantees related to indemnification contracts are required to be recorded at fair value. Related to the sale of certain investments, the Allianz Group recorded a liability related to guarantees for US GAAP.

 

(i) Financial assets and liabilities designated at fair value through income

 

As described in Note 3, a result of the adoption of IAS 39 revised, the Allianz Group reclassified certain available-for-sale securities to financial assets designated at fair value through income. Under US GAAP, these financial assets and liabilities will continue to be accounted for as available-for-sale securities. In addition, the Allianz Group reclassified certain financial liabilities to financial liabilities designated at fair value. IAS 39 required retrospective application of these changes. Therefore, the reclassification adjustments to net income and shareholders’ equity represent the elimination of these changes under US GAAP.

 

(j) Derivatives on own shares

 

Under IFRS, written put options on own shares which require physical settlement are recorded initially in shareholders’ equity for the option premium received and as a liability, with an offsetting decrease in shareholders’ equity, for the present value of the redemption amount. Until maturity, the liability is accreted to the redemption amount with the change being recorded as interest expense. Under US GAAP, written put options are initially and subsequently recorded as liabilities at fair value with changes recorded in net income. Therefore, the reconciliation adjustment to net income includes the reversal of accretion recorded under IFRS and recording changes in the fair value of the written put options required under US GAAP. The reconciliation adjustment to shareholders’ equity represents the impacts on net income and the reversal of the liability recorded under IFRS for the present value of the redemption amount.

(k) Insurance liabilities

 

A summary of the reconciliation adjustments relating to insurance liabilities is as follows:

 

     Net Income

    Shareholders’
Equity(1)


     For the years ended December 31,

    As of December 31,

     2005

   2004

   2003

    2005

   2004

         € mn            € mn            € mn             € mn            € mn    

Discretionary participation features

   5    37    (10 )   266    35

Purchase accounting differences resulting from transactions between equity holders

   3    —      —       35    —  
    
  
  

 
  

Total

       8    37    (10 )   301    35
    
  
  

 
  

(1) Shareholders’ equity before minority interests. See reconciliation of minority interests in shareholders’ equity following.

Discretionary participation features

 

As described in Note 3, the adoption of IFRS 4 resulted in the Allianz Group recognizing a liability for certain discretionary participating features. IFRS 4 requires retrospective application of this change. Under US GAAP, these discretionary participating features are not recognized. Therefore, the reconciliation adjustment to net income and shareholders’ equity represents the elimination of these liabilities under US GAAP.

 

Purchase accounting differences resulting from transactions between equity holders

 

As further described under “Acquisitions and Disposals of Minority Interests”, the reconciliation adjustment to net income for the year ended

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

December 31, 2005 and shareholders’ equity as of December 31, 2005, includes adjustments to the carrying amount of insurance liabilities, including utilization of different discount rates for aggregate policy reserves and discounting reserves for loss and loss adjustment expenses as a result of purchase accounting adjustments recorded in accordance with US GAAP related to transactions with equity holders.

 

(l) Share based compensation

 

As described in Note 3, the adoption of IFRS 2 resulted in a change to the Allianz Group’s accounting policy for the Class B Plan of PIMCO LLC. As a result of the shares issued under the Class B plan being puttable by the holder, the shares issued are required to be classified as a cash settled plan under IFRS. Therefore, the shares issued under the plan are recognized as liabilities and measured at fair value with changes recognized in net income. IFRS 2 requires retrospective application of this change. Under US GAAP, the Class B Plan continues to be classified an equity settled plan. Therefore, the reconciliation adjustment to net income and shareholders’ equity represents the elimination of the additional compensation expense recognized under IFRS for these shares.

 

(m) Income taxes

 

In accordance with IFRS, the effect on deferred taxes resulting from a change in tax laws or rates is recognized in the income statement except to the extent the change relates to transactions recognized directly in shareholders’ equity. The effect on deferred taxes for transactions originally recognized directly in shareholders’ equity are allocated directly to shareholders’ equity.

 

In accordance with US GAAP, the effect on deferred taxes of a change in tax laws or rates is recognized in the income statement including the effect for transactions originally recognized directly in shareholders’ equity.

 

The following table indicates the amounts recognized in US GAAP net income for changes in tax laws and rates related to transactions recognized directly to shareholders’ equity under IFRS:

 

For the years ended December 31,


   2005

    2004

   2003

 
     € mn     € mn    € mn  

Before elimination of minority interests

   (13 )   —      25  

After elimination of minority interests

   (13 )   —      (80 )

 

The adjustment concerning the change in tax laws and tax rates during the year ended December 31, 2003, primarily relates to a change in tax law in Germany in December 2003 affecting life/health insurance companies through the taxation of capital gains and dividends effective beginning January 1, 2004. Additionally, the net income adjustment for the year ended December 31, 2003 also includes a reduction in the federal tax rates within Italy (effective January 1, 2004), as well as a change in tax law whereby all unrealized gains/losses and impairments/reversals of impairments on participations in strategic investments have become exempt from taxation (effective January 1, 2004).

 

The tax effect of all other US GAAP adjustments, primarily investments and intangibles, during the years ended December 31, 2005, 2004 and 2003, amounted to tax benefits of €268 mn, €168 mn and €332 mn, respectively.

 

The Allianz Group has elected to utilize the portfolio method in its US GAAP accounting treatment for the accumulated deferred tax amounts recorded within shareholders’ equity which relate to the net unrealized gains of available-for-sale securities that are no longer taxable. Under the portfolio method, the accumulated deferred tax amounts recorded within stockholders’ equity will not be recognized in the income statement as income tax expense in future periods as long as the Allianz Group maintains an available-for-sale investment portfolio.

 

(n) Minority interest in earnings

 

The reconciliation adjustment to net income represents the effect of the US GAAP adjustments on minority interests in earnings. The reconciliation

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

adjustment to shareholders’ equity represents effect of the US GAAP adjustments on minority interests in shareholders’ equity and the reclassification of minority interests in shareholders’ from equity under IFRS to liability under US GAAP and the reclassification of certain puttable instruments to liabilities.

 

The following table represents the reconciliation of the Allianz Group’s minority interests in shareholders’ equity between IFRS and US GAAP:

 

     Shareholders’
Equity


As of December 31,


   2005

   2004

     € mn    € mn

Amounts determined in accordance with IFRS

   7,615    7,696

Valuation and recognition differences as noted above

   69    36

Reclassification of puttable instruments related to consolidated investment funds from liabilities

   3,137    1,389

Reclassification of puttable instruments related to share based compensation from liabilities

   598    410
    
  

Total

   11,419    9,531
    
  

 

Acquisitions and Disposals of Minority Interests

 

As described in Note 3, the Allianz Group changed its accounting policy for accounting for the acquisition or disposal of a minority interest in shareholders’ equity for subsidiaries, or companies under control, of the Allianz Group. IFRS 3 does not specifically address these transactions, as the scope of IFRS 3 is limited to accounting for transactions in which the Allianz Group obtains control over a company. The Allianz Group has adopted an accounting policy to treat these acquisitions as transactions between equity holders. Therefore, the acquisition of a minority interest does not result in an allocation of the acquisition cost to the respective fair value of the assets acquired and liabilities assumed. Rather, the excess of the acquisition cost over the Allianz Group’s carrying amount is recognized as a reduction of equity. Similarly, the disposal of a minority interest does not result in any realized gain or loss. The Allianz Group has applied this accounting policy to all acquisitions of a minority interest in shareholders’ equity on or after January 1, 2005.

