Edgar Filing: ALLIANZ AKTIENGESELLSCHAFT

December 31, 2004

Carrying
Value

Fair
value⁽¹⁾

%
Ownership

Eurohypo AG

Annual Report for the fiscal year ended December 31, 2004

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

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

For the fiscal year ended December 31, 2004

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

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, 2004:


Ordinary shares, without par value		366,859,799 shares

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 which financial statement item the registrant has elected to follow.

Item 17 ¨ Item 18 x

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	4
	Exchange Rate Information	4
	Risk Factors	5
ITEM 4.	Information on the Company	13
	General	13
	Operations	13
	Insurance Operations	14
	Property-Casualty Operations by Geographic Region	15
	Life/Health Operations by Geographic Region	20
	Banking Operations	25
	Banking Operations by Division	29
	Asset Management Operations	33
	Property-Casualty Insurance Reserves	38
	Selected Statistical Information Relating to Our Banking Operations	52
	Regulation and Supervision	74
ITEM 5.	Operating and Financial Review and Prospects	92
	Critical Accounting Policies and Estimates	92
	Changes to Accounting and Valuation Policies	98
	Economic Environment	99
	Recent Developments	103
	Introduction	104
	Executive Summary	105
	Allianz Group’s Consolidated Results of Operations	105
	Allianz Group’s Consolidated Assets, Liabilities and Shareholders’ Equity	108


Item		Page
	Property-Casualty Insurance Operations	110
	Property-Casualty Operations by Geographic Region	116
	Life/Health Insurance Operations	134
	Life/Health Operations by Geographic Region	138
	Banking Operations	148
	Banking Operations by Division	154
	Asset Management Operations	162
	Investment Portfolio Impairments and Unrealized Losses	175
	Liquidity and Capital Resources	179
	Off-Balance Sheet Arrangements	184
	Tabular Disclosure of Contractual Obligations	185
ITEM 6.	Directors, Senior Management and Employees	185
	Corporate Governance	185
	Management Board	187
	Supervisory Board	189
	Compensation of Directors and Officers	194
	Board Practices	197
	Share Ownership	197
	Employees	197
	Stock-based Compensation Plans	198
	Employee Stock Purchase Plans	198
ITEM 7.	Major Shareholders and Related Party Transactions	198
	Major Shareholders	198
	Related Party Transactions	199
ITEM 8.	Financial Information	201
	Consolidated Statements and Other Financial Information	201
	Legal Proceedings	201
	Dividend Policy	203
	Significant Changes	203
ITEM 9.	The Offer and Listing	203
	Trading Markets	203
	Market Price Information	204

TABLE OF CONTENTS


Item		Page
ITEM 10.	Additional Information	206
	Articles of Association	206
	Capital Increase	207
	Material Contracts	207
	Exchange Controls	207
	German Taxation	207
	United States Taxation	210
	Documents on Display	212
ITEM 11.	Quantitative and Qualitative Disclosures About Market Risk	212
	Risk Governance Structure	212
	Market Risk Measurement	219
	Allianz Group Market Risk Exposure Estimates	220
ITEM 12.	Description of Securities Other than Equity Securities	222
ITEM 13.	Defaults, Dividend Arrearages and Delinquencies	223


Item		Page
ITEM 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds	223
ITEM 15.	Controls and Procedures	223
ITEM 16A.	Audit Committee Financial Expert	223
ITEM 16B.	Code of Ethics	223
ITEM 16C.	Principal Accountant Fees and Services	223
ITEM 16D.	Exemptions from the Listing Standards for Audit Committees	224
ITEM 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	225
ITEM 17.	Financial Statements	226
ITEM 18.	Financial Statements	226
ITEM 19.	Exhibits	226

Index to Consolidated Financial Statements and Schedules

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, 2004 and 2003 and for each of the years in the three-year period ended December 31, 2004, which have been audited by KPMG Deutsche Treuhand-Gesellschaft AG Wirtschaftsprüfungsgesellschaft. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (or IFRS), which differ 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 48 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 $1.2972 = €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 April 11, 2005. 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, 2000 through April 11, 2005.

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.

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. Data on position and market share within particular countries are based on our own internal estimates.

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.

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

The selected consolidated financial data set forth below are derived from our consolidated financial statements, which have been audited by KPMG Deutsche Treuhand-Gesellschaft AG Wirtschaftsprüfungsgesellschaft.

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 48 to the consolidated financial statements.

You should read the information below in conjunction with our consolidated financial statements and the other financial information we have included elsewhere in this annual report.


	At or For the Year Ended December 31,
	2004⁽¹⁾		2004		2003		2002		2001		2000
	$		€		€		€		€		€
	(In millions, except per share data)
IFRS consolidated income statement data
Gross premiums written⁽²⁾
Property-Casualty	56,791		43,780		43,420		43,293		42,137		38,382
Life/Health	26,873		20,716		20,689		20,664		20,145		20,239
Consolidation adjustments⁽³⁾	(1,044	)	(805	)	(722	)	(804	)	(694	)	(736	)

Total	82,620		63,691		63,387		63,153		61,588		57,885
Premiums earned (net)	73,667		56,789		55,978		55,133		52,745		49,907
Total income
Property-Casualty	63,115		48,655		50,772		55,556		48,770		45,197
Life/Health	45,917		35,397		36,692		36,536		34,092		37,251
Banking Operations	15,659		12,071		13,830		21,275		12,755		1,722
Asset Management Operations	4,242		3,270		3,059		3,185		2,738		1,722
Consolidation adjustments⁽³⁾	(4,885	)	(3,766	)	(2,698	)	(8,876	)	(2,705	)	(2,103	)

Total	124,047		95,627		101,655		107,676		95,650		83,789
Net income (loss)	2,853		2,199		1,890		(1,496	)	1,585		3,448
Basic earnings per share	7.80		6.01		5.59		(5.40	)	6.51		14.05
Diluted earnings per share	7.76		5.98		5.57		(5.40	)	6.51		14.05
U.S. GAAP consolidated income statement data
Net income (loss)	3,737		2,881		2,245		(1,260	)	4,246		6,519
Basic earnings per share	10.21		7.87		6.71		(4.79	)	16.30		28.85
Diluted earnings per share	10.16		7.83		6.70		(4.79	)	16.30		28.85
IFRS consolidated balance sheet data
Group’s own investments⁽⁴⁾	613,957		473,294		394,821		395,321		462,219		337,793
Total assets	1,290,322		994,698		935,912		852,133		942,986		440,008
Total insurance reserves	460,759		355,195		311,471		305,763		299,512		284,824
Total liabilities	1,237,969		954,339		898,953		822,145		911,373		404,416
Issued capital and capital reserves	25,208		19,433		19,347		14,785		14,769		7,994
Shareholders’ equity	39,990		30,828		28,592		21,674		31,613		35,592
Shareholders’ equity per share	109		84		85		78		114		127
Weighted average number of shares outstanding
Basic	365.9		365.9		338.2		276.9		277.8		279.8
Diluted	368.1		368.1		339.8		276.9		277.8		279.8
U.S. GAAP consolidated balance sheet data
Shareholders’ equity	43,301		33,380		30,825		22,836		31,655		35,102
Shareholders’ equity per share	118		91		91		83		114		125
Other financial and operating data
Combined ratio	92.9	%	92.9	%	97.0	%	105.7	%	108.8	%	104.9	%
Third-party assets	758,374		584,624		564,714		560,588		620,458		336,424
Market capitalization	46,616		35,936		36,637		22,111		64,156		97,813

⁽¹⁾

Amounts given in Euros have been translated for convenience only into U.S. dollars at the rate of $1.2972 = €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 April 11, 2005. See “Presentation of Financial and Other Information.”

⁽²⁾	In some countries, health insurance operations are reflected in either or both of the property-casualty and life/health segments in accordance with local practice and regulatory considerations.

⁽³⁾	Represents the elimination of intercompany transactions between Allianz Group companies in different segments.

⁽⁴⁾	For additional information on Group’s own investments, see “Information on the Company—Asset Management Operations—Group’s Own Investments.”

Dividends

The following table sets forth the annual dividends paid per ordinary share and American Depositary Share (or “ADS”) equivalent for 2000 through 2004. 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
	€	$	€	$
2000	1.50	1.42	0.150	0.142
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⁾	1.75	2.27	0.175	0.227

⁽¹⁾

Dividend amounts given in Euros have been translated for convenience only into U.S. dollars at the rate of $1.2972 = €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 April 11, 2005. 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)
2000	1.0335	0.8270	0.9207	0.9388
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
October	1.2783	1.2271	1.2573	1.2746
November	1.3288	1.2703	1.3000	1.3259
December	1.3625	1.3224	1.3423	1.3538
2005
January	1.3476	1.2954	1.3263	1.3049
February	1.3274	1.2773	1.3146	1.3224
March	1.3465	1.2877	1.3079	1.2969
April (until April 11, 2005)	1,2972	1.2838	1.2934	1.2972

⁽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 April 11, 2005, the noon buying rate for the Euro was $1.2972.

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. Our investment portfolios are heavily weighted toward Euro-denominated fixed-income investments. Accordingly, interest rate movements in the Euro zone will significantly affect the value of our investment portfolios. Excluding trading portfolios, fixed income securities constituted 79.6% of our Group’s own investment at December 31, 2004. For additional information on our fixed-income investments, see “Information on the Company—Asset Management Operations—Group’s Own Investments—Insurance Operations Investments—Fixed-Income Investments” and “Information on the Company—Selected Statistical Information Relating to Our Banking Operations.” 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.

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.

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.

In addition, our management of interest rate risks affects the results of our banking operations. 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 14.6% of our Group’s own investments at December 31, 2004, excluding trading portfolios. For additional information on our equity investments, see “Information on the Company—Asset Management Operations—Group’s Own Investments—Insurance Operations Investments—Equity Investments” and “Information on the Company—Selected Statistical Information Relating to Our Banking Operations.” Our equity investment portfolio includes, in particular, large stakes in a number of major German companies, including Schering AG, Linde AG, Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München (or “Munich Re”) and Beiersdorf AG, as

well as significant holdings in companies in Spain, Italy and France, and equity investments in companies in virtually all major financial markets of the world. 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, and securities available-for-sale. Changes in the value of securities held for trading purposes 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. Securities available-for-sale are reviewed regularly for impairment, with writedowns to fair value charged to income if an other-than-temporary diminution in value occurs. If a decline in the market value below the original cost of an available-for-sale security is considered other-than-temporary, the decline in value will be recorded in the consolidated income statement.

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 accounts. As of December 31, 2004, we have recorded goodwill in an aggregate amount of €11,677 million, of which €1,633 million relates to our banking business, €6,178 million to our asset management business and €3,866 million relates to our insurance business.

Our banking operations, of which Dresdner Bank AG (or “Dresdner Bank”, and together with its consolidated subsidiaries, the “Dresdner Bank Group”) represents by far the most significant component, reported net income of €104 million for the year ended December 31, 2004. See “Operating and Financial Review and Prospects—Banking Operations—Results of Operations.” As the value of certain other parts of our businesses, including in particular our asset management business, are also 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 writedowns, which could be material. No impairments were recorded for goodwill in 2004.

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 2004.

As of December 31, 2004, we had a total of €13,809 million in net deferred tax assets and €14,486 million in deferred tax liabilities. The calculation of the respective tax assets and liabilities is based on current tax laws and accounting standards and depends on the performance of the Allianz Group as a whole and certain business units in particular. At December 31, 2004, €5,337 million (2003: €5,753 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 writeoff 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.

Allianz AG operates both as a reinsurance company and as a holding company for the Allianz Group, and is exposed to various liquidity risks.

Allianz AG acts as the principal reinsurer for the Allianz Group companies. At the same time, Allianz AG is a holding company, conducting its insurance and financial services operations through direct and indirect subsidiaries. In addition to premiums from our reinsurance operations, the principal sources of Allianz AG’s funds are dividends received from subsidiaries, associated companies and other equity investments as well as funds that we may raise from time to time through the issuance of debt or equity securities or through bank or other borrowings. Allianz AG’s uses of funds include payment of interest and principal on our outstanding debt, obligations arising in our reinsurance business, which may include large and unpredictable claims including catastrophe claims, as well as the funding of potential capital requirements of our operating subsidiaries or of acquisitions.

Allianz AG expects that premiums from its own reinsurance business, together with dividends and other amounts received from subsidiaries, associated companies and other investments, will continue to cover its operating expenses, including interest payments on its outstanding debt, together with its reinsurance and other obligations. As a holding company, Allianz AG can offer no assurance, however, that funds available to it will continue to be sufficient to meet its operating expenses, funding obligations and interest payments in the future, and that it will not need to raise additional funds from time to time through the issuance of debt or equity securities, through bank or other borrowings or through dispositions of assets or other transactions, nor as to the adequacy or timing of any such measures.

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. Our earnings 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 increase our reserves, which may materially adversely affect earnings.

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. 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 earnings. See “Information on the Company—Property-Casualty Insurance Reserves.”

Asbestos-related and Environmental Pollution Claims. In relation to asbestos-related and environmental pollution, it has been necessary, and may over time continue to be necessary, to revise

estimated potential loss exposure and, therefore, the related loss reserves. Changes in law, novel or changing policy interpretations, evolving judicial theories as well as developments in class action litigation add to the uncertainties inherent in claims of this nature. As a result, we continue to monitor developments in asbestos-related and environmental claims and may determine that further adjustments in the reserve amounts are required in the future. In 2002, reserves were increased for asbestos and environmental claims in the United States by €762 million following external and internal actuarial reviews. During 2005, we will update our analysis of the ground-up asbestos and environmental claims exposures of Fireman’s Fund Insurance Company (or “Fireman’s Fund”). For further information see “Information on the Company—Property-Casualty Insurance Reserves—Asbestos and Environmental Reserves in the United States” and “Operating and Financial Review and Prospects—Critical Accounting Policies and Estimates—Property-Casualty Insurance Reserves.”

Run-off Insurance Businesses. We maintain loss reserves in our run-off insurance businesses to cover our estimated ultimate liability for losses and loss adjustment expenses for reported and unreported losses incurred as of the end of each fiscal year. In 2002, we ceased underwriting certain lines of business formerly pursued by Fireman’s Fund in the United States, including the surety, national accounts, diversified risk and medical malpractice lines of business. We believe that reserves associated with lines in run-off are adequate. However, the costs and liabilities associated with these divested and run-off businesses and other contingent liabilities could cause us to take additional charges that could be material to our results of operations.

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 substantial 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. See “Information on the Company—Regulation and Supervision—Insurance—Germany—Life Insurance.” 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 substantial 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. There can be no assurance that the hedging arrangements will satisfy the returns guaranteed to policyholders.

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. During 2002 and 2001 we incurred significant catastrophe losses, in particular net claims costs of approximately €1.5 billion relating to the terrorist attack of September 11, 2001. We also suffered losses from severe flooding in Germany and Central and Eastern Europe, which adversely affected our results by €710 million in 2002. In 2003 and 2004, we did not experience losses from catastrophe events at the levels seen in 2002 or 2001. During 2004, the Allianz Group experienced the following major natural catastrophe loss events: the four hurricanes Charley, Frances, Jeanne and Ivan in the South-Eastern United States, as well as the tsunamis in South Asia. As a result of the Allianz Group’s risk management system, the Allianz Group 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. Net losses in connection with the tsunamis which struck South Asia in late December 2004 amounted to €22 million. If natural or man-made catastrophes affecting properties we insure, occur with high frequency and/or severity, related claims could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

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.

Changes in trends and the investment climate in financial markets may result in an increase in investment impairments on our investment assets due to defaults and credit downgrades, and a further downturn in the economy generally could result in increased impairments. In addition, we are subject to geographic and industry concentrations with respect to our credit exposures, and as a result, developments in particular geographic regions or industries may adversely impact us. In particular, we have extended significant credit to financial institutions in Germany, and as a result any systemic risk materializing in the German financial industry could have a material adverse effect on our results of operations. See “Information on the Company—Selected Statistical Information Relating to Our Banking Operations” and “Quantitative and Qualitative Disclosures About Market Risk.”

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, the reinsurers may become financially unsound by the time they are called upon to pay amounts due. For a discussion of our external reinsurance relationships, see “Information on the Company—Property-Casualty Operations by Geographic Region—Germany—Allianz AG” and “Quantitative and Qualitative Disclosures About Market Risk—Risk Controlling—Insurance Business.”

Developments at Dresdner Bank, including the development of operating performance, loan loss levels or writedowns and impairments, could adversely affect our results and may result in capital requirements that could constrain our operations.

In July 2001, we acquired Dresdner Bank. Our banking operations, of which Dresdner Bank is the most significant component, suffered significant net losses in 2002 and 2003 but returned to profitability in 2004 with net income of €142 million. If improvements seen in the bank’s operating performance do not continue and stabilize, our results could be adversely affected. The future success of our banking business depends in large part on our ability to continue to restore the profitability of Dresdner Bank. In the event that management is unable to successfully complete the implementation of the restructuring and cost-cutting measures announced and started to date, our financial performance and results of operations may be materially adversely affected.

Dresdner Bank may need to make additional loan loss provisions or recognize further credit losses as a result of weak economic conditions, declines in collateral value, inability to enforce security interests in collateral, an increase in corporate or personal bankruptcies, in particular in Germany, further deterioration of the financial position of borrowers or changes in reserve and risk management requirements.