 

As required under US GAAP, the Allianz Group utilizes purchase accounting to allocate the acquisition cost of an acquisition of a minority interest to the fair value of the assets acquired and liabilities assumed. Further, for disposals of minority interests, the Allianz Group recognizes a realized gain or loss for any difference between the carrying amount of the minority interest disposed and the proceeds received. As result, for transactions involving minority interests after January 1, 2005, the IFRS to US GAAP reconciliation includes the effects of these accounting policies.

 

The primary transactions impacted by this difference during the year ended December 31, 2005, include the acquisition of an additional interest of 20.7% in Riunione Adriactica di Sicurta S.p.A. (“RAS”) and the acquisition of an additional interest of 3.4% in Allianz Global Investors of America L.P. (“AGI LP”). A summary of the preliminary purchase accounting effects, based upon preliminary valuations, recorded on the date of acquisition of these interests under US GAAP is as follows:

 

     RAS

    AGI LP and other

     € mn     € mn

Goodwill

   1,148     196

PVFP

   334     —  

Deferred acquisition costs

   (198 )   —  

Customer relationships

   16     —  

Real estate

   118     —  

Reserves for loss and loss adjustment expenses

   58     —  

Aggregate policy reserves

   (30 )   —  

Deferred tax liabilities

   (107 )   —  
    

 

Total

   1,339     196
    

 

 

The preliminary purchase accounting effects may be adjusted up to one year from the acquisition date upon the finalization of the valuation process. In addition, the Allianz Group continues to evaluate the recognition of separately identifiable intangible assets and the relevant amortization period for recognized intangible assets.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

The goodwill resulting from these transactions has been allocated to the segments expected to benefit from the transactions as follows:

 

     RAS

   AGI LP and other

 
     € mn    € mn  

Property-Casualty

   949    (15 )

Life/Health

   111    (6 )

Banking

   —      —    

Asset Management

   88    217  
    
  

Total

   1,148    196  
    
  

 

Presentation Differences

 

In addition to the valuation and recognition differences, other differences, essentially related to presentation, exist between IFRS and US GAAP. Although there is no impact on IFRS and US GAAP reported net income or shareholders’ equity due to these differences, it may be useful to understand them to interpret the condensed consolidated financial statements presented in accordance with US GAAP in this note. The following is a summary of presentation differences that relate to the Allianz Group’s consolidated financial statements presented in accordance with IFRS and the condensed consolidated financial statements presented in accordance with US GAAP:

 

Balance sheet:

 

1. The Allianz Group’s interest in Eurohypo AG, classified as assets held for sale in other assets under IFRS, is classified in investments under US GAAP, as equity method investees do not qualify for assets held for sale under US GAAP.

 

2. Investments in associated enterprises and joint ventures are presented in investments excluding funds held by others under reinsurance contracts assumed. Fund held by other under reinsurance contracts are presented in other assets.

 

3. When the Allianz Group is the lender in a lending agreement and receives securities as collateral that can be pledged or sold, it recognizes the securities received and corresponding obligations to return them. These securities are reflected as assets in the US GAAP condensed balance sheet in the line “Securities received as collateral”. The offsetting liability is presented in the line “Obligation to return securities received as collateral”.

 

4. Assets and liabilities that qualify for separate account treatment under SOP 03-1 are classified separately on the balance sheet for US GAAP. Investment income related to financial assets for unit linked contracts that do not qualify for this treatment is presented gross in trading income with an offset in benefits, claims, and loss expenses incurred.

 

5. During 2005, Dresdner Bank AG completed the sale of certain portfolios of loans. For IFRS reporting purposes, the loans were derecognized. For US GAAP reporting purposes, the transactions did not meet the criteria to be derecognized. Therefore, the loans are included in loans (net) with a corresponding amount included in other liabilities. In addition, Dresdner Bank AG completed a synthetic sale of certain private equity investments. For IFRS reporting purposes the private equity investments were derecognized. For US GAAP reporting purposes, the transactions did not meet the criteria to be derecognized. Loans to banks and customers are presented as loans (net).

 

6. Other assets are allocated among interest and fees receivable, premium and insurance balances receivables (net), reinsurance recoverables, deferred policy acquisition costs, and other assets.

 

7. Deferred tax assets and liabilities are presented net.

 

8. Unearned premiums included in insurance reserves are disclosed separately.

 

9. Liabilities to banks and liabilities to customers, less amounts for repurchase agreements and registered bonds, are presented separately as deposits.

 

10. Certificated liabilities, participation certificates and subordinated liabilities, registered bonds and amounts for repurchase agreements are presented as short-term borrowings and long-term debt.

 

11. Other accrued liabilities, other liabilities, and deferred income are presented within other liabilities.

 

12. Minority interests in consolidated subsidiaries are excluded from shareholders’ equity.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Income statement:

 

13. Other income from investments and other expenses from investments is presented net as realized investment gains and losses.

 

14. Fee and commission income is presented net of fee and commission expenses by reclassification from acquisition and administrative expenses and other expenses. Other fees are reclassified from other income.

 

15. Interest and similar expenses are primarily allocated among interest on deposits, interest on short-term borrowings, and interest on long-term debt, as appropriate.

 

16. Administrative expenses from the Banking and Asset Management segments are presented in other expenses.

 

17. Reinsurance expenses are reclassified from other expenses to acquisition and administrative expenses.

 

18. Other taxes are reclassified from taxes to other expenses.

 

19. Income from investments in associated enterprises and joint ventures is presented outside of revenues.

 

20. Results from discontinued operations is shown net in the income statement. As described in note 13, the disposal of Four Seasons Health Care Ltd. and BetterCare Group Limited meet the qualifications for discontinued operations under US GAAP.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Condensed consolidated balance sheet information

 

The following is condensed consolidated balance sheet information of the Allianz Group, reformatted to reflect the impacts of the valuation, recognition and presentation differences between IFRS and US GAAP:

 

As of December 31,


   Reference

   US GAAP

   IFRS Reformatted

      2005

   2004

   2005

   2004

          € mn    € mn    € mn    € mn

Assets

                        

Cash and cash equivalents

        31,647    15,628    31,647    15,628

Trading account assets

   i    212,463    220,001    235,007    240,574

Investments

   c, d, i, 1 , 2    356,200    323,742    283,443    252,483

Securities received as collateral

   3    11,300    26,199    —      —  

Separate account assets

   4    20,953    15,851    —      —  

Loans (net)

   c, 5    271,569    313,839    336,808    377,223

Loans held for sale

        —      1,591    —      —  

Interest and fees receivable

   6    5,474    5,286    5,474    5,286

Premium and insurance balances receivables (net)

   6    7,691    7,579    7,691    7,579

Reinsurance recoverables

   6    24,589    24,447    24,589    24,447

Deferred policy acquisition costs

   a, 6    15,389    13,474    15,586    13,474

Goodwill and other intangible assets

   a, b    20,565    18,786    15,385    15,147

Other assets

   d, h, l, 1,
2, 5, 6
   26,848    24,907    27,655    24,338
         
  
  
  

Total assets

        1,004,688    1,011,330    983,285    976,179
         
  
  
  

Liabilities and Shareholders’ Equity

                        

Insurance policy and claims reserves

   c, i, k, 4, 8    382,522    343,145    345,834    314,330

Deposits

   i, 9    201,211    220,677    201,033    220,533

Liabilities held for separate accounts

        20,953    15,848    —      —  

Unearned premiums

   8    13,303    12,050    13,303    12,050

Short-term borrowings

   10    135,101    151,622    135,101    151,622

Long-term debt

   10    48,326    47,330    48,069    47,311

Trading account liabilities

   i, j, 4    85,150    102,141    144,640    145,137

Obligations to return securities

   3    11,300    26,199    —      —  

Net deferred tax liabilities

   a, b, c, d, f,
g, h, i , j,
k, l, 7
   226    948    25    211

Other liabilities

   b, d, f, g,
h, l, 5, 11
   50,794    48,459    48,178    47,294
         
  
  
  

Total liabilities

        948,886    968,419    936,183    938,488

Minority interests in consolidated subsidiaries

   c, d, h, i ,
k, l, 12
   11,419    9,531    7,615    7,696

Shareholders’ equity before minority interests

   a, b, c, d, f,
g, h, i , j,
k, l
   44,383    33,380    39,487    29,995
         
  
  
  

Total liabilities and shareholders’ equity

        1,004,688    1,011,330    983,285    976,179
         
  
  
  

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Condensed consolidated income statement information

 

The following is condensed consolidated income statement information of the Allianz Group, reformatted to reflect the impacts of the valuation, recording and presentation differences between IFRS and US GAAP:

 

For the years ended December 31,


   Reference

   US GAAP

    IFRS Reformatted

 
      2005

    2004

    2003

    2005

    2004

    2003

 
          € mn     € mn     € mn     € mn     € mn     € mn  

Premiums earned (net)

        57,747     56,789     55,978     57,747     56,789     55,978  

Interest and similar income

   20    22,315     21,041     22,592     22,341     20,956     22,510  

Trading income

   i, j, 4, 20    3,513     2,813     243     1,159     1,658     519  

Realized investment gains and losses (net)

   c, d, 13    1,977     1,716     (721 )   3,031     2,507     3,038  

Commissions and fees

   14, 20    6,746     5,902     5,418     7,318     6,065     5,418  

Other income

   14, 20    1,737     2,016     3,021     1,739     1,993     3,074  
         

 

 

 

 

 

Total income

        94,035     90,277     86,531     93,335     89,968     90,537  
         

 

 

 

 

 

Interest on deposits

   15, 20    (2,719 )   (1,993 )   (2,297 )   (2,719 )   (1,950 )   (2,297 )

Interest on short-term borrowings

   15, 20    (793 )   (1,380 )   (2,096 )   (793 )   (1,379 )   (2,096 )

Interest on long-term debt

   15, 20    (2,780 )   (2,350 )   (2,478 )   (2,858 )   (2,374 )   (2,478 )
         

 

 

 

 

 

Total interest expense

        (6,292 )   (5,723 )   (6,871 )   (6,370 )   (5,703 )   (6,871 )
         

 

 

 

 

 

Total income, net of interest expense

        87,743     84,554     79,660     86,965     84,265     83,666  
         

 

 

 

 

 

Benefits, claims, and loss expenses incurred

   c, k    (56,171 )   (53,326 )   (50,432 )   (53,797 )   (52,255 )   (52,240 )

Provision for loan losses

        109     (354 )   (1,027 )   109     (354 )   (1,027 )
         

 

 

 

 

 

Total provisions for losses, loss expenses, and loan losses

        (56,062 )   (53,680 )   (51,459 )   (53,688 )   (52,609 )   (53,267 )
         

 

 

 

 

 

Insurance underwriting, acquisition and insurance expenses

   a, c, 13, 20    (15,149 )   (14,994 )   (13,807 )   (15,560 )   (15,079 )   (14,061 )

Goodwill and other intangibles amortization

   a    (264 )   (349 )   (507 )   —       (1,164 )   (1,413 )

Other expenses

   f, g, l, 14,
16, 17, 18,
20
   (10,749 )   (10,718 )   (14,162 )   (11,146 )   (11,147 )   (14,128 )
         

 

 

 

 

 

Total operating expenses

        (26,162 )   (26,061 )   (28,476 )   (26,706 )   (27,390 )   (29,602 )
         

 

 

 

 

 

Income before income (net) from investments in associated enterprises and joint ventures, income tax expense, and minority interests

        5,519     4,813     (275 )   6,571     4,266     797  

Income (net) from investments in associated enterprises and joint ventures

   d, h, 19,
20
   1,037     768     3,115     1,257     777     3,014  

Income tax (expense)/benefit

   a, b, c, d,
e, f, g, h, i,
j, k, l, 18,
20
   (1,794 )   (1,443 )   163     (2,062 )   (1,609 )   (194 )
         

 

 

 

 

 

Income before minority interests

        4,762     4,138     3,003     5,766     3,434     3,617  

Minority interests in income of consolidated subsidiaries

   c, d, h, i, k,
l, 20
   (1,078 )   (1,248 )   (758 )   (1,386 )   (1,168 )   (926 )
         

 

 

 

 

 

Income from continuing operations

        3,684     2,890     2,245     4,380     2,266     2,691  

Discontinued operations

   19    9     (9 )   —       —       —       —    
         

 

 

 

 

 

Net income

        3,693     2,881     2,245     4,380     2,266     2,691  
         

 

 

 

 

 

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

Cash flows

 

The cash flow statement has been prepared under the provisions of IAS 7, Cash Flow Statements (“IAS 7”). The presentation requirements of IAS 7 vary in some respects from the presentation requirements of US GAAP. These presentation differences are summarized as follows:

 

Cash flows from operating activities include the following item that would be included in cash flows from investing activities under US GAAP:

 

During the year ended
December 31,


   2005

    2004

    2003

     € mn     € mn     € mn

Change in loans and advances to banks and customers

   (2,451 )   (726 )   14,768

 

Cash flows from operating activities include the following items that would be included in cash flows from financing activities under US GAAP:

 

During the year ended
December 31,


   2005

    2004

    2003

 
     € mn     € mn     € mn  

Change in liabilities to banks and customers

   (18,418 )   (16,926 )   19,842  

Change in certificated liabilities

   1,569     5,786     (14,393 )

 

Net income per share

 

Net income per share is calculated excluding the effect of Allianz AG shares held by associated companies. During the years ended December 31, 2005 and 2004, associated companies did not hold any Allianz AG shares (2003: weighted-average of 3,728,666).