Dresdner Bank has established the Institutional Restructuring Unit (or “IRU”) as a new division that started its activities in January 2003. The IRU’s task is to develop individual solutions for loan exposures and restructuring cases. The goal is to reduce risk capital requirements over the coming years by sale of credit or portfolio, reduction of credit limits, work-out of loans, restructuring of operative units, including possible sales of business activities and modern capital market instruments. Difficulties or delays in achieving their goal could lead to higher capital requirements for the Allianz Group. The result of operations could be adversely affected by any need for further reserving for potential loan losses arising in the process of selling or restructuring loans.

Capital ratios for Dresdner Bank at December 31, 2004 were 6.55% (2003: 6.56%) in the case of consolidated Tier I capital and 13.32% (2003: 13.39%) in the case of consolidated total capital under the risk adjusted capital guidelines (or “Basle Accord”) promulgated by the Basle Committee on Banking Supervision (BIS-rules). There can be no assurance that Dresdner Bank will be able to maintain its capital ratios at the above mentioned levels. Failure to do so could require us to restrict our banking operations, or further support our banking operations through injection of additional capital. Further, the BIS-rules, which have an important impact on the capital adequacy guidelines of the German Federal Financial Supervisory Authority (the Bundesanstalt für Finanzdienstleistungsaufsicht, or “BaFin”), are being revised and implementation is planned for 2006. At this time, we are unable to predict how the revised guidelines will affect our requirements for capital and the impact of these revisions on our banking or other operations. See “Information on the Company—Regulation and Supervision—Banking, Asset Management and Investment Services Germany—Capital Adequacy Requirements” for a discussion of the capital adequacy guidelines applicable to our banking operations. See also “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Resources.”

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.

Standard & Poor’s Ratings Services (or Standard & Poor’s), Moody’s Investor Services (or Moody’s) and A.M. Best assign ratings to various obligations of certain Allianz Group companies. On March 20, 2003, Standard & Poor’s cut the Allianz Group’s financial strength ratings from AA to AA—, citing the Allianz Group’s negative performance and reduced capital base resulting from significant writedowns and losses in the period to December 31, 2002, and noted that Allianz AG continued to be on “negative outlook.” Likewise, on July 25, 2003, Moody’s lowered its rating for the senior unsecured debt securities issued by Allianz Group’s finance subsidiaries from Aa2 to Aa3. This downgrade came after the rating had been placed “under review” on May 22, 2003. The outlook on the Aa3 rating is now “stable.” On March 21, 2003 A.M. Best also cut the Allianz Group’s financial strength rating from A++ to A+, and noted that Allianz AG continued to be on “negative outlook.” Rating agencies can be

expected to continue to monitor our financial strength, and no assurances can be given that further 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.

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 its 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, further ratings downgrades could adversely impact sales of our life insurance products. Any further 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.

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 Allianz Group’s insurance operations, a growing portion of our assets under management, particularly following the acquisitions of PIMCO in May 2000, Nicholas-Applegate in January 2001 and Dresdner Bank in July 2001, represents third-party funds. 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.

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 U.S. 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 regulations in the countries in which we operate may materially impact us.

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.

In December 2004, Germany adopted a law, effective January 2005, implementing the directive of the European Union (EU) that provides for assessment of the capital requirements of a financial

conglomerate on the group level, supervision of risk concentration and intra-group transactions and prevention of “double-gearing” of the capital of the holding or parent company, i.e., once in the holding or parent company and a second time in the subsidiary. We are a financial conglomerate within the scope of this directive and the German law. The law requires Allianz AG to submit to the German Federal Financial Supervisory Authority and the German Bundesbank its first calculation of capital adequacy as of year-end 2005. It is as yet unclear, however, how the capital requirements will be implemented in Germany in detail because the German regulations implementing the law have not been finalized. We have performed preliminary calculations based on business forecasts for 2005 and assumptions of the outcome of these pending regulations. These preliminary calculations indicate that we would meet these capital requirements by a sufficient margin. But as these calculations are based only on forecasts and assumptions of pending regulations, there can be no assurance that the current and future level of capital will be sufficient to meet the then finally implemented capital requirements.

In 2002, Germany adopted a law, effective January 2005, regarding assets covering technical reserves of reinsurance companies such as Allianz AG. It requires those assets to be appropriately diversified to prevent a reinsurer from relying excessively on any particular asset. This law anticipates an EU directive on reinsurance which is currently under discussion. Further amendments to the draft EU directive or an interpretation of the directive’s rules on assets covering technical reserves that diverges with German law and its regulations may require Germany to amend its law and regulations. Although Allianz AG expects to comply with the regulations interpreting the new German law, there can be no assurances as to the impact on Allianz AG of any amendments thereto, 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 European Union (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.”

Changes in tax legislation could adversely affect our business.

Changes to tax laws may affect the attractiveness of certain of our products that currently receive favorable tax treatment. Under German tax regulations applicable through 2004, payments received at the maturity of a life insurance policy with a term of at least 12 years and on which premiums have been paid for at least five years are not taxable, and the life insurance premiums are deductible from the insured’s income in the year paid, subject to certain limitations.

In June 2004, the Retirement Income Revenue Act (Alterseinkünftegesetz) was adopted in Germany. Under the new law, taking effect as from 2005, the tax exemption for payments under life insurance has been abolished for new policies written. Instead, half of the interest income from life insurance will be taxed as of 2005, provided the insurance runs for at least 12 years and does not mature before age 60.

The new law also provides for the introduction of a so called “basic provision scheme” which will benefit from favorable tax rules. From 2005 onwards, private pensions will be taxed at a lower tax rate. Based on the new “basic provision scheme” and on further improvements relating to private pensions which are additionally provided by the new law, new life insurance and pension products are being developed. However, it is too early yet to reliably assess the impact on new business.

From time to time, governments in other jurisdictions in which we do business have also considered changes to tax laws which could adversely affect the tax advantages of certain of our products, and if enacted, could result in a significant reduction in the sale of such products.

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, 2004, approximately 34.3% of our gross premiums written 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 reported results.

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 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 its 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 the strategy, described in this annual report; 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 insurance and banking activities; announcements concerning the bankruptcy or other similar reorganization proceedings involving, or any investigations into the accounting practices of, other insurance or reinsurance companies or banks; and general market volatility.

ITEM 4. Information on the Company

General

Allianz AG is a stock corporation organized in the Federal Republic of Germany under the German Stock Corporation Act. It was incorporated as Allianz Versicherungs-Aktiengesellschaft in Berlin, Germany on February 5, 1890. It is registered in the Commercial Register in Munich, Germany under the entry number HR B 7158. Our registered office is located at Königinstrasse 28, 80802 Munich, Germany, telephone (49)(89) 3800-0. Allianz AG is the ultimate parent company of the Allianz Group.

The Allianz Group is 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 one of the largest insurance groups in the world based on gross premiums written in 2004. We are the largest German property-casualty and life/health insurance company based on gross premiums written in 2004. We are also among the largest insurance companies in other countries, including France, Italy, the United Kingdom, Switzerland and Spain. We are the second- largest German financial institution, based on market capitalization at March 31, 2005. As of March 31, 2005, we had financial strength ratings of A+ from A.M. Best and AA– from Standard & Poor’s, both with a negative outlook and an Aa3 senior unsecured debt rating with a stable outlook from Moody’s.

Operations

We were founded in 1890 in Berlin, Germany, and since that time we have become the largest German insurer. Through our international expansion strategy, we have sought to bring into the Allianz Group companies that are well-positioned in their domestic markets and that have leading positions in particular business lines and attractive earnings prospects. In the last several years, our non-German insurance business has grown substantially in importance. Gross premiums written by our non-German business represented approximately 60% of our total gross premiums written in 2004. We now operate in more than 70 countries worldwide and have leading market positions in many of them.

In 1998, building on over a century’s experience in managing our extensive insurance investment portfolio, we established financial services as our third core business segment, in addition to our property-casualty and life/health insurance

businesses. In 2001, following our acquisition of Dresdner Bank, we reorganized our financial services segment into separate asset management and banking segments. Based on assets under management as of December 31, 2004, we were one of the five largest asset managers in the world. In our banking segment, which is now our fourth core business segment, our acquisition of Dresdner Bank made us one of the major banks in Germany and provided us with significantly expanded bank distribution channels for our property-casualty, life/health and asset management products and services.

Our German property-casualty and life/health insurance businesses are managed by subsidiaries located primarily in Munich and Stuttgart. Our non-German insurance businesses are locally managed. Among our largest non-German markets are France, Italy, the United Kingdom, Switzerland, Spain and the United States. In contrast, each of our specialty lines of credit insurance, marine and aviation insurance, international industrial risks reinsurance through Allianz Global Risks Rückversicherungs–AG (or ”Allianz Global Risks Re”) and travel insurance and assistance services is managed and operates on a global basis. Our asset management segment also operates on a worldwide basis, with key management centers in Munich, Frankfurt, London, Paris, Singapore, Hong Kong, Milan, Westport, Connecticut, and San Francisco, San Diego and Newport Beach, California. Our banking segment operates through the 969 German and non-German branch offices of Dresdner Bank and various subsidiaries, with significant operations in Germany, the United Kingdom, other European countries and the United States.

At December 31, 2004, we employed more than 162,000 persons in our insurance, banking and asset management businesses worldwide, of whom more than 86,000 were based outside Germany. Through interdisciplinary and multi-jurisdictional training and advancement programs, we seek to develop and promote a corporate culture that emphasizes technical expertise, dedication to client service and an international outlook.

Our headquarters are located in Munich, Germany. In addition, we have subsidiary, branch, representative and similar offices worldwide.

Insurance Operations

We provide property-casualty and life/health products and services on an individual and group basis in approximately 70 countries worldwide. In our property-casualty business, we provide, among other things, automobile, homeowners, travel and other personal lines products and are a leading provider of commercial and industrial coverage to business enterprises of all sizes, including many of the world’s largest companies. Our life/health insurance businesses provide endowment, annuity and term insurance products and a wide range of health, disability and related coverage to individual insured, as well as group life, group health and pension products to employers. In addition to strong local positions, we have established leading positions in certain specialty lines on a global basis, including credit insurance, marine and aviation insurance, international industrial risks reinsurance through Allianz Global Risks Re, and travel and assistance insurance.

Our products are marketed in Germany primarily under the “Allianz” brand name. In other countries we generally operate through our subsidiary insurers’ brand names, which are identified as part of the Allianz Group. We believe that our brand name is one of the best-known and most highly respected in the German marketplace, combining a reputation for excellent customer service with our superior financial strength.

Our philosophy is to provide considerable latitude to our operating entities in product design, underwriting, distribution, marketing and operations while providing various levels of centralized support in such areas as financial and strategic planning, investment management, knowledge transfer, accounting and reinsurance to our subsidiaries from our headquarters in Munich. We refer to this combination of centralized strategic management and local business autonomy as a “multi-local” approach to our global insurance business. We believe that this gives our subsidiary operations the flexibility to best respond to local market conditions and allows us to implement strategic goals and create incentives for our employees on a country-by-country basis.

Property-Casualty Operations by Geographic Region

Germany

Germany is one of the world’s largest property-casualty insurance markets, based on gross premiums written in 2004. We were the largest provider of property-casualty insurance in Germany, as measured by gross premiums written in 2004. Germany is our most important single market for property-casualty insurance. As a percentage of our total property-casualty gross premiums written worldwide, Germany accounted for 27.1% in 2004, 27.1% in 2003 and 26.7% in 2002.

We conduct our property-casualty insurance operations in Germany primarily through the Sachversicherungsgruppe Deutschland (or the “German Property-Casualty Group”), which handles most of our lines of property-casualty insurance in Germany, other than credit insurance and marine and aviation insurance. Allianz AG, the parent company of the Allianz Group, also acts as a reinsurance company for both Allianz Group companies and third parties.

German Property-Casualty Group

The German Property-Casualty Group comprises a number of different operating entities, some of which offer a full range of property-casualty lines and one which provides specialized coverage:

•

Allianz Versicherungs AG (or “Allianz Versicherung”), which is the German Property-Casualty Group’s primary full-line property-casualty insurer;

•

Frankfurter Versicherungs AG, a full-line property-casualty insurer based in Frankfurt;

•

Bayerische Versicherungsbank AG, a full-line property-casualty insurer based in Munich; and

•

Vereinte Spezial Versicherung AG, primarily a specialist provider of automobile insurance.

Products

The operating companies that make up the German Property-Casualty Group together offer a comprehensive range of property-casualty insurance products and related services to customers primarily in Germany. The German Property-Casualty Group’s principal product lines are automobile liability and other automobile insurance, fire and property insurance, personal accident insurance, liability insurance and legal expense insurance.

While our insurance operations in Germany generally operate on a decentralized basis through separate operating entities, many of our products in Germany are distributed through common or overlapping distribution systems. The importance of these distribution channels varies by type of business. For the German Property-Casualty Group’s personal and commercial lines, the network of full-time tied agents is our most important distribution channel. For industrial lines, the brokerage channel predominates. In addition, we distribute our property-casualty insurance products through our insurance specialists at Dresdner Bank branches in Germany. The relative importance of each of these distribution channels also varies by region and by product mix.

Distribution

The following sets forth certain key data concerning our German insurance distribution systems as they related to property-casualty insurance at and for the year ended December 31, 2004:


	Number⁽¹⁾		% of 2004 Property-Casualty Premiums
Full-time tied agents	11,397		65.8
Part-time tied agents	39,902		6.0
Brokers	6,218		14.3
Banks	2,510	⁽²⁾	4.0
Other⁽³⁾	—		9.9

Total	—		100.0

⁽¹⁾	Represents the total number in Germany for all Allianz Group segments.

⁽²⁾

Represents the number of German branches at Dresdner Bank (722), Oldenburgische Landesbank (177), Reuschel Bank (10), and at unaffiliated banks, comprising Volks- und Raiffeisenbanken (1,594) and Industrie Kredit-Bank (7), with which we have distribution agreements covering our property-casualty and life/health insurance products.

⁽³⁾	Includes all Allianz Group employees in Germany, who are able to sell Allianz Group policies.

In our German property-casualty insurance business, we distribute our products primarily through a network of self-employed, full-time tied

agents. We believe that our network of tied agents is the largest full-time insurance sales force in Europe. These agents, who have an average of more than ten years’ experience selling Allianz Group products, receive a full range of support from the Allianz Group, from initial support in establishing an office and a portfolio to pension benefits based upon the volume and product mix of their portfolios. Apart from pension provisions, agent compensation is based primarily on volume, although we also utilize a number of incentive schemes to encourage sales of strategically more important policy types. Our full-time tied agents follow centralized underwriting and pricing guidelines, allowing us to carefully segment and monitor our German book of business.

Allianz AG

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 our German property-casualty subsidiaries Allianz AG is the primary reinsurer with exception of our credit insurance subsidiary, Euler Hermes, and our international industrial risks reinsurance unit, Allianz Global Risks Re, for which Munich Re is the primary reinsurer. See “—Specialty Lines—Allianz Global Risks Re.” In the life/health segment, Allianz AG and Munich Re each assume 50% of the reinsurance ceded by Allianz Lebensversicherungen-AG, the main operating company for our German life insurance operations.

Outside of Germany, Allianz AG acts as a reinsurer of Allianz Group subsidiaries. Each subsidiary is able to place reinsurance directly with reinsurers other than Allianz AG, but Allianz AG has a preferred partnership with respect to reinsurance cessions of its subsidiaries based on ordinary market terms and conditions. For the years ended December 31, 2004, 2003 and 2002, Allianz AG assumed 37.6%, 39.1% and 39.4%, respectively, of all reinsurance ceded by Allianz Group companies. Furthermore, Allianz AG provides centralized advice to subsidiaries on structuring their own reinsurance programs, establishing lists of permitted reinsurers, and monitoring aggregate exposures to catastrophes and other events. In addition, Allianz AG assumes a relatively small amount of reinsurance from non-Allianz Group companies.

The following table sets forth the reinsurance assumed by Allianz AG by gross premiums written for the years shown:


	Year Ended December 31,
	2004	2003	2002
	€ mn	€ mn	€ mn
From German Property-Casualty Group subsidiaries	2,568	2,909	3,028
From German life/health subsidiaries	659	589	638
From Euler Hermes	188	173	155
From other subsidiaries	1,173	1,161	1,190

Subtotal	4,588	4,832	5,011
From non-Allianz Group companies	660	653	589

Total⁽¹⁾	5,248	5,485	5,600

⁽¹⁾	Excludes direct insurance gross premiums written from Münchener und Magdeburger Agrarversicherung AG of €19 million, €19 million and €21 million in 2004, 2003 and 2002, respectively.

Allianz AG writes a limited amount of third-party reinsurance, with premiums totaling €661 million in 2004, €653 million in 2003 and €589 million in 2002. Other than Munich Re, which represented €268 million, €301 million and €240 million, or 40.5%, 46.1% and 40.7% of Allianz AG’s third-party assumed reinsurance in 2004, 2003 and 2002, respectively, no single third-party accounted for any significant amount of reinsurance assumed in such years.

In the ordinary course of business, the Allianz Group reinsures a portion of the risks that it underwrites to external reinsurers, with Munich Re being our primary external reinsurer. Notwithstanding the ceding of reinsurance to third parties, the Allianz Group remains liable as a primary insurer. To manage and control our credit exposure to external reinsurers, we evaluate and select only companies with solid financial security, based on claims-paying history, debt ratings, capital and surplus levels, and their marketplace reputation. Based on this evaluation, we believe any risks of collectibility to which we are exposed are not significant. Historically, Allianz Group companies have not experienced considerable difficulty in

collecting from their reinsurers. For further information on the amounts ceded by the Allianz Group to reinsurers, see Note 12 to the Consolidated Financial Statements.