 

Recently issued US accounting pronouncements

 

In November 2005, the FASB issued FASB Staff Position FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP 115-1”). FAS 115-1 provides accounting guidance regarding the determination of when an impairment of debt and marketable equity securities and investments accounted for under the cost method should be considered other-than-temporary and recognized in income. FSP 115-1 is effective for the year ending December 31, 2006.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, (“SFAS 123”) and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Due to ongoing discussions at the FASB, the Allianz Group has elected not to early adopt SFAS 123R. SFAS 123R is effective for the year ending December 31, 2006.

 

In November 2005, the FASB issued FASB Staff Position No. 45-3, Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or its Owners (“FSP No. 45-3”), which amended FASB Interpretation No. 45 to require that the recognition and measurement provisions be applied to new or modified minimum revenue guarantees. FSP No. 45-3 is effective for the year ended December 31, 2006.

 

In September 2005, AcSEC issued SOP 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in FASB No. 97. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. SOP 05-1 is effective for the year ended December 31, 2007.

 

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments (“SFAS 155”). SFAS 155 permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that would require bifurcation. SFAS 155 is effective for the year ended December 31, 2007.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

The Allianz Group is currently assessing the impact of the new standards on its condensed consolidated financial statements presented in accordance with US GAAP contained in this footnote.

 

Recently adopted US accounting pronouncements

 

In March 2004, the EITF reached consensus on Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128 (“EITF 03-6”). EITF 03-6 provides guidance in determining whether a security should be considered a participating security for purposes of computing earnings per share and how earnings should be allocated to the participating security. EITF 03-6 was effective for the year ended December 31, 2005 and did not have a material effect on the Allianz Group’s condensed consolidated financial statements presented in accordance with US GAAP contained in this footnote.

 

In March 2004, the EITF reached consensus on Issue No. 03-16, Accounting for Investments in Limited Liability Companies (“EITF 03-16”). EITF 03-16 provides guidance regarding whether a limited liability company should be viewed as similar to a corporation or similar to a partnership for purposes of determining whether a noncontrolling investment should be accounted for using the cost method or the equity method of accounting. EITF 03-16 was effective for the year ended December 31, 2005 and did not have a material effect on the Allianz Group’s condensed consolidated financial statements presented in accordance with US GAAP contained in this footnote.

 

In June 2004, the EITF reached a consensus on Issue 02-14, Whether the Equity Method of Accounting Applies When an Investor Does Not Have an Investment in Voting Stock of an Investee but Exercises Significant Influence through Other Means (“EITF 02-14”). The consensus reached indicates that in situations where an investor has the ability to exercise significant influence over the investee, an investor should apply the equity method of accounting only when it has either common stock or “in-substance” common stock of a corporation. EITF 02-14 prohibits the application of the equity method in instances where an investment is neither common stock nor “in-substance” common stock. EITF 02-14 was effective for the year ended December 31, 2005 and did not have a material effect on the Allianz Group’s condensed consolidated financial statements presented in accordance with US GAAP contained in this footnote.

 

In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer, which addresses the accounting for certain loans acquired in a transfer when it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. SOP 03-3 requires acquired loans with evidence of credit deterioration to be recorded at fair value and prohibits recording any valuation allowance related to such loans at the time of purchase. This SOP limits the yield that may be accreted on such loans to the excess of the investor’s estimated cash flows over its initial investment in the loan. The excess of contractual cash flows over cash flows expected to be collected is not to be recognized as an adjustment of yield. Subsequent increases in cash flows expected to be collected are recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected are recognized as impairment. Loans carried at fair value, mortgage loans held for sale, and loans to borrowers in good standing under revolving credit agreements are excluded from the scope of SOP 03-3. SOP 03-3 was effective for the year ended December 31, 2005 and did not have a material effect on the Allianz Group’s condensed consolidated financial statements presented in accordance with US GAAP contained in this footnote.

 

Variable Interest Entities

 

In December 2003, the FASB issued FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities (“FIN 46R”), which revised the original FIN 46 guidance issued in January 2003. FIN 46R introduces a new concept of a variable interest entity (VIE) and determining when an entity should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. A VIE is an entity (1) that has a total equity investment at risk that is not

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

sufficient to finance its activities without additional subordinated financial support from other parties, or (2) where the group of equity owners does not have the ability to make significant decisions about the entity’s activities through voting or similar rights, or the obligation to absorb the entity’s expected losses, or the right to receive the entity’s expected residual returns.

 

FIN 46R requires that a VIE be consolidated if a party with an ownership, contractual or other financial interest in the VIE is obligated to absorb a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the VIE’s residual returns, or both. The holder of a variable interest that consolidates the VIE is the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest.

 

The Allianz Group is involved with a variety of VIEs 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 VIEs 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.

 

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 VIEs with the goal of developing, marketing and managing these funds. During the establishment phase of these funds, the Allianz Group may provide initial capital for the VIEs to acquire securities until sufficient third-party investors purchase participations in the funds or the VIEs are terminated. Certain of these VIE’s funds may include capital maintenance and/or performance guarantees given to the investors. These guarantees 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 VIEs.

 

The Allianz Group adopted the provisions of FIN 46R on the date the relationship began for all VIEs that the Allianz Group became involved with after January 31, 2003. For all relationships with VIEs that began before February 1, 2003, the Allianz Group adopted the provisions of FIN 46R on January 1, 2004.

 

On January 1, 2004, the Allianz Group consolidated certain special purpose entities, established prior to February 1, 2003, which are used to conduct asset securitizations of finance receivables that are sold to third-parties. The Allianz Group considers itself to be the primary beneficiary for these special purpose entities through its involvement in the capacity of program administrator, liquidity provider and credit enhancer. As of January 1, 2004, total assets held by these VIEs which had to be consolidated in the Allianz Group’s consolidated financial statements were €6,327 mn.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

The following table reflects all VIEs for which the Allianz Group is the primary beneficiary, however does not hold a majority voting interest. These VIEs are consolidated in the Allianz Group’s consolidated financial statements.

 

     As of December 31, 2005

Type of VIE


   Total assets

  

Consolidated assets
which are collateral
for VIE’s obligations


   Amount of
consolidated
assets which are
collateral for
VIE’s obligations


   Creditor’s
recourse to
Allianz Group
assets


     € mn         € mn    € mn

Asset-backed securities transaction

   23,233    Various receivables and corporate notes    23,233    —  

Derivatives transactions

   4,443   

Derivatives, equity

and cash balances

   4,443    —  

Investment funds

   23    Fixed income, foreign exchange and derivative instruments    23    —  

Other

   335    Various receivables, equity instruments and cash and cash equivalents    335    —  
    
       
  

Total

   28,034         28,034    —  
    
       
  

 

The following table reflects the VIEs for which the Allianz Group has a significant variable interest but which are not consolidated as the Allianz Group is not the primary beneficiary.

 

Type of VIE


  

As of December 31, 2005,


  

Nature of Allianz Group’s
involvement with VIEs


   Total assets

  

Allianz

Group’s
maximum
exposure
to loss


          € mn    € mn

Investment funds

   Guarantee obligations    2,285    1,076

Investment funds

   Investment manager and/or equity holder    281    10

Vehicles primarily used for asset-backed security transactions

   Arranger, establisher, servicer, liquidity provider and/or investment counterparty    24,251    672

Vehicles used for CBO and CDO transactions

   Investment manager and/or equity holder    8,669    2

Other

   Equity holder    784    275
         
  

Total

        36,270    2,035
         
  

 

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Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

48     Selected subsidiaries and other holdings

 

OPERATING SUBSIDIARIES—GERMANY


   Equity

   % owned(*)

     € mn     

AGIS Allianz Dresdner Informationssysteme GmbH, Munich

   208    100.0

Allianz Capital Partners GmbH, Munich

   550    100.0

Allianz Dresdner Bauspar AG, Bad Vilbel

   6    100.0

Allianz Global Investors Advisory GmbH, Frankfurt am Main

   3    100.0

Allianz Global Investors AG, Munich

   3,036    100.0

Allianz Global Risks Rückversicherungs-AG, Munich

   351    100.0

Allianz Immobilien GmbH, Stuttgart

   5    100.0

Allianz Lebensversicherungs-Aktiengesellschaft, Stuttgart

   1,396    91.0

Allianz Marine & Aviation Versicherungs-AG, Hamburg

   122    100.0

Allianz Pensionskasse AG, Stuttgart

   116    100.0

Allianz Private Equity Partners GmbH, Munich

   0.04    100.0

Allianz Private Krankenversicherungs-Aktiengesellschaft, Munich

   335    100.0

Allianz ProzessFinanz GmbH, Munich

   0.4    100.0

Allianz Versicherungs-Aktiengesellschaft, Munich

   2,386    100.0

Allianz Zentrum für Technik GmbH, Munich

   0.2    100.0

Bayerische Versicherungsbank AG, Munich (was merged in January 2006 retroactively effective October 1, 2005 into Allianz Versicherungs-Aktiengesellschaft, Munich)

   275    100.0

DEGI Deutsche Gesellschaft für Immobilienfonds mbH, Frankfurt am Main

   124    94.0

Deutsche Lebensversicherungs-AG, Berlin

   40    100.0

Deutscher Investment-Trust Gesellschaft für Wertpapieranlagen mbH, Frankfurt am Main

   115    100.0

Dresdner Bank AG, Frankfurt am Main

   7,533    100.0

dresdner bank investment management Kapitalanlagegesellschaft mbH, Frankfurt am Main

   24    100.0

Euler Hermes Kreditversicherungs-AG, Hamburg

   161    100.0

Frankfurter Versicherungs-AG, Frankfurt am Main (was merged in January 2006 retroactively effective October 1, 2005 into Allianz Versicherungs-Aktiengesellschaft, Munich)

   299    100.0

Münchner und Magdeburger Agrarversicherung AG, Munich

   5    58.5

Oldenburgische Landesbank AG, Oldenburg

   94    89.4

Reuschel & Co. Kommanditgesellschaft, Munich

   234    97.5

Vereinte Spezial Krankenversicherung AG, Munich

   4    100.0

Vereinte Spezial Versicherung AG, Munich

   45    100.0

(*) Percentage includes equity participations held by dependent enterprises in full, even if the Allianz Group’s share in the dependent enterprise is under 100%.

 

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Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

OPERATING SUBSIDIARIES—OTHER COUNTRIES


   Equity

   % owned(1)

 
     € mn       

Adriática de Seguros C. A., Caracas

   20    97.0  

AGF Allianz Argentina Compania de Seguros Generales S. A., Buenos Aires

   23    100.0  

AGF Asset Management S. A., Paris

   66    99.9  

AGF Belgium Insurance S. A., Brussels

   209    100.0  

AGF Brasil Seguros S. A., Sao Paulo

   107    72.5  

AGF La Lilloise S. A., Paris

   57    100.0  

Alba Allgemeine Versicherungs-Gesellschaft, Basel

   31    100.0  

Allianz Australia Limited, Sydney

   992    100.0  

Allianz Bulgaria Insurance and Reinsurance Company Ltd., Sofia

   22    78.0  

Allianz Bulgaria Life Insurance Company Ltd., Sofia

   9    99.0  

Allianz Compañía de Seguros y Reaseguros S. A., Barcelona

   504    99.9  

Allianz Cornhill Insurance plc., Guildford

   1,266    98.0 (2)

Allianz Dazhong Life Insurance Company Ltd., Shanghai

   6    51.0  

Allianz Egypt Insurance Company S. A. E., Cairo

   12    85.0  

Allianz Egypt Life Company S. A. E., Cairo

   10    96.0  

Allianz Elementar Lebensversicherungs-Aktiengesellschaft, Vienna

   57    100.0  

Allianz Elementar Versicherungs-Aktiengesellschaft, Vienna

   393    100.0  

Allianz Europe Ltd., Amsterdam

   451    100.0  

Allianz Fire and Marine Insurance Japan Ltd., Tokyo

   7    100.0  

Allianz Generales du Laos Ltd., Laos

   4    51.0  

Allianz General Insurance Company S. A., Athens

   27    100.0  

Allianz General Insurance Malaysia Berhad p.l.c., Kuala Lumpur

   68    98.7  

Allianz Global Investors Distributors LLC, Stamford

   36    100.0  

Allianz Global Investors Hong Kong Ltd., Hong Kong

   47    100.0  

Allianz Global Investors Ireland Ltd., Dublin

   6    100.0  

Allianz Global Investors Korea Limited, Seoul

   22    100.0  

Allianz Global Investors Luxembourg S. A., Luxembourg

   67    100.0  

Allianz Global Investors of America L. P., Delaware

   806    97.0  

Allianz Global Investors Taiwan (SITE) Ltd., Taipeh

   10    100.0  

Allianz Global Risks US Insurance Company, Burbank

   4,199    100.0  

Allianz Hungária Biztosító Rt., Budapest

   150    100.0  

Allianz Insurance (Hong Kong) Ltd., Hong Kong

   8    100.0  

Allianz Insurance Company of Singapore Pte. Ltd., Singapore

   16    100.0  

Allianz Irish Life Holdings p.l.c., Dublin

   362    66.4  

Allianz Life Insurance Co. Ltd., Seoul

   422    100.0  

Allianz Life Insurance Company of North America, Minneapolis

   2,802    100.0  

Allianz Life Insurance Company S. A., Athens

   21    100.0  

Allianz Life Insurance Malaysia Berhad p.l.c., Kuala Lumpur

   20    100.0  

Allianz Marine & Aviation (France), Paris

   129    100.0  

Allianz México S. A. Compañía de Seguros, Mexico-City

   83    100.0  

Allianz Nederland Levensverzekering N.V., Utrecht

   263    100.0  

Allianz Nederland Schadeverzekering N.V., Rotterdam

   384    100.0  

Allianz of America Inc., Wilmington

   9,468    100.0  

Allianz poistóvna a.s., Prague

   92    100.0  

(1) Percentage includes equity participations held by dependent enterprises in full, even if the Allianz Group’s share in the dependent enterprise is under 100%.
(2) 99.99 % of the voting share capital.