France

We conduct our property-casualty insurance operations in France through Assurances Générales de France (or “AGF”, and together with its subsidiaries, the “AGF Group”). The AGF Group is the third-largest property-casualty insurance provider in France as measured by gross premiums written in 2004. The primary property-casualty insurance products which we offer in France are automobile, property, injury and liability for both individual and corporate customers. As of December 31, 2004, we held 58.1% of the share capital of AGF (or 62.0% after deduction of own shares held by AGF), with the remainder being publicly traded in France. We distribute our property-casualty products and services in France primarily through a network of general agents and brokers. We also utilize bancassurance and other direct sales channels. As a percentage of our total property-casualty gross premiums written worldwide, our property-casualty insurance operations in France accounted for 11.2% in 2004, 11.5% in 2003 and 10.7% in 2002.

Italy

We conduct our property-casualty insurance operations in Italy primarily through Riunione Adriatica di Sicurtà (or “RAS”, and together with its subsidiaries, the “RAS Group”) and Lloyd Adriatico, which we refer to together with our other Italian subsidiaries as our “Italian Subsidiaries.” Taken together, our Italian Subsidiaries are the third-largest property-casualty insurer in the Italian market as measured by gross premiums written in 2004. The RAS Group operates in all personal and commercial property-casualty lines throughout Italy, while Lloyd Adriatico underwrites mainly personal lines. As of December 31, 2004, we held 55.5% of the voting rights of RAS, with the remainder being publicly traded in Italy, and 99.7% of the share capital of Lloyd Adriatico. The Italian Subsidiaries distribute our property-casualty products and services primarily through an extensive network of general agents, brokers and through Internet and telephone-based direct sales channels. As a percentage of our total property-casualty gross premiums written worldwide, our property-casualty insurance operations in Italy accounted for 11.2% in 2004, 10.9% in 2003 and 10.7% in 2002.

United Kingdom

We are the sixth-largest provider of property-casualty insurance in the United Kingdom as measured by gross premiums written in 2004. We operate our property-casualty insurance business in the United Kingdom primarily through our wholly-owned subsidiary Allianz Cornhill Insurance plc (or “Allianz Cornhill”). The primary property-casualty insurance products that Allianz Cornhill offers in the United Kingdom are generally similar to those offered by the German Property-Casualty Group in Germany. In addition, we sell a number of specialty products in the United Kingdom, including extended warranty, mobile phone and pet insurance. We distribute our property-casualty products and services in the United Kingdom through a range of distribution channels, including brokers and various product specific distribution channels, including affinity groups. As a percentage of our total property-casualty gross premiums written worldwide, our property-casualty insurance operations in the United Kingdom accounted for 5.6% in 2004, 5.4% in 2003 and 5.8% in 2002.

Switzerland

We are the fourth-largest provider of property-casualty insurance in Switzerland as measured by gross premiums written in 2004, not including travel insurance. We conduct our property-casualty insurance operations in Switzerland primarily through the Allianz Suisse Versicherungsgesellschaft and its subsidiaries, which together we refer to as our “Swiss Property-Casualty Subsidiaries.” The Swiss Property-Casualty Subsidiaries handle our lines of property-casualty insurance in Switzerland other than travel insurance. In addition, our wholly owned subsidiary Allianz Risk Transfer (or “ART”) sells conventional reinsurance as well as a variety of alternative risk transfer products for corporate customers worldwide. Our travel and assistance insurance subsidiary, Mondial Assistance Group, operates and is managed on a global basis and is discussed separately (see “—Specialty Lines”). The Swiss Property-Casualty Subsidiaries and ART distribute our products and services through a wide

range of tied and general agents and also through brokers, bancassurance and other direct channels. As a percentage of our total property-casualty gross premiums written worldwide, our property-casualty insurance operations in Switzerland accounted for 3.8% in 2004, 3.7% in 2003 and 3.8% in 2002.

Spain

We are the second-largest property-casualty insurer in Spain as measured by gross premiums written in 2004. We serve the Spanish property-casualty insurance market through Allianz Compañia de Séguros (or “Allianz Spain”), and Fénix Directo. Allianz Spain has headquarters in Madrid and Barcelona, with regional offices throughout Spain. Allianz Spain offers a wide variety of traditional personal and commercial property-casualty insurance products, with an emphasis on automobile insurance. Allianz Spain distributes its products through agents, brokers and direct distribution channels. As a percentage of our total property-casualty gross premiums written worldwide, our property-casualty insurance operations in Spain accounted for 3.7% in 2004, 3.6% in 2003 and 3.2% in 2002.

Other Europe

The primary property-casualty insurance markets in which we operate in Other Europe are the Netherlands, Austria and Ireland. As a percentage of our total property-casualty gross premiums written worldwide, Other Europe accounted for 10.9%, 11.2% and 10.4% in 2004, 2003 and 2002, respectively.

Netherlands. Our most important subsidiary in the Netherlands is Allianz Nederland Groep N.V., with its most important lines of business being automobile and fire insurance. Our Netherlands subsidiaries distribute their products through independent agents and brokers.

Austria. Allianz Elementar offers a broad range of property-casualty and health insurance products to individual and group customers in Austria. We distribute our property-casualty products in Austria primarily through salaried sales forces, tied agents and brokers.

Ireland. Our subsidiary, Allianz Irish Life Holdings, offers a wide variety of traditional property-casualty insurance products, including mainly automobile and property insurance for both commercial and private customers. Allianz Irish Life Holdings distributes its products primarily through brokers and banks as well as through telephone-based direct sales channels.

Other. In addition, we have property-casualty insurance operations in Hungary, Belgium, Slovakia, Portugal, Czech Republic, Poland, Romania, Luxembourg, Bulgaria, Greece, Croatia and Russia. Except for Russia, we are one of the five leading insurers in the Central and Eastern European markets, and in Hungary, Slovakia, Romania and Bulgaria we are the largest insurer by market share. The primary products sold in these countries are mandatory motor third-party liability and motor own damage coverage. We continue to work in further building up our sales organization and will continue to seek to exploit other synergies in our insurance operations in these European countries.

NAFTA

Our primary property-casualty insurance markets in the NAFTA zone are the United States and Mexico. As a percentage of our total property-casualty gross premiums written worldwide, the NAFTA zone accounted for 11.3%, 11.5% and 13.0% in 2004, 2003 and 2002, respectively. As part of our efforts to focus on our core markets, we disposed of our property-casualty insurance business, other than our industrial insurance risks business, in Canada in December 2004.

United States. Our property-casualty operations in the United States are organized under the umbrellas of Allianz of America, Inc. (or “Allianz of America”). We have been present in the United States since 1977, when we established Allianz Insurance Co., an important provider of commercial insurance to major corporate customers, as one of our first U.S. subsidiaries. In 1991, we acquired Fireman’s Fund Insurance Company, an important personal and commercial lines property-casualty insurance company founded in 1864. In November 2003, we renamed Allianz Insurance Co. as Allianz Global Risks U.S. Insurance Company (or “Allianz Global Risks”) in order to reflect the principal operations of the company (i.e., international industrial insurance), as well as to align our global brand with our international industrial insurance

business line. Allianz of America comprises a group of companies writing a wide variety of property-casualty lines of business. Our operations in the United States accounted for 86.9% of our gross written property-casualty insurance premiums in the NAFTA zone in 2004.

Other. We also conduct property-casualty operations in Mexico. Our property-casualty products are generally similar to those we offer and sell in the United States.

Asia-Pacific

As a percentage of our total property-casualty gross premiums written worldwide, our property-casualty insurance operations in Asia-Pacific accounted for 3.5% in 2004, 3.5% in 2003 and 3.4% in 2002. Our largest insurance company in Asia-Pacific, based on gross written premium, is the Allianz Australia Group.

Australia. Through the Allianz Australia Group, we serve the markets of Australia, New Zealand and Papua New Guinea. The Allianz Australia Group’s insurance operations comprise exclusively property-casualty insurance products and services. We are the second-largest workers’ compensation insurer in Australia based on gross premiums written in 2004, and a major provider of rehabilitation and occupational health, safety and environment services. We also operate in certain niche areas including premium financing and pleasure craft insurance. We market our products through brokers, which are the major distribution channels for commercial business in Australia, as well as non-tied agents (including automobile dealers, accountants and banks) and directly to customers. The Allianz Australia Group had gross premiums written of €1,324 million in 2004.

Other. We also market property-casualty insurance products and services through our subsidiaries in Taiwan, which we sold in the second half of 2004, Malaysia, Japan, Hong Kong, Indonesia, Laos, Singapore, Vietnam and China, and through joint venture agreements with Bajaj Auto, a large manufacturing company in India and the CP Group, a large conglomerate in Thailand.

South America

As a percentage of our total property-casualty gross premiums written worldwide, our property- casualty insurance operations in South America accounted for 1.3% in 2004, 1.3% in 2003 and 1.7% in 2002.

Brazil. We conduct our property-casualty operations in Brazil through our subsidiary, AGF Seguros. With gross premiums written of €271 million in 2004, AGF Seguros is our largest property-casualty operation in South America and the sixth-largest property-casualty insurance provider in Brazil. The company writes primarily automobile insurance, together with fire, transportation and other lines. Distribution is organized primarily through brokers.

Other. In addition to Brazil, we also sell property-casualty products in Colombia, Argentina and Venezuela. Our property-casualty insurance operations in Chile were sold in August 2004 as part of our efforts to focus on our core markets in South America.

Specialty Lines

In addition to our multi-local approach to our global insurance business, under which our non-German insurance businesses are locally managed, we manage our specialty lines of credit/trade insurance, marine, aviation and industrial transport insurance, international industrial risks reinsurance and travel insurance and assistance services on a worldwide basis.

Credit Insurance

In July 2002, we consolidated our French subsidiary, Euler, and our German subsidiary, Hermes, into a new corporate entity, Euler Hermes. The consolidation of Euler and Hermes, which complemented each other in terms of product mix and geographical penetration, further strengthened our presence in the marketplace. Through Euler Hermes, we are the largest credit insurer in the world based on gross premiums written in 2004. Our credit insurance operations generated gross premiums written of €1,630 million in 2004, €1,564 million in 2003 and €1,579 million in 2002.

Euler Hermes is the world’s largest credit insurer in terms of gross premiums written. Euler Hermes’s credit insurance operations are rated A+ (strong) by Standard & Poor’s. In December 2004, Euler Hermes sold its factoring activities to Credit Argicole SA for €187 million in order to focus its resources on its core business, credit insurance. The proceeds from the sale were used to reduce the debt of the Euler Hermes Group.

Euler Hermes provides customers around the world with a wide range of credit insurance and related products and services, including commercial credit insurance and reinsurance, guarantee insurance, fidelity insurance and consumer credit insurance, and manages, and derives fee income from, the German federal government’s export credit guarantee program.

Euler Hermes cedes a large portion of its gross premiums written to reinsurers. The percentage of gross premiums written ceded in reinsurance was 44.4% in 2004, 45.6% in 2003 and 45.0% in 2002, of which 10.8%, 11.1% and 9.8%, respectively, was ceded to Allianz AG.

Allianz Global Risks Rückversicherungs-AG (Allianz Global Risks Re)

We launched Allianz Global Risks Re on January 1, 2002 to establish our international industrial risks reinsurance business as a globally managed business. While our operating subsidiaries around the world continue to conduct our direct industrial insurance business, Allianz Global Risks Re acts as our industrial reinsurance clearing house, assuming industrial insurance from Allianz Group companies and centralizing the placement of outgoing reinsurance with third-party carriers, primarily Munich Re, in the reinsurance market. Allianz Global Risks Re generated gross premiums written of €1,345 million in 2004, of which approximately €133 million, or 9.9%, was ceded to Munich Re.

Through Allianz Global Risks Re, we aim to increase the efficiency and transparency of our international industrial risks reinsurance activities through economies of scale and a consistent reinsurance structure, including a selective underwriting policy, appropriate rates and coverage limits, natural catastrophe control, a new underwriting tool for property, tight risk management and centralized policies and standards throughout the Allianz Group. We have also introduced new products tailored for specific risks, such as our specialized liability products for the pharmaceutical and chemical industries and policies covering Internet risks. Through these and other measures, we intend to re-establish our international industrial risks reinsurance business as a profitable market leader.

Allianz Marine & Aviation

Effective January 1, 2002, we reorganized our marine, aviation and industrial transport insurance business in Germany, France and the United Kingdom under Allianz Marine & Aviation, a new specialty line. Our marine, aviation and industrial transport insurance activities in these countries, which we had previously included in the property-casualty insurance results of our respective subsidiaries, were integrated into Allianz Marine & Aviation as a single European marine, aviation and industrial transport unit. Allianz Marine & Aviation generated gross premiums written of €949 million in 2004, €1,073 million in 2003 and €1,424 million in 2002.

Travel Insurance and Assistance Services

Through Mondial Assistance Group, which is owned equally by our subsidiaries, AGF and RAS, we are among the world’s largest providers of travel insurance and assistance services (or “travel and assistance”) based on gross premiums written in 2004. Our travel and assistance operations generated gross premiums written of €900 million in 2004, €818 million in 2003 and €808 million in 2002. We believe that internal growth and recent acquisitions in our travel insurance and assistance business will enable us to strengthen our leading market position and achieve enhanced efficiencies in this dynamic market. With a view toward establishing long-term partnerships, our travel and assistance business provides business-to-business services to clients in the travel, insurance, automobile and banking industries.

Life/Health Operations by Geographic Region

Germany

As a percentage of our total life/health statutory premiums worldwide, Germany accounted for 30.9% in 2004, 31.7% in 2003 and 31.3% in 2002.

We conduct our life/health insurance operations in Germany through:

•

Allianz Lebensversicherungs AG, the main operating company for our German life insurance operations. At December 31, 2004, we owned 91% of Allianz Lebensversicherungs AG;

•

Deutsche Lebensversicherungs AG, a wholly-owned subsidiary of Allianz Lebensversicherungs AG, which is our vehicle for selling standardized, low-cost term insurance in Germany;

•

Allianz Pensionskasse AG (or “Allianz Pensionskasse”), a wholly-owned subsidiary of Allianz Lebensversicherungs AG, which offers a variety of pension products (together referred to as “Allianz Leben”); and

•

Allianz Private Krankenversicherungs AG (or “Allianz Private Health”), our health insurance subsidiary, formerly known as Vereinte Krankenversicherung AG, which we renamed in January 2003.

Distribution

Our distribution channels for our life/health products in Germany are similar to those used for our property-casualty products. Many of our products in Germany are distributed through common or overlapping distribution systems. In our German life/health insurance businesses, we distribute our products primarily through a network of self-employed, full-time tied agents. For our individual life, health and unit-linked products, the network of full-time tied agents is our most important distribution channel. Brokers are also an important channel for the distribution of Allianz Leben’s and Allianz Private Health’s group life and health products. The bank distribution channel is utilized primarily in our life insurance business. We distribute our life insurance products through Dresdner Bank, and under contractual arrangements with Volks- und Raiffeisenbanken, a network of cooperative banks in southern Germany. Since 2001, we have placed approximately 986 insurance specialists (as of December 31, 2004) to sell both life insurance products and property-casualty insurance products at Dresdner Bank branches throughout Germany.

The following table sets forth certain key data concerning our distribution systems as they relate to life and health insurance at and for the year ended December 31, 2004:


			% of 2004
	Number⁽¹⁾		Life Premiums	Health Premiums
Full-time tied agents	11,397		55.5	82.4
Part-time tied agents	39,902		5.0	5.0
Brokers	6,218		13.6	7.3
Banks	2,510	⁽²⁾	18.5	0.3
Other⁽³⁾	—		7.4	5.0
Total	—		100.0	100.0

⁽¹⁾	Represents the total number in Germany for all Allianz Group segments.

⁽²⁾

Represents the number of German branches at Dresdner Bank (722), Oldenburgische Landesbank (177), Bankhaus Reuschel (10), and at unaffiliated banks, comprising Volks- und Raiffeisenbanken (1,594) and Industrie Kredit-Bank (7), with which we have distribution agreements covering our property-casualty and life/health insurance products.

⁽³⁾	Includes all Allianz Group employees in Germany, who are able to sell Allianz Group policies.

Germany Life

Life insurance is the most popular form of savings for old age in Germany. With the demographic shift toward an aging German population, we see increasing opportunities for our life insurance business as private sector products are used to supplement decreasing levels of state provisions. In addition, the demand for insurance against financial loss resulting from occupational disability has grown rapidly in Germany in recent years as the German statutory social insurance system has provided declining levels of support.

On January 1, 2002, a new law German Pension Reform Act (Altersvermögensgesetz) took effect, providing incentives for private retirement plans and company pension funds beginning in 2002. The law provides for direct state subsidies or, in certain circumstances, tax-free premium payments, and it requires that life-long benefit payments be guaranteed. The benefit payments are subject to income tax. In July 2001, we started selling through Allianz Lebensversicherungs AG specially designed products that satisfy the legal requirements of the Altersvermögensgesetz, primarily the requirement

that the sum of premium payments be fixed at the beginning of the benefit payment period. We established Allianz Pensionskasse AG, a wholly-owned subsidiary of Allianz Lebensversicherungs AG, and Allianz Dresdner Pensionsfonds AG, a wholly-owned subsidiary of Allianz AG (effective January 2005, a wholly-owned subsidiary of Allianz Lebensversicherungs AG), in 2002 in order to more aggressively sell a variety of pension products in accordance with the Altersvermögensgesetz.