 

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Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

OPERATING SUBSIDIARIES—OTHER COUNTRIES


   Equity

   % owned(1)

 
     € mn       

Allianz President Life Insurance Co. Ltd., Taipeh

   57    50.0 (2)

Allianz Re Dublin Ltd., Dublin

   14    100.0  

Allianz Risk Transfer AG, Zurich

   390    100.0  

Allianz Slovenská poist’ovna a. s., Bratislava

   267    84.6  

ALLIANZ SUBALPINA S. p. A. SOCIETÀ DI ASSICURAZIONI E RIASSICURAZIONI, Turin

   282    98.0  

Allianz Suisse Lebensversicherungs-Gesellschaft, Zurich

   377    100  

Allianz Suisse Versicherungs-Gesellschaft, Zurich

   612    100.0  

Allianz Tiriac Insurance S. A., Bucharest

   45    51.6  

Allianz Underwriters Insurance Company, Burbank

   41    100.0  

Allianz (UK) Limited, Guildford

   1,406    100.0  

Allianz Worldwide Care Ltd., Dublin

   18    100.0  

Allianz Zagreb d.d., Zagreb

   14    80.1  

Assurances Générales de France, Paris

   7,022    61.0  

Assurances Générales de France IART S. A., Paris

   2,291    100.0  

Assurances Générales de France Vie S. A., Paris

   2,703    100.0  

Assurances Générales du Laos Ltd., Laos

   4    51.0  

Banque AGF S. A., Paris

   358    100.0  

Colseguros Generales S. A., Bogota

   40    100.0  

Commercial Bank Allianz Bulgaria Ltd., Sofia

   21    99.6  

Compagnie d’Assurance de Protection Juridique S. A., Zug

   11    100.0  

Companhia de Seguros Allianz Portugal S. A., Lissabon

   158    64.8  

Dresdner Bank Luxemburg S. A., Luxembourg

   160    100.0  

Dresdner Bank (Schweiz) AG, Zurich

   22    99.8  

Dresdner Kleinwort Wasserstein (Japan) Limited, Hong Kong

   115    100.0  

Dresdner Kleinwort Wasserstein (South East Asia) Ltd., Singapore

   186    100.0  

ELVIA Reiseversicherungs-Gesellschaft AG, Zurich

   135    100.0  

Euler Hermes Crédito Compañía de Seguros y Reaseguros, S. A., Madrid

   8    100.0  

EULER HERMES SFAC. S. A., Paris

   312    100.0  

Eurovida, S. A. Compañía de Seguros y Reaseguros, Madrid

   42    51.0  

Fireman’s Fund Insurance Company, Novato

   2,994    100.0  

Four Seasons (JDM) Ltd., Wilmslow (former: Four Seasons Health Care Ltd., Wilmslow)

   184    100.0  

GENIALLOYD S. p. A., Milan

   56    100.0  

Insurance Joint Stock Company „Allianz”, Moscow

   7    100.0  

Lloyd Adriatico S. p. A., Triest

   935    99.7  

Mondial Assistance S. A. S., Paris Cedex

   44    100.0  

NFJ Investment Group LP, Dallas

   3    100.0  

Nicholas Applegate Capital Management LLC, Delaware

   17    100.0  

Oppenheimer Capital LLC, Delaware

   5    100.0  

Pacific Investment Management Company LLC, Delaware

   196    85.0  

Privatinvest AG, Salzburg

   40    74.0  

PT Asuransi Allianz Life Indonesia p.l.c, Jakarta

   13    99.8  

PT Asuransi Allianz Utama Indonesia Ltd., Jakarta

   15    75.4  

RAS ASSET MANAGEMENT Socièta di gestione del risparmio S. p. A., Milan

   42    100.0  

RAS Tutela Giudiziaria S. p. A., Milan

   11    100.0  

RB Vita S. p. A., Milan

   236    100.0  

(1) Percentage includes equity participations held by dependent enterprises in full, even if the Allianz Group’s share in the dependent enterprise is under 100%.
(2) Controlled by the Allianz Group.

 

F-131


Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

OPERATING SUBSIDIARIES—OTHER COUNTRIES


   Equity

   % owned(*)

     € mn     

RCM Capital Management LLC, San Francisco

   25    100.0

RCM (UK) Ltd., London

   27    100.0

Riunione Adriatica di Sicurtà S. p. A., Milan

   4,862    76.3

TU Allianz Polska S. A., Warsaw

   56    100.0

TU Allianz Zycie Polska S. A., Warsaw

   13    100.0

Veer Palthe Voûte (VPV) N.V., Gouda

   14    100.0

Wm. H McGee & Co. Inc., New York

   2    100.0

(*) Percentage includes equity participations held by dependent enterprises in full, even if the Allianz Group’s share in the dependent enterprise is under 100%.

 

ASSOCIATED ENTERPRISES(1)


   Equity

   % owned(2)

 
     € mn       

Eurohypo AG, Frankfurt am Main(2)

   5,998    21.1  

AGF Eurocash

   3,147    20.5  

Deutsche Schiffsbank AG, Bremen und Hamburg

   445    40.0  

Objective Japon

   251    19.9 (4)

Oddo, Paris

   222    27.0  

Oddo Generation C

   173    36.3  

Kommanditgesellschaft Allgemeine Leasing GmbH & Co., Grünwald

   155    40.5  

Cofitem Cofimur, Paris

   148    21.8  

Koç Allianz Sigorta T.A.S., Istanbul

   138    37.1  

Captain Holding S.à.r.l., Luxembourg

   128    46.0  

Depfa Holding III, Frankfurt

   115    22.4  

Oddo Euro Index AC

   110    22.0  

Oddo Capital Europe

   101    19.7 (4)

PHRV (Paris Hotels Roissy Vaugirard), Paris

   86    24.9  

Russian People’s Insurance Society “Rosno”, Moskow

   78    47.4  

Rendite Partner Gesellschaft für Vermögensverwaltung-mbH, Frankfurt am Main

   77    33.3  

Koç Allianz Hayat ve Emeklilik A.S. (Koç Allianz Life and Pension Company), Istanbul

   57    38.0  

Ayudhya Allianz C.P. Life Public Company Limited, Bangkok

   52    25.0  

Allianz Bajaj Life Insurance Company Limited, Pune (Indien)

   43    26.0  

EUROPENSIONES S. A.—Entidad Gestora de Fondos de Pensiones, Madrid

   37    49.0  

Compania de Seguro de Creditos S. A. (Cosec), Portugal

   34    41.4  

Dresdner-Cetelem Bank GmbH, Munich

   22    49.9  

(1) Associated enterprises are all those enterprises other than affiliated enterprises or joint ventures, in which the Allianz Group has an interest of between 20% and 50% regardless of whether a significant influence is exercised or not. The presented associated enterprises represent 90% of total carrying amount of investments in associated enterprises.
(2) Including shares held by dependent subsidiaries.
(3) Included in assets held for sale in the consolidated financial statements.
(4) Significant influence