In June 2004, the Retirement Income Revenue Act (Alterseinkünftegesetz) was adopted in Germany. Generally, under the new law, which is effective for policies issued on or after January 1, 2005, premiums can be deducted by policyholders from their gross income, while benefit payments are taxable. Maturity payments from conventional insurance policies and unit-linked products, as well as lump-sum payments from deferred pension insurance policies were not subject to income taxes under the existing law if certain criteria were met. Under the new law, all such payments will be subject to income taxes at a rate of 50% for all policies issued on or after January 1, 2005. As a result, we experienced a rapid growth in new business, particularly in the fourth quarter of 2004, during which we recorded sales of approximately 800,000 policies, as customers chose to purchase insurance policies prior to the commencement of the new law. Although we do not expect this type of growth in 2005 under the new law, the premiums related to the new business in 2004 will be primarily reflected in the results of operations for fiscal year 2005 and onwards.

While it is too early to assess the long-term impact of this new law on our business, Allianz Leben has developed new products and adapted existing products that seek to provide more possibilities for retirement planning, which take into account changes introduced by the new law. Besides the “Private Pension” and the “Riester Pension”, Allianz Leben now additionally offers the new state-supported “Basic Pension”. Private Pension business has become more flexible due to the new possibility of additional payments and flexible benefits. Benefits are heritable, transferable and alienable. The state-supported old-age “Riester Pension” has been improved substantially by the possibility of a partial capital pay-off up to 30 percent, as well as a simplified application process for government subsidies. The Retirement Income Revenue Act offers additional sale opportunities with the new “Basic Pension”. As old-age provision can be combined with provision for surviving dependents and occupational disability, the new “Basic Pension” product provides us with the opportunity to offer old-age savings products with tax advantages in accordance with the new law.

In our life insurance business, our policy surrender rates were 4.2% in 2004, 4.0% in 2003 and 3.7% in 2002, compared to the German industry-wide surrender rates of 5.5%, 5.5% and 4.9%, respectively, based on information provided by the German Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft). We believe that this is in large part due to our widely recognized and well respected brand name, our position as a market leader in most German insurance lines, our reputation for superior customer service and our financial strength. We also pay close attention to promoting follow-on business, which involves policyholders reinvesting funds. This typically takes the form of using the benefits paid out on an endowment policy as the single premium for an immediate annuity that ensures a guaranteed income for the rest of the policyholder’s life, or investing in a fund managed by our asset management subsidiary Allianz Global Investors (formerly ADAM). See “—Asset Management Operations.”

Products

Our 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 are: 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.

Our annuity and endowment life products for the German market include policies both with unchanging levels of premiums and guaranteed benefits, as well as those with premiums and guaranteed benefits that rise automatically in accordance with contributions to the German statutory pension system. Amounts payable at maturity of an endowment policy include a “guaranteed benefit,” an amount established by

reference to a legally mandated maximum guaranteed interest rate on actuarial reserves. This interest rate is currently 2.75% per year for policies issued on or after January 1, 2004, having declined from 3.25% in previous years. For additional information, see “—Regulation and Supervision—Insurance—Germany—Life Insurance.” The future profit participation credited to policyholders is not guaranteed. The total amount payable at the maturity of a policy, which is calculated based on the total expected profit participation, is the principal basis of competition between life insurance providers in the German market. Under current German law, the policyholder must be credited with at least 90% of each year’s statutory net investment result plus an appropriate share in other profit components. In the current competitive environment, however, the rate of profit participation exceeds this statutory minimum and is subject to periodic adjustment by insurers in light of competitive conditions prevailing from time to time. In conformity with prevailing market conditions, we recently credited between 91% and 94% of each year’s profits to policyholders.

Germany Health

Allianz Private Health is the third-largest private health insurer in Germany, with approximately 2.4 million customers in 2004. Allianz Private Health has strong ties to the German medical profession and is the largest health insurer for this profession in Germany, as well as a major provider of group health insurance.

The German statutory healthcare system operates as a mandatory system for persons with incomes below a specified threshold (Versicherungspflichtgrenze) and allows persons with income above the threshold to voluntarily opt out of the statutory system and use the private healthcare system. Currently, the German healthcare system is dominated by the German statutory schemes, while private providers of health insurance, including Allianz Private Health, compete for the remainder.

Changes to the German healthcare system are currently being considered, in particular with a view to reducing costs or increasing funds in the statutory system. Enactment into law of any such changes may have an impact on private health insurance providers, as the amount of new business written under full private health coverage may decrease or the amount of new business written with supplementary coverage may increase.

Allianz Private Health provides 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.

Similar to endowment and other life insurance products, health insurance products include mandatory profit-sharing features, whereby Allianz Private Health, like any other German private health insurer, returns 80% of the statutory profit on its health business, after the payment of claims and claims costs, the establishment of reserves, payment of taxes and other expenses, to policyholders annually, generally in the form of premium subsidies or rebates. Since the beginning of 2000, Allianz Private Health has also been required by law to allocate to its policyholders 90% of interest surplus, which is a component of statutory profits.

Effective from December 21, 2004, insurance companies that offer full private healthcare coverage are required to become member of an insurance guarantee fund (Sicherungsfonds). See “Information on the Company—Regulation and Supervision—Insurance—Germany—Health Insurance.”

France

We conduct our life/health insurance operations in France through the companies of the AGF Group. The AGF Group is the eighth-largest life insurance provider in France based on gross premiums written in 2004. The AGF Group provides a broad line of life insurance and other financial products, including short-term investment and savings products. An important portion of AGF Group’s life premiums is generated through the sale of unit-linked policies and investment-oriented products, for which only the cost- and risk-related components of premiums are reflected in gross premiums written under U.S. GAAP, which we have adopted to account for our insurance contracts.

The AGF Group also operates in the French health insurance market through a separate business unit responsible for both group insurance and health insurance and offers a wide variety of health products, which are designed to pay benefits that complement those of the mandatory French social

security plan. The results of our health operations in France are included in part in our property-casualty segment and in part in our life segment.

Statutory premiums from our life/health insurance operations in France were €4,719 million in 2004, €4,438 million in 2003 and €4,283 million in 2002. As a percentage of our total life/health statutory premiums worldwide, France accounted for 10.4% in 2004, 10.5% in 2003 and 10.7% in 2002.

Italy

We conduct our life/health insurance operations in Italy primarily through the Italian Subsidiaries. Taken together, the Italian Subsidiaries are the second-largest life insurer in the Italian market based on gross premiums written in 2004. The Italian Subsidiaries’ individual life policies are primarily endowment policies but also include annuities and other policies, including capitalization and other products. Consistent with trends in the Italian market generally, the Italian Subsidiaries’ products include an increasing amount of unit-linked policies, where policyholders participate directly in the performance of policy-related investments, and, after a year of a decreasing number of endowment products, we again noticed an increase in these products in 2004. Sales of unit-linked and equity-linked products sold through banks represented 69% of our total statutory life premiums in Italy, reflecting the importance of this distribution channel. The Italian Subsidiaries’ unit-linked policies include products linked to funds managed by the Italian Subsidiaries, as well as by third-party investment managers and index-linked products.

Our life/health insurance operations in Italy recorded statutory premiums of €8,738 million in 2004, €9,197 million in 2003 and €7,717 million in 2002. As a percentage of our total life/health statutory premiums worldwide, Italy accounted for 19.3% in 2004, 21.7% in 2003 and 19.2% in 2002.

Switzerland

We conduct our life/health operations in Switzerland primarily through the Allianz Suisse Lebensversicherungs-Gesellschaft and Phénix Vie, which together we refer to as our “Swiss Life/Health Subsidiaries.” Taken together, the Swiss Life/Health Subsidiaries are the sixth-largest life insurance provider in Switzerland based on gross premiums written in 2004. The Swiss Life/Health Subsidiaries sell a wide range of individual and group life insurance products, including retirement and old age, death and disability products. Statutory premiums from our life/health insurance operations in Switzerland were €1,054 million in 2004, €1,197 million in 2003 and €1,197 million in 2002. As a percentage of our total life/health statutory premiums worldwide, Switzerland accounted for 2.3% in 2004, 2.8% in 2003 and 3.0% in 2002.

Spain

We are the seventh-largest life insurance provider in Spain based on gross premiums written in 2004. We conduct our life/health operations in Spain primarily through Allianz Seguros and through Eurovida, our joint venture with Banco Popular. Our Spanish life insurance subsidiaries sell primarily traditional life insurance, pensions and unit-linked products. Statutory premiums from our life/health insurance operations in Spain were €676 million in 2004, €611 million in 2003 and €551 million in 2002. As a percentage of our total life/health statutory premiums worldwide, Spain accounted for 1.5% in 2004, 1.4% in 2003 and 1.4% in 2002.

Other Europe

We conduct significant life/health operations in Other Europe through 17 Allianz subsidiaries in 15 other European countries. Our life insurance products in Other Europe are generally the same as the life products we offer in the German market. Our primary life/health insurance markets in Other Europe are Belgium, the Netherlands and Austria. In December 2004, we sold our life insurance business in the United Kingdom in order to concentrate on our property-casualty insurance business in that region. With statutory premiums of €2,140 million, €2,133 million and €1,747 million in 2004, 2003 and 2002, respectively, our life insurance operations in Other Europe accounted for 4.7%, 5.0% and 4.3% of our total life/health statutory premiums worldwide in 2004, 2003 and 2002, respectively.

United States

We serve the United States life/health insurance market through Allianz Life Insurance Company of

North America (or “Allianz Life”), which is headquartered in Minneapolis, Minnesota. Allianz Life and its subsidiaries are licensed to write business in all 50 states, the District of Columbia and Guam. Allianz Life markets a wide variety of life insurance, fixed and variable annuity contracts, and long-term care insurance to individual and corporate customers. Allianz Life is a major company in providing fixed annuities, including equity-indexed annuities, and variable annuities to individuals. Allianz Life also provides healthcare excess of loss coverage. During 2003, Allianz Life exited the traditional life reinsurance business. In 2004, our total statutory premiums written from life/health insurance in the United States, which include gross receipts from the sales of unit-linked and other investment-oriented products, were €11,234 million, up from €8,566 million in 2003.

Allianz Life’s individual wealth management products (life insurance, annuities and long-term care insurance) are distributed primarily through independent agents and registered representatives. The majority of these independent producers are contracted with Allianz Life through third-party intermediaries, including independent marketing organizations, banks and broker-dealers. Allianz Life has full and partial ownership interests in certain of these intermediaries, including a broker-dealer and 13 independent marketing organizations. Healthcare excess of loss products, which include HMO reinsurance, employer stop loss insurance and provider excess of loss insurance, are sold directly by internal sales personnel and through independent brokers and third-party administrators.

Asia-Pacific

The life/health insurance markets in which we operate in the Asia-Pacific region are as follows:

South Korea. We conduct our life/health insurance operations in South Korea through our subsidiary Allianz Life Insurance Korea Co. Ltd., Seoul, and Hana Allianz, our bancassurance joint venture with Hana Bank, Seoul, which together we refer to as our “South Korean operating entities”. Our South Korean operating entities market a wide variety of life insurance products including unit-linked products, individual whole life insurance polices, annuities, endowment insurance, education insurance, protection insurance and group life insurance. In 2004, Allianz Life Insurance Korea and Hana Allianz generated statutory premiums of €1,370 million and €107 million, respectively.

Other Asia-Pacific. In addition to the primary markets described above, we conduct life and accident insurance operations in Taiwan, China, Thailand, Indonesia, India and Malaysia. We also market a range of health insurance products in Indonesia and Pakistan.

Other

Our life insurance activities in South America are currently concentrated in the sale of investment- oriented products in Columbia. Our life insurance companies in Chile and Brazil were sold in the first half of 2003 and in the first quarter of 2004, respectively.

Competition

There is substantial competition in Germany and the other countries in which we do business for the types of insurance products and services that we provide. This competition is most pronounced in our more mature markets—Germany, France, Italy and the United States. In recent years, however, 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.

In Germany, which is our largest market for insurance operations, there is intense competition for virtually all products and services that we provide. In addition, the German insurance sector is a mature market in which we already have significant market shares in most lines of business.

Banking Operations

Our banking segment consists primarily of the banking operations of our subsidiary, 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. Based

on total assets at December 31, 2004, Dresdner Bank was one of the largest banks in Germany. We established banking as our fourth core business segment alongside property-casualty insurance, life/health insurance and asset management following our acquisition of Dresdner Bank in 2001. The asset management operations of Dresdner Bank are included in our asset management segment. For a discussion of our asset management operations, including those of Dresdner Bank, see “—Asset Management Operations.”

The selected statistical information on our banking operations set forth in “—Selected Statistical Information Relating to Our Banking Operations” differs significantly from, and may not be comparable to, the financial information presented below. The statistical information for all periods presented also includes the asset management operations of Dresdner Bank, which we do not include in our banking segment. In addition, the statistical information presents the assets and liabilities of Dresdner Bank without reflecting the adjustments that are necessary to apply purchase accounting, which we have applied in the financial information presented below. For additional information, see “—Selected Statistical Information Relating to Our Banking Operations.”

Dresdner Bank AG emerged in 1957 from the reunification of three independent banks (Hamburger Kreditbank AG, Rhein-Ruhr Bank AG and Rhein-Main Bank AG), which had been formed in 1952 as successor companies of Dresdner Bank, Berlin, which was founded in 1872 in Dresden. In the 1990s and early 2000s, Dresdner Bank made significant acquisitions in investment banking, including British merchant bank Kleinwort Benson Group plc in 1995 and U.S.-based investment bank Wasserstein Perella & Co. in January 2001, and asset management, including U.S. asset manager RCM Capital Management in 1995.

In 2002, following the acquisition of Dresdner Bank by the Allianz Group, Dresdner Bank transferred substantially all of its German asset management subsidiaries to Allianz Global Investors (formerly ADAM). In 2004, Dresdner Bank further transferred RCM Capital Management and other foreign asset management subsidiaries to Allianz Global Investors. Also in 2002, Dresdner Bank’s mortgage bank, Deutsche Hyp, was merged with Rheinische Hypothekenbank AG, the mortgage banking subsidiary of Commerzbank, and Eurohypo AG (or Eurohypo), the mortgage banking subsidiary of Deutsche Bank, into a single entity.

With 969 branch offices and approximately 36,000 employees at December 31, 2004, Dresdner Bank focuses on selected geographic regions and business areas, and our different customers now choose from products from our four principal business lines, which include personal banking, private and business banking, corporate banking and investment banking. Our principal banking products and services include traditional commercial banking 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 our own account and for our customers.

We operate through the domestic and international branch network of Dresdner Bank and through subsidiaries in Germany and abroad, some of which have branch networks. At December 31, 2004, our German-wide branch banking network comprised approximately 911 branches, while our international branch network totaled approximately 58 non-German branches.

Reorganization of Business Divisions

We have reorganized our banking operations significantly since 2001. We currently conduct our banking business through six divisions: Personal Banking, Private & Business Banking, Corporate Banking, Dresdner Kleinwort Wasserstein, Institutional Restructuring Unit (“IRU”) and Corporate Other. This structure is the result of a series of reorganizations, as explained below:

•

In 2002, we merged our mortgage banking subsidiary, Deutsche Hyp, which was then included in our former Other division with the mortgage banking subsidiaries of Commerzbank and Deutsche Bank into a single entity, Eurohypo AG. Accordingly, the assets and liabilities of the former Deutsche Hyp were deconsolidated as of August 1, 2002. We account for our remaining interest of 28.5% in Eurohypo

using the equity method. See “—Banking Operations By Division—Corporate Other”, as well as Note 7 to our Consolidated Financial Statements.

•

We established our IRU division, effective January 1, 2003, with the aim to free up risk capital through the reduction of risk-weighted assets. Our strategy to accomplish this goal includes repayment, reduction of exposure limits, sale of individual loans or portfolios, and restructuring of loans, while seeking to maximize the recovery from non-strategic assets and private equity investments. For additional information on our IRU division, see “—Banking Operations by Division—IRU.”

•

In early 2003, we split our former Corporates & Markets division into Corporate Banking, to primarily serve our domestic corporate customers, and Dresdner Kleinwort Wasserstein, to primarily serve our international corporate customers and to provide investment banking services. For additional information on our Corporate Banking and Dresdner Kleinwort Wasserstein divisions, see “— Banking Operations by Division—Corporate Banking” and “—Banking Operations by Division—Dresdner Kleinwort Wasserstein,” respectively.

•

In our Corporate Other division, during 2003, we disposed of our institutional custody business, with the transfer of such business occurring in 2004. In addition, we have sold our payment processing activities to a third-party and have begun outsourcing the IT services related to our domestic retail securities processing to a third-party. This outsourcing migration is expected to be completed in 2006.

•

In 2004, we split our former Private and Business Clients division into two new divisions: Personal Banking and Private & Business Banking. Our Personal Banking division is designed to make our banking operations more accessible to individuals by offering easier access to personalized consulting services and products. Our Private & Business Banking division offers customized financial and wealth management services to high net-worth customers and to small- and mid-sized corporate customers. For further information on our Personal Banking and Private & Business Banking divisions, see “—Banking Operations by Division—Personal Banking” and “—Banking Operations by Division—Private & Business Banking,” respectively.

Cost-Cutting and Restructuring Measures

From 2000 through 2004, Dresdner Bank implemented comprehensive cost-cutting and restructuring programs to increase its operating efficiency. These programs comprise four different sets of initiatives: measures announced in 2004 (or “2004 Measures”), the “New Dresdner” program introduced in August 2003, the “Turnaround 2003” plan established in September 2002, and various other restructuring initiatives either focused on specific subsidiaries and/or begun prior Allianz AG’s acquisition of Dresdner Bank (or “Other Programs”). Through these initiatives, Dresdner Bank announced plans to terminate a total of approximately 16,800 positions. As of December 31, 2004, approximately 13,710 positions have been terminated under these initiatives.

During the year ended December 31, 2004, Dresdner Bank recorded restructuring charges for all restructuring programs of €290 million. This amount includes new provisions, additions to existing provisions, releases of provisions recognized in previous years, and restructuring charges as reflected in our consolidated income statement. A summary of the restructuring charges related to Dresdner Bank that were reflected in the Allianz Group’s consolidated income statement for the year ended December 31, 2004, by restructuring program is as follows. See Note 22 of our Consolidated Financial Statements for further information.


	2004 Measures	New Dresdner		Turnaround 2003		Other Programs		Total
	€ mn	€ mn		€ mn		€ mn		€ mn
Provisions:
New provisions	132	—		—		—		132
Additions to existing provisions	—	97		22		24		143
Release of provisions recognized in previous years	—	(44	)	(11	)	(7	)	(62	)
Restructuring charges directly reflected in the income statement	7	58		8		4		77

Total restructuring charges during the year ended December 31, 2004	139	111	⁽¹⁾	19		21		290

Total restructuring charges incurred to date	139	582	⁽²⁾	561		699		1,981

⁽¹⁾	Includes €15 million 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.

⁽²⁾	Includes €106 million 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.

2004 Measures

During 2004, Dresdner Bank recorded restructuring charges of €139 million for further restructuring initiatives announced in addition to and separately from the “New Dresdner” program. Through these 2004 Measures, Dresdner Bank 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 40 employees had been terminated pursuant to the 2004 Measures as of December 31, 2004.

New Dresdner

In August 2003, Dresdner Bank announced the “New Dresdner” program as part of its cost-cutting initiatives to eliminate approximately 4,700 employees in its banking operations by the end of 2005. This initiative focuses on back-office areas and support functions, which will primarily affect Dresdner Bank’s head office within Dresdner Bank AG and its subsidiaries. Approximately 2,740 employees (2003: 290 employees) had been terminated and approximately 900 additional employees had contractually agreed to leave Dresdner Bank pursuant to the New Dresdner program as of December 31, 2004.

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’s direct banking subsidiary Advance Bank into the Allianz Group in 2003. This initiative involves 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, 2004.

Turnaround 2003

In September 2002, Dresdner Bank established the Turnaround 2003 program related to cost-cutting efforts and strategic restructuring. The initiatives involve the elimination of approximately 3,000 positions at Dresdner Bank, including approximately 2,100 positions in the former Corporates & Markets division, 300 positions in the former Private and Business Clients division and 600 positions in the Corporate Other division. We will complete the implementation of the initiatives in 2005. Approximately 2,950 employees (2003: 2,100 employees) had been terminated pursuant to Turnaround 2003 as of December 31, 2004.

Other Programs

In addition to the above mentioned programs, there were also other cost-cutting and restructuring programs that were implemented by Dresdner Bank since 2000, all of which have been completed as of December 31, 2004.

In February 2003, as part of the continued reorganization of its business structure to focus on core operating divisions, Dresdner Bank publicly announced the closure of its wholly owned subsidiary Lombardkasse AG (or “Lombardkasse”), a broker-dealer specializing in securities custody and clearing transactions. The closure involved the termination of approximately 80 employees. All 80 positions had been eliminated as of December 31, 2003.

In April 2002, as part of our ongoing cost-cutting measures, Dresdner Bank announced the elimination of an additional approximately 200 positions in its former Corporates & Markets division. All 200 of these positions had been eliminated as of December 31, 2002.

In September 2001, the Allianz Group announced further restructuring plans relating primarily to subsidiaries of Dresdner Bank AG. The plans involved an aggregate reduction of approximately 1,300 positions throughout the banking operations. Of the 1,300 positions to be eliminated under these plans, approximately 1,280 positions (2003: 1,120 positions) had been eliminated as of December 31, 2004. Also in 2001, Dresdner Bank announced the reorganization of the investment banking division, which was combined with its European corporate banking activities into a single new division. The program led to the elimination of approximately 1,500 positions, primarily in front and back office support functions and was completed at December 31, 2002.

In connection with the acquisition of Dresdner Bank, several restructuring plans established by Dresdner Bank prior to its acquisition by Allianz AG had also been included in the consolidated financial statements of the Allianz Group. These include restructuring plans established by Dresdner Bank in May 2000 related to the reorganization of the German branch network and to other back-office activities in Germany, as well as a restructuring initiative related to its non-European business, primarily concerning the reduction of commercial lending activities outside of Europe. These plans involved an aggregated reduction of approximately 5,000 positions and were completed by December 31, 2004.

Competition

We are subject to intense competition in all aspects of our banking business 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. In our Personal Banking division, our main competitors are Citibank and Postbank as well as the savings and cooperative banks. In our Private & Business Banking division, our main competitors are UBS, Credit Suisse, HSBC, Deutsche Bank, BNP Paribas, Royal Bank of Scotland as well as especially in Germany Commerzbank, Sal. Openheim and the savings banks. In our Corporate Banking division, our main competitors are Deutsche Bank, Citigroup, Commerzbank and HypoVereinsbank, as well as the German public state banks and savings and cooperative banks. In our Dresdner Kleinwort Wasserstein division, our main competitors are all international investment banks and BNP Paribas, ING, ABN Amro, Barclay’s Capital and Royal Bank of Scotland. Competition is based on a number of factors, including distribution systems, transaction execution, products and services, innovation, reputation and price. In recent years, we have generally experienced intensifying price competition as competitors have sought to increase their market share. We believe this trend will continue.

Banking Operations by Division

In 2003 and 2004, Dresdner Bank significantly reorganized its banking divisions. See “—Banking Operations—Reorganization of Business Divisions.” Following these reorganizations, Dresdner Bank now conducts its banking operations through six divisions: Personal Banking, Private & Business Banking, Corporate Banking, Dresdner Kleinwort Wasserstein,

IRU and Corporate Other. The Dresdner Kleinwort Wasserstein division does not represent the legal entity Dresdner Kleinwort Wasserstein Group, Ltd. Dresdner Bank’s Corporate Other division includes Dresdner Bank’s corporate investments, corporate functions (i.e. internal service areas), corporate items, which consists of income and expense items that are not directly attributable to one of Dresdner Bank’s other five divisions, and adjustments to reflect elimination of transactions between divisions.

In January 2004, we disposed of our French mortgage banking subsidiary, Entenial. Following this divestment, our banking segment’s operations are almost exclusively represented by Dresdner Bank.

Personal Banking

In 2004, we split our former Private and Business Clients division into two new divisions: Personal Banking and Private & Business Banking. Through the Personal Banking division, Dresdner Bank seeks to broaden its client base by offering more personalized financial services such as financing, asset accumulation and appreciation, investment advice, financial planning and insurance products. This comprehensive offering of services is designed to foster customer loyalty at an early stage in the customer-bank relationship, allowing to accompany them through every stage of their life.

Products and Services

Dresdner Bank seeks to expand its market position by attracting new customers, who wish to have access to not only a wide range of financial products but also to reliable professional advice in all aspects of financial and asset planning matters. Dresdner Bank also has the objective to foster customer loyalty by offering enhanced and personalized service.

Distribution

Dresdner Bank intends to further expand its multi-channel platform in order to provide customers with user-friendly access to its banking services at all times. Dresdner Bank offers its Personal Banking products and services in approximately 900 of its network of branches. Due to this broad coverage, Dresdner Bank has organized its Personal Banking division into 12 “personal banking” regions within Germany, each with a customer base ranging from 200,000 to 500,000 customers.

Private & Business Banking

In 2004, we split our former Private and Business Clients division into two new divisions: Personal Banking and Private & Business Banking. Through the Private & Business Banking division, Dresdner Bank seeks to pursue a growth strategy to develop and maintain long-lasting client relationships and control both costs and risks. This division aims to deliver stable, positive returns for clients by applying a customer-oriented investment plan, as well as using advanced investment and financial analyses. Dresdner Bank believes that this strategy, combined with offering quality customer service, should strengthen the division’s international and domestic market position.

Products and Services

With its re-orientation in 2004, Dresdner Bank has sought to provide better 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. Through its business banking service, Dresdner Bank offers business clients integrated advice for their personal and business needs, such as medium-scale industry programs, company pension schemes and preparation for Basel II.

Distribution

Private & Business Banking services are offered through 125 domestic service centers, located in seven regions in Germany. Private & Business Banking also maintains a strong presence in key European financial centers and has offices worldwide.

Corporate Banking

We serve our large corporates, corporate groups and multinational clients through our Corporate Banking division. Effective January 1, 2003, we split our former Corporates & Markets division into Corporate Banking, to primarily serve our domestic corporate customers, and Dresdner Kleinwort Wasserstein, to primarily serve our international

corporate customers and to provide investment banking services. However, our customers still benefit from the entire range of our corporate and investment banking products and services provided through the client relationship managers.

The core market for our Corporate Banking division is Germany. We also assist our customers in Germany with their cross-border activities. We offer a wide range of commercial banking, structured finance and other corporate finance products and services to our Corporate Banking customers. We intend to increase the profitability of the Corporate Banking division by continuing to strengthen corporate finance, through the expansion of the Structured Finance Unit. Within this unit we focus on structured, mezzanine and lease financing transactions for customers. Our customer base consists of approximately 9,000 client groups, most of which are domiciled in Germany.

Products and Services

Our Corporate Banking division offers corporate loans, structured mezzanine and lease financing, structured export and trade financing, treasury and securities products, insurance products, and provides corporate customers with cash management solutions, payment services, global documentary services, and advice on occupational pension plans.

Distribution

In our Corporate Banking division, we assign each client group a client relationship manager (or “CRM”). The CRM manages and coordinates the Corporate Banking division’s comprehensive expertise. All clients have access to the entire product range of the Allianz Group via their CRMs and client action teams, which are composed of product specialists tailored to each customer individually. In addition, customer service units are set up to operate as service providers and as direct contact partners for the client in accounting and account maintenance matters.

Dresdner Kleinwort Wasserstein

We provide investment banking services to our corporate, government and financial institutional clients and to our institutional investors through our Dresdner Kleinwort Wasserstein division. Effective January 1, 2003, we split our former Corporates & Markets division into Corporate Banking and Dresdner Kleinwort Wasserstein. Through our Dresdner Kleinwort Wasserstein division, we aim to take advantage of our access to those clients in Europe and other markets around the world, our extensive capital markets experience around the world and our strong positions in Germany and the United Kingdom. Our Dresdner Kleinwort Wasserstein division is focused on providing a wide range of investment banking, corporate finance and advisory and other capital markets products and services to its clients.

Products and Services

Our Dresdner Kleinwort Wasserstein division offers corporate finance advisory services on mergers and acquisitions, divestitures, restructurings and other strategic matters, securities underwriting and market making, securitization products and services, securities and derivatives trading, portfolio management, and other capital markets products and services. Capital markets combines Dresdner Kleinwort Wasserstein’s equity, fixed-income and foreign currency derivatives capabilities, offering our customers a full range of structuring and over the counter solutions.

Distribution

In our Dresdner Kleinwort Wasserstein division, relationship managers and sales teams work together with product specialists to provide in-depth capital markets expertise in investment banking to meet the capital markets needs of our clients. Our goal is to offer a full range of capital markets products and services to our Dresdner Kleinwort Wasserstein’s clients worldwide.

IRU

We established the IRU division, effective January 1, 2003, with the aim to free-up risk capital through the reduction of risk-weighted assets. Our strategy to accomplish this goal includes repayment, reduction of exposure limits, sale of individual loans or portfolios, and restructuring of loans, while seeking to maximize the recovery from non-strategic assets and private equity investments. Individual

restructurings of operative units of Dresdner Bank are also part of its business.

At the inception of the IRU division on January 1, 2003, the IRU division included approximately €35.5 billion of assets and undrawn commitments, consisting of approximately €34.1 billion of loans, as well as approximately €1.4 billion of other non-strategic assets, including private equity investments. Of the €34.1 billion of loans €24.6 billion were fully drawn, and include approximately €6.9 billion of non-performing loans, approximately €1.1 billion of potential problem loans. During 2004, some of the IRU’s most significant transactions within the international capital markets included:

•

€345 million (May 2004) and €142 million (June 2004) of foreign loan exposure sold through closed bid portfolio auctions;

•

25% shareholding in Telecinco in June 2004 sold through an initial public offering (IPO) in Spain;

•

€70 million in September 2004 for the sale of a North American private equity portfolio; and

•

€1.2 billion in October 2004 for the sale of a portfolio of German loan assets.

In addition, in December 2004, Dresdner Bank announced that it has entered into sale negotiations relating to a German non-strategic loan portfolio of approximately €2 billion.

During 2003, some of IRU’s most significant transactions within the international capital markets included:

•

€511 million in May 2003 for the disposal of loan portfolios consisting primarily of loans to borrowers in the United States and Europe;

•

€123 million in September 2003 relating to the loan and equity portfolio in Asia Pacific; and

•

€1.9 billion during November and December 2003 for the reduction of loan exposure in the North American portfolio.

From January 1, 2003 to December 31, 2004, the total exposure in the IRU division was reduced by €26.2 billion. At December 31, 2004, the IRU included approximately €9.3 billion of assets and undrawn commitments, consisting of approximately €8.5 billion of loans and approximately €0.8 billion of other non-strategic assets, including private equity investments. Of the €8.5 billion of loans, €6.5 billion were fully drawn, and included approximately €2.7 billion of non-performing loans and approximately €0.1 billion of potential problem loans. Approximately €2.0 billion of undrawn commitments remained at December 31, 2004. As a result of the significant dispositions throughout 2004, our risk-weighted assets were reduced to €4.0 billion, at the end of 2004, as compared to €10.1 billion at December 31, 2003.

Corporate Other

Our banking segment’s Corporate Other division contains income and expense items that are not directly assigned to our 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.

In our Corporate Other division, during 2003, we disposed of our institutional custody business, with the transfer of such business occurring in 2004. In 2004, we have sold our payment processing activities to a third party and have begun outsourcing the IT services related to our domestic retail securities processing, including custody, to a third party. This outsourcing migration is expected to be completed in 2006.

Until August 2002, we served our real estate customers through our real estate business line, which comprised primarily the business operations of our mortgage bank Deutsche Hyp and our German real estate fund management subsidiary, Deutsche Gesellschaft für Immobilienfonds GmbH (or DEGI). On August 1, 2002, we merged Deutsche Hyp with Rheinische Hypothekenbank AG, the mortgage banking subsidiary of Commerzbank, and Eurohypo, the mortgage banking subsidiary of Deutsche Bank, into a single entity, Eurohypo. We deconsolidated Deutsche Hyp and dissolved our real estate business line on August 1, 2002. We held an ownership interest of 28.5% in Eurohypo as of December 31,

2004 and accounted for it using the equity method; see Note 7 to our Consolidated Financial Statements.

Our German real estate fund management subsidiary, DEGI, remained within our Corporate Other division.

Asset Management Operations

Our 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 our insurance operations. We managed approximately €1,078 billion of third-party assets, group’s own investments and separate account assets on a worldwide basis as of December 31, 2004, with key management centers in Munich, Frankfurt, London, Paris, Singapore, Hong Kong, Milan, Westport, Connecticut, and San Francisco, San Diego and Newport Beach, California. Our third-party assets under management were approximately €585 billion as of December 31, 2004. As measured by total assets under management at December 31, 2004, we were among the five largest asset managers in the world.

Assets Under Management

Our asset management operations pursue two objectives. In our third-party asset management business, we seek to leverage the power of our portfolio management expertise, existing customer relationships and distribution to maintain and further develop our position as a leading global asset manager. In the management of the Allianz Group’s own investments, we seek to maximize long-term total return on our investments for the benefit of our shareholders and policyholders, including the value of our portfolio of financial and industrial equity participations, while remaining within the Allianz Group’s risk management guidelines.

Third-Party Assets

We manage our third-party asset management business primarily through Allianz Global Investors (formerly Allianz Dresdner Asset Management, or “ADAM”, until October 2004), our wholly owned asset management subsidiary. We reorganized our former financial services operations in 2001 under ADAM in order to integrate the asset management operations of Dresdner Bank, acquired on July 23, 2001, to achieve new economies of scale and to extend the reach of our distribution networks for asset management products and services. In 2002, we transferred substantially all of Dresdner Bank’s German asset management subsidiaries to ADAM.

We conduct our third-party asset management business primarily through our operating companies worldwide under the new umbrella brand name, Allianz Global Investors. As part of our multi-regional strategy, however, we operate under multiple brand names in different regions. In the United States, our main operating companies include PIMCO, Nicholas-Applegate, RCM Capital Management (formerly Dresdner RCM Global Investors), Oppenheimer Capital and NFJ Investment Group. In Europe, we operate primarily through AGF Asset Management, RAS Asset Management, Deutscher Investment Trust (or “dit”) and Dresdner Bank Investment Management (or “dbi”), as well as RCM Capital Management and PIMCO. In Asia, our main brands are Allianz Global Investors (effective in 2005, which was formerly ADAM), PIMCO and RCM Capital Management.