 

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Table of Contents

Notes to the Allianz Group’s Consolidated Financial Statements—(Continued)

 

OTHER SELECTED HOLDINGS IN LISTED
COMPANIES(1)


   Market value

   owned(2)

   Group equity

   Net Profit

   

Balance sheet

date


     € mn    %    € mn    € mn      

Banco Popular Español S. A., Madrid

   1,170    9.4    4,946    888     12/31/2004

Banco BPI S. A., Porto

   251    8.8    1,242    251     12/31/2005

BASF AG, Ludwigshafen

   862    2.6    15,766    1,883     12/31/2004

Bayer AG, Leverkusen

   1,122    4.4    12,379    603     12/31/2004

Bayerische Motorenwerke AG, Munich

   1,012    4.1    17,517    2,222     12/31/2004

Beiersdorf AG, Hamburg

   642    7.3    1,033    296     12/31/2004

BNP Paribas S.A., Paris

   528    0.9    45,993    5,852     12/31/2005

E.ON AG, Düsseldorf

   1,925    3.2    37,704    4,339     12/31/2004

ENI S.p.A., Roma

   848    0.9    28,318    7,274     12/31/2004

GEA Group AG, Bochum

   205    10.1    1,686    62     12/31/2004

Heidelberger Druckmaschinen AG, Heidelberg

   340    12.2    1,230    55     3/31/2005

KarstadtQuelle AG, Essen

   228    8.5    620    (1,631 )   12/31/2004

Linde AG, Wiesbaden

   906    11.5    4,081    274     12/31/2004

Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München, Munich

   2,573    9.8    20,737    1,833     12/31/2004

Nestle S.A., Vevey

   619    0.6    25,899    4,319     12/31/2004

Rhön-Klinikum AG, Bad Neustadt/Saale

   112    6.7    569    76     12/31/2004

RWE AG, Essen

   1,297    4.1    11,193    2,137     12/31/2004

Sanofi-Aventis S.A., Paris

   727    0.7    35,933    (3,610 )   12/31/2004

Schering AG, Berlin

   1,253    11.4    3,026    500     12/31/2004

Sequana Capital, Paris

   375    14.8    1,779    (64 )   12/31/2004

Siemens AG, Munich

   802    1.2    27,773    2,248     9/30/2005

Süd Chemie AG, Munich

   104    19.0    224    20     12/31/2004

Total S. A., Paris

   1,055    1.2    31,889    9,612     12/31/2004

Unicredito Italiano S.p.A., Milan

   1,954    3.2    15,165    2,131     12/31/2004

Zagrebacka Banka d.d., Zagreb

   217    13.7    750    90     12/31/2004

(1) Market value greater than or equal to €100 mn and percentage of shares owned greater than or equal to 5%, or market value greater than or equal to €500 mn, excluding trading portfolio of banking business.
(2) Including shares held by dependent subsidiaries (incl. consolidated investment funds).

 

F-133


Table of Contents

SCHEDULE I

 

SUMMARY OF INVESTMENTS(1)

As of December 31, 2005

 

     Amortized
cost


   Fair
Value


  

Amount shown

in balance sheet


     € mn    € mn    € mn

Debt securities:

              

Government and agency mortgage-backed securities (residential and commercial)

   9,894    9,651    9,651

Corporate mortgage-backed securities (residential and commercial)

   3,265    3,271    3,271

Other asset-backed securities

   3,381    3,415    3,415

Government Bonds:

              

Germany

   15,941    16,742    16,734

Italy

   23,906    25,248    25,206

France

   16,250    17,893    17,893

United States

   9,527    9,644    9,644

Spain

   8,484    9,304    9,304

Belgium

   4,438    4,736    4,736

Austria

   4,094    4,313    4,311

All other countries

   28,896    29,938    29,868

Corporate Bonds:

              

Public utilities

   3,283    3,435    3,433

All other corporate bonds

   72,472    75,591    75,439

Other

   1,592    1,744    1,744
    
  
  

Total debt

   205,423    214,925    214,649

Equity securities:

              

Common stocks:

              

Public utilities

   4,985    7,795    7,795

Banks, insurance companies, funds

   11,591    17,398    17,398

Industrial, miscellaneous and all other

   21,432    31,769    31,769

Non-redeemable preferred stocks

   149    168    168
    
  
  

Total equity securities

   38,157    57,130    57,130

Mortgage loans on real estate

   26,753    26,753    26,753

Real Estate

   9,569    12,901    9,569

Policy loans

   1,810    1,810    1,810

Certificates of deposit

   2,120    2,120    2,120

Short-term investments

   3,172    3,172    3,172
    
  
  

Total investments

   287,004    318,811    315,203
    
  
  

(1) Includes all Allianz Group investments except trading portfolios.

 

S-1


Table of Contents

SCHEDULE II

 

ALLIANZ AKTIENGESELLSCHAFT

 

PARENT ONLY CONDENSED FINANCIAL STATEMENTS BALANCE SHEETS (IFRS BASIS)

 

As of December 31,


   2005

   2004

     € mn    € mn

Assets:

         

Investment in subsidiaries and affiliates

   68,324    50,895

Other invested assets

   16,048    19,887

Insurance reserves ceded

   3,310    3,479

Cash funds and cash equivalents

   59    40

Other assets

   6,506    6,174
    
  
     94,247    80,475
    
  

Liabilities and Shareholders’ Equity:

         

Insurance reserves

   13,540    16,039

Participation certificates and subordinated liabilities

   6,629    5,126

Certificated liabilities

   1,912    2,191

Other liabilities

   32,679    27,124
    
  
     54,760    50,480

Shareholders’ equity

   39,487    29,995
    
  
     94,247    80,475
    
  

 

S-2


Table of Contents

SCHEDULE II

 

ALLIANZ AKTIENGESELLSCHAFT

 

PARENT ONLY CONDENSED FINANCIAL STATEMENTS

STATEMENTS OF INCOME (IFRS BASIS)

 

For the years ended December 31,


   2005

   2004

    2003

 
     € mn    € mn     € mn  

Revenues:

                 

Net premiums earned

   3,291    3,627     3,608  

Investment income

   2,736    1,165     686  

Other income

   582    114     433  
    
  

 

     6,609    4,906     4,727  

Expenses:

                 

Insurance benefits

   2,195    2,601     2,855  

Acquisition costs and administrative expenses

   1,058    1,081     1,160  

Investment expense

   1,412    1,998     1,707  

Other expense

   1,052    478     704  
    
  

 

     5,717    6,158     6,426  
    
  

 

Income before tax

   892    (1,252 )   (1,699 )

Taxes

   571    110     797  
    
  

 

Income before equity in undistributed net income of subsidiaries

   1,463    (1,142 )   (902 )

Equity in undistributed net income of subsidiaries

   2,917    3,408     3,593  
    
  