In 2002, together with Guotai Junan Securities (or “GTJA”), we established Guotai Junan Allianz Fund Management, a Shanghai-based joint venture that was the first joint venture fund management company and the first licensed fund manager with foreign participation in China. By combining GTJA’s distribution network and our international asset management expertise, our joint venture has become one of the most successful Sino-foreign partnerships based on net inflows (Source: Pensions and Investments, November 2004) and is well-positioned to make further inroads into this growth market.

We have significantly grown our third-party assets under management in recent years, both through acquisitions such as Dresdner Bank and Nicholas-Applegate in 2001 and PIMCO in 2000, and through organic growth driven by significant net capital inflows. We continue to leverage the PIMCO, dit, dbi, Nicholas-Applegate, Oppenheimer Capital and RCM Capital Management franchises in further developing our third-party asset management business through our flagship subsidiaries on a global basis. We believe that the European markets offer

especially attractive opportunities for third-party fund managers. We also expect that investment fund products, in particular retirement planning vehicles, will increase in importance in Europe. We expect this trend to be supported by the increased demographic pressure that state-run pension systems will face and the rising prevalence of defined contribution arrangements. We believe that we are well-positioned in third-party markets, especially in Germany, France and Italy, and we continually seek to increase our market share in these markets.

We are also developing our insurance and banking distribution capabilities, including our dedicated advisory, branch bank and insurance networks in Europe, as asset accumulation arms to further our asset management capabilities. Leading examples of our activities in this area include our operations through Dresdner Bank, where approximately 7,000 financial advisors in branch offices distribute our asset management, life insurance and other financial products; our operations at RAS Group in Italy, with its independent network of licensed financial advisors who distribute life insurance and financial products; and our operations at the AGF Group in France, with its network of advisors offering comprehensive financial planning services. See also “—Banking Operations.”

As a result of the re-organization of our asset management operations under Allianz Global Investors, we believe we are well-positioned to deliver quality products and services in all major asset classes for both retail and institutional clients. We aim to provide our clients with first-class products on a global basis by fully utilizing our distribution channels and leveraging the asset management expertise of our specialized asset managers around the world.

We serve a comprehensive range of retail and institutional asset management clients, including corporate and public pension funds, insurance and other financial services companies, governments and charities, financial advisors and private individuals. Our third-party asset management includes primarily equity, fixed income, money market and sector products, as well as alternative investments.

Our third-party asset management subsidiary, Allianz Global Investors, is organized globally into global equity and global fixed income business lines, each led by a global head. Together with Allianz Global Investors’ chief executive officer and chief operating officer, who set the standards and coordinate corporate controlling and administration, each global head is also a member of Allianz Global Investors’ executive committee, which is responsible for the strategic development and financial performance. In addition, country organizations led by country managers provide shared infrastructure and services. Allianz Global Investors’ management structure has been designed to manage the complexity of its multi-regional, multi-product and multi-channel business activities. Within this structure, Allianz Global Investors maintains significant incentives for entrepreneurship and encourages its business units to operate autonomously.

Portfolio Management

Allianz Global Investors has consistent, well-structured and transparent investment processes that are based on fundamental primary research. Allianz Global Investors’ goal is to provide its clients with portfolios that consistently offer superior performance in accordance with its clients’ investment objectives. Allianz Global Investors aims for outperformance through active portfolio management coupled with comprehensive risk management at all levels of the investment process. At December 31, 2004, we had 450 portfolio managers and approximately 200 analysts in major markets worldwide providing a comprehensive range of actively managed fixed-income and equity products and services.

Global Fixed Income. Allianz Global Investors’ fixed-income portfolio investment process is led by PIMCO, one of the world’s major fixed-income investment managers. Our fixed-income product range includes total return, short- and long-duration, regional, country-specific, global and other geographic products, sector products including government and corporate bonds and specialty funds such as high yield and emerging markets. We deliver our fixed-income products in a broad range of investment vehicles, including separate accounts, fixed-income mutual funds and investment trusts.

Global Equity. Our equity portfolio investment products include all major investment styles: value investment, growth investment and core investment.

Our equity product range comprises regional, country-specific, global and other geographic products, sector products such as technology, biotechnology, capital equipment, consumer goods, energy and materials, and finance, as well as large, medium and small market capitalization funds. We deliver our equity products in a broad range of investment vehicles.

Distribution

In Europe, Allianz Global Investors markets and services institutional products through specialized personnel located primarily in its Frankfurt, London, Munich, Paris and Milan 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 Germany, mutual funds are distributed primarily through our Dresdner Bank branches and our full-time insurance agents. In support of these channels, Allianz Global Investors provides asset management specialists and support services, including call centers and client services.

In France, AGF Asset Management markets a wide range of retail products to individual investors through its own in-house network of financial advisors, including full-time agents employed by AGF Group, brokers and specialist networks.

In Italy, RAS Asset Management offers mutual funds that are marketed through affiliated financial planners, financial advisors, banks and via the Internet.

In the United Kingdom and the United States, each of our Allianz Global Investors asset managers markets and services its institutional products through its own specialized personnel. The institutional markets in the United Kingdom and the United States are dominated by consultants, who advise their clients with regard to investment strategy and asset allocation, conduct due diligence on and rank portfolio managers, and conduct searches. As a result, the portfolio managers in these areas put strong emphasis on servicing consultants. In addition, in the United States, Allianz Global Investors asset managers offer a wide range of retail products. The principal proprietary channel is PIMCO Funds, which distributes mutual funds through broker-dealers, financial planners, 401(k) funds and other intermediaries. We also provide “wrap” services through broker-dealers, by managing all or a part of separate accounts maintained by broker-dealers for their customers. In the United States, Allianz Global Investors also advises mutual funds sponsored by third parties, including other mutual fund families and insurance companies offering variable annuity products.

Allianz Global Investors has committed substantial resources to the expansion of the third-party asset management business in Asia-Pacific. We have offices in Tokyo, Hong Kong, Shanghai, Singapore, Taipei, Seoul and Sydney, which are being enlarged to accommodate equity and fixed-income portfolio management, as well as institutional and retail distribution. Allianz Global Investors is also seeking to leverage its brand, investment know-how and customer relationships in China and to exploit the opportunities in this growing asset management market.

Competition

Our main competitors in the asset management business include Deutsche Bank, AXA, UBS, Credit Suisse, Fidelity Investments, Citigroup, Merrill Lynch, Capital Group and Amvescap. They each have large, multi-jurisdictional and multi-product asset management operations, and most of them compete with us for both retail and institutional clients.

Group’s Own Investments

Our group’s own investments consist of the investment portfolios of our insurance, banking and asset management operations. Our investment strategy with regard to our group’s own investments is to maximize long-term total return while remaining within the Allianz Group’s risk management guidelines. These guidelines relate primarily to the quality of the investments and the matching of assets and liabilities. Our general policy is to closely match the maturities and currencies of assets and liabilities. The investment policies of the insurance subsidiaries reflect the different liability characteristics and tax profiles of their respective operations. Our

internationally integrated teams of portfolio managers work closely with the regional asset management subsidiaries to coordinate asset/liability management and product development activities. Because our insurance investments mostly serve to cover liabilities in the insurance business, our asset management professionals place a high priority on high quality, liquid and widely marketable securities in our insurance investments portfolio. For a discussion of the investment portfolios of our banking operations, see “—Selected Statistical Information Relating to Our Banking Operations.” For further discussion regarding our group’s own investment strategy and risk management practices, see “Quantitative and Qualitative Disclosures about Market Risk.”

Group’s own investments reflect the definition of investments as used by management for controlling purposes. Real estate owned by the Allianz Group and used for its own activities is, however, not considered by management to be an investment and, therefore, does not mirror the real estate category under Note 39 to our Consolidated Financial Statements.

The following table sets forth our group’s own investment portfolios by type of investment at the end of the years indicated:


	December 31, 2004⁽¹⁾
	Property- Casualty	Life/Health		Banking	Asset Management	Group
	€ mn	€ mn		€ mn	€ mn	€ mn
Real estate	3,534	5,613		1,479	2	10,628
Fixed-income investments⁽²⁾	60,770	204,411		17,278	475	282,933
Equity investments	16,886	28,115		6,728	53	51,783
Other investments⁽³⁾	7,513	2,572		—	5	10,090

Subtotal	88,703	240,711		25,485	535	355,434
Trading portfolio	331	25,645	⁽⁴⁾	91,754	129	117,860

Total	89,034	266,356		117,239	664	473,294

⁽¹⁾

Group’s own investments are shown at balance sheet value and are presented after consolidation adjustments representing the elimination of intra-group investment holdings. Fair values investments in associated enterprises and joint ventures (included within equity investments) and real estate used by third-parties amounted to €6,372 million and €14,181 million, respectively.

⁽²⁾	Includes loans issued by Allianz Group operating entities within the Property-Casualty and Life/Health segments (€21,561 million).

⁽³⁾	Consists of funds held by others under reinsurance contracts assumed (€1,601 million), bank deposits (€8,481 million), as well as loans to associated enterprises and joint ventures (€8 million).

⁽⁴⁾	As a result of a new accounting standard, investments from certain unit-linked contracts were reclassified from separate account assets to trading assets, which are included within group’s own investments.

Insurance Operations Investments

The following is a discussion of the investment portfolio of our insurance operations. For a discussion of the investment portfolios of our banking operations, see “—Selected Statistical Information Relating to Our Banking Operations.”

Fixed-Income Investments

Excluding the trading portfolio, fixed income securities constituted 68.5% of our property-casualty investment portfolio (after elimination of the intra- Allianz Group investment holdings) and 84.9% of our life/health investment portfolio (after elimination of the intra-Allianz Group investment holdings) as of December 31, 2004. The credit quality of our fixed income securities portfolio has historically been strong. As of December 31, 2004, of the rated fixed income securities in our group’s own investments portfolio, approximately 42.1% had a rating comparable to a Standard & Poor’s rating of “AAA”, approximately 72.4% were invested in securities with a Standard & Poor’s rating of “AA” or better and approximately 99.4% were invested in securities with a Standard & Poor’s rating of BBB or better.

The following table shows the maturities of our held-to-maturity and available-for-sale fixed income investments, including the fixed income investments of our banking and asset management segments, at December 31, 2004:


	Held-to-maturity		Available-for-sale
	Amortized cost	Market value	Amortized cost	Market value
	€ mn	€ mn	€ mn	€ mn
Contractual term to maturity up to one year	523	528	26,314	26,992
Over one year through five years	1,446	1,530	99,286	103,943
Over five years through ten years	1,903	1,991	76,595	81,313
Over ten years	1,307	1,338	40,969	43,945

Total	5,179	5,387	243,164	256,193

Equity Investments

Excluding the trading portfolio, equity investments constituted 19.0% of our property-casualty investment portfolio (after elimination of the intra-Allianz Group investment holdings) and 11.7% of our life/health investment portfolio (after elimination of the intra-Allianz Group investment holdings) as of December 31, 2004. Consistent with our strategy, we invest life policyholders’ and shareholders’ funds, as well as certain amounts of property-casualty cash flow, in equities. Since the early 1900’s, the life/health and property casualty investments in Germany have included equity positions in a number of well-known German companies.

In 2004, we continued to reduce our exposure to equity investments through divestments of certain shareholdings, including our shareholdings in Munich Re and Beiersdorf AG, which were reduced from 12.4% and 16.6% as of December 31, 2003 to 9.8% and 7.3% as of December 31, 2004, respectively. See also Note 47 to our Consolidated Financial Statements for information regarding the Allianz Group’s sale of its shareholdings in MAN AG in January 2005.

Significant Allianz Group Equity Investments

The following tables set forth information regarding our significant equity investments in German and non-German companies at December 31, 2004. Except for our investment in Eurohypo AG, which is accounted for under the equity method as we hold more than a 20% interest, these investments are carried on our financial statements at market value.

⁽¹⁾	Based on internal valuation.


	December 31, 2004
	Market value	% Ownership
	€ mn
German companies
Schering AG	1,259	11.8
Linde AG	629	11.5
Munich Re	2,028	9.8
Beiersdorf AG	530	7.3
Bayer AG	939	5.2
RWE AG	1,094	4.8
HeidelbergCement AG	187	4.2
Bayerische Motorenwerke AG	907	4.1
E.ON AG	1,606	3.5
BASF AG	749	2.6
Siemens AG	729	1.3
Non-German companies
Banco Popular Espanol S.A.	1,043	9.5
UniCredito Italiano S.p.A.	1,300	4.9
Crédit Agricole S.A.	752	2.3
Total S.A.	822	1.2

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-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. These reserves, like the 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. These 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. Late reported claim trends, claim severity, exposure growth and future inflation are examples of factors used in projecting the IBNR reserve requirements. These 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 imprecise 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 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. 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 2004, 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.

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, 2004, 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, 2004


	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⁾	4,617	2,112	703	—	3,430	10	10,872
France⁽⁵⁾	2,129	1,774	1,198	228	3,199	—	8,528
Italy	3,919	1,495	445	163	411	12	6,445
United Kingdom	967	344	467	47	325	900	3,050
Switzerland⁽⁵⁾	844	239	101	81	913	771	2,949
Spain	914	210	120	2	170	—	1,416
Rest of Europe	3,675	1,300	672	243	639	628	7,157
NAFTA Region⁽⁶⁾	468	4,024	2,104	73	706	1,465	8,840
Asia-Pacific Region	1,210	343	226	3	131	599	2,512
South America, Africa and Rest of World	108	29	147	2	49	—	335

Subtotal of regions	18,851	11,870	6,183	842	9,973	4,385	52,104

Credit insurance	—	—	—	1,107	101	—	1,208
Travel insurance and assistance services	—	—	—	130	—	—	130
Marine & Aviation	—	—	—	—	1,206	888	2,094

Subtotal of specific business (global)	—	—	—	1,237	1,307	888	3,432

Allianz Group Total	18,851	11,870	6,183	2,079	11,280	5,273	55,536

⁽¹⁾	By jurisdiction of individual Allianz Group subsidiary companies.

⁽²⁾	Other Short-Tail Lines comprise health, credit insurance, crop and hail.

⁽³⁾	Other Medium-Tail Lines consist 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 comprise workers compensation, marine third party liability and aviation third party liability.

⁽⁵⁾	Other Medium-Tail business in Germany, France and Switzerland 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, 50% medium-tail and 30% long-tail business.

During 2004, the Allianz Group experienced the following major natural catastrophe loss events: the four hurricanes Charley, Frances, Jeanne and Ivan in the South-Eastern United States, as well as the tsunamis in South Asia. As a result of the Allianz Group’s risk management system, the Allianz Group recorded €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. Net losses in connection with the tsunamis which struck South Asia in late December 2004 amounted to €22 million.

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, 2004 on an IFRS basis.

Reconciliation of Loss and LAE Reserves


	Year Ended December 31,
	2004		2003		2002
	€ mn		€ mn		€ mn
Balance as of January 1	56,644		60,054		61,876
Less reinsurance recoverable	(12,049	)	(14,588	)	(16,156	)

Net	44,595		45,466		45,720

Plus incurred related to:
Current year	25,643		25,712		27,130
Prior years	(446	)⁽¹⁾	279		646	⁽²⁾

Total incurred	25,197		25,991		27,776

Less paid related to:
Current year	(11,374	)	(11,860	)	(12,642	)
Prior years	(11,818	)	(13,155	)	(12,143	)

Total paid	(23,192	)	(25,015	)	(24,785	)

Effect of foreign exchange	(469	)	(1,822	)	(3,367	)
Effect of (divestitures)/acquisitions⁽³⁾	(624	)	(25	)	122
Net balance at end of year	45,507		44,595		45,466
Plus reinsurance recoverable	10,029		12,049		14,588

Balance as of December 31	55,536		56,644		60,054

⁽¹⁾	The €446 million of favorable development during 2004 was the result of many individual developments by region and line of business. See “—Changes in Loss and LAE Reserves During 2004.”

⁽²⁾	The €646 million of unfavorable development during 2002 was due primarily to increases in asbestos and environmental reserves in the United States.

⁽³⁾	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.

Changes in Loss and LAE Reserves During 2004

As noted above, loss and LAE reserves of the Allianz Group at December 31, 2004 included €446 million reduction in incurred loss and LAE relating to prior years, representing 1.0% of net loss and LAE reserves at January 1, 2004. The following table provides a breakdown of this amount by region.

Changes in Loss and LAE Reserves During 2004


	Net Loss and LAE Reserves as of December 31, 2003	Net Development in 2004 related to Prior Years		in %⁽¹⁾
	€ mn	€ mn
Germany	7,994	(372	)	(4.6	)
France	7,129	210		2.9
Italy	5,949	(249	)	(4.2	)
United Kingdom	2,376	(139	)	(5.8	)
Switzerland	2,702	27		1.0
Spain	1,135	(63	)	(5.6	)
Rest of Europe	6,083	22		0.4
NAFTA Region	7,019	204		2.9
Asia-Pacific Region	2,120	20		0.9
South America, Africa and Rest of World	259	(21	)	(8.0	)

Subtotal of regions	42,766	(361	)	(0.8	)
Credit insurance	893	(235	)	(26.4	)
Travel insurance and assistance services	105	(20	)	(19.5	)
Marine & aviation	831	170		20.4

Allianz Group Total	44,595	(446	)	(1.0	)

⁽¹⁾	In percent of net reserves as of December 31, 2003.

Within each region, these reserve developments represent the sum of amounts for individual companies and lines of business. Because of the diversity and complexity of various developments in the loss and LAE reserves in each geographic region and global specific business, it is not feasible, or meaningful, to provide detailed information (e.g., claim frequencies, severities, settlement rates) by region or specific business. Instead, we present a discussion of the key drivers of the reserve developments during the past year as they are recognized at the operative entities. Most of these companies analyze loss and LAE reserves on a gross basis. Therefore, unless otherwise indicated, the discussion is based on gross loss and LAE reserves in the local currency of the company before consolidation adjustments but after taking into account intra-group cessions to Allianz AG and Allianz Global Risks Re. Consequently, individual amounts in the following discussion do not fully reconcile to those in the above table, which are based on net loss and LAE reserves and net developments during 2004.

Germany

In Germany, gross loss and LAE reserves developed favorably during 2004 by approximately €326 million, or 3.1% of reserves at January 1, 2004.

At Sachgruppe Deutschland (or “SGD”), the property-casualty insurance group of the Allianz Group in Germany, gross loss and LAE reserves developed favorably by €193 million. This development was the result of multiple effects, including favorable developments of €224 million, offset partially by adverse development of €47 million.

Favorable developments included:

•

€79 million for motor third-party liability, attributable to a favorable trend in claim frequency and a release of IBNR reserves for accident year 2003, as a result of our annual review process based on current facts and circumstances, as well as a favorable

development in subsequent claim emergence in 2004;

•

€55 million for motor own damage due to declining claim frequencies;

•

€50 million for private and commercial property due to favorable development in claims settlement, particularly for large claims, which accounted for approximately €20 million of this positive development; and

•

€40 million for fire, engineering and extended coverage, resulting from the introduction of internal ground-up actuarial analyses for fire and extended coverage as well as improved loss ratios in engineering for accident years 2002 and 2003.

Offsetting unfavorable developments include:

•

€37 million for personal accident, attributable to a change in business mix towards a greater proportion of policies with annuity benefits payments as compared to policies with a lump-sum benefit payment;

•

€7 million for legal protection business, following the introduction of a new lawyers compensation statute in July 2004; and

•

€3 million from two large fire and extended coverage claims in accident year 2003.

Also during 2004, Allianz AG, the Allianz Group company underwriting primarily intra-Allianz Group reinsurance, experienced €25 million of unfavorable reserve development. This amount was the result of unfavorable development of €140 million, offset partially by favorable development of €109 million. In many cases, these developments are the direct result of corresponding developments in reserves on the underlying business of the Allianz Group companies that were ceded to Allianz AG.

Adverse development included:

•

€126 million on facultative business ceded from two Allianz Group entities in Canada and Chile, which were both sold during 2004. Most of this amount relates to the sale of Allianz Canada, which resulted in the recognition of reserves at the Allianz AG level as of December 31, 2004. These reserves were previously carried at Allianz Canada and were eliminated through consolidation; and

•

€14 million on global engineering business, arising out of a ground–up reserve analysis of the time-lag between date of loss and date of reporting.

Offsetting favorable developments included:

•

€50 million relating to a facultative German linked business retroceded to Allianz Versicherungs-AG, for which reserves were estimated by the cedent;

•

€36 million in respect of gains from participation in the run-off of credit business, which was primarily written in Germany; and

•

€23 million from the quota-share business assumed from Munich Re.

Allianz Global Risks Re, which provides reinsurance for the international corporate business of the Allianz Group companies worldwide, experienced a favorable development of €131 million during 2004, 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:

•

€86 million development reported by cedants on quota-share basis predominantly from United Kingdom, France, United States and Belgium;

•

€33 million on property business partly due to reductions in the loss and LAE reserves for certain large claims and a decline in case reserves attributable to more up-to-date information on claims information from the ceding companies; and

•

€10 million primarily attributable to foreign exchange movements.

France

In France, gross loss and LAE reserves developed adversely by €89 million, or 1.1% of the reserves at January 1, 2004.

At AGF IART, favorable reserve developments of €200 million were offset by unfavorable developments of €269 million.

Favorable development at AGF IART included:

•

€189 million on property business from agents, brokers and international corporate business, due to reductions in ultimate loss and LAE development factors, which were re-evaluated in the normal course of actuarial analyses; and

•

€11 million for motor own damage in the agents business due to declining claim frequency.

Offsetting unfavorable developments at AGF IART included:

•

€111 million for unwinding discounts of mathematical reserves of bodily injury claims in health business;

•

€66 million in motor third-party liability written by agents due to increased severity of large claims, partially offset by reduced claim frequency;

•

€26 million on construction business written by brokers following normal course of actuarial re-evalution;

•

€23 million on general liability claims at the London branch;

•

€22 million on general liability broker business, due to updated actuarial evaluations; and

•

€21 million on natural catastrophe agents business, arising out of government decrees on 2003 drought damages in France.

La Lilloise, an AGF IART company, experienced favorable developments of €25 million from motor own damage, property and construction businesses. However, this amount was more than offset by adverse development of €59 million for motor third-party bodily injury liability, attributable to greater than expected case reserve emergence during 2004.

Italy

As a result of a combination of reserve developments at three operating entities, the gross loss and LAE reserves developed favorably in Italy by €263 million, or 4.1% of the reserves at January 1, 2004.

At RAS S.p.A., favorable developments of €104 million were attributable to the following factors:

•

€43 million due to positive developments in the settlements of previous years’ claims and favorable developments in the IBNR reserves for short-tail lines, primarily property, fire and engineering, theft and construction all risk;

•

€28 million for assumed business due to foreign currency effects of €18 million and adjustments to loss development patterns to reflect portfolio movements;

•

€15 million for marine own damage, due to positive developments in the settlement of several large claims and a lower than expected emergence of late claims;

•

€11 million for credit, mainly due to higher than expected recoveries for claims paid in the past years in the bond business; and

•

€7 million for personal accident due to lower than expected claims emergence on previous accident years.

These favorable developments were partially offset by adverse development of €28 million attributable to:

•

€15 million for general liability, mainly in the public administration and public health lines from accident years 1998 through 2000;

•

€9 million for health as a result of several large individual claims, as well as a negative development in the IBNR reserves attributable to the discontinued coverage of public administration employees; and

•

€4 million on foreign business.

Allianz Subalpina, a consolidated subsidiary of RAS S.p.A., exhibited a favorable development of €23 million during 2004, consisting of €9 million for property, €7 million for personal accident and additional €12 million for motor own damage, theft, technical, engineering and bond. These amounts were partially offset by €6 million for motor third-party liability, health and general liability, primarily due to an increase in the average cost of claims.

Lloyd Adriatico experienced a positive development of €175 million from the favorable run-off in motor third-party liability, partially offset by adverse development of €25 million in general liability. The favorable run-off in motor third-party liability was due to a significant decline in claim frequency. Adverse development in general liability reflected higher case reserve estimates in the coinsured business, as a result of the re-evaluation by the leading coinsurer.

United Kingdom

In the United Kingdom, gross loss and LAE reserves developed favorably during 2004 by €204 million, or 6.9%, of the reserves at January 1, 2004.

At Allianz Cornhill, gross loss and LAE reserves developed favorably during 2004 by €224 million due to the following factors:

•

€75 million on global risks due to favorable experience on the property non-energy and engineering accounts, which more than offset the adverse development observed on a single large claim. Most of the benefit of these favorable developments were passed onto Allianz Global Risks Re as a result of a 90% quota-share treaty;

•

€72 million on commercial and personal property, primarily due to lower than expected late reported large losses and weather related events;

•

€58 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;

•

€34 million on specialized insurance programs or schemes in particular due to favorable experience on the creditor and all risks account. The net impact was much less due to high levels of quota-share reinsurance;

•

€32 million on commercial liability, which has benefited inter alia from the same bodily injury development as that of motor claims;

•

€26 million on personal motor, which experienced generally favorable development despite the strengthening for run-off business; and

•

€8 million on personal property.

These favorable developments were offset by the following factors:

•

€34 million for commercial employers’ liability to cover the high degree of uncertainty related to mesothelioma claims in accident years 1994 and prior following recent judicial developments concerning allocation of employers liability claims; and

•

€16 million for marine.

Switzerland

In Switzerland, gross loss and LAE reserves of Allianz Suisse Versicherungs-Gesellschaft experienced unfavorable development of €64 million, or 1.5% of the reserves at January 1, 2004. This amount was the result of numerous unfavorable and favorable developments. Unfavorable developments included:

•

€33 million for loss adjustment expense reserves following increased expenses as a result of refining expense allocation factors to a specific line of business level;

•

€21 million on assumed reinsurance due to late reported claims for accident year 2003 in the non-proportional business, offset in part by favorable developments of premium developments on multi-year proportional policies;

•

€13 million in workers’ compensation due to amortizing discounted annuities;

•

€13 million arising out of a reserve re-evaluation by the leading co-insurer for the former Elvia co-insurance business; and

•

€5 million due to adopting the recommendation of the Swiss Insurance Association (SIA) on loss development tail factors for short-term compensation business.

These unfavorable developments were partially offset by favorable developments of €7 million for assumed facultative property business, €5 million for transport and €6 million for other lines of business.

Loss and LAE reserves of Allianz Risk Transfer, the Allianz Group company selling conventional reinsurance as well as a variety of alternative risk transfer, developed favorably by €14 million

primarily due to the recognition of gains on a quota-share treaty with Munich Re for underwriting years 2001 through 2003.

Spain

Gross loss and LAE reserves for Allianz Seguros developed favorably by €102 million, or 7.8% of the reserves at January 1, 2004. Favorable development in motor attributable to lower than expected IBNR claims, lower allocated expenses and improved claim settlement rates was partly offset by adverse development in industrial lines, in particular for general liability, following an actuarial re-evaluation.

Rest of Europe

Loss and LAE reserves in other European Allianz Group companies developed favorably by €80 million, or 1.2% of the reserves at January 1, 2004. 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 exchange rate movements.

Allianz Irish Life Holdings p.l.c. experienced favorable development of €63 million. Favorable court decisions, declining claim frequencies and a government-backed nationwide initiative to reduce fraudulant claims contributed to a €30 million surplus in commercial and personal motor. The government fraudulant claims reduction initiative, including the Personal Injuries Assessment Board, contributed another €10 million surplus for employers liability.

Gross loss and LAE reserves for Allianz Nederland Schade experienced favorable run-off of €36 million in 2004. The primary sources of favorable developments included:

•

€31 million for an individual large claims in engineering and several individual large claims;

•

€17 million from case reserves in motor due to quicker claim settlement, as the low claim frequency in 2004 allowed claim adjusters to spend more time on open claims from prior years; and

•

€9 million reduction for the discontinued medical business of the former Zwolsche Algemeene, now part of Allianz Nederland Schade.

These factors were partially offset by a reserve strengthening of €22 million in general liability arising out of a ground-up reserve analysis following a change in case reserve policy in 2003.

NAFTA Region

For the entire NAFTA region, Allianz Group’s gross loss and LAE reserves developed favorably during 2004 by €140 million, or 1.2% of the reserves at January 1, 2004. The largest Allianz Group companies in this region are Fireman’s Fund Insurance Company (or “Fireman’s Fund”) and Allianz Global Risks U.S. Insurance Company (or “AGR U.S.”). Allianz Insurance Company of Canada (or “Allianz Canada”) was sold during 2004 and contributed €2 million in adverse development to the total NAFTA result.

At Fireman’s Fund, prior period gross loss and loss adjustment expenses reserve estimates increased by €64 million for accident year 2003 and prior. This amount comprises several partially offsetting components.

Favorable developments included:

•

€121 million for special property driven by accident year 2003 and the change in the organizational structure of agribusiness, where the Fireman’s Fund business was combined with that of Rural Community Insurance Services, with Fireman’s Fund serving as lead underwriter and lead reinsurer; and

•

€32 million for workers compensation, €26 million for other liability on occurrence-basis and €18 million for commercial multi-peril, all attributable to general volatility and the re-alignment of reserves by line and accident year.

These favorable developments were more than offset by the following adverse developments:

•

€106 million for products on occurrence-basis, €46 million for fidelity/surety, €35 million for commercial auto liability, €31 million for other liability on a claims made basis, €18 million for medical malpractice reflecting general volatility as well as re-alignment of reserves by line and accident year; and

•

€16 million other liability on an occurrence basis at Jefferson Insurance Company, a consolidated subsidiary of Fireman’s Fund, primarily due to reserve increases for accident years prior to 1995.

AGR U.S., experienced a favorable run-off of €230 million during 2004. This favorable development was attributable primarily to a €258 million redundancy in the property lines, based on 2004 internal reserve studies performed in the general course of AGR U.S.’s reserve process, partially offset by unfavorable development of €41 million for a single large claim in occurrence-basis general liability business. In the fourth quarter of 2004, AGR U.S. created a branch in Canada to continue the global risk business of the former Allianz Insurance Company of Canada.

Asia-Pacific

Gross loss and LAE reserves for the Asia-Pacific region developed favorably during 2004 by approximately €28 million or 1.1% of reserves at January 1, 2004. 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 developments of €12 million during 2004. This result arose from partially offsetting favorable and unfavorable developments from different lines of business. Favorable developments included:

•

€49 million due to impact of earlier years’ legislative changes in Queensland and New South Wales motor bodily injury being better than anticipated;

•

€29 million in property, fire, theft, technical and engineering as a result of further reviews of reserves for accident year 2003; and

•

€29 million for motor and marine property damage based on re-evaluation of prior year accident data.

These effects were partially offset by the following adverse developments:

•

€46 million in workers’ compensation and employers’ liability related to asbestos diseases while the experience for the total portfolio has been better than expected;

•

€13 million increase as a result of an updated actuarial review of the builders warranty class of business. This business is in run-off and was 94% reinsured and is therefore not significant on a net basis;

•

€5 million for construction damage and liability in response to indications that third-party recoveries may increase from workers’ compensation in New South Wales leading to increased liability claims;

•

€4 million for discontinued assumed reinsurance mostly written in 1997 and 1998; and

•

€3 million in personal accident arising out of an actuarial re-evaluation.

Credit Insurance

Credit insurance is underwritten in the Allianz Group by Euler Hermes. During 2004, Euler Hermes experienced favorable development of €408 million, or 29.5% of the reserves at January 1, 2004. In Germany, the further refinement of an actuarial approach and the revision of development assumptions for accident years 2002 and 2003, were attributable to favorable run-off of €121 million. In Italy and the United Kingdom €46 million and €47 million of favorable development occurred respectively, due to favorable loss development, in particular for attachment year 2003. In France favorable run-off of €115 million was also attributable to the favorable emergence of the 2003 attachment year.

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 Insurance Company) and is reported in these respective entities.

Allianz Marine & Aviation gross loss and LAE reserves developed favorably by €55 million in France and unfavorably by €224 million in Germany, resulting in €170 million unfavorable development in total, or 8.1% of the reserves at January 1, 2004.

In Germany, favorable development—primarily for underwriting years 2002 and 2003—for aviation claims of €49 million for business both from Germany and the United Kingdom was more than offset by a charge of €316 million to reflect the difference between underwriting and accident year basis accounting.

In France, there were several causes for the favorable development, each contributing between €12 million and €16 million. IBNR reserves for underwriting years 2001 and prior for aviation were reduced. Other favorable development consisted of IBNR in marine hull underwriting year 2003 and a benign experience in the UK branch aviation portfolio.

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 eight years. Since the Allianz Group adopted IFRS in 1997, historical loss development data is available on an IFRS basis of accounting for the eight years 1997 to 2004 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, 2004. 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.

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
	€ mn		€ mn		€ mn		€ mn		€ mn		€ mn		€ mn		€ mn
Gross liability for unpaid claims and claims expenses	34,323		45,560		51,272		54,047		61,876		60,054		56,644		55,536
Paid (cumulative) as of:
One year later	8,573		12,996		15,949		16,639		17,384		16,019		14,393
Two years later	13,329		20,967		24,132		24,451		25,889		24,099
Three years later	16,778		24,588		29,123		29,265		31,032
Four years later	19,562		27,829		32,423		32,525
Five years later	21,539		30,217		34,965
Six years later	22,902		32,020
Seven years later	23,957
Liability re-estimated as of:
One year later	32,200		46,768		52,663		55,357		60,195		56,092		54,232
Two years later	33,104		46,975		53,589		55,289		57,995		56,043
Three years later	32,766		47,346		53,101		53,181		57,015
Four years later	33,455		46,687		51,281		52,500
Five years later	33,426		45,307		51,074
Six years later	32,052		45,241
Seven years later	32,126
Cumulative surplus (deficiency)	2,197		319		198		1,547		4,861		4,011		2,412
Cumulative surplus (deficiency) excluding impact of foreign exchange	1,984		1,525		(821	)	(1,479	)	(805	)	1,798		1, 387
Percent	5.8	%	3.3	%	(1.6	)%	(2.7	)%	(1.3	)%	3.0	%	2.4	%

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

The overall reduction in loss and LAE reserves from 2003 to 2004 is attributable to several factors including the divestiture of Allianz Canada, with 2003 year-end loss and LAE reserves of €688 million, the ongoing settlement and run-off of various U.S. business lines, and the appreciation of the Euro relative to U.S. dollar.

Reserve developments during 2004 are described in further detail in the preceding section “—Changes in Loss and LAE Reserves.”