 

Net Income

   4,380    2,266     2,691  
    
  

 

 

S-3


Table of Contents

SCHEDULE II

 

ALLIANZ AKTIENGESELLSCHAFT

 

PARENT ONLY CONDENSED FINANCIAL STATEMENTS

STATEMENT OF CASH FLOWS (IFRS BASIS)

 

For the years ended December 31,


   2005

    2004

    2003

 
     € mn     € mn     € mn  

Cash flows from operating activities:

                  

Net income

   4,380     2,266     2,691  

Adjustments to reconcile net income to cash provided by operating activities:

                  

Equity in undistributed net income of consolidated subsidiaries

   (2,917 )   (3,408 )   (3,593 )

Change in insurance reserves—net

   (2,330 )   (631 )   (769 )

Change in other assets

   (332 )   2,250     (1,992 )

Change in other liabilities

   5,555     (14,167 )   2,530  
    

 

 

Net cash (used) provided by operating activities

   4,356     (13,690 )   (1,133 )
    

 

 

Cash flows from investing activities:

                  

Change in investments in subsidiaries

   (17,429 )   4,835     (2,706 )

Change in other invested assets

   3,839     4,663     (3,821 )
    

 

 

Net cash provided (used) in investing activities

   (13,590 )   9,498     (6,527 )
    

 

 

Cash flows from financing activities:

                  

Change in certificated liabilities, participation certificates and subordinated liabilities

   1,224     1,075     (218 )

Net proceeds from issuance of common stocks and additional paid in capital

   2,183     86     4,562  

Dividends paid

   (674 )   (551 )   (374 )

Other changes in shareholders’ capital

   6,520     3,609     3,662  
    

 

 

Net cash provided (used) by financing activities

   9,253     4,219     7,632  
    

 

 

Net increase (decrease) in cash

   19     27     (28 )

Cash at January 1

   40     13     41  
    

 

 

Cash at December 31

   59     40     13  
    

 

 

 

S-4


Table of Contents

SCHEDULE III

 

SUPPLEMENTARY INSURANCE INFORMATION(1)

 

    

Deferred

policy

acquisition

Costs

GROSS


  

Future

policy

benefits,

losses, claims

and loss

expense

GROSS


  

Unearned

premiums

GROSS


  

Other policy

claims and

benefits

payable

GROSS


  

Premium

revenue

(earned)

NET


     € mn    € mn    € mn    € mn    € mn

At and for the year ended December 31, 2005:

                        

Life/Health

   12,735    248,510    333    27,079    19,969

Property-Casualty

   3,938    68,026    12,970    2,223    37,778
    
  
  
  
  

Total

   16,673    316,536    13,303    29,302    57,747
    
  
  
  
  

At and for the year ended December 31, 2004:

                        

Life/Health

   10,378    229,206    228    20,264    19,382

Property-Casualty

   3,998    62,998    11,822    1,858    37,407
    
  
  
  
  

Total

   14,376    292,204    12,050    22,122    56,789
    
  
  
  
  

At and for the year ended December 31, 2003:

                        

Life/Health

   9,417    216,790    236    14,677    19,402

Property-Casualty

   3,416    63,874    11,962    1,873    36,576
    
  
  
  
  

Total

   12,833    280,664    12,198    16,550    55,978
    
  
  
  
  

(1) After eliminating intra-Allianz Group transactions between segments.

 

S-5


Table of Contents

SCHEDULE III

 

SUPPLEMENTARY INSURANCE INFORMATION(1)

 

    

Investment

income

NET


  

Benefits claims,

losses and

settlement

expenses

NET


  

Amortization

of deferred

policy

acquisition

costs

NET


  

Other

operating

expenses

NET


  

Premiums

written

NET


     € mn    € mn    € mn    € mn    € mn

At and for the year ended December 31, 2005:

                        

Life/Health

   14,057    27,811    1,270    2,121    20,065

Property-Casualty

   6,793    25,986    2,675    6,271    38,271
    
  
  
  
  

Total

   20,850    53,797    3,945    8,392    58,336
    
  
  
  
  

At and for the year ended December 31, 2004:

                        

Life/Health

   12,448    27,464    1,093    2,305    19,454

Property-Casualty

   4,552    26,028    1,569    6,127    37,666
    
  
  
  
  

Total

   17,000    53,492    2,662    8,432    57,120
    
  
  
  
  

At and for the year ended December 31, 2003:

                        

Life/Health

   11,238    25,808    120    3,472    19,438

Property-Casualty

   6,999    26,431    410    6,766    37,305
    
  
  
  
  

Total

   18,237    52,239    530    10,238    56,743
    
  
  
  
  

(1) After eliminating intra-Allianz Group transactions between segments.

 

S-6


Table of Contents

SCHEDULE IV

 

SUPPLEMENTARY REINSURANCE INFORMATION(3)

 

    

Direct gross

amount


  

Ceded to

other

companies


   

Assumed

from other

companies


  

Net

amount


  

Amount

assumed to

net


 
     € mn    € mn     € mn    € mn       

2005:

                           

Life insurance in force

   724,484    (70,885 )   23,119    676,718    3.42 %
    
  

 
  
      

Premiums earned:

                           

Life/Health insurance(1)

   20,612    (884 )   241    19,969    1.21 %

Property-Casualty insurance, including title insurance(2)

   40,168    (5,409 )   3,019    37,778    7.99 %
    
  

 
  
      

Total premiums

   60,780    (6,293 )   3,260    57,747    5.65 %
    
  

 
  
      

2004:

                           

Life insurance in force

   681,816    (65,730 )   43,949    660,035    6.66 %
    
  

 
  
      

Premiums earned:

                           

Life/Health insurance(1)

   20,174    (1,249 )   457    19,382    2.36 %

Property-Casualty insurance, including title insurance(2)

   40,156    (5,285 )   2,536    37,407    6.78 %
    
  

 
  
      

Total premiums

   60,330    (6,534 )   2,993    56,789    5.27 %
    
  

 
  
      

2003:

                           

Life insurance in force

   624,901    (62,231 )   44,096    606,766    7.27 %
    
  

 
  
      

Premiums earned:

                           

Life/Health insurance(1)

   19,968    (1,242 )   676    19,402    3.48 %

Property-Casualty insurance, including title insurance(2)

   40,111    (5,528 )   1,993    36,576    5.45 %
    
  

 
  
      

Total premiums

   60,079    (6,770 )   2,669    55,978    4.77 %
    
  

 
  
      

(1) Life/Health have been combined for this schedule.
(2) Title insurance has been combined with Property-Casualty insurance.
(3) After eliminating intra-Allianz Group transactions between segments.

 

S-7


Table of Contents

SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

    Allianz Aktiengesellschaft    
   

/s/ MICHAEL DIEKMANN


   
    Name: Michael Diekmann    
    Title: Chief Executive Officer    
   

/s/ DR. HELMUT PERLET


   
    Name: Dr. Helmut Perlet    
    Title: Chief Financial Officer    

 

Date: April 6, 2006