The overall decrease in loss and LAE reserves between December 31, 2002 and 2003 is 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 is 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, 2004, this decision had no adverse impact on the Allianz Group’s operating results. 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, 2004, 2003 and 2002, the Allianz Group consolidated property-casualty reserves reflected discounts of €1,220 million, €1,261 million and €1,685 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 long-tailed liabilities, primarily including commercial multiple peril, auto liability, workers’ compensation and other liability. 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 in		Interest rate used for Discounting
	2004	2003	2004	2003	2004	2003
	€ mn	€ mn	€ mn	€ mn
France	1,402	1,466	330	346	3.25%	3.00%
Germany	407	366	278	256	2.75% to 4.00%	3.25% to 4.00%
Switzerland	392	396	236	242	3.25%	3.25%
United States	190	207	216	257	6.00%	6.55%
United Kingdom	84	70	65	70	4.25%	4.25%
Belgium	83	85	26	20	4.75%	4.75%
Hungary	69	60	22	19	1.40%	1.40%
Portugal	57	58	47	51	4.25%	4.50%

Total	2,684	2,708	1,220	1,261

Asbestos and Environmental Reserves in the United States

In 2002, Fireman’s Fund completed an analysis of its asbestos and environmental (or “A&E”) liabilities, resulting in an increase to these reserves of $750 million (net and gross) in September 2002. Also during 2002, Fireman’s Fund ceded the majority of its A&E loss reserves to Allianz AG.

There are significant uncertainties in estimating the amount of A&E claims. Reserves for asbestos-related illnesses, toxic waste clean-up claims and latent drug and chemical exposures cannot be estimated with traditional loss reserving techniques. Case reserves are established when sufficient information has been obtained to indicate the involvement of a specific insurance policy. In addition, IBNR reserves are established to cover

additional exposures on both known and unasserted claims. In establishing the liabilities for claims arising from asbestos-related illnesses, toxic waste clean-up and latent drug and chemical exposures, 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, and given the inherent uncertainty in estimating A&E liabilities, significant adverse deviation from the current carried A&E reserve position is possible.

In response to the uncertainty associated with A&E claims, Fireman’s Fund created an environmental claims unit focused on A&E claims evaluation and remediation for the Allianz Group’s U.S. property-casualty insurance subsidiaries. The staff of this unit, consisting of a total of approximately fifty employees, determines appropriate coverage issues according to the terms of the policies and contracts involved and, on the basis of its experience and expertise, makes judgments as to the ultimate loss potential related to each claim submitted for payment under the various policies and contracts. Judgments of potential losses are also made from precautionary reports submitted by insured companies for claims which have the possibility of involving policy coverage. Factors considered in determining the reserve are: whether the claim relates to asbestos or hazardous waste; whether the claim is for bodily injury or property damage; the limits of liability and attachment points; policy provisions for legal and litigation expenses (which are a significant portion of the estimated ultimate cost of these claims); type of insured; and any provision for reinsurance recoverables. In addition, Fireman’s Fund actively pursues commutations, policy buybacks and reinsurance cessions to reduce its A&E exposures.

The industry-wide loss trends for some of these exposures, especially for asbestos-related losses, have deteriorated over the past several years. Some of the reasons for this deterioration include: insureds who either produced or installed products containing asbestos have seen more and larger claims brought against them, some of these companies have declared bankruptcy, which has caused plaintiffs’ 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 product liability portion of their coverage has been exhausted. These developments led the Allianz Group to engage outside actuarial consulting firms to update a previous study conducted in 1995 to analyze the adequacy of the Allianz Group’s reserves for these types of losses. In 1995, Fireman’s Fund had increased its net and gross reserves for A&E by $800 million and in 2000 an additional $250 million was reallocated to A&E.

These A&E reserve analyses were updated during 2002, ultimately resulting in an additional $750 million of reserves attributed entirely to asbestos-related exposures. The analyses included a review of the ultimate gross asbestos loss and allocated loss expense reserves for accident years 1987 and prior. The methodology involved exposure-based modeling of policies with the greatest asbestos exposure, supplemented by aggregate methods for the remaining insureds. As previously stated, Fireman’s Fund is planning a regular update of its 2002 A&E reserve study during the course of 2005.

The total net reserve for asbestos and environmental claims exposure related liabilities for the U.S. based subsidiaries of the Allianz Group at December 31, 2004 was €739 million (2003: €906 million), excluding intercompany reinsurance agreements. The total gross reserve for asbestos and environmental claims exposure related liabilities at December 31, 2004 was €1,097 million (2003: €1,263 million).

The table below shows Fireman’s Fund case count activity for A&E in 2002 to 2004, including the activity for A&E of Jefferson Insurance Company of New York for 2004:


	Year to Date Case Counts December 31,			Percent Change
	2004	2003	2002	2004		2003
New	442	428	495	3.3	%	(13.5	)%
Reopened	156	244	241	(36.1	)%	1.2	%
Closed	669	660	902	1.4	%	(26.8	)%
Pending	1,720	1,718	1,741	0.1	%	(1.3	)%

On September 30, 2002, Fireman’s Fund entered into a reinsurance contract whereby it ceded net carried A&E loss and allocated ALAE reserves to Allianz AG, with Allianz AG providing reinsurance cover up to a maximum of $2,158 million. Total A&E reserves ceded under this treaty were $1,276 million for consideration in the amount of $1,276 million. The following table summarizes the gross and net U.S. claim reserves for A&E claims at December 31 for the years indicated.


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
2000	1,072	1,778	14.0	%	3.3	%
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	%

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.

A&E Gross Loss and LAE History


	Year Ended December 31,
Asbestos:	2000	2001		2002	2003		2004
	$ mn	$ mn		$ mn	$ mn		$ mn
Loss + LAE Reserves as of January 1	727	679		596	1,147		1,097
Plus Incurred Loss and LAE	126	23		688	101		110
Less Loss and LAE Payments	174	106		137	151		173
Payments for Loss	142	79		102	106		121
Payments for LAE	32	27		35	45		52
Loss + LAE Reserves as of December 31	679	596		1,147	1,097		1,033

	Year Ended December 31,
Environmental:	2000	2001		2002	2003		2004
	$ mn	$ mn		$ mn	$ mn		$ mn
Loss + LAE Reserves as of January 1	788	975		863	630		482
Plus Incurred Loss and LAE	318	(37	)	73	(89	)	67
Less Loss and LAE Payments	131	75		306	59		87
Payments for Loss	75	38		259	31		53
Payments for LAE	55	37		47	28		34
Loss + LAE Reserves as of December 31	975	863		630	482		462

	Year Ended December 31,
Total Asbestos and Environmental:	2000	2001		2002	2003		2004
	$ mn	$ mn		$ mn	$ mn		$ mn
Loss + LAE Reserves as of January 1	1,515	1,654		1,459	1,776		1,579
Plus Incurred Loss and LAE	444	(14	)	761	12		177
Less Loss and LAE Payments	305	181		443	210		260
Payments for Loss	217	117		361	137		174
Payments for LAE	87	64		82	73		86
Loss + LAE Reserves as of December 31	1,654	1,459		1,776	1,579		1,495

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. Allianz Group expects to conduct a review of its non-U.S. A&E exposures during 2005.

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 (or “Dresdner Bank”), including its asset management operations, and certain other banking subsidiaries of the Allianz Group. This presentation differs from the presentation in the remainder of “Information on the Company and 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 adjustments necessary to convert such information to U.S. GAAP. Although the financial statements of Dresdner Bank were consolidated into the financial statements of Allianz AG on the date of our acquisition of Dresdner Bank on July 23, 2001, the information presented below includes the banking operations of Dresdner Bank for all periods in order to provide the reader with comparable information about our banking operations. Additionally, the assets and liabilities of Dresdner Bank do not reflect the purchase accounting adjustments applied with respect to Dresdner Bank’s assets and liabilities at July 23, 2001.

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, 2004, 2003 and 2002. 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 nonaccrual status. For a description of our accounting policies on nonaccrual loans see “—Risk Elements—Nonaccrual Loans” and “Operating and Financial Review and Prospects—Critical Accounting Policies and Estimates.”

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,
	2004					2003					2002
	Average Balance		Interest Income/ Expense	Average Yield/ Rate in %		Average Balance		Interest Income/ Expense	Average Yield/ Rate in %		Average Balance		Interest Income/ Expense	Average Yield/ Rate in %
	€ mn		€ mn			€ mn		€ mn			€ mn		€ mn
Assets
Trading securities
In German offices	110,316		1,676	1.5	%	84,197		1,724	2.0	%	57,523		1,681	2.9	%
In non-German offices	36,381		1,080	3.0	%	28,056		767	2.7	%	30,155		1,137	3.8	%

Total	146,697		2,756	1.9	%	112,253		2,491	2.2	%	87,678		2,818	3.2	%

Loans and advances to banks
In German offices	20,801		411	2.0	%	18,509		464	2.5	%	15,708		454	2.9	%
In non-German offices	8,364		198	2.4	%	6,883		311	4.5	%	9,966		343	3.4	%

Total	29,165		609	2.1	%	25,392		775	3.1	%	25,674		797	3.1	%

Loans and advances to customers
In German offices	83,950		4,057	4.8	%	90,720		4,452	4.9	%	112,709		5,490	4.9	%
In non-German offices	28,029		1,210	4.3	%	39,246		2,137	5.4	%	45,760		2,413	5.3	%

Total	111,979		5,267	4.7	%	129,966		6,589	5.1	%	158,469		7,903	5.0	%

Securities purchased under resale agreements
In German offices	110,439		2,896	2.6	%	91,306		2,602	2.8	%	56,213		2,109	3.8	%
In non-German offices	64,030		1,399	2.2	%	27,492		851	3.1	%	38,059		794	2.1	%

Total	174,469		4,295	2.5	%	118,798		3,453	2.9	%	94,272		2,903	3.1	%

Investment securities¹⁾
In German offices	6,806		250	3.7	%	7,563		306	4.0	%	35,017		1,584	4.5	%
In non-German offices	9,214		304	3.3	%	9,179		319	3.5	%	9,893		401	4.1	%

Total	16,020		554	3.5	%	16,742		625	3.7	%	44,910		1,985	4.4	%

Total interest-earning assets	478,330		13,481	2.8	%	403,151		13,933	3.5	%	411,003		16,406	4.0	%

Non-interest-earning assets
In German offices	45,759					38,581					49,686
In non-German offices	38,008					30,868					29,206

Total non-interest-earning assets	83,767					69,449					78,892

Total assets	562,097					472,600					489,895

Percent of assets attributable to Non-German offices	32.7	%				30.0	%				33.3	%


	Year Ended December 31,
	2004					2003					2002
	Average Balance		Interest Income/ Expense	Average Yield/ Rate in %		Average Balance		Interest Income/ Expense	Average Yield/ Rate in %		Average Balance		Interest Income/ Expense	Average Yield/ Rate in %
	€ mn		€ mn			€ mn		€ mn			€ mn		€ mn
Liabilities and shareholders’ equity
Liabilities to banks⁽²⁾
In German offices	86,796		1,989	2.3	%	86,172		2,000	2.3	%	58,881		1,978	3.4	%
In non-German offices	21,784		1,066	4.9	%	13,784		754	5.5	%	23,284		1,081	4.6	%

Total	108,580		3,055	2.8	%	99,956		2,754	2.8	%	82,165		3,059	3.7	%

Liabilities to customers⁽²⁾
In German offices	58,060		1,591	2.7	%	57,486		1,740	3.0	%	71,296		1,906	2.7	%
In non-German offices	32,793		1,043	3.2	%	37,211		910	2.4	%	36,977		1,126	3.0	%

Total	90,853		2,634	2.9	%	94,697		2,650	2.8	%	108,273		3,032	2.8	%

Securities sold under repurchase agreements
In German offices	75,091		2,019	2.7	%	58,997		1,719	2.9	%	40,328		1,544	3.8	%
In non-German offices	52,941		1,105	2.1	%	17,568		638	3.6	%	26,840		588	2.2	%

Total	128,032		3,124	2.4	%	76,565		2,357	3.1	%	67,168		2,132	3.2	%

Subordinated liabilities
In German offices	3,433		164	4.8	%	3,757		173	4.6	%	4,541		206	4.5	%
In non-German offices	3,707		220	5.9	%	3,836		194	5.1	%	4,661		361	7.7	%

Total	7,140		384	5.4	%	7,593		367	4.8	%	9,202		567	6.2	%

Certificated liabilities⁽²⁾
In German offices	16,651		604	3.6	%	13,745		537	3.9	%	42,166		2,507	5.9	%
In non-German offices	28,392		779	2.7	%	40,093		1,365	3.4	%	56,854		2,108	3.7	%

Total	45,043		1,383	3.1	%	53,838		1,902	3.5	%	99,020		4,615	4.7	%

Profit participation certificates outstanding
In German offices	1,517		111	7.3	%	1,515		111	7.3	%	1,771		133	7.5	%
Total	1,517		111	7.3	%	1,515		111	7.3	%	1,771		133	7.5	%

Total interest-bearing Liabilities	381,165		10,691	2.8	%	334,164		10,141	3.0	%	367,599		13,538	3.7	%

Non-interest-bearing liabilities
In German offices	116,286					89,562					64,014
In non-German offices	52,892					36,447					39,288
Total non-interest-bearing liabilities	169,178					126,009					103,302

Shareholders’ equity	11,754					12,427					18,994

Total liabilities and shareholders’ equity	562,097					472,600					489,895

Percent of liabilities attributable to non-German offices	35.0	%				32.4	%				39.9	%

⁽¹⁾

In 2003 and 2002, 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 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 have been presented within liabilities to banks and liabilities to customers; certificates of deposit have been presented within certificated liabilities.

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,
	2004		2003		2002
	€ mn		€ mn		€ mn
Average total interest-earning assets	478,330		403,151		411,003
Net interest earned⁽¹⁾	2,790		3,792		2,868
Net interest margin in %⁽²⁾	0.58	%	0.94	%	0.70	%

⁽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,
	2004 over 2003						2003 over 2002
	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
Trading securities
In German offices	(48	)	(507	)	459		43		(595	)	638
In non-German offices	313		70		243		(370	)	(295	)	(75	)

Total	265		(437	)	702		(327	)	(890	)	563

Loans and advances to banks
In German offices	(53	)	(106	)	53		10		(65	)	75
In non-German offices	(113	)	(170	)	57		(32	)	91		(123	)

Total	(166	)	(276	)	110		(22	)	26		(48	)

Loans and advances to customers
In German offices	(395	)	(67	)	(328	)	(1,038	)	41		(1,079	)
In non-German offices	(927	)	(390	)	(537	)	(276	)	77		(353	)

Total	(1,322	)	(457	)	(865	)	(1,314	)	118		(1,432	)

Securities purchased under resale agreements
In German offices	294		(220	)	514		493		(595	)	1,088
In non-German offices	548		(311	)	859		57		316		(259	)

Total	842		(531	)	1,373		550		(279	)	829

Investment securities
In German offices	(56	)	(27	)	(29	)	(1,278	)	(152	)	(1,126	)
In non-German offices	(15	)	(16	)	1		(82	)	(54	)	(28	)

Total	(71	)	(43	)	(28	)	(1,360	)	(206	)	(1,154	)

Total interest income	(452	)	(1,744	)	1,292		(2,473	)	(1,231	)	(1,242	)

Interest expense
Liabilities to banks
In German offices	(11	)	(25	)	14		22		(725	)	747
In non-German offices	312		(87	)	399		(327	)	169		(496	)

Total	301		(112	)	413		(305	)	(556	)	251

Liabilities to customers
In German offices	(149	)	(166	)	17		(166	)	232		(398	)
In non-German offices	133		250		(117	)	(216	)	(223	)	7

Total	(16	)	84		(100	)	(382	)	9		(391	)

Securities sold under repurchase agreements
In German offices	300		(141	)	441		175		(427	)	602
In non-German offices	467		(366	)	833		50		300		(250	)

Total	767		(507	)	1,274		225		(127	)	352

Subordinated liabilities
In German offices	(9	)	6		(15	)	(33	)	2		(35	)
In non-German offices	26		33		(7	)	(167	)	(111	)	(56	)

Total	17		39		(22	)	(200	)	(109	)	(91	)

Certificated liabilities
In German offices	67		(40	)	107		(1,970	)	(665	)	(1,305	)
In non-German offices	(586	)	(234	)	(352	)	(743	)	(161	)	(582	)

Total	(519	)	(274	)	(245	)	(2,713	)	(826	)	(1,887	)

Profit participation certificates outstanding
In German offices	—		—		—		(22	)	(3	)	(19	)
Total	—		—		—		(22	)	(3	)	(19	)

Total interest expense	550		(770	)	1,320		(3,397	)	(1,612	)	(1,785	)

Change in taxable net interest income	(1,002	)	(974	)	(28	)	924		381		543

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,
	2004		2003		2002
	€ mn		€ mn		€ mn
Net income/(loss)	163		(1,816	)	(944	)
Average shareholders’ equity	11,754		12,427		18,994
Return on assets in %⁽¹⁾	0.03	%	(0.38	)%	(0.19	)%
Return on equity in %⁽²⁾	1.39	%	(14.61	)%	(4.97	)%
Equity to assets ratio in %⁽³⁾	2.09	%	2.63	%	3.88	%

⁽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.

Trading and Investment Securities

The following table sets forth the book value of trading 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,
	2004	2003	2002
	€ mn	€ mn	€ mn
Trading securities
German:
Federal and state government and government agency debt securities	33,693	19,764	14,304
Local government debt securities	1,578	4,384	2,573
Corporate debt securities	30,157	31,319	34,645
Mortgage-backed securities	112	315	403
Equity securities	2,853	1,636	412

German